Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.liabilities, either directly or indirectly.
Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and that are significant to the fair value of the assets or liabilities.
Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies, which are more fully described in Part II, Item 8 “Financial"Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements–Employee Benefit Plans”Plans" in its 2016the 2019 Annual Report on Form 10-K.
Mattel has various stock compensation plans, which are more fully described in Part II, Item 8 “Financial"Financial Statements and Supplementary Data—Note 78 to the Consolidated Financial Statements–Statements—Share-Based Payments”Payments" in its 2016the 2019 Annual Report on Form 10-K. Under the Mattel, Inc. Amended and Restated 2010 Equity and Long-Term Compensation Plan, Mattel has the ability to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent rights, and shares of common stock to officers, employees, and other persons providing services to Mattel. Stock options are granted with exercise prices at the fair market value of Mattel’sMattel's common stock on the applicable grant date and expire no later than ten10 years from the date of grant. Both stockStock options and time-vesting RSUs generally provide for vesting over a period of three years from the date of grant.
Compensation expense, included within other selling and administrative expenses in the consolidated statements of operations, related to stock options and RSUs is as follows:
Mattel uses treasury shares purchased under its share repurchase program to satisfy stock option exercises and the vesting of RSUs. CashNaN cash was received for stock option exercises forduring the ninethree months ended September 30, 2017March 31, 2020 and 2016 was $1.8 million and $28.5 million, respectively.2019.
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| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
| | (In thousands) |
| Operating income (loss) | $ | 2,857 |
| | $ | (48,076 | ) | | $ | (32,137 | ) | | $ | (85,081 | ) |
| Other non-operating expense, net | (1,244 | ) | | (1,269 | ) | | (7,368 | ) | | (29,388 | ) |
| Net transaction gains (losses) | $ | 1,613 |
| | $ | (49,345 | ) | | $ | (39,505 | ) | | $ | (114,469 | ) |
|
| | | | | | | |
| | For the Three Months Ended |
| | March 31,
2020 | | March 31,
2019 |
| | (In thousands) |
| Operating loss | $ | 224 |
| | $ | (3,770 | ) |
| Other non-operating expense, net | (832 | ) | | (1,668 | ) |
| Currency transaction gains (losses), net | $ | (608 | ) | | $ | (5,438 | ) |
In March 2016, the Venezuelan government revised its currency exchange platform to a dual system. The Sistema Complementario de Administración de Divisas (“SICAD”) rate merged with the official exchange rate, becoming the new Tipo de Cambio Protegido (“DIPRO”) exchange rate. The existing Marginal Currency System (“SIMADI”) rate was renamed the Tipo de Cambio Complementario (“DICOM”) exchange rate. During the three months ended March 31, 2016, Mattel changed its remeasurement rate from the official exchange rate to the new DICOM exchange rate and recognized an unrealized foreign currency exchange loss of approximately $26 million in other non-operating expense/income, net as a result of the change in the remeasurement rate.
Capital Light Program
During the first quarter of 2019, Mattel announced the commencement of its Capital Light program to optimize Mattel's manufacturing footprint (including the sale or consolidation of manufacturing facilities), increase the productivity of its plant infrastructure, and achieve additional efficiencies across its entire supply chain.
In connection with the Capital Light program, Mattel recorded severance and other restructuring charges within the consolidated statements of operations as follows:
|
| | | |
| | For the Three Months Ended March 31, 2020 |
| | (In thousands) |
| Cost of sales (a) | $ | 3,057 |
|
| Other selling and administrative expenses (b) | 2,746 |
|
| | $ | 5,803 |
|
_______________________________________
| |
| (a) | Severance and other restructuring costs recorded within cost of sales in the consolidated statements of operations include charges associated with the consolidation of manufacturing facilities. |
| |
| (b) | Severance and other restructuring costs recorded within other selling and administrative expenses in the consolidated statements of operations are included in corporate and other expense in "Note 22 to the Consolidated Financial Statements—Segment Information." |
The following table summarizes Mattel's severance and other restructuring charges activity related to the Capital Light program for the three months ended March 31, 2020:
|
| | | | | | | | | | | | | | | |
| | Liability at December 31, 2019 | | Charges (a) | | Payments/Utilization | | Liability at March 31, 2020 |
| | (In thousands) |
| Severance | $ | 6,151 |
| | $ | 2,606 |
| | $ | (1,481 | ) | | $ | 7,276 |
|
| Other restructuring charges | 11,484 |
| | 3,197 |
| | (5,622 | ) | | 9,059 |
|
| | $ | 17,635 |
| | $ | 5,803 |
| | $ | (7,103 | ) | | $ | 16,335 |
|
_______________________________________
| |
| (a) | Other restructuring charges consist primarily of expenses associated with the consolidation of manufacturing facilities. |
As of March 31, 2020, Mattel has recorded cumulative severance and other restructuring charges related to the Capital Light program of $43.4 million, which include non-cash charges. Mattel has recorded cumulative non-cash charges of approximately $13 million. Mattel expects to incur total severance and other restructuring charges, excluding non-cash charges, of approximately $35 million related to the Capital Light program.
Other Cost Savings Actions
During the three months ended March 31, 2020, Mattel recorded severance and other restructuring charges of $4.8 million, primarily related to actions taken to further streamline its organizational structure.
Mattel’sMattel's provision for income taxes was $614.4$11.9 million and $26.6$2.7 million for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively. During the three months ended March 31, 2020, Mattel recognized a net discrete tax expense of $561.5$6.4 million primarily related to an expense for reassessments of prior years' tax liabilities and $558.8 million duringincome taxes recorded on a discrete basis in various jurisdictions. During the three and nine months ended September 30, 2017, respectively, andMarch 31, 2019, Mattel recognized a net discrete tax benefitsbenefit of $9.0$1.9 million, and $12.8 million during the three and nine months ended September 30, 2016, respectively, primarily related to a benefit for reassessments of prior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. As a result of the establishment of a valuation allowance and reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world.
Mattel regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, Mattel considers both positive and negative evidence related to the likelihood of realization of theU.S. deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Mattel considered its recent operating results which resulted in a cumulative net operating loss in the2017, there was no U.S. for the 36-month period ending September 30, 2017. The 36-month cumulative U.S. loss from operations is considered strong negative evidence and outweighs other positive subjective evidence, such as projections of future income. As a result, in the third quarter Mattel established a valuation allowance on its U.S. federal and state deferred tax assets. This results in a discrete charge to the quarter of $561.9 million for the balance of these net deferred tax assets as of December 31, 2016. Further, Mattel has provided zero tax benefit inprovided for U.S. losses during the year-to-date tax expense for items such as the year-to-date U.S. operating lossthree months ended March 31, 2020 and other effects occurring in the current year. The valuation allowance does not impact Mattel's actual ability under applicable tax laws to utilize deferred tax assets such as loss carryforwards and tax credits to reduce future cash tax payments if and when sufficient income is earned prior to the expiration of the deferred tax assets. Mattel will continue to assess the likelihood that the deferred tax assets will be realizable at each period end.2019.
In the normal course of business, Mattel is regularly audited by federal, state, and foreign tax authorities. Based on the current status of federal, state, and foreign audits, Mattel believes it is reasonably possible that in the next twelve months, the total unrecognized tax benefits could decrease by approximately $27$12 million related to the settlement of tax audits and/or the expiration of statutes of limitations. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’sMattel's consolidated financial statements.
In April 2020, Mattel initiated an analysis of withholding tax regimes in Europe and potential changes in the interpretation of withholding tax rules which may subject Mattel to withholding tax for years remaining open under the applicable statute of limitation. Due to the age and diversity of the laws in question, as well as the applicability of numerous tax treaties, the analysis is complex and ongoing. Though Mattel believes it is in compliance with all tax laws in the jurisdictions in which it operates, the completion of its analysis in the second quarter of 2020 could result in an adjustment to its income tax expense. A reasonable estimate of the potential impact cannot be made at this time.
Litigation Related to Carter Bryant and MGA Entertainment, Inc.
In April 2004, Mattel filed a lawsuit in Los Angeles County Superior Court against Carter Bryant (“Bryant”), a former Mattel design employee. The suit alleges that Bryant aided and assisted a Mattel competitor, MGA Entertainment, Inc. (“MGA”), during the time he was employed by Mattel, in violation of his contractual and other duties to Mattel. In September 2004, Bryant asserted counterclaims against Mattel, including counterclaims in which Bryant sought, as a putative class action representative, to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees. Bryant also removed Mattel’s suit to the United States District Court for the Central District of California. In December 2004, MGA intervened as a party-defendant in Mattel’s action against Bryant, asserting that its rights to Bratz properties are at stake in the litigation.
Separately, in November 2004, Bryant filed an action against Mattel in the United States District Court for the Central District of California. The action sought a judicial declaration that Bryant’s purported conveyance of rights in Bratz was proper and that he did not misappropriate Mattel property in creating Bratz.
In April 2005, MGA filed suit against Mattel in the United States District Court for the Central District of California. MGA’s action alleges claims of trade dress infringement, trade dress dilution, false designation of origin, unfair competition, and unjust enrichment. The suit alleges, among other things, that certain products, themes, packaging, and/or television commercials in various Mattel product lines have infringed upon products, themes, packaging, and/or television commercials for various MGA product lines, including Bratz. The complaint also asserts that various alleged Mattel acts with respect to unidentified retailers, distributors, and licensees have damaged MGA and that various alleged acts by industry organizations, purportedly induced by Mattel, have damaged MGA. MGA’s suit alleges that MGA has been damaged in an amount “believed to reach or exceed tens of millions of dollars” and further seeks punitive damages, disgorgement of Mattel’s profits and injunctive relief.
In June 2006, the three cases were consolidated in the United States District Court for the Central District of California. On July 17, 2006, the Court issued an order dismissing all claims that Bryant had asserted against Mattel, including Bryant’s purported counterclaims to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees, and Bryant’s claims for declaratory relief.
On January 12, 2007, Mattel filed an Amended Complaint setting forth counterclaims that included additional claims against Bryant as well as claims for copyright infringement, Racketeer Influenced and Corrupt Organizations (“RICO”) violations, misappropriation of trade secrets, intentional interference with contract, aiding and abetting breach of fiduciary duty and breach of duty of loyalty, and unfair competition, among others, against MGA, its Chief Executive Officer Isaac Larian, certain MGA affiliates and an MGA employee. The RICO claim alleged that MGA stole Bratz and then, by recruiting and hiring key Mattel employees and directing them to bring with them Mattel confidential and proprietary information, unfairly competed against Mattel using Mattel’s trade secrets, confidential information, and key employees to build their business.
Mattel sought to try all of its claims in a single trial, but in February 2007, the Court decided that the consolidated cases would be tried in two phases, with the first trial to determine claims and defenses related to Mattel’s ownership of Bratz works and whether MGA infringed those works. On May 19, 2008, Bryant reached a settlement agreement with Mattel and is no longer a defendant in the litigation. In the public stipulation entered by Mattel and Bryant in connection with the resolution, Bryant agreed that he was and would continue to be bound by all prior and future Court Orders relating to Bratz ownership and infringement, including the Court’s summary judgment rulings.
The first phase of the first trial resulted in a unanimous jury verdict on July 17, 2008 in favor of Mattel. The jury found that almost all of the Bratz design drawings and other works in question were created by Bryant while he was employed at Mattel; that MGA and Isaac Larian intentionally interfered with the contractual duties owed by Bryant to Mattel, aided and abetted Bryant’s breaches of his duty of loyalty to Mattel, aided and abetted Bryant’s breaches of the fiduciary duties he owed to Mattel, and converted Mattel property for their own use. The same jury determined that defendants MGA, Larian, and MGA Entertainment (HK) Limited infringed Mattel’s copyrights in the Bratz design drawings and other Bratz works, and awarded Mattel total damages of approximately $100 million against the defendants. On December 3, 2008, the Court issued a series of orders rejecting MGA’s equitable defenses and granting Mattel’s motions for equitable relief, including an order enjoining the MGA party defendants from manufacturing, marketing, or selling certain Bratz fashion dolls or from using the “Bratz” name. The Court stayed its December 3, 2008 injunctive orders until further order of the Court.
The parties filed and argued additional motions for post-trial relief, including a request by MGA to enter judgment as a matter of law on Mattel’s claims in MGA’s favor and to reduce the jury’s damages award to Mattel. Mattel additionally moved for the appointment of a receiver. On April 27, 2009, the Court entered an order confirming that Bratz works found by the jury to have been created by Bryant during his Mattel employment were Mattel’s property and that hundreds of Bratz female fashion dolls infringe Mattel’s copyrights. The Court also upheld the jury’s award of damages in the amount of $100 million and ordered an accounting of post-trial Bratz sales. The Court further vacated the stay of the December 3, 2008 orders.
MGA appealed the Court’s equitable orders to the Court of Appeals for the Ninth Circuit. On December 9, 2009, the Ninth Circuit heard oral argument on MGA’s appeal and issued an order staying the District Court’s equitable orders pending a further order to be issued by the Ninth Circuit. On July 22, 2010, the Ninth Circuit vacated the District Court’s equitable orders. The Ninth Circuit stated that, because of several jury instruction errors it identified, a significant portion-if not all-of the jury verdict and damage award should be vacated.
In its opinion, the Ninth Circuit found that the District Court erred in concluding that Mattel’s Invention Agreement unambiguously applied to “ideas;” that it should have considered extrinsic evidence in determining the application of the agreement; and if the conclusion turns on conflicting evidence, it should have been up to the jury to decide. The Ninth Circuit also concluded that the District Judge erred in transferring the entire brand to Mattel based on misappropriated names and that the Court should have submitted to the jury, rather than deciding itself, whether Bryant’s agreement assigned works created outside the scope of his employment and whether Bryant’s creation of the Bratz designs and sculpt was outside of his employment. The Court then went on to address copyright issues which would be raised after a retrial, since Mattel “might well convince a properly instructed jury” that it owns Bryant’s designs and sculpt. The Ninth Circuit stated that the sculpt itself was entitled only to “thin” copyright protection against virtually identical works, while the Bratz sketches were entitled to “broad” protection against substantially similar works; in applying the broad protection, however, the Ninth Circuit found that the lower court had erred in failing to filter out all of the unprotectable elements of Bryant’s sketches. This mistake, the Court said, caused the lower court to conclude that all Bratz dolls were substantially similar to Bryant’s original sketches.
Judge Stephen Larson, who presided over the first trial, retired from the bench during the course of the appeal, and the case was transferred to Judge David O. Carter. After the transfer, Judge Carter granted Mattel leave to file a Fourth Amended Answer and Counterclaims which focused on RICO, trade secret and other claims, and added additional parties, and subsequently granted in part and denied in part a defense motion to dismiss those counterclaims.
Later, on August 16, 2010, MGA asserted several new claims against Mattel in response to Mattel’s Fourth Amended Answer and Counterclaims, including claims for alleged trade secret misappropriation, an alleged violation of RICO, and wrongful injunction. MGA alleged, in summary, that, for more than a decade dating back to 1992, Mattel employees engaged in a pattern of stealing alleged trade secret information from competitors “toy fair” showrooms, and then sought to conceal that alleged misconduct. Mattel moved to strike and/or dismiss these claims, as well as certain MGA allegations regarding Mattel’s motives for filing suit. The Court granted that motion as to the wrongful injunction claim, which it dismissed with prejudice, and as to the allegations about Mattel’s motives, which it struck. The Court denied the motion as to MGA’s trade secret misappropriation claim and its claim for violations of RICO.
The Court resolved summary judgment motions in late 2010. Among other rulings, the Court dismissed both parties’ RICO claims; dismissed Mattel’s claim for breach of fiduciary duty and portions of other claims as “preempted” by the trade secrets act; dismissed MGA’s trade dress infringement claims; dismissed MGA’s unjust enrichment claim; dismissed MGA’s common law unfair competition claim; and dismissed portions of Mattel’s copyright infringement claim as to “later generation” Bratz dolls.
Trial of all remaining claims began in early January 2011. During the trial, and before the case was submitted to the jury, the Court granted MGA’s motions for judgment as to Mattel’s claims for aiding and abetting breach of duty of loyalty and conversion. The Court also granted a defense motion for judgment on portions of Mattel’s claim for misappropriation of trade secrets relating to thefts by former Mattel employees located in Mexico.
The jury reached verdicts on the remaining claims in April 2011. In those verdicts, the jury ruled against Mattel on its claims for ownership of Bratz-related works, for copyright infringement, and for misappropriation of trade secrets. The jury ruled for MGA on its claim of trade secret misappropriation as to 26 of its claimed trade secrets and awarded $88.5 million in damages. The jury ruled against MGA as to 88 of its claimed trade secrets. The jury found that Mattel’s misappropriation was willful and malicious.
In early August 2011, the Court ruled on post-trial motions. The Court rejected MGA’s unfair competition claims and also rejected Mattel’s equitable defenses to MGA’s misappropriation of trade secrets claim. The Court reduced the jury’s damages award of $88.5 million to $85.0 million. The Court awarded MGA an additional $85.0 million in punitive damages and approximately $140 million in attorney’s fees and costs. The Court entered a judgment which totaled approximately $310 million in favor of MGA.
On August 11, 2011, Mattel appealed the judgment, challenging on appeal the entirety of the District Court’s monetary award in favor of MGA, including both the award of $170 million in damages for alleged trade secret misappropriation and approximately $140 million in attorney’s fees and costs. On January 24, 2013, the Ninth Circuit Court of Appeals issued a ruling on Mattel’s appeal. In that ruling, the Court found that MGA’s claim for trade secrets misappropriation was not compulsory to any Mattel claim and could not be filed as a counterclaim-in-reply. Accordingly, the Court of Appeals vacated the portion of the judgment awarding damages and attorney’s fees and costs to MGA for prevailing on its trade secrets misappropriation claim, totaling approximately $172.5 million. It ruled that, on remand, the District Court must dismiss MGA’s trade secret claim without prejudice. In its ruling, the Court of Appeals also affirmed the District Court’s award of attorney’s fees and costs under the Copyright Act. Accordingly, Mattel recorded a litigation accrual of approximately $138 million during the fourth quarter of 2012 to cover these fees and costs.
Because multiple claimants asserted rights to the attorney’s fees portion of the judgment, on February 13, 2013, Mattel filed a motion in the District Court for orders permitting Mattel to interplead the proceeds of the judgment and releasing Mattel from liability to any claimant based on Mattel’s payment of the judgment.
On February 27, 2013, MGA filed a motion for leave to amend its prior complaint in the existing federal court lawsuit so that it could reassert its trade secrets claim. Mattel opposed that motion. On December 17, 2013, the District Court denied MGA’s motion for leave to amend and entered an order dismissing MGA’s trade secrets claim without prejudice. Also on December 17, 2013, following a settlement between MGA and certain insurance carriers, the District Court denied Mattel’s motion for leave to interplead the proceeds of the judgment.
On December 21, 2013, a stipulation regarding settlement with insurers and payment of judgment was filed in the District Court, which provided that (i) Mattel would pay approximately $138 million, including accrued interest, in full satisfaction of the copyright fees judgment, (ii) all parties would consent to entry of an order exonerating and discharging the appeal bond posted by Mattel, and (iii) MGA’s insurers would dismiss all pending actions related to the proceeds of the copyright fees judgment, including an appeal by Evanston Insurance Company in an action against Mattel that was pending in the Ninth Circuit. On December 23, 2013, Mattel paid the copyright fees judgment in the total sum, including interest, of approximately $138 million. On December 26, 2013, the District Court entered an order exonerating and discharging the appeal bond posted by Mattel, and on December 27, 2013, MGA filed an acknowledgment of satisfaction of judgment. On December 30, 2013, Evanston Insurance Company’s appeal in its action against Mattel was dismissed.
On January 13, 2014, MGA filed a new, but virtually identical, trade secrets claim against Mattel in Los Angeles County Superior Court. In its complaint, MGA purports to seek damages in excess of $1 billion. Mattel believes that MGA’s claim should be barred as a matter of law, and intends to vigorously defend against it. On December 3, 2014, the Court overruled Mattel’s request to dismiss MGA’s case as barred as a result of prior litigation between the parties. In light of that ruling, Mattel believes that it is reasonably possible that damages in this matter could range from $0 to approximately $12.5 million. In addition, Mattel believes that if such damages are awarded, it is reasonably possible that pre-judgment interest, ranging from $0 to approximately $12.0 million, could be awarded. Mattel may be entitled to an offset against any damages awarded to MGA. Mattel has not quantified the amount of any such offset as it is not currently estimable. As Mattel believes a loss in this matter is reasonably possible but not probable, no liability has been accrued to date.
Litigation Related to Yellowstone do Brasil Ltda.
Yellowstone do Brasil Ltda. (formerly known as Trebbor Informática Ltda.) was a customer of Mattel’sMattel's subsidiary Mattel do Brasil Ltda. when a commercial dispute arose between Yellowstone and Mattel do Brasil regarding the supply of product and related payment terms. As a consequence of the dispute, in April 1999, Yellowstone filed a declarative action against Mattel do Brasil before the 15th15th Civil Court of Curitiba -– State of Parana (the “Trial Court”"Trial Court"), requesting the annulment of its security bonds and promissory notes given to Mattel do Brasil as well as requesting the Trial Court to find Mattel do Brasil liable for damages incurred as a result of Mattel do Brasil’s alleged abrupt and unreasonable breach of an oral exclusive distribution agreement between the parties relating to the supply and sale of toys in Brazil. Yellowstone’sYellowstone's complaint sought alleged loss of profits of approximately $1 million, plus an unspecified amount of damages consisting of: (i) compensation for all investments made by Yellowstone to develop Mattel do Brasil’sBrasil's business; (ii) reimbursement of the amounts paid by Yellowstone to terminate labor and civil contracts in connection with the business; (iii) compensation for alleged unfair competition and for the goodwill of trade; and (iv) compensation for non-pecuniary damages.
Mattel do Brasil filed its defenses to these claims and simultaneously presented a counterclaim for unpaid accounts receivable for goods supplied to Yellowstone in the approximate amount of $4 million.
During the evidentiary phase a first accounting report was submitted by a court-appointed expert. Such report stated that Yellowstone had invested approximately $3 million in its business. Additionally, the court-appointed expert calculated a loss of profits compensation of approximately $1 million. Mattel do Brasil challenged the report since it was not made based on the official accounting documents of Yellowstone and since the report calculated damages based only on documents unilaterally submitted by Yellowstone.
The Trial Court accepted the challenge and ruled that a second accounting examination should take place in the lawsuit. Yellowstone appealed the decision to the Court of Appeals of the State of Parana (the “Appeals Court”"Appeals Court"), but it was upheld by the Appeals Court.
The second court-appointed expert’s report submitted at trial did not assign a value to any of Yellowstone’s claims and found no evidence of causation between Mattel do Brasil’sBrasil's actions and such claims.
In January 2010, the Trial Court ruled in favor of Mattel do Brasil and denied all of Yellowstone’s claims based primarily on the lack of any causal connection between the acts of Mattel do Brasil and Yellowstone’s alleged damages. Additionally, the Trial Court upheld Mattel do Brasil’sBrasil's counterclaim and ordered Yellowstone to pay Mattel do Brasil approximately $4 million. The likelihood of Mattel do Brasil recovering this amount was uncertain due to the fact that Yellowstone was declared insolvent and filed for bankruptcy protection. In February 2010, Yellowstone filed a motion seeking clarification of the decision which was denied.
In September 2010, Yellowstone filed a further appeal with the Appeals Court. Under Brazilian law, the appeal was de novo and Yellowstone restated all of the arguments it made at the Trial Court level. Yellowstone did not provide any additional information supporting its unspecified alleged damages. The Appeals Court held hearings on the appeal in March and April 2013. On July 26, 2013, the Appeals Court awarded Yellowstone approximately $17 million in damages, plus attorney's fees, as adjusted for inflation and interest. The Appeals Court also awarded Mattel do Brasil approximately $7.5 million on its counterclaim, as adjusted for inflation. On August 2, 2013, Mattel do Brasil filed a motion with the Appeals Court for clarification since the written decision contained clear errors in terms of amounts awarded and interest and inflation adjustments. Mattel do Brasil’sBrasil's motion also asked the Appeals Court to decide whether Yellowstone’s award could be offset by the counterclaim award, despite Yellowstone’sYellowstone's status as a bankrupt entity. Yellowstone also filed a motion for clarification on August 5, 2013. A decision on the clarification motions was rendered on November 11, 2014, and the Appeals Court accepted partially the arguments raised by Mattel do Brasil. As a result, the Appeals Court awarded Yellowstone approximately $14.5 million in damages, as adjusted for inflation and interest, plus attorney's fees. The Appeals Court also awarded Mattel do Brasil approximately $7.5 million on its counterclaim, as adjusted for inflation. The decision also recognized the existence of legal rules that support Mattel do Brasil’sBrasil's right to offset its counterclaim award of approximately $7.5 million. Mattel do Brasil filed a new motion for clarification with the Appeals Court on January 21, 2015, due to the incorrect statement made by the reporting judge of the Appeals Court, that the court-appointed expert analyzed the “accounting documents”"accounting documents" of Yellowstone. On April 26, 2015, a decision on the motion for clarification was rendered. The Appeals Court ruled that the motion for clarification was denied and imposed a fine on Mattel do Brasil equal to 1% of the value of the claims made for the delay caused by the motion. On July 3, 2015, Mattel do Brasil filed a special appeal to the Superior Court of Justice based upon both procedural and substantive grounds. This special appeal seekssought to reverse the Appeals Court's decision of July 26, 2013, and to reverse the fine as inappropriate under the law. This special appeal was submitted to the Appeals Court which must rule on its admissibility before it is transferred to the Superior Court.
Yellowstone also filed a special appeal with the Appeals Court in February 2015, which was made available to Mattel do Brasil on October 7, 2015. Yellowstone's special appeal seekssought to reverse the Appeals Court decision with respect to: (a) the limitation on Yellowstone's loss of profits claim to the amount requested in the complaint, instead of the amount contained in the first court-appointed experts report, and (b) the award of damages to Mattel do Brasil on the counterclaim, since the specific amount was not requested in Mattel do Brasil's counterclaim brief.
On October 19, 2015, Mattel do Brasil filed its answer to the special appeal filed by Yellowstone and Yellowstone filed its answer to the special appeal filed by Mattel do Brasil. On April 4, 2016, the Appeals Court rendered a decision denying the admissibility of Mattel’sMattel's and Yellowstone’sYellowstone's special appeals. On May 11, 2016, both Mattel and Yellowstone filed interlocutory appeals and are awaiting the decision.appeals.
On August 31, 2017, the reporting justice for the Appeals Court denied Yellowstone’s interlocutory appeal. As to Mattel, the reporting justice reversed the fine referenced above that had been previously imposed on Mattel for filing a motion for clarification. However, the reporting justice rejected Mattel’s arguments on the merits of Yellowstone’s damages claims. On September 22, 2017, Mattel filed a further appeal to the full panel of five appellate justices to challenge the merits of Yellowstone’sYellowstone's damages claims. Yellowstone did not file a further appeal.
Mattel believes that it is reasonably possible that a loss in this matter could range from $0 to approximately $18.5 million. The high end of this range, approximately $18.5 million, is based on the calculation of the current amount of the damages (reported in the first court-appointed examination report submitted in the lawsuit), and loss of profits (indicated in the complaint by Yellowstone), including interest, inflation, currency adjustments, plus attorney's fees.In April 2018, Mattel do Brasil will be entitledentered into a settlement agreement to offset its counterclaim award of approximately $7.5 million,resolve this matter, but the current amount including inflation, and currency adjustment, against such loss. The existence of procedural matters that will be addressedsettlement was later rejected by the courts, subject to the Superior Court of Justice adds some uncertainty to the final outcome of the matter. Mattel do Brasil believes, however, that it has valid legal grounds for ana pending appeal ofby Mattel.
On October 2, 2018, the Appeals Court decision.rejected Mattel's merits appeal, and affirmed the prior rulings in favor of Yellowstone. In October 2019, Mattel do Brasil may be required by the Trial Court to place a bond for the full amountreached an agreement with Yellowstone's former counsel regarding payment of the damage award in escrowattorney's fees portion of the judgment. In November 2019, Yellowstone initiated an action to enforce its judgment against Mattel, but did not account for an offset for Mattel's counterclaim. On January 27, 2020, Mattel obtained an injunction, staying Yellowstone's enforcement action pending anresolution of Mattel's appeal decision byto enforce the Superior Court.parties' April 2018 settlement. As of March 31, 2020, Mattel believesassessed its probable loss related to the Yellowstone matter and has accrued a loss in this matter is reasonably possible butreserve, which was not probable, no liability has been accrued to date.material.
2017 Securities Litigation
Two stockholders have filedA purported class action lawsuitslawsuit is pending in the United States District Court for the Central District of California, (Waterford(consolidating Waterford Township Police & Fire Retirement System v. Mattel, Inc., et al., filed June 27, 2017; and Lathe v. Mattel, Inc., et al., filed July 6, 2017) against Mattel, Christopher A. Sinclair, Richard Dickson, Kevin M. Farr, and Joseph B. Johnson alleging federal securities laws violations in connection with statements allegedly made by the defendants during the period October 20, 2016 through April 20, 2017. In general, the lawsuits assert the same or similarlawsuit asserts allegations including that the defendants artificially inflated Mattel’sMattel's common stock price by knowingly making materially false and misleading statements and omissions to the investing public about retail customer inventory, the alignment between point-of-sale and shipping data, and Mattel’sMattel's overall financial condition. The lawsuits allegelawsuit alleges that the defendants’defendants' conduct caused the plaintiffsplaintiff and other stockholders to purchase Mattel common stock at artificially inflated prices. ByOn May 24, 2018, the Court granted Mattel's motion to dismiss the class action lawsuit, and on June 25, 2018, the plaintiff filed a motion informing the Court he would not be filing an order datedamended complaint. Judgment was entered in favor of Mattel and the individual defendants on September 29, 2017,19, 2018. The plaintiff filed his Notice of Appeal on October 16, 2018 and his opening appellate brief on February 25, 2019. On April 26, 2019, Mattel filed its responsive appellate brief, and on June 17, 2019, plaintiff filed his reply brief. Oral argument occurred on February 4, 2020, and on February 20, 2020, the two actions were ordered consolidatedCourt of Appeals affirmed the dismissal of the lawsuit.
In addition, a stockholder has filed a derivative action in the United States District Court for the District of Delaware (Lombardi v. Sinclair, et al., filed December 21, 2017) making allegations that are substantially identical to, or are based upon, the allegations of the class action lawsuit. The defendants in the derivative action are the same as those in the class action lawsuit plus Margaret H. Georgiadis, Michael J. Dolan, Trevor A. Edwards, Frances D. Fergusson, Ann Lewnes, Dominic Ng, Vasant M. Prabhu, Dean A. Scarborough, Dirk Van de Put, and Kathy W. Loyd. On February 26, 2018, the derivative action was stayed pending further developments in the class action litigation. On April 16, 2020, the stockholder filed an amended complaint, which is based on new allegations and which names a lead plaintiff was appointed.new set of defendants. The amended complaint is discussed in more detail below under “Litigation and Investigations Related to Whistleblower Letter.”
The lawsuits seek unspecified compensatory damages, attorneys’attorneys' fees, expert fees, and costs.costs, and/or injunctive relief. Mattel believes that the allegations in the lawsuits are without merit and intends to vigorously defend against them. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
Litigation Related to the Fisher-Price Rock 'n Play Sleeper
A number of putative class action lawsuits are pending against Fisher-Price, Inc. and/or Mattel, Inc. asserting claims for false advertising, negligent product design, breach of warranty, fraud, and other claims in connection with the marketing and sale of the Fisher-Price Rock 'n Play Sleeper (the "Sleeper"). In general, the lawsuits allege that the Sleeper should not have been marketed and sold as safe and fit for prolonged and overnight sleep for infants. The putative class action lawsuits propose nationwide and over 15 statewide consumer classes comprised of those who purchased the Sleeper as marketed as safe for prolonged and overnight sleep. The class actions have been consolidated before a single judge for pre-trial purposes pursuant to the federal courts’ Multi-District Litigation program.
NaN additional lawsuits are pending against Fisher-Price, Inc. and Mattel, Inc. alleging that a product defect in the Sleeper caused the fatalities of or injuries to NaN children. Additionally, Fisher-Price, Inc. and/or Mattel, Inc. have also received letters from lawyers purporting to represent additional plaintiffs who are threatening to assert similar claims.
The lawsuits seek compensatory damages, punitive damages, statutory damages, restitution, disgorgement, attorneys’ fees, costs, interest, declaratory relief, and/or injunctive relief. Mattel believes that the allegations in the lawsuits are without merit and intends to vigorously defend against them.
A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
Litigation and Investigations Related to Whistleblower Letter
In December 2019 and January 2020, two stockholders filed separate complaints styled as class actions against Mattel, Inc., and certain of its current and former officers, alleging violations of federal securities laws. The complaints rely on the results of an investigation announced by Mattel in October 2019 regarding allegations in a whistleblower letter and claim that Mattel misled the market in several of its financial statements beginning in the third quarter of 2017. The lawsuits allege that the defendants' conduct caused the plaintiff and other stockholders to purchase Mattel common stock at artificially inflated prices.
In addition, a stockholder has filed a derivative action in the United States District Court for the District of Delaware (Moher v. Kreiz, et al., filed April 9, 2020) making allegations that are substantially identical to, or are based upon, the allegations of the class action lawsuits. The defendants in the derivative action are Ynon Kreiz, Margaret H. Georgiadis, Joseph J. Euteneuer, Joseph B. Johnson, R. Todd Bradley, Adriana Cisneros, Michael J. Dolan, Trevor A. Edwards, Frances D. Fergusson, Soren T. Laursen, Ann Lewnes, Kathy W. Loyd, Roger Lynch, Dominic Ng, Judy D. Olian, Vasant M. Prabhu, Dean A. Scarborough, Christopher A. Sinclair, Mattel, Inc., and PricewaterhouseCoopers LLP. Subsequently, a nearly identical derivative action was filed by a different stockholder against the same defendants (Lombardi v. Kreiz, et al., filed April 16, 2020). The second lawsuit is styled as an amended complaint and replaces a complaint making unrelated allegations in a previously filed lawsuit already pending in Delaware federal court (discussed above under “2017 Securities Litigation”).
The lawsuits seek unspecified compensatory damages, attorneys' fees, expert fees, costs and/or injunctive relief. Mattel believes that the allegations in the lawsuits are without merit and intends to vigorously defend against them. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
Mattel also received a subpoena in December 2019 from the SEC, seeking documents related to the whistleblower letter and subsequent investigation, and is responding to the SEC's subpoena. Mattel is also responding to requests from the United States Attorney's Office for the Southern District of New York ("SDNY") related to this matter. Mattel cannot predict the eventual scope, duration or outcome of potential legal action by the SEC or SDNY, if any, or whether any such action could have a material impact on Mattel's financial condition, results of operations or cash flows.
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21.22. | Segment Information |
Mattel through its subsidiaries, sellsdesigns, manufactures, and markets a broad variety of toy products worldwide, which are grouped into four major brand categories:sold to its customers and directly to consumers.
Mattel Girls & Boys BrandsGross Sales
Gross sales by categories are presented as follows:
Dolls—including brands such as Barbie® fashion dolls,American Girl, Enchantimals,and Polly Pocket.
Infant, Toddler, and accessories (“Barbie”)Preschool—including brands such as Fisher-Price and Thomas & Friends, Monster High®Power Wheels, Ever After High®, Polly Pocket® Fireman Sam, and DC Super Hero Girls™ (collectively “Other Girls”Shimmer and Shine (Nickelodeon), .
Vehicles—including brands such as Hot Wheels® and , Matchbox® vehicles and play sets (collectively “Wheels”, CARS (Disney Pixar), and CARS®Jurassic World (NBCUniversal).
Action Figures, Building Sets, and Games—including brands such as MEGA, DC Comics®UNO, WWE® Wrestling, Minecraft®, Max Steel®, BOOMco.®, Toy Story®(Disney Pixar), Jurassic World (NBCUniversal),and games and puzzles (collectively “Entertainment”) WWE.
Fisher-Price Brands—including Fisher-Price®, Little People®, BabyGear™, Laugh & Learn®, and Imaginext® (collectively “Core Fisher-Price”), Thomas & Friends®, Dora the Explorer®, Mickey Mouse® Clubhouse, and Disney Jake and the Never Land Pirates® (collectively “Fisher-Price Friends”), and Power Wheels®.Segment Data
American Girl Brands—including Truly Me®, Girl of the Year®, BeForever®, Bitty Baby®, and WellieWishers™. American Girl® Brands products are sold directly to consumers via its catalog, website, and proprietary retail stores, as well as sold directly to certain retailers.
Construction and Arts & Crafts Brands—including MEGA BLOKS® and RoseArt®.
Mattel’sMattel's operating segments are: (i) North America, which consists of the USU.S. and Canada,Canada; (ii) International,International; and (iii) American Girl. The North America and International segments sell products in the Mattel Girls & Boys Brands, Fisher-Price Brands, and Construction and Arts & Crafts Brandsacross categories, although some products are developed and adapted for particular international markets.
Segment Data
The following tables present information about revenues, income (loss), and assets by segment. In the following tables, Mattel does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues (referred to as “gross sales”"gross sales" and reconciled to net sales in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Non-GAAP Financial Measures” of this Quarterly Report on Form 10-Q)the tables below). Mattel records these adjustments in its financial accounting systems at the time of sale to each customer, but the adjustments are not allocated to brands or individual products. For this reason, Mattel’s chief operating decision makerMattel's Chief Operating Decision Maker uses gross and net sales by segment as one of the metrics to measure segment performance. Such sales adjustments are included in the determination of segment income (loss) from operations based on the adjustments recorded in the financial accounting systems. Segment income (loss) represents each segment’ssegment's operating income (loss), while consolidated operating incomeloss represents incomeloss from operations before net interest, other non-operating expense/income,expense, net, and income taxes as reported in the consolidated statements of operations. The corporate and other expense category includes costs not allocated to individual segments, including charges related to incentive compensation, severance and other restructuring costs, share-based payments, andcompensation, corporate headquarters functions managed on a worldwide basis, and the impact of changes in foreign currency exchange rates on intercompany transactions.
|
| | | | | | | |
| | For the Three Months Ended |
| | March 31,
2020 | | March 31,
2019 |
| | (In thousands) |
| Revenues by Segment | | | |
| North America | $ | 305,754 |
| | $ | 369,391 |
|
| International | 326,119 |
| | 365,178 |
|
| American Girl | 38,092 |
| | 45,557 |
|
| Gross sales | 669,965 |
| | 780,126 |
|
| Sales adjustments | (75,896 | ) | | (90,880 | ) |
| Net sales | $ | 594,069 |
| | $ | 689,246 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
| | (In thousands) |
| Revenues by Segment | | | | | | | |
| North America | $ | 839,341 |
| | $ | 1,071,030 |
| | $ | 1,708,901 |
| | $ | 2,077,147 |
|
| International | 776,947 |
| | 774,211 |
| | 1,637,031 |
| | 1,614,169 |
|
| American Girl | 93,876 |
| | 130,109 |
| | 247,376 |
| | 298,933 |
|
| Gross sales | 1,710,164 |
| | 1,975,350 |
| | 3,593,308 |
| | 3,990,249 |
|
| Sales adjustments | (149,181 | ) | | (179,775 | ) | | (322,230 | ) | | (367,999 | ) |
| Net sales | $ | 1,560,983 |
| | $ | 1,795,575 |
| | $ | 3,271,078 |
| | $ | 3,622,250 |
|
|
| | | | | | | |
| | For the Three Months Ended |
| | March 31,
2020 | | March 31,
2019 |
| | (In thousands) |
| Segment Income (Loss) | | | |
| North America (a) | $ | 8,031 |
| | $ | (19,741 | ) |
| International (a) | (34,082 | ) | | (24,303 | ) |
| American Girl | (17,441 | ) | | (14,059 | ) |
| | (43,492 | ) | | (58,103 | ) |
| Corporate and other expense (b) | (106,318 | ) | | (68,908 | ) |
| Operating loss | (149,810 | ) | | (127,011 | ) |
| Interest expense | 48,980 |
| | 46,958 |
|
| Interest (income) | (2,084 | ) | | (2,272 | ) |
| Other non-operating expense, net | 2,143 |
| | 1,904 |
|
| Loss before income taxes | $ | (198,849 | ) | | $ | (173,601 | ) |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
| | (In thousands) |
| Segment Income (Loss) | | | | | | | |
| North America | $ | 86,240 |
| | $ | 265,597 |
| | $ | 109,623 |
| | $ | 371,096 |
|
| International | 81,307 |
| | 150,232 |
| | 48,140 |
| | 155,949 |
|
| American Girl | (14,601 | ) | | 28,056 |
| | (38,558 | ) | | 21,850 |
|
| | 152,946 |
| | 443,885 |
| | 119,205 |
| | 548,895 |
|
| Corporate and other expense (a) | (67,244 | ) | | (126,489 | ) | | (209,208 | ) | | (292,305 | ) |
| Operating income (loss) | 85,702 |
| | 317,396 |
| | (90,003 | ) | | 256,590 |
|
| Interest expense | 24,646 |
| | 24,989 |
| | 68,557 |
| | 70,133 |
|
| Interest (income) | (1,575 | ) | | (2,477 | ) | | (6,337 | ) | | (7,550 | ) |
| Other non-operating expense, net | 1,368 |
| | 856 |
| | 5,928 |
| | 23,210 |
|
| Income (loss) before income taxes | $ | 61,263 |
| | $ | 294,028 |
| | $ | (158,151 | ) | | $ | 170,797 |
|
__________________________________________
| |
| (a) | Corporate and other expense includesSegment income (loss) for the three months ended March 31, 2020 included severance and restructuring expenses of $12.6$3.1 million which were allocated to the North America and International segments. North America segment loss for the three months ended March 31, 2019 included a charge of approximately $27 million attributable to the inclined sleeper product recalls. |
| |
| (b) | Corporate and other expense included severance and restructuring charges of $7.5 million and $21.5$8.7 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $6.4 million and $33.6 million for the three and nine months ended September 30, 2016,2019, respectively, and share-based compensation expense of $17.0$14.3 million and $47.6$11.9 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $12.4 million and $38.7 million for the three and nine months ended September 30, 2016,2019, respectively. |
Segment assets are comprised of accounts receivable and inventories, net of applicable reservesallowances and allowances.reserves.
|
| | | | | | | | | | | |
| | March 31,
2020 | | March 31,
2019 | | December 31,
2019 |
| | (In thousands) |
| Assets by Segment | | | | | |
| North America | $ | 480,738 |
| | $ | 520,812 |
| | $ | 569,819 |
|
| International | 455,918 |
| | 569,214 |
| | 721,251 |
|
| American Girl | 36,427 |
| | 39,998 |
| | 35,004 |
|
| | 973,083 |
| | 1,130,024 |
| | 1,326,074 |
|
| Corporate and other | 116,084 |
| | 110,281 |
| | 105,789 |
|
| Accounts receivable and inventories, net | $ | 1,089,167 |
| | $ | 1,240,305 |
| | $ | 1,431,863 |
|
|
| | | | | | | | | | | |
| | September 30,
2017 | | September 30,
2016 | | December 31,
2016 |
| | (In thousands) |
| Assets by Segment | | | | | |
| North America | $ | 1,060,312 |
| | $ | 1,050,120 |
| | $ | 677,203 |
|
| International | 1,144,772 |
| | 1,049,008 |
| | 766,584 |
|
| American Girl | 197,110 |
| | 184,101 |
| | 154,924 |
|
| | 2,402,194 |
| | 2,283,229 |
| | 1,598,711 |
|
| Corporate and other | 93,946 |
| | 156,125 |
| | 130,304 |
|
| Accounts receivable, net and inventories | $ | 2,496,140 |
| | $ | 2,439,354 |
| | $ | 1,729,015 |
|
The table below presents worldwide revenues by brand category:categories:
|
| | | | | | | |
| | For the Three Months Ended |
| | March 31,
2020 | | March 31,
2019 |
| | (In thousands) |
| Revenues by Categories | | | |
| Dolls | $ | 225,869 |
| | $ | 252,886 |
|
| Infant, Toddler, and Preschool | 140,320 |
| | 193,626 |
|
| Vehicles | 185,651 |
| | 183,361 |
|
| Action Figures, Building Sets, and Games | 118,125 |
| | 150,253 |
|
| Gross sales | 669,965 |
| | 780,126 |
|
| Sales adjustments | (75,896 | ) | | (90,880 | ) |
| Net sales | $ | 594,069 |
| | $ | 689,246 |
|
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30,
2017 | | September 30,
2016 | | September 30,
2017 | | September 30,
2016 |
| | (In thousands) |
| Worldwide Revenues by Brand Category | | | | | | | |
| Mattel Girls & Boys Brands | $ | 967,028 |
| | $ | 1,061,113 |
| | $ | 2,018,017 |
| | $ | 2,142,665 |
|
| Fisher-Price Brands | 561,610 |
| | 661,489 |
| | 1,143,466 |
| | 1,280,435 |
|
| American Girl Brands | 88,008 |
| | 125,499 |
| | 234,181 |
| | 286,910 |
|
| Construction and Arts & Crafts Brands | 84,599 |
| | 118,605 |
| | 176,076 |
| | 252,802 |
|
| Other | 8,919 |
| | 8,644 |
| | 21,568 |
| | 27,437 |
|
| Gross sales | 1,710,164 |
| | 1,975,350 |
| | 3,593,308 |
| | 3,990,249 |
|
| Sales adjustments | (149,181 | ) | | (179,775 | ) | | (322,230 | ) | | (367,999 | ) |
| Net sales | $ | 1,560,983 |
| | $ | 1,795,575 |
| | $ | 3,271,078 |
| | $ | 3,622,250 |
|
|
| | | | | | | |
| | For the Three Months Ended |
| | March 31,
2020 | | March 31,
2019 |
| | (In thousands) |
| Revenues by Top 3 Power Brands | | | |
| Barbie | $ | 147,485 |
| | $ | 163,478 |
|
| Hot Wheels | 158,618 |
| | 150,536 |
|
| Fisher-Price and Thomas & Friends | 128,750 |
| | 172,398 |
|
| Other | 235,112 |
| | 293,714 |
|
| Gross sales | 669,965 |
| | 780,126 |
|
| Sales adjustments | (75,896 | ) | | (90,880 | ) |
| Net sales | $ | 594,069 |
| | $ | 689,246 |
|
Geographic Information
The table below presents information by geographic area. Revenues are attributed to countries based on location of the customer.
|
| | | | | | | |
| | For the Three Months Ended |
| | March 31,
2020 | | March 31,
2019 |
| | (In thousands) |
| Revenues by Geographic Area | | | |
| North America | $ | 343,846 |
| | $ | 414,948 |
|
| International | | | |
| EMEA | 215,286 |
| | 216,349 |
|
| Latin America | 59,661 |
| | 75,250 |
|
| Asia Pacific | 51,172 |
| | 73,579 |
|
| Total International | 326,119 |
| | 365,178 |
|
| Gross sales | 669,965 |
| | 780,126 |
|
| Sales adjustments | (75,896 | ) | | (90,880 | ) |
| Net sales | $ | 594,069 |
| | $ | 689,246 |
|
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22.23. | New Accounting Pronouncements |
Recently Adopted Accounting Pronouncements
In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued ASU 2014-09, Revenue from Contracts with CustomersAccounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), which supersedeschanges the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition,methodology for measuring credit losses on financial instruments and most industry-specific guidance. The core principlethe timing of when such losses are recorded. This update replaces the guidance is thatexisting incurred loss impairment model with an entity should recognize revenueexpected loss model (referred to depictas the transfer of promised goodsCurrent Expected Credit Loss model, or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance establishes a five-step model to achieve that core principle and also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 was originally effective for interim and annual reporting periods beginning after December 15, 2016."CECL"). In August 2015,November 2018, the FASB issued ASU 2015-14, Revenue2018-19, Codifications Improvements to Topic 326, Financial Instruments-Credit Losses" which clarifies that receivables arising from Contracts with Customers - Deferraloperating leases are accounted for using lease guidance and not as financial instruments. Mattel adopted ASU 2016-13 and its related amendments (ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2020-02) on January 1, 2020. The adoption of the Effective Date, which defers the effective date to annual reporting periods beginning after December 15, 2017. Early application is permitted after December 15, 2016. this new accounting standard did not have a material impact on Mattel's consolidated financial statements.
In March 2016,August 2018, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net),2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which clarifiesmodifies the implementation guidancedisclosure requirements on principal versus agent considerations,fair value measurements, including the consideration of costs and benefits. ASU 2016-10, Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients, which clarifies guidance on assessing collectibility, presenting sales taxes and other similar taxes collected from customers, measuring noncash consideration, and certain transition matters. ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12 (collectively, the “new revenue standards”) will be2018-13 was effective for interim and annual reporting periods beginning on January 1, 2018. Upon2020. The amendments on changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty will be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. Mattel adopted ASU 2018-13 on January 1, 2020. The adoption Mattel will recognize the cumulative effect of adopting this guidance as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. Mattel continues to make progress in its implementation and assessment of the new revenue standards. While the completion of this assessment is still ongoing and certain licensing contracts will be impacted by the new revenue standards, Mattel doesaccounting standard did not expect the new standards to have a material impact on its revenue recognition accounting policy and itsMattel's consolidated financial statements.
In February 2016,March 2019, the FASB issued ASU 2016-02, Leases,2019-02, Entertainment - Films - Other Assets - Film Costs (Subtopic 926-20): Improvements to Accounting for Costs of Films and License Agreements for Program Materials, which requiresaligns the accounting for production costs of episodic television series with the accounting of films by removing the content distinction for capitalization. Mattel adopted ASU 2019-02 on January 1, 2020. The adoption of this new accounting standard did not have a lesseematerial impact on Mattel's consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to recognize a lease asset and lease liability on its balance sheetthe Disclosure Requirements for all leases with a term greater than 12 months.Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2016-022018-14 will bebecome effective for interim and annual reporting periodsthe fiscal year beginning on January 1, 2019.2021. Early adoption is permitted and the amendments will be applied on a retrospective basis to all periods presented. Mattel is currently evaluating the impact of the adoption of ASU 2016-022018-14 on its operating results andconsolidated financial position.statements.
In August 2016,December 2019, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which addssimplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and clarifies guidance onsimplify the classificationaccounting for other areas of certain cash receiptsTopic 740 by clarifying and payments in the statement of cash flows.amending existing guidance. ASU 2016-152019-12 will bebecome effective for interim and annual reporting periodsthe fiscal year beginning on January 1, 2018.2021. Early adoption is permitted. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries will be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2007. The amendments related to franchise taxes that are partially based on income will be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2007. All other amendments will be applied on a prospective basis. Mattel is currently evaluating the impact of the adoption of ASU 2016-152019-12 on its operating results andconsolidated financial position.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 will be effective for interim and annual reporting periods beginning on January 1, 2018. Mattel is currently evaluating the impact of the adoption of ASU 2016-16 on its operating results and financial position.
In January 2017, the FASB issued ASU 2017-01, Business Combinations: Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses and refines the definition of the term output. ASU 2017-01 will be effective for interim and annual reporting periods beginning on January 1, 2018. Mattel is currently evaluating the impact of the adoption of ASU 2017-01 on its operating results and financial position.
In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, which clarifies the scope on recently established guidance on nonfinancial asset derecognition as well as the accounting for partial sales of nonfinancial assets. ASU 2017-05 will be effective for interim and annual reporting periods beginning on January 1, 2018. Mattel is currently evaluating the impact of the adoption of ASU 2017-05 on its operating results and financial position.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which requires entities that sponsor defined benefit plans to (i) present service cost within operations, if such a subtotal is presented, (ii) other components of net benefit costs should be presented separately outside of income from operations, if such a subtotal is presented, and (iii) only the service cost component should be capitalized, when applicable. If a separate line item is not used, the line item in the income statement where the other components of net benefit costs are included must be disclosed. Further, gains and losses from curtailments and settlements, and the cost of certain termination benefits should be reported in the same manner as other components of net benefit cost. ASU 2017-07 will be effective for interim and annual reporting periods beginning on January 1, 2018. Mattel is currently evaluating the impact of the adoption of ASU 2017-07 on its operating results and financial position.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. ASU 2017-09 will be effective prospectively for interim and annual reporting periods beginning on January 1, 2018. Mattel is currently evaluating the impact of the adoption of ASU 2017-09 on its operating results and financial position.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities, which expands the hedging strategies eligible for hedge accounting and changes both how companies assess hedge effectiveness and presentation and disclosure requirements. ASU 2017-12 will be effective for interim and annual reporting periods beginning on January 1, 2019. Early application is permitted in any interim period after issuance of the update. Mattel is currently evaluating the impact of the adoption of ASU 2017-12 on its operating results and financial position.statements.
| |
23.24. | Subsequent EventEvents |
On October 26, 2017,During April 2020, Mattel announced thatdrew down an incremental $250.0 million under the senior secured revolving credit facilities for a total outstanding balance of $400.0 million as of April 30, 2020. Mattel accelerated the timing of its Boardborrowings under the senior secured revolving credit facilities in anticipation of Directors determinedits projected seasonal working capital requirements and in light of uncertainties surrounding the impact of COVID-19.
In connection with Mattel’s continued efforts to suspendstreamline its organizational structure and restore profitability, on May 4, 2020, Mattel committed to a planned 4% reduction in its non-manufacturing workforce. The timing of this action was accelerated due to the Company's quarterly dividend beginningimpact of COVID-19. Mattel expects to incur severance and restructuring charges of approximately $13 million, consisting solely of cash expenditures for employee termination and severance costs, starting in the fourthsecond quarter of 2017.2020 through the end of 2020.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
In the discussion that follows, “Mattel”"Mattel" refers to Mattel, Inc. and/or one or more of its family of companies.
The following discussion should be read in conjunction with the consolidated financial informationstatements and related notes that appear in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q. Mattel’sMattel's business is seasonal with consumers making a large percentage of all toy purchases during the traditional holiday season; therefore, results of operations are comparable only with corresponding periods.
The following discussion also includes gross sales and currency exchange rate impact, non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission (“("Regulation G”G"), to supplement the financial results as reported in accordance with GAAP.generally accepted accounting principles ("GAAP"). Gross sales represent sales to customers, excluding the impact of sales adjustments, such as trade discounts and other allowances. The currency exchange rate impact reflects the portion (expressed as a percentage) of changes in Mattel's reported results that are attributable to fluctuations in currency exchange rates. Mattel uses these non-GAAP financial measures to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Management believes that the disclosure of non-GAAP financial measures provides useful supplemental information to investors to allow them to better evaluate ongoing business performance and certain components of Mattel's results. These measures are not, and should not be viewed as, a substitute for GAAP financial measures. Refer to “Non-GAAP"Non-GAAP Financial Measures”Measures" in this Quarterly Report on Form 10-Q for a more detailed discussion, including a reconciliation of gross sales, a non-GAAP financial measure, to net sales, its most directly comparable GAAP financial measure.
Note that amounts within this Item 2 shown in millions may not foot due to rounding.
Overview
Mattel designs, manufactures,is a leading global children's entertainment company that specializes in the design and markets a broad varietyproduction of toy products worldwide which are sold to its customersquality toys and directly to consumers. Mattel is the owner of a portfolio of global brands with untapped intellectual property potential.consumer products. Mattel's products are among the most widely recognized toy products in the world. Mattel’sMattel'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 groupedorganized into four major brandthe following categories:
Mattel Girls & Boys BrandsDolls—including brands such as Barbie fashion,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, (“Barbie”), Monster High, Ever After High, Polly Pocket,content, gaming, and DC Super Hero Girls (collectively “Other Girls”), Hot Wheelslifestyle 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 Matchbox vehiclesbooks, featuring diverse characters from past and play sets (collectively “Wheels”), and CARS, DC Comics, WWE Wrestling, Minecraft, Max Steel, BOOMco., Toy Story, and games and puzzles (collectively “Entertainment”).
Fisher-Price Brands—including Fisher-Price, Little People, BabyGear, Laugh & Learn, and Imaginext (collectively “Core Fisher-Price”), Thomas & Friends, Dora the Explorer, Mickey Mouse Clubhouse, and Disney Jake and the Never Land Pirates (collectively “Fisher-Price Friends”), and Power Wheels.
American Girl Brands—including Truly Me, Girl of the Year, BeForever, Bitty Baby, and WellieWishers. American Girl Brandspresent. Its products are sold directly to consumers via its catalog, website, and proprietary retail stores,stores.
Infant, Toddler, and Preschool—including brands such as wellFisher-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 sold directlyHot Wheels, Matchbox, CARS (Disney Pixar), and Jurassic World (NBCUniversal).In production for over 50 years, Hot Wheels continues to certain retailers.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 Arts & Crafts BrandsGames—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 BLOKScreates products that spark purposeful play and RoseArt.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's vision isoperating 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.
COVID-19 Update
A novel strain of coronavirus disease ("COVID-19") was reported in December 2019 and characterized as a pandemic by the World Health Organization in March 2020. The impact of COVID-19 and the actions taken by governments, businesses, and individuals in response to “inspireit have resulted in significant global economic disruption, including, but not limited to, restrictions on travel, temporary business closures, reduced retail traffic, and volatility in financial markets. Mattel’s results of operations, financial position, and cash flows as of and for the wonderfirst quarter of childhood as the global leader2020 were significantly impacted by COVID-19, primarily due to a decline in learningnet sales. COVID-19 has negatively impacted retail operations and development through play.” In order to deliver on this vision,distribution centers of both Mattel is focused on the following five-pillar strategy:
Build Mattel's Power Brands (American Girl, Barbie, Fisher-Price, Hot Wheels, and Thomas & Friends) into connected 360-degree play systemsits customers, with non-essential brick and experiences;
Accelerate emerging markets growthmortar channels most severely impacted. The impact of COVID-19 has coincided with digital-first solutions;
Focus and strengthen Mattel's innovation pipeline;
Reshape Mattel's operations to enable this strategy - leaner, faster, and smarter - via commercial realignment, supply chain transformation and IT transformation; and
Reignite Mattel's culture and team.
Third Quarter 2017 Overview
Mattel’s third quarter 2017 financial highlights include the following:
Net saleschanges in consumer demand, with large increases in consumer demand in the thirdBuilding Sets and Games categories and declines in all other categories in which Mattel operates. Manufacturing operations of Mattel and its third-party suppliers have also been and continue to be disrupted for periods in affected regions during a seasonally low period for production.
In the near-term, COVID-19 is expected to have adverse effects on revenue, overall profitability, and working capital, as net sales are expected to decline more significantly during the second quarter of 2017 were $1.56 billion, down 13%2020 as compared to thirdthe first quarter of 20162020. Due to the uncertainty of the pandemic and resulting effects, it is not possible to estimate the ultimate impact to net sales of $1.80 billion. As a result of Toys “R” Us filing for bankruptcy, Mattel reversed approximately $43 million of net sales in the third and fourth quarter of 2017.2020.
Gross salesWhile COVID-19 has caused manufacturing and distribution disruptions for Mattel and the manufacturers and distribution network it relies upon, to date, these disruptions have not materially impacted Mattel’s ability to meet demand for its products. To the extent any of these disruptions become prolonged or recur, particularly during seasonally high periods of production or distribution, Mattel’s ability to meet demand may be materially impacted. Due to the uncertainty of the pandemic and resulting disruption, it is not possible to predict the extent of such impact.
Prolonged disruption to Mattel’s customers, supply chain, or other critical operations would result in material adverse effects to Mattel’s business and its liquidity. The ultimate impact of COVID-19 on Mattel’s results of operations, financial position, and cash flows are uncertain at this time due to the third quarterrapidly evolving circumstances. Mattel is closely monitoring the situation and actively managing its business as developments occur. Refer to Part II, Item 1A "Risk Factors" of 2017 were $1.71 billion, down 13% as comparedthis Quarterly Report on Form 10-Q for further discussion regarding potential impacts of COVID-19 on Mattel’s business.
The specific line items that have been materially affected by these impacts of COVID-19 are noted within "Results of Operations–First Quarter" below. Additional discussion of the impact of COVID-19 on Mattel's liquidity and capital resources is discussed in "Liquidity and Capital Resources" and in "Cost Savings Programs" below. In addition to third quarterthe impacts of 2016 gross sales of $1.98 billion. As a result of Toys “R” Us filing for bankruptcy, Mattel reversed approximately $47 million of gross sales inCOVID-19 discussed below, it is reasonably likely that the third quarter of 2017.
Gross margin in the third quarter of 2017 was 41.5%, a decrease of 700 basis points from the third quarter of 2016. The decrease in gross margin was driven by unfavorable product mix, higher freight and logistics expenses, an unfavorable impact from Toys “R” Us filing for bankruptcy, and lower licensing income.
Operating income in the third quarter of 2017 was $85.7 million, as compared to operating income of $317.4 million in the third quarter of 2016.
Diluted net loss per share in the third quarter of 2017 was $1.75, as compared to diluted net income per share of $0.68 in the third quarter of 2016. Mattel's provision for income taxes includes a discrete non-cash tax expense of $561.9 million related to deferred tax assetspandemic or its economic consequences could have other unforeseen consequences that will likely not be realized.affect Mattel’s business.
Results of Operations—ThirdFirst Quarter
Consolidated Results
Net sales for the thirdfirst quarter of 20172020 were $1.56 billion,$594.1 million, a 13%14% decrease, as compared to $1.80 billion$689.2 million in the thirdfirst quarter of 2016,2019, with a favorablean unfavorable impact from changes in currency exchange rates of 12 percentage point. As a result of Toys “R” Us filing for bankruptcy in September 2017, Mattel reversed approximately $43 million of net sales attributable to the North America segment in the third quarter of 2017. Mattel reduced shipping to Toys “R” Us in early September, which resulted in a loss of revenue in the third quarter of 2017. Further, gross margin includes the cost of sales for the inventory sold to Toys “R” Us, but excludes the corresponding net sales.points. Net loss for the thirdfirst quarter of 20172020 was $603.2$210.7 million, or $1.75$0.61 per diluted share, as compared to a net incomeloss of $236.3$176.3 million, or $0.68$0.51 per diluted share, in the thirdfirst quarter of 2016. Net loss for the third quarter of 2017 was negatively impacted by discrete non-cash tax expense of $561.9 million related2019, primarily due to lower net sales, primarily due to the establishmentimpact of a valuation allowance on deferred tax assets that will likely not beCOVID-19 and higher retail inventory levels entering and during the quarter, partially offset by higher gross profit, primarily driven by incremental realized savings from the Structural Simplification and lower gross profit.Capital Light programs (the "cost savings programs"), and the absence of the impact of the inclined sleeper product recalls of approximately $27 million.
The following table provides a summary of Mattel’sMattel's consolidated results for the thirdfirst quarter of 20172020 and 2016:2019:
| | | | For the Three Months Ended | | Year/Year Change | For the Three Months Ended | | Year/Year Change |
| September 30, 2017 | | September 30, 2016 | | March 31, 2020 | | March 31, 2019 | |
| Amount | | % of Net
Sales | | Amount | | % of Net
Sales | | % | | Basis Points
of Net Sales | Amount | | % of Net
Sales | | Amount | | % of Net
Sales | | % | | Basis Points
of Net Sales |
| | (In millions, except percentage and basis point information) | (In millions, except percentage and basis point information) |
| Net sales | $ | 1,561.0 |
| | 100.0 | % | | $ | 1,795.6 |
| | 100.0 | % | | -13 | % | | — |
| $ | 594.1 |
| | 100.0 | % | | $ | 689.2 |
| | 100.0 | % | | -14 | % | | — |
|
| Gross profit | $ | 647.2 |
| | 41.5 | % | | $ | 870.8 |
| | 48.5 | % | | -26 | % | | -700 |
| $ | 255.2 |
| | 43.0 | % | | $ | 239.8 |
| | 34.8 | % | | 6 | % | | 820 |
|
| Advertising and promotion expenses | 179.7 |
| | 11.5 | % | | 202.9 |
| | 11.3 | % | | -11 | % | | 20 |
| 76.3 |
| | 12.8 | % | | 69.5 |
| | 10.1 | % | | 10 | % | | 270 |
|
| Other selling and administrative expenses | 381.8 |
| | 24.5 | % | | 350.5 |
| | 19.5 | % | | 9 | % | | 500 |
| 328.7 |
| | 55.3 | % | | 297.4 |
| | 43.1 | % | | 11 | % | | 1,220 |
|
| Operating income | 85.7 |
| | 5.5 | % | | 317.4 |
| | 17.7 | % | | -73 | % | | -1,220 |
| |
| Operating loss | | (149.8 | ) | | -25.2 | % | | (127.1 | ) | | -18.4 | % | | 18 | % | | -680 |
|
| Interest expense | 24.7 |
| | 1.6 | % | | 25.0 |
| | 1.4 | % | | -1 | % | | 20 |
| 49.0 |
| | 8.2 | % | | 47.0 |
| | 6.8 | % | | 4 | % | | 140 |
|
| Interest (income) | (1.5 | ) | | -0.1 | % | | (2.5 | ) | | -0.1 | % | | -36 | % | | — |
| (2.1 | ) | | -0.4 | % | | (2.3 | ) | | -0.3 | % | | -8 | % | | -10 |
|
| Other non-operating expense, net | 1.3 |
| | | | 0.9 |
| | | | | | | 2.1 |
| | | | 1.9 |
| | | | | | |
| Income before income taxes | $ | 61.2 |
| | 3.9 | % | | $ | 294.0 |
| | 16.4 | % | | -79 | % | | -1,250 |
| |
| Loss before income taxes | | (198.8 | ) | | -33.5 | % | | (173.6 | ) | | -25.2 | % | | 15 | % | | -830 |
|
| Provision for income taxes | | 11.9 |
| | | | 2.7 |
| | | | | | |
| Net loss | | $ | (210.7 | ) | | -35.5 | % | | $ | (176.3 | ) | | -25.6 | % | | 20 | % | | -990 |
|
Sales
Net sales for the thirdfirst quarter of 20172020 were $1.56 billion,$594.1 million, a 13% decrease of $95.1 million or 14%, as compared to $1.80 billion$689.2 million in the thirdfirst quarter of 2016,2019, with a favorablean unfavorable impact from changes in currency exchange rates of 12 percentage point.
points.
The following table provides a summary of Mattel’sMattel's consolidated gross sales by categories, along with supplemental information by brand, for the thirdfirst quarter of 20172020 and 2016:2019:
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Mattel Girls & Boys Brands: | | | | | | | |
| Barbie | $ | 329.6 |
| | $ | 349.7 |
| | -6 | % | | 1 | % |
| Other Girls | 96.3 |
| | 161.6 |
| | -40 | % | | 2 | % |
| Wheels | 270.3 |
| | 281.9 |
| | -4 | % | | 2 | % |
| Entertainment | 270.8 |
| | 267.9 |
| | 1 | % | | 2 | % |
| | 967.0 |
| | 1,061.1 |
| | -9 | % | | 1 | % |
| Fisher-Price Brands: | | | | | | | |
| Core Fisher-Price | 396.8 |
| | 453.3 |
| | -12 | % | | 1 | % |
| Fisher-Price Friends | 136.4 |
| | 166.7 |
| | -18 | % | | 1 | % |
| Other Fisher-Price | 28.4 |
| | 41.5 |
| | -32 | % | | — | % |
| | 561.6 |
| | 661.5 |
| | -15 | % | | 1 | % |
| American Girl Brands | 88.0 |
| | 125.5 |
| | -30 | % | | — | % |
| Construction and Arts & Crafts Brands | 84.6 |
| | 118.6 |
| | -29 | % | | 1 | % |
| Other | 9.0 |
| | 8.7 |
| | | | |
| Total Gross Sales | $ | 1,710.2 |
| | $ | 1,975.4 |
| | -13 | % | | 2 | % |
| Sales Adjustments | (149.2 | ) | | (179.8 | ) | | | | |
| Total Net Sales | $ | 1,561.0 |
| | $ | 1,795.6 |
| | -13 | % | | 1 | % |
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | March 31,
2020 | | March 31,
2019 | |
| | (In millions, except percentage information) |
| Revenues by Categories | | | | | | | |
| Dolls | $ | 225.9 |
| | $ | 252.9 |
| | -11 | % | | -2 | % |
| Infant, Toddler, and Preschool | 140.3 |
| | 193.6 |
| | -28 | % | | -2 | % |
| Vehicles | 185.7 |
| | 183.4 |
| | 1 | % | | -3 | % |
| Action Figures, Building Sets, and Games | 118.1 |
| | 150.3 |
| | -21 | % | | -1 | % |
| Gross Sales | $ | 670.0 |
| | $ | 780.1 |
| | -14 | % | | -2 | % |
| Sales Adjustments | (75.9 | ) | | (90.9 | ) | | | | |
| Net Sales | $ | 594.1 |
| | $ | 689.2 |
| | -14 | % | | -2 | % |
| | | | | | | | |
| Supplemental Revenue Disclosure | | | | | | | |
| Revenues by Top 3 Power Brands | | | | | | | |
| Barbie | $ | 147.5 |
| | $ | 163.5 |
| | -10 | % | | -2 | % |
| Hot Wheels | 158.6 |
| | 150.5 |
| | 5 | % | | -3 | % |
| Fisher-Price and Thomas & Friends | 128.8 |
| | 172.4 |
| | -25 | % | | -1 | % |
| Other | 235.1 |
| | 293.7 |
| | -20 | % | | -1 | % |
| Gross Sales | $ | 670.0 |
| | $ | 780.1 |
| | -14 | % | | -2 | % |
Gross sales were $1.71 billion$670.0 million in the thirdfirst quarter of 2017,2020, a decrease of $265.2$110.1 million or 13%14%, as compared to $1.98 billion$780.1 million in the thirdfirst quarter of 2016,2019, with a favorablean unfavorable impact from changes in currency exchange rates of 2 percentage points. The decrease in first quarter of 2020 gross sales was primarily due to lower sales of Other Girls, American Girl, ConstructionInfant, Toddler, and Arts & Crafts, Fisher-Price Friends,Preschool; Action Figures, Building Sets, and Core Fisher-Price products, partially as a resultGames; and Dolls, including the impact of COVID-19 and higher retail inventory levels entering and during the reversal of approximately $47 million of grossquarter.
sales related to Toys “R” Us filing for bankruptcy. In addition, Mattel began to reduce shipping to Toys “R” Us in early
September, which resulted in a loss of revenue in the third quarter of 2017. Of the 40%11% decrease in Other GirlsDolls gross sales, 30%7% was due to lower sales of Monster High products, 15% was due to lower sales of DC Super Hero Girls products, and 11% was due to lower sales of Ever After High products, partially offset by initial sales of Enchantimals products of 12%. The 30% decrease in American Girl gross sales was due to lower licensing income and initial sales in the prior year through external distribution channels. Of the 29% decrease in Construction and Arts & Crafts gross sales, 26% was due to lower sales of MEGA BLOKS products, primarily driven by licensed properties and MEGA BLOKS Preschool products. Of the 18% decrease in Fisher-Price Friends gross sales, 17% was due to lower sales of Thomas & Friends products. Of the 12% decrease in Core Fisher-Price gross sales, 6% was due to lower sales of infantBarbie products, and 3% was due to lower sales of Imaginext American Girl products.
Of the 28% decrease in Infant, Toddler, and Preschool gross sales, 23% was due to lower sales of Fisher-Price and Thomas & Friends products, consistent with the overall category decline, including the impact of COVID-19, and 5% was due to lower sales of Fisher-Price Friendsproducts.
Of the 1% increase in Vehicles gross sales, 4% was due to higher sales of Hot Wheels products, partially offset by lower sales of CARS products of 2% following its movie launch in a prior year.
Of the 21% decrease in Action Figures, Building Sets, and Games gross sales, 12% was due to lower sales of Toy Story 4 products following its 2019 theatrical release, 6% was due to lower sales of DC Comics products, 5% was due to lower sales of Jurassic World products following its movie launch in a prior year, and 4% was due to lower sales of MEGA products, partially offset by higher sales of card game products, including UNO, of 6%.
Cost of Sales
Cost of sales as a percentage of net sales was 58.5%57.0% in the thirdfirst quarter of 2017,2020, as compared to 51.5%65.2% in the thirdfirst quarter of 2016.2019. Cost of sales decreased by $11.0$110.6 million, or 1%25%, to $913.8$338.9 million in the thirdfirst quarter of 20172020 from $924.8$449.5 million in the thirdfirst quarter of 2016,2019, as compared to a 13%14% decrease in net sales. Within cost of sales, product and other costs decreased by $26.6$90.8 million, or 3%26%, to $738.4$260.4 million in the thirdfirst quarter of 20172020 from $765.0$351.2 million in the thirdfirst quarter of 2016;2019; freight and logistics expenses increaseddecreased by $14.3$8.0 million, or 16%13%, to $103.0$55.0 million in the thirdfirst quarter of 20172020 from $88.7$63.0 million in the thirdfirst quarter of 2016;2019; and royalty expense increaseddecreased by $1.3$11.8 million, or 2%33%, to $72.4$23.5 million in the thirdfirst quarter of 20172020 from $71.1$35.2 million in the thirdfirst quarter of 2016.2019.
Gross Margin
Gross margin decreasedincreased to 41.5%43.0% in the thirdfirst quarter of 20172020 from 48.5%34.8% in the thirdfirst quarter of 2016.2019. The decreaseincrease in gross margin was primarily driven by unfavorable product mix, higher freightthe benefit of costs savings programs and logistics expenses, an unfavorable impact from Toys “R” Us filing for bankruptcy, and lower licensing income. As a resultthe absence of the Toys “R” Us net sales reversal, gross margin includesimpact of the costinclined sleeper product recalls of sales for the inventory sold, but excludes the corresponding net sales.
approximately $27 million.
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,advertisements; (ii) non-media costs, which primarily include commercial and website production, merchandising, and promotional costs,costs; (iii) retail advertising costs, which primarily include consumer direct catalogs, newspaper inserts, fliers, and mailers,mailers; and (iv) generic advertising costs, which primarily include trade show costs. Advertising and promotion expenses as a percentage of net sales increased to 11.5%12.8% in the thirdfirst quarter of 20172020 from 11.3%10.1% in the thirdfirst quarter of 2016.2019, primarily driven by lower net sales and higher non-media expense.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $381.8$328.7 million, or 24.5%55.3% of net sales, in the thirdfirst quarter of 2017,2020, as compared to $350.5$297.4 million, or 19.5%43.1% of net sales, in the thirdfirst quarter of 2016.2019. The increase in other selling and administrative expenses was primarily due to asset impairments of approximately $15 million,driven by higher incentive compensation expense, employee-related costs, of approximately $7 million, higher severance and restructuring expenses of approximately $6 million, and investments inexpense related to the new American Girl flagship store in New York City of approximately $3 million,inclined sleeper product recall litigation, partially offset by lower incentivethe benefit of the Structural Simplification cost savings program.
Interest expense
Interest expense was $49.0 million in first quarter of 2020, as compared to $47.0 million in first quarter of 2019. The increase in interest expense was due to the higher interest rate associated with the refinancing of both the 2010 Senior Notes due October 2020 and equity compensation expenses of approximately $8 million.the 2016 Senior Notes due August 2021 with the 2019 Senior Notes.
Provision for Income Taxes
Mattel’sMattel's provision for income taxes was $664.5$11.9 million and $57.8$2.7 million infor the thirdfirst quarter of 20172020 and 2016,2019, respectively. For the first quarter of 2020, Mattel recognized a net discrete tax expense of $561.5$6.4 million primarily related to an expense for reassessments of prior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. For the thirdfirst quarter of 20172019, Mattel recognized a net discrete tax benefit of $1.9 million, primarily related to a non-cash chargebenefit for reassessments of $561.9 million resulting fromprior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. As a result of the establishment of a valuation allowance on U.S. deferred tax assets that will likely not be realized and net discretein 2017, there was no U.S. tax benefits of $9.0 million inbenefit provided for U.S. losses for the thirdfirst quarter of 2016 primarily related to reassessments of prior years’ tax liabilities based on the status of audits2020 and tax filings in various jurisdictions around the world.2019.
Segment Results
North America Segment
The following table provides a summary of Mattel’sMattel's gross sales by brand for the North America segment by categories, along with supplemental information by brand, for the thirdfirst quarter of 20172020 and 2016:2019:
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Mattel Girls & Boys Brands: | | | | | | | |
| Barbie | $ | 171.2 |
| | $ | 183.0 |
| | -7 | % | | — | % |
| Other Girls | 33.2 |
| | 79.6 |
| | -58 | % | | — | % |
| Wheels | 130.7 |
| | 157.5 |
| | -17 | % | | — | % |
| Entertainment | 124.5 |
| | 157.0 |
| | -21 | % | | — | % |
| | 459.6 |
| | 577.1 |
| | -20 | % | | — | % |
| Fisher-Price Brands: | | | | | | | |
| Core Fisher-Price | 225.1 |
| | 279.1 |
| | -19 | % | | — | % |
| Fisher-Price Friends | 68.9 |
| | 88.6 |
| | -22 | % | | — | % |
| Other Fisher-Price | 27.9 |
| | 40.3 |
| | -31 | % | | — | % |
| | 321.9 |
| | 408.0 |
| | -21 | % | | — | % |
| Construction and Arts & Crafts Brands | 54.5 |
| | 82.9 |
| | -34 | % | | — | % |
| Other | 3.3 |
| | 3.0 |
| | | | |
| Total Gross Sales | $ | 839.3 |
| | $ | 1,071.0 |
| | -22 | % | | — | % |
| Sales Adjustments | (43.2 | ) | | (67.4 | ) | | | | |
| Total Net Sales | $ | 796.1 |
| | $ | 1,003.6 |
| | -21 | % | | — | % |
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | March 31,
2020 | | March 31,
2019 | |
| | (In millions, except percentage information) |
| Revenues by Categories | | | | | | | |
| Dolls | $ | 73.9 |
| | $ | 80.3 |
| | -8 | % | | — | % |
| Infant, Toddler, and Preschool | 76.6 |
| | 108.0 |
| | -29 | % | | — | % |
| Vehicles | 88.7 |
| | 85.0 |
| | 4 | % | | — | % |
| Action Figures, Building Sets, and Games | 66.5 |
| | 96.2 |
| | -31 | % | | — | % |
| Gross Sales | $ | 305.8 |
| | $ | 369.4 |
| | -17 | % | | — | % |
| Sales Adjustments | (18.2 | ) | | (28.0 | ) | | | | |
| Net Sales | $ | 287.6 |
| | $ | 341.4 |
| | -16 | % | | — | % |
| | | | | | | | |
| Supplemental Revenue Disclosure | | | | | | | |
| Revenues by Top 3 Power Brands | | | | | | | |
| Barbie | $ | 67.8 |
| | $ | 69.3 |
| | -2 | % | | — | % |
| Hot Wheels | 74.1 |
| | 67.1 |
| | 11 | % | | — | % |
| Fisher-Price and Thomas & Friends | 69.9 |
| | 96.6 |
| | -28 | % | | — | % |
| Other | 94.0 |
| | 136.5 |
| | -31 | % | | — | % |
| Gross Sales | $ | 305.8 |
| | $ | 369.4 |
| | -17 | % | | — | % |
Gross sales for the North America segment were $839.3$305.8 million in the thirdfirst quarter of 2017,2020, a decrease of $231.7$63.6 million, or 22%17%, as compared to $1.07 billion$369.4 million in the thirdfirst quarter of 2016.2019. The decrease in the North America segment gross sales was primarily due to lower sales of Other Girls, ConstructionInfant, Toddler, and Arts & Crafts, Fisher-Price Friends, Entertainment, Core Fisher-Price,Preschool, and Wheels products. As a result Toys “R” Us filing for bankruptcy, Mattel reversed approximately $47 millionAction Figures, Building Sets, and Games, including the impact of COVID-19 and higher retail inventory levels entering and during the quarter.
Of the 8% decrease in Dolls gross sales, in the third quarter of 2017. In addition, Mattel began to reduce shipping to Toys “R” Us in early September, which resulted in a loss of revenue in the third quarter of 2017. Of the 58% decrease in Other Girls gross sales, 40%2% was due to lower sales of Monster HighBarbie products, 2% was due to lower sales of Enchantimals products, and 1% was due to lower sales of Lil' Gleemerz products.
Of the 29% decrease in Infant, Toddler, and Preschool gross sales, 25% was due to lower sales of Fisher-Price and Thomas & Friends products, consistent with the overall category decline, including the impact of COVID-19,and 4% was due to lower sales of Fisher-Price Friendsproducts.
Of the 4% increase in Vehicles gross sales, 7% was due to higher sales of Hot Wheels products, partially offset by lower sales of CARS products of 2% and lower sales of Jurassic World products of 1% following their movie launches in prior years.
Of the 31% decrease in Action Figures, Building Sets, and Games gross sales, 18% was due to lower sales of DC Super Hero Girls products. Of the 34% decrease in ConstructionToy Story 4 products and Arts & Crafts gross sales, 30%6% was due to lower sales of MEGA BLOKSJurassic World products primarily driven by licensed properties and MEGA BLOKS Preschool products. Of the 22% decreasefollowing their movie launches in Fisher-Price Friends gross sales, 22%prior years, 6% was due to lower sales of Thomas & Friends products. Of the 21% decrease in Entertainment gross sales, 13% was due to lower sales of Minecraft products, 4% was due to lower sales of DC Comics products, 4% was due to lower sales of games and puzzles products, and 7% was due to lower sales of other licensed properties, partially offset by higher sales of CARS products of 12%. Of the 19% decrease in Core Fisher-Price gross sales, 8% was due to lower sales of infantMEGA products, and 5% was due to lower sales of Imaginext products. Of the 17% decrease in Wheels gross sales, 9% was due to lowerDC Comics products, partially offset by higher sales of Hot Wheelscard game products, andincluding UNO, of 6% was due to lower sales of Tyco™ RCvehicles products..
Cost of sales decreased 6%31% in the thirdfirst quarter of 2017,2020, as compared to a 21%16% decrease in net sales, primarily due to lower product and other costs, partially offset by higher freight and logistics expenses.costs. Gross margin in the thirdfirst quarter of 2017 decreased2020 increased primarily due to an unfavorable impact from Toys “R” Us filing for bankruptcy, higher freightthe benefit of cost savings programs and logistics expenses, and unfavorable product mix. As a resultthe absence of the Toys “R” Us net sales reversal, gross margin includesimpact of the costinclined sleeper product recalls of sales for the inventory sold, but excludes the corresponding net sales.approximately $27 million.
North America segment income decreased to $86.2was $8.0 million in the thirdfirst quarter of 2017,2020, as compared to $265.6segment loss of $19.7 million in the thirdfirst quarter of 2016,2019, primarily due to lower gross profit and higher other selling and administrative expenses, partially offset by lower advertising and promotion expenses.the absence of the impact of the inclined sleeper product recalls of approximately $27 million.
International Segment
The following table provides a summary of percentage changes in net sales within the International segment in the third quarter of 2017 versus 2016:
|
| | | | | |
| | % Change in Net Sales as Reported | | Currency Exchange Rate Impact |
| Total International Segment | 1 | % | | 2 | % |
| Europe | — | % | | 3 | % |
| Latin America | 4 | % | | 3 | % |
| Asia Pacific | 1 | % | | — | % |
The following table provides a summary of percentage changes inMattel's gross sales within the International segment in the third quarter of 2017 versus 2016:
|
| | | | | |
| | % Change in Gross Sales as Reported | | Currency Exchange Rate Impact |
| Total International Segment | — | % | | 2 | % |
| Europe | -1 | % | | 4 | % |
| Latin America | 2 | % | | 3 | % |
| Asia Pacific | 2 | % | | 1 | % |
The following table provides a summary of Mattel’s gross sales by brand for the International segment by categories, along with supplemental brand information, for the thirdfirst quarter of 20172020 and 2016:2019:
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Mattel Girls & Boys Brands: | | | | | | | |
| Barbie | $ | 158.4 |
| | $ | 166.6 |
| | -5 | % | | 3 | % |
| Other Girls | 63.1 |
| | 82.1 |
| | -23 | % | | 3 | % |
| Wheels | 139.6 |
| | 124.4 |
| | 12 | % | | 3 | % |
| Entertainment | 146.3 |
| | 110.9 |
| | 32 | % | | 4 | % |
| | 507.4 |
| | 484.0 |
| | 5 | % | | 3 | % |
| Fisher-Price Brands: | | | | | | | |
| Core Fisher-Price | 171.7 |
| | 174.2 |
| | -1 | % | | 3 | % |
| Fisher-Price Friends | 67.5 |
| | 78.1 |
| | -14 | % | | 1 | % |
| Other Fisher-Price | 0.5 |
| | 1.2 |
| |
|
| |
|
|
| | 239.7 |
| | 253.5 |
| | -5 | % | | 3 | % |
| Construction and Arts & Crafts Brands | 29.9 |
| | 35.7 |
| | -16 | % | | 3 | % |
| Other | — |
| | 1.0 |
| | | | |
| Total Gross Sales | $ | 777.0 |
| | $ | 774.2 |
| | — | % | | 2 | % |
| Sales Adjustments | (101.8 | ) | | (108.3 | ) | | | | |
| Total Net Sales | $ | 675.2 |
| | $ | 665.9 |
| | 1 | % | | 2 | % |
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | March 31,
2020 | | March 31,
2019 | |
| | (In millions, except percentage information) |
| Revenues by Categories | | | | | | | |
| Dolls | $ | 113.9 |
| | $ | 127.1 |
| | -10 | % | | -3 | % |
| Infant, Toddler, and Preschool | 63.8 |
| | 85.6 |
| | -26 | % | | -4 | % |
| Vehicles | 96.9 |
| | 98.4 |
| | -2 | % | | -5 | % |
| Action Figures, Building Sets, and Games | 51.5 |
| | 54.1 |
| | -5 | % | | -4 | % |
| Gross Sales | $ | 326.1 |
| | $ | 365.2 |
| | -11 | % | | -4 | % |
| Sales Adjustments | (56.8 | ) | | (61.8 | ) | | | | |
| Net Sales | $ | 269.4 |
| | $ | 303.4 |
| | -11 | % | | -3 | % |
| | | | | | | | |
| Supplemental Revenue Disclosure | | | | | | | |
| Revenues by Top 3 Power Brands | | | | | | | |
| Barbie | $ | 79.7 |
| | $ | 94.2 |
| | -15 | % | | -3 | % |
| Hot Wheels | 84.5 |
| | 83.5 |
| | 1 | % | | -5 | % |
| Fisher-Price and Thomas & Friends | 58.8 |
| | 75.8 |
| | -22 | % | | -3 | % |
| Other | 103.1 |
| | 111.7 |
| | -8 | % | | -4 | % |
| Gross Sales | $ | 326.1 |
| | $ | 365.2 |
| | -11 | % | | -4 | % |
Gross sales for the International segment were $777.0$326.1 million in the thirdfirst quarter of 2017, an increase2020, a decrease of $2.8$39.1 million, or 11%, as compared to $774.2$365.2 million in the thirdfirst quarter of 2016,2019, with a favorablean unfavorable impact from changes in currency exchange rates of 24 percentage points. The increasedecrease in the International segment gross sales was primarily due to higher sales of Entertainment and Wheels products, partially offset by lower sales of Other Girls, ConstructionInfant, Toddler, and Arts & Crafts,Preschool, and Fisher-Price Friends products. Dolls, including the impact of COVID-19.
Of the 32% increase10% decrease in EntertainmentDolls gross sales, 44% was due to higher sales of CARS products, partially offset by lower sales of Dinotrux, WWE, and Minecraft products of 3% each. Of the 12% increase in Wheels gross sales, 12% was due to higher sales of Hot Wheels products. Of the 23% decrease in Other Girls gross sales, 21%11% was due to lower sales of Monster High Barbie products, 13%primarily driven by the impact of COVID-19.
Of the 26% decrease in Infant, Toddler, and Preschool gross sales, 20% was due to lower sales of DC Super Hero Girls Fisher Price and Thomas & Friends products, consistent with the overall category decline, including the impact of COVID-19, and 12%6% was due to lower sales of Ever After High products, partially offset by initial sales of Enchantimals products of 19%. Fisher-Price Friendsproducts.
Of the 16%2% decrease in Construction and Arts & CraftsVehicles gross sales, 16%3% was due to lower sales of MEGA BLOKS CARS products primarily drivenfollowing its movie launch in a prior year, partially offset by MEGA BLOKS Preschool higher sales of Hot Wheels products and licensed properties. of 1%.
Of the 14%5% decrease in Fisher-Price FriendsAction Figures, Building Sets, and Games gross sales, 12%8% was due to lower sales of Thomas & Friends products.DC Comics products, 3% was due to lower sales of Jurassic World products following its movie launch in a prior year, partially offset by higher sales of card game products, including UNO, of 7%.
Cost of sales increased 1%decreased 17% in the thirdfirst quarter of 2017,2020, as compared to an 1% increase11% decrease in net sales, primarily due to higher royalty expense, partially offset by lower freightproduct and logistics expenses.other costs. Gross margin in the thirdfirst quarter of 2017 decreased as a result2020 increased primarily due to the benefit of an unfavorable product mix and higher royalty expense, partially offset by strategic pricing.cost savings programs.
International segment income decreased to $81.3loss was $34.1 million in the thirdfirst quarter of 2017,2020, as compared to $150.2segment loss of $24.3 million in the thirdfirst quarter of 2016,2019, primarily due to lower net sales due to the impact from COVID-19, partially offset by a higher gross profit and higher other selling and administrative expenses.
margin.
American Girl Segment
The following table provides a summary of Mattel’sMattel's gross sales by brand for the American Girl segment for the thirdfirst quarter of 20172020 and 2016:2019:
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| American Girl Segment: | | | | | | | |
| American Girl Brands | $ | 88.0 |
| | $ | 124.5 |
| | -29 | % | | — | % |
| Construction and Arts & Crafts Brands | 0.2 |
| | — |
| |
|
| |
|
|
| Other Brands | 5.7 |
| | 5.6 |
| | 3 | % | | 5 | % |
| Total Gross Sales | $ | 93.9 |
| | $ | 130.1 |
| | -28 | % | | — | % |
| Sales Adjustments | (4.2 | ) | | (4.0 | ) | | | | |
| Total Net Sales | $ | 89.7 |
| | $ | 126.1 |
| | -29 | % | | — | % |
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | March 31,
2020 | | March 31,
2019 | |
| | (In millions, except percentage information) |
| American Girl Segment | | | | | | | |
| Total Gross Sales | $ | 38.1 |
| | $ | 45.6 |
| | -16 | % | | — | % |
| Sales Adjustments | (0.9 | ) | | (1.1 | ) | | | | |
| Total Net Sales | $ | 37.2 |
| | $ | 44.4 |
| | -16 | % | | — | % |
Gross sales for the American Girl segment were $93.9$38.1 million in the thirdfirst quarter of 2017,2020, a decrease of $36.2$7.5 million, or 28%16%, as compared to $130.1$45.6 million in the thirdfirst quarter of 2016.2019. The decrease in American Girl segment gross sales was primarily due to lower sales in proprietary retail channels, including the impact of American Girl brands products. The 29% decrease in American Girl brands gross sales wasretail store closures due to lower licensing income and initial sales in the prior year through external distribution channels.
Cost of sales decreased 1% in the third quarter of 2017, as compared to a 29% decrease in net sales. Gross margin in the third quarter of 2017 decreased as a result of lower licensing income and higher obsolescence expense.
American Girl segment loss was $14.6 million in the third quarter of 2017, as compared to segment income of $28.1 million in the third quarter of 2016, primarily due to lower gross profit, lower licensing income, and higher other selling and administrative expenses.
Results of Operations—First Nine Months
Consolidated Results
Net sales for the first nine months of 2017 were $3.27 billion, a 10% decrease, as compared to $3.62 billion in the first nine months of 2016. As a result of Toys “R” Us filing for bankruptcy in September 2017, Mattel reversed approximately $43 million of net sales attributable to the North America segment in the third quarter of 2017. Mattel reduced shipping to Toys “R” Us in early September, which resulted in a loss of revenue in the third quarter of 2017. Further, gross margin includes the cost of sales for the inventory sold to Toys “R” Us, but excludes the corresponding net sales. Net loss for the first nine months of 2017 was $772.6 million, or $2.25 per diluted share, as compared to net income of $144.2 million, or $0.42 per diluted share, in the first nine months of 2016. Net loss for the first nine months of 2017 was negatively impacted by discrete non-cash tax expense of $561.9 million related to the establishment of a valuation allowance on deferred tax assets that will likely not be realized and lower gross profit,COVID-19, partially offset by lower advertising and promotion expenses and lower other non-operating expense. Other non-operating expense was higher in the first nine months of 2016 due to the change in the remeasurement rate used by Mattel's Venezuelan subsidiary in the first quarter of 2016, which resulted in an unrealized foreign currency exchange loss of approximately $26 million.
The following table provides a summary of Mattel’s consolidated results for the first nine months of 2017 and 2016 (in millions, except percentage and basis point information):
|
| | | | | | | | | | | | | | | | | | | |
| | For the Nine Months Ended | | Year/Year Change |
| September 30, 2017 | | September 30, 2016 | |
| Amount | | % of Net
Sales | | Amount | | % of Net
Sales | | % | | Basis Points
of Net Sales |
| | (In millions, except percentage and basis point information) |
| Net sales | $ | 3,271.1 |
| | 100.0 | % | | $ | 3,622.3 |
| | 100.0 | % | | -10 | % | | — |
|
| Gross profit | $ | 1,325.7 |
| | 40.5 | % | | $ | 1,693.0 |
| | 46.7 | % | | -22 | % | | -620 |
|
| Advertising and promotion expenses | 348.8 |
| | 10.7 | % | | 384.6 |
| | 10.6 | % | | -9 | % | | 10 |
|
| Other selling and administrative expenses | 1,066.9 |
| | 32.6 | % | | 1,051.8 |
| | 29.0 | % | | 1 | % | | 360 |
|
| Operating (loss) income | (90.0 | ) | | -2.8 | % | | 256.6 |
| | 7.1 | % | | -135 | % | | -990 |
|
| Interest expense | 68.6 |
| | 2.1 | % | | 70.1 |
| | 1.9 | % | | -2 | % | | 20 |
|
| Interest (income) | (6.3 | ) | | -0.2 | % | | (7.6 | ) | | -0.2 | % | | -16 | % | | — |
|
| Other non-operating expense, net | 5.9 |
| | | | 23.3 |
| | | | | | |
| (Loss) income before income taxes | $ | (158.2 | ) | | -4.8 | % | | $ | 170.8 |
| | 4.7 | % | | -193 | % | | -950 |
|
Sales
Net sales for the first nine months of 2017 were $3.27 billion, a 10% decrease, as compared to $3.62 billion in the first nine months of 2016.
The following table provides a summary of Mattel’s consolidated gross sales by brand results for the first nine months of 2017 and 2016:
|
| | | | | | | | | | | | | |
| | For the Nine Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Mattel Girls & Boys Brands: | | | | | | | |
| Barbie | $ | 605.2 |
| | $ | 651.3 |
| | -7 | % | | — | % |
| Other Girls | 194.7 |
| | 304.5 |
| | -36 | % | | 1 | % |
| Wheels | 563.3 |
| | 579.0 |
| | -3 | % | | — | % |
| Entertainment | 654.8 |
| | 607.9 |
| | 8 | % | | 1 | % |
| | 2,018.0 |
| | 2,142.7 |
| | -6 | % | | — | % |
| Fisher-Price Brands: | | | | | | | |
| Core Fisher-Price | 794.6 |
| | 870.1 |
| | -9 | % | | — | % |
| Fisher-Price Friends | 288.4 |
| | 330.8 |
| | -13 | % | | -1 | % |
| Other Fisher-Price | 60.5 |
| | 79.5 |
| | -24 | % | | — | % |
| | 1,143.5 |
| | 1,280.4 |
| | -11 | % | | — | % |
| American Girl Brands | 234.2 |
| | 286.9 |
| | -18 | % | | — | % |
| Construction and Arts & Crafts Brands | 176.1 |
| | 252.8 |
| | -30 | % | | 1 | % |
| Other | 21.5 |
| | 27.4 |
| | | | |
| Total Gross Sales | $ | 3,593.3 |
| | $ | 3,990.2 |
| | -10 | % | | — | % |
| Sales Adjustments | (322.2 | ) | | (367.9 | ) | | | | |
| Total Net Sales | $ | 3,271.1 |
| | $ | 3,622.3 |
| | -10 | % | | — | % |
Gross sales were $3.59 billion in the first nine months of 2017, a decrease of $396.9 million, or 10%, as compared to $3.99 billion in the first nine months of 2016. The decrease in gross sales was due to lower sales of Other Girls, Construction and Arts & Crafts, American Girl, and Fisher-Price Friends products, partially as a result of the reversal of approximately $47 million of gross sales related to Toys “R” Us filing for bankruptcy. In addition, Mattel began to reduce shipping to Toys “R” Us in early September, which resulted in a loss of revenue in the third quarter of 2017. Of the 36% decrease in Other Girls gross sales, 30% was due to lower sales of Monster High products and 13% was due to lower sales of Ever After High products, partially offset by initial sales of Enchantimals products of 7%. Of the 30% decrease in Construction and Arts & Crafts gross sales, 28% was due to lower sales of MEGA BLOKS products, primarily driven by licensed properties and MEGA BLOKS Preschool products. The 18% decrease in American Girl gross sales was due to lower licensing income and initial sales in the prior year through external distribution channels. Of the 13% decrease in Fisher-Price Friends gross sales, 14% was due to lower sales of Thomas & Friends products.
Cost of Sales
Cost of sales as a percentage of net sales was 59.5% in the first nine months of 2017, as compared to 53.3% in the first nine months of 2016. Cost of sales increased by $16.1 million, or 1%, to $1.95 billion in the first nine months of 2017 from $1.93 billion in the first nine months of 2016, as compared to a 10% decrease in netdirect-to-consumer channel sales. Within cost of sales, freight and logistics expenses increased by $24.5 million, or 12%, to $233.8 million in the first nine months of 2017 from $209.3 million in the first nine months of 2016; royalty expense increased by $7.7 million, or 5%, to $155.7 million in the first nine months of 2017 from $148.0 million in the first nine months of 2016; product and other costs decreased by $16.1 million, or 1%, to $1.56 billion in the first nine months of 2017 from $1.57 billion in the first nine months of 2016.
Gross Margin
Gross margin decreased to 40.5% in the first nine months of 2017 from 46.7% in the first nine months of 2016. The decrease in gross margin was due to unfavorable product mix, higher freight and logistics expenses, lower licensing income, and an unfavorable impact from Toys “R” Us filing for bankruptcy. As a result of the Toys “R” Us net sales reversal, gross margin includes the cost of sales for the inventory sold, but excludes the corresponding net sales.
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 slightly to 10.7% in the first nine months of 2017 from 10.6% in the first nine months of 2016.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $1.07 billion, or 32.6% of net sales, in the first nine months of 2017, as compared to $1.05 billion, or 29.0% of net sales, in the first nine months of 2016. The increase in other selling and administrative expenses was primarily due to asset impairments of approximately $15 million and higher employee-related costs of approximately $15 million, partially offset by lower severance and restructuring expenses of approximately $12 million.
Other Non-Operating Expense
Other non-operating expense was $5.9 million in the first nine months of 2017, as compared to $23.3 million in the first nine months of 2016. The decrease in other non-operating expense was primarily due to the change in the remeasurement rate used by Mattel's Venezuelan subsidiary in 2016, which resulted in an unrealized foreign currency exchange loss of approximately $26 million in the first quarter of 2016.
Provision for Income Taxes
Mattel’s provision for income taxes was $614.4 million and $26.6 million in the first nine months of 2017 and 2016, respectively. Mattel recognized net discrete tax expense of $558.8 million in the first nine months of 2017 primarily related to a non-cash charge of $561.9 million resulting from the establishment of a valuation allowance on deferred tax assets that will likely not be realized and net discrete tax benefits of $12.8 million in the first nine months 2016 primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world.
North America Segment
The following table provides a summary of Mattel’s gross sales by brand for the North America segment for the first nine months of 2017 and 2016:
|
| | | | | | | | | | | | | |
| | For the Nine Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Mattel Girls & Boys Brands: | | | | | | | |
| Barbie | $ | 285.6 |
| | $ | 327.7 |
| | -13 | % | | — | % |
| Other Girls | 73.5 |
| | 154.4 |
| | -52 | % | | — | % |
| Wheels | 256.5 |
| | 294.4 |
| | -13 | % | | — | % |
| Entertainment | 330.7 |
| | 356.9 |
| | -7 | % | | — | % |
| | 946.3 |
| | 1,133.4 |
| | -17 | % | | — | % |
| Fisher-Price Brands: | | | | | | | |
| Core Fisher-Price | 449.0 |
| | 515.7 |
| | -13 | % | | — | % |
| Fisher-Price Friends | 135.6 |
| | 168.3 |
| | -19 | % | | — | % |
| Other Fisher-Price | 59.5 |
| | 77.5 |
| | -23 | % | | — | % |
| | 644.1 |
| | 761.5 |
| | -15 | % | | — | % |
| Construction and Arts & Crafts Brands | 109.7 |
| | 170.1 |
| | -36 | % | | — | % |
| Other | 8.8 |
| | 12.1 |
| | | | |
| Total Gross Sales | $ | 1,708.9 |
| | $ | 2,077.1 |
| | -18 | % | | — | % |
| Sales Adjustments | (88.0 | ) | | (123.0 | ) | | | | |
| Total Net Sales | $ | 1,620.9 |
| | $ | 1,954.1 |
| | -17 | % | | — | % |
Gross sales for the North America segment were $1.71 billion in the first nine months of 2017, a decrease of $368.2 million, or 18%, as compared to $2.08 billion in the first nine months of 2016. The decrease in the North America segment gross sales was primarily due to lower sales of Other Girls, Construction and Arts & Crafts, Fisher-Price Friends, Core Fisher-Price, Wheels, and Barbie products. As a result Toys “R” Us filing for bankruptcy, Mattel reversed approximately $47 million of gross sales in the third quarter of 2017. In addition, Mattel began to reduce shipping to Toys “R” Us in early September, which resulted in a loss of revenue in the third quarter of 2017. Of the 52% decrease in Other Girls gross sales, 37% was due to lower sales of Monster High products and 15% was due to lower sales of Ever After High products. Of the 36% decrease in Construction and Arts & Crafts gross sales, 32% was due to lower sales of MEGA BLOKS products, primarily driven by licensed properties and MEGA BLOKS Preschool products. Of the 19% decrease in Fisher-Price Friends gross sales, 19% was due to lower sales of Thomas & Friends products. Of the 13% decrease in Core Fisher-Price gross sales, 8% was due to lower sales of infant products and 3% was due to lower sales of Imaginext products. Of the 13% decrease in Wheels gross sales, 8% was due to lower sales of Hot Wheels products and 4% was due to lower sales of Matchbox products. The 13% decrease in Barbie gross sales was due to a shift in DVD entertainment strategy.
Cost of sales decreased 6% in the first nine monthsquarter of 2017,2020, as compared to a 17%16% decrease in net sales, primarily due to lower product and other costs, partially offset by higher freight and logistics expenses. Gross margin in the first nine monthsquarter of 20172020 decreased primarily due to an unfavorable impact from Toys “R” Us filing for bankruptcy, higherincreased freight and logistics expenses and unfavorable product mix. As a result of the Toys “R” Us net sales reversal, gross margin includes the cost of sales for the inventory sold, but excludes the corresponding net sales.
North America segment income decreased to $109.6 million in the first nine months of 2017, as compared to $371.1 million in the first nine months of 2016, primarily due to lower gross profithigher direct-to-consumer channel sales and higher other selling and administrative expenses,strategic price decreases, partially offset by lower advertising and promotion expenses.
International Segment
The following table provides a summarythe benefit of percentage changes in net sales within the International segment in the first nine months of 2017 versus 2016:
|
| | | | | |
| | % Change in Net Sales as Reported | | Currency Exchange Rate Impact |
| Total International Segment | 2 | % | | — | % |
| Europe | -2 | % | | — | % |
| Latin America | 5 | % | | 2 | % |
| Asia Pacific | 10 | % | | -1 | % |
The following table provides a summary of percentage changes in gross sales within the International segment in the first nine months of 2017 versus 2016:
|
| | | | | |
| | % Change in Gross Sales as Reported | | Currency Exchange Rate Impact |
| Total International Segment | 1 | % | | — | % |
| Europe | -3 | % | | — | % |
| Latin America | 4 | % | | 2 | % |
| Asia Pacific | 8 | % | | -1 | % |
The following table provides a summary of Mattel’s gross sales by brand for the International segment for the first nine months of 2017 and 2016:
|
| | | | | | | | | | | | | |
| | For the Nine Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Mattel Girls & Boys Brands: | | | | | | | |
| Barbie | $ | 319.6 |
| | $ | 323.6 |
| | -1 | % | | 1 | % |
| Other Girls | 121.2 |
| | 150.0 |
| | -19 | % | | 2 | % |
| Wheels | 306.8 |
| | 284.6 |
| | 8 | % | | 1 | % |
| Entertainment | 324.1 |
| | 251.0 |
| | 29 | % | | — | % |
| | 1,071.7 |
| | 1,009.2 |
| | 6 | % | | 1 | % |
| Fisher-Price Brands: | | | | | | | |
| Core Fisher-Price | 345.6 |
| | 354.4 |
| | -2 | % | | 1 | % |
| Fisher-Price Friends | 152.8 |
| | 162.5 |
| | -6 | % | | -2 | % |
| Other Fisher-Price | 1.0 |
| | 2.0 |
| | | | |
| | 499.4 |
| | 518.9 |
| | -4 | % | | -1 | % |
| Construction and Arts & Crafts Brands | 65.9 |
| | 82.7 |
| | -20 | % | | 1 | % |
| Other | — |
| | 3.4 |
| | | | |
| Total Gross Sales | $ | 1,637.0 |
| | $ | 1,614.2 |
| | 1 | % | | — | % |
| Sales Adjustments | (221.6 | ) | | (233.2 | ) | | | | |
| Total Net Sales | $ | 1,415.4 |
| | $ | 1,381.0 |
| | 2 | % | | — | % |
Gross sales for the International segment were $1.64 billion in the first nine months of 2017, an increase of $22.8 million, or 1%, as compared to $1.61 billion in the first nine months of 2016. The increase in the International segment gross sales was primarily due to higher sales of Entertainment products, partially offset by lower sales of Construction and Arts & Crafts and Other Girls products. Of the 29% increase in Entertainment gross sales, 46% was due to higher sales of CARS products, partially offset by lower sales of DC Comics products of 7%, lower sales of Minecraft products of 3%, and lower sales of Max Steel and WWE products of 2% each. Of the 20% decrease in Construction and Arts & Crafts gross sales, 20% was due to lower sales of MEGA BLOKS products, primarily driven by licensed properties and MEGA BLOKS Preschool products. Of the 19% decrease in Other Girls gross sales, 23% was due to lower sales of Monster High products and 10% was due to lower sales of Ever After High products, partially offset by initial sales of Enchantimals products of 11%.
Cost of sales increased 6% in the first nine months of 2017, as compared to a 2% increase in net sales, primarily due to higher product and other costs and higher royalty expense. Gross margin in the first nine months of 2017 decreased as a result of unfavorable product mix, higher royalty expense, lower licensing income, and higher obsolescence expense, partially offset by strategic pricing.
International segment income decreased to $48.1 million in the first nine months of 2017, as compared to $155.9 million in the first nine months of 2016, driven primarily by lower gross profit and higher other selling and administrative expenses.
American Girl Segment
The following table provides a summary of Mattel’s gross sales by brand for the American Girl segment for the first nine months of 2017 and 2016:
|
| | | | | | | | | | | | | |
| | For the Nine Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| American Girl Segment: | | | | | | | |
| American Girl Brands | $ | 234.2 |
| | $ | 285.9 |
| | -18 | % | | — | % |
| Construction and Arts & Crafts Brands | 0.5 |
| | — |
| |
|
| |
|
|
| Other Brands | 12.7 |
| | 13.0 |
| | -2 | % | | 1 | % |
| Total Gross Sales | $ | 247.4 |
| | $ | 298.9 |
| | -17 | % | | — | % |
| Sales Adjustments | (12.6 | ) | | (11.7 | ) | | | | |
| Total Net Sales | $ | 234.8 |
| | $ | 287.2 |
| | -18 | % | | — | % |
Gross sales for the American Girl segment were $247.4 million in the first nine months of 2017, a decrease of $51.5 million, or 17%, as compared to $298.9 million in the first nine months of 2016. The decrease in the American Girl segment gross sales was primarily due to lower sales of American Girl brands products. The 18% decrease in American Girl brands gross sales was due to lower licensing income and initial sales in the prior year through external distribution channels.
Cost of sales decreased 2% in the first nine months of 2017, as compared to an 18% decrease in net sales. Gross margin in the first nine months of 2017 decreased as a result of lower licensing income and higher obsolescence expense.cost savings programs.
American Girl segment loss was $38.6$17.4 million in the first nine monthsquarter of 2017,2020, as compared to segment incomeloss of $21.9$14.1 million in the first nine monthsquarter of 2016,2019, driven primarily by lower gross profit, lower licensing income,sales in proprietary retail channels, including the impact of temporary retail store closures due to COVID-19, partially offset by higher direct-to-consumer channel sales.
Cost Savings Programs
Capital Light Program
During the first quarter of 2019, Mattel announced the commencement of its Capital Light program to optimize Mattel's manufacturing footprint (including the sale or consolidation of manufacturing facilities), increase the productivity of its plant infrastructure, and higherachieve additional efficiencies across its entire supply chain. 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. Mattel recorded severance and other restructuring charges of $5.8 million for the first quarter of 2020. Of the total charges recorded for the first quarter of 2020, $2.7 million was recorded within other selling and administrative expenses.expenses and $3.1 million was recorded within cost of sales in the consolidated statements of operations.
Income Taxes
Mattel’s provision for income taxes was $614.4 millionAs of March 31, 2020, Mattel has recorded cumulative severance and $26.6 million for the nine months ended September 30, 2017 and 2016, respectively. Mattel recognized net discrete non-cash tax expense of $561.5 million and $558.8 million during the three and nine months ended September 30, 2017, respectively, and net discrete tax benefits of $9.0 million and $12.8 million during the three and nine months ended September 30, 2016, respectively, primarilyother restructuring charges related to the establishmentCapital Light program of a valuation allowance and reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, respectively.
Mattel regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, Mattel considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Mattel considered its recent operating results$43.4 million, which resulted in a cumulative net operating loss in the U.S. for the 36-month period ending September 30, 2017. The 36-month cumulative U.S. loss from operations is considered strong negative evidence and outweighs other positive subjective evidence, such as projections of future income. As a result, in the third quarter Mattel established a valuation allowance on its U.S. federal and state deferred tax assets. This results in a discreteinclude non-cash charge to the quarter of $561.9 million for the balance of these net deferred tax assets as of December 31, 2016. Further,charges. Mattel has provided zero tax benefit in the year-to-date tax expense for items such as the year-to-date U.S. operating lossrecorded cumulative non-cash charges of approximately $13 million. Mattel expects to incur total severance and other effects occurring in the current year. The valuation allowance does not impact Mattel's actual ability under applicable tax laws to utilize deferred tax assets such as loss carryforwards and tax credits to reduce future cash tax payments if and when sufficient income is earned prior to the expirationrestructuring charges, excluding non-cash charges, of the deferred tax assets. Mattel will continue to assess the likelihood that the deferred tax assets will be realizable at each period end.
In the normal course of business, Mattel is regularly audited by federal, state, and foreign tax authorities. Based on the current status of federal, state, and foreign audits, Mattel believes it is reasonably possible that in the next twelve months, the total unrecognized tax benefits could decrease by approximately $27$35 million related to the settlementCapital Light program.
Mattel is currently evaluating other cost saving measures, including the optimization of tax audits and/orowned and operated manufacturing facilities and the expirationgeographical footprint of statutesco-manufacturing facilities, which may result in incremental cost savings. Mattel realized cost savings (before severance, restructuring costs, and cost inflation) of limitations. The ultimate settlementapproximately $8 million, primarily within gross profit, for the first quarter of any issue2020 and has achieved approximately $23 million of run-rate savings in connection with the applicable taxing authority could haveprogram. Mattel expects to realize cumulative run-rate cost savings of approximately $65 million in 2020 and $72 million by 2021 related to the Capital Light program actions taken to date.
Other Cost Savings Actions
During the first quarter of 2020, Mattel recorded severance and other restructuring charges of $4.8 million, primarily related to actions taken to further streamline its organizational structure.
In connection with Mattel’s continued efforts to streamline its organizational structure and restore profitability, on May 4, 2020, Mattel committed to a materialplanned 4% reduction in its non-manufacturing workforce. The timing of this action was accelerated due to the impact on Mattel’s consolidated financial statements.of COVID-19. Mattel expects to incur severance and restructuring charges of approximately $13 million, consisting solely of cash expenditures for employee termination and severance costs, starting in the second quarter of 2020 through the end of 2020. As a result of the reduction in force actions initiated in 2020, Mattel expects to realize approximately $40 million of run-rate cost savings exiting 2020.
Liquidity and Capital Resources
Mattel’sMattel's primary sources of liquidity are its domestic and foreign cash and equivalents balances, access to short-term borrowing facilities, including its $1.60 billion domestic unsecured committedsenior secured revolving credit facility (“Credit Facility”), commercial paper program,facilities, and issuances of long-termaccess to capital markets to fund its operations and obligations. Such obligations may include investing and financing activities such as capital expenditures and debt securities. service. Of Mattel's $499.4 million in cash and equivalents at March 31, 2020, approximately $335 million was held by foreign subsidiaries.
Cash flows from operating activities could be negatively impacted by decreased demand for Mattel’sMattel's products, which could result from factors such as, but not limited to, adverse economic conditions and changes in public and consumer preferences, or by increased costs associated with manufacturing and distribution of products or shortages in raw materials or component parts. Additionally, Mattel’sMattel's ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as, but not limited to, global economic crises and tight credit environments, an inability to meet its debt covenant requirements which include maintaining consolidated debt-to-earnings before interest, taxes, depreciation, and amortization and interest coverage ratios,its senior secured revolving credit facility covenants, or afurther deterioration of Mattel’sMattel's credit ratings. As discussed above under Part I, Item 2 "Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Update" of this Quarterly Report on Form 10-Q, many of the aforementioned factors have been, and are expected to continue to be, adversely affected by COVID-19. However, based on Mattel’s abilitycurrent business plan and factors known to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sourcesdate, including the currently known impacts of liquidity.
Of Mattel’s $181.3 million inCOVID-19, it is expected that existing cash and equivalents, as of September 30, 2017, approximately $102 million is held by foreign subsidiaries. Mattel may need to accrue and pay additional income taxes if some or all of the undistributed earnings of foreign subsidiaries were repatriated. Mattel does not foresee a need to repatriate undistributed earnings of foreign subsidiaries. Mattel has several liquidity options to fund its domestic operations and obligations; such obligations include investing and financing activities such as dividends, share repurchases, and debt service. Positive cash flows generated annually by its domesticfrom operations, availability under the Credit Facility, alternative forms of financing,senior secured credit revolving facility, and access to both long-termcapital markets, will be sufficient to meet our working capital and short-term public and private debt markets at competitive interest rates are availableoperating expenditure requirements for the next twelve months. Additionally, Mattel expects to fund domestic operations and obligations. If these sources are not adequate, Mattel also has the ability to repatriate highly taxed foreign earnings, receive repayment of intercompany loans to foreign subsidiaries, and/or distribute liquidating dividends from foreign subsidiaries,remain in compliance with all of which would have a very nominal impact, if any,its debt covenants through May 5, 2021. Refer to Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q for further discussion regarding potential impacts of COVID-19 on Mattel’s tax liabilities. Mattel believes that its policy to indefinitely reinvest the earnings of its foreign subsidiaries will not result in and is not reasonably likely to result in a material change to Mattel’s liquidity position.
In October 2017, Mattel's Board of Directors determined to suspend the Company's quarterly dividend beginning in the fourth quarter of 2017, which was previously $0.15 per share, in order to increase financial flexibility, strengthen the balance sheet, and facilitate strategic investments.business.
Current Market Conditions
Mattel is exposed to financial market risk resulting from changes in interest and foreign currency exchange rates. Mattel believes that it has ample liquidity to fund its business needs, including beginning of year cash and equivalents, cash flows from operations, and access to the commercial paper markets and its Credit Facility, which it uses for seasonal working capital requirements.
Subject to market conditions,Consistent with prior periods, Mattel intends to utilize its commercial paper program as its primary short-term borrowing facility, and does not intend to sell commercial paper notes in excess of the available amount under the Credit Facility as described below. The Credit Facility is used as a back-up to Mattel’s commercial paper program. If, for any reason, Mattel is unable to access the commercial paper market, Mattel intends to use the Credit Facility or alternative forms of financingsenior secured revolving credit facilities to meet its short-term liquidity needs. As of September 30, 2017, there were no amountsAt March 31, 2020, Mattel had $150.0 million in outstanding borrowings under the Credit Facility. Assenior secured revolving credit facilities and approximately $13 million in outstanding letters of Septembercredit under the senior secured revolving credit facilities. During April 2020, Mattel drew down an incremental $250.0 million under the senior secured revolving credit facilities for a total outstanding balance of $400.0 million as of April 30, 2017,2020. Mattel hadaccelerated the timing of its borrowings under the senior secured revolving credit facilities in anticipation of $732.6 million outstanding related to its commercial paper program. Mattel has not experienced any limitations on its ability to access this sourceprojected seasonal working capital requirements and in light of liquidity. uncertainties surrounding the impact of COVID-19.
Market conditions could affect certain terms of other debt instruments that Mattel enters into from time to time.
Mattel monitors the third-party depository institutions that hold the Company'sMattel's cash and equivalents. Mattel’sMattel's emphasis is primarily on safety and liquidity of principal, and secondarily on maximizing the yield on those funds. Mattel diversifies its cash and equivalents among counterparties and securities to minimize risks.
Mattel is subject to credit risks relating to the ability of its counterparties in hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and nonperformance have been considered in the fair value measurements of Mattel’sMattel's foreign currency forward exchange contracts. Mattel closely monitors its counterparties and takes action, as necessary, to manage its counterparty credit risk.
Mattel expects that some of its customers and vendors may experience difficulty in obtaining the liquidity required to buy inventory or raw materials.materials, especially in light of the global economic uncertainty caused by COVID-19. Mattel monitors its customers’customers' financial condition and their liquidity in order to mitigate Mattel’sMattel's accounts receivable collectibility risks, and customer terms and credit limits are adjusted, if necessary. Additionally, Mattel uses a variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment. As a result of Toys “R” Us filing for bankruptcy in September 2017, Mattel reversed gross sales and accounts receivable of approximately $47 million, and reversed net sales of approximately $43 million in the three months ended September 30, 2017.
Mattel sponsors defined benefit pension plans and postretirement benefit plans for its employees. Actual returns below the expected rate of return, including as a result of the market disruptions caused by COVID-19, along with changes in interest rates that affect the measurement of the liability, would impact the amount and timing of Mattel’sMattel's future contributions to these plans.
Mattel's business has been adversely impacted by COVID-19. Refer to Part I, Item 2 "Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Update" and Part II, Item 1A "Risk Factors" of this Quarterly Report on Form 10-Q for further discussion regarding the impact and potential impacts of COVID-19 on Mattel’s business.
Operating Activities
Cash flows used for operating activities were $740.1$174.5 million in the first nine monthsquarter of 2017,2020, as compared to $331.3$192.8 million in the first nine monthsquarter of 2016.2019. The decrease in cash flows used for operating activities increasedwas primarily due to a higher net loss, excluding the impact of the valuation allowance on deferred tax assets, and higherlower working capital usage.
Investing Activities
Cash flows used for investing activities were $174.9$81.2 million in the first nine monthsquarter of 2017,2020, as compared to $204.7$19.2 million in the first nine monthsquarter of 2016.2019. The increase in cash flows used for investing activities decreasedwas primarily due to an increase in proceeds fromdriven by higher payments for foreign currency forward exchange contracts and payments related to Fuhu and Sproutling in 2016, partially offset by higher capital spending.spending in the first quarter of 2020.
Financing Activities
Cash flows provided by financing activities were $213.7$149.3 million in the first nine monthsquarter of 2017,2020, as compared to cash flows used for financing activities of $43.2$4.3 million in the first nine monthsquarter of 2016.2019. The increasechange in cash flows provided byfrom financing activities was primarily driven by higher net proceeds from short-term borrowings partially offset by proceeds from long-term borrowingsof $150.0 million in 2016.
the first quarter of 2020.
Seasonal Financing
Mattel maintains and periodically amends or replaces its domestic unsecured committed revolving credit facility with a commercial bank group. Subject to market conditions, Mattel intends to utilize its commercial paper program as its primary short-term borrowing facility, and does not intend to sell commercial paper notes in excess of the available amount under the Credit Facility as described below. The Credit Facility is used as a back-up to Mattel’s commercial paper program. If, for any reason, Mattel is unable to access the commercial paper market, Mattel intends to use the Credit Facility. Mattel is contemplating alternative financing to replace the Credit Facility on a longer-term basis, including an asset based credit facility. The agreement governing the Credit Facility was amended on June 15, 2017 to, among other things, increase the maximum allowed consolidated debt-to-consolidated earnings before interest, taxes, depreciation, and amortization (“consolidated EBITDA”) ratio that Mattel is required to maintain under the Credit Facility to 3.75 toSee Part I, Item 1 from 3.50 to 1 for the four consecutive quarters beginning with the second quarter of 2017. Additionally, the Credit Facility was amended on September 20, 2017 to remove the consolidated debt-to-consolidated EBITDA ratio requirement for the third fiscal quarter of 2017 and increase the consolidated debt-to-consolidated EBITDA ratio during a covenant modification period to 4.50 to 1.00 for the fourth fiscal quarter of 2017 and 4.25 to 1.00 for each fiscal quarter thereafter. The covenant modification period commenced on September 20, 2017 and continues, at a minimum, through the fourth fiscal quarter of 2017 and thereafter until such time as Mattel (i) requests the termination of the covenant modification period, and (ii) delivers financial statements and a certificate"Financial Statements—Note 8 to the lenders demonstrating a consolidated debt-to-consolidated EBITDA ratioConsolidated Financial Statements—Seasonal Financing" of 3.75 to 1.00 or less for the period consisting of the preceding four consecutive fiscal quarters. The amendment further amends the Credit Facility to, among other items, (i) add certain restrictive covenants during the covenant modification period that include greater restrictions against certain receivable financing facilities, as well as restrictionsthis Quarterly Report on certain asset dispositions, burdensome agreements, and specified restricted payments, (ii) add a guarantee and lien trigger event that occurs if Mattel’s debt rating falls below certain thresholds, (iii) add covenants that require all U.S. material subsidiaries under the Credit Facility (other than foreign subsidiary holding companies) to become guarantors upon a guarantee and lien trigger event, and (iv) provide that after a guarantee and lien trigger event and before the termination of the covenant modification period, indebtedness under the Credit Facility in an amount not to exceed 10% of Mattel’s consolidated net tangible assets will be secured by pledges from Mattel and the guarantors of 100% of the equity of all U.S. subsidiaries (other than any foreign subsidiary holding company) and 66% of the equity of all first-tier foreign subsidiaries and foreign subsidiary holdings companies. Such guarantees and pledges, as well as the additional restrictive covenants, will be eliminated upon the termination of the covenant modification period.
The aggregate commitments under the Credit Facility remain at $1.60 billion, with an “accordion feature,” which allows Mattel to increase the aggregate availability under the Credit Facility to $1.85 billion under certain circumstances. In addition, applicable interest rate margins remain within a range of 0.00% to 0.75% above the applicable base rate for base rate loans and 0.88% to 1.75% above the applicable LIBOR for Eurodollar rate loans, and commitment fees range from 0.08% to 0.25% of the unused commitments under the Credit Facility, in each case depending on Mattel’s senior unsecured long-term debt rating.
Although the consolidated debt-to-consolidated EBITDA ratio was removed for the third quarter, Mattel is required to meet financial ratio covenants at the end of each quarter and fiscal year, using the formulae specified in the agreement governing the Credit Facility to calculate the ratios. Mattel was in compliance with its interest coverage ratio covenant at the end of the nine months ended September 30, 2017. Mattel’s interest coverage ratio was 6.19 to 1 (compared to a minimum required of 3.50 to 1) as of September 30, 2017.
The agreement governing the Credit Facility is a material agreement, and failure to comply with the financial ratio covenants may result in an event of default under the terms of the Credit Facility. If Mattel were to default under the terms of the Credit Facility, its ability to meet its seasonal financing requirements could be adversely affected. Furthermore, Mattel’s long-term debt agreements contain cross-default provisions which would result in an event of default if Mattel, among other items, fails to comply with the financial ratio covenants under the terms of the Credit Facility with outstanding borrowings in excess of $25 million. The Credit Facility is used as a back-up to Mattel’s commercial paper program. Mattel does not expect to have any outstanding borrowings under the Credit Facility at the end of 2017.
To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term credit lines with a number of banks. Mattel expects to extend the majority of these credit lines throughout 2017.
In July 2017, a major credit rating agency changed Mattel’s long-term credit rating to BBB-, changed its short-term credit rating to A-3, and changed its outlook to negative. Another major credit rating agency changed Mattel’s long-term credit rating to BBB. A reduction in Mattel’s credit ratings could increase the cost of obtaining financing.
Mattel believes its cash on hand, its foreign credit lines, and amounts available under its Credit Facility or alternative forms of financing will be adequate to meet its seasonal financing requirements in 2017.
Form 10-Q.
Financial Position
Mattel’sMattel's cash and equivalents decreased $688.2$130.6 million to $181.3$499.4 million at September 30, 2017,March 31, 2020, as compared to $869.5$630.0 million at December 31, 2016. The decrease was2019, primarily due to higher working capital usage, dividend payments, and purchases of tools, dies, and molds and other property, plant, and equipment,the net loss, excluding non-cash charges, partially offset by net proceeds from short-term borrowings during the first quarter of 2020. Mattel's cash and equivalents increased $119.3 million to $499.4 million at March 31, 2020, as compared to $380.1 million at March 31, 2019, primarily due to net proceeds from foreign currency forward exchange contracts.short-term borrowings during the first quarter of 2020.
Accounts receivable increased $390.9decreased $407.9 million to $1.51 billion$528.5 million at September 30, 2017,March 31, 2020, as compared to $1.12 billion$936.4 million at December 31, 2016,2019, primarily due to seasonal declines as year-end receivables are collected and the impact of foreign exchange, due to the strengthening of the U.S. dollar. Accounts receivable decreased $96.0 million to $528.5 million at March 31, 2020, as compared to $624.5 million at March 31, 2019, primarily due to lower sales during the first quarter of 2020, including the impact of COVID-19, and the impact of foreign exchange, due to the strengthening of the U.S. dollar.
Inventory increased $65.1 million to $560.6 million at March 31, 2020, as compared to $495.5 million at December 31, 2019, primarily due to seasonal inventory build, partially offset by the temporary closure of production facilities in regions affected by COVID-19, and the impact of foreign exchange, due to the strengthening of the U.S. dollar. Inventory decreased $55.2 million to $560.6 million at March 31, 2020, as compared to $615.8 million at March 31, 2019, primarily due to the seasonalitytemporary closure of Mattel's business. Accounts receivable decreased $22.7 million to $1.51 billion at September 30, 2017, as compared to $1.53 billion at September 30, 2016, primarilyproduction facilities and the impact of foreign exchange, due to the strengthening of the U.S. dollar, partially offset by lower volume,sales during the first quarter of 2020, including the impact of Toys “R” Us filing for bankruptcy, partially offset by a shift in the timing of sales in the US to later in the quarter. Inventory increased $376.2 million to $990.0 million at September 30, 2017, as compared to $613.8 million at December 31, 2016, primarily due to lower-than-expected sales volume in the first nine months of 2017, including the impact of Toys “R” Us filing for bankruptcy.COVID-19.
Accounts payable and accrued liabilities decreased $11.4$265.2 million to $1.28 billion$963.7 million at September 30, 2017,March 31, 2020, as compared to $1.29$1.23 billion at December 31, 2016. The decrease was2019, primarily due to lower advertisingseasonal declines in expenditure levels. Accounts payable and promotion accruals, partially offset by tighter management of vendor disbursements.
Noncurrent long-term debtaccrued liabilities decreased $18.3 million to $1.89 billion$963.7 million at September 30, 2017 from $2.13 billionMarch 31, 2020, as compared to $982.0 million at DecemberMarch 31, 20162019, primarily due to the reclassificationtiming and amount of $250.0payments for various liabilities.
At March 31, 2020, Mattel had $150.0 million of 2013 Senior Notes due onshort-term borrowings outstanding. At March 15, 2018.31, 2019 and December 31, 2019, Mattel had no short-term borrowings outstanding.
A summary of Mattel’sMattel's capitalization is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 | | December 31, 2016 |
| | (In millions, except percentage information) |
| 2010 Senior Notes | $ | 500.0 |
| | 13 | % | | $ | 500.0 |
| | 10 | % | | $ | 500.0 |
| | 10 | % |
| 2011 Senior Notes | 300.0 |
| | 7 | % | | 300.0 |
| | 6 | % | | 300.0 |
| | 6 | % |
| 2013 Senior Notes | 250.0 |
| | 6 | % | | 500.0 |
| | 10 | % | | 500.0 |
| | 10 | % |
| 2014 Senior Notes | 500.0 |
| | 13 | % | | 500.0 |
| | 10 | % | | 500.0 |
| | 10 | % |
| 2016 Senior Notes | 350.0 |
| | 9 | % | | 350.0 |
| | 7 | % | | 350.0 |
| | 7 | % |
| Debt issuance costs | (13.6 | ) | | — | % | | (16.5 | ) | | — | % | | (15.7 | ) | | — | % |
| Total noncurrent long-term debt | 1,886.4 |
| | 48 | % | | 2,133.5 |
| | 43 | % | | 2,134.3 |
| | 43 | % |
| Other noncurrent liabilities | 576.3 |
| | 15 | % | | 454.4 |
| | 9 | % | | 446.1 |
| | 9 | % |
| Stockholders’ equity | 1,439.7 |
| | 37 | % | | 2,415.4 |
| | 48 | % | | 2,407.8 |
| | 48 | % |
| | $ | 3,902.4 |
| | 100 | % | | $ | 5,003.3 |
| | 100 | % | | $ | 4,988.2 |
| | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 | | December 31, 2019 |
| | (In millions, except percentage information) |
| Cash and equivalents | $ | 499.4 |
| | | | $ | 380.1 |
| | | | $ | 630.0 |
| | |
| | | | | | | | | | | |
| Short-term borrowings | 150.0 |
| | | | — |
| | | | — |
| | |
| 2010 Senior Notes due October 2020 | — |
| | | | 250.0 |
| | | | — |
| | |
| 2010 Senior Notes due October 2040 | 250.0 |
| | | | 250.0 |
| | | | 250.0 |
| | |
| 2011 Senior Notes due November 2041 | 300.0 |
| | | | 300.0 |
| | | | 300.0 |
| | |
| 2013 Senior Notes due March 2023 | 250.0 |
| | | | 250.0 |
| | | | 250.0 |
| | |
| 2016 Senior Notes due August 2021 | — |
| | | | 350.0 |
| | | | — |
| | |
| 2017/2018 Senior Notes due December 2025 | 1,500.0 |
| | | | 1,500.0 |
| | | | 1,500.0 |
| | |
| 2019 Senior Notes due December 2027 | 600.0 |
| | | | — |
| | | | 600.0 |
| | |
| Debt issuance costs and debt discount | (51.1 | ) | | | | (46.5 | ) | | | | (53.2 | ) | | |
| Total debt | 2,998.9 |
| | 95 | % | | 2,853.5 |
| | 85 | % | | 2,846.8 |
| | 85 | % |
| Stockholders' equity | 157.9 |
| | 5 |
| | 523.4 |
| | 15 |
| | 491.7 |
| | 15 |
|
| Total capitalization (debt plus equity) | $ | 3,156.8 |
| | 100 | % | | $ | 3,376.9 |
| | 100 | % | | $ | 3,338.5 |
| | 100 | % |
Mattel’s debt-to-total capital ratio, includingTotal debt was $3.00 billion at March 31, 2020, as compared to $2.85 billion at December 31, 2019. There were no borrowings or repayments on long-term debt during the first quarter of 2020. There were short-term borrowings of $150.0 million during the first quarter of 2020. Total debt was $3.00 billion at March 31, 2020, as compared to $2.85 billion at March 31, 2019. The increase is primarily due to the short-term borrowings of $150.0 million during the first quarter of 2020. In November 2019, Mattel used the proceeds from the $600.0 million aggregate principal issuance of the 2019 Senior Notes to redeem and retire its $250.0 million of 2010 Senior Notes due October 2020 and $350.0 million of 2016 Senior Notes due August 2021.
Stockholders' equity decreased $333.8 million to $157.9 million at March 31, 2020, as compared to $491.7 million at December 31, 2019, primarily due to the current portionnet loss for the first quarter of long-term debt, increased from 50.2%2020. Stockholders' equity decreased $365.5 million to $157.9 million at September 30, 2016March 31, 2020, as compared to 66.6%$523.4 million at September 30, 2017 asMarch 31, 2019, primarily due to the higher net loss for the first quarter of 2020 and a resultdecrease in currency translation adjustments within accumulated other comprehensive loss due to the strengthening of higher debt and lower stockholders’ equity.the U.S. dollar.
Litigation
See Part I, Item 1 “Financial"Financial Statements—Note 2021 to the Consolidated Financial Statements—Contingencies”Contingencies" of this Quarterly Report on Form 10-Q.
Application of Critical Accounting Policies and Estimates
DuringMattel considered the thirdimpacts of the COVID-19 pandemic on significant estimates and judgments used in applying its accounting policies for the first quarter of 2017, Mattel elected to early adopt of ASU 2017-04 Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which removes Step 22020. However, in light of the goodwill impairment test. Ifpandemic, there is a greater degree of uncertainty in applying these judgments and depending on the carrying amountduration and severity of the reporting unit exceedspandemic, changes to its fair value, an impairment chargeestimates and judgments could result in meaningful impacts to its financial statements in future periods.
Mattel concluded that the impact of COVID-19 did not result in a triggering event for goodwill during the first quarter of 2020. Given the current impacts to Mattel’s business, there is recognized in an amount equala higher degree of uncertainty as to the excess, limited bylong-term impacts to its discount rates and forecasts used for determining the amountrecoverability of goodwillgoodwill. Prolonged disruption to Mattel’s customers, supply chain, or other critical operations would materially impact Mattel’s results of operations and future period assumptions used in that reporting unit.
In determining the determination of the estimated fair value for eachdetermining the recoverability of itsgoodwill of Mattel’s reporting units, Mattel’s quantitative analysis contemplates both the income approach and the market approach. The income approach utilizes a discounted cash flow analysis based on what the business is forecastedunits. Material downward revisions to generategrowth in net sales or profitability may result in the future. The market approach utilizes earnings multiplesimpairment of comparable public companies, which are reflective ofgoodwill for the market in which each respective reporting unit operates, and recent comparable market transactions.
In the third quarter of 2017, Mattel performed its annual impairment tests and determined that goodwill was not impaired since each reporting unit's fair value exceeded its carrying value. The fair value of the North America and American Girl reporting units were substantially in excess of their carrying value.
Mattel’sand International reporting unit was deemed to be at risk of failing the goodwill impairment test. The estimated fair value was approximately 1.39x its carrying value. Based on year-to-date performance and business outlook, the International reporting unit has achieved lower-than-expected earnings resulting in a downward revision of future years’ forecasts. The International reporting unit did not meet its forecasts due to lower-than-expected sales growth, primarily driven by a net sales decline in Europe, and gross margin decline, driven by unfavorable product mix. The valuation model assumes incremental growth in sales and gross margin from current levels. If Mattel is unable to successfully execute its plans in international markets to achieve further growth in emerging markets, improve gross margin, market demand is below expectations, or the value of our common stock decreases, goodwill may be impaired.units.
Other than the early adoption of ASU 2017-04, Mattel’s critical accounting policies and estimates are included in the 2019 Annual Report on Form 10-K and did not materially change during the first nine monthsquarter of 2017, and are included in its Annual Report on Form 10-K for the year ended December 31, 2016.2020.
New Accounting Pronouncements
See Part I, Item 1 “Financial"Financial Statements—Note 2223 to the Consolidated Financial Statements—New Accounting Pronouncements”Pronouncements" of this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
To supplement the financial results presented in accordance with generally accepted accounting principles in the United States (“GAAP”),U.S. GAAP, Mattel presents certain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The non-GAAP financial measures that Mattel presents include currency exchange rate impact and gross sales. Mattel uses these metrics to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Mattel believes that the disclosure of non-GAAP financial measures provides useful supplemental information to investors to be able to better evaluate ongoing business performance and certain components of the Company'sMattel's results. These measures are not, and should not be viewed as, substitutes for GAAP financial measures and may not be comparable to similarly-titled measures used by other companies.
Currency Exchange Rate Impact
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.
For entities reporting in currencies other than the USU.S. dollar, Mattel calculates the percentage change of period-over-period results at constant currency exchange rates (established as described below) by translating current period and prior period results using these rates. It then determines the currency exchange rate impact percentage by calculating the difference between the percentage change at such constant currency exchange rates and the percentage change at actual exchange rates.
The consistentconstant currency exchange rates are determined by Mattel at the beginning of each year and are applied consistently during the year. They are generally different from the actual exchange rates in effect during the current or prior period due to volatility in actual foreign exchange rates. Mattel considers whether any changes to the constant currency rates are appropriate at the beginning of each year. The exchange rates used for these constant currency calculations are generally based on prior year actual exchange rates.
Mattel believes that the disclosure of the percentage impact of foreign currency changes is useful supplemental information for investors to be able to gauge Mattel’sMattel's current business performance and the longer termlonger-term strength of its overall business since foreign currency changes could potentially mask underlying sales trends. The disclosure of the percentage impact of foreign exchange allows investors to calculate the impact on a constant currency basis and also enhances their ability to compare financial results from one period to another.
Gross Sales
Gross sales represent sales to customers, excluding the impact of sales adjustments. Net sales, as reported, include the impact of sales adjustments, such as trade discounts and other allowances. Mattel presents changes in gross sales as a metric for comparing its aggregate, categorical, brand, and geographic results to highlight significant trends in Mattel’sMattel's business. Changes in gross
sales are discussed because, while Mattel records the details of such sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with brands and individual products, making net sales less meaningful. Because sales adjustments are not allocated to individual products, net sales are only presented on a consolidated and segment basis and not on a categories or brand level.
Since sales adjustments are determined by customer rather than at the categories or brand level, Mattel believes that the disclosure of gross sales by categories and brand is useful supplemental information for investors to be able to assess the performance of its underlying categories and brands (e.g., Barbie)Dolls, Barbie) and also enhances their ability to compare sales trends over time.
A reconciliation from Mattel's consolidated net sales to its consolidated gross sales is as follows:
| | | | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | For the Three Months Ended | | % Change as Reported | | Currency Exchange Rate Impact |
| | September 30,
2017 | | September 30,
2016 | | March 31,
2020 | | March 31,
2019 | |
| | (In millions, except percentage information) | (In millions, except percentage information) |
| Net sales | $ | 1,561.0 |
| | $ | 1,795.6 |
| | -13 | % | | 1 | % | $ | 594.1 |
| | $ | 689.2 |
| | -14 | % | | -2 | % |
| Sales adjustments | 149.2 |
| | 179.8 |
| | | | | 75.9 |
| | 90.9 |
| | | | |
| Gross sales | $ | 1,710.2 |
| | $ | 1,975.4 |
| | -13 | % | | 2 | % | $ | 670.0 |
| | $ | 780.1 |
| | -14 | % | | -2 | % |
| | | | | | | | | |
| | For the Nine Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | |
| | September 30,
2017 | | September 30,
2016 | | |
| | (In millions, except percentage information) | |
| Net sales | $ | 3,271.1 |
| | $ | 3,622.3 |
| | -10 | % | | — | % | |
| Sales adjustments | 322.2 |
| | 367.9 |
| | | | | |
| Gross sales | $ | 3,593.3 |
| | $ | 3,990.2 |
| | -10 | % | | — | % | |
A reconciliation from net sales to gross sales for the North America segment is as follows:
A reconciliation from net sales to gross sales for the International segment is as follows: