The following tables present the classification and amount of gains and losses, net of tax, from derivatives reported in the consolidated statements of operations:
Mattel uses treasury shares purchased under its share repurchase program to satisfy stock option exercises and the vesting of RSUs. CashRSUs and performance awards. For the six months ended June 30, 2021, cash received for stock option exercises forwas $3.3 million. For the ninesix months ended SeptemberJune 30, 20172020, 0 cash was received for stock option exercises.
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$35.8 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.
24
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.21. Contingencies
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 June 30, 2021, 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 accruedmaterial.
Litigation Related to date.the Fisher-Price Rock 'n Play Sleeper
Securities Litigation
Two stockholders have filed purportedA 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 United States DistrictSleeper caused the fatalities of or injuries to NaN children. Several lawsuits have been settled and/or dismissed. 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.
In addition, a stockholder has filed a derivative action in the Court of Chancery for the Central DistrictState of California (Waterford Township Police & Fire Retirement SystemDelaware (Kumar v. Mattel, Inc., et al., filed June 27, 2017; and Lathe v. Mattel, Inc.,Bradley, et al., filed July 6, 2017)7, 2020) alleging breach of fiduciary duty and unjust enrichment related to the development, marketing, and sale of the Sleeper. The defendants in the derivative action are certain of Mattel's current and former officers and directors. In August 2020, the derivative action was stayed pending further developments in the class action lawsuits.
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, 2 stockholders filed separate complaints styled as class actions against Mattel, Christopher A. Sinclair, Richard Dickson, Kevin M. Farr,Inc., and Joseph B. Johnsoncertain of its current and former officers, alleging violations of federal securities laws violationslaws. The complaints rely on the results of an investigation announced by Mattel in connection withOctober 2019 regarding allegations in a whistleblower letter and claim that Mattel misled the market in several of its financial statements allegedly made bybeginning in the defendants during the period October 20, 2016 through April 20,third quarter of 2017. In general, the lawsuits assert the same or similar allegations, including that the defendants artificially inflated Mattel’s common stock price by knowingly making materially false and misleading statements and omissions to the investing public about retail customer inventory, the alignment between point-of-sale and shipping data, and Mattel’s overall financial condition. The lawsuits allege that the defendants’defendants' conduct caused the plaintiffsplaintiff and other stockholders to purchase Mattel common stock at artificially inflated prices. By
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 certain of Mattel's current and former officers and directors, Mattel, Inc., and PricewaterhouseCoopers LLP. Subsequently, a nearly identical derivative action was filed by a different stockholder against the same defendants. The second lawsuit is styled as an order dated September 29, 2017,amended complaint and replaces a complaint making unrelated allegations in a previously filed lawsuit already pending in Delaware federal court (Lombardi v. Kreiz, et al., amended complaint filed April 16, 2020). In May 2020, the twoMoher and Lombardi derivative actions were ordered consolidated and stayed pending further developments in the class action lawsuits. In June 2021, a lead plaintiffthird similar derivative action was appointed.filed in the United States District Court for the District of Delaware (Chagnon v. Kreiz, et al., filed June 22, 2021). NaN additional derivative actions asserting similar claims are also pending in Delaware Chancery Court (Owen v. Euteneuer, et al., filed May 12, 2021; Andersen v. Georgiadis, et al., filed May 18, 2021; and Armon v. Euteneuer, et al., filed June 29, 2021).
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.
Mattel has also received subpoenas from the Securities and Exchange Commission (the "SEC") seeking documents related to the whistleblower letter and subsequent investigation, and is responding to those subpoenas. 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. 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:
Mattel Girls & Boys Brands—including Barbie® fashion dollssold to its customers and accessories (“Barbie”), Monster High®, Ever After High®, Polly Pocket®, and DC Super Hero Girls™ (collectively “Other Girls”), Hot Wheels® and Matchbox® vehicles and play sets (collectively “Wheels”), and CARS®, DC Comics®, WWE® Wrestling, Minecraft®, Max Steel®, BOOMco.®, Toy Story®, and games and puzzles (collectively “Entertainment”).
Fisher-Price Brands—including Fisher-Price®, Little People®, BabyGear™, Laugh & Learn®, and Imaginext® (collectively “Core Fisher-Price”), Thomas & Friends®, Dora the Explorer®, Mickey Mouse® Clubhouse, and Disney Jake and the Never Land Pirates® (collectively “Fisher-Price Friends”), and Power Wheels®.
American Girl Brands—including Truly Me®, Girl of the Year®, BeForever®, Bitty Baby®, and WellieWishers™. American Girl® Brands products are sold directly to consumers via its catalog, website, and proprietary retail stores, as well as sold directly to certain retailers.consumers.
Construction and Arts & Crafts Brands—including MEGA BLOKS® and RoseArt®.Segment Data
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,regarding net sales, operating 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” and reconciled to net sales in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Non-GAAP Financial Measures” of this Quarterly Report on Form 10-Q). Mattel records these adjustments in its financial accounting systems at the time of sale to each customer, but the adjustments are not allocated to brands or individual products. For this reason, Mattel’s chief operating decision maker uses gross sales by segment as one of the metrics to measure segment performance. Such sales adjustments are included in the determination of segment income from operations based on the adjustments recorded in the financial accounting systems. Segment income represents each segment’s operating income, while consolidated operating income represents income from operations before net interest, other non-operating expense/income, net, and income taxes as reported in the consolidated statements of operations. The corporate and other expense category includes operating costs not allocated to individual segments, including charges related to incentive compensation,and 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.transactions, and certain severance and other restructuring costs. The prior period presentation of operating income by segment and assets by segment has been conformed to the current period's presentation.
It is impracticable for Mattel to present net sales by categories, brands, or products, as trade discounts and other allowances are generally recorded in the financial accounting systems by customer.
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30,
2021 | | June 30,
2020 | | June 30,
2021 | | June 30,
2020 |
| | (In thousands) |
| Net Sales by Segment | | | | | | | |
| North America | $ | 560,830 | | | $ | 432,892 | | | $ | 1,040,489 | | | $ | 720,446 | |
| International | 424,897 | | | 271,065 | | | 774,252 | | | 540,421 | |
| American Girl | 40,639 | | | 28,179 | | | 85,817 | | | 65,339 | |
| Net sales | $ | 1,026,366 | | | $ | 732,136 | | | $ | 1,900,558 | | | $ | 1,326,206 | |
|
| | | | | | | | | | | | | | | |
| | 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 | | For the Six Months Ended |
| | June 30,
2021 | | June 30,
2020 | | June 30,
2021 | | June 30,
2020 |
| | (In thousands) |
| Operating Income (Loss) by Segment | | | | | | | |
| North America (a) | $ | 149,600 | | | $ | 81,838 | | | $ | 274,451 | | | $ | 98,686 | |
| International (a) | 50,758 | | | (4,420) | | | 87,018 | | | (31,444) | |
| American Girl | (9,725) | | | (13,886) | | | (19,290) | | | (30,987) | |
| 190,633 | | | 63,532 | | | 342,179 | | | 36,255 | |
| Corporate and other expense (b) | (141,493) | | | (111,610) | | | (259,168) | | | (229,105) | |
| Operating Income (Loss) | 49,140 | | | (48,078) | | | 83,011 | | | (192,850) | |
| Interest expense | 38,144 | | | 49,615 | | | 168,627 | | | 98,595 | |
| Interest (income) | (584) | | | (1,025) | | | (1,403) | | | (3,108) | |
| Other non-operating expense (income), net | 533 | | | 2,662 | | | (555) | | | 5,684 | |
| Income (Loss) Before Income Taxes | $ | 11,047 | | | $ | (99,330) | | | $ | (83,658) | | | $ | (294,021) | |
(a)Segment operating income (loss) included severance and restructuring expenses of $(0.2) million and $1.8 million, for the three and six months ended June 30, 2021, respectively, and $1.4 million and $4.5 million, for the three and six months ended June 30, 2020, respectively, which were allocated to the North America and International segments.
(b)Corporate and other expense included severance and restructuring charges of $10.7 million and $16.5 million, for the three and six months ended June 30, 2021, respectively, and $16.2 million and $23.8 million, for the three and six months ended June 30, 2020, respectively. Corporate and other expense also included expenses related to inclined sleeper product recall litigation of $6.8 million and $12.1 million for the three and six months ended June 30, 2021, respectively, and $2.9 million and $9.1 million, for the three and six months ended June 30, 2020, respectively, and incentive and share-based compensation for all periods presented.
|
| | | | | | | | | | | | | | | |
| | 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 includes severance and restructuring expenses of $12.6 million and $21.5 million for the three and nine months ended September 30, 2017, respectively, and $6.4 million and $33.6 million for the three and nine months ended September 30, 2016, respectively, and share-based compensation expense of $17.0 million and $47.6 million for the three and nine months ended September 30, 2017, respectively, and $12.4 million and $38.7 million for the three and nine months ended September 30, 2016, respectively. |
Segment assets are comprised of accounts receivable and inventories, net of applicable reservesallowances and allowances.reserves.
| | | | | | | | | | | | | | | | | |
| June 30,
2021 | | June 30,
2020 | | December 31,
2020 |
| | (In thousands) |
| Assets by Segment | | | | | |
| North America | $ | 686,959 | | | $ | 615,180 | | | $ | 658,404 | |
| International | 644,450 | | | 528,510 | | | 715,043 | |
| American Girl | 51,453 | | | 47,028 | | | 40,414 | |
| 1,382,862 | | | 1,190,718 | | | 1,413,861 | |
| Corporate and other | 219,259 | | | 187,648 | | | 148,579 | |
| Accounts receivable and inventories, net | $ | 1,602,121 | | | $ | 1,378,366 | | | $ | 1,562,440 | |
|
| | | | | | | | | | | |
| | 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 |
|
Geographic Information
The table below presents worldwide revenuesinformation by brand category:geographic area. Net sales are attributed to countries based on location of the customer.
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended |
| | June 30,
2021 | | June 30,
2020 | | June 30,
2021 | | June 30,
2020 |
| | (In thousands) |
| Net Sales by Geographic Area | | | | | | | |
| North America | $ | 601,469 | | | $ | 461,071 | | | $ | 1,126,306 | | | $ | 785,785 | |
| International | | | | | | | |
| EMEA | 246,816 | | | 151,948 | | | 484,985 | | | 325,271 | |
| Latin America | 92,477 | | | 57,719 | | | 148,755 | | | 108,994 | |
| Asia Pacific | 85,604 | | | 61,398 | | | 140,512 | | | 106,156 | |
| Total International | 424,897 | | | 271,065 | | | 774,252 | | | 540,421 | |
| Net sales | $ | 1,026,366 | | | $ | 732,136 | | | $ | 1,900,558 | | | $ | 1,326,206 | |
23. New Accounting Pronouncements
|
| | | | | | | | | | | | | | | |
| | 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 |
|
| |
22. | New Accounting Pronouncements |
In May 2014,December 2019, the Financial Accounting Standards Board (“FASB”("FASB") issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”Update ("ASU") 605, Revenue Recognition,2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and most industry-specificsimplify the accounting for other areas of Topic 740 by clarifying and amending existing guidance. The core principleamendments related to changes in ownership of foreign equity method investments or foreign subsidiaries are applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance establishes a five-step model to achieve that core principle and also requires additional disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 was originally effective for interim and annual reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which defersfiscal year of adoption. The amendments related to franchise taxes that are partially based on income are 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 the effective date to annual reporting periods beginning after December 15, 2017. Early application is permitted after December 15, 2016. In March 2016,of the FASB issuedfiscal year of adoption. All other amendments are applied on a prospective basis. Mattel adopted ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations, and ASU 2016-10, Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers - Narrow-Scope Improvements and Practical Expedients, which clarifies guidance on assessing collectibility, presenting sales taxes and other similar taxes collected from customers, measuring noncash consideration, and certain transition matters. ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, and ASU 2016-12 (collectively, the “new revenue standards”) will be effective for interim and annual reporting periods beginning2019-12 on January 1, 2018. Upon2021. 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.
Accounting Pronouncements Not Yet Adopted
In February 2016,March 2020 and January 2021, the FASB issued ASU 2016-02, Leases, which requires a lessee2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and ASU 2021-01, Reference Rate Reform (Topic 848): Scope, respectively. ASU 2020-04 and ASU 2021-01 provide optional expedients and exceptions for applying U.S. GAAP, to recognize a lease assetcontracts, hedging relationships, and lease liability on its balance sheet for all leases with a term greater than 12 months.other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. The guidance in ASU 2016-02 will2020- 04 and ASU 2021-01 was effective upon issuance and, once adopted, may be effective for interimapplied prospectively to contract modifications and annual reporting periods beginning on January 1, 2019.hedging relationships through December 31, 2022. Mattel is currently evaluating the impact of the adoption of ASU 2016-022020-04 and ASU 2021-01 on its consolidated financial statements.
24. Revision for Immaterial Misstatements
As disclosed in Note 1, during the quarter ended June 30, 2021, Mattel identified misstatements for inventory tooling expenses that should have first been capitalized into inventory and a misstatement related to the timing of disbursements for certain capital expenditures that resulted in a cash flow misclassification between operating resultsactivities and investing activities. Although Mattel concluded that these misstatements were not material, either individually or in aggregate, to its current or previously issued consolidated financial position.
statements, Mattel has elected to revise its previously issued consolidated financial statements to correct for these misstatements. In August 2016, the FASB issued ASU 2016-15, Statementconnection with such revision, Mattel is also correcting for other previously identified immaterial misstatements that were previously corrected for as out of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which adds and clarifies guidance on the classification of certain cash receipts and paymentsperiod adjustments in the statementperiod of cash flows. ASU 2016-15 will be effective for interim and annual reporting periods beginning onidentification.
Due to certain misstatements originating prior to 2018, the opening retained earnings balance as of January 1, 2018. Mattel is currently evaluating2018 was understated by $25.1 million, primarily due to the net impact of the adoptiontooling misstatement of ASU 2016-15 on its operating results$37.2 million, partially offset by other previously identified misstatements of $12.1 million. Such previously identified misstatements were previously corrected for as out of period adjustments and financial position.
In October 2016,included the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfersimproper revenue recognition for certain licensing contracts executed prior to 2018 and the understatement of Assets Other Than Inventory, which requires an entity to recognizedepreciation expense for certain fixed assets. Similarly, the income tax consequencesopening retained earnings balance as 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 evaluating2020 was understated by $16.9 million, which principally included the net impact of the adoptiontooling misstatement and an over-accrual of ASU 2016-16 on its operating resultsadvertising costs.
The revision also reflects the correction of previously identified balance sheet misclassifications, including a misclassification between property, plant and financial position.equipment and other assets associated with capitalized implementation costs for cloud computing software.
In January 2017,The accompanying consolidated statements of cash flows have been revised to reflect 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 definitionabove items, inclusive of the term output. ASU 2017-01 will be effectivecash flow misstatement between operating and investing activities related to capitalized implementation costs for interimcloud computing software and annual reporting periods beginning on January 1, 2018. Mattel is currently evaluating the impacttiming of disbursements for capital expenditures.
The revision to the adoptionaccompanying unaudited consolidated balance sheets, consolidated statements of ASU 2017-01 on its operating resultsoperations and financial position.
In February 2017,comprehensive loss, and consolidated statements of cash flows are as follows. There were no changes to the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognitionconsolidated statements 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 entitiesstockholders’ equity 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 ishave not used, the line itemotherwise been reflected in the income statement where the other componentsconsolidated balance sheets and consolidated statements of net benefit costs are included must be disclosed. Further, gainsoperations and losses from curtailments and settlements, and the cost of certain termination benefits should be reportedcomprehensive loss as detailed 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.tables below:
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. | | | | | | | | | | | | | | | | | |
| As of June 30, 2020 |
| As Previously Reported | | Adjustments | | As Revised |
| (In thousands) |
| Consolidated Balance Sheet | | | | | |
| Inventories | $ | 702,592 | | | $ | 25,272 | | | $ | 727,864 | |
| Prepaid expenses and other current assets | $ | 211,418 | | | $ | (37,200) | | | $ | 174,218 | |
| Total current assets | $ | 2,026,069 | | | $ | (11,928) | | | $ | 2,014,141 | |
| Property, plant, and equipment, net | $ | 506,555 | | | $ | (34,689) | | | $ | 471,866 | |
| Other noncurrent assets | $ | 794,724 | | | $ | 52,642 | | | $ | 847,366 | |
| Total Assets | $ | 4,992,680 | | | $ | 6,025 | | | $ | 4,998,705 | |
| Accrued liabilities | $ | 563,633 | | | $ | (21,800) | | | $ | 541,833 | |
| Total current liabilities | $ | 1,381,585 | | | $ | (21,800) | | | $ | 1,359,785 | |
| Other noncurrent liabilities | $ | 427,692 | | | $ | 7,873 | | | $ | 435,565 | |
| Total noncurrent liabilities | $ | 3,524,947 | | | $ | 7,873 | | | $ | 3,532,820 | |
| Retained earnings | $ | 1,093,268 | | | $ | 19,952 | | | $ | 1,113,220 | |
| Total stockholders' equity | $ | 86,148 | | | $ | 19,952 | | | $ | 106,100 | |
On October 26, 2017, Mattel announced that its Board of Directors determined to suspend the Company's quarterly dividend beginning in the fourth quarter of 2017.
| | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, 2020 |
| As Previously Reported | | Adjustments | | As Revised |
| (In thousands, except per share amounts) |
| Consolidated Statement of Operations and Comprehensive Loss | | | | | |
| Cost of sales | $ | 411,288 | | | $ | 1,937 | | | $ | 413,225 | |
| Gross Profit | $ | 320,848 | | | $ | (1,937) | | | $ | 318,911 | |
| Operating Loss | $ | (46,141) | | | $ | (1,937) | | | $ | (48,078) | |
| Loss Before Income Taxes | $ | (97,393) | | | $ | (1,937) | | | $ | (99,330) | |
| Net Loss | $ | (109,172) | | | $ | (1,937) | | | $ | (111,109) | |
| Comprehensive Loss | $ | (80,886) | | | $ | (1,937) | | | $ | (82,823) | |
| Net Loss Per Common Share - Basic | $ | (0.31) | | | $ | (0.01) | | | $ | (0.32) | |
| Net Loss Per Common Share - Diluted | $ | (0.31) | | | $ | (0.01) | | | $ | (0.32) | |
| | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2020 |
| As Previously Reported | | Adjustments | | As Revised |
| (In thousands, except per share amounts) |
| Consolidated Statement of Operations and Comprehensive Loss | | | | | |
| Cost of sales | $ | 750,175 | | | $ | (3,102) | | | $ | 747,073 | |
| Gross Profit | $ | 576,031 | | | $ | 3,102 | | | $ | 579,133 | |
| Operating Loss | $ | (195,952) | | | $ | 3,102 | | | $ | (192,850) | |
| Loss Before Income Taxes | $ | (297,123) | | | $ | 3,102 | | | $ | (294,021) | |
| Net Loss | $ | (319,914) | | | $ | 3,102 | | | $ | (316,812) | |
| Comprehensive Loss | $ | (428,027) | | | $ | 3,102 | | | $ | (424,925) | |
| Net Loss Per Common Share - Basic | $ | (0.92) | | | $ | 0.01 | | | $ | (0.91) | |
| Net Loss Per Common Share - Diluted | $ | (0.92) | | | $ | 0.01 | | | $ | (0.91) | |
| | | | | | | | | | | | | | | | | |
| For the Six Months Ended June 30, 2020 |
| As Previously Reported | | Adjustments | | As Revised |
| (In thousands) |
| Consolidated Statement of Cash Flows | | | | | |
| Net loss | $ | (319,914) | | | $ | 3,102 | | | $ | (316,812) | |
| Changes in assets and liabilities: | | | | | |
| Inventories | $ | (241,833) | | | $ | (3,102) | | | $ | (244,935) | |
| Prepaid expenses and other current assets | $ | (30,923) | | | $ | 11,500 | | | $ | (19,423) | |
| Accounts payable, accrued liabilities, and income taxes payable | $ | (305,316) | | | $ | (12,689) | | | $ | (318,005) | |
| Other, net | $ | 28,092 | | | $ | (5,044) | | | $ | 23,048 | |
| Net cash flows used for operating activities | $ | (463,032) | | | $ | (6,233) | | | $ | (469,265) | |
| Purchases of tools, dies, and molds | $ | (25,824) | | | $ | (560) | | | $ | (26,384) | |
| Purchases of other property, plant, and equipment | $ | (34,367) | | | $ | 6,793 | | | $ | (27,574) | |
| Net cash flows used for investing activities | $ | (80,932) | | | $ | 6,233 | | | $ | (74,699) | |
| | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| As Previously Reported | | Adjustments | | As Revised |
| (In thousands) |
| Consolidated Balance Sheet | | | | | |
| Inventories | $ | 514,673 | | | $ | 13,801 | | | $ | 528,474 | |
| Total current assets | $ | 2,482,890 | | | $ | 13,801 | | | $ | 2,496,691 | |
| Total Assets | $ | 5,521,089 | | | $ | 13,801 | | | $ | 5,534,890 | |
| Retained earnings | $ | 1,539,809 | | | $ | 13,801 | | | $ | 1,553,610 | |
| Total stockholders' equity | $ | 596,343 | | | $ | 13,801 | | | $ | 610,144 | |
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.subsidiaries.
The following discussion should be read in conjunction with the consolidated financial informationstatements and the 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 most comparable only withto corresponding periods.
The following discussion also includes gross sales and currency exchange rate impact, a non-GAAP financial measuresmeasure within the meaning of Regulation G promulgated by the Securities and Exchange Commission (“SEC ("Regulation G”G"), to supplement the financial results as reported in accordance with GAAP. Gross sales represent sales to customers, excluding the impact of sales adjustments, such as trade discounts and other allowances.generally accepted accounting principles ("GAAP"). 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 thesethis non-GAAP financial measuresmeasure 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 this non-GAAP financial measuresmeasure provides useful supplemental information to investors to allow them to better evaluate ongoing business performance and certain components of Mattel's results. These measures areThis measure is not, and should not be viewed as, a substitute for GAAP financial measures. Refer
The following discussion also includes the use of gross billings, a key performance indicator. Gross billings represent amounts invoiced to “Non-GAAPcustomers. It does not include the impact of sales adjustments, such as trade discounts and other allowances. Mattel presents changes in gross billings as a metric for comparing its aggregate, categorical, brand, and geographic results to highlight significant trends in Mattel's business. Changes in gross billings are discussed because, while Mattel records the details of sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with categories, brands, and individual products.
The following discussion has been amended to reflect Mattel’s revision of previously issued consolidated financial statements to correct for prior period misstatements, which Mattel has concluded did not, either individually or in the aggregate, result in a material misstatement of its previously issued consolidated financial statements. Further information regarding the revision is included in "Note 1 to the Consolidated Financial Measures” inStatements - Basis of Presentation" and "Note 24 to the Consolidated Financial Statements - Revision for Immaterial Misstatements" of this Quarterly Report on Form 10-Q for a more detailed discussion, including a reconciliation10-Q.
Effective as of gross sales, a non-GAAP financial measure,the first quarter of 2021, operating income by segment reviewed by the Chief Operating Decision Maker does not include certain corporate expenses which were historically allocated by segment. The prior period presentation of operating income by segment has been conformed to net sales, its most directly comparable GAAP financial measure.the current period's presentation.
Note that amounts shown in millions or billions within this Item 2 may not sum due to rounding.
Overview
Mattel designs, manufactures,is a leading global toy company and markets a broad varietyowner of one of the strongest catalogs of children’s and family entertainment franchises in the world, creating innovative products and experiences that inspire, entertain and develop children through play. Mattel is focused on the following two-part strategy to transform Mattel into an intellectual property ("IP") driven, high-performing toy products worldwide which are soldcompany:
•In the short-term, improve profitability by optimizing operations and accelerate topline growth by growing Mattel's Power Brands and expanding Mattel's brand portfolio.
•In the mid-to-long-term, continue to its customersmake progress on capturing the full value of Mattel's IP through franchise management and directly to consumers. online retail and e-commerce.
Mattel is the owner of a portfolio of iconic brands and partners with global brands with untappedentertainment companies to license other intellectual property potential.property. Mattel's products are among the most widely recognized toy products in the world. Mattel’s portfolio ofowned and licensed brands and products are groupedorganized into four majorthe following categories:
Dolls—including brands such as Barbie, American Girl, Polly Pocket, Spirit (Universal) and Enchantimals. Mattel's Dolls portfolio is driven by the flagship Barbie brand categories:
Mattel Girls & Boys Brands—including and a collection of complementary brands offered globally. Empowering girls since 1959, Barbie fashion 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, 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 well as sold directly to certain retailers.
ConstructionFisher-Price and Thomas & Friends, Power Wheels, and Arts & Crafts Brands—including MEGA BLOKSFireman Sam. As a leader in play and RoseArt.
Mattel's visionchild development, Fisher-Price’s mission is to “inspireprovide meaningful solutions for parents and enrich children’s lives from birth to school readiness, helping families get the wonder of childhood as the global leader in learning and development through play.” In order to deliver on this vision, Mattel is focused on the following five-pillar strategy:
Build Mattel's Power Brands (American Girl, Barbie, Fisher-Price, Hot Wheels, and best possible start. Thomas & Friends) into connected 360-degree play systemsFriends is an award-winning preschool train brand franchise that brings meaningful life lessons of friendship and experiences;teamwork to kids through content, toys, live events, and other lifestyle categories.
Accelerate emergingVehicles—including brands such as Hot Wheels, Matchbox, CARS (Disney Pixar), and Mario Kart (Nintendo). In production for over 50 years, Hot Wheels continues to push the limits of performance and design, and ignites the challenger spirit of kids, adults, and collectors. From die-cast vehicles, to tracks, playsets, and accessories, the Mattel vehicles portfolio has broad appeal that engages and excites kids of all ages.
Action Figures, Building Sets, Games, and Other—including brands such as Masters of the Universe, MEGA, UNO, Toy Story (Disney Pixar), Jurassic World (NBCUniversal), WWE, and Star Wars (Disney). From big blocks to small bricks, first builders to advanced collectors, MEGA creates building sets that encourage kids and adults to unlock their creative potential. America's number one game, UNO is the classic matching card game that is easy to learn and fast fun for everyone.
COVID-19 Update
The impact of the coronavirus disease ("COVID-19") and the actions taken by governments, businesses, and individuals in response to it have resulted in significant global economic disruption, including, but not limited to, temporary business closures, reduced retail traffic, volatility in financial markets, growth with digital-first solutions;and restrictions on travel.
FocusStrong consumer demand for toys during the first half of 2021 contributed to double digit year-over-year increases in net sales across all reportable segments and strengthen Mattel's innovation pipeline;in each geographic region, despite COVID-19 disruption and local restrictions that impacted certain locations. Mattel’s first half of 2020 results and net sales were significantly and negatively impacted by COVID-19.
Reshape Mattel's operationsWhile COVID-19 has caused manufacturing and distribution disruptions for Mattel and the manufacturers and distribution network it relies upon, to enable this strategy - leaner, faster,date, these disruptions, including temporary plant and smarter - via commercial realignment, supply chain transformationport closures, have not materially impacted Mattel’s ability to meet demand for its products. To the extent COVID-19 causes further manufacturing and IT transformation;distribution disruption, particularly during seasonally-high periods of production and/or distribution, Mattel’s ability to meet demand may be materially impacted. Due to the uncertainty of the duration and severity of the pandemic and resulting effects, it is not possible to estimate the extent of such impact.
Reignite Mattel's culture and team.
Third Quarter 2017 Overview
Input cost inflation adversely affected Mattel’s third quarter 2017 financial highlights include the following:
Net salesgross margin in the third quarterfirst half of 2017 were $1.56 billion, down 13%the year due to the increased demand for raw materials and distribution services associated with the impact of COVID-19, but such impact was more than offset by the benefits of fixed cost absorption and cost savings programs. Mattel anticipates that input cost inflation will have a greater adverse impact on Mattel’s gross margin in the second half of 2021 as compared to third quarterthe first half of 2016 net sales2021 and the prior year, but such impact is expected to be partially offset by cost savings programs and pricing actions. To the extent input cost inflation becomes more widespread and/or significant than anticipated, it may have a material effect on Mattel’s results of $1.80 billion. As aoperations.
Prolonged disruption to Mattel’s customers, supply chain, or other critical operations during the second half of 2021 would result in material adverse effects to Mattel’s business and its liquidity. The future impact of Toys “R” Us filing for bankruptcy,COVID-19 on Mattel’s results of operations, financial position, and cash flows remains uncertain at this time due to rapidly evolving circumstances. Mattel reversed approximately $43 million of net salesis closely monitoring the situation and actively managing its business as developments occur. Refer to Part I, Item 1A "Risk Factors" in the third quarter2020 Annual Report on Form 10-K for further discussion regarding potential impacts of 2017.COVID-19 on Mattel’s business.
Gross sales inThe specific line items that have been materially affected by these impacts of COVID-19 are noted within "Results of Operations—Second Quarter" and "Results of Operations—First Half" below. In addition to the third quarterimpacts of 2017 were $1.71 billion, down 13% as compared to third quarter 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.pandemic and its resulting effects could have other unforeseen consequences that affect Mattel’s business.
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 assets that will likely not be realized.
Results of Operations—ThirdSecond Quarter
Consolidated Results
Net salesThe following table provides a summary of Mattel's consolidated results for the thirdsecond quarter of 20172021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | Year/Year Change |
| June 30, 2021 | | June 30, 2020 | |
| Amount | | % of Net
Sales | | Amount | | % of Net
Sales | | % | | Basis Points
of Net Sales |
| (In millions, except percentage and basis point information) |
| Net sales | $ | 1,026.4 | | | 100.0 | % | | $ | 732.1 | | | 100.0 | % | | 40 | % | | — | |
| Gross profit | $ | 488.0 | | | 47.5 | % | | $ | 318.9 | | | 43.6 | % | | 53 | % | | 390 | |
| Advertising and promotion expenses | 88.3 | | | 8.6 | % | | 60.2 | | | 8.2 | % | | 47 | % | | 40 | |
| Other selling and administrative expenses | 350.5 | | | 34.2 | % | | 306.8 | | | 41.9 | % | | 14 | % | | (770) | |
| Operating income (loss) | 49.1 | | | 4.8 | % | | (48.1) | | | -6.6 | % | | n/m | | n/m |
| Interest expense | 38.1 | | | 3.7 | % | | 49.6 | | | 6.8 | % | | -23 | % | | (310) | |
| Interest (income) | (0.6) | | | -0.1 | % | | (1.0) | | | -0.1 | % | | -43 | % | | |
| Other non-operating expense, net | 0.5 | | | | | 2.7 | | | | | | | |
| Income (loss) before income taxes | 11.0 | | | 1.1 | % | | (99.3) | | | -13.6 | % | | n/m | | n/m |
| Provision for income taxes | 20.6 | | | | | 12.8 | | | | | | | |
| Income from equity method investments | 4.1 | | | | | 1.1 | | | | | | | |
| Net Loss | $ | (5.5) | | | -0.5 | % | | $ | (111.1) | | | -15.2 | % | | -95 | % | | 1,470 | |
n/m - Not Meaningful
Sales
The following table provides a summary of Mattel's consolidated gross billings by categories, along with supplemental information by brand, for the second quarter of 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | | |
| June 30,
2021 | | June 30,
2020 | |
| (In millions, except percentage information) |
| Gross Billings by Categories | | | | | | | | | |
| Dolls | $ | 394.7 | | | $ | 261.0 | | | 51 | % | | 4 | % | | |
| Infant, Toddler, and Preschool | 229.4 | | | 199.8 | | | 15 | % | | 3 | % | | |
| Vehicles | 266.3 | | | 158.7 | | | 68 | % | | 6 | % | | |
| Action Figures, Building Sets, Games, and Other | 258.2 | | | 195.0 | | | 32 | % | | 4 | % | | |
| Gross Billings | $ | 1,148.6 | | | $ | 814.6 | | | 41 | % | | 4 | % | | |
| Sales Adjustments | (122.2) | | | (82.4) | | | | | | | |
| Net Sales | $ | 1,026.4 | | | $ | 732.1 | | | 40 | % | | 4 | % | | |
| | | | | | | | | |
| Supplemental Gross Billings Disclosure | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gross Billings by Top 3 Power Brands | | | | | | | | | |
| Barbie | $ | 291.3 | | | $ | 199.3 | | | 46 | % | | 5 | % | | |
| Hot Wheels | 227.4 | | | 136.5 | | | 67 | % | | 6 | % | | |
| Fisher-Price and Thomas & Friends | 207.8 | | | 176.3 | | | 18 | % | | 3 | % | | |
| Other | 422.2 | | | 302.5 | | | 40 | % | | 5 | % | | |
| Gross Billings | $ | 1,148.6 | | | $ | 814.6 | | | 41 | % | | 4 | % | | |
Gross billings were $1.56$1.15 billion a 13% decrease,in the second quarter of 2021, an increase of $334.0 million or 41%, as compared to $1.80 billion$814.6 million in the thirdsecond quarter of 2016,2020, with a favorable impact from changes in currency exchange rates of 1 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. Net loss for the third quarter of 2017 was $603.2 million, or $1.75 per diluted share, as compared to net income of $236.3 million, or $0.68 per diluted share, in the third quarter of 2016. Net loss for the third quarter 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.
The following table provides a summary of Mattel’s consolidated results for the third quarter of 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | | |
| | For the Three 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 | $ | 1,561.0 |
| | 100.0 | % | | $ | 1,795.6 |
| | 100.0 | % | | -13 | % | | — |
|
| Gross profit | $ | 647.2 |
| | 41.5 | % | | $ | 870.8 |
| | 48.5 | % | | -26 | % | | -700 |
|
| Advertising and promotion expenses | 179.7 |
| | 11.5 | % | | 202.9 |
| | 11.3 | % | | -11 | % | | 20 |
|
| Other selling and administrative expenses | 381.8 |
| | 24.5 | % | | 350.5 |
| | 19.5 | % | | 9 | % | | 500 |
|
| Operating income | 85.7 |
| | 5.5 | % | | 317.4 |
| | 17.7 | % | | -73 | % | | -1,220 |
|
| Interest expense | 24.7 |
| | 1.6 | % | | 25.0 |
| | 1.4 | % | | -1 | % | | 20 |
|
| Interest (income) | (1.5 | ) | | -0.1 | % | | (2.5 | ) | | -0.1 | % | | -36 | % | | — |
|
| Other non-operating expense, net | 1.3 |
| | | | 0.9 |
| | | | | | |
| Income before income taxes | $ | 61.2 |
| | 3.9 | % | | $ | 294.0 |
| | 16.4 | % | | -79 | % | | -1,250 |
|
Sales
Net sales for the third quarter of 2017 were $1.56 billion, a 13% decrease, as compared to $1.80 billion in the third quarter of 2016, with a favorable impact from changes in currency exchange rates of 1 percentage point.
The following table provides a summary of Mattel’s consolidated gross sales by brand for the third quarter of 2017 and 2016:
|
| | | | | | | | | | | | | |
| | 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 | % |
Gross sales were $1.71 billion in the third quarter of 2017, a decrease of $265.2 million or 13%, as compared to $1.98 billion in the third quarter of 2016, with a favorable impact from changes in currency exchange rates of 2four percentage points. The decreaseincrease in gross sales was primarily due to lower sales of Other Girls, American Girl, Construction and Arts & Crafts, Fisher-Price Friends, and Core Fisher-Price 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 thirdsecond quarter of 2017. Of the 40% decrease in Other Girls2021 gross sales, 30%billings was due to lower saleshigher billings across all categories.
Dolls gross billings increased 51%, of Monster High which 35% was driven by higher billings of Barbie products, 15%driven by positive brand momentum and point of sale demand ("POS"), 5% was driven by higher billings of American Girl products, 5% was due to lower salesinitial billings of DC Super Hero GirlsSpirit products, and 11%4% was due to lower saleshigher billings of Ever After High products, partially offsetPolly Pocket products.
Infant, Toddler, and Preschool gross billings increased 15%, of which 16% was driven by initial saleshigher billings of Enchantimals products of 12%. The 30% decrease in American Girl gross sales was due to lower licensing income Fisher-Price and initial sales in the prior year through external distribution channels. Of the 29% decrease in Construction and Arts Thomas & Crafts gross sales, 26% was due to lower sales of MEGA BLOKS Friends 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 saleshigher billings of infant and newborn products. This was partially offset by lower billings of Power Wheelsproducts of 2%.
Vehicles gross billings increased 68%, of which 57% was driven by higher billings of Hot Wheels products, driven by positive brand momentum and 3%POS, which benefited from a return to in-store impulse shopping, and 5% was duedriven by higher billings of Matchbox products.
Action Figures, Building Sets, Games, and Other gross billings increased 32%, of which 16% was driven by higher billings of Jurassic World, 14% driven by initial billings of Masters of the Universe, and 5% driven by higher billings of WWE. This was partially offset by lower billings of card game products, including UNO of 7%.
Sales adjustments represent arrangements with Mattel’s customers to lowerprovide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of Imaginext products.specified promotional activities, and other specified factors such as sales to consumers. Sales adjustments as a percentage of net sales was relatively consistent at 11.9% for the second quarter of 2021, as compared to 11.3% for the second quarter of 2020.
Cost of Sales
Cost of sales as a percentage of net sales was 58.5%52.5% in the thirdsecond quarter of 2017,2021, as compared to 51.5%56.4% in the thirdsecond quarter of 2016.2020. Cost of sales decreasedincreased by $11.0$125.1 million, or 1%30%, to $913.8$538.4 million in the thirdsecond quarter of 20172021 from $924.8$413.2 million in the thirdsecond quarter of 2016,2020, as compared to a 13%40% increase in net sales in the second quarter of 2020. Within cost of sales, product and other costs increased by $104.8 million, or 31%, to $439.9 million in the second quarter of 2021 from $335.2 million in the second quarter of 2020; freight and logistics expenses increased by $13.8 million, or 29%, to $61.0 million in the second quarter of 2021 from $47.1 million in the second quarter of 2020; and royalty expense increased by $6.6 million, or 21%, to $37.5 million in the second quarter of 2021 from $30.9 million in the second quarter of 2020. Within cost of sales, certain inbound freight costs were previously classified as freight and logistics costs. Mattel reclassified such inbound freight costs from freight and logistics expenses to present all inbound freight costs within product and other costs for the periods and segments presented.
Gross Margin
Gross margin increased to 47.5% in the second quarter of 2021 from 43.6% in the second quarter of 2020. The increase in gross margin was primarily driven by the favorable impact of fixed cost absorption and the incremental realized savings from the cost savings programs, partially offset by input cost inflation due to higher raw material and inbound freight costs.
Advertising and Promotion Expenses
Advertising and promotion expenses primarily consist of: (i) media costs, which include the media, planning, and buying fees for television, print, and online advertisements, (ii) non-media costs, which include commercial and website production, merchandising, and promotional costs, (iii) retail advertising costs, which include consumer direct catalogs, newspaper inserts, fliers, and mailers and (iv) generic advertising costs, which include trade show costs. Advertising and promotion expenses as a percentage of net sales was relatively consistent at 8.6% in the second quarter of 2021, as compared to 8.2% in the second quarter of 2020. Advertising and promotion expenses increased $28.2 million, or 47%, to $88.3 million in the second quarter of 2021 from $60.2 million in the second quarter of 2020, driven by higher media spend.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $350.5 million, or 34.2% of net sales, in the second quarter of 2021, as compared to $306.8 million, or 41.9% of net sales, in the second quarter of 2020. The increase in other selling and administrative expenses was primarily driven by higher employee compensation costs and comparisons to cost-savings actions taken in the prior year in response to COVID-19.
Interest expense
Interest expense was $38.1 million for the second quarter of 2021, as compared to $49.6 million for the second quarter of 2020. The decrease in interest expense was due to a lower interest rate associated with the partial refinancing of the 2017/2018 Senior Notes due December 2025 in the first quarter of 2021.
Provision for Income Taxes
Mattel's provision for income taxes was $20.6 million and $12.8 million for the second quarter of 2021 and 2020, respectively. For the second quarter of 2021, Mattel recognized a discrete tax expense of $9.8 million related to income taxes recorded on a discrete basis in various jurisdictions, a discrete tax expense of $7.2 million related to tax rate changes impacting deferred tax assets, and a discrete tax benefit of $4.8 million for reassessments of prior years' tax liabilities. For the second quarter of 2020, Mattel recognized a discrete tax expense of $3.7 million related to income taxes recorded on a discrete basis in various jurisdictions and a discrete tax benefit of $0.5 million for reassessments of prior years' tax liabilities. As a result of the establishment of a valuation allowance on U.S. deferred tax assets, there was no U.S. tax benefit provided for U.S. losses during the second quarter of 2021 or 2020.
Mattel recorded a valuation allowance against certain domestic and foreign deferred tax assets as of both December 31, 2020 and June 30, 2021. Evaluating the need for and the amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence to determine whether it is more likely than not that these assets will be realized. Mattel maintains a valuation allowance on its deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. Given Mattel's improved earnings for the year ended December 31, 2020 and the first half of 2021, and if Mattel's earnings continue to improve in the future, Mattel believes that there is a reasonable possibility that in the near term, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance related to certain foreign jurisdictions will no longer be needed. Release of the valuation allowance would result in the recognition of a portion of these deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount, if any, of the valuation allowance release are subject to change depending on the level of earnings that Mattel is able to achieve in the tax jurisdictions in which a valuation allowance has been recorded.
Segment Results
North America Segment
The following table provides a summary of Mattel's net sales, segment income, and gross billings by categories, along with supplemental information by brand, for the North America segment for the second quarter of 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | | |
| June 30,
2021 | | June 30,
2020 | |
| | (In millions, except percentage information) |
| Net Sales | $ | 560.8 | | | $ | 432.9 | | | 30 | % | | 1 | % | | |
| Segment Income | 149.6 | | | 81.8 | | | 83 | % | | | | |
| | | | | | | | | |
| Gross Billings by Categories | | | | | | | | | |
| Dolls | $ | 172.6 | | | $ | 121.2 | | | 42 | % | | — | % | | |
| Infant, Toddler, and Preschool | 139.9 | | | 132.4 | | | 6 | % | | 1 | % | | |
| Vehicles | 131.3 | | | 77.8 | | | 69 | % | | 1 | % | | |
| Action Figures, Building Sets, Games, and Other | 154.1 | | | 130.2 | | | 18 | % | | — | % | | |
| Gross Billings | $ | 597.9 | | | $ | 461.5 | | | 30 | % | | 1 | % | | |
| Sales Adjustments | (37.0) | | | (28.7) | | | | | | | |
| Net Sales | $ | 560.8 | | | $ | 432.9 | | | 30 | % | | 1 | % | | |
| | | | | | | | | |
| Supplemental Gross Billings Disclosure | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gross Billings by Top 3 Power Brands | | | | | | | | | |
| Barbie | $ | 151.4 | | | $ | 112.3 | | | 35 | % | | 1 | % | | |
| Hot Wheels | 109.7 | | | 66.2 | | | 66 | % | | 1 | % | | |
| Fisher-Price and Thomas & Friends | 122.9 | | | 111.7 | | | 10 | % | | 1 | % | | |
| Other | 213.9 | | | 171.4 | | | 25 | % | | 1 | % | | |
| Gross Billings | $ | 597.9 | | | $ | 461.5 | | | 30 | % | | 1 | % | | |
Gross billings for the North America segment were $597.9 million in the second quarter of 2021, an increase of $136.3 million, or 30%, as compared to $461.5 million in the second quarter of 2020, with a favorable impact from changes in currency exchange rates of one percentage point . The increase in the North America segment gross billings was due to higher billings across all categories. .
Dolls gross billings increased 42%, of which 32% was due to higher billings of Barbie products, 5% was due to initial billings of Spirit products, and 5% was due to higher billings of Polly Pocket products.
Infant, Toddler, and Preschool gross billings increased 6%, of which 9% was due to higher billings of Fisher-Price and Thomas & Friends products, partially offset by lower billings of Power Wheels products of 3%.
Vehicles gross billings increased 69%, of which 56% was due to higher billings of Hot Wheels products, and 6% was due to higher billings of Matchbox products.
Action Figures, Building Sets, Games, and Other gross billings increased 18%, of which 15% was due to higher billings of Jurassic World, 11% was due to initial billings of Masters of the Universe, and 7% was due to higher billings of WWE. This was partially offset by lower billings of card game products, including UNO of 11%, and lower billings of arts, crafts and stationery products of 6%.
Sales adjustments as a percentage of net sales was consistent at 6.6% for the second quarter of 2021 and 2020.
Cost of sales increased 20% in the second quarter of 2021, as compared to a 30% increase in net sales, primarily due to higher product and other costs. Gross margin in the second quarter of 2021 increased, primarily driven by the incremental realized savings from the cost savings programs and the favorable impact of fixed cost absorption, partially offset by input cost inflation. North America segment income was $149.6 million in the second quarter of 2021, as compared to segment income of $81.8 million in the second quarter of 2020; the improvement was due to higher gross profit.
International Segment
The following table provides a summary of Mattel's net sales, segment income (loss), and gross billings by categories, along with supplemental information by brand, for the International segment for the second quarter of 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | | |
| June 30,
2021 | | June 30,
2020 | |
| (In millions, except percentage information) |
| Net Sales | $ | 424.9 | | | $ | 271.1 | | | 57 | % | | 10 | % | | |
| Segment Income (Loss) | 50.8 | | | (4.4) | | | n/m | | | | |
| | | | | | | | | |
| Gross Billings by Categories | | | | | | | | | |
| Dolls | $ | 180.7 | | | $ | 110.8 | | | 63 | % | | 10 | % | | |
| Infant, Toddler, and Preschool | 89.5 | | | 67.4 | | | 33 | % | | 9 | % | | |
| Vehicles | 135.0 | | | 80.9 | | | 67 | % | | 11 | % | | |
| Action Figures, Building Sets, Games, and Other | 104.1 | | | 64.8 | | | 61 | % | | 12 | % | | |
| Gross Billings | $ | 509.2 | | | $ | 323.9 | | | 57 | % | | 10 | % | | |
| Sales Adjustments | (84.3) | | | (52.9) | | | | | | | |
| Net Sales | $ | 424.9 | | | $ | 271.1 | | | 57 | % | | 10 | % | | |
| | | | | | | | | |
| Supplemental Gross Billings Disclosure | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Gross Billings by Top 3 Power Brands | | | | | | | | | |
| Barbie | $ | 139.9 | | | $ | 87.0 | | | 61 | % | | 11 | % | | |
| Hot Wheels | 117.7 | | | 70.3 | | | 67 | % | | 10 | % | | |
| Fisher-Price and Thomas & Friends | 84.9 | | | 64.6 | | | 31 | % | | 8 | % | | |
| Other | 166.8 | | | 102.1 | | | 63 | % | | 11 | % | | |
| Gross Billings | $ | 509.2 | | | $ | 323.9 | | | 57 | % | | 10 | % | | |
n/m - Not Meaningful
Gross billings for the International segment were $509.2 million in the second quarter of 2021, an increase of $185.3 million, or 57%, as compared to $323.9 million in the second quarter of 2020, with a favorable impact from changes in currency exchange rates of ten percentage points. The increase in the International segment gross billings was due to higher billings across all categories.
Dolls gross billings increased 63%, of which 48% was due to higher billings of Barbie products, 5% was due to initial billings of Spirit products, and 5% was due to higher billings of Polly Pocket products.
Infant, Toddler, and Preschool gross billings increased 33%, of which 30% was driven by higher billings of Fisher-Price and Thomas & Friends products.
Vehicles gross billings increased 67%, of which 59% was due to higher billings of Hot Wheels products, and 5% was due to higher billings of Matchbox products.
Action Figures, Building Sets, Games, and Other gross billings increased 61% due to higher billings of the following products: 19% from Jurassic World, 18% from initial billings of Masters of the Universe, and 8% from MEGA.
Sales adjustments as a percentage of net sales was relatively consistent at 19.9% for the second quarter of 2021, as compared to 19.5% for the second quarter of 2020.
Cost of sales increased 50% in the second quarter of 2021, as compared to a 57% increase in net sales, primarily due to higher product and other costs. Gross margin in the second quarter of 2021 increased, primarily driven by the favorable impact of fixed cost absorption and the incremental realized savings from the cost savings programs, partially offset by input cost inflation. International segment income was $50.8 million in the second quarter of 2021, as compared to a segment loss of $4.4 million in the second quarter of 2020; the improvement was primarily due to higher gross profit, partially offset by higher advertising and promotion expenses.
American Girl Segment
The following table provides a summary of Mattel's net sales, segment loss, and gross billings for the American Girl segment for the second quarter of 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | | |
| | June 30,
2021 | | June 30,
2020 | |
| | (In millions, except percentage information) |
| Net Sales | $ | 40.6 | | | $ | 28.2 | | | 44 | % | | — | % | | |
| Segment Loss | (9.7) | | | (13.9) | | | -30 | % | | — | % | | |
| | | | | | | | | |
| American Girl Segment | | | | | | | | | |
| Total Gross Billings | 41.5 | | | 29.1 | | | 43 | % | | — | % | | |
| Sales Adjustments | (0.8) | | | (0.9) | | | | | | | |
| Total Net Sales | $ | 40.6 | | | $ | 28.2 | | | 44 | % | | — | % | | |
Gross billings for the American Girl segment were $41.5 million in the second quarter of 2021, an increase of $12.4 million, or 43%, as compared to $29.1 million in the second quarter of 2020. The increase in American Girl gross billings was primarily due to higher billings in proprietary retail channels, which were impacted in the second quarter of 2020 by retail store closures due to the impact of COVID-19. This was partially offset by lower billings in direct-to-consumer channels.
Sales adjustments as a percentage of net sales decreased to 2.1% for the second quarter of 2021, as compared to 3.2% for the second quarter of 2020 due to lower wholesale returns.
Cost of sales increased 38% in the second quarter of 2021, as compared to a 44% increase in net sales, primarily due to higher product and other costs. Gross margin in the second quarter of 2021 increased, primarily due to decreased freight and logistics expenses as a percentage of net sales driven by lower direct-to-consumer channel sales and the favorable impact of fixed cost absorption, partially offset by input cost inflation. American Girl segment loss was $9.7 million in the second quarter of 2021, as compared to segment loss of $13.9 million in the second quarter of 2020. This improvement was driven by higher gross profit, partially offset by higher advertising and promotion expenses.
Results of Operations—First Half
Consolidated Results
The following table provides a summary of Mattel's consolidated results for the first half of 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended | | Year/Year Change |
| June 30, 2021 | | June 30, 2020 | |
| Amount | | % of Net
Sales | | Amount | | % of Net
Sales | | % | | Basis Points
of Net Sales |
| (In millions, except percentage and basis point information) |
| Net sales | $ | 1,900.6 | | | 100.0 | % | | $ | 1,326.2 | | | 100.0 | % | | 43 | % | | — | |
| Gross profit | $ | 899.8 | | | 47.3 | % | | $ | 579.1 | | | 43.7 | % | | 55 | % | | 360 | |
| Advertising and promotion expenses | 162.4 | | | 8.5 | % | | 136.5 | | | 10.3 | % | | 19 | % | | (180) | |
| Other selling and administrative expenses | 654.4 | | | 34.4 | % | | 635.5 | | | 47.9 | % | | 3 | % | | (1,350) | |
| Operating income (loss) | 83.0 | | | 4.4 | % | | (192.8) | | | -14.5 | % | | n/m | | n/m |
| Interest expense | 168.6 | | | 8.9 | % | | 98.6 | | | 7.4 | % | | 71 | % | | 150 | |
| Interest (income) | (1.4) | | | -0.1 | % | | (3.1) | | | -0.2 | % | | -55 | % | | 10 | |
| Other non-operating (income) expense, net | (0.6) | | | | | 5.7 | | | | | | | |
| Loss before income taxes | (83.7) | | | -4.4 | % | | (294.0) | | | -22.2 | % | | -72 | % | | 1,780 | |
| Provision for income taxes | 40.9 | | | | | 24.7 | | | | | | | |
| Income from equity method investments | 6.7 | | | | | 1.9 | | | | | | | |
| Net Loss | $ | (117.9) | | | -6.2 | % | | $ | (316.8) | | | -23.9 | % | | -63 | % | | 1,770 | |
n/m - Not MeaningfulSales
The following table provides a summary of Mattel's consolidated gross billings by categories, along with supplemental information by brand, for the first half of 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | | |
| June 30,
2021 | | June 30,
2020 | |
| | (In millions, except percentage information) |
| Gross Billings by Categories | | | | | | | | | |
| Dolls | $ | 776.0 | | | $ | 486.9 | | | 59 | % | | 2 | % | | |
| Infant, Toddler, and Preschool | 412.5 | | | 340.1 | | | 21 | % | | 2 | % | | |
| Vehicles | 481.7 | | | 344.3 | | | 40 | % | | 3 | % | | |
| Action Figures, Building Sets, Games, and Other | 457.3 | | | 313.2 | | | 46 | % | | 4 | % | | |
| Gross Billings | $ | 2,127.6 | | | $ | 1,484.5 | | | 43 | % | | 3 | % | | |
| Sales Adjustments | (227.0) | | | (158.3) | | | | | | | |
| Net Sales | $ | 1,900.6 | | | $ | 1,326.2 | | | 43 | % | | 2 | % | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Supplemental Gross Billings Disclosure | | | | | | | | | |
| Gross Billings by Top 3 Power Brands | | | | | | | | | |
| Barbie | $ | 567.5 | | | $ | 346.8 | | | 64 | % | | 4 | % | | |
| Hot Wheels | 412.0 | | | 295.1 | | | 40 | % | | 3 | % | | |
| Fisher-Price and Thomas & Friends | 379.3 | | | 305.0 | | | 24 | % | | 2 | % | | |
| Other | 768.7 | | | 537.6 | | | 43 | % | | 3 | % | | |
| Gross Billings | $ | 2,127.6 | | | $ | 1,484.5 | | | 43 | % | | 3 | % | | |
Gross billings were $2.13 billion in the first half of 2021, an increase of $643.0 million or 43%, as compared to $1.48 billion in the first half of 2020, with a favorable impact from changes in currency exchange rates of three percentage points. The increase in gross billings for the first half of 2021 was due to higher billings across all categories.
Dolls gross billings increased 59%, of which 45% was due to higher billings of Barbie products, primarily driven by positive brand momentum and POS, 4% was due to higher billings of American Girl products, 4% was due to initial billings of Spirit products, and 3% was due to higher billings of Polly Pocket products.
Infant, Toddler, and Preschool gross billings increased 21%, of which 22% was due to higher billings of Fisher-Price and Thomas & Friends, primarily driven by higher billings of infant and newborn products. This waspartially offset by lower billings of Power Wheels products of 1%.
Vehicles gross billings increased 40%, of which 34% was due to higher billings of Hot Wheels products, driven by positive brand momentum and POS, which benefited from a return to in-store impulse shopping, and 3% was due to higher billings of Matchbox products.
Action Figures, Building Sets, Games, and Other gross billings increased 46% due to higher billings of the following products: 16% from Jurassic World, 14% from initial billings of Masters of the Universe, 7% from WWE, and 6% from MEGA.
Sales adjustments represent arrangements with Mattel’s customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Sales adjustments as a percentage of net sales was consistent at 11.9% for the first half of 2021 and 2020.
Cost of Sales
Cost of sales as a percentage of net sales was 52.7% in the first half of 2021, as compared to 56.3% in the first half of 2020. Cost of sales increased by $253.6 million, or 34%, to $1.0 billion in the first half of 2021 from $747.1 million in the first half of 2020, as compared to a 43% increase in net sales. Within cost of sales, product and other costs decreasedincreased by $26.6$217.1 million, or 3%36%, to $738.4$816.7 million in the third quarterfirst half of 20172021 from $765.0$599.6 million in the third quarterfirst half of 2016;2020; freight and logistics expenses increased by $14.3$25.6 million, or 16%28%, to $103.0$118.7 million in the third quarterfirst half of 20172021 from $88.7$93.1 million in the third quarterfirst half of 2016;2020; and royalty expense increased by $1.3$10.9 million, or 2%20%, to $72.4$65.2 million in the third quarterfirst half of 20172021 from $71.1$54.4 million in the third quarterfirst half of 2016.2020. Within cost of sales, certain inbound freight costs were previously classified as freight and logistics costs. Mattel reclassified such inbound freight costs from freight and logistics expenses to present all inbound freight costs within product and other costs for the periods and segments presented.
Gross Margin
Gross margin decreasedincreased to 41.5%47.3% in the third quarterfirst half of 20172021 from 48.5%43.7% in the third quarterfirst half of 2016.2020. The decreaseincrease in gross margin was primarily driven by unfavorable product mix, higher freightthe favorable impact of fixed cost absorption and logistics expenses, an unfavorable impactthe incremental realized savings from Toys “R” Us filing for bankruptcy, and lower licensing income. 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.
savings programs, partially offset by input cost inflation due to higher raw material and inbound freight costs.
Advertising and Promotion Expenses
Advertising and promotion expenses primarily consist of: (i) media costs, which primarily include the media, planning, and buying fees for television, print, and online advertisements,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 increaseddecreased to 11.5%8.5% in the third quarterfirst half of 20172021 from 11.3%10.3% in the third quarterfirst half of 2016.2020 driven by a 43% increase in net sales as compared to an increase in advertising and promotion expense of $25.9 million, or 19%. The increase in advertising and promotion expense to $162.4 million in the first half of 2021 from $136.5 million in the first half of 2020, was driven by higher media spend.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $381.8$654.4 million, or 24.5%34.4% of net sales, in the third quarterfirst half of 2017,2021, as compared to $350.5$635.5 million, or 19.5%47.9% of net sales, in the third quarterfirst half of 2016.2020. The increase in other selling and administrative expenses was primarily driven by higher employee compensation costs, partially offset by incremental realized savings from the cost savings programs.
Interest Expense
Interest expense was $168.6 million in the first half of 2021, as compared to $98.6 million in the first half of 2020. The increase in interest expense was due to asset impairmentsa loss on extinguishment of approximately $15$83.2 million higher employee-related costsas a result of approximately $7 million, higher severance and restructuring expensesthe partial redemption of approximately $6 million, and investmentsthe 2017/2018 Senior Notes due December 2025 in the new American Girl flagship store in New York Cityfirst quarter of approximately $3 million,2021. This was partially offset by lower incentive and equity compensation expensesinterest expense in the second quarter of approximately $8 million.2021 due to a lower interest rate associated with the partial refinancing of the 2017/2018 Senior Notes.
Provision for Income Taxes
Mattel’sMattel's provision for income taxes was $664.5$40.9 million and $57.8$24.7 million infor the third quarterfirst half of 20172021 and 2016,2020, respectively. For the first half of 2021, Mattel recognized a net discrete tax expense of $561.5$16.2 million in the third quarter of 2017 primarily related to income taxes recorded on a non-cash chargediscrete basis in various jurisdictions, a discrete tax expense of $561.9$7.2 million resulting fromrelated to tax rate changes impacting deferred tax assets, and a discrete tax benefit of $3.9 million for reassessments of prior years' tax liabilities. For the first half of 2020, Mattel recognized a discrete tax expense of $8.3 million related to income taxes recorded on a discrete basis in various jurisdictions and a discrete tax expense of $1.3 million for reassessments of prior years' tax liabilities. As a result of the establishment of a valuation allowance on U.S. deferred tax assets, that will likely not be realized and net discretethere was no U.S. tax benefitsbenefit provided for U.S. losses during the first half of $9.0 million in the third quarter of 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.2021 or 2020.
Segment Results
North America Segment
The following table provides a summary of Mattel’sMattel's net sales, segment income, and gross salesbillings by categories, along with supplemental information by brand, for the North America segment for the third quarterfirst half of 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | | |
| June 30,
2021 | | June 30,
2020 | |
| | (In millions, except percentage information) |
| Net Sales | $ | 1,040.5 | | | $ | 720.4 | | | 44 | % | | — | % | | |
| Segment Income | 274.5 | | | 98.7 | | | 178 | % | | | | |
| | | | | | | | | |
| Gross Billings by Categories | | | | | | | | | |
| Dolls | $ | 348.8 | | | $ | 195.1 | | | 79 | % | | 1 | % | | |
| Infant, Toddler, and Preschool | 248.4 | | | 208.9 | | | 19 | % | | 1 | % | | |
| Vehicles | 241.2 | | | 166.5 | | | 45 | % | | 1 | % | | |
| Action Figures, Building Sets, Games, and Other | 271.3 | | | 196.7 | | | 38 | % | | 1 | % | | |
| Gross Billings | $ | 1,109.6 | | | $ | 767.3 | | | 45 | % | | 1 | % | | |
| Sales Adjustments | (69.1) | | | (46.9) | | | | | | | |
| Net Sales | $ | 1,040.5 | | | $ | 720.4 | | | 44 | % | | — | % | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Supplemental Gross Billings Disclosure | | | | | | | | | |
| Gross Billings by Top 3 Power Brands | | | | | | | | | |
| Barbie | $ | 308.3 | | | $ | 180.1 | | | 71 | % | | — | % | | |
| Hot Wheels | 202.4 | | | 140.3 | | | 44 | % | | — | % | | |
| Fisher-Price and Thomas & Friends | 223.7 | | | 181.6 | | | 23 | % | | — | % | | |
| Other | 375.2 | | | 265.3 | | | 41 | % | | — | % | | |
| Gross Billings | $ | 1,109.6 | | | 767.3 | | | 45 | % | | 1 | % | | |
|
| | | | | | | | | | | | | |
| | 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 | % | | — | % |
Gross salesbillings for the North America segment were $839.3 million$1.11 billion in the third quarterfirst half of 2017, a decrease2021, an increase of $231.7$342.3 million, or 22%45%, as compared to $1.07 billion$767.3 million in the third quarterfirst half of 2016.2020, with a favorable impact from changes in currency exchange rates of one percentage point. The decreaseincrease in the North America segment gross sales was primarily due to lower sales of Other Girls, Construction and Arts & Crafts, Fisher-Price Friends, Entertainment, Core Fisher-Price, and Wheels 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 58% decrease in Other Girls gross sales, 40%billings was due to lower saleshigher billings across all categories.
Dolls gross billings increased 79%, of Monster High products and 18%which 66% was due to lower saleshigher billings of DC Super Hero Girls products. Of the 34% decrease in Construction and Arts & Crafts gross sales, 30% was due to lower sales of MEGA BLOKS Barbie products, primarily driven by licensed properties and MEGA BLOKS Preschool products. Of the 22% decrease in Fisher-Price Friends gross sales, 22% 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 salesinitial billings 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 infant Spirit products, and 5% was due to lower saleshigher billings of ImaginextPolly Pocket products. Of the 17% decrease in Wheels
Infant, Toddler, and Preschool gross sales, 9%billings increased 19%, of which 20% was due to higher billings of Fisher-Price and Thomas & Friends products, partially offset by lower salesbillings of HotPower Wheels products and 6%of 1%.
Vehicles gross billings increased 45%, of which 37% was due to higher billings of Hot Wheels products, and 3% was due to higher billings of Matchbox products.
Action Figures, Building Sets, Games, and Other gross billings increased 38% due to higher billings of the following products: 15% from Jurassic World, 13% from initial billings of Masters of the Universe, 9% from WWE, and 5% from MEGA. This was partially offset by lower billings of card games products, including UNO of 7%.
Sales adjustments as a percentage of net sales was relatively consistent at 6.6% for the first half of Tyco™ RCvehicles products.2021, as compared to 6.5% for the first half of 2020.
Cost of sales decreased 6% inincreased 31.0% during the third quarterfirst half of 2017,2021, as compared to a 21% decrease44% increase in net sales, primarily due to lowerhigher product and other costs, partially offset by higher freight and logistics expenses.costs. Gross margin in the third quarterfirst half of 2017 decreased due to an unfavorable2021 increased primarily driven by the favorable impact from Toys “R” Us filing for bankruptcy, higher freightof fixed cost absorption and logistics expenses, and unfavorable product mix. As a result of the Toys “R” Us net sales reversal, gross margin includesincremental realized savings from the cost of sales for the inventory sold, but excludes the corresponding net sales.
savings programs, partially offset by input cost inflation. North America segment income decreased to $86.2was $274.5 million in the third quarterfirst half of 2017,2021, as compared to $265.6segment income of $98.7 million in the third quarterfirst half of 2016,2020; the improvement was primarily due to lowerhigher gross profit, and higher other selling and administrative expenses, partially offset by lowerhigher advertising and promotion expenses.
International Segment
The following table provides a summary of percentage changes inMattel's 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 inincome (loss), and 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 salesbillings by categories, along with supplemental information by brand, for the International segment for the third quarterfirst half of 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | | |
| June 30,
2021 | | June 30,
2020 | |
| | (In millions, except percentage information) |
| Net Sales | $ | 774.3 | | | $ | 540.4 | | | 43 | % | | 6 | % | | |
| Segment Income (Loss) | 87.0 | | | (31.4) | | | n/m | | | | |
| | | | | | | | | |
| Gross Billings by Categories | | | | | | | | | |
| Dolls | $ | 339.4 | | | $ | 224.7 | | | 51 | % | | 6 | % | | |
| Infant, Toddler, and Preschool | 164.1 | | | 131.2 | | | 25 | % | | 6 | % | | |
| Vehicles | 240.5 | | | 177.8 | | | 35 | % | | 5 | % | | |
| Action Figures, Building Sets, Games, and Other | 186.1 | | | 116.4 | | | 60 | % | | 9 | % | | |
| Gross Billings | $ | 930.2 | | | $ | 650.1 | | | 43 | % | | 6 | % | | |
| Sales Adjustments | (155.9) | | | (109.6) | | | | | | | |
| Net Sales | $ | 774.3 | | | $ | 540.4 | | | 43 | % | | 6 | % | | |
| | | | | | | | | |
| Supplemental Gross Billings Disclosure | | | | | | | | | |
| Gross Billings by Top 3 Power Brands | | | | | | | | | |
| Barbie | $ | 259.2 | | | $ | 166.7 | | | 55 | % | | 6 | % | | |
| Hot Wheels | 209.6 | | | 154.8 | | | 35 | % | | 4 | % | | |
| Fisher-Price and Thomas & Friends | 155.6 | | | 123.4 | | | 26 | % | | 5 | % | | |
| Other | 305.8 | | | 205.2 | | | 49 | % | | 7 | % | | |
| Gross Billings | $ | 930.2 | | | $ | 650.1 | | | 43 | % | | 6 | % | | |
|
| | | | | | | | | | | | | |
| | 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 | % |
Gross salesbillings for the International segment were $777.0$930.2 million in the third quarterfirst half of 2017,2021, an increase of $2.8$280.1 million, or 43%, as compared to $774.2$650.1 million in the third quarterfirst half of 2016,2020, with a favorable impact from changes in currency exchange rates of 26 percentage points. The increase 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, Construction and Arts & Crafts, and Fisher-Price Friends products. Of the 32% increase in Entertainment gross sales, 44%billings was due to higher salesbillings across all categories.
Dolls gross billings increased 51%, 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%which 41% was due to higher salesbillings of Hot Wheels products. Of the 23% decrease in Other Girls gross sales, 21%Barbie products, 4% was due to lower salesinitial billings of Monster High Spirit products, 13%and 3% was due to lower saleshigher billings of DC Super Hero Girls products,Polly Pocket products.
Infant, Toddler, and 12%Preschool gross billings increased 25%, of which 24% was due to lower saleshigher billings of Ever After High products, partially offset by initial salesFisher-Price and Thomas & Friends products.
Vehicles gross billings increased 35%, of Enchantimals products of 19%. Of the 16% decrease in Construction and Arts & Crafts gross sales, 16%which 31% was due to lower saleshigher billings of MEGA BLOKS products, primarily driven by MEGA BLOKS Preschool Hot Wheels products, and licensed properties. Of the 14% decrease in Fisher-Price Friends gross sales, 12%4% was due to lower saleshigher billings of Thomas & FriendsMatchbox products.
Cost of salesAction Figures, Building Sets, Games, and Other gross billings increased 1% in the third quarter of 2017, as compared to an 1% increase in net sales, primarily60% due to higher royalty expense, partially offset by lower freight and logistics expenses. Gross margin in the third quarter of 2017 decreased as a result of an unfavorable product mix and higher royalty expense, partially offset by strategic pricing.
International segment income decreased to $81.3 million in the third quarter of 2017, as compared to $150.2 million in the third quarter of 2016, primarily due to 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 third quarter of 2017 and 2016:
|
| | | | | | | | | | | | | |
| | 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 | % | | — | % |
Gross sales for the American Girl segment were $93.9 million in the third quarter of 2017, a decrease of $36.2 million, or 28%, as compared to $130.1 million in the third quarter of 2016. The decrease in American Girl segment gross sales was primarily due to lower sales of American Girl brands products. The 29% 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 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, 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 resultbillings of the reversalfollowing products: 17% from Jurassic World, 15% from initial billings of approximately $47 millionMasters 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 productsUniverse, 8% from MEGA, and 13% was due to lower sales of Ever After High products, partially offset by initial sales of Enchantimals products of 7%3% from WWE. 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 adjustments as a percentage of net sales was 59.5% inrelatively consistent at 20.1% for the first nine monthshalf of 2017,2021, 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 net 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 segment20.3% for the first nine monthshalf 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 months of 2017, as compared to a 17% 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 months of 2017 decreased due to an unfavorable impact from Toys “R” Us filing for bankruptcy, higher 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 profit and higher other selling and administrative expenses, partially offset by lower advertising and promotion expenses.
International Segment
The following table provides a summary of percentage changes in net sales within the International segment in the first 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%.2020.
Cost of sales increased 6%35.0% in the first nine monthshalf of 2017,2021, as compared to a 2%43% increase in net sales, primarily due to higher product and other costs and higher royalty expense.costs. Gross margin in the first nine monthshalf of 2017 decreased as a result2021 increased primarily driven by the incremental realized savings from the cost savings programs and the favorable impact of unfavorable product mix, higher royalty expense, lower licensing income, and higher obsolescence expense,fixed cost absorption, partially offset by strategic pricing.
input cost inflation. International segment income decreased to $48.1was $87.0 million in the first nine monthshalf of 2017,2021, as compared to $155.9segment loss of $31.4 million in the first nine monthshalf of 2016, driven2020; the improvement was primarily by lowerdue to higher gross profit, partially offset by higher advertising and higher other selling and administrativepromotion expenses.
American Girl Segment
The following table provides a summary of Mattel’sMattel's net sales, segment loss, and gross salesbillings by categories, along with supplemental information by brand, for the American Girl segment for the first nine monthshalf of 20172021 and 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Six Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact | | |
| | June 30,
2021 | | June 30,
2020 | |
| | (In millions, except percentage information) |
| Net Sales | $ | 85.8 | | | $ | 65.3 | | | 31 | % | | — | % | | |
| Segment Loss | (19.3) | | | (31.0) | | | -38 | % | | | | |
| | | | | | | | | |
| American Girl Segment | | | | | | | | | |
| Total Gross Billings | 87.8 | | | 67.2 | | | 31 | % | | — | % | | |
| Sales Adjustments | (2.0) | | | (1.8) | | | | | | | |
| Total Net Sales | $ | 85.8 | | | $ | 65.3 | | | 31 | % | | — | % | | |
|
| | | | | | | | | | | | | |
| | 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 salesbillings for the American Girl segment were $247.4was $87.8 million in the first nine monthshalf of 2017, a decrease2021, an increase of $51.5$20.6 million, or 17%31%, as compared to $298.9$67.2 million in the first nine monthshalf of 2016.2020. The decreaseincrease in the American Girl segment gross billings was due to higher billings in propriety retail channels and higher direct-to-consumer channel billings.
Sales adjustments as a percentage of net sales was primarilydecreased to 2.3% for the first half of 2021, as compared to 2.8% for the first half of 2020 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.wholesale returns.
Cost of sales decreased 2%increased 29% in the first nine monthshalf of 2017,2021, as compared to an 18% decreasea 31% increase in net sales.sales, primarily due to higher product and other costs. Gross margin in the first nine monthshalf of 2017 decreased as a result2021 increased, primarily driven by the favorable impact of lower licensing incomefixed cost absorption and higher obsolescence expense.
the incremental realized savings from the cost savings programs, partially offset by input cost inflation. American Girl segment loss was $38.6$19.3 million in the first nine monthshalf of 2017,2021, as compared to segment incomeloss of $21.9$31.0 million in the first nine monthshalf of 2016, driven2020; the improvement was primarily by lowerdue to higher gross profit, lower licensingpartially offset by higher advertising and promotion expenses.
Cost Savings Programs
Optimizing for Growth (formerly Capital Light)
On February 9, 2021, Mattel announced the Optimizing for Growth program, a multi-year cost savings program which integrates and expands upon the previously announced Capital Light program (the "Program"). Targeted annual gross cost savings from actions that are expected to be completed beginning 2021 through 2023 are $250 million. Of the $250 million in incremental targeted gross cost savings, approximately 50% is expected to benefit Cost of Sales, 40% to benefit Other Selling and Administrative Expenses, and 10% to benefit Advertising and Promotion Expense. Aggregate incremental cash expenditures associated with the Program are expected to be approximately $100 to $125 million.
Mattel estimates the aggregate cost of incremental actions for the Program to be as follows:
| | | | | |
| Optimizing for Growth - Incremental Actions | Estimate of Cost |
| Employee severance | $40 to $50 million |
| Real estate/supply chain optimization and other restructuring costs | $15 to $20 million |
| Asset impairments and other non-cash charges | $25 to $30 million |
| Total estimated severance and restructuring costs | $80 to $100 million |
| Information technology enhancements and other investments | $45 to $55 million |
| Total estimated incremental charges | $125 to $155 million |
Cumulatively, in conjunction with previous actions taken under the Capital Light program, targeted annual gross cost savings for the Program are $325 million by 2023, with total expected cash expenditures of approximately $140 to $165 million, and total expected non-cash charges of $40 to $45 million.Of the $325 million in targeted gross cost savings, approximately 60% is expected to benefit Cost of Sales, 30% to benefit Other Selling and Administrative Expenses, and 10% to benefit Advertising and Promotion Expense.
In connection with the Program, Mattel has recorded severance and other restructuring costs in the following cost and expense categories within the consolidated statements of operations:
| | | | | | | | | | | |
| For the Six Months Ended |
| June 30,
2021 | | June 30,
2020 |
| (In millions) |
| Cost of sales (a) | $ | 1.8 | | | $ | 4.5 | |
| Other selling and administrative expenses (b) | 17.2 | | | 4.1 | |
| $ | 18.9 | | | $ | 8.6 | |
(a)Severance and other restructuring costs recorded within cost of sales in the consolidated statements of operations are included in segment income (loss) in "Note 22 to the Consolidated Financial Statements—Segment Information."
(b)Severance and higherother restructuring costs recorded within other selling and administrative expenses.expenses in the consolidated statements of operations are included in corporate and other expense in "Note 22 to the Consolidated Financial Statements—Segment Information."
As of June 30, 2021, Mattel has recorded cumulative severance and other restructuring charges related to the Program of approximately $69 million, which include approximately $18 million of non-cash charges. Mattel realized cumulative cost savings (before severance, restructuring costs, and cost inflation) of approximately $124 million, primarily within gross profit, as of June 30, 2021 in connection with the Program. Income Taxes
Mattel’s provision for income taxes was $614.4 million and $26.6 million forDuring the ninethree months ended September 30, 2017March 31, 2021, in conjunction with the Program, Mattel completed the sale of a manufacturing plant based in Mexico, which included land and 2016, respectively.buildings, resulting in a pre-tax gain of $15.8 million.
Other Cost Savings Actions
During the first half of 2020, Mattel recognized net discrete non-cash tax expenserecorded severance charges of $561.5approximately $15 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, primarily related to 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, respectively.actions taken to further streamline its organizational structure.
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 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 discrete 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, Mattel has provided zero tax benefit in the year-to-date tax expense for items such as the year-to-date U.S. operating loss 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.
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 million related to the settlement of tax audits and/or the expiration of statutes of limitations. The ultimate settlement of any issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.
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$1.40 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 $384.7 million in cash and equivalents at June 30, 2021, approximately $215.3 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 meetcomply with its debt covenant requirements, which include maintaining consolidated debt-to-earnings before interest, taxes, depreciation,covenants and amortization and interest coverage ratios,its senior secured revolving credit facilities covenants, or a deterioration of Mattel’sMattel's credit ratings. As discussed 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 may 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 facilities, and access to both long-termcapital markets, will be sufficient to meet working capital and short-term public and private debt markets at competitive interest rates are available to fund domestic operations and obligations. If these sources are not adequate, Mattel also hasoperating expenditure requirements for the ability to repatriate highly taxed foreign earnings, receive repayment of intercompany loans to foreign subsidiaries, and/or distribute liquidating dividends from foreign subsidiaries, all of which would have a very nominal impact, if any, 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.next twelve months.
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 SeptemberAt June 30, 2017, there were2021, Mattel had no amounts outstanding borrowings under the Credit Facility. Assenior secured revolving credit facilities and approximately $10 million in outstanding letters of September 30, 2017, Mattel had borrowings of $732.6 million outstanding related to its commercial paper program. Mattel has not experienced any limitations on its ability to access this source of liquidity. credit under the senior secured revolving credit facilities.
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. Mattel monitors its customers’customers' financial condition and their liquidity in order to mitigate Mattel’sMattel's accounts receivable collectibilitycollectability risks, and customer terms and credit limits are adjusted, if necessary. Additionally, Mattel uses a variety of financial arrangements to ensure collectibilitycollectability 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, 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.
OperatingMattel's business has been 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" for further discussion regarding the impact and potential impacts of COVID-19 on Mattel’s business.
Cash Flow Activities
Cash flows used for operating activities were $740.1$241.4 million in the first nine monthshalf of 2017,2021, as compared to $331.3$469.3 million in the first nine monthshalf of 2016.2020. The decrease in cash flows used for operating activities increasedwas primarily due to a higherlower net loss, excluding the impact of the valuation allowance on deferred tax assets, and higher working capital usage.non-cash charges.
Cash flows used for investing activities were $174.9$27.2 million in the first nine monthshalf of 2017,2021, as compared to $204.7$74.7 million in the first nine monthshalf of 2016.2020. The decrease in cash flows used for investing activities decreasedwas primarily due to an increasedriven by proceeds from the disposal of assets and a business of $43.1 million in proceeds fromthe first half of 2021 and net payments for foreign currency forward exchange contracts and payments related to Fuhu and Sproutling in 2016, partially offset by higher capital spending.
Financing Activities
Cash flows provided by financing activities were $213.7 million in the first nine monthshalf of 2017, as compared to cash2020.
Cash flows used for financing activities of $43.2were $107.8 million in the first nine monthshalf of 2016. The increase in2021, as compared to cash flows provided by financing activities was primarily driven by higher net short-term borrowings, partially offset by proceeds from long-term borrowings in 2016.
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 to 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 to the lenders demonstrating a consolidated debt-to-consolidated EBITDA ratio 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 restrictions 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$399.3 million in the agreement governing the Credit Facility to calculate the ratios. Mattelfirst half of 2020. The change in cash flows from financing activities 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.
Financial Position
Mattel’s cash and equivalents decreased $688.2 million to $181.3 million at September 30, 2017, as compared to $869.5 million at December 31, 2016. The decrease wasdriven primarily due to higher working capital usage, dividend payments, and purchases of tools, dies, and molds and other property, plant, and equipment, partially offset by net proceeds from short-term borrowings and proceeds from foreign currency forward exchange contracts.
Accounts receivable increased $390.9of $400.0 million to $1.51 billion at September 30, 2017,in the first half of 2020 as compared to $1.12 billion atthe partial redemption of the 2017/2018 Senior Notes due December 31, 2016, primarily due to the seasonality 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, primarily due to lower volume, 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 volume2025 in the first nine monthshalf of 2017, including the impact of Toys “R” Us filing for bankruptcy.2021.
Accounts payable and accrued liabilities decreased $11.4 million to $1.28 billion at September 30, 2017, as compared to $1.29 billion at December 31, 2016. The decrease was primarily due to lower advertising and promotion accruals, partially offset by tighter management of vendor disbursements.
Noncurrent long-term debt decreased to $1.89 billion at September 30, 2017 from $2.13 billion at December 31, 2016 due to the reclassification of $250.0 million of 2013 Senior Notes due on March 15, 2018.
A summary of Mattel’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 | % |
Mattel’s debt-to-total capital ratio, including short-term borrowings and the current portion of long-term debt, increased from 50.2% at September 30, 2016 to 66.6% at September 30, 2017 as a result of higher debt and lower stockholders’ equity.
LitigationSeasonal Financing
See Part I, Item 1 “Financial"Financial Statements—Note 208 to the Consolidated Financial Statements—Contingencies”Seasonal Financing" of this Quarterly Report on Form 10-Q.
Financial Position
Mattel's cash and equivalents decreased $377.4 million to $384.7 million at June 30, 2021, as compared to $762.2 million at December 31, 2020, due to seasonal working capital usage, the partial redemption of the 2017/2018 Senior Notes due December 2025, and capital expenditures. The decreases were partially offset by proceeds from the disposal of assets and a business during the first half of 2021. Mattel's cash and equivalents decreased $76.8 million to $384.7 million at June 30, 2021, as compared to $461.6 million at June 30, 2020, primarily due to repayment of short-term borrowings of $400.0 million outstanding as of June 30, 2020, the partial redemption of the 2017/2018 Senior Notes due December 2025 in the first half of 2021, and capital expenditures, partially offset by cash flows from operating activities in the trailing twelve months.
Accounts receivable decreased $249.9 million to $784.1 million at June 30, 2021, as compared to $1.03 billion at December 31, 2020, primarily due to seasonal declines as year-end receivables are collected. Accounts receivable increased $133.6 million to $784.1 million at June 30, 2021, as compared to $650.5 million at June 30, 2020, primarily due to higher net sales in the second quarter of 2021. Net sales in the second quarter of 2020 were negatively impacted by COVID-19.
Inventory increased $289.6 million to $818.0 million at June 30, 2021, as compared to $528.5 million at December 31, 2020, primarily due to seasonal inventory build. Inventory increased $90.2 million to $818.0 million at June 30, 2021, as compared to $727.9 million at June 30, 2020, due to cost inflation and increased production to support growth in the second half of 2021.
Accounts payable and accrued liabilities decreased $240.9 million to $1.09 billion at June 30, 2021, as compared to $1.33 billion at December 31, 2020 due to seasonal declines in expenditure levels. Accounts payable and accrued liabilities increased $142.3 million to $1.09 billion at June 30, 2021, as compared to $944.1 million at June 30, 2020 due to increased payables associated with cost inflation and higher inventory production levels.
Mattel had $0.2 million, $400.0 million, and $1.0 million of short-term borrowings outstanding at June 30, 2021, June 30, 2020, and December 31, 2020, respectively. Mattel elevated its borrowings under the senior secured revolving credit facilities during 2020 in light of uncertainties surrounding the impact of COVID-19.
A summary of Mattel's capitalization is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 | | June 30, 2020 | | December 31, 2020 |
| | (In millions, except percentage information) |
| Cash and equivalents | $ | 384.7 | | | | | $ | 461.6 | | | | | $ | 762.2 | | | |
| | | | | | | | | | | |
| Short-term borrowings | 0.2 | | | | | 400.0 | | | | | 1.0 | | | |
| 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 | | | |
| 2017/2018 Senior Notes due December 2025 | 275.0 | | | | | 1,500.0 | | | | | 1,500.0 | | | |
| 2019 Senior Notes due December 2027 | 600.0 | | | | | 600.0 | | | | | 600.0 | | | |
| 2021 Senior Notes due April 2026 | 600.0 | | | | | — | | | | | — | | | |
| 2021 Senior Notes due April 2029 | 600.0 | | | | | — | | | | | — | | | |
| Debt issuance costs and debt discount | (35.9) | | | | | (49.2) | | | | | (45.3) | | | |
| Total debt | 2,839.3 | | | 84 | % | | 3,250.8 | | | 97 | % | | 2,855.7 | | | 82 | % |
| Stockholders’ equity | 527.7 | | | 16 | | | 106.1 | | | 3 | | | 610.1 | | | 18 | |
| Total capitalization (debt plus equity) | $ | 3,367.1 | | | 100 | % | | $ | 3,356.9 | | | 100 | % | | $ | 3,465.8 | | | 100 | % |
Total debt was $2.84 billion at June 30, 2021, as compared to $2.86 billion at December 31, 2020. On March 19, 2021, Mattel used the net proceeds from the issuance of $600.0 million aggregate principal amount of 3.375% Senior Notes due 2026 and $600.0 million aggregate principal amount of 3.750% Senior Notes due 2029, together with cash on hand, to redeem and retire $1.23 billion in aggregate principal amount of Mattel's outstanding 2017/2018 Senior Notes due December 2025 (the "2025 Notes") and pay related prepayment premiums and transaction fees and expenses. Total debt was $2.84 billion at June 30, 2021, as compared to $3.25 billion at June 30, 2020. The decrease is primarily due to the repayment of short-term borrowings of $400.0 million outstanding at June 30, 2020.
On June 21, 2021, Mattel issued a conditional notice of redemption to holders of its 2025 Notes for the redemption of the remaining $275 million outstanding aggregate principal amount of the 2025 Notes on July 1, 2021 (the "Redemption Date") at a price equal to 105.063% of the principal amount of the 2025 Notes redeemed plus accrued and unpaid interest to, but excluding, the Redemption Date. The conditional notice was subject to the condition precedent that Mattel receive funds from the senior secured revolving credit facilities sufficient to consummate the redemption (the "Condition Precedent") and provided Mattel the right to delay the Redemption Date or modify or rescind such notice in the event the Condition Precedent was not satisfied or waived by the Redemption Date, which, consequently, gave Mattel the right to defer settlement of the 2025 Notes for a period greater than one year after June 30, 2021. The Condition Precedent was satisfied and Mattel fully redeemed the 2025 Notes on the Redemption Date using cash on hand and funds from the senior secured revolving credit facilities.
Stockholders' equity decreased $82.4 million to $527.7 million at June 30, 2021, as compared to $610.1 million at December 31, 2020, primarily due to the net loss for the first half of 2021. Stockholders' equity increased $421.6 million to $527.7 million at June 30, 2021, as compared to $106.1 million at June 30, 2020, primarily due to net income for the trailing twelve months.
Litigation
See Part I, Item 1 "Financial Statements—Note 21 to the Consolidated Financial Statements—Contingencies" of this Quarterly Report on Form 10-Q.
Application of Critical Accounting Policies and Estimates
During the third 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 2 of the goodwill impairment test. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to the excess, limited by the amount of goodwill in that reporting unit.
In determining the fair value for each of its 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 forecasted to generate in the future. The market approach utilizes earnings multiples of comparable public companies, which are reflective of 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’s 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.
Other than the early adoption of ASU 2017-04, Mattel’s critical accounting policies and estimates are included in the 2020 Annual Report on Form 10-K and did not materially change during the first ninesix months of 2017, and are included in its Annual Report on Form 10-K for the year ended December 31, 2016.2021.
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 MeasuresMeasure
To supplement the financial results presented in accordance with generally accepted accounting principles in the United States (“GAAP”),U.S. GAAP, Mattel presents certaina non-GAAP financial measuresmeasure within the meaning of Regulation G promulgated by the Securities and Exchange Commission.SEC. The non-GAAP financial measuresmeasure that Mattel presents includeis currency exchange rate impact and gross sales.impact. Mattel uses these metricsthis measure 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 this non-GAAP financial measuresmeasure 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 areThis measure is not, and should not be viewed as, substitutesa substitute 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 SalesKey Performance Indicator
Gross salesbillings represent salesamounts invoiced to customers, excluding the impact of sales adjustments. Net sales, as reported,customers. It does not include the impact of sales adjustments, such as trade discounts and other allowances. Mattel presents changes in gross salesbillings 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 billings 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 categories, 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 brand level.products.
Since sales adjustments are determined by customer rather than at the brand level, Mattel believes that the disclosure of gross sales by brand is useful supplemental information for investors to be able to assess the performance of its underlying brands (e.g., 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 |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Net sales | $ | 1,561.0 |
| | $ | 1,795.6 |
| | -13 | % | | 1 | % |
| Sales adjustments | 149.2 |
| | 179.8 |
| | | | |
| Gross sales | $ | 1,710.2 |
| | $ | 1,975.4 |
| | -13 | % | | 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:
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Net sales | $ | 796.1 |
| | $ | 1,003.6 |
| | -21 | % | | — | % |
| Sales adjustments | 43.2 |
| | 67.4 |
| | | | |
| Gross sales | $ | 839.3 |
| | $ | 1,071.0 |
| | -22 | % | | — | % |
| | | | | | | | |
| | 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 | $ | 1,620.9 |
| | $ | 1,954.1 |
| | -17 | % | | — | % |
| Sales adjustments | 88.0 |
| | 123.0 |
| | | | |
| Gross sales | $ | 1,708.9 |
| | $ | 2,077.1 |
| | -18 | % | | — | % |
A reconciliation from net sales to gross sales for the International segment is as follows:
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Net sales | $ | 675.2 |
| | $ | 665.9 |
| | 1 | % | | 2 | % |
| Sales adjustments | 101.8 |
| | 108.3 |
| | | | |
| Gross sales | $ | 777.0 |
| | $ | 774.2 |
| | — | % | | 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 | $ | 1,415.4 |
| | $ | 1,381.0 |
| | 2 | % | | — | % |
| Sales adjustments | 221.6 |
| | 233.2 |
| | | | |
| Gross sales | $ | 1,637.0 |
| | $ | 1,614.2 |
| | 1 | % | | — | % |
A reconciliation from net sales to gross sales for the American Girl segment is as follows:
|
| | | | | | | | | | | | | |
| | For the Three Months Ended | | % Change as
Reported | | Currency
Exchange Rate
Impact |
| | September 30,
2017 | | September 30,
2016 | |
| | (In millions, except percentage information) |
| Net sales | $ | 89.7 |
| | $ | 126.1 |
| | -29 | % | | — | % |
| Sales adjustments | 4.2 |
| | 4.0 |
| | | | |
| Gross sales | $ | 93.9 |
| | $ | 130.1 |
| | -28 | % | | — | % |
| | | | | | | | |
| | 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 | $ | 234.8 |
| | $ | 287.2 |
| | -18 | % | | — | % |
| Sales adjustments | 12.6 |
| | 11.7 |
| | | | |
| Gross sales | $ | 247.4 |
| | $ | 298.9 |
| | -17 | % | | — | % |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Exchange Rate Risk
Currency exchange rate fluctuations impact Mattel’sMattel's results of operations and cash flows. Inventory transactions denominated in the Euro, Mexican peso, Australian dollar, British pound sterling, Canadian dollar, Australian dollar,Russian ruble, and Brazilian real and Russian ruble arewere the primary transactions that caused foreign currency transaction exposure for Mattel.Mattel during the first half of 2021. Mattel seeks to mitigate its exposure to market risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. For those intercompany receivables and payables that are not hedged, the transaction gains or losses are recorded in the consolidated statementstatements of operations in the period in which the exchange rate changes as part of operating income (loss) or other non-operating income/expense (income), net based on the nature of the underlying transaction. Transaction gains or losses on hedged intercompany inventory transactions are recorded in the consolidated statementstatements of operations in the period in which the inventory is sold to customers. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes.
Mattel’sMattel's financial position is also impacted by currency exchange rate fluctuations on translation of its net investments in subsidiaries with non-USnon-U.S. dollar functional currencies. Assets and liabilities of subsidiaries with non-USnon-U.S. dollar functional currencies are translated into USU.S. dollars at fiscal period-end exchange rates. Income, expense, and cash flow items are translated at weighted averageweighted-average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss)loss within stockholders’stockholders' equity. Mattel’sMattel's primary currency translation exposures duringadjustments for the first nine monthshalf of 20172021 were related to its net investments in entities having functional currencies denominated in the Euro, British pound sterling, and Mexican peso.Turkish lira.
There are numerous factors impacting the amount by which Mattel’sMattel's financial results are affected by foreign currency translation and transaction gains and losses resulting from changes in currency exchange rates, including, but not limited to, the level of foreign currency forward exchange contracts in place at a given time and the volume of foreign currency denominatedcurrency-denominated transactions in a given period. There have been no material changes to the quantitative information about market risks as disclosed under Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in Mattel’s 2016 Annual Report on Form 10-K.
Venezuelan Operations
Since JanuaryHowever, assuming that such factors were held constant, Mattel estimates that a 1 2010, Mattel has accounted for Venezuela as a highly inflationary economy as the three-year cumulative inflation rate for Venezuela exceeded 100%. Accordingly, Mattel’s Venezuelan subsidiary uses the US dollar as its functional currency, and monetary assets and liabilities denominated in Venezuelan bolívar fuerte (“BsF”) generate income or expense for changes in value associated with foreign currency exchange rate fluctuations against the US dollar. From January 2010 through January 2013, Mattel’s Venezuelan subsidiary used the Sistema de Transacciones con Títulos en Moneda Extranjera (“SITME”) rate, which was quoted at 5.30 BsF per US dollar as of December 31, 2012, to remeasure monetary assets and liabilities denominated in BsF. During February 2013, the Central Bank of Venezuela revised its official exchange rate to 6.30 BsF per US dollar and eliminated the SITME rate.
During March 2013, the Venezuelan government introduced a complementary currency exchange system, the Sistema Complementario de Administración de Divisas 1 (“SICAD 1”). SICAD 1 was intended to function as an auction system, allowing entities in specific sectors to bid for US dollars to be used for specified import transactions. During February 2014, the Venezuelan government introduced an additional currency exchange system, the Sistema Complementario de Administración de Divisas 2 (“SICAD 2”), which was expected to provide a greater supply of US dollars from sources other than the Venezuelan government and increase participation to all sectors and companies.
During February 2015, the Venezuelan government announced the launch of a new three-tiered currency exchange platform, which included a new exchange system called the Marginal Currency System (“SIMADI”). The first tier was used for food, medicine, agriculture, and other essential goods and used an official exchange rate of 6.30 BsF per US dollar. The second tier was a merger of the SICAD 1 and SICAD 2 systems, which held periodic auctions for entities in specific sectors. The third tier was the new SIMADI system, which was intended to be a market-driven exchange that allowed for legal trading of foreign currency based on supply and demand.
During March 2016, the Venezuelan government further revised its currency exchange platform to a dual system. The SICAD rate merged with the official exchange rate, becoming the new Tipo de Cambio Protegido (“DIPRO”) exchange rate, which was fixed at 10.00 BsF per US dollar. The existing SIMADI rate was renamed the Tipo de Cambio Complementario (“DICOM”) exchange rate. The DIPRO rate is used for essential imports, such as food and medicine, whereas the DICOM rate is used for all other transactions. During the first quarter of 2016, Mattel changed its remeasurement rate from the official exchange rate to the new DICOM exchange rate. Thepercent change in the remeasurement rate resulted in an unrealized foreign currency exchange loss of approximately $26 million, which was recognized in other non-operating expense/income, net in the consolidated statement of operations in the firstU.S. dollar would have impacted Mattel's second quarter of 2016.
Mattel’s Venezuelan subsidiary represented less than 0.01% of Mattel’s consolidated net sales in the first nine months of 2017by approximately 0.4% and had approximately $1 million of net monetary assets denominated in BsF as of September 30, 2017. Venezuela currency matters, along with economic and political instability, continue tohave no impact the operating results of Mattel’s Venezuelan subsidiary. If the Venezuelan bolívar fuerte significantly devalues in the future, or if the economic or political conditions significantly worsen, Mattel may consider ceasing operations of its Venezuelan subsidiary, which could result in a pre-tax charge to its consolidated statement of operations of up to $71 million.
second quarter loss per share.
United Kingdom Operations
During June 2016, the referendum by British voters to exit the European Union (“Brexit”EU ("Brexit") adversely impacted global markets and resulted in a sharp decline of the British pound sterling against the USU.S. dollar. In February 2017, the British Parliament voted in favor of allowing the British government to begin the formal process of Brexit and discussions with the European UnionEU began in March 2017. InOn January 29, 2020, the short-term,British Parliament approved a withdrawal agreement, and the United Kingdom ("U.K.") officially withdrew from the EU on January 31, 2020 and entered into a transition period that ended on December 31, 2020.
On December 24, 2020, the U.K. and EU agreed upon The EU-UK Trade and Cooperation Agreement. The agreement was provisionally applicable beginning January 1, 2021 and sets new rules and arrangements between the U.K. and EU in areas such as the trade of goods and services, intellectual property, transportation, and more. As a result of the agreement, the U.K. is no longer considered a member of the EU Single Market and Customs Union and exited all EU policies and trade agreements. The transfer of goods between the U.K. and EU is subject to additional inspections and checkpoints causing possible delays in the movement of inventory.
On April 27, 2021, the European Parliament gave final approval to the EU-UK Trade and Cooperation Agreement, and on April 29, 2021, the EU approved the conclusion of the agreement by way of a Council Decision. As a result, the agreements between the U.K. and the EU came into effect on May 1, 2021. This was the last official step in formalizing the new relationship between the U.K. and the EU. Although the agreement has mitigated a portion of the risk that arose due to the U.K.'s withdrawal from the EU, the overall impact on Mattel's operations is still being evaluated, including the volatility inof the British pound sterling could continue as the United Kingdom negotiates its anticipated exit from the European Union. In the longer term, any impact from Brexit onsterling. Mattel's United Kingdom operations will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations. Mattel's United KingdomU.K. operations represented approximately 5%6% of Mattel's consolidated net sales infor the first nine monthshalf of 2017.2021.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of SeptemberJune 30, 2017,2021, Mattel’s disclosure controls and procedures were evaluated, with the participation of Mattel’s principal executive officer and principal financial officer, to assess whether they are effective in providing reasonable assurance that information required to be disclosed by Mattel in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionCommission's rules and forms. Based on this evaluation, Margaret H. Georgiadis,Ynon Kreiz, Mattel’s principal executive officer, and Joseph J. Euteneuer,Anthony DiSilvestro, Mattel’s principal financial officer, concluded that these disclosure controls and procedures were effective to provide reasonable assurance as of SeptemberJune 30, 2017.2021.
Changes in Internal Control Overover Financial Reporting
During the quarter ended September 30, 2017, Mattel madeThere were no changes to itsin internal control over financial reporting that occurred during the quarter ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, itsMattel’s internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
The content of Part I, Item 1 “Financial"Financial Statements—Note 2021 to the Consolidated Financial Statements—Contingencies”Contingencies" of this Quarterly Report on Form 10-Q is hereby incorporated by reference in its entirety in this Item 1.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed under Part I, Item 1A “Risk Factors”"Risk Factors" in Mattel’s 2016the 2020 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Equity Securities
During the thirdsecond quarter of 2017,2021, Mattel did not sell any unregistered equity securities.
Issuer Purchases of Equity Securities
This table provides certain information with respect to Mattel’sMattel's purchases of its common stock during the thirdsecond quarter of 2017:2021:
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares (or Units) Purchased (1) | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) |
| July 1—31 | 167,334 |
| | $ | 20.12 |
| | — |
| | $ | 203,016,273 |
|
| August 1—31 | 289,305 |
| | 19.56 |
| | — |
| | 203,016,273 |
|
| September 1—30 | 48,922 |
| | 15.39 |
| | — |
| | 203,016,273 |
|
| Total | 505,561 |
| | $ | 19.34 |
| | — |
| | $ | 203,016,273 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total Number of
Shares (or Units)
Purchased (a) | | Average Price Paid
per Share (or Unit) | | Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs | | Maximum Number (or
Approximate Dollar
Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (b) |
| April 1—30 | 12,548 | | | $ | 20.85 | | | — | | | $ | 203,016,273 | |
| May 1—31 | 3,184 | | | 21.21 | | | — | | | 203,016,273 | |
| June 1—30 | 9,822 | | | 20.07 | | | — | | | 203,016,273 | |
| Total | 25,554 | | | $ | 20.60 | | | — | | | $ | 203,016,273 | |
____________________________________
| |
(1) | The total number of shares purchased relates to 505,561 shares withheld from employees to satisfy minimum tax withholding obligations that occur upon vesting of restricted stock units. These shares were not purchased as part of a publicly announced repurchase plan or program. |
| |
(2) | Mattel’s share repurchase program was first announced on July 21, 2003. On July 17, 2013, the Board of Directors authorized Mattel to increase its share repurchase program by $500.0 million. At September 30, 2017, share repurchase authorizations of $203.0 million had not been executed. Repurchases under the program will take place from time to time, depending on market conditions. Mattel’s share repurchase program has no expiration date. |
(a)The total number of shares purchased represents shares withheld from employees to satisfy minimum tax withholding obligations that occur upon settlement of equity awards. These shares were not purchased as part of a publicly announced repurchase plan or program. (b)Mattel's share repurchase program was first announced on July 21, 2003. On July 17, 2013, the Board of Directors authorized Mattel to increase its share repurchase program by $500.0 million. At June 30, 2021, share repurchase authorizations of $203.0 million had not been executed. Repurchases under the program will take place from time to time, depending on market conditions. Mattel's share repurchase program has no expiration date.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| | | | | | | Incorporated by Reference | | | | | Incorporated by Reference |
| Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit(s) | | Filing Date | Exhibit No. | | Exhibit Description | | Form | | File No. | | Exhibit(s) | | Filing Date |
| | Restated Certificate of Incorporation of Mattel, Inc. | | 8-K | | 001-05647 | | 99.0 | | May 21, 2007 | | | Restated Certificate of Incorporation of Mattel, Inc. | | 8-K | | 001-05647 | | 99.0 | | May 21, 2007 |
| | Amended and Restated Bylaws of Mattel, Inc. | | 8-K | | 001-05647 | | 3.1 | | January 30, 2017 | | | Amended and Restated Bylaws of Mattel, Inc. | | 8-K | | 001-05647 | | 3.1 | | August 28, 2018 |
| | Specimen Stock Certificate with respect to Mattel, Inc. | | 10-Q | | 001-05647 | | 4.0 | | August 3, 2007 | | | Specimen Stock Certificate with respect to Mattel, Inc. | | 10-Q | | 001-05647 | | 4.0 | | August 3, 2007 |
| | Amendment No. 2 to Seventh Amended and Restated Credit Agreement dated as of June 8, 2015, by and among Mattel, Inc., as Borrower, Bank of America, N.A., as Administrative Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo Bank, N.A. and Citibank N.A., as Co-Syndication Agents, Mizuho Bank, Ltd., MUFG Union Bank, N.A., and Royal Bank of Canada, as Co-Documentation Agents, and the other financial institutions party thereto | | 8-K | | 001-05647 | | 10.1 | | September 21, 2017 | |
| | Letter Agreement between Mattel, Inc. and Kevin M. Farr, dated August 16, 2017, regarding his separation from the Company | | 8-K | | 001-05647 | | 10.1 | | August 18, 2017 | |
| | Letter Agreement between Mattel, Inc. and Joseph J. Euteneuer, dated September 25, 2017, regarding an offer of employment for the position of Chief Financial Officer | | 8-K | | 001-05647 | | 10.1 | | October 3, 2017 | |
| | Participation Letter Agreement under the Mattel, Inc. Executive Severance Plan B between Mattel, Inc. and Joseph J. Euteneuer, dated September 25, 2017 | | 8-K | | 001-05647 | | 10.2 | | October 3, 2017 | |
| | Computation of Ratio of Earnings to Fixed Charges | | |
| | | | Fifth Amendment to Mattel, Inc. Amended and Restated 2010 Equity and Long-Term Compensation Plan | | DEF 14A | | 001-05647 | | Appendix A | | April 13, 2021 |
| | Certification of Principal Executive Officer dated October 26, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| | Certification of Principal Financial Officer dated October 26, 2017 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| | Certifications of Principal Executive Officer and Principal Financial Officer dated October 26, 2017 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
101.INS* | | XBRL Instance Document | | 101.INS* | | Inline XBRL Instance Document | |
101.SCH* | | XBRL Taxonomy Extension Schema Document | | 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document | | 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document | | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104* | | 104* | | The cover page from Mattel's Quarterly Report on Form 10-Q for the three months ended June 30, 2021, formatted in Inline XBRL. | |
| | | | | |
| |
| + | Management contract or compensatory plan or arrangement.arrangement |
| * | Filed herewith. |
| ** | Furnished herewith. This exhibit should not be deemed to be “filed”"filed" for purposes of Section 18 of the Securities Exchange Act of 1934. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| MATTEL, INC. Registrant |
| | | |
| MATTEL, INC.
Registrant
By: | | /s/ Yoon Hugh |
| | | |
| By: | | /s/ JOSEPH B. JOHNSON
|
| | | Joseph B. Johnson
Yoon Hugh
Senior Vice President and Corporate Controller (Duly authorizedAuthorized Officer and Chief Accounting Officer) |
Date: October 26, 2017August 9, 2021