Attached files

file filename
EX-32.0 - EXHIBIT 32.0 - MATTEL INC /DE/ex320.htm
EX-12.0 - EXHIBIT 12.0 - MATTEL INC /DE/ex120.htm
EX-23.0 - EXHIBIT 23.0 - MATTEL INC /DE/ex230.htm
EX-21.0 - EXHIBIT 21.0 - MATTEL INC /DE/ex210.htm
EX-31.0 - EXHIBIT 31.0 - MATTEL INC /DE/ex310.htm
EX-31.1 - EXHIBIT 31.1 - MATTEL INC /DE/ex311.htm
EX-10.19 - EXHIBIT 10.19 - MATTEL INC /DE/ex1019.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                     to  
                     
Commission File Number 001-05647 
________________________________________________________
MATTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
95-1567322
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
333 Continental Blvd.
El Segundo, CA 90245-5012
(Address of principal executive offices)
(310) 252-2000
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $1.00 par value
 
The NASDAQ Global Select Market
________________________________________________________
 Securities registered pursuant to Section 12(g) of the Act:
NONE
________________________________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ý    No  ¨
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.  ¨
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ¨    No  ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $8,698,634,000 based upon the closing market price as of the close of business June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter.
Number of shares outstanding of registrant’s common stock, $1.00 par value, as of February 12, 2016:
340,006,335 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Mattel, Inc. 2016 Proxy Statement, to be filed with the Securities and Exchange Commission (“SEC”) within 120 days after the close of the registrant’s fiscal year (incorporated into Part III).




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

2


PART I
 
Item 1.
Business.
Throughout this report “Mattel” refers to Mattel, Inc. and/or one or more of its family of companies. Mattel designs, manufactures, and markets a broad variety of toy products worldwide which are sold to its customers and directly to consumers. Mattel’s vision is “creating the future of play.” Mattel’s objectives are to grow its share in the marketplace, continue to improve its operating margins, and create long-term stockholder value. To achieve these objectives, management has established the following strategies:
First, Mattel is focused on embracing brand building, creativity, and innovation, and management will put a premium on speed and personal accountability. Management is focused on putting Mattel back on track for growth and improved profitability.
Additionally, Mattel is organizing around the following six strategic priorities:
Exploiting the franchise strength of its core brands;
Re-establishing toy leadership;
Strengthening its global supply chain;
Achieving distinctiveness and excellence in its commercial organization;
Rapidly expanding into emerging markets; and
Continuously driving cost improvement.
Mattel believes its products are among the most widely recognized toy products in the world. Mattel’s portfolio of brands and products are grouped into four major brand categories, including the Construction and Arts & Crafts brand category, which was introduced in the second quarter of 2014 with the acquisition of MEGA Brands Inc. (“MEGA Brands”).
Mattel Girls & Boys Brands—including Barbie® fashion dolls and accessories (“Barbie”), Monster High®, Disney Classics®, Ever After High®, Little Mommy®, and Polly Pocket® (collectively “Other Girls”), Hot Wheels® and Matchbox® vehicles and play sets (collectively “Wheels”), and CARS®, Disney Planes™, BOOMco®, Radica®, Toy Story®, Max Steel®, WWE® Wrestling, DC Comics™, 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®, BeForever®, and Bitty Baby®. American Girl® Brands products are sold directly to consumers via its catalog, website, and proprietary retail stores. Its children’s publications are also sold to certain retailers.
Construction and Arts & Crafts Brands—including MEGA BLOKS®, RoseArt®, and Board Dudes®.
Mattel, Inc. was incorporated in California in 1948 and reincorporated in Delaware in 1968. Its executive offices are located at 333 Continental Blvd., El Segundo, California 90245-5012, telephone number (310) 252-2000.
Business Segments
Mattel’s operating segments are separately managed business units, consisting of: (i) North America, which consists of the US and Canada, (ii) International, and (iii) American Girl.  The North America and International segments sell products in the Mattel Girls & Boys Brands, Fisher-Price Brands, and Construction and Arts & Crafts Brands categories, although some products are developed and adapted for particular international markets.
For additional information on Mattel’s segment reporting, including revenues and segment income, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” and Part II, Item 8 “Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Segment Information.” For additional information regarding segment assets and geographic areas, see Part II, Item 8 “Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Segment Information.” For

3


additional information regarding revenues by brand category, see Part II, Item 8 “Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Segment Information.”
For a discussion of the risks inherent in the foreign operations of Mattel, which affect each segment, see Item 1A “Risk Factors.”
North America Segment
The North America segment markets and sells toys in the US and Canada through the Mattel Girls & Boys Brands, Fisher-Price Brands, and Construction and Arts & Crafts Brands categories.
In the Mattel Girls & Boys Brands category, Barbie includes Barbie fashion dolls and accessories. Other Girls includes Monster High, Ever After High, Little Mommy, and Polly Pocket. Wheels includes Hot Wheels and Matchbox vehicles and play sets. Entertainment includes CARS, Disney Planes, BOOMco, Toy Story, Teenage Mutant Ninja Turtles™, Halo®, and WWE Wrestling, as well as games and puzzles.
In 2016, Barbie is evolving to offer more choices for girls and remind parents what the brand stands for - that through playing with Barbie, a girl can imagine the possibilities of what she can be. The global “You Can Be Anything” campaign will be supported by innovative products, events, and strategic partnerships.  Barbie recently announced the expansion of its Fashionistas® line with the addition of three new body types - tall, curvy and petite - and a variety of skin tones, hair styles and outfits. In addition, Barbie will feature new products to support two animated launches with empowered story lines - Barbie in Spy Squad™ in spring 2016, and Barbie in Starlight Adventure in fall 2016. Monster High continues to inspire kids to be themselves and celebrate their unique differences. In 2016, Monster High is partnering with Lady Gaga’s Born This Way Foundation to support the well-being of young people and elevate kindness and bravery through play both online and offline. A new Monster High DVD tackling anti-bullying and entitled Great Scarrier Reef will be released in spring 2016 and a second DVD, Welcome to Monster High™, will be released in fall 2016 to reintroduce the brand to the next generation of fans.
In 2016, Hot Wheels will continue to enable children to create and discover new play experiences through new vehicles and track sets, as well as immersive gaming and storytelling.  Hot Wheels will allow children to design, create, and customize their track creation by connecting existing tracks with new track pieces using the Track Builder™ System. Additionally, Hot Wheels is continuing to partner with the best in the automotive and entertainment world, including Star Wars™, DC Comics, Minecraft® and Marvel®.
In 2016, Toy Box, Mattel's new division focused on driving speed and innovation in product development, will expand market presence with two new product launches: My Mini MixieQs™, a girls collectible line featuring sharable and wearable tiny fashions and accessories, and Vs. Spin Warriors™, an action battle line featuring multiple licensed entertainment properties. Toy Box will continue to bring innovative new products to market and collaborate with leading entertainment companies such as ©Disney, Warner Bros. Entertainment Inc., Dreamworks Animation SKG, Inc., and WWE. Key product lines based on entertainment franchises for 2016 include Batman v Superman: Dawn of Justice™, Suicide Squad™, Ghostbusters™, Minecraft, CARS, and Toy Story. 
The Fisher-Price Brands category includes Fisher-Price, Little People, BabyGear, Laugh & Learn, Imaginext, Thomas & Friends, Dora & Friends™, Blaze and The Monster Machines™, Shimmer and Shine™, Mickey Mouse Clubhouse, Minnie Mouse, Octonauts™, and Power Wheels.
In 2016, Fisher-Price will introduce innovative products throughout its Baby Gear line, including the Smart Connect™ Auto Rock ‘n Play™ Sleeper, which allows parents to control the product features remotely through Bluetooth technology, and the Soothing Motions™ Seat, which mimics a parent's natural bounce and sway movement. For babies six months and older, Fisher-Price is debuting new active learning toys, including friends BeatBelle™ and BeatBowWow™ for the multi-award winning Bright Beats™ Dance & Move Beatbo and the inclusion of these character in a new Learnin’ Lights Dance Mat™, which incorporates motion sensor technology to detect the baby's presence on the mat in order to encourage greater learning and movement.  Fisher-Price is also making a return to preschool learning with the Think & Learn™ line of active, hands-on toys, including the Think & Learn Code-a-Pillar™ and the Smart Scan Color Chameleon™. Also in 2016, Fisher-Price will release a new Thomas & Friends movie, The Great Race, which will be supported by spring and fall product lines.
The Construction and Arts & Crafts Brands category includes MEGA BLOKS, RoseArt, and Board Dudes.
In 2016, MEGA BLOKS will expand its construction toy portfolio with new building play-patterns for preschoolers in the Fisher-Price endorsed First Builders product line and other boys, girls, and collectors properties. In alignment with the 2016 theatrical release, MEGA BLOKS will launch new Teenage Mutant Ninja Turtles product lines, featuring building sets for all age groups in sets inspired by the new movie, original television series, and Eastman & Laird comic books. Girls can also choose to build with Monster High and the all-new American Girl building sets, featuring popular Girl of the Year® characters and themes

4


made to build and personalize their stories. Additionally, the MEGA BLOKS Collectors portfolio will bring new product features and micro action figures based on gaming properties, including Halo and Call of Duty®. New to the portfolio this year is Star Trek™, celebrating its 50th anniversary, and the Kubros™ collection.
International Segment
Products marketed by the International segment are generally the same as those developed and marketed by the North America segment, although some are developed or adapted for particular international markets. Mattel’s products are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence.
Mattel’s International segment revenue represented 41% of worldwide consolidated gross sales in 2015. Within the International segment, Mattel operates in three regional groups that generated the following gross sales during 2015:
 
 
Amount
 
Percentage of
International
Gross Sales
 
(In millions, except
percentage information)
Europe
$
1,388.8

 
54
%
Latin America
711.0

 
27
%
Asia Pacific
503.7

 
19
%
 
$
2,603.5

 
100
%
No individual country within the International segment exceeded 6% of worldwide consolidated gross sales during 2015.
The strength of the US dollar relative to other currencies can significantly affect the revenues and profitability of Mattel’s international operations. Mattel enters into foreign currency forward exchange contracts, primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies, to limit the impact of exchange rate fluctuations on its results of operations and cash flows. See Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Part II, Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements—Derivative Instruments.” For financial information by geographic area, see Part II, Item 8 “Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Segment Information.”
American Girl Segment
The American Girl segment is a direct marketer, children’s publisher, and retailer best known for its BeForever flagship line of historical dolls, books, and accessories, as well as the Truly Me, Girl of the Year, and Bitty Baby brands. American Girl also publishes best-selling fiction and non-fiction titles, plus the award-winning American Girl® magazine. The American Girl segment sells products directly to consumers via its catalog, website, and proprietary retail stores in the US, as well as in specialty boutiques at select Indigo™ and Chapters™ stores in Canada and El Palacio de Hierro locations in Mexico City. In January 2016, American Girl introduced Lea Clark™, the new 2016 Girl of the Year character.
Manufacturing and Materials
Mattel manufactures toy products for all segments in both company-owned facilities and through third-party manufacturers. Products are also purchased from unrelated entities that design, develop, and manufacture those products. To provide greater flexibility in the manufacture and delivery of its products, and as part of a continuing effort to reduce manufacturing costs, Mattel has concentrated production of most of its core products in company-owned facilities and generally uses third-party manufacturers for the production of non-core products.
Mattel’s principal manufacturing facilities are located in Canada, China, Indonesia, Malaysia, Mexico, and Thailand. To help avoid disruption of its product supply due to political instability, civil unrest, economic instability, changes in government policies or regulations, and other risks, Mattel produces its products in multiple facilities across multiple countries. Mattel believes that the existing production capacity at its own and its third-party manufacturers’ facilities is sufficient to handle expected volume in the foreseeable future. See Item 1A “Risk Factors.”
Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research, and current market information. Actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers,

5


changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or excess inventory in a particular product line.
The majority of Mattel’s raw materials are available from numerous suppliers but may be subject to fluctuations in price.
Competition and Industry Background
Mattel is a worldwide leader in the manufacture, marketing, and sale of toys. Competition in the toy industry is based primarily on quality, play value, and price. Mattel offers a diverse range of products for children of all ages and families that include, among others, toys for infants and preschoolers, girls’ toys, boys’ toys, youth electronics, hand-held and other games, puzzles, educational toys, media-driven products, and fashion-related toys. The North America segment competes with several large toy companies, including Bandai, Hasbro, Jakks Pacific, Leap Frog, Lego, MGA Entertainment, Spin Master, Tomy, and VTech, many smaller toy companies, and manufacturers of video games and consumer electronics. The International segment competes with global toy companies including Bandai, Hasbro, Lego, MGA Entertainment, Playmobil, Tomy, and VTech, other national and regional toy companies, and manufacturers of video games and consumer electronics. Foreign regions may include competitors that are strong in a particular toy line or geographical area but do not compete with Mattel or other international toy companies worldwide. The American Girl segment competes with companies that manufacture girls’ toys and with children’s book publishers and retailers.
Competition among the above companies is intensifying due to trends towards shorter life cycles for individual toy products and an increasing use of high technology in toys.  In addition, as a result of the phenomenon of “children getting older younger” resulting from children outgrowing toys at younger ages, Mattel competes with companies that sell products outside the toy aisle, such as electronic consumer products and video games.  Competition continues to be heavily influenced by the fact that a small number of retailers account for a large portion of all toy sales, allocate the shelf space from which toys are viewed, and have direct contact with parents and children through in-store purchases, coupons, and print advertisements. Such retailers can and do promote their own private-label toys, facilitate the sale of competitors’ toys, and allocate shelf space to one type of toy over another. Competition is also intensifying due to the availability of online-only distributors, including Amazon.com, which are able to promote a wide variety of toys and represent a wide variety of toy manufacturers, and, with limited overhead, do so at a lower cost.
Seasonality
Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases during the traditional holiday season. A significant portion of Mattel’s customers’ purchasing occurs in the third and fourth quarters of Mattel’s fiscal year in anticipation of holiday buying. These seasonal purchasing patterns and requisite production lead times create risk to Mattel’s business associated with the underproduction of popular toys and the overproduction of less popular toys that do not match consumer demand. Retailers have also been attempting to manage their inventories more tightly in recent years, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase the risk that Mattel may not be able to meet demand for certain products at peak demand times or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its sales to vary significantly from period to period.
In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of its fiscal year. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the respective levels of inventories and accounts receivable, which result in seasonal working capital financing requirements. See Part II, Item 8 “Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt.”
Product Design and Development
Through its product design and development group, Mattel regularly refreshes, redesigns, and extends existing toy product lines and develops innovative new toy product lines for all segments. Mattel believes its success is dependent on its ability to continue these activities effectively. See Item 1A “Risk Factors.” Product design and development activities are principally conducted by a group of professional designers and engineers employed by Mattel. During 2015, 2014, and 2013, Mattel incurred expenses of $217.8 million, $209.5 million, and $201.9 million, respectively, in connection with the design and development of products, exclusive of royalty payments. See Part II, Item 8 “Financial Statements and Supplementary Data—Note 13 to the Consolidated Financial Statements—Supplemental Financial Information.”

6


Additionally, independent toy designers and developers bring concepts and products to Mattel and are generally paid a royalty on the net selling price of products licensed to Mattel. These independent toy designers may also create different products for other toy companies.
Advertising and Marketing
Mattel supports its product lines with extensive advertising and consumer promotions. Advertising takes place at varying levels throughout the year and peaks during the traditional holiday season. Advertising includes television and radio commercials, magazine, newspaper, and internet advertisements, and social media. Promotions include in-store displays, sweepstakes, merchandising materials, major events focusing on products, and tie-ins with various consumer products companies.
During 2015, 2014, and 2013, Mattel incurred expenses of $717.9 million (12.6% of net sales), $733.2 million (12.2% of net sales), and $750.2 million (11.6% of net sales), respectively, for advertising and promotion.
Sales
Mattel’s products are sold throughout the world. Products within the North America segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets, and, to a limited extent, wholesalers. Mattel also operates several small retail outlets, generally near or at its corporate headquarters and distribution centers as a service to its employees and as an outlet for its products. Products within the International segment are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence. Mattel also has retail outlets in Latin America and Europe that serve as outlets for its products. American Girl products are sold directly to consumers, and its children’s publications are also sold to certain retailers. Mattel has 20 American Girl retail stores: American Girl Place in Chicago, Illinois, Los Angeles, California, and New York, New York, and American Girl stores in Alpharetta, Georgia, Bloomington, Minnesota, Charlotte, North Carolina, Chesterfield, Missouri, Columbus, Ohio, Dallas, Texas, Houston, Texas, Lone Tree, Colorado, Lynnwood, Washington, McLean, Virginia, Miami, Florida, Nashville, Tennessee, Natick, Massachusetts, Orlando, Florida, Overland Park, Kansas, Palo Alto, California, and Scottsdale, Arizona, each of which features children’s products from the American Girl segment. American Girl also has a retail outlet in Oshkosh, Wisconsin that serves as an outlet for its products. Additionally, Mattel sells certain of its products online through websites of one or more of its subsidiaries.
During 2015, Mattel’s three largest customers (Wal-Mart at $1.0 billion, Toys “R” Us at $0.6 billion, and Target at $0.5 billion) accounted for approximately 37% of worldwide consolidated net sales. Within countries in the International segment, there is also a concentration of sales to certain large customers that do not operate in the US, none of which exceed 10% of net sales. The customers and the degree of concentration vary depending upon the region or nation. See Item 1A “Risk Factors” and Part II, Item 8 “Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Segment Information.”
Licenses and Distribution Agreements
Mattel has license agreements with third parties that permit Mattel to utilize the trademark, characters, or inventions of the licensor in products that Mattel sells. A number of these licenses relate to product lines that are significant to Mattel’s business and operations.
Mattel has entered into agreements to license entertainment properties from, among others, Disney Enterprises, Inc. (including Disney characters such as Star Wars, Mickey Mouse, Jake and the Never Land Pirates, Disney Planes, CARS and Toy Story from Pixar, and certain Disney films and television properties), Viacom International, Inc. relating to its Nickelodeon® properties (including Dora the Explorer, Blaze and the Monster Machines, and SpongeBob SquarePants™), Warner Bros. Consumer Products (including Batman, Superman®, and Justice League®), Microsoft (including Halo), Mojang (including Minecraft), and WWE Wrestling.
Royalty expense for 2015, 2014, and 2013 was $264.6 million, $242.4 million, and $246.9 million, respectively. See “Commitments” and Part II, Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements—Commitments and Contingencies."
Mattel’s license agreement with Disney Enterprises, Inc. for the global rights to produce and sell toys based on Disney Princess® characters expired at the end of 2015 and was not renewed. Gross sales of Disney Princess products were $455.6 million in 2015. However, as evidence of Mattel's continuing relationship with Disney, Mattel recently announced important renewals, including CARS 3 and Toy Story 4, with theatrical releases in 2017 and 2018, respectively.

7


Mattel also licenses a number of its trademarks and other property rights to others for use in connection with the sale of their products. Mattel distributes some third-party finished products that are independently designed and manufactured.
Trademarks, Copyrights, and Patents
Most of Mattel’s products are sold under trademarks, trade names, and copyrights, and a number of these products incorporate patented devices or designs. Trademarks, copyrights, and patents are significant assets of Mattel in that they provide product recognition and acceptance worldwide.
Mattel customarily seeks trademark, copyright, and patent protection covering its products, and it owns or has applications pending for US and foreign trademarks, copyrights, and patents covering many of its products. A number of these trademarks, copyrights, and patents relate to product lines that are significant to Mattel’s business and operations. Mattel believes its rights to these properties are adequately protected, but there can be no assurance that its rights can be successfully asserted in the future or will not be invalidated, circumvented, or challenged.
Commitments
In the normal course of business, Mattel enters into contractual arrangements for future purchases of goods and services to ensure availability and timely delivery and to obtain and protect Mattel’s right to create and market certain products. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the term of the contracts. Current and future commitments for guaranteed payments reflect Mattel’s focus on expanding its product lines through alliances with businesses in other industries. Additionally, Mattel routinely enters into noncancelable lease agreements for premises and equipment used in the normal course of business.
Agreements to purchase inventory, services, and other items with terms extending through 2020 contain future minimum payments totaling approximately $438 million. Licensing and similar agreements with terms extending through 2020 and beyond contain provisions for future guaranteed minimum payments totaling approximately $411 million. Operating lease commitments with terms extending through 2020 and beyond contain future minimum obligations totaling approximately $442 million. See Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commitments” and Part II, Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements—Commitments and Contingencies.”
Backlog
Mattel ships products in accordance with delivery schedules specified by its customers, which usually request delivery within three months. In the toy industry, orders are subject to cancellation or change at any time prior to shipment. In recent years, a trend toward just-in-time inventory practices in the toy industry has resulted in fewer advance orders and therefore less backlog of orders. Mattel believes that the amount of backlog orders at any given time may not accurately indicate future sales.
Financial Instruments
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel seeks to mitigate its exposure to foreign exchange risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes.
For additional information regarding foreign currency contracts, see “International Segment” above, Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk,” and Part II, Item 8 “Financial Statements and Supplementary Data—Note 9 to the Consolidated Financial Statements—Derivative Instruments.”
Seasonal Financing
See Part II, Item 8 “Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt.”
Government Regulations and Environmental Quality
Mattel’s products sold in the US are subject to the provisions of the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008, the Federal Hazardous Substances Act, and the Consumer Product Safety Improvement Act of 2008, and may also be subject to the requirements of the Flammable Fabrics Act or the Food, Drug, and

8


Cosmetics Act and the regulations promulgated pursuant to such statutes. These statutes and the related regulations ban from the market consumer products that fail to comply with applicable product safety laws, regulations, and standards. The Consumer Product Safety Commission may require the recall, repurchase, replacement, or repair of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances. Similar laws exist in some US states. Mattel believes that it is in substantial compliance with these federal and state laws and regulations.
Mattel’s products sold worldwide are subject to the provisions of similar laws and regulations in many jurisdictions, including the European Union and Canada. Mattel believes that it is in substantial compliance with these laws and regulations.
Mattel maintains a quality control program to help ensure compliance with applicable product safety requirements. Nonetheless, Mattel has experienced, and may in the future experience, issues in products that result in recalls, withdrawals, or replacements of products. A product recall could have a material adverse effect on Mattel’s results of operations and financial condition, depending on the product affected by the recall and the extent of the recall efforts required. A product recall could also negatively affect Mattel’s reputation and the sales of other Mattel products. See Item 1A “Risk Factors.”
Mattel’s advertising is subject to the Federal Trade Commission Act, The Children’s Television Act of 1990, the rules and regulations promulgated by the Federal Trade Commission, and the Federal Communications Commission, as well as laws of certain countries that regulate advertising and advertising to children. In addition, Mattel’s online and other digital communications activity are or may be subject to US and foreign privacy-related regulations, including the US Children’s Online Privacy Protection Act of 1998 and the EU Data Protection Directive (Directive 95/46/EC) and related national regulations. Mattel believes that it is in substantial compliance with these laws and regulations.
Mattel’s worldwide operations are subject to the requirements of various environmental laws and regulations in the jurisdictions where those operations are located. Mattel believes that it is in substantial compliance with those laws and regulations. Mattel’s operations are from time to time the subject of investigations, conferences, discussions, and negotiations with various federal, state and local environmental agencies within and outside the US with respect to the discharge or cleanup of hazardous waste. Mattel is not aware of any material cleanup liabilities.
Mattel is subject to various other federal, state, local and international laws and regulations applicable to its business. Mattel believes that it is in substantial compliance with these laws and regulations.
Employees
The total number of persons employed by Mattel and its subsidiaries at any one time varies because of the seasonal nature of its manufacturing operations. As of December 31, 2015, Mattel’s total number of employees was approximately 31,000.
Research and Development
See “Design and Development” in Part II, Item 8 “Financial Statements and Supplementary Data—Note 13 to the Consolidated Financial Statements—Supplemental Financial Information.”
Available Information
Mattel files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) with the SEC. The public may read and copy any materials that Mattel files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Mattel’s Internet website address is http://corporate.mattel.com. Mattel makes available on its Internet website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.






9


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

If Mattel does not successfully identify or satisfy consumer preferences, its results of operations may be adversely affected.
Mattel’s business and operating results depend largely upon the appeal of its toy products. Consumer preferences, particularly with children as the end users of Mattel’s products, are continuously changing. Significant, sudden shifts in demand are caused by “hit” toys and trends, which are often unpredictable. Mattel offers a diverse range of products for children of all ages and families that includes, among others, toys for infants and preschoolers, girls’ toys, boys’ toys, youth electronics, digital media, hand-held and other games, puzzles, educational toys, media-driven products, and fashion-related toys. Mattel competes domestically and internationally with a wide range of large and small manufacturers, marketers and sellers of toys, video games, consumer electronics such as tablets and mobile devices, and other play products, as well as retailers, which means that Mattel’s market position is always at risk. Mattel’s ability to maintain its current product sales, and increase its product sales or establish product sales with new, innovative toys, will depend on Mattel’s ability to satisfy play preferences, enhance existing products, develop and introduce new products, and achieve market acceptance of these products. These challenges are intensifying due to trends towards shorter life cycles for individual toy products, the phenomenon of children outgrowing traditional toys at younger ages, and an increasing use of more sophisticated technology in toys. If Mattel does not successfully meet the challenges outlined above in a timely and cost-effective manner, demand for its products could decrease, and Mattel’s revenues, profitability and results of operations may be adversely affected.
High levels of competition and low barriers to entry make it difficult to achieve, maintain, or build upon the success of Mattel’s brands, products, and product lines.
Mattel faces competitors who are also constantly monitoring and attempting to anticipate consumer tastes, seeking ideas which will appeal to consumers and introducing new products that compete with Mattel’s products. In addition, competition for access to entertainment properties could lessen Mattel’s ability to secure, maintain, and renew popular licenses to entertainment products developed by other parties and licensed to Mattel or require Mattel to pay licensors higher royalties and higher minimum guaranteed payments in order to obtain or retain these licenses. In addition, the barriers to entry for new participants in the toy products industry are low. In a very short period of time, new market participants with a popular product idea or entertainment property can become a significant source of competition for Mattel and its products. If demand for Mattel’s brands, products and product lines is reduced as a result of these factors, Mattel’s results of operations may be adversely affected.
Inaccurately anticipating changes and trends in popular culture, media and movies, fashion, or technology can negatively affect Mattel’s sales.
Successful movies and characters in children’s literature affect play preferences, and many toys depend on media-based intellectual property licenses. Media-based licenses can cause a line of toys to gain immediate success among children, parents, or families. Trends in media, movies, and children’s characters change swiftly and contribute to the transience and uncertainty of play preferences. In addition, certain developments in the entertainment industry, including labor strikes, could cause delay or interruption in the release of new movies and television programs and could adversely affect the sales of Mattel’s toys based on such movies and television programs. Mattel responds to such trends and developments by modifying, refreshing, extending, and expanding its product offerings on an annual basis. If Mattel does not accurately anticipate trends in popular culture, movies, media, fashion, or technology, its products may not be accepted by children, parents, or families and Mattel’s revenues, profitability, and results of operations may be adversely affected.

10


Mattel’s failure to successfully market or advertise its products could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel’s products are marketed worldwide through a diverse spectrum of advertising and promotional programs. Mattel’s ability to sell products is dependent in part upon the success of these programs. If Mattel does not successfully market its products or if media or other advertising or promotional costs increase, these factors could have an adverse effect on Mattel’s business, financial condition, and results of operations.

Mattel’s business is highly seasonal and its operating results depend, in large part, on sales during the relatively brief traditional holiday season. Any events that disrupt Mattel’s business during its peak demand times could significantly, adversely and disproportionately affect Mattel’s business.
Mattel’s business is subject to risks associated with the underproduction of popular toys and the overproduction of toys that are less popular with consumers. Sales of toy products at retail are highly seasonal, with a majority of retail sales occurring during the period from September through December. In recent years, many consumers have delayed their purchases until just before the holidays. As a result, Mattel’s operating results depend, in large part, on sales during the relatively brief traditional holiday season. Retailers attempt to manage their inventories tightly, which requires Mattel to ship products closer to the time the retailers expect to sell the products to consumers. This in turn results in shorter lead times for production. Management believes that the recent increase in “last minute” shopping during the holiday season and the popularity of gift cards (which often shift purchases to after the holiday season) may negatively impact customer re-orders during the holiday season. These factors may decrease sales or increase the risks that Mattel may not be able to meet demand for certain products at peak demand times or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed.
In addition, as a result of the seasonal nature of Mattel’s business, Mattel may be significantly and adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events, such as terrorist attacks, economic shocks, severe weather, earthquakes or other catastrophic events, that harm the retail environment or consumer buying patterns during its key selling season, or by events, such as strikes, disruptions in transportation or port delays, that interfere with the manufacture or shipment of goods during the critical months leading up to the holiday purchasing season.
Mattel has significant customer concentration, so that economic difficulties or changes in the purchasing policies or patterns of its key customers could have a significant impact on Mattel’s business and operating results.
A small number of customers account for a large share of Mattel’s net sales. In 2015, Mattel’s three largest customers, Wal-Mart, Toys “R” Us, and Target, in the aggregate, accounted for approximately 37% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 48% of net sales. While the concentration of Mattel’s business with a relatively small number of customers may provide certain benefits to Mattel, such as potentially more efficient product distribution and decreased costs of sales and distribution, this concentration may expose Mattel to a material adverse effect if one or more of Mattel’s large customers were to significantly reduce purchases for any reason, favor competitors or new entrants, or increase their direct competition with Mattel by expanding their private-label business. Customers make no binding long-term commitments to Mattel regarding purchase volumes and make all purchases by delivering one-time purchase orders. Any customer could reduce its overall purchases of Mattel’s products, reduce the number and variety of Mattel’s products that it carries and the shelf space allotted for Mattel’s products, or otherwise seek to materially change the terms of the business relationship at any time. Any such change could significantly harm Mattel’s business and operating results. Furthermore, the bankruptcy or other lack of success of one or more of Mattel's significant retail customers could negatively impact Mattel's revenues and profitability.
Liquidity problems or bankruptcy of Mattel’s key customers could have a significant adverse effect on Mattel’s business, financial condition and results of operations.
Mattel’s sales to customers are typically made on credit without collateral. There is a risk that key customers will not pay, or that payment may be delayed, because of bankruptcy, contraction of credit availability to such customers, weak retail sales or other factors beyond the control of Mattel, which could increase Mattel’s exposure to losses from bad debts. In addition, if key customers were to cease doing business as a result of bankruptcy or significantly reduce the number of stores operated, it could have a significant adverse effect on Mattel’s business, financial condition, and results of operations.



11


Significant increases in the price of commodities, transportation, or labor, if not offset by declines in other input costs, or a reduction or interruption in the delivery of raw materials, components and finished products from Mattel’s vendors could negatively impact Mattel’s financial results.
Cost increases, whether resulting from rising costs of materials, transportation, services, labor or compliance with existing or future regulatory requirements could impact the profit margins realized by Mattel on the sale of its products. Because of market conditions, timing of pricing decisions, and other factors, there can be no assurance that Mattel will be able to offset any of these increased costs by adjusting the prices of its products. Increases in prices of Mattel’s products may not be sustainable and could result in lower sales. Mattel’s ability to meet customer demand depends, in part, on its ability to obtain timely and adequate delivery of materials, parts and components from its suppliers and internal manufacturing capacity. Mattel has experienced shortages in the past, including shortages of raw materials and components. Additionally, as Mattel cannot guarantee the stability of its major suppliers, major suppliers may stop manufacturing components at any time with little or no notice. If Mattel is required to use alternative sources, it may be required to redesign some aspects of the affected products, which may involve delays and additional expense. Although Mattel works closely with suppliers to avoid these types of shortages, there can be no assurance that Mattel will not encounter these problems in the future. A reduction or interruption in supplies or in the delivery of finished products, whether resulting from more stringent regulatory requirements, disruptions in transportation, port delays, labor strikes, lockouts, an outbreak of a severe public health pandemic, severe weather, the occurrence or threat of wars or other conflicts, or a significant increase in the price of one or more supplies, such as fuel or resin (which is an oil-based product used in plastics), or otherwise, could negatively impact Mattel’s financial results.
Significant changes in currency exchange rates or the ability to transfer capital across borders could have a significant adverse effect on Mattel’s business and results of operations.
Mattel operates facilities and sells products in numerous countries outside the United States. During 2015, Mattel’s net sales to international customers comprised 43% of Mattel’s total consolidated net sales. Furthermore, Mattel’s net investment in its foreign subsidiaries and its results of operations and cash flows are subject to changes in currency exchange rates and regulations. Highly inflationary economies of certain foreign countries can result in foreign currency devaluation, which negatively impacts Mattel’s profitability. Mattel seeks to mitigate the exposure of its results of operations to fluctuations in currency exchange rates by aligning its prices with the local currency cost of acquiring inventory, distributing earnings in US Dollars, and partially hedging this exposure using foreign currency forward exchange contracts. These contracts are primarily used to hedge Mattel’s purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. Government action may restrict Mattel’s ability to transfer capital across borders and may also impact the fluctuation of currencies in the countries where Mattel conducts business or has invested capital. Significant changes in currency exchange rates, reductions in Mattel’s ability to transfer its capital across borders, and changes in government-fixed currency exchange rates, including the Chinese yuan and Venezuelan bolivar fuerte, could have a significant adverse effect on Mattel’s business and results of operations.
If global economic conditions deteriorate, Mattel’s business and financial results could be adversely affected.
Mattel designs, manufactures, and markets a wide variety of toy products worldwide through sales to retailer customers and directly to consumers. Mattel’s performance is impacted by the level of discretionary consumer spending, which remains relatively weak in many countries around the world in which Mattel does business. Consumers’ discretionary purchases of toy products may be impacted by job losses, foreclosures, bankruptcies, reduced access to credit, significantly falling home prices, lower consumer confidence, and other macroeconomic factors that affect consumer spending behavior. Any of these factors can reduce the amount which consumers spend on the purchase of Mattel’s products. Deterioration of global economic conditions or disruptions in credit markets in the markets in which Mattel operates could potentially have a material adverse effect on Mattel’s liquidity and capital resources, including increasing Mattel’s cost of capital or its ability to raise additional capital if needed, or otherwise adversely affect Mattel’s business and financial results.

In addition to experiencing potentially lower revenues during times of economic difficulty, in an effort to maintain sales during such times, Mattel may need to increase promotional spending or take other steps to encourage retailer and consumer purchase of its products. Those steps may increase costs and/or decrease operating margins.

An increasing portion of Mattel's business may come from new and emerging markets, and growing business in new and emerging markets presents additional challenges.
Mattel expects an increasing portion of its net revenues to come from new and emerging markets, including China and Russia. Operating in new and emerging markets, each with its own unique consumer preferences and business climates, presents additional challenges that Mattel must meet. In addition, sales and operations in new and emerging markets are subject to other risks associated with international operations. Such risks include complications in complying with different laws in varying jurisdictions; dealing with changes in governmental policies and the evolution of laws and regulations that impact

12


Mattel's product offerings and related enforcement; difficulties understanding the retail climate, consumer trends, local customs and competitive conditions in foreign markets, which may be quite different from the US; difficulties in moving materials and products from one country to another, including port congestion, strikes and other transportation delays and interruptions; potential challenges to Mattel's transfer pricing determinations and other aspects of its cross border transactions; and the impact of tariffs, quotas, or other protectionist measures.
Because of the importance of Mattel's new and emerging market net revenues, Mattel's business, financial condition and results of operations could be harmed if any of the risks described above are not properly managed, or if Mattel is otherwise unsuccessful in managing its new and emerging market business.
Failure to successfully implement new initiatives or meet product introduction schedules could have a significant adverse effect on Mattel’s business, financial condition and results of operations.
Mattel has announced, and in the future may announce, initiatives to reduce its costs, increase its efficiency, improve the execution of its core business, globalize and extend Mattel’s brands, catch new trends, create new brands, and offer new innovative products and improve existing products, enhance product safety, develop people, improve productivity, simplify processes, maintain customer service levels, as well as initiatives designed to drive sales growth, capitalize on Mattel’s scale advantage, and improve its supply chain. These initiatives involve investment of capital and complex decision-making as well as extensive and intensive execution, and the success of these initiatives is not assured. In addition, Mattel may anticipate introducing a particular product, product line or brand at a certain time in the future. There is no guarantee that Mattel will be able to manufacture, source and ship new or continuing products in a timely manner and on a cost-effective basis. Unforeseen delays or difficulties in the development process or significant increases in the planned cost of development for new Mattel products may cause the introduction date for products to be later than anticipated or, in some situations, may cause a product or new product introduction to be discontinued. Failure to successfully implement any of these initiatives, or launches, or the failure of any of these initiatives or launches to produce the results anticipated by management, could have a significant adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel’s business depends in large part on the success of its vendors and outsourcers, and Mattel’s brands and reputation may be harmed by actions taken by third-parties that are outside Mattel’s control. In addition, any material failure, inadequacy, or interruption resulting from such vendors or outsourcings could harm Mattel’s ability to effectively operate its business.
As a part of its efforts to cut costs, achieve better efficiencies and increase productivity and service quality, Mattel relies significantly on vendor and outsourcing relationships with third parties for services and systems including manufacturing, transportation, logistics and information technology. Any shortcoming of a Mattel vendor or outsourcer, particularly an issue affecting the quality of these services or systems, may be attributed by customers to Mattel, thus damaging Mattel’s reputation, and brand value, and potentially affecting its results of operations. In addition, problems with transitioning these services and systems to or operating failures with these vendors and outsourcers could cause delays in product sales, and reduce efficiency of Mattel’s operations, and significant capital investments could be required to remediate the problem.
Increases in interest rates, reduction of Mattel’s credit ratings, contraction of credit availability, or the inability of Mattel to meet the debt covenant requirements in its credit facilities could negatively impact Mattel’s ability to conduct its operations.
Mattel relies on external financing, including commercial paper and borrowings under its domestic unsecured committed revolving credit facility, to help fund its seasonal working capital needs. Increases in interest rates, both domestically and internationally, could negatively affect Mattel’s cost of financing its operations. Any reduction in Mattel’s credit ratings could increase the cost of obtaining financing. Mattel may be hindered from obtaining, or incur additional costs to obtain, additional credit in tight credit markets. Additionally, Mattel’s ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as market conditions and an inability to meet its debt covenant requirements, which include maintaining certain financial ratios. Mattel’s ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its ability to access these sources of liquidity.

If Mattel is not able to adequately protect its proprietary intellectual property and information, and protect against third party claims that Mattel is infringing on their intellectual property rights, its results of operations could be adversely affected.
The value of Mattel’s business depends on its ability to protect its intellectual property and information, including its trademarks, trade names, copyrights, patents, trade secrets, and rights under intellectual property license agreements and other agreements with third parties, in the US and around the world, as well as its customer, employee, and consumer data. From time

13


to time, third parties have challenged, and may in the future try to challenge, Mattel's ownership of its intellectual property in the US and around the world. In addition, Mattel's business is subject to the risk of third parties counterfeiting its products or infringing on its intellectual property rights. The steps Mattel has taken may not prevent unauthorized use of its intellectual property, particularly in foreign countries where the laws may not protect its intellectual property as fully as in the US. Mattel may need to resort to litigation to protect its intellectual property rights, which could result in substantial costs and diversion of resources. If Mattel fails to protect its proprietary intellectual property and information, including with respect to any successful challenge to Mattel’s ownership of its intellectual property or material infringements of its intellectual property, this failure could have a significant adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel has acquired certain intellectual properties from third parties. Declines in the profitability of these acquired brands may impact Mattel’s ability to recover the carrying value of the related assets and could result in an impairment charge. Reduction in net earnings caused by impairment charges could harm Mattel’s financial results.
Unfavorable resolution of or adverse developments in legal proceedings, other investigations, or regulatory matters could have a significant adverse effect on Mattel’s financial condition.
Mattel periodically receives claims of infringement of intellectual property rights held by other parties. Responding to any infringement claim, regardless of its validity, may be costly and time-consuming and may divert management and key personnel from business operations. If Mattel, its distributors, its licensors or its manufacturers are found to be infringing on the intellectual property rights of any third party, they may be required to obtain a license to use those rights, which may not be obtainable on reasonable terms, if at all.
Mattel is, from time to time, involved in litigation or other disputes, investigations, and regulatory matters. An unfavorable resolution of these matters could have a significant adverse effect on Mattel’s financial condition and its operations. Regardless of their outcome, these matters may result in substantial costs and expenses, significantly divert the attention of management, or interrupt Mattel’s normal business operations. There can be no assurance that Mattel will be able to prevail in, or achieve a favorable settlement of, any of these matters.
Mattel is subject to various laws and government policies or regulations in numerous jurisdictions, violation of which could subject it to sanctions. In addition, changes in such laws or policies or regulations may lead to increased costs, changes in Mattel’s effective tax rate, or the interruption of normal business operations that would negatively impact Mattel’s financial condition and results of operations.
Mattel operates in a highly regulated environment in the US and international markets. US federal, state, and local governmental entities, and foreign governments regulate many aspects of Mattel’s business, including its products and the importation and exportation of its products. These policies or regulations may include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws and revised tax law interpretations), product safety and other safety standards, trade restrictions, duties and tariffs, and regulations regarding currency and financial matters, anticorruption standards (such as the US Foreign Corrupt Practices Act), environmental matters, advertising directed toward children, product content, and privacy and data protection, as well as other administrative and regulatory restrictions. While Mattel takes all the steps it believes are necessary to comply with these laws and policies or regulations, there can be no assurance that Mattel will be in compliance in the future. Compliance with these various laws, regulations and policies imposes significant costs on Mattel’s business, and failure to comply could result in monetary liabilities and other penalties, and could lead to significant negative media attention and consumer dissatisfaction, which could have a significant adverse effect on Mattel’s business, financial condition and results of operations.
In addition, changes in laws or policies or regulations may lead to increased costs, changes in Mattel’s effective tax rate, or the interruption of normal business operations, any of which could negatively impact its financial condition and results of operations.
Issues with products may lead to product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities that could divert resources, affect business operations, decrease sales, increase costs, and put Mattel at a competitive disadvantage, any of which could have a significant adverse effect on Mattel’s financial condition.
Mattel has experienced, and may in the future experience, issues with products that may lead to product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. Any of these activities could result in increased governmental scrutiny, harm to Mattel’s reputation, reduced demand by consumers for its products, decreased willingness by retailer customers to purchase or provide marketing support for those products, adverse impacts on Mattel’s ability to enter into licensing agreements for products on competitive terms, absence or increased cost of insurance, or additional safety and testing requirements. Such results could divert development and

14


management resources, adversely affect Mattel’s business operations, decrease sales, increase legal fees and other costs, and put Mattel at a competitive disadvantage compared to other manufacturers not affected by similar issues with products, any of which could have a significant adverse effect on Mattel’s financial condition and results of operations.
Mattel’s current and future operating procedures and product requirements may increase costs, significantly and adversely affect its relationship with vendors, and make it more difficult for Mattel to produce, purchase, and deliver products on a timely basis to meet market demands. Future conditions may require Mattel to adopt further changes that may increase its costs and further affect its relationship with vendors.
Mattel’s current operating procedures and product requirements, including testing requirements and standards, have imposed costs on both Mattel and the vendors from which it purchases products. Changes in business conditions, including those resulting from new legislative and regulatory requirements, have caused and in the future could cause further revisions in Mattel’s operating procedures and product requirements. Changes in Mattel’s operating procedures and product requirements may delay delivery of products and increase costs. Mattel’s relationship with its existing vendors may be adversely affected as a result of these changes, making Mattel more dependent on a smaller number of vendors. Some vendors may choose not to continue to do business with Mattel or not to accommodate Mattel’s needs to the extent that they have done in the past. In addition, rising production costs, contraction of credit availability, and labor shortages have caused a substantial contraction in the number of toy manufacturers in China, decreasing the number of potential vendors to manufacture Mattel’s products. Because of the seasonal nature of Mattel’s business and the demands of its customers for deliveries with short lead times, Mattel depends upon the cooperation of its vendors to meet market demand for its products in a timely manner. There can be no assurance that existing and future events will not require Mattel to adopt additional requirements and incur additional costs, and impose those requirements and costs on its vendors, which may adversely affect its relationship with those vendors and Mattel’s ability to meet market demand in a timely manner.
Political developments, including trade relations, and the threat or occurrence of war or terrorist activities could adversely impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions.
Mattel’s business is worldwide in scope, including operations in 40 countries and territories. The deterioration of the political situation in a country in which Mattel has significant sales or operations, or the breakdown of trade relations between the US and a foreign country in which Mattel has significant manufacturing facilities or other operations, could adversely affect Mattel’s business, financial condition, and results of operations. For example, a change in trade status for China could result in a substantial increase in the import duty of toys manufactured in China and imported into the US. In addition, the occurrence of war or hostilities between countries or threat of terrorist activities, and the responses to and results of these activities, could adversely impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions.
Disruptions in Mattel’s manufacturing operations due to political instability, civil unrest, or disease could negatively impact Mattel’s business, financial position, and results of operations.
Mattel owns, operates and manages manufacturing facilities and utilizes third-party manufacturers throughout Asia, primarily in China, Indonesia, Malaysia and Thailand. The risk of political instability and civil unrest exists in certain of these countries, which could temporarily or permanently damage Mattel’s manufacturing operations located there. In the past, outbreaks of SARS have been significantly concentrated in Asia, particularly in Hong Kong, and in the Guangdong province of China, where many of Mattel’s manufacturing facilities and third-party manufacturers are located. The design, development and manufacture of Mattel’s products could suffer if a significant number of Mattel’s employees or the employees of its third-party manufacturers or their suppliers contract SARS, avian flu or other communicable diseases, or otherwise are unable to fulfill their obligations to Mattel. While Mattel has developed contingency plans designed to help mitigate the impact of disruptions in its manufacturing operations, its business, financial position, and results of operations could be negatively impacted by a significant disruption to its manufacturing operations or suppliers.
Earthquakes or other catastrophic events out of Mattel’s control may damage its facilities or those of its contractors and harm Mattel’s results of operations.
Mattel has significant operations near major earthquake faults, including its corporate headquarters in El Segundo, California. A catastrophic event where Mattel has important operations, such as an earthquake, tsunami, flood, typhoon, fire, or other natural or manmade disaster, could disrupt Mattel’s operations or those of its contractors and impair production or distribution of its products, damage inventory, interrupt critical functions, or otherwise affect its business negatively, harming Mattel’s results of operations.

15


The production and sale of private-label toys by Mattel’s retail customers may result in lower purchases of Mattel-branded products by those retail customers.
In recent years, consumer goods companies, including those in the toy business, generally have experienced the phenomenon of retail customers developing their own private-label products that directly compete with the products of traditional manufacturers. Some retail chains that are customers of Mattel sell private-label toys designed, manufactured and branded by the retailers themselves. These toys may be sold at prices lower than comparable toys sold by Mattel and may result in lower purchases of Mattel-branded products by these retailers. In some cases, retailers who sell these private-label toys are larger than Mattel and may have substantially more resources than Mattel.
Mattel depends on key personnel and may not be able to hire, retain, and integrate sufficient qualified personnel to maintain and expand its business.
Mattel’s future success depends partly on the continued contribution of key executives, designers, technical, sales, marketing, manufacturing, and administrative personnel. The loss of services of any of Mattel’s key personnel could harm Mattel’s business. Recruiting and retaining skilled personnel is costly and highly competitive. If Mattel fails to retain, hire, train, and integrate qualified employees and contractors, Mattel may not be able to maintain or expand its business.

Mattel may engage in acquisitions, mergers, or dispositions, which may affect the profit, revenues, profit margins, debt-to-capital ratio, capital expenditures, or other aspects of Mattel’s business. In addition, Mattel has certain anti-takeover provisions in its by-laws that may make it more difficult for a third party to acquire Mattel without its consent, which may adversely affect Mattel’s stock price.
Mattel may engage in acquisitions, mergers or dispositions, which may affect the profit, revenues, profit margins, debt-to-capital ratio, capital expenditures, or other aspects of Mattel’s business. There can be no assurance that Mattel will be able to identify suitable acquisition targets or merger partners or that, if identified, it will be able to acquire these targets on terms acceptable to Mattel and to potential merger partners. There can also be no assurance that Mattel will be successful in integrating any acquired company into its overall operations, or that any such acquired company will operate profitably or will not otherwise adversely impact Mattel’s results of operations. Further, Mattel cannot be certain that key talented individuals at those acquired companies will continue to work for Mattel after the acquisition or that they will continue to develop popular and profitable products or services. In addition, Mattel has certain anti-takeover provisions in its by-laws that may make it more difficult for a third party to acquire Mattel without its consent, which may adversely affect Mattel’s stock price.
Mattel relies extensively on information technology in its operations, and any material failure, inadequacy, interruption, or security breach of that technology could have a material adverse impact on its business.
Mattel relies extensively on information technology systems across its operations, including for management of its supply chain, sale and delivery of its products, reporting its results of operations, collection and storage of consumer data, personal data of customers, employees and other stakeholders, and various other processes and transactions. Many of these systems are managed by third-party service providers. Mattel’s ability to effectively manage its business and coordinate the production, distribution, and sale of its products depends significantly on the reliability and capacity of these systems and third-party service providers. Mattel has exposure to similar security risks faced by other large companies that have data stored on their information technology systems. To its knowledge, Mattel has not experienced any material breach of its cybersecurity systems. If Mattel’s or its third-party service providers’ systems fail to operate effectively or are damaged, destroyed, or shut down, or there are problems with transitioning to upgraded or replacement systems, or there are security breaches in these systems, any of the above which could occur as a result of natural disasters, software or equipment failures, telecommunications failures, loss or theft of equipment, acts of terrorism, circumvention of security systems, or other cyber-attacks, Mattel could experience delays or decreases in product sales, and reduced efficiency of its operations. Additionally, any of these events could lead to violations of privacy laws, loss of customers, or loss, misappropriation or corruption of confidential information, trade secrets or data, which could expose Mattel to potential litigation, regulatory actions, sanctions or other statutory penalties, any or all of which could adversely affect its business, and cause it to incur significant losses and remediation costs.
The level of returns on pension plan assets and the actuarial assumptions used for valuation purposes could affect Mattel’s earnings in future periods. Changes in standards and government regulations could also affect its pension plan expense and funding requirements.
Assumptions used in determining projected benefit obligations and the fair value of plan assets for Mattel’s pension plan are evaluated by Mattel in consultation with outside actuaries. In the event that Mattel determines that changes are warranted in the assumptions used, such as the discount rate, expected long term rate of return, or health care costs, its future pension benefit expenses could increase or decrease. Due to changing market conditions or changes in the participant population, the actuarial assumptions that Mattel uses may differ from actual results, which could have a significant impact on its pension and

16


postretirement liability and related costs. Funding obligations are determined based on the value of assets and liabilities on a specific date as required under relevant government regulations for each plan. Future pension funding requirements, and the timing of funding payments, could be affected by legislation enacted by the relevant governmental authorities.

If Mattel’s nonamortizable intangible assets or goodwill becomes impaired, Mattel’s results of operations could be adversely affected.
Mattel tests its nonamortizable intangible assets, including trademarks and trade names, and goodwill for impairment annually or more often if an event or circumstance indicates that an impairment may have occurred. The impairment test for nonamortizable intangible assets is performed by comparing the estimated fair values of the assets with their carrying values. Future changes in estimates used to determine the fair values may impact the fair value of Mattel’s intangible assets, which could result in a write-down, negatively impacting its results of operations. For purposes of evaluating whether goodwill is impaired, goodwill is allocated to various reporting units, which are at the operating segment level. Declines in profitability of Mattel’s reporting units may impact the fair value of its reporting units, which could result in a write-down of its goodwill, negatively impacting its results of operations.
Mattel’s stock price has been volatile over the past several years and could decline in the future, resulting in losses for our investors.
All the factors discussed in this section or any other material announcements or events could affect our stock price. In addition, quarterly fluctuations in our operating results, changes in investor and analyst perception of our business risks and conditions of our business, our ability to meet earnings estimates and other performance expectations of financial analysts or investors, unfavorable commentary or downgrades of our stock by research analysts, fluctuations in the stock prices of our peer companies or in stock markets in general, and general economic or political conditions could also cause the price of our stock to change. A significant drop in the price of our stock could expose us to the risk of securities class action lawsuits, which could result in substantial costs and divert management’s attention and resources, adversely affecting our business.
* * * * * * * * * * * * * * * * *
If any of the risks and uncertainties described in the cautionary risk factors listed above actually occurs, Mattel’s business, financial condition and results of operations could be significantly and adversely affected. The risk factors listed above are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact Mattel’s business, financial condition and results of operations. Moreover, Mattel operates in a very competitive and rapidly changing environment. New factors emerge from time to time, and it is not possible for management to predict the impact of all of these factors on Mattel’s business, financial condition or results of operations, or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by Mattel or its representatives may turn out to be wrong. Mattel expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.
 
Item 1B.
Unresolved Staff Comments.
None.

Item 2.
Properties.
Mattel owns its corporate headquarters in El Segundo, California, consisting of approximately 335,000 square feet, and an adjacent office building consisting of approximately 55,000 square feet. Mattel also leases buildings in El Segundo consisting of approximately 327,000 square feet. All segments use these facilities. Mattel also owns facilities in East Aurora, New York, consisting of approximately 535,000 square feet, which is used by the North America segment and for brand and corporate support functions. American Girl owns its headquarters facilities in Middleton, Wisconsin, consisting of

17


approximately 180,000 square feet, a warehouse in Middleton, consisting of approximately 215,000 square feet, and distribution facilities in Middleton, DeForest, and Wilmot, Wisconsin, consisting of a total of approximately 948,000 square feet, all of which are used by the American Girl segment. Additionally, Mattel leases a facility in Montreal, Canada, consisting of approximately 817,000 square feet, which is used for brand support and manufacturing functions, and a warehouse in Lachine, Canada, consisting of approximately 360,000 square feet. These facilities in Canada are used by both the North America and International segments. Mattel also owns its principal manufacturing facilities located in Indonesia, Malaysia, Mexico, and Thailand.
Mattel maintains leased offices in Arkansas, California, Illinois, Minnesota, and New York, and leased warehouse and distribution facilities in California and Texas, all of which are used by the North America segment. Mattel has leased retail and related office space in Chicago, Illinois, Los Angeles, California, and New York, New York for its American Girl Place stores, Alpharetta, Georgia, Bloomington, Minnesota, Charlotte, North Carolina, Chesterfield, Missouri, Columbus, Ohio, Dallas, Texas, Houston, Texas, Lone Tree, Colorado, Lynnwood, Washington, McLean, Virginia, Miami, Florida, Nashville, Tennessee, Natick, Massachusetts, Orlando, Florida, Overland Park, Kansas, Palo Alto, California, and Scottsdale, Arizona for its American Girl stores, leased retail space in Oshkosh, Wisconsin, which is used by the American Girl segment, and Pomona, California, which is used by the North America segment. Internationally, Mattel has offices and/or warehouse space in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, France, Germany, Greece, Hong Kong, Hungary, India, Italy, Japan, Luxembourg, Malaysia, Mexico, the Netherlands, New Zealand, Peru, Poland, Portugal, Russia, South Korea, Spain, Switzerland, Taiwan, Turkey, the United Kingdom, and Venezuela, which are leased (with the exception of office and warehouse space in Chile and certain warehouse space in France that is owned by Mattel) and used by the International segment. Mattel also has office space and principal manufacturing facilities in China, which support both the North America and International segments.
For leases that are scheduled to expire during the next twelve months, Mattel may negotiate new lease agreements, renew existing lease agreements, or utilize alternate facilities. See Part II, Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements—Commitments and Contingencies.” Mattel believes that its owned and leased facilities, in general, are suitable and adequate for its present and currently foreseeable needs.
 
Item 3.
Legal Proceedings.
See Part II, Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements—Commitments and Contingencies—Litigation.”

Item 4.
Mine Safety Disclosures.
Not applicable.

18


PART II
 
Item 5.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
For information regarding the markets in which Mattel’s common stock, par value $1.00 per share, is traded, see the cover page hereof. For information regarding the high and low closing prices of Mattel’s common stock for the last two calendar years, see Item 8 “Financial Statements and Supplementary Data—Note 14 to the Consolidated Financial Statements—Quarterly Financial Information (Unaudited).”
Holders of Record
As of February 12, 2016, Mattel had approximately 29,000 holders of record of its common stock.
Dividends
During 2015, 2014, and 2013, Mattel paid total dividends per share of $1.52, $1.52, and $1.44, respectively, to holders of its common stock. The Board of Directors declared the dividends on a quarterly basis, and Mattel paid the dividends during the quarters in which the dividends were declared. The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations.
Under US federal income tax rules, corporate dividends are designated as a dividend or a non-dividend distribution based on the applicable “earnings and profits” of the entity paying the dividend. Although Mattel has significant retained earnings, these earnings do not constitute “earnings and profits” as defined in US federal tax rules. Non-dividend distributions are considered a return of capital and are generally not taxable; however, the recipient must adjust his cost basis to reflect the distribution. In 2015, based on assumptions by Mattel, 95% of the distribution is a non-dividend distribution for US federal income tax purposes. Mattel expects more than 70% of its future dividends to be designated as a non-dividend distribution for US federal income tax purposes, assuming no changes to current business operations or current tax laws.
Recent Sales of Unregistered Securities
During the fourth quarter of 2015, Mattel did not sell any unregistered securities.
Issuer Purchases of Equity Securities
During 2015, Mattel did not repurchase any shares of its common stock. During 2014, Mattel repurchased 4.9 million shares of its common stock at a cost of $177.2 million. During 2013, Mattel repurchased 11.0 million shares of its common stock at a cost of $469.2 million.

The following table provides certain information with respect to Mattel’s purchases of its common stock during the fourth quarter of 2015:
 
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)
October 1—31
1,509

 
$
24.46

 

 
$
203,016,273

November 1—30
16,517

 
24.79

 

 
203,016,273

December 1—31
31,686

 
26.28

 

 
203,016,273

Total
49,712

 
$
25.73

 

 
$
203,016,273

 
(1)
The total number of shares purchased includes 49,712 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 December 31, 2015, share repurchase

19


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.

Performance Graph
The following graph compares the performance of Mattel common stock with that of the S&P 500 Index and the S&P 500 Consumer Discretionary Index. The Cumulative Total Return listed below assumes an initial investment of $100 on December 31, 2010 and reinvestment of dividends.
 
 

 
December 31,
Cumulative Total Return
2010
 
2011
 
2012
 
2013
 
2014
 
2015
Mattel, Inc.
$
100.00

 
$
112.97

 
$
154.56

 
$
207.63

 
$
140.95

 
$
131.43

S&P 500
100.00

 
102.08

 
118.39

 
156.70

 
178.10

 
180.56

S&P 500 Consumer Discretionary
100.00

 
106.10

 
131.46

 
188.06

 
206.25

 
227.09


20


Item 6.
Selected Financial Data.
 
 
For the Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands, except per share and percentage information)
Operating Results:
 
 
 
 
 
 
 
 
 
Net sales
$
5,702,613

 
$
6,023,819

 
$
6,484,892

 
$
6,420,881

 
$
6,266,037

Gross profit
2,806,358

 
3,001,022

 
3,478,883

 
3,409,197

 
3,145,826

% of net sales
49.2
%
 
49.8
%
 
53.6
%
 
53.1
%
 
50.2
%
Operating income (a)
540,922

 
653,714

 
1,168,103

 
1,021,015

 
1,041,101

% of net sales
9.5
%
 
10.9
%
 
18.0
%
 
15.9
%
 
16.6
%
Income before income taxes
463,915

 
586,910

 
1,099,128

 
945,045

 
970,673

Provision for income taxes (b)
94,499

 
88,036

 
195,184

 
168,581

 
202,165

Net income (a)
$
369,416

 
$
498,874

 
$
903,944

 
$
776,464

 
$
768,508

Net Income Per Common Share—Basic (a)
$
1.08

 
$
1.46

 
$
2.61

 
$
2.25

 
$
2.20

Net Income Per Common Share—Diluted (a)
$
1.08

 
$
1.45

 
$
2.58

 
$
2.22

 
$
2.18

Dividends Declared Per Common Share
$
1.52

 
$
1.52

 
$
1.44

 
$
1.24

 
$
0.92

 
 
 
 
 
 
 
 
 
 
 
December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(In thousands)
Financial Position:
 
 
 
 
 
 
 
 
 
Total assets
$
6,552,689

 
$
6,721,983

 
$
6,439,626

 
$
6,526,785

 
$
5,671,638

Noncurrent liabilities
2,273,863

 
2,684,026

 
2,140,627

 
1,743,729

 
2,022,107

Stockholders’ equity
2,633,254

 
2,949,071

 
3,251,559

 
3,067,044

 
2,610,603

 
(a)
In 2012, a charge arising from the litigation between Mattel and MGA Entertainment, Inc. resulted in reductions to operating income and net income of $137.8 million and $87.1 million, respectively. This litigation charge also negatively impacted both basic and diluted net income per common share by $0.25 per share.
(b)
The provision for income taxes in 2015 was positively impacted by net tax benefits of $19.1 million, primarily related to reassessments of prior years' tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes. The provision for income taxes in 2014 was positively impacted by net tax benefits of $42.6 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes, partially offset by a tax charge related to a 2014 tax restructuring for the HIT Entertainment and MEGA Brands operations. The provision for income taxes in 2013 was positively impacted by net tax benefits of $32.2 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes. The provision for income taxes in 2012 was positively impacted by net tax benefits of $16.0 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes. The provision for income taxes in 2011 was positively impacted by net tax benefits of $6.8 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes.

21


Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements and the related notes. See Item 8 “Financial Statements and Supplementary Data.”
Overview
Mattel’s vision is “creating the future of play.” Mattel’s objectives are to grow its share in the marketplace, continue to improve its operating margins, and create long-term stockholder value. To achieve these objectives, management has established the following strategies:
First, Mattel is focused on embracing brand building, creativity, and innovation, and management will put a premium on speed and personal accountability. Management is focused on putting Mattel back on track for growth and improved profitability.
Additionally, Mattel is organizing around the following six strategic priorities:
Exploiting the franchise strength of its core brands;
Re-establishing toy leadership;
Strengthening its global supply chain;
Achieving distinctiveness and excellence in its commercial organization;
Rapidly expanding into emerging markets; and
Continuously driving cost improvement.
2015 Overview
Mattel’s 2015 results were encouraging, with significant and continuing progress being made against the six strategic priorities and cultural transformation that the company began executing against in the prior year. The business was stabilized as net sales increased over prior year in constant currency. Critical core brands like Barbie and Fisher-Price were revitalized, and core brands like Hot Wheels and Thomas maintained their strong momentum, with positive trends in both consumer takeaway and shipping. Barbie in particular was successfully revamped in 2015, with fourth quarter results reflecting double digit growth in North America and positive numbers in International. Investments in emerging markets began to pay off, with significant growth in China and Russia. Though results continued to be impacted by strong foreign exchange headwinds, these losses were partially offset by the successful implementation of cost savings initiatives in the current year.
Mattel’s 2015 financial highlights include the following:
Gross sales in 2015 were up 1% in constant currency, and down 6% as reported, compared to 2014.
Net sales in 2015 were up 2% in constant currency, and down 5% as reported, compared to 2014.
Adjusted gross margin in 2015 was 49.2%, a decrease of 90 basis points from adjusted gross margin in 2014. Gross margin, as reported, in 2015 was 49.2%, a decrease of 60 basis points from 2014.
Adjusted operating income in 2015 was $640.3 million, as compared to adjusted operating income of $765.3 million in 2014. Operating income, as reported, in 2015 was $540.9 million compared to operating income of $653.7 million in 2014.
Adjusted earnings per share, including discrete tax items, in 2015 was $1.31, as compared to adjusted earnings per share, including discrete tax items, of $1.71 in 2014. Earnings per share, as reported, in 2015 was $1.08 compared to earnings per share of $1.45 in 2014.
2016 and Beyond
Though significant progress was made in 2015, Mattel continues to face many challenges in 2016 and beyond, including the impact of the loss of the Disney Princess license, further declines in Monster High, recent softness in American Girl, and continued foreign exchange headwinds. In 2016, Mattel intends to address revenue headwinds by building upon the current momentum in core brands, as well as pursuing new initiatives to support Monster High and strengthening American Girl. Further supporting this effort is a strong licensed entertainment slate and expected continued growth from emerging markets.

22


Finally, Mattel is currently on track to deliver at the high-end of the Funding Our Future two-year savings target of $250 million to $300 million, helping to maintain gross margins despite challenges to revenues.

Results of Operations
2015 Compared to 2014
Consolidated Results
Net sales for 2015 were $5.70 billion, a 5% decrease as reported, and a 2% increase in constant currency, as compared to $6.02 billion in 2014. Net income for 2015 was $369.4 million, or $1.08 per diluted share, as compared to net income of $498.9 million, or $1.45 per diluted share, in 2014. Adjusted earnings per share, including discrete tax items, in 2015 was $1.31, compared to adjusted earnings per share, including discrete tax items, of $1.71 in 2014. Adjusted earnings per share, including discrete tax items, in 2015 was negatively impacted by unfavorable foreign exchange and lower gross profit, partially offset by Funding Our Future savings.
The following table provides a summary of Mattel’s consolidated results for 2015 and 2014 (in millions, except percentage and basis point information):
 
 
For the Year
 
Year/Year
Change

2015
 
2014
 
 
Amount
 
% of Net
Sales
 
Amount
 
% of Net
Sales
 
%
 
Basis Points
of Net Sales
Net sales
$
5,702.6

 
100.0
 %
 
$
6,023.8

 
100.0
 %
 
-5
 %
 

Gross profit
$
2,806.4

 
49.2
 %
 
$
3,001.0

 
49.8
 %
 
-6
 %
 
–60

Advertising and promotion expenses
717.9

 
12.6

 
733.2

 
12.2

 
-2
 %
 
40

Other selling and administrative expenses
1,547.6

 
27.1

 
1,614.1

 
26.8

 
-4
 %
 
30

Operating income
540.9

 
9.5

 
653.7

 
10.9

 
-17
 %
 
–140

Interest expense
85.3

 
1.5

 
79.3

 
1.3

 
8
 %
 
20

Interest (income)
(7.2
)
 
-0.1

 
(7.4
)
 
-0.1

 
-2
 %
 

Other non-operating (income), net
(1.1
)
 
 
 
(5.1
)
 
 
 
 
 
 
Income before income taxes
$
463.9

 
8.1
 %
 
$
586.9

 
9.7
 %
 
-21
 %
 
–160

Sales
Net sales for 2015 were $5.70 billion, a 5% decrease as reported, and a 2% increase in constant currency, as compared to $6.02 billion in 2014.















23


The following table provides a summary of Mattel’s consolidated gross sales by brand for 2015 and 2014:
 
 
For the Year
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
2015
 
2014
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
 
 
Barbie
$
905.9

 
$
1,009.5

 
-10
 %
 
-9
 %
 
-1
 %
Other Girls
954.4

 
1,293.5

 
-26
 %
 
-9
 %
 
-17
 %
Wheels
831.3

 
754.9

 
10
 %
 
-11
 %
 
21
 %
Entertainment
772.6

 
839.3

 
-8
 %
 
-9
 %
 
1
 %
 
3,464.2

 
3,897.2

 
-11
 %
 
-9
 %
 
-2
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
 
 
Core Fisher-Price
1,224.1

 
1,213.4

 
1
 %
 
-7
 %
 
8
 %
Fisher-Price Friends
503.1

 
504.8

 
 %
 
-6
 %
 
6
 %
Other Fisher-Price
125.0

 
124.4

 
 %
 
-2
 %
 
2
 %
 
1,852.2

 
1,842.6

 
1
 %
 
-6
 %
 
7
 %
American Girl Brands
572.0

 
618.7

 
-8
 %
 
-1
 %
 
-7
 %
Construction and Arts & Crafts Brands
351.7

 
315.0

 
 
 
 
 
 
Other
43.5

 
44.9

 
 
 
 
 
 
Total Gross Sales
$
6,283.6

 
$
6,718.4

 
-6
 %
 
-7
 %
 
1
 %
Gross sales were $6.28 billion in 2015, a decrease of $434.8 million or 6% as reported, and an increase of 1% in constant currency, as compared to 2014. The decrease in gross sales in constant currency was primarily due to lower sales of Other Girls products, partially offset by higher sales of Wheels products. Of the 17% decrease in Other Girls gross sales in constant currency, 16% was due to lower sales of Monster High products. Of the 21% increase in Wheels gross sales in constant currency, 20% was due to higher sales of Hot Wheels products.
Cost of Sales
Cost of sales as a percentage of net sales was 50.8% in 2015, as compared to 50.2% in 2014. Cost of sales decreased by $126.5 million, or 4%, from $3.02 billion in 2014 to $2.90 billion in 2015, as compared to a 5% decrease in net sales. Within cost of sales, product and other costs decreased by $145.0 million, or 6%, from $2.44 billion in 2014 to $2.30 billion in 2015; royalty expenses increased $22.2 million, or 9%, from $242.4 million in 2014 to $264.6 million in 2015; and freight and logistics expenses decreased by $3.7 million, or 1%, from $337.1 million in 2014 to $333.4 million in 2015.
Gross Margin
Gross margin decreased from 49.8% in 2014 to 49.2% in 2015. Adjusted gross margin decreased from 50.1% in 2014 to 49.2% in 2015. The decrease in adjusted gross margin was due to unfavorable foreign exchange, higher product-related costs, unfavorable product mix, and higher royalty expenses, partially offset by price increases and Funding Our Future savings.
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 from 12.2% in 2014 to 12.6% in 2015, primarily as a result of Mattel's investments to support core brands throughout the year.
Other Selling and Administrative Expenses
Other selling and administrative expenses, as reported, decreased from $1.61 billion, or 26.8% of net sales, in 2014 to $1.55 billion, or 27.1% of net sales, in 2015. Adjusted other selling and administrative expenses decreased from $1.52 billion, or 25.2% of net sales, in 2014 to $1.45 billion, or 25.4% of net sales, in 2015. The decrease in adjusted other selling and administrative expenses was primarily due to Funding Our Future savings of approximately $70 million.

24


Non-Operating Items
Interest expense increased $6.0 million from $79.3 million in 2014 to $85.3 million in 2015, primarily due to higher average outstanding long-term borrowings.
Provision for Income Taxes
Mattel’s effective tax rate on income before income taxes in 2015 was 20.4%, as compared to 15.0% in 2014. The 2015 and 2014 income tax provisions included net tax benefits of $19.1 million and $42.6 million, respectively. The 2015 net tax benefits primarily relate to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes. The 2014 net tax benefits primarily relate to reassessments of prior year's tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes, partially offset by a tax charge related to a 2014 tax restructuring for the HIT Entertainment and MEGA Brands operations.

North America Segment
The following table provides a summary of Mattel’s gross sales by brand for the North America segment for 2015 and 2014:
 
 
For the Year
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
2015
 
2014
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
 
 
Barbie
$
433.9

 
$
423.6

 
2
 %
 
-1
 %
 
3
 %
Other Girls
443.9

 
563.1

 
-21
 %
 
 %
 
-21
 %
Wheels
409.9

 
337.9

 
21
 %
 
-1
 %
 
22
 %
Entertainment
417.4

 
379.0

 
10
 %
 
-1
 %
 
11
 %
 
1,705.1

 
1,703.6

 
 %
 
-1
 %
 
1
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
 
 
Core Fisher-Price
734.0

 
682.5

 
8
 %
 
 %
 
8
 %
Fisher-Price Friends
263.6

 
279.7

 
-6
 %
 
-1
 %
 
-5
 %
Other Fisher-Price
117.3

 
108.3

 
8
 %
 
-1
 %
 
9
 %
 
1,114.9

 
1,070.5

 
4
 %
 
-1
 %
 
5
 %
Construction and Arts & Crafts Brands
245.4

 
220.5

 
 
 
 
 
 
Other
18.5

 
17.0

 
 
 
 
 
 
Total Gross Sales
$
3,083.9

 
$
3,011.6

 
2
 %
 
-1
 %
 
3
 %
Gross sales for the North America segment were $3.08 billion in 2015, an increase of $72.3 million or 2% as reported, and 3% in constant currency, compared to 2014. The increase in the North America segment gross sales in constant currency was primarily due to higher sales of Wheels and Entertainment products, partially offset by lower sales of Other Girls products. Of the 22% increase in Wheels gross sales in constant currency, 21% was due to higher sales of Hot Wheels products. Of the 11% increase in Entertainment gross sales in constant currency, 19% was due to higher sales of Minecraft products and 3% was due to higher sales of WWE Wrestling products, partially offset by lower sales of Disney Planes products of 14%. Of the 21% decrease in Other Girls gross sales in constant currency, 9% was due to lower sales of Monster High products and 9% was due to lower sales of Disney Princess products. Cost of sales increased 2% in 2015, compared to a 3% increase in net sales, primarily due to higher product and other costs, higher freight and logistics expenses, and higher royalty expenses, partially offset by Funding Our Future savings. Gross margins increased due to Funding Our Future savings.
North America segment income increased 17% to $538.2 million in 2015, as compared to $459.8 million in 2014, due to higher gross profit and lower other selling and administrative expenses.




25


International Segment
The following table provides a summary of percentage changes in gross sales within the International segment in 2015 versus 2014:
 
 
% Change in
Gross Sales as Reported
Currency Exchange Rate Impact
% Change in Gross Sales in Constant Currency
Total International Segment
-15
-16
1
Europe
-18
-15
-3
Latin America
-22
-21
-1
Asia Pacific
8
-8
16
The following table provides a summary of Mattel’s gross sales by brand for the International segment for 2015 and 2014:
 
 
For the Year
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
2015
 
2014
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
 
 
Barbie
$
472.0

 
$
585.9

 
-19
 %
 
-15
 %
 
-4
 %
Other Girls
510.5

 
730.4

 
-30
 %
 
-15
 %
 
-15
 %
Wheels
421.4

 
417.0

 
1
 %
 
-19
 %
 
20
 %
Entertainment
355.2

 
460.3

 
-23
 %
 
-16
 %
 
-7
 %
 
1,759.1

 
2,193.6

 
-20
 %
 
-16
 %
 
-4
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
 
 
Core Fisher-Price
490.1

 
530.9

 
-8
 %
 
-14
 %
 
6
 %
Fisher-Price Friends
239.5

 
225.1

 
6
 %
 
-12
 %
 
18
 %
Other Fisher-Price
7.7

 
16.1

 
-52
 %
 
-12
 %
 
-40
 %
 
737.3

 
772.1

 
-4
 %
 
-13
 %
 
9
 %
Construction and Arts & Crafts Brands
106.3

 
94.5

 
 
 
 
 
 
Other
0.8

 
1.3

 
 
 
 
 
 
Total Gross Sales
$
2,603.5

 
$
3,061.5

 
-15
 %
 
-16
 %
 
1
 %
Gross sales for the International segment were $2.60 billion in 2015, a decrease of $458.0 million or 15% as reported, and an increase of 1% in constant currency, compared to 2014. The increase in the International segment gross sales in constant currency was primarily due to higher sales of Wheels and Fisher-Price Friends products, partially offset by lower sales of Other Girls products. The 20% increase in Wheels gross sales in constant currency was due to higher sales of Hot Wheels products. The 18% increase in Fisher-Price Friends gross sales in constant currency was due to higher sales of Thomas & Friends products. Of the 15% decrease in Other Girls gross sales in constant currency, 22% was due to lower sales of Monster High products, partially offset by higher sales of Disney Princess products of 5%. Cost of sales decreased 18% in 2015, as compared to a 14% decrease in net sales, primarily due to Funding Our Future savings and lower freight and logistics expenses, partially offset by higher product and other costs. Gross margins increased due to Funding Our Future savings.
International segment income decreased 11% to $321.1 million in 2015, as compared to $359.9 million in 2014, primarily due to lower gross profit, partially offset by lower other selling and administrative expenses and lower advertising and promotion expenses.





26


American Girl Segment
The following table provides a summary of Mattel’s gross sales by brand for the American Girl segment for 2015 and 2014:
 
 
For the Year
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
2015
 
2014
 
 
(In millions, except percentage information)
American Girl Segment:
 
 
 
 
 
 
 
 
 
American Girl Brands
$
572.0

 
$
618.7

 
-8
 %
 
-1
 %
 
-7
 %
Other Brands
24.2

 
26.6

 
-9
 %
 
-11
 %
 
2
 %
Total American Girl Segment
$
596.2

 
$
645.3

 
-8
 %
 
-1
 %
 
-7
 %
Gross sales for the American Girl segment were $596.2 million in 2015, a decrease of $49.1 million or 8% as reported, and 7% in constant currency, compared to 2014. Of the 7% decrease in American Girl Brands gross sales in constant currency, 4% was due to lower sales of the 2015 Girl of the Year, Grace Thomas™, and 4% was due to lower sales of Truly Me products. Cost of sales decreased 6% in 2015, as compared to a 9% decrease in net sales, primarily due to lower product and other costs. Gross margins decreased due to higher product-related costs, partially offset by Funding Our Future savings.
American Girl segment income decreased 38% to $69.9 million in 2015, as compared to $113.6 million in 2014, primarily due to lower gross profit.
2014 Compared to 2013
Consolidated Results
Net sales for 2014 were $6.02 billion, a 7% decrease as reported, and a 5% decrease in constant currency, as compared to $6.48 billion in 2013. Net income for 2014 was $498.9 million, or $1.45 per diluted share, as compared to net income of $903.9 million, or $2.58 per diluted share, in 2013. Earnings per share for 2014 was negatively impacted by lower sales volume and lower gross profit.
The following table provides a summary of Mattel’s consolidated results for 2014 and 2013 (in millions, except percentage and basis point information):
 
 
For the Year
 
Year/Year
Change
 
2014
 
2013
 
 
Amount
 
% of Net
Sales
 
Amount
 
% of Net
Sales
 
%
 
Basis Points
of Net Sales
Net sales
$
6,023.8

 
100.0
 %
 
$
6,484.9

 
100.0
 %
 
-7
 %
 

Gross profit
$
3,001.0

 
49.8
 %
 
$
3,478.9

 
53.6
 %
 
-14
 %
 
–380

Advertising and promotion expenses
733.2

 
12.2

 
750.2

 
11.6

 
-2
 %
 
60

Other selling and administrative expenses
1,614.1

 
26.8

 
1,560.6

 
24.1

 
3
 %
 
270

Operating income
653.7

 
10.9

 
1,168.1

 
18.0

 
-44
 %
 
–710

Interest expense
79.3

 
1.3

 
78.5

 
1.2

 
1
 %
 
10

Interest (income)
(7.4
)
 
-0.1

 
(5.6
)
 
-0.1

 
33
 %
 

Other non-operating (income), net
(5.1
)
 
 
 
(3.9
)
 
 
 
 
 
 
Income before income taxes
$
586.9

 
9.7
 %
 
$
1,099.1

 
16.9
 %
 
-47
 %
 
–720


Sales
Net sales for 2014 were $6.02 billion, a 7% decrease as reported, and a 5% decrease in constant currency, as compared to $6.48 billion in 2013.

27


The following table provides a summary of Mattel’s consolidated gross sales by brand for 2014 and 2013:
 
For the Year
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
2014
 
2013
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
 
 
Barbie
$
1,009.5

 
$
1,202.8

 
-16
 %
 
-2
 %
 
-14
 %
Other Girls
1,293.5

 
1,322.8

 
-2
 %
 
-3
 %
 
1
 %
Wheels
754.9

 
747.7

 
1
 %
 
-2
 %
 
3
 %
Entertainment
839.3

 
1,042.6

 
-20
 %
 
-2
 %
 
-18
 %
 
3,897.2

 
4,315.9

 
-10
 %
 
-2
 %
 
-8
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
 
 
Core Fisher-Price
1,213.4

 
1,374.9

 
-12
 %
 
-2
 %
 
-10
 %
Fisher-Price Friends
504.8

 
608.6

 
-17
 %
 
-2
 %
 
-15
 %
Other Fisher-Price
124.4

 
137.2

 
-9
 %
 
 %
 
-9
 %
 
1,842.6

 
2,120.7

 
-13
 %
 
-1
 %
 
-12
 %
American Girl Brands
618.7

 
632.5

 
-2
 %
 
 %
 
-2
 %
Construction and Arts & Crafts Brands
315.0

 

 
 
 
 
 
 
Other
44.9

 
48.7

 
 
 
 
 
 
Total Gross Sales
$
6,718.4

 
$
7,117.8

 
-6
 %
 
-2
 %
 
-4
 %
Gross sales were $6.72 billion in 2014, a decrease of $399.4 million or 6% as reported, and 4% in constant currency, compared to 2013. The decrease in gross sales in constant currency was primarily due to lower sales of Entertainment, Fisher-Price Friends, Barbie, and Core Fisher-Price products, partially offset by Construction and Arts & Crafts products. Of the 18% decrease in Entertainment gross sales in constant currency, 5% was due to lower sales of Max Steel products, 4% was due to lower sales of Superman products, 4% was due to lower sales of CARS products, and 2% was due to lower sales of kids’ games. Of the 15% decrease in Fisher-Price Friends gross sales in constant currency, 6% was due to lower sales of Disney Jake and the Never Land Pirates products, 4% was due to lower sales of Nickelodeon products, and 3% was due to lower sales of Mike the Knight® products. The 14% decrease in Barbie gross sales in constant currency was primarily due to competition within the doll category and brand propositions that were not compelling enough to consumers. Of the 10% decrease in Core Fisher-Price gross sales in constant currency, 4% was due to lower sales of Little People products and 3% was due to lower sales of Imaginext products. The increase in Construction and Arts & Crafts gross sales was due to initial sales of MEGA Brands products.
Cost of Sales
Cost of sales as a percentage of net sales was 50.2% in 2014, as compared to 46.4% in 2013. Cost of sales increased by $16.8 million, or 1%, from $3.01 billion in 2013 to $3.02 billion in 2014, as compared to a 7% decrease in net sales. Within cost of sales, product and other costs increased by $21.5 million, or 1%, from $2.42 billion in 2013 to $2.44 billion in 2014; royalty expenses decreased $4.5 million, or 2%, from $246.9 million in 2013 to $242.4 million in 2014; and freight and logistics expenses decreased by $0.2 million from $337.3 million in 2013 to $337.1 million in 2014.
Gross Margin
Gross margin decreased from 53.6% in 2013 to 49.8% in 2014. The decrease in gross margin was due to the impact of the MEGA Brands acquisition, including the impact of the inventory fair value markup above historical cost, efforts to improve consumer takeaway, the impact of lower sales volume on Mattel’s fixed cost manufacturing and distribution base, and unfavorable product mix, partially offset by price increases and Operational Excellence 3.0 savings offset by higher input costs

Advertising and Promotion Expenses
Advertising and promotion expenses primarily consist of: (i) media costs, which primarily include the media, planning, and buying fees for television, print, and online advertisements, (ii) non-media costs, which primarily include commercial and website production, merchandising, and promotional costs, (iii) retail advertising costs, which primarily include consumer direct catalogs, newspaper inserts, fliers, and mailers and (iv) generic advertising costs, which primarily include trade show

28


costs. Advertising and promotion expenses as a percentage of net sales increased from 11.6% in 2013 to 12.2% in 2014, primarily as a result of lower sales volume.
Other Selling and Administrative Expenses
Other selling and administrative expenses increased from $1.56 billion, or 24.1% of net sales, in 2013 to $1.61 billion, or 26.8% of net sales, in 2014. The $53.5 million increase in other selling and administrative expenses was primarily due to approximately $53 million of transaction, integration, and amortization costs associated with the MEGA Brands acquisition, the addition of MEGA Brands’ ongoing other selling and administrative expenses of approximately $51 million, and approximately $25 million of incremental severance and other termination-related costs, partially offset by lower employee-related expenses, including incentive and equity compensation, of approximately $51 million, and Operational Excellence 3.0 gross savings of approximately $35 million.
Provision for Income Taxes
Mattel’s effective tax rate on income before income taxes in 2014 was 15.0%, as compared to 17.8% in 2013. The 2014 and 2013 income tax provisions include net tax benefits of $42.6 million and $32.2 million, respectively. The 2014 net tax benefits primarily relate to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes, partially offset by a tax charge related to a 2014 tax restructuring for the HIT Entertainment and MEGA Brands operations. The 2013 net tax benefits primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes.
North America Segment
The following table provides a summary of Mattel’s gross sales by brand for the North America segment for 2014 and 2013:
 
 
For the Year
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
2014
 
2013
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
 
 
Barbie
$
423.6

 
$
458.6

 
-8
 %
 
-1
 %
 
-7
 %
Other Girls
563.1

 
600.0

 
-6
 %
 
 %
 
-6
 %
Wheels
337.9

 
352.0

 
-4
 %
 
 %
 
-4
 %
Entertainment
379.0

 
454.1

 
-17
 %
 
-1
 %
 
-16
 %
 
1,703.6

 
1,864.7

 
-9
 %
 
-1
 %
 
-8
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
 
 
Core Fisher-Price
682.5

 
816.7

 
-16
 %
 
 %
 
-16
 %
Fisher-Price Friends
279.7

 
361.8

 
-23
 %
 
-1
 %
 
-22
 %
Other Fisher-Price
108.3

 
120.4

 
-10
 %
 
 %
 
-10
 %
 
1,070.5

 
1,298.9

 
-18
 %
 
-1
 %
 
-17
 %
Construction and Arts & Crafts Brands
220.5

 

 
 
 
 
 
 
Other
17.0

 
17.6

 
 
 
 
 
 
Total Gross Sales
$
3,011.6

 
$
3,181.2

 
-5
 %
 
 %
 
-5
 %

Gross sales for the North America segment were $3.01 billion in 2014, a decrease of $169.6 million or 5% as reported and in constant currency, compared to 2013. The decrease in the North America segment gross sales in constant currency was primarily due to lower sales of Fisher-Price Friends, Core Fisher-Price, and Entertainment products, partially offset by Construction and Arts & Crafts products. Of the 22% decrease in Fisher-Price Friends gross sales in constant currency, 6% was due to lower sales of Nickelodeon products, 5% was due to lower sales of Thomas & Friends products, 5% was due to lower sales of Disney Jake and the Never Land Pirates products, and 4% was due to lower sales of Mike the Knight products. Of the 16% decrease in Core Fisher-Price gross sales in constant currency, 6% was due to lower sales of Little People products and 4% was due to lower sales of Imaginext products. Of the 16% decrease in Entertainment gross sales in constant currency, 6% was due to lower sales of Superman products, 5% was due to lower sales of CARS products, 4% was due to lower sales of Radica products, and 3% was due to lower sales of Max Steel products. The increase in Construction and Arts & Crafts gross

29


sales was due to initial sales of MEGA Brands products. Cost of sales increased 3% in 2014, compared to a 7% decrease in net sales, primarily due to higher product and other costs, partially offset by lower royalty expenses. Gross margins decreased due to the impact of the MEGA Brands acquisition, including the impact of the inventory fair value markup above historical cost, efforts to improve consumer takeaway, the impact of lower sales volume on Mattel’s fixed cost manufacturing and distribution base, and unfavorable product mix, partially offset by price increases and Operational Excellence 3.0 savings offset by higher input costs.
North America segment income decreased 36% to $459.8 million in 2014, as compared to $723.8 million in 2013, due to lower gross profit and higher other selling and administrative expenses.
International Segment
The following table provides a summary of percentage changes in gross sales within the International segment in 2014 versus 2013:
 
 
% Change in
Gross Sales as Reported
Currency Exchange Rate Impact
% Change in Gross Sales in Constant Currency
Total International Segment
-7
-4
-3
Europe
-7
-4
-3
Latin America
-10
-4
-6
Asia Pacific
1
-2
3
The following table provides a summary of Mattel’s gross sales by brand for the International segment for 2014 and 2013:
 
 
For the Year
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
2014
 
2013
 
 
(In millions, except percentage information)
Mattel Girls & Boys Brands:
 
 
 
 
 
 
 
 
 
Barbie
$
585.9

 
$
744.2

 
-21
 %
 
-3
 %
 
-18
 %
Other Girls
730.4

 
722.8

 
1
 %
 
-5
 %
 
6
 %
Wheels
417.0

 
395.7

 
5
 %
 
-4
 %
 
9
 %
Entertainment
460.3

 
588.5

 
-22
 %
 
-2
 %
 
-20
 %
 
2,193.6

 
2,451.2

 
-11
 %
 
-4
 %
 
-7
 %
Fisher-Price Brands:
 
 
 
 
 
 
 
 
 
Core Fisher-Price
530.9

 
558.2

 
-5
 %
 
-3
 %
 
-2
 %
Fisher-Price Friends
225.1

 
246.8

 
-9
 %
 
-5
 %
 
-4
 %
Other Fisher-Price
16.1

 
16.8

 
-4
 %
 
-4
 %
 
 %
 
772.1

 
821.8

 
-6
 %
 
-4
 %
 
-2
 %
Construction and Arts & Crafts Brands
94.5

 

 
 
 
 
 
 
Other
1.3

 
4.8

 
 
 
 
 
 
Total Gross Sales
$
3,061.5

 
$
3,277.8

 
-7
 %
 
-4
 %
 
-3
 %

Gross sales for the International segment were $3.06 billion in 2014, a decrease of $216.3 million or 7% as reported, and 3% in constant currency, compared to 2013. The decrease in the International segment gross sales in constant currency was primarily due to lower sales of Entertainment and Barbie products, partially offset by Construction and Arts & Crafts products. Of the 20% decrease in Entertainment gross sales in constant currency, 7% was due to lower sales of Max Steel products, 5% was due to lower sales of kids’ games, 3% was due to lower sales of CARS products, 3% was due to lower sales of Superman products, and 2% was due to lower sales of Disney Planes products. The 18% decrease in Barbie gross sales in constant currency was primarily due to competition within the doll category and brand propositions that were not compelling enough to consumers. The increase in Construction and Arts & Crafts gross sales was due to initial sales of MEGA Brands products. Cost of sales remained flat in 2014, as compared to a 9% decrease in net sales, as lower product and other costs and lower freight and logistics expenses were offset by higher royalty expenses. Gross margins decreased due to efforts to improve consumer

30


takeaway, the impact of the MEGA Brands acquisition, including the impact of the inventory fair value markup above historical cost, the impact of lower sales volume on Mattel’s fixed cost manufacturing and distribution base, unfavorable product mix, and higher input costs offset by price increases.
International segment income decreased 42% to $359.9 million in 2014, as compared to $622.9 million in 2013, 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 2014 and 2013:
 
 
For the Year
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
2014
 
2013
 
 
(In millions, except percentage information)
American Girl Segment:
 
 
 
 
 
 
 
 
 
American Girl Brands
$
618.7

 
$
632.5

 
-2
 %
 
 %
 
-2
 %
Other Brands
26.6

 
26.3

 
-6
 %
 
-2
 %
 
-4
 %
Total American Girl Segment
$
645.3

 
$
658.8

 
-2
 %
 
 %
 
-2
 %
Gross sales for the American Girl segment were $645.3 million in 2014, a decrease of $13.5 million or 2% as reported and in constant currency, compared to 2013. Of the 2% decrease in American Girl Brands gross sales in constant currency, 3% was due to lower sales of BeForever products. Cost of sales increased 2% in 2014, as compared to a 2% decrease in net sales, primarily due to higher product and other costs. Gross margins decreased as a result of efforts to improve consumer takeaway.
American Girl segment income decreased 18% to $113.6 million in 2014, as compared to $138.0 million in 2013, primarily due to lower gross profit and higher advertising and promotion expenses.
Cost Savings Programs
During 2013, Mattel initiated Operational Excellence 3.0, which targeted cumulative gross cost savings of approximately $175 million by the end of 2014. Mattel exceeded its Operational Excellence 3.0 goal by realizing approximately $179 million of cumulative gross cost savings throughout the program. The cost savings program was designed to generate sustainable cost savings through the following primary initiatives:
Manufacturing efficiencies through automation, lean manufacturing principles, design for manufacturing, enterprise quality, and packaging optimization;
Indirect procurement; and
Operational efficiencies related to enhanced International clustering and realignment of North America operations.
During 2013, Mattel realized gross cost savings before severance charges and investments of approximately $60 million (or approximately $39 million in net cost savings). Of the gross cost savings realized in 2013, approximately $51 million was reflected within gross profit, approximately $8 million within other selling and administrative expenses, and approximately $1 million within advertising and promotion expenses.
During 2014, Mattel realized gross cost savings before severance charges and investments of approximately $119 million (or approximately $74 million in net cost savings). Of the gross cost savings realized in 2014, approximately $77 million was reflected within gross profit, approximately $35 million within other selling and administrative expenses, and approximately $7 million within advertising and promotion expenses.
Beginning in 2015, Mattel initiated the next phase of its cost savings program, Funding Our Future, which targets additional cumulative gross cost savings of approximately $250 million to $300 million by the end of 2016. The cost savings program is designed to generate cost savings through various initiatives, including structural and process improvements and supply chain optimization.
During 2015, Mattel realized gross cost savings before severance charges and investments of approximately $153 million (or approximately $92 million in net cost savings). Of the gross cost savings realized in 2015, approximately $70 million was

31


reflected within gross profit, approximately $73 million within other selling and administrative expenses, and approximately $10 million within advertising and promotion expenses.
Income Taxes
Mattel’s effective tax rate on income before income taxes in 2015 was 20.4%, as compared to 15.0% in 2014. The 2015 income tax provision included net tax benefits of $19.1 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes.
Mattel’s effective tax rate on income before income taxes in 2014 and 2013 was 15.0% and 17.8%, respectively. The 2014 income tax provision included net tax benefits of $42.6 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes, partially offset by a tax charge related to a 2014 tax restructuring for the HIT Entertainment and MEGA Brands operations.
The 2013 income tax provision included net tax benefits of $32.2 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes.
Liquidity and Capital Resources
Mattel’s primary sources of liquidity are its cash and equivalents balances, access to short-term borrowing facilities, including its $1.60 billion domestic unsecured committed revolving credit facility (“Credit Facility”), and issuances of long-term debt securities. Cash flows from operating activities could be negatively impacted by decreased demand for Mattel’s products, which could result from factors such as 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’s ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as global economic crises and tight credit environments, an inability to meet its debt covenant requirements, which include maintaining consolidated debt-to-earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and interest coverage ratios, or a deterioration of Mattel’s credit ratings. Mattel’s ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity.
Of Mattel’s $892.8 million in cash and equivalents as of December 31, 2015, approximately $742 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 intend nor foresee a need to repatriate undistributed earnings of foreign subsidiaries. Mattel has several liquidity options to fund its domestic operations and obligations, including investing and financing activities such as dividends, share repurchases, and debt service. Positive cash flows generated annually by its domestic operations, the Credit Facility, and access to both long-term and short-term public and private debt markets at highly competitive interest rates are available to fund domestic operations and obligations. If these sources are not adequate, Mattel also has the ability to repatriate highly taxed foreign earnings, receive repayment of intercompany loans to foreign subsidiaries, and 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.
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. As of December 31, 2015, Mattel had available incremental borrowing resources totaling $1.60 billion under the Credit Facility, and Mattel has not experienced any limitations on its ability to access this source of liquidity. 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’s cash and equivalents. Mattel’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’s foreign currency forward exchange contracts. Mattel closely monitors its counterparties and takes action, as necessary, to manage its counterparty credit risk.

32


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’ financial condition and their liquidity in order to mitigate Mattel’s accounts receivable collectibility risks, and customer terms and credit limits are adjusted, if necessary. Additionally, Mattel uses a variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
 
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’s future contributions to these plans.

Capital and Investment Framework
To guide future capital deployment decisions, with a goal of maximizing stockholder value, Mattel’s Board of Directors established the following capital and investment framework:
To maintain approximately $800 million to $1 billion in year-end cash available to fund a substantial portion of seasonal working capital;
To maintain a year-end debt-to-capital ratio of about 35%;
To invest approximately $180 million to $200 million in capital expenditures annually to maintain and grow the business;
To make strategic opportunistic acquisitions; and
To return excess funds to stockholders through dividends and share repurchases.
Over the long term, assuming annual cash flows from operating activities remain strong, Mattel plans to use its free cash flows to invest in strategic acquisitions and to return funds to stockholders through cash dividends and share repurchases. Mattel’s share repurchase program has no expiration date and repurchases will take place from time to time, depending on market conditions. The ability to successfully implement the capital deployment plan is directly dependent on Mattel’s ability to generate strong annual cash flows from operating activities. There is no assurance that Mattel will continue to generate strong annual cash flows from operating activities or achieve its targeted goals for investing activities.
Operating Activities
Cash flows from operating activities were $734.6 million during 2015, as compared to $888.6 million during 2014 and $698.4 million during 2013. The decrease in cash flows from operating activities in 2015 from 2014 was primarily due to higher working capital usage and lower net income. The increase in cash flows from operating activities in 2014 from 2013 was primarily due to lower working capital usage, partially offset by lower net income.
Investing Activities
Cash flows used for investing activities were $282.5 million during 2015, as compared to $708.6 million during 2014 and $242.1 million during 2013. The decrease in cash flows used for investing activities in 2015 from 2014 was primarily due to the acquisition of MEGA Brands in 2014. The increase in cash flows used for investing activities in 2014 from 2013 was primarily due to the acquisition of MEGA Brands.
Financing Activities
Cash flows used for financing activities were $500.2 million during 2015, as compared to $227.3 million during 2014 and $740.0 million during 2013. The increase in cash flows used for financing activities in 2015 from 2014 was primarily due to prior year net proceeds from long-term borrowings and lower proceeds from stock option exercises, partially offset by lower share repurchases. The decrease in cash flows used for financing activities in 2014 from 2013 was primarily due to lower repayments of long-term borrowings and lower share repurchases, partially offset by lower proceeds from stock option exercises.
During 2015, Mattel did not repurchase any shares of its common stock. During 2014, Mattel repurchased 4.9 million shares of its common stock at a cost of $177.2 million. During 2013, Mattel repurchased 11.0 million shares of its common stock at a cost of $469.2 million. Mattel's share repurchase program was first announced on July 21, 2003. On July 17, 2013, the Board of Directors authorized Mattel to increase its share repurchase program by $500.0 million. At December 31, 2015, 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.

33


During 2015, 2014, and 2013, Mattel paid total dividends per share of $1.52, $1.52, and $1.44, respectively, to holders of its common stock. The Board of Directors declared the dividends on a quarterly basis, and Mattel paid the dividends during the quarters in which the dividends were declared. The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations. Dividend payments were $515.1 million, $514.8 million, and $494.4 million in 2015, 2014, and 2013, respectively.
Seasonal Financing
See Item 8 “Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt.”
Financial Position
Mattel’s cash and equivalents decreased $78.9 million to $892.8 million at December 31, 2015, as compared to $971.7 million at December 31, 2014. The decrease was primarily due to dividend payments, purchases of tools, dies, and molds and other property, plant, and equipment, partially offset by cash flows from operating activities.
Accounts receivable increased $50.6 million to $1.15 billion at December 31, 2015, as compared to $1.09 billion at December 31, 2014. Inventory increased $25.7 million to $587.5 million at December 31, 2015, as compared to $561.8 million at December 31, 2014. The increase in accounts receivable was primarily due to the later timing of sales in the US. The increase in inventory was primarily due to a shift in North America from direct import sales to trade sales, which requires longer lead times.
Accounts payable and accrued liabilities increased $239.8 million to $1.31 billion at December 31, 2015, as compared to $1.07 billion at December 31, 2014. The increase was primarily due to the extension of credit terms with third-party vendors, tighter management of vendor disbursements, and higher incentive compensation.
As of December 31, 2015, Mattel had foreign short-term borrowings outstanding of $16.9 million, an increase of $16.9 million from December 2014. The current portion of long-term debt increased to $300.0 million at December 31, 2015 due to the scheduled repayment of 2011 Senior Notes in 2016.
A summary of Mattel’s capitalization is as follows:
 
 
December 31,
 
2015
 
2014
 
(In millions, except percentage
information)
2010 Senior Notes
$
500.0

 
10
%
 
$
500.0

 
9
%
2011 Senior Notes
300.0

 
6

 
600.0

 
11

2013 Senior Notes
500.0

 
10

 
500.0

 
9

2014 Senior Notes
500.0

 
10

 
500.0

 
9

Total noncurrent long-term debt
1,800.0

 
36

 
2,100.0

 
38

Other noncurrent liabilities
473.9

 
10

 
584.0

 
10

Stockholders’ equity
2,633.3

 
54

 
2,949.1

 
52

 
$
4,907.2

 
100
%
 
$
5,633.1

 
100
%

Noncurrent long-term debt decreased by $300.0 million from December 31, 2014 to $1.80 billion at December 31, 2015 due to the reclassification of the 2011 Senior Notes due in November 2016 to current.
Stockholders’ equity decreased $315.8 million from December 31, 2014 to $2.63 billion at December 31, 2015, primarily due to dividend payments and currency translation adjustments, partially offset by net income.
Mattel’s debt-to-total capital ratio, including short-term borrowings and the current portion of long-term debt, increased from 41.6% at December 31, 2014 to 44.6% at December 31, 2015 as a result of lower stockholders’ equity.
Off-Balance Sheet Arrangements
Mattel has no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

34


Commitments
In the normal course of business, Mattel enters into debt agreements and contractual arrangements to obtain and protect Mattel’s right to create and market certain products and for future purchases of goods and services to ensure availability and timely delivery. These arrangements include commitments for future inventory and service purchases and royalty payments pursuant to licensing agreements. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the terms of the contracts. Mattel also has defined benefit and postretirement benefit plans, which require future cash contributions and benefit payments. Additionally, Mattel routinely enters into noncancelable lease agreements for premises and equipment used, which contain minimum rental payments.
The following table summarizes Mattel’s contractual commitments and obligations:
 
 
Total
 
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
(In millions)
Long-term debt
$
2,100.0

 
$
300.0

 
$

 
$
250.0

 
$
500.0

 
$
250.0

 
$
800.0

Interest on long-term debt
969.4

 
72.9

 
66.6

 
63.2

 
54.7

 
47.9

 
664.1

Capital leases*
1.2

 
0.3

 
0.3

 
0.3

 
0.3

 

 

Operating leases
441.7

 
105.6

 
78.7

 
58.4

 
45.5

 
41.0

 
112.5

Minimum guarantees under licensing and similar agreements
411.1

 
106.0

 
84.5

 
101.9

 
79.3

 
35.0

 
4.4

Defined benefit and postretirement benefit plans
399.1

 
40.9

 
42.6

 
41.2

 
38.9

 
39.4

 
196.1

Purchases of inventory, services, and other
438.5

 
418.0

 
11.6

 
5.7

 
2.1

 
1.1

 

Total
$
4,761.0

 
$
1,043.7

 
$
284.3

 
$
520.7

 
$
720.8

 
$
414.4

 
$
1,777.1

*
Represents total obligation, including imputed interest of $0.2 million.
Liabilities for uncertain tax positions for which a cash tax payment is not expected to be made in the next twelve months are classified as other noncurrent liabilities. Due to the uncertainty about the periods in which examinations will be completed and limited information related to current audits, Mattel is not able to make reasonably reliable estimates of the periods in which cash settlements will occur with taxing authorities for the noncurrent liabilities.
Subsequent Events
In January 2016, Mattel acquired substantially all of the assets of Fuhu, Inc., a developer of high technology products for children and families and best known for its nabi® brand of products. In addition, Mattel completed its acquisition of Sproutling, Inc., a maker of smart technology products for parents and families, in January 2016. These acquisitions are expected to strengthen Mattel's digital and smart technology capabilities and create opportunities to bring new technology-enabled products to market. These acquisitions are immaterial, individually and in the aggregate, to Mattel.
On February 1, 2016, Mattel announced that its Board of Directors declared a first quarter dividend of $0.38 per common share. The dividend is payable on March 4, 2016 to stockholders of record on February 17, 2016.
Litigation
The content of Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements—Commitments and Contingencies—Litigation” is hereby incorporated by reference in this Item 7.
Effects of Inflation
Inflation rates in the US and in major foreign countries where Mattel does business have not had a significant impact on its results of operations or financial position during 2015, 2014, or 2013. Mattel receives some protection from the impact of inflation from high turnover of inventories and its ability, under certain circumstances and at certain times, to pass on higher prices to its customers.
Employee Savings Plan
Mattel sponsors a 401(k) savings plan, the Mattel, Inc. Personal Investment Plan (the “Plan”), for its domestic employees. Contributions to the Plan include voluntary contributions by eligible employees and employer automatic and matching

35


contributions by Mattel. The Plan allows employees to allocate both their voluntary contributions and their employer automatic and matching contributions to a variety of investment funds, including a fund that is invested in Mattel common stock (the “Mattel Stock Fund”). Employees are not required to allocate any of their Plan account balance to the Mattel Stock Fund, allowing employees to limit or eliminate their exposure to market changes in Mattel’s stock price. Furthermore, the Plan limits the percentage of the employee’s total account balance that may be allocated to the Mattel Stock Fund to 25%. Employees may generally reallocate their account balances on a daily basis. However, pursuant to Mattel’s insider trading policy, employees classified as insiders and restricted personnel under Mattel’s insider trading policy are limited to certain periods in which they may make allocations into or out of the Mattel Stock Fund.
Application of Critical Accounting Policies and Estimates
Mattel makes certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those Mattel considers most critical in preparing its consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of its Board of Directors, and the Audit Committee has reviewed the disclosures included below. These accounting policies and estimates include significant judgments made by management using information available at the time the estimates are made. As described below, however, these estimates could change materially if different information or assumptions were used instead.
For a summary of Mattel’s significant accounting policies, estimates, and methods used in the preparation of Mattel’s consolidated financial statements, see Item 8 “Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies.” In most instances, Mattel must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America (“US GAAP”).
Accounts Receivable—Allowance for Doubtful Accounts
The allowance for doubtful accounts represents adjustments to customer trade accounts receivable for amounts deemed partially or entirely uncollectible. Management believes the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including other selling and administrative expenses, net income, and accounts receivable. In addition, the allowance requires a high degree of judgment since it involves estimation of the impact of both current and future economic factors in relation to its customers’ ability to pay amounts owed to Mattel.
Mattel’s products are sold throughout the world. Products within the North America segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers, and directly to consumers. Products within the International segment are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence.
In recent years, the mass-market retail channel has experienced significant shifts in market share among competitors, causing some large retailers to experience liquidity problems. Mattel’s sales to customers are typically made on credit without collateral and are highly concentrated in the third and fourth quarters due to the seasonal nature of toy sales, which results in a substantial portion of trade receivables being collected during the latter half of the year and the first quarter of the following year. There is a risk that customers will not pay, or that payment may be delayed, because of bankruptcy or other factors beyond the control of Mattel. This could increase Mattel’s exposure to losses from bad debts.
A small number of customers account for a large share of Mattel’s net sales and accounts receivable. In 2015, Mattel’s three largest customers, Wal-Mart, Toys “R” Us, and Target, in the aggregate, accounted for approximately 37% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 48% of net sales. As of December 31, 2015, Mattel’s three largest customers accounted for approximately 34% of net accounts receivable, and its ten largest customers accounted for approximately 47% of net accounts receivable. The concentration of Mattel’s business with a relatively small number of customers may expose Mattel to a material adverse effect if one or more of Mattel’s large customers were to experience financial difficulty.
Mattel has procedures to mitigate its risk of exposure to losses from bad debts. Revenue is recognized upon shipment or upon receipt of products by the customer, depending on the terms, provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and collectibility is reasonably assured. Value added taxes are recorded on a net basis and are excluded from revenue. Credit limits and payment terms are established based on the underlying criteria that collectibility must be reasonably assured at the levels set for each customer. Extensive evaluations are performed on an ongoing basis throughout the

36


fiscal year of each customer’s financial performance, cash generation, financing availability, and liquidity status. Customers are reviewed at least annually, with more frequent reviews being performed, if necessary, based on the customers’ financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses prior to shipping to those customers on credit. Customers’ terms and credit limits are adjusted, if necessary, to reflect the results of the review. Mattel uses a variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
The following table summarizes Mattel’s allowance for doubtful accounts at December 31:
 
 
2015
 
2014
 
2013
 
(In millions, except percentage
information)
Allowance for doubtful accounts
$
24.4

 
$
26.3

 
$
20.4

As a percentage of total accounts receivable
1.6
%
 
1.7
%
 
1.6
%

Mattel’s allowance for doubtful accounts is based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, and customer disputes. Changes in the allowance for doubtful accounts reflect management’s assessment of the factors noted above, including past due accounts, disputed balances with customers, and the financial condition of customers. The allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off.
Mattel believes that its allowance for doubtful accounts at December 31, 2015 is adequate and proper. However, as described above, Mattel’s business is greatly dependent on a small number of customers. Should one or more of Mattel’s major customers experience liquidity problems, then the allowance for doubtful accounts may not be sufficient to cover such losses. Any incremental bad debt charges would negatively affect the results of operations of one or more of Mattel’s business segments.
Inventories—Allowance for Obsolescence
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Inventory obsolescence reserves are recorded for damaged, obsolete, excess, and slow-moving inventory. Inventory allowances are charged to cost of sales and establish a lower cost basis for the inventory. Management believes that the accounting estimate related to the allowance for obsolescence is a “critical accounting estimate” because changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, net income, and inventories. As more fully described below, valuation of Mattel’s inventory could be impacted by changes in public and consumer preferences, demand for product, or changes in the buying patterns of both retailers and consumers and inventory management of customers.
In the toy industry, orders are subject to cancellation or change at any time prior to shipment since actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these factors could result in excess inventory in a particular product line, which would require management to record a valuation adjustment on such inventory.
Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research, and current market information. Mattel ships products in accordance with delivery schedules specified by its customers, who usually request delivery within three months. In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of its fiscal year. These seasonal purchasing patterns and requisite production lead times create risk to Mattel’s business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase inventory valuation risk since Mattel’s inventory levels may be adversely impacted by the need to pre-build products before orders are placed.
When current conditions in the domestic and global economies become uncertain, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or contraction in various parts of the economy, including the economies in which Mattel participates. Because all components of Mattel’s budgeting and forecasting are dependent upon estimates of growth or contraction in the markets it serves and demand for its products,

37


economic uncertainty makes estimates of future demand for product more difficult. Such economic changes may affect the sales of Mattel’s products and its corresponding inventory levels, which could potentially impact the valuation of its inventory.
At the end of each quarter, management within each business segment, North America, International, and American Girl, performs a detailed review of its inventory on an item-by-item basis and identifies products that are believed to be impaired. Management assesses the need for, and the amount of, an obsolescence reserve based on the following factors:

Customer and/or consumer demand for the item;
Overall inventory positions of Mattel’s customers;
Strength of competing products in the market;
Quantity on hand of the item;
Sales price of the item;
Mattel’s cost for the item; and
Length of time the item has been in inventory.
The timeframe between when an estimate is made and the time of disposal depends on the above factors and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.
The following table summarizes Mattel’s obsolescence reserve at December 31:
 
 
2015
 
2014
 
2013
 
(In millions, except percentage
information)
Allowance for obsolescence
$
45.7

 
$
46.9

 
$
49.1

As a percentage of total inventory
7.2
%
 
7.7
%
 
7.9
%
Management believes that its allowance for obsolescence at December 31, 2015 is adequate and proper. However, the impact resulting from the aforementioned factors could cause actual results to vary. Any incremental obsolescence charges would negatively affect the results of operations of one or more of Mattel’s business segments.
Goodwill and Nonamortizable Intangible Assets
Mattel tests goodwill and nonamortizable intangible assets for impairment annually or more often if an event or circumstance indicates that an impairment may have occurred. Management believes that the accounting estimates related to the fair value estimates of its goodwill and nonamortizable intangible assets are “critical accounting estimates” because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income, goodwill, and other intangible assets.
Assessing goodwill for impairment involves a high degree of judgment due to the assumptions that underlie the valuation. For purposes of evaluating whether goodwill is impaired, goodwill is allocated to various reporting units, which are at the operating segment level. Mattel’s reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel then assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. This qualitative assessment is used as a basis for determining whether it is necessary to perform the quantitative two-step goodwill impairment test. When the quantitative two-step goodwill impairment test is necessary, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s book value. If the fair value is greater than the book value of the reporting unit, goodwill is not impaired. If an impairment exists, the fair value of the reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the excess amount representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill.
When performing the quantitative two-step goodwill impairment test, Mattel utilizes the fair value based upon the discounted cash flows that the business can be expected to generate in the future (the “Income Approach”). The Income Approach valuation method requires Mattel to make projections of revenue, operating costs, and working capital investment for the reporting unit over a multi-year period. Additionally, management must make an estimate of a weighted average cost of capital that a market participant would use as a discount rate. Changes in these projections or estimates could result in a reporting unit either passing or failing the first step of the impairment model, which could significantly change the amount of any impairment ultimately recorded.

38


During the third quarter of 2015, Mattel assessed its goodwill for impairment by performing the quantitative two-step goodwill impairment test. Mattel determined that its goodwill was not impaired since, for each of the reporting units, the fair value of the reporting unit exceeded its carrying value.
Testing nonamortizable intangible assets for impairment also involves a high degree of judgment due to the assumptions that underlie the valuation. Mattel evaluates nonamortizable intangible assets, including trademarks and trade names, for impairment by comparing the estimated fair values with the carrying values. The fair value is measured using a multi-period excess earnings method, which reflects the incremental after-tax cash flows attributable to the trademark and trade names after deducting the appropriate contributory asset charges.
During the second quarter of 2013, Mattel changed its brand strategy for Polly Pocket, which includes a more focused allocation of resources to support the Polly Pocket brand in specific markets, resulting in a reduction of the forecasted future cash flows of the brand. As a result of the change, Mattel tested the asset for impairment. The Polly Pocket trade name, which previously had a carrying value of approximately $113 million, had a fair value of approximately $99 million, and Mattel recorded an impairment charge of approximately $14 million within other selling and administrative expenses. In conjunction with the impairment test, Mattel reassessed Polly Pocket’s nonamortizable classification and determined that the nonamortizable classification could no longer be supported. As such, the Polly Pocket trade name was reclassified as an amortizable intangible asset, and the remaining fair value of the asset is being amortized over its estimated remaining useful life. See Item 8 “Financial Statements and Supplementary Data—Note 2 to the Consolidated Financial Statements—Goodwill and Other Intangibles” for additional information.
During the third quarter of 2015, Mattel performed the annual impairment test for the remaining nonamortizable intangible assets as required and determined that its remaining nonamortizable intangible assets were not impaired as the fair values of the nonamortizable intangible assets exceeded their carrying values. Mattel also considered events and circumstances subsequent to these impairment tests in concluding there was no impairment as of December 31, 2015.
Sales Adjustments
Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross revenue in the period the related revenue is recognized. Sales adjustments for such programs totaled $581.0 million, $694.6 million, and $632.9 million during 2015, 2014, and 2013, respectively.
The above-described programs primarily involve fixed amounts or percentages of sales to customers. Accruals for such programs are calculated based on an assessment of customers’ purchases and performance under the programs and any other specified factors. While the majority of sales adjustment amounts are readily determinable at period end and do not require estimates, certain of the sales adjustments require management to make estimates. In making these estimates, management considers all available information, including the overall business environment, historical trends, and information from customers. Management believes that the accruals recorded for customer programs as of December 31, 2015 are adequate and proper.
Benefit Plan Assumptions
Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering substantially all employees of these companies. See Item 8 “Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements—Employee Benefit Plans.”
Actuarial valuations are used in determining amounts recognized in the financial statements for certain retirement and other postretirement benefit plans. These valuations incorporate the following significant assumptions:
Weighted average discount rate to be used to measure future plan obligations and interest cost component of plan income or expense;
Rate of future compensation increases (for defined benefit pension plans);
Expected long-term rate of return on plan assets (for funded plans); and
Health care cost trend rates (for other postretirement benefit plans).
Management believes that these assumptions are “critical accounting estimates” because significant changes in these assumptions could impact Mattel’s results of operations and financial position. Management believes that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’ experience and advice received from its

39


outside actuaries. Mattel reviews its benefit plan assumptions annually and modifies its assumptions based on current rates and trends as appropriate. The effects of such changes in assumptions are amortized as part of plan income or expense in future periods.
At the end of each fiscal year, Mattel determines the weighted average discount rate used to calculate the projected benefit obligation. The discount rate is an estimate of the current interest rate at which the benefit plan liabilities could be effectively settled at the end of the year. The discount rate also impacts the interest cost component of plan income or expense. As of December 31, 2015, Mattel determined the discount rate for its domestic benefit plans used in determining the projected and accumulated benefit obligations to be 4.2%, as compared to 3.8% and 4.7% as of December 31, 2014 and 2013, respectively. In estimating this rate, Mattel reviews rates of return on high-quality corporate bond indices, which approximate the timing and amount of benefit payments. Assuming all other benefit plan assumptions remain constant, the increase in the discount rate from 3.8% to 4.2% would result in a decrease in benefit plan expense during 2016 of $0.2 million.
The rate of future compensation increases used by Mattel for the benefit obligation and the net periodic pension cost of its domestic defined benefit pension plans averaged 3.8% for 2015, 2014, and 2013, based on plan demographics. This assumption is reviewed annually based on historical salary increases for participants in the defined benefit pension plans and impacts the service and interest cost components of plan income or expense.
The long-term rate of return on plan assets is based on management’s expectation of earnings on the assets that secure Mattel’s funded defined benefit pension plans, taking into account the mix of invested assets, the arithmetic average of past returns, economic and stock market conditions and future expectations, and the long-term nature of the projected benefit obligation to which these investments relate. The long-term rate of return is used to calculate the expected return on plan assets that is used in calculating pension income or expense. The difference between this expected return and the actual return on plan assets is deferred, net of tax, and is included in accumulated other comprehensive loss. The net deferral of past asset gains or losses affects the calculated value of plan assets and, ultimately, future pension income or expense. Mattel’s long-term rate of return used in determining plan expense for its domestic defined benefit pension plans was 7.5% during the first half of 2015 and revised to 6.8% for the second half of 2015, as compared to 8.0% in 2014 and 2013. Assuming all other benefit plan assumptions remain constant, a one percentage point decrease in the expected return on plan assets would result in an increase in benefit plan expense during 2016 of $3.5 million.
The health care cost trend rates used by Mattel for its other postretirement benefit plans reflect management’s best estimate of expected claim costs over the next ten years. These trend rates impact the service and interest cost components of plan expense. Rates ranging from 8.8% in 2015 to 4.5% in 2024, with rates assumed to stabilize in 2023 for participants younger than age 65 and 2024 for participants age 65 and older, were used in determining plan expense for 2015. These rates are reviewed annually and are estimated based on historical costs for participants in the other postretirement benefit plans as well as estimates based on current economic conditions. As of December 31, 2015, Mattel maintained the health care cost trend rates for its other postretirement benefit plan obligation at 7.5% for participants younger than age 65 and 8.8% for participants age 65 and older. For participants younger than age 65, the cost trend rates are estimated to reduce to 4.5% by 2023, with rates assumed to stabilize in 2023. For participants age 65 and older, the cost trend rates are estimated to reduce to 4.5% by 2024, with rates assumed to stabilize in 2024. Assuming all other postretirement benefit plan assumptions remain constant, a one percentage point increase in the assumed health care cost trend rates would result in an increase in benefit plan expense during 2016 of $0.1 million.
A one percentage point increase/(decrease) in the assumed health care cost trend rate for each future year would impact the postretirement benefit obligation as of December 31, 2015 by $2.0 million and $(1.6) million, respectively, and the service and interest cost recognized for 2015 by $0.1 million and $(0.1) million, respectively.
Share-Based Payments
Mattel recognizes the cost of employee share-based payment awards on a straight-line attribution basis over the requisite employee service period, net of estimated forfeitures. In determining when additional tax benefits associated with share-based payment exercises are recognized, Mattel follows the ordering of deductions under the tax law, which allows deductions for share-based payment exercises to be utilized before previously existing net operating loss carryforwards.
Determining the fair value of share-based awards at the measurement date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and the expected dividends. Mattel estimates the fair value of options granted using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues approximating the

40


expected life. Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting. Management believes that these assumptions are “critical accounting estimates” because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income.
The weighted average grant date fair value of options granted during 2015, 2014, and 2013 was $1.97, $4.57, and $8.80, respectively. The following weighted average assumptions were used in determining the fair value of options granted:
 
 
2015
 
2014
 
2013
Expected life (in years)
4.9

 
4.9

 
4.9

Risk-free interest rate
1.5
%
 
1.6
%
 
1.5
%
Volatility factor
23.1
%
 
23.7
%
 
31.8
%
Dividend yield
6.5
%
 
4.3
%
 
3.4
%
The following table summarizes the sensitivity of valuation assumptions within the calculation of stock option fair values, if all other assumptions are held constant:
 
 
Increase in
Assumption
Factor
 
Increase
(Decrease)
in Fair
Value
(in % pts)
Expected life (in years)
1 year

 
(2.6
)
Risk-free interest rate
1
%
 
13.0

Volatility factor
1
%
 
7.3

Dividend yield
1
%
 
(16.6
)
 
 
(Decrease) in
Assumption
Factor
 
Increase
(Decrease)
in Fair
Value
(in % pts)
Expected life (in years)
(1) year

 
1.0

Risk-free interest rate
(1
)%
 
(12.4
)
Volatility factor
(1
)%
 
(7.8
)
Dividend yield
(1
)%
 
18.7

Mattel recognized compensation expense of $15.2 million, $12.5 million, and $12.1 million for stock options during 2015, 2014, and 2013, respectively, which is included within other selling and administrative expenses. Compensation expense recognized related to grants of restricted stock units (“RSUs”), including performance-based restricted stock units (“Performance RSUs”), was $41.5 million, $39.5 million, and $38.2 million in 2015, 2014, and 2013, respectively, and is also included within other selling and administrative expenses. As of December 31, 2015, total unrecognized compensation cost related to unvested share-based payments totaled $85.4 million and is expected to be recognized over a weighted-average period of 2.0 years.
Income Taxes
Mattel’s income tax provision and related income tax assets and liabilities are based on actual and expected future income, US and foreign statutory income tax rates, and tax regulations and planning opportunities in the various jurisdictions in which Mattel operates. Management believes that the accounting estimates related to income taxes are “critical accounting estimates” because significant judgment is required in interpreting tax regulations in the US and in foreign jurisdictions, evaluating Mattel’s worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits. Actual results could differ materially from those judgments, and changes in judgments could materially affect Mattel’s consolidated financial statements.
Certain income and expense items are accounted for differently for financial reporting and income tax purposes. As a result, the income tax expense reflected in Mattel’s consolidated statements of operations is different than that reported in Mattel’s tax returns filed with the taxing authorities. Some of these differences are permanent, such as expenses that are not deductible in Mattel’s tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred income tax assets and liabilities. Deferred income tax assets generally represent items that can be

41


used as a tax deduction or credit in Mattel’s tax returns in future years for which Mattel has already recorded a tax benefit in its consolidated statement of operations. Mattel records a valuation allowance to reduce its deferred income tax assets if, based on the weight of available evidence, management believes expected future taxable income is not likely to support the use of a deduction or credit in that jurisdiction. Management evaluates the level of Mattel’s valuation allowances at least annually, and more frequently if actual operating results differ significantly from forecasted results.
Mattel records unrecognized tax benefits for US federal, state, local, and foreign tax positions related primarily to transfer pricing, tax credits claimed, tax nexus, and apportionment. For each reporting period, management applies a consistent methodology to measure unrecognized tax benefits and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances warrant. Mattel’s measurement of its unrecognized tax benefits is based on management’s assessment of all relevant information, including prior audit experience, the status of audits, conclusions of tax audits, lapsing of applicable statutes of limitations, identification of new issues, and any administrative guidance or developments. Mattel recognizes unrecognized tax benefits in the first financial reporting period in which information becomes available indicating that such benefits will more-likely-than-not (a greater than 50 percent likelihood) be realized.
Mattel’s effective tax rate on income before income taxes in 2015 was 20.4%, as compared to 15.0% in 2014. The income tax provision included net tax benefits of $19.1 million, $42.6 million, and $32.2 million in 2015, 2014, and 2013, respectively. The 2015 net tax benefits primarily relate to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes. The 2014 net tax benefits primarily related to the reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes, partially offset by a tax charge related to a 2014 tax restructuring for the HIT Entertainment and MEGA Brands operations. The 2013 net tax benefits primarily related to the reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes.
In the normal course of business, Mattel is regularly audited by federal, state, local, and foreign tax authorities. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.
New Accounting Pronouncements
See Item 8 “Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies.”
Non-GAAP Financial Measures
To supplement the financial results presented in accordance with GAAP, Mattel presents certain non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The non-GAAP financial measures included in this Annual Report on Form 10-K include gross sales, adjusted gross margin and adjusted gross profit, adjusted other selling and administrative expenses, adjusted operating income, adjusted earnings per share, and constant currency. Mattel uses these non-GAAP financial measures to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. These measures are not, and should not be viewed as, substitutes for GAAP financial measures.
Gross Sales
Gross sales represent sales to customers, excluding the impact of sales adjustments. Net sales, as reported, include the impact of sales adjustments, such as trade discounts and other allowances. Mattel presents changes in gross sales as a metric for comparing its aggregate, brand, and geographic results to highlight significant trends in Mattel’s business. Changes in gross sales are discussed because, while Mattel records the details of such sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with individual products, making net sales less meaningful.
A reconciliation between net sales and gross sales is as follows:
 
 
 
Year Ended December 31,
 
% Change as Reported
 
Currency Exchange Rate Impact
 
% Change in Constant Currency
 
 
2015
 
2014
 
 
 
 
 
(In millions, except percentage information)
Net Sales
 
5,702.6

 
6,023.8

 
-5
 %
 
-7
 %
 
2
%
Sales adjustments
 
581.0

 
694.6

 
 
 
 
 
 
Gross Sales
 
6,283.6

 
6,718.4

 
-6
 %
 
-7
 %
 
1
%

42



Adjusted Gross Margin and Adjusted Gross Profit
Adjusted gross margin represents Mattel’s reported gross profit, adjusted to exclude the impact of inventory fair value markup above cost associated with the acquisition of a business, as a percentage of net sales. Adjusted gross margin is presented to provide additional perspective on underlying trends in Mattel’s core gross margin. A reconciliation between gross margin and adjusted gross margin is as follows:

 
 
Year Ended December 31,
 
 
2015
 
2014
 
 
 
Gross Profit
 
$
2,806.4

 
$
3,001.0

Gross Margin
 
49.2
%
 
49.8
%
Adjustments
 
 
 
 
MEGA Brands Inventory Fair Value Markup Above Cost
 

 
15.0

Adjusted Gross Profit
 
$
2,806.4

 
$
3,016.0

Adjusted Gross Margin
 
49.2
%
 
50.1
%
Adjusted Other Selling and Administrative Expenses
Adjusted other selling and administrative expenses represents Mattel’s reported other selling and administrative expenses, adjusted to exclude the impact of expenses associated with the acquisition and integration of an acquired business and restructuring and restructuring-related expenses. Adjusted other selling and administrative expenses is presented to provide additional perspective on underlying trends in Mattel’s core other selling and administrative expenses. A reconciliation between other selling and administrative expenses and adjusted other selling and administrative expenses is as follows:

 
 
Year Ended December 31,
 
 
2015
 
2014
 
 
Other Selling and Administrative Expenses
 
$
1,547.6

 
$
1,614.1

Adjustments
 
 
 
 
MEGA Brands Integration & Acquisition Costs