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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ___________________________________________________________ 
FORM 10-Q
 ___________________________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-05647
___________________________________________________________ 
MATTEL, INC.
(Exact name of registrant as specified in its charter)
___________________________________________________________ 
 
Delaware
 
95-1567322
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
333 Continental Blvd.
El Segundo, CA
 
90245-5012
 
(Address of principal executive offices)
 
(Zip Code)
(310) 252-2000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report):
NONE
___________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Number of shares outstanding of registrant’s common stock, $1.00 par value, as of October 13, 2017:
343,729,550 shares

1



MATTEL, INC. AND SUBSIDIARIES

 
 
Page
 
 
 
 
PART I
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  

2



(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)
Mattel is including this Cautionary Statement to caution investors and qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”) for forward-looking statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Act. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. The use of words such as “anticipates,” “expects,” “intends,” “plans,” “confident that” and “believes,” among others, generally identify forward-looking statements. These forward-looking statements are based on currently available operating, financial, economic and other information, and are subject to a number of significant risks and uncertainties. A variety of factors, many of which are beyond our control, could cause actual future results to differ materially from those projected in the forward-looking statements. Specific factors that might cause such a difference include, but are not limited to: (i) Mattel’s ability to design, develop, produce, manufacture, source and ship products on a timely and cost-effective basis, as well as interest in and purchase of those products by retail customers and consumers in quantities and at prices that will be sufficient to profitably recover Mattel’s costs; (ii) downturns in economic conditions affecting Mattel’s markets which can negatively impact retail customers and consumers, and which can result in lower employment levels, lower consumer disposable income and spending, including lower spending on purchases of Mattel’s products; (iii) other factors which can lower discretionary consumer spending, such as higher costs for fuel and food, drops in the value of homes or other consumer assets, and high levels of consumer debt; (iv) potential difficulties or delays Mattel may experience in implementing cost savings and efficiency enhancing initiatives; (v) other economic and public health conditions or regulatory changes in the markets in which Mattel and its customers and suppliers operate, which could create delays or increase Mattel’s costs, such as higher commodity prices, labor costs or transportation costs, or outbreaks of disease; (vi) currency fluctuations, including movements in foreign exchange rates, which can lower Mattel’s net revenues and earnings, and significantly impact Mattel’s costs; (vii) the concentration of the Mattel’s customers, potentially increasing the negative impact to Mattel of difficulties experienced by any of Mattel’s customers, including the bankruptcy of Toys “R” Us, Inc., or changes in their purchasing or selling patterns; (viii) the future willingness of licensors of entertainment properties for which Mattel currently has licenses or would seek to have licenses in the future to license those products to Mattel; (ix) the inventory policies of Mattel’s retail customers, including retailers’ potential decisions to lower their inventories, even if it results in lost sales, as well as the concentration of Mattel’s revenues in the second half of the year, which coupled with reliance by retailers on quick response inventory management techniques increases the risk of underproduction of popular items, overproduction of less popular items and failure to achieve compressed shipping schedules; (x) the increased costs of developing more sophisticated digital and smart technology products, and the corresponding supply chain and design challenges associated with such products; (xi) work disruptions, which may impact Mattel’s ability to manufacture or deliver product in a timely and cost-effective manner; (xii) the bankruptcy of Toys “R” Us, Inc. or other of Mattel’s significant retailers, or the general lack of success of one of Mattel’s significant retailers which could negatively impact Mattel’s revenues or bad debt exposure; (xiii) the impact of competition on revenues, margins and other aspects of Mattel’s business, including the ability to offer products which consumers choose to buy instead of competitive products, the ability to secure, maintain and renew popular licenses and the ability to attract and retain talented employees; (xiv) the risk of product recalls or product liability suits and costs associated with product safety regulations; (xv) changes in laws or regulations in the United States and/or in other major markets in which Mattel operates, including, without limitation, with respect to taxes, tariffs or product safety, which may increase Mattel’s product costs and other costs of doing business, and reduce Mattel’s earnings, (xvi) failure to realize the planned benefits from any investments or acquisitions made by Mattel, (xvii) the impact of other market conditions, third party actions or approvals and competition which could reduce demand for Mattel’s products or delay or increase the cost of implementation of Mattel’s programs or alter Mattel’s actions and reduce actual results; (xviii) changes in financing markets or the inability of Mattel to obtain financing on attractive terms (xix) the impact of litigation or arbitration decisions or settlement actions; and (xx) other risks and uncertainties detailed in Part 1, Item 1A “Risk Factors” in Mattel’s 2016 Annual Report on Form 10-K. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so.

3



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
(Unaudited; in thousands, except share data)
ASSETS
 
 
 
 
 
Current Assets
 
 
 
 
 
Cash and equivalents
$
181,308

 
$
297,089

 
$
869,531

Accounts receivable, net
1,506,145

 
1,528,808

 
1,115,217

Inventories
989,995

 
910,546

 
613,798

Prepaid expenses and other current assets
352,711

 
342,362

 
341,518

Total current assets
3,030,159

 
3,078,805

 
2,940,064

Noncurrent Assets
 
 
 
 
 
Property, plant, and equipment, net
821,228

 
747,451

 
773,965

Goodwill
1,397,642

 
1,392,155

 
1,387,628

Other noncurrent assets
950,655

 
1,430,456

 
1,392,137

Total Assets
$
6,199,684

 
$
6,648,867

 
$
6,493,794

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
 
Current Liabilities
 
 
 
 
 
Short-term borrowings
$
732,649

 
$

 
$
192,168

Current portion of long-term debt
250,000

 
300,000

 

Accounts payable
713,488

 
694,757

 
664,857

Accrued liabilities
568,845

 
629,114

 
628,826

Income taxes payable
32,296

 
21,695

 
19,722

Total current liabilities
2,297,278

 
1,645,566

 
1,505,573

Noncurrent Liabilities
 
 
 
 
 
Long-term debt
1,886,404

 
2,133,489

 
2,134,271

Other noncurrent liabilities
576,327

 
454,434

 
446,168

Total noncurrent liabilities
2,462,731

 
2,587,923

 
2,580,439

Stockholders’ Equity
 
 
 
 
 
Common stock $1.00 par value, 1.0 billion shares authorized; 441.4 million shares issued
441,369

 
441,369

 
441,369

Additional paid-in capital
1,793,036

 
1,781,540

 
1,790,832

Treasury stock at cost: 97.7 million shares, 99.3 million shares, and 99.0 million shares, respectively
(2,392,422
)
 
(2,434,520
)
 
(2,426,749
)
Retained earnings
2,460,224

 
3,502,076

 
3,545,359

Accumulated other comprehensive loss
(862,532
)
 
(875,087
)
 
(943,029
)
Total stockholders’ equity
1,439,675

 
2,415,378

 
2,407,782

Total Liabilities and Stockholders’ Equity
$
6,199,684

 
$
6,648,867

 
$
6,493,794

The accompanying notes are an integral part of these financial statements

4



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 
For the Three Months Ended
 
For the Nine Months Ended
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(Unaudited; in thousands, except per share amounts)
Net Sales
$
1,560,983

 
$
1,795,575

 
$
3,271,078

 
$
3,622,250

Cost of sales
913,834

 
924,810

 
1,945,386

 
1,929,247

Gross Profit
647,149

 
870,765

 
1,325,692

 
1,693,003

Advertising and promotion expenses
179,691

 
202,900

 
348,752

 
384,614

Other selling and administrative expenses
381,756

 
350,469

 
1,066,943

 
1,051,799

Operating Income (Loss)
85,702

 
317,396

 
(90,003
)
 
256,590

Interest expense
24,646

 
24,989

 
68,557

 
70,133

Interest (income)
(1,575
)
 
(2,477
)
 
(6,337
)
 
(7,550
)
Other non-operating expense, net
1,368

 
856

 
5,928

 
23,210

Income (Loss) Before Income Taxes
61,263

 
294,028

 
(158,151
)
 
170,797

Provision for income taxes
664,510

 
57,778

 
614,402

 
26,620

Net (Loss) Income
$
(603,247
)
 
$
236,250

 
$
(772,553
)
 
$
144,177

Net (Loss) Income Per Common Share—Basic
$
(1.75
)
 
$
0.69

 
$
(2.25
)
 
$
0.42

Weighted average number of common shares
343,870

 
341,961

 
343,304

 
341,089

Net (Loss) Income Per Common Share—Diluted
$
(1.75
)
 
$
0.68

 
$
(2.25
)
 
$
0.42

Weighted average number of common and potential common shares
343,870

 
344,226

 
343,304

 
343,298

Dividends Declared Per Common Share
$
0.15

 
$
0.38

 
$
0.91

 
$
1.14

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

5



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(Unaudited; in thousands)
Net (Loss) Income
$
(603,247
)
 
$
236,250

 
$
(772,553
)
 
$
144,177

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
 
 
 
 
Currency translation adjustments
36,912

 
(14,570
)
 
142,248

 
(18,926
)
Defined benefit pension plan adjustments
1,106

 
2,024

 
3,185

 
4,568

Net unrealized losses on available-for-sale security
(3,848
)
 

 
(7,585
)
 

Net unrealized losses on derivative instruments:
 
 
 
 
 
 
 
Unrealized holding (losses) gains
(24,009
)
 
974

 
(63,999
)
 
642

Reclassification adjustment for realized losses (gains) included in net (loss) income
9,241

 
(2,157
)
 
6,648

 
(12,472
)
 
(14,768
)
 
(1,183
)
 
(57,351
)
 
(11,830
)
Other Comprehensive Income (Loss), Net of Tax
19,402

 
(13,729
)
 
80,497

 
(26,188
)
Comprehensive (Loss) Income
$
(583,845
)
 
$
222,521

 
$
(692,056
)
 
$
117,989


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

6



MATTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended
September 30,
2017
 
September 30,
2016
 
(Unaudited; in thousands)
Cash Flows From Operating Activities:
 
Net (loss) income
$
(772,553
)
 
$
144,177

Adjustments to reconcile net (loss) income to net cash flows used for operating activities:
 
 
 
Depreciation
179,831

 
177,939

Amortization
16,264

 
19,577

Asset impairments
14,942

 

Deferred income taxes
2,057

 
(38,424
)
Valuation allowance on deferred tax assets
561,915

 

Share-based compensation
47,582

 
38,744

(Decrease) increase from changes in assets and liabilities, net of acquired assets and liabilities:
 
 
 
Accounts receivable
(355,821
)
 
(389,550
)
Inventories
(359,013
)
 
(311,141
)
Prepaid expenses and other current assets
(19,027
)
 
25,292

Accounts payable, accrued liabilities, and income taxes payable
9,893

 
42,006

Other, net
(66,140
)
 
(39,966
)
Net cash flows used for operating activities
(740,070
)
 
(331,346
)
Cash Flows From Investing Activities:
 
Purchases of tools, dies, and molds
(101,428
)
 
(101,562
)
Purchases of other property, plant, and equipment
(133,895
)
 
(77,586
)
Payments for acquisition, net of cash acquired

 
(33,154
)
Proceeds from foreign currency forward exchange contracts
60,376

 
6,228

Other, net
38

 
1,349

Net cash flows used for investing activities
(174,909
)
 
(204,725
)
Cash Flows From Financing Activities:
 
Payments of short-term borrowings, net
(878,937
)
 
(83,914
)
Proceeds from short-term borrowings, net
1,419,418

 
67,000

Proceeds from long-term borrowings, net

 
350,000

Payments of dividends on common stock
(311,973
)
 
(388,518
)
Proceeds from exercise of stock options
1,768

 
28,531

Other, net
(16,543
)
 
(16,341
)
Net cash flows provided by (used for) financing activities
213,733

 
(43,242
)
Effect of Currency Exchange Rate Changes on Cash
13,023

 
(16,412
)
Decrease in Cash and Equivalents
(688,223
)
 
(595,725
)
Cash and Equivalents at Beginning of Period
869,531

 
892,814

Cash and Equivalents at End of Period
$
181,308

 
$
297,089

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


7



MATTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of only those of a normal recurring nature, considered necessary for a fair presentation of the financial position and interim results of Mattel, Inc. and its subsidiaries (“Mattel”) as of and for the periods presented have been included. As Mattel’s business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year.
The year-end balance sheet data was derived from audited financial statements; however, the accompanying interim notes to the consolidated financial statements do not include all disclosures required by GAAP.
The financial information included herein should be read in conjunction with Mattel’s consolidated financial statements and related notes in its 2016 Annual Report on Form 10-K.
2.
Accounts Receivable
Accounts receivable are net of allowances for doubtful accounts of $22.4 million, $30.9 million, and $21.4 million as of September 30, 2017September 30, 2016, and December 31, 2016, respectively. As a result of Toys “R” Us filing for bankruptcy in September 2017, Mattel reversed gross sales and accounts receivable of approximately $47 million, and reversed net sales of approximately $43 million in the three months ended September 30, 2017.
3.
Inventories
Inventories include the following:
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
(In thousands)
Raw materials and work in process
$
130,895

 
$
137,385

 
$
112,327

Finished goods
859,100

 
773,161

 
501,471

 
$
989,995

 
$
910,546

 
$
613,798

4.
Property, Plant, and Equipment
Property, plant, and equipment, net includes the following: 
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
(In thousands)
Land
$
25,045

 
$
25,193

 
$
25,113

Buildings
293,024

 
277,974

 
280,226

Machinery and equipment
933,967

 
819,501

 
828,969

Software
374,934

 
342,974

 
356,622

Tools, dies, and molds
923,752

 
876,642

 
869,385

Capital leases
23,970

 
23,970

 
23,970

Leasehold improvements
263,276

 
255,769

 
261,254

 
2,837,968

 
2,622,023

 
2,645,539

Less: accumulated depreciation
(2,016,740
)
 
(1,874,572
)
 
(1,871,574
)
 
$
821,228

 
$
747,451

 
$
773,965


8



5.
Goodwill
Goodwill is allocated to various reporting units, which are at the operating segment level, for purposes of evaluating whether goodwill is impaired. Mattel’s reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel tests its goodwill for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value. In the third quarter of 2017, Mattel early adopted Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment, which removes Step 2 from the goodwill impairment test. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to the excess, limited by the amount of goodwill in that reporting unit.
In the third quarter of 2017, Mattel performed its annual impairment tests and determined that goodwill was not impaired. The change in the carrying amount of goodwill by operating segment for the nine months ended September 30, 2017 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the North America and American Girl operating segments selling those brands, thereby causing a foreign currency translation impact for these operating segments.
 
December 31,
2016
 
Currency
Exchange Rate
Impact
 
September 30,
2017
 
(In thousands)
North America
$
730,139

 
$
2,595

 
$
732,734

International
445,008

 
6,813

 
451,821

American Girl
212,481

 
606

 
213,087

 
$
1,387,628

 
$
10,014

 
$
1,397,642

Acquisitions of Sproutling, Inc. and Fuhu assets
In January 2016, Mattel completed its acquisition of Sproutling, Inc. (“Sproutling”), a maker of smart technology products for parents and families, for total consideration of $9.9 million and additional contingent consideration that may become payable under the terms of the agreement based on Sproutling's operating results over the subsequent three years following the closing. Also in January 2016, Mattel acquired substantially all of the assets of Fuhu, Inc. (“Fuhu”), a developer of high technology products for children and families and best known for its nabi® brand of products, for total consideration of $23.3 million. These acquisitions are expected to strengthen Mattel's digital and smart technology capabilities and create opportunities to bring new technology-enabled products to market.
Mattel finalized the valuation of the assets acquired and liabilities assumed in the fourth quarter of 2016, which resulted in adjustments to the purchase price allocation during the measurement period. During the three and nine months ended September 30, 2016, Mattel recognized $0.3 million and $1.4 million, respectively, of integration and acquisition costs. Integration and acquisition costs are recorded within other selling and administrative expenses in the consolidated statements of operations. The pro forma and actual results of operations for these acquisitions have not been presented because they are not material, individually or in the aggregate, to Mattel.
6.
Other Noncurrent Assets
Other noncurrent assets include the following: 
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
(In thousands)
Nonamortizable identifiable intangibles
$
462,398

 
$
466,384

 
$
458,589

Identifiable intangibles (net of amortization of $166.7 million, $147.9 million, and $153.7 million, respectively)
189,382

 
206,874

 
201,859

Deferred income taxes
75,660

 
548,437

 
508,363

Other
223,215

 
208,761

 
223,326

 
$
950,655

 
$
1,430,456

 
$
1,392,137

In connection with the acquisitions of Sproutling and substantially all of the assets of Fuhu in the first quarter of 2016, as more fully described in “Note 5 to the Consolidated Financial Statements—Goodwill” of this Quarterly Report on Form 10-Q, Mattel recognized $11.2 million of amortizable identifiable intangible assets, primarily related to patents.

9



Mattel tests nonamortizable intangible assets, including trademarks and trade names, for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying values may exceed the fair values.  During the third quarter of 2017, Mattel discontinued the use of a trademark which resulted in an asset impairment charge of $9.2 million.  The asset impairment charge is recorded within other selling and administrative expenses in the consolidated statements of operations. Mattel performed its annual impairment assessment during the third quarter of 2017 and determined that its remaining nonamortizable intangible asset was not impaired.
Mattel also tests its amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Amortizable intangible assets were determined to not be impaired during the three and nine months ended September 30, 2017.
During the third quarter of 2017, Mattel established a valuation allowance on certain deferred tax assets, the benefits of which Mattel believes will likely not be realized. Refer to “Note 19 to the Consolidated Financial Statements—Income Taxes” of this Quarterly Report on Form 10-Q for additional information.
7.
Accrued Liabilities
Accrued liabilities include the following: 
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
(In thousands)
Royalties
$
90,968

 
$
92,739

 
$
107,077

Advertising and promotion
81,185

 
101,649

 
85,116

Taxes other than income taxes
61,318

 
60,031

 
67,555

Other
335,374

 
374,695

 
369,078

 
$
568,845

 
$
629,114

 
$
628,826

8.
Seasonal Financing
Mattel maintains and periodically amends or replaces its domestic unsecured committed revolving credit facility (“Credit Facility”) with a commercial bank group. The Credit Facility is used as a back-up to Mattel’s commercial paper program, which is used as Mattel's primary short-term borrowing facility. The agreement governing the Credit Facility was amended on June 15, 2017 to, among other things, increase the maximum allowed consolidated debt-to-consolidated earnings before interest, taxes, depreciation, and amortization (“consolidated EBITDA”) ratio that Mattel is required to maintain under the Credit Facility to 3.75 to 1 from 3.50 to 1 for the four consecutive quarters beginning with the second quarter of 2017. Additionally, the Credit Facility was amended on September 20, 2017 to remove the consolidated debt-to-consolidated EBITDA ratio requirement for the third fiscal quarter of 2017 and increase the consolidated debt-to-consolidated EBITDA ratio during a covenant modification period to 4.50 to 1.00 for the fourth fiscal quarter of 2017 and 4.25 to 1.00 for each fiscal quarter thereafter. The covenant modification period commenced on September 20, 2017 and continues, at a minimum, through the fourth fiscal quarter of 2017 and thereafter until such time as Mattel (i) requests the termination of the covenant modification period, and (ii) delivers financial statements and a certificate to the lenders demonstrating a consolidated debt-to-consolidated EBITDA ratio of 3.75 to 1.00 or less for the period consisting of the preceding four consecutive fiscal quarters. The amendment further amends the Credit Facility to, among other items, (i) add certain restrictive covenants during the covenant modification period that include greater restrictions against certain receivable financing facilities, as well as restrictions on certain asset dispositions, burdensome agreements, and specified restricted payments, (ii) add a guarantee and lien trigger event that occurs if Mattel’s debt rating falls below certain thresholds, (iii) add covenants that require all U.S. material subsidiaries under the Credit Facility (other than foreign subsidiary holding companies) to become guarantors upon a guarantee and lien trigger event, and (iv) provide that after a guarantee and lien trigger event and before the termination of the covenant modification period, indebtedness under the Credit Facility in an amount not to exceed 10% of Mattel’s consolidated net tangible assets will be secured by pledges from Mattel and the guarantors of 100% of the equity of all U.S. subsidiaries (other than any foreign subsidiary holding company) and 66% of the equity of all first-tier foreign subsidiaries and foreign subsidiary holdings companies. Such guarantees and pledges, as well as the additional restrictive covenants, will be eliminated upon the termination of the covenant modification period.
Although the consolidated debt-to-consolidated EBITDA ratio was removed for the third quarter, Mattel is required to meet financial ratio covenants at the end of each quarter and fiscal year, using the formulae specified in the Credit Facility to calculate the ratios. Mattel was in compliance with its interest coverage ratio covenant at September 30, 2017.

10



The aggregate commitments under the Credit Facility remain at $1.60 billion, with an “accordion feature,” which allows Mattel to increase the aggregate availability under the Credit Facility to $1.85 billion under certain circumstances. In addition, applicable interest rate margins remain within a range of 0.00% to 0.75% above the applicable base rate for base rate loans and 0.88% to 1.75% above the applicable LIBOR for Eurodollar rate loans, and the commitment fees range from 0.08% to 0.25% of the unused commitments under the Credit Facility, in each case depending on Mattel’s senior unsecured long-term debt rating.
Both the borrowing costs incurred as a result of the amendment and the portion of unamortized debt issuance costs from the prior facility renewal related to creditors involved in both the prior facility and amended facility were deferred, and such costs will be amortized over the term of the amended Credit Facility.
The agreement governing the Credit Facility is a material agreement, and failure to comply with the financial ratio covenants may result in an event of default under the terms of the Credit Facility. If Mattel were to default under the terms of the Credit Facility, its ability to meet its seasonal financing requirements could be adversely affected. Furthermore, Mattel’s long-term debt agreements contain cross-default provisions which would result in an event of default if Mattel, among other items, fails to comply with the financial ratio covenants under the terms of the Credit Facility with outstanding borrowings in excess of $25 million. The Credit Facility is used as a back-up to Mattel’s commercial paper program.
9.
Long-Term Debt
Long-term debt includes the following:
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
(In thousands)
2010 Senior Notes due October 2020 and October 2040
$
500,000

 
$
500,000

 
$
500,000

2011 Senior Notes due November 2016 and November 2041
300,000

 
600,000

 
300,000

2013 Senior Notes due March 2018 and March 2023
500,000

 
500,000

 
500,000

2014 Senior Notes due May 2019
500,000

 
500,000

 
500,000

2016 Senior Notes due August 2021
350,000

 
350,000

 
350,000

Debt issuance costs
(13,596
)
 
(16,511
)
 
(15,729
)
 
2,136,404

 
2,433,489

 
2,134,271

Less: current portion
(250,000
)
 
(300,000
)
 

Total long-term debt
$
1,886,404

 
$
2,133,489

 
$
2,134,271


In August 2016, Mattel issued $350.0 million aggregate principal amount of 2.35% senior unsecured notes due August 15, 2021 (“2016 Senior Notes”). Interest on the 2016 Senior Notes is payable semi-annually in arrears on February 15 and August 15 of each year, beginning February 15, 2017. Mattel may redeem all or part of the 2016 Senior Notes at any time or from time to time prior to July 15, 2021 (one month prior to the maturity date of the 2016 Senior Notes) (the “Par Call Date”), at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2016 Senior Notes being redeemed or (ii) a “make-whole” amount based on the yield of a comparable U.S. Treasury security plus 20 basis points, plus, in each case, accrued and unpaid interest on the 2016 Senior Notes being redeemed to, but excluding, the redemption date. Mattel may redeem all or part of the 2016 Senior Notes at any time or from time to time on or after the Par Call Date, at its option, at a redemption price equal to 100% of the principal amount of the 2016 Senior Notes to be redeemed, plus accrued and unpaid interest on the 2016 Senior Notes being redeemed to, but excluding, the redemption date.
10.
Other Noncurrent Liabilities
Other noncurrent liabilities include the following:
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
(In thousands)
Noncurrent tax liabilities
$
218,308

 
$
96,447

 
$
96,871

Benefit plan liabilities
196,967

 
179,979

 
192,466

Other
161,052

 
178,008

 
156,831

 
$
576,327

 
$
454,434

 
$
446,168


11



11.
Accumulated Other Comprehensive Income (Loss)
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss), including current period other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss):
 
For the Three Months Ended September 30, 2017
 
Derivative
Instruments
 
Available-for-Sale
Security
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of June 30, 2017
$
(25,114
)
 
$
(588
)
 
$
(155,625
)
 
$
(700,607
)
 
$
(881,934
)
Other comprehensive (loss) income before reclassifications
(24,009
)
 
(3,848
)
 
(103
)
 
36,912

 
8,952

Amounts reclassified from accumulated other comprehensive income (loss)
9,241

 

 
1,209

 

 
10,450

Net (decrease) increase in other comprehensive income (loss)
(14,768
)
 
(3,848
)
 
1,106

 
36,912

 
19,402

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2017
$
(39,882
)
 
$
(4,436
)
 
$
(154,519
)
 
$
(663,695
)
 
$
(862,532
)
 
For the Nine Months Ended September 30, 2017
 
Derivative
Instruments
 
Available-for-Sale
Security
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2016
$
17,469

 
$
3,149

 
$
(157,704
)
 
$
(805,943
)
 
$
(943,029
)
Other comprehensive (loss) income before reclassifications
(63,999
)
 
(7,585
)
 
(303
)
 
142,248

 
70,361

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

 

 
3,488

 

 
10,136

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

 
142,248

 
80,497

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2017
$
(39,882
)
 
$
(4,436
)
 
$
(154,519
)
 
$
(663,695
)
 
$
(862,532
)
 
For the Three Months Ended September 30, 2016
 
Derivative
Instruments
 
Available-for-Sale
Security
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of June 30, 2016
$
4,716

 
$

 
$
(157,314
)
 
$
(708,760
)
 
$
(861,358
)
Other comprehensive income (loss) before reclassifications
974

 

 
(74
)
 
(14,570
)
 
(13,670
)
Amounts reclassified from accumulated other comprehensive income (loss)
(2,157
)
 

 
2,098

 

 
(59
)
Net (decrease) increase in other comprehensive income (loss)
(1,183
)
 

 
2,024

 
(14,570
)
 
(13,729
)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2016
$
3,533

 
$

 
$
(155,290
)
 
$
(723,330
)
 
$
(875,087
)

12



 
For the Nine Months Ended September 30, 2016
 
Derivative
Instruments
 
Available-for-Sale
Security
 
Defined Benefit
Pension Plans
 
Currency
Translation
Adjustments
 
Total
 
(In thousands)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2015
$
15,363

 
$

 
$
(159,858
)
 
$
(704,404
)
 
$
(848,899
)
Other comprehensive income (loss) before reclassifications
642

 

 
(208
)
 
(18,926
)
 
(18,492
)
Amounts reclassified from accumulated other comprehensive income (loss)
(12,472
)
 

 
4,776

 

 
(7,696
)
Net (decrease) increase in other comprehensive income (loss)
(11,830
)
 

 
4,568

 
(18,926
)
 
(26,188
)
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2016
$
3,533

 
$

 
$
(155,290
)
 
$
(723,330
)
 
$
(875,087
)
The following tables present the classification and amount of the reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of operations:
 
For the Three Months Ended
 
 
 
September 30,
2017
 
September 30,
2016
 
Statements of Operations
Classification
 
(In thousands)
 
 
Derivative Instruments
 
(Loss) gain on foreign currency forward exchange contracts
$
(9,124
)
 
$
2,383

 
Cost of sales
 
(117
)
 
(226
)
 
Provision for income taxes
 
$
(9,241
)
 
$
2,157

 
Net (loss) income
Defined Benefit Pension Plans

 

 
 
Amortization of prior service cost
$
(8
)
 
$
(8
)
 
(a)
Recognized actuarial loss
(1,860
)
 
(1,769
)
 
(a)
Settlement loss

 
(1,495
)
 
Other selling and administrative expenses
 
(1,868
)
 
(3,272
)
 
 
 
659

 
1,174

 
Provision for income taxes
 
$
(1,209
)
 
$
(2,098
)
 
Net (loss) income

13



 
For the Nine Months Ended
 
 
 
September 30,
2017
 
September 30,
2016
 
Statements of Operations
Classification
 
(In thousands)
 
 
Derivative Instruments
 
(Loss) gain on foreign currency forward exchange contracts
$
(6,658
)
 
$
13,260

 
Cost of sales
 
10

 
(788
)
 
Provision for income taxes
 
$
(6,648
)
 
$
12,472

 
Net (loss) income
Defined Benefit Pension Plans
 
 
 
 
 
Amortization of prior service cost
$
(23
)
 
$
(23
)
 
(a)
Recognized actuarial loss
(5,576
)
 
(5,305
)
 
(a)
Settlement loss

 
(1,495
)
 
Other selling and
administrative expenses
 
(5,599
)
 
(6,823
)
 
 
 
2,111

 
2,047

 
Provision for income taxes
 
$
(3,488
)
 
$
(4,776
)
 
Net (loss) income
 ____________________________________________
(a)
The amortization of prior service cost and recognized actuarial loss are included in the computation of net periodic benefit cost. Refer to “Note 15 to the Consolidated Financial Statements—Employee Benefit Plans” of this Quarterly Report on Form 10-Q for additional information regarding Mattel’s net periodic benefit cost.
Currency Translation Adjustments
Mattel’s reporting currency is the US dollar. The translation of its net investments in subsidiaries with non-US dollar functional currencies subjects Mattel to the impact of currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at fiscal period-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Currency translation adjustments resulted in a net gain of $142.2 million for the nine months ended September 30, 2017, primarily due to the strengthening of the Euro, British pound sterling, and Mexican peso against the US dollar. Currency translation adjustments resulted in a net loss of $18.9 million for the nine months ended September 30, 2016, primarily due to the weakening of the British pound sterling and the Mexican peso against the US dollar, partially offset by the strengthening of the Euro and the Brazilian real.
12.
Derivative Instruments
Mattel seeks to mitigate its exposure to foreign currency transaction risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts. Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its purchases and sales of inventory denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. These derivative instruments have been designated as effective cash flow hedges, whereby the unsettled hedges are reported in Mattel’s consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in other comprehensive (loss) income (“OCI”). Realized gains and losses for these contracts are recorded in the consolidated statements of operations in the period in which the inventory is sold to customers. Additionally, Mattel uses foreign currency forward exchange contracts to hedge intercompany loans and advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel has not designated these contracts as hedging instruments, and as such, changes in fair value are recorded in the period of change in the consolidated statements of operations.

14



As of September 30, 2017September 30, 2016, and December 31, 2016, Mattel held foreign currency forward exchange contracts with notional amounts of $2.46 billion, $1.15 billion, and $1.20 billion, respectively. The notional amounts of the foreign currency forward exchange contracts outstanding as of September 30, 2017 include foreign currency forward contracts executed on September 29, 2017 to settle contracts used to hedge intercompany loans and advances that matured on October 2, 2017.  The notional amounts also include additional foreign currency forward contracts executed on September 29, 2017 to replace the contracts used to hedge the intercompany loans and advances that matured and settled on October 2, 2017.  The increase to the notional amounts outstanding as of September 30, 2017 was primarily due to the timing of the scheduled settlements of Mattel’s intercompany loans and advances denominated in foreign currencies. As of September 30, 2016, Mattel also held cross currency swap contracts with notional amounts of $16.9 million.
The following tables present Mattel’s derivative assets and liabilities:
 
Derivative Assets
 
Balance Sheet Classification
 
Fair Value
 
 
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
 
 
(In thousands) 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Prepaid expenses and other
current assets
 
$
1,951

 
$
7,127

 
$
18,747

Foreign currency forward exchange contracts
Other noncurrent assets
 
764

 
1,122

 
5,782

Total derivatives designated as hedging instruments
 
 
$
2,715

 
$
8,249

 
$
24,529

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Prepaid expenses and other
current assets
 
$
1,369

 
$
826

 
$
2,678

Total
 
 
$
4,084

 
$
9,075

 
$
27,207

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
Balance Sheet Classification
 
Fair Value
 
 
 
September 30,
2017
 
September 30,
2016
 
December 31,
2016
 
 
 
(In thousands) 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Accrued liabilities
 
$
21,624

 
$
5,131

 
$
1,917

Foreign currency forward exchange contracts
Other noncurrent liabilities
 
7,206

 
1,382

 
223

Total derivatives designated as hedging instruments
 
 
$
28,830

 
$
6,513

 
$
2,140

Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
Accrued liabilities
 
$
1,047

 
$

 
$
7,072

Cross currency swap contract
Accrued liabilities
 

 
1,532

 

Total derivatives not designated as hedging instruments
 
 
$
1,047

 
$
1,532

 
$
7,072

Total
 
 
$
29,877

 
$
8,045

 
$
9,212


15



The following tables present the classification and amount of gains and losses, net of tax, from derivatives reported in the consolidated statements of operations:
 
For the Three Months Ended
 
 
 
September 30, 2017
 
September 30, 2016
 
Statements of
Operations
Classification
 
Amount of Gain
(Loss) Recognized
in OCI
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
to Statements of
Operations
 
Amount of Gain
(Loss) Recognized
in OCI
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
to Statements of
Operations
 
 
(In thousands)
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
(24,009
)
 
$
(9,241
)
 
$
974

 
$
2,157

 
Cost of sales
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended
 
 
 
September 30, 2017
 
September 30, 2016
 
Statements of
Operations
Classification
 
Amount of Gain
(Loss) Recognized
in OCI
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
to Statements of
Operations
 
Amount of Gain
(Loss) Recognized
in OCI
 
Amount of
Gain (Loss)
Reclassified from
Accumulated OCI
to Statements  of
Operations
 
 
(In thousands)
 
 
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
 
Foreign currency forward exchange contracts
$
(63,999
)
 
$
(6,648
)
 
$
642

 
$
12,472

 
Cost of sales
The net losses of $9.2 million and $6.6 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three and nine months ended September 30, 2017, respectively, and the net gains of $2.2 million and $12.5 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three and nine months ended September 30, 2016, respectively, are offset by the changes in cash flows associated with the underlying hedged transactions.
 
 
Amount of Gain
(Loss) Recognized in the
Statements of Operations
 
Statements of Operations
Classification
 
For the Three Months Ended
 
 
September 30,
2017
 
September 30,
2016
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments
 
Foreign currency forward exchange contracts
$
13,624

 
$
306

 
Other non-operating income/expense
Cross currency swap contract

 
(274
)
 
Other non-operating income/expense
Foreign currency forward exchange contracts
9

 
619

 
Cost of sales
Total
$
13,633

 
$
651

 
 
 
 
 
 
 
 

16



 
Amount of Gain
(Loss) Recognized in the
Statements of Operations
 
Statements of Operations
Classification
 
For the Nine Months Ended
 
 
September 30,
2017
 
September 30,
2016
 
 
(In thousands)
 
 
Derivatives not designated as hedging instruments
 
Foreign currency forward exchange contracts
$
64,582

 
$
5,909

 
Other non-operating income/expense
Cross currency swap contract

 
(1,532
)
 
Other non-operating income/expense
Foreign currency forward exchange contracts
511

 
2,217

 
Cost of sales
Total
$
65,093

 
$
6,594

 
 
The net gains of $13.6 million and $65.1 million recognized in the consolidated statements of operations for the three and nine months ended September 30, 2017, respectively, and the net gains of $0.7 million and $6.6 million recognized in the consolidated statements of operations for the three and nine months ended September 30, 2016, respectively, are offset by foreign currency transaction gains and losses on the related hedged balances.
13.
Fair Value Measurements
The following tables present information about Mattel’s assets and liabilities measured and reported in the financial statements at fair value and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:
Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, and that are significant to the fair value of the assets or liabilities.
Mattel’s financial assets and liabilities measured and reported at fair value on a recurring basis include the following:
 
September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
4,084

 
$

 
$
4,084

Available-for-sale security (b)
7,354

 

 

 
7,354

Total assets
$
7,354

 
$
4,084

 
$

 
$
11,438

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
29,877

 
$

 
$
29,877

 
 
 
 
 
 
 
 

17



 
September 30, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
9,075

 
$

 
$
9,075

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
6,513

 
$

 
$
6,513

Cross currency swap contract (a)

 
1,532

 

 
1,532

Total liabilities
$

 
$
8,045

 
$

 
$
8,045

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
27,207

 
$

 
$
27,207

Available-for-sale security (b)
14,939

 

 

 
14,939

Total assets
$
14,939

 
$
27,207

 
$

 
$
42,146

Liabilities:
 
 
 
 
 
 
 
Foreign currency forward exchange contracts (a)
$

 
$
9,212

 
$

 
$
9,212

 ____________________________________________
(a)
The fair value of the foreign currency forward exchange contracts and cross currency swap contracts are based on dealer quotes of market forward rates and reflect the amount that Mattel would receive or pay at their maturity dates for contracts involving the same notional amounts, currencies, and maturity dates.
(b)
The fair value of the available-for-sale security is based on the quoted price on an active public exchange.
Other Financial Instruments
Mattel’s financial instruments include cash and equivalents, accounts receivable and payable, short-term borrowings, and accrued liabilities. The fair values of these instruments approximate their carrying values because of their short-term nature. Cash is classified as Level 1 and all other financial instruments are classified as Level 2 within the fair value hierarchy.
The estimated fair value of Mattel’s long-term debt, including the current portion, was $2.17 billion (compared to a carrying value of $2.15 billion) as of September 30, 2017, $2.57 billion (compared to a carrying value of $2.45 billion) as of September 30, 2016, and $2.18 billion (compared to a carrying value of $2.15 billion) as of December 31, 2016. The estimated fair values have been calculated based on broker quotes or rates for the same or similar instruments and are classified as Level 2 within the fair value hierarchy.
14.
Earnings Per Share
Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Certain of Mattel’s restricted stock units (“RSUs”) are considered participating securities because they contain nonforfeitable rights to dividend equivalents.
Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic earnings per common share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net income allocable to common shares by the weighted average number of common shares for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.

18



The following table reconciles earnings per common share for the three and nine months ended September 30, 2017 and 2016: 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(In thousands, except per share amounts)
Basic:
 
 
 
 
 
 
 
Net (loss) income
$
(603,247
)
 
$
236,250

 
$
(772,553
)
 
$
144,177

Less: net income allocable to participating RSUs (a)

 
(610
)
 

 
(1,628
)
Net (loss) income available for basic common shares
$
(603,247
)
 
$
235,640

 
$
(772,553
)
 
$
142,549

Weighted average common shares outstanding
343,870

 
341,961

 
343,304

 
341,089

Basic net (loss) income per common share
$
(1.75
)
 
$
0.69

 
$
(2.25
)
 
$
0.42

Diluted:
 
 
 
 
 
 
 
Net (loss) income
$
(603,247
)
 
$
236,250

 
$
(772,553
)
 
$
144,177

Less: net income allocable to participating RSUs (a)

 
(609
)
 

 
(1,628
)
Net (loss) income available for diluted common shares
$
(603,247
)
 
$
235,641

 
$
(772,553
)
 
$
142,549

Weighted average common shares outstanding
343,870

 
341,961

 
343,304

 
341,089

Weighted average common equivalent shares arising from:
 
 
 
 
 
 
 
Dilutive stock options and non-participating RSUs

 
2,265

 

 
2,209

Weighted average number of common and potential common shares
343,870

 
344,226

 
343,304

 
343,298

Diluted net (loss) income per common share
$
(1.75
)
 
$
0.68

 
$
(2.25
)
 
$
0.42

 _______________________________________
(a)
During the three and nine months ended September 30, 2017, Mattel did not allocate its net loss to its participating RSUs as its participating RSUs are not obligated to share in Mattel's losses. During the three and nine months ended September 30, 2016, Mattel allocated a proportionate share of both dividends and undistributed earnings to participating RSUs.
The calculation of potential common shares assumes the exercise of dilutive stock options and vesting of non-participating RSUs, net of assumed treasury share repurchases at average market prices. Mattel was in a net loss position during the three and nine months ended September 30, 2017 and, accordingly, all outstanding nonqualified stock options and non-participating RSUs were excluded from the calculation of diluted earnings per common share because their effect would be antidilutive. Nonqualified stock options and non-participating RSUs totaling 9.8 million and 7.7 million shares were excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2016, respectively, because they were antidilutive.
15.
Employee Benefit Plans
Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies, which are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements–Employee Benefit Plans” in its 2016 Annual Report on Form 10-K.

19



A summary of the components of net periodic benefit cost for Mattel’s defined benefit pension plans is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(In thousands)
Service cost
$
1,198

 
$
1,609

 
$
3,441

 
$
4,293

Interest cost
4,479

 
6,107

 
13,370

 
18,407

Expected return on plan assets
(5,768
)
 
(6,393
)
 
(17,253
)
 
(19,309
)
Amortization of prior service cost
8

 
8

 
23

 
23

Recognized actuarial loss
1,823

 
1,732

 
5,464

 
5,194

Settlement loss

 
1,495

 

 
1,495

 
$
1,740

 
$
4,558

 
$
5,045

 
$
10,103


A summary of the components of net periodic benefit cost for Mattel’s postretirement benefit plans is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(In thousands)
Service cost
$

 
$
13

 
$
1

 
$
39

Interest cost
203

 
286

 
609

 
857

Recognized actuarial loss
37

 
37

 
112

 
111

 
$
240

 
$
336

 
$
722

 
$
1,007

During the nine months ended September 30, 2017, Mattel made cash contributions totaling approximately $3 million and $1 million related to its defined benefit pension and postretirement benefit plans, respectively. During the remainder of 2017, Mattel expects to make additional cash contributions of approximately $6 million.
16.
Share-Based Payments
Mattel has various stock compensation plans, which are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements–Share-Based Payments” in its 2016 Annual Report on Form 10-K. Under the Mattel, Inc. Amended and Restated 2010 Equity and Long-Term Compensation Plan, Mattel has the ability to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent rights, and shares of common stock to officers, employees, and other persons providing services to Mattel. Stock options are granted with exercise prices at the fair market value of Mattel’s common stock on the applicable grant date and expire no later than ten years from the date of grant. Both stock options and time-vesting RSUs generally provide for vesting over a period of three years from the date of grant.
In March 2017, the Compensation Committee approved a new long-term incentive program (“LTIP”) for the performance cycle of January 1, 2017–December 31, 2019. As of September 30, 2017, Mattel has two long-term incentive programs in place: (i) a January 1, 2016–December 31, 2018 performance cycle, and (ii) a January 1, 2017–December 31, 2019 performance cycle.
For the January 1, 2017–December 31, 2019 LTIP performance cycle, Mattel granted performance-based restricted stock units (“Performance RSUs”) under the Mattel, Inc. Amended and Restated 2010 Equity and Long-Term Compensation Plan to senior executives. Performance RSUs granted under this program will be earned based on the product of the initial target number of Performance RSUs multiplied by a performance factor based on a three-year average of annual achievements of Mattel's performance with respect to annual EPS targets for the performance cycle (the “2017–2019 performance-related component”) and then adjusted upward or downward based on Mattel's total shareholder return (“TSR”) for the three-year performance cycle relative to the TSR realized by companies comprising the S&P 500 (the “2017–2019 market-related component”). The Performance RSUs under the 2017–2019 LTIP performance cycle have dividend equivalent rights that are converted to shares of Mattel common stock only when and to the extent the underlying Performance RSUs are earned and paid.

20



During the three and nine months ended September 30, 2017, Mattel recognized no expense related to the 2017–2019 performance-related component, and recognized $0.1 million of expense related to the 2017–2019 market-related component. During the three and nine months ended September 30, 2017, Mattel recognized no expense related to the 2016–2018 performance-related component, and recognized $0.1 million and $0.3 million of expense, respectively, related to the 2016–2018 market-related component. These amounts are included within RSU compensation expense in the table below.
Compensation expense, included within other selling and administrative expenses in the consolidated statements of operations, related to stock options and RSUs is as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(In thousands)
Stock option compensation expense
$
3,446

 
$
2,528

 
$
9,262

 
$
6,826

RSU compensation expense
13,583

 
9,840

 
38,320

 
31,918

 
$
17,029

 
$
12,368

 
$
47,582

 
$
38,744

As of September 30, 2017, total unrecognized compensation cost related to unvested share-based payments totaled $127.9 million and is expected to be recognized over a weighted-average period of 2.2 years.
Mattel uses treasury shares purchased under its share repurchase program to satisfy stock option exercises and the vesting of RSUs. Cash received for stock option exercises for the nine months ended September 30, 2017 and 2016 was $1.8 million and $28.5 million, respectively.
17.
Other Selling and Administrative Expenses
Other selling and administrative expenses include the following:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(In thousands)
Design and development
$
58,288

 
$
54,680

 
$
166,784

 
$
160,264

Identifiable intangible asset amortization
4,444

 
5,524

 
13,045

 
16,354

18.
Foreign Currency Transaction Gains and Losses
Currency exchange rate fluctuations impact Mattel’s results of operations and cash flows. Mattel’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income to which they relate in the consolidated statements of operations. For hedges of intercompany loans and advances, which do not qualify for hedge accounting treatment, the gains or losses on the hedges resulting from changes in fair value as well as the offsetting transaction gains or losses on the related hedged items, along with unhedged items, are recognized in other non-operating expense/income, net in the consolidated statements of operations.  Inventory purchase and sale transactions denominated in the Euro, Mexican peso, British pound sterling, Canadian dollar, Australian dollar, Brazilian real, and Russian ruble are the primary transactions that cause foreign currency transaction exposure for Mattel.
Currency transaction gains (losses) included in the consolidated statements of operations are as follows:
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(In thousands)
Operating income (loss)
$
2,857

 
$
(48,076
)
 
$
(32,137
)
 
$
(85,081
)
Other non-operating expense, net
(1,244
)
 
(1,269
)
 
(7,368
)
 
(29,388
)
Net transaction gains (losses)
$
1,613

 
$
(49,345
)
 
$
(39,505
)
 
$
(114,469
)

21



In March 2016, the Venezuelan government revised its currency exchange platform to a dual system. The Sistema Complementario de Administración de Divisas (“SICAD”) rate merged with the official exchange rate, becoming the new Tipo de Cambio Protegido (“DIPRO”) exchange rate. The existing Marginal Currency System (“SIMADI”) rate was renamed the Tipo de Cambio Complementario (“DICOM”) exchange rate. During the three months ended March 31, 2016, Mattel changed its remeasurement rate from the official exchange rate to the new DICOM exchange rate and recognized an unrealized foreign currency exchange loss of approximately $26 million in other non-operating expense/income, net as a result of the change in the remeasurement rate.
19.
Income Taxes
Mattel’s provision for income taxes was $614.4 million and $26.6 million for the nine months ended September 30, 2017 and 2016, respectively. Mattel recognized net discrete tax expense of $561.5 million and $558.8 million during the three and nine months ended September 30, 2017, respectively, and net discrete tax benefits of $9.0 million and $12.8 million during the three and nine months ended September 30, 2016, respectively, primarily related to the establishment of a valuation allowance and reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world.
Mattel regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, Mattel considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more-likely-than-not that some or all of the deferred tax assets will not be realized. In evaluating the need for a valuation allowance, Mattel considered its recent operating results which resulted in a cumulative net operating loss in the U.S. for the 36-month period ending September 30, 2017. The 36-month cumulative U.S. loss from operations is considered strong negative evidence and outweighs other positive subjective evidence, such as projections of future income. As a result, in the third quarter Mattel established a valuation allowance on its U.S. federal and state deferred tax assets. This results in a discrete charge to the quarter of $561.9 million for the balance of these net deferred tax assets as of December 31, 2016. Further, Mattel has provided zero tax benefit in the year-to-date tax expense for items such as the year-to-date U.S. operating loss and other effects occurring in the current year. The valuation allowance does not impact Mattel's actual ability under applicable tax laws to utilize deferred tax assets such as loss carryforwards and tax credits to reduce future cash tax payments if and when sufficient income is earned prior to the expiration of the deferred tax assets. Mattel will continue to assess the likelihood that the deferred tax assets will be realizable at each period end.
In the normal course of business, Mattel is regularly audited by federal, state, and foreign tax authorities. Based on the current status of federal, state, and foreign audits, Mattel believes it is reasonably possible that in the next twelve months, the total unrecognized tax benefits could decrease by approximately $27 million related to the settlement of tax audits and/or the expiration of statutes of limitations. The ultimate settlement of any issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.
20.
Contingencies
Litigation Related to Carter Bryant and MGA Entertainment, Inc.
In April 2004, Mattel filed a lawsuit in Los Angeles County Superior Court against Carter Bryant (“Bryant”), a former Mattel design employee. The suit alleges that Bryant aided and assisted a Mattel competitor, MGA Entertainment, Inc. (“MGA”), during the time he was employed by Mattel, in violation of his contractual and other duties to Mattel. In September 2004, Bryant asserted counterclaims against Mattel, including counterclaims in which Bryant sought, as a putative class action representative, to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees. Bryant also removed Mattel’s suit to the United States District Court for the Central District of California. In December 2004, MGA intervened as a party-defendant in Mattel’s action against Bryant, asserting that its rights to Bratz properties are at stake in the litigation.
Separately, in November 2004, Bryant filed an action against Mattel in the United States District Court for the Central District of California. The action sought a judicial declaration that Bryant’s purported conveyance of rights in Bratz was proper and that he did not misappropriate Mattel property in creating Bratz.

22



In April 2005, MGA filed suit against Mattel in the United States District Court for the Central District of California. MGA’s action alleges claims of trade dress infringement, trade dress dilution, false designation of origin, unfair competition, and unjust enrichment. The suit alleges, among other things, that certain products, themes, packaging, and/or television commercials in various Mattel product lines have infringed upon products, themes, packaging, and/or television commercials for various MGA product lines, including Bratz. The complaint also asserts that various alleged Mattel acts with respect to unidentified retailers, distributors, and licensees have damaged MGA and that various alleged acts by industry organizations, purportedly induced by Mattel, have damaged MGA. MGA’s suit alleges that MGA has been damaged in an amount “believed to reach or exceed tens of millions of dollars” and further seeks punitive damages, disgorgement of Mattel’s profits and injunctive relief.
In June 2006, the three cases were consolidated in the United States District Court for the Central District of California. On July 17, 2006, the Court issued an order dismissing all claims that Bryant had asserted against Mattel, including Bryant’s purported counterclaims to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees, and Bryant’s claims for declaratory relief.
On January 12, 2007, Mattel filed an Amended Complaint setting forth counterclaims that included additional claims against Bryant as well as claims for copyright infringement, Racketeer Influenced and Corrupt Organizations (“RICO”) violations, misappropriation of trade secrets, intentional interference with contract, aiding and abetting breach of fiduciary duty and breach of duty of loyalty, and unfair competition, among others, against MGA, its Chief Executive Officer Isaac Larian, certain MGA affiliates and an MGA employee. The RICO claim alleged that MGA stole Bratz and then, by recruiting and hiring key Mattel employees and directing them to bring with them Mattel confidential and proprietary information, unfairly competed against Mattel using Mattel’s trade secrets, confidential information, and key employees to build their business.
Mattel sought to try all of its claims in a single trial, but in February 2007, the Court decided that the consolidated cases would be tried in two phases, with the first trial to determine claims and defenses related to Mattel’s ownership of Bratz works and whether MGA infringed those works. On May 19, 2008, Bryant reached a settlement agreement with Mattel and is no longer a defendant in the litigation. In the public stipulation entered by Mattel and Bryant in connection with the resolution, Bryant agreed that he was and would continue to be bound by all prior and future Court Orders relating to Bratz ownership and infringement, including the Court’s summary judgment rulings.
The first phase of the first trial resulted in a unanimous jury verdict on July 17, 2008 in favor of Mattel. The jury found that almost all of the Bratz design drawings and other works in question were created by Bryant while he was employed at Mattel; that MGA and Isaac Larian intentionally interfered with the contractual duties owed by Bryant to Mattel, aided and abetted Bryant’s breaches of his duty of loyalty to Mattel, aided and abetted Bryant’s breaches of the fiduciary duties he owed to Mattel, and converted Mattel property for their own use. The same jury determined that defendants MGA, Larian, and MGA Entertainment (HK) Limited infringed Mattel’s copyrights in the Bratz design drawings and other Bratz works, and awarded Mattel total damages of approximately $100 million against the defendants. On December 3, 2008, the Court issued a series of orders rejecting MGA’s equitable defenses and granting Mattel’s motions for equitable relief, including an order enjoining the MGA party defendants from manufacturing, marketing, or selling certain Bratz fashion dolls or from using the “Bratz” name. The Court stayed its December 3, 2008 injunctive orders until further order of the Court.
The parties filed and argued additional motions for post-trial relief, including a request by MGA to enter judgment as a matter of law on Mattel’s claims in MGA’s favor and to reduce the jury’s damages award to Mattel. Mattel additionally moved for the appointment of a receiver. On April 27, 2009, the Court entered an order confirming that Bratz works found by the jury to have been created by Bryant during his Mattel employment were Mattel’s property and that hundreds of Bratz female fashion dolls infringe Mattel’s copyrights. The Court also upheld the jury’s award of damages in the amount of $100 million and ordered an accounting of post-trial Bratz sales. The Court further vacated the stay of the December 3, 2008 orders.
MGA appealed the Court’s equitable orders to the Court of Appeals for the Ninth Circuit. On December 9, 2009, the Ninth Circuit heard oral argument on MGA’s appeal and issued an order staying the District Court’s equitable orders pending a further order to be issued by the Ninth Circuit. On July 22, 2010, the Ninth Circuit vacated the District Court’s equitable orders. The Ninth Circuit stated that, because of several jury instruction errors it identified, a significant portion-if not all-of the jury verdict and damage award should be vacated.

23



In its opinion, the Ninth Circuit found that the District Court erred in concluding that Mattel’s Invention Agreement unambiguously applied to “ideas;” that it should have considered extrinsic evidence in determining the application of the agreement; and if the conclusion turns on conflicting evidence, it should have been up to the jury to decide. The Ninth Circuit also concluded that the District Judge erred in transferring the entire brand to Mattel based on misappropriated names and that the Court should have submitted to the jury, rather than deciding itself, whether Bryant’s agreement assigned works created outside the scope of his employment and whether Bryant’s creation of the Bratz designs and sculpt was outside of his employment. The Court then went on to address copyright issues which would be raised after a retrial, since Mattel “might well convince a properly instructed jury” that it owns Bryant’s designs and sculpt. The Ninth Circuit stated that the sculpt itself was entitled only to “thin” copyright protection against virtually identical works, while the Bratz sketches were entitled to “broad” protection against substantially similar works; in applying the broad protection, however, the Ninth Circuit found that the lower court had erred in failing to filter out all of the unprotectable elements of Bryant’s sketches. This mistake, the Court said, caused the lower court to conclude that all Bratz dolls were substantially similar to Bryant’s original sketches.
Judge Stephen Larson, who presided over the first trial, retired from the bench during the course of the appeal, and the case was transferred to Judge David O. Carter. After the transfer, Judge Carter granted Mattel leave to file a Fourth Amended Answer and Counterclaims which focused on RICO, trade secret and other claims, and added additional parties, and subsequently granted in part and denied in part a defense motion to dismiss those counterclaims.
Later, on August 16, 2010, MGA asserted several new claims against Mattel in response to Mattel’s Fourth Amended Answer and Counterclaims, including claims for alleged trade secret misappropriation, an alleged violation of RICO, and wrongful injunction. MGA alleged, in summary, that, for more than a decade dating back to 1992, Mattel employees engaged in a pattern of stealing alleged trade secret information from competitors “toy fair” showrooms, and then sought to conceal that alleged misconduct. Mattel moved to strike and/or dismiss these claims, as well as certain MGA allegations regarding Mattel’s motives for filing suit. The Court granted that motion as to the wrongful injunction claim, which it dismissed with prejudice, and as to the allegations about Mattel’s motives, which it struck. The Court denied the motion as to MGA’s trade secret misappropriation claim and its claim for violations of RICO.
The Court resolved summary judgment motions in late 2010. Among other rulings, the Court dismissed both parties’ RICO claims; dismissed Mattel’s claim for breach of fiduciary duty and portions of other claims as “preempted” by the trade secrets act; dismissed MGA’s trade dress infringement claims; dismissed MGA’s unjust enrichment claim; dismissed MGA’s common law unfair competition claim; and dismissed portions of Mattel’s copyright infringement claim as to “later generation” Bratz dolls.
Trial of all remaining claims began in early January 2011. During the trial, and before the case was submitted to the jury, the Court granted MGA’s motions for judgment as to Mattel’s claims for aiding and abetting breach of duty of loyalty and conversion. The Court also granted a defense motion for judgment on portions of Mattel’s claim for misappropriation of trade secrets relating to thefts by former Mattel employees located in Mexico.
The jury reached verdicts on the remaining claims in April 2011. In those verdicts, the jury ruled against Mattel on its claims for ownership of Bratz-related works, for copyright infringement, and for misappropriation of trade secrets. The jury ruled for MGA on its claim of trade secret misappropriation as to 26 of its claimed trade secrets and awarded $88.5 million in damages. The jury ruled against MGA as to 88 of its claimed trade secrets. The jury found that Mattel’s misappropriation was willful and malicious.
In early August 2011, the Court ruled on post-trial motions. The Court rejected MGA’s unfair competition claims and also rejected Mattel’s equitable defenses to MGA’s misappropriation of trade secrets claim. The Court reduced the jury’s damages award of $88.5 million to $85.0 million. The Court awarded MGA an additional $85.0 million in punitive damages and approximately $140 million in attorney’s fees and costs. The Court entered a judgment which totaled approximately $310 million in favor of MGA.
On August 11, 2011, Mattel appealed the judgment, challenging on appeal the entirety of the District Court’s monetary award in favor of MGA, including both the award of $170 million in damages for alleged trade secret misappropriation and approximately $140 million in attorney’s fees and costs. On January 24, 2013, the Ninth Circuit Court of Appeals issued a ruling on Mattel’s appeal. In that ruling, the Court found that MGA’s claim for trade secrets misappropriation was not compulsory to any Mattel claim and could not be filed as a counterclaim-in-reply. Accordingly, the Court of Appeals vacated the portion of the judgment awarding damages and attorney’s fees and costs to MGA for prevailing on its trade secrets misappropriation claim, totaling approximately $172.5 million. It ruled that, on remand, the District Court must dismiss MGA’s trade secret claim without prejudice. In its ruling, the Court of Appeals also affirmed the District Court’s award of attorney’s fees and costs under the Copyright Act. Accordingly, Mattel recorded a litigation accrual of approximately $138 million during the fourth quarter of 2012 to cover these fees and costs.

24



Because multiple claimants asserted rights to the attorney’s fees portion of the judgment, on February 13, 2013, Mattel filed a motion in the District Court for orders permitting Mattel to interplead the proceeds of the judgment and releasing Mattel from liability to any claimant based on Mattel’s payment of the judgment.
On February 27, 2013, MGA filed a motion for leave to amend its prior complaint in the existing federal court lawsuit so that it could reassert its trade secrets claim. Mattel opposed that motion. On December 17, 2013, the District Court denied MGA’s motion for leave to amend and entered an order dismissing MGA’s trade secrets claim without prejudice. Also on December 17, 2013, following a settlement between MGA and certain insurance carriers, the District Court denied Mattel’s motion for leave to interplead the proceeds of the judgment.
On December 21, 2013, a stipulation regarding settlement with insurers and payment of judgment was filed in the District Court, which provided that (i) Mattel would pay approximately $138 million, including accrued interest, in full satisfaction of the copyright fees judgment, (ii) all parties would consent to entry of an order exonerating and discharging the appeal bond posted by Mattel, and (iii) MGA’s insurers would dismiss all pending actions related to the proceeds of the copyright fees judgment, including an appeal by Evanston Insurance Company in an action against Mattel that was pending in the Ninth Circuit. On December 23, 2013, Mattel paid the copyright fees judgment in the total sum, including interest, of approximately $138 million. On December 26, 2013, the District Court entered an order exonerating and discharging the appeal bond posted by Mattel, and on December 27, 2013, MGA filed an acknowledgment of satisfaction of judgment. On December 30, 2013, Evanston Insurance Company’s appeal in its action against Mattel was dismissed.
On January 13, 2014, MGA filed a new, but virtually identical, trade secrets claim against Mattel in Los Angeles County Superior Court. In its complaint, MGA purports to seek damages in excess of $1 billion. Mattel believes that MGA’s claim should be barred as a matter of law, and intends to vigorously defend against it. On December 3, 2014, the Court overruled Mattel’s request to dismiss MGA’s case as barred as a result of prior litigation between the parties. In light of that ruling, Mattel believes that it is reasonably possible that damages in this matter could range from $0 to approximately $12.5 million. In addition, Mattel believes that if such damages are awarded, it is reasonably possible that pre-judgment interest, ranging from $0 to approximately $12.0 million, could be awarded. Mattel may be entitled to an offset against any damages awarded to MGA. Mattel has not quantified the amount of any such offset as it is not currently estimable. As Mattel believes a loss in this matter is reasonably possible but not probable, no liability has been accrued to date.
Litigation Related to Yellowstone do Brasil Ltda.
Yellowstone do Brasil Ltda. (formerly known as Trebbor Informática Ltda.) was a customer of Mattel’s subsidiary Mattel do Brasil Ltda. when a commercial dispute arose between Yellowstone and Mattel do Brasil regarding the supply of product and related payment terms. As a consequence of the dispute, in April 1999, Yellowstone filed a declarative action against Mattel do Brasil before the 15th Civil Court of Curitiba - State of Parana (the “Trial Court”), requesting the annulment of its security bonds and promissory notes given to Mattel do Brasil as well as requesting the Trial Court to find Mattel do Brasil liable for damages incurred as a result of Mattel do Brasil’s alleged abrupt and unreasonable breach of an oral exclusive distribution agreement between the parties relating to the supply and sale of toys in Brazil. Yellowstone’s complaint sought alleged loss of profits of approximately $1 million, plus an unspecified amount of damages consisting of: (i) compensation for all investments made by Yellowstone to develop Mattel do Brasil’s business; (ii) reimbursement of the amounts paid by Yellowstone to terminate labor and civil contracts in connection with the business; (iii) compensation for alleged unfair competition and for the goodwill of trade; and (iv) compensation for non-pecuniary damages.
Mattel do Brasil filed its defenses to these claims and simultaneously presented a counterclaim for unpaid accounts receivable for goods supplied to Yellowstone in the approximate amount of $4 million.
During the evidentiary phase a first accounting report was submitted by a court-appointed expert. Such report stated that Yellowstone had invested approximately $3 million in its business. Additionally, the court-appointed expert calculated a loss of profits compensation of approximately $1 million. Mattel do Brasil challenged the report since it was not made based on the official accounting documents of Yellowstone and since the report calculated damages based only on documents unilaterally submitted by Yellowstone.
The Trial Court accepted the challenge and ruled that a second accounting examination should take place in the lawsuit. Yellowstone appealed the decision to the Court of Appeals of the State of Parana (the “Appeals Court”), but it was upheld by the Appeals Court.
The second court-appointed expert’s report submitted at trial did not assign a value to any of Yellowstone’s claims and found no evidence of causation between Mattel do Brasil’s actions and such claims.

25



In January 2010, the Trial Court ruled in favor of Mattel do Brasil and denied all of Yellowstone’s claims based primarily on the lack of any causal connection between the acts of Mattel do Brasil and Yellowstone’s alleged damages. Additionally, the Trial Court upheld Mattel do Brasil’s counterclaim and ordered Yellowstone to pay Mattel do Brasil approximately $4 million. The likelihood of Mattel do Brasil recovering this amount was uncertain due to the fact that Yellowstone was declared insolvent and filed for bankruptcy protection. In February 2010, Yellowstone filed a motion seeking clarification of the decision which was denied.
In September 2010, Yellowstone filed a further appeal with the Appeals Court. Under Brazilian law, the appeal was de novo and Yellowstone restated all of the arguments it made at the Trial Court level. Yellowstone did not provide any additional information supporting its unspecified alleged damages. The Appeals Court held hearings on the appeal in March and April 2013. On July 26, 2013, the Appeals Court awarded Yellowstone approximately $17 million in damages, plus attorney's fees, as adjusted for inflation and interest. The Appeals Court also awarded Mattel do Brasil approximately $7.5 million on its counterclaim, as adjusted for inflation. On August 2, 2013, Mattel do Brasil filed a motion with the Appeals Court for clarification since the written decision contained clear errors in terms of amounts awarded and interest and inflation adjustments. Mattel do Brasil’s motion also asked the Appeals Court to decide whether Yellowstone’s award could be offset by the counterclaim award, despite Yellowstone’s status as a bankrupt entity. Yellowstone also filed a motion for clarification on August 5, 2013. A decision on the clarification motions was rendered on November 11, 2014, and the Appeals Court accepted partially the arguments raised by Mattel do Brasil. As a result, the Appeals Court awarded Yellowstone approximately $14.5 million in damages, as adjusted for inflation and interest, plus attorney's fees. The Appeals Court also awarded Mattel do Brasil approximately $7.5 million on its counterclaim, as adjusted for inflation. The decision also recognized the existence of legal rules that support Mattel do Brasil’s right to offset its counterclaim award of approximately $7.5 million. Mattel do Brasil filed a new motion for clarification with the Appeals Court on January 21, 2015, due to the incorrect statement made by the reporting judge of the Appeals Court, that the court-appointed expert analyzed the “accounting documents” of Yellowstone. On April 26, 2015, a decision on the motion for clarification was rendered. The Appeals Court ruled that the motion for clarification was denied and imposed a fine on Mattel do Brasil equal to 1% of the value of the claims made for the delay caused by the motion. On July 3, 2015, Mattel do Brasil filed a special appeal to the Superior Court of Justice based upon both procedural and substantive grounds. This special appeal seeks to reverse the Appeals Court's decision of July 26, 2013, and to reverse the fine as inappropriate under the law. This special appeal was submitted to the Appeals Court which must rule on its admissibility before it is transferred to the Superior Court.
Yellowstone also filed a special appeal with the Appeals Court in February 2015, which was made available to Mattel do Brasil on October 7, 2015. Yellowstone's special appeal seeks to reverse the Appeals Court decision with respect to: (a) the limitation on Yellowstone's loss of profits claim to the amount requested in the complaint, instead of the amount contained in the first court-appointed experts report, and (b) the award of damages to Mattel do Brasil on the counterclaim, since the specific amount was not requested in Mattel do Brasil's counterclaim brief.
On October 19, 2015, Mattel do Brasil filed its answer to the special appeal filed by Yellowstone and Yellowstone filed its answer to the special appeal filed by Mattel do Brasil. On April 4, 2016, the Appeals Court rendered a decision denying the admissibility of Mattel’s and Yellowstone’s special appeals. On May 11, 2016, both Mattel and Yellowstone filed interlocutory appeals and are awaiting the decision.
On August 31, 2017, the reporting justice for the Appeals Court denied Yellowstone’s interlocutory appeal. As to Mattel, the reporting justice reversed the fine referenced above that had been previously imposed on Mattel for filing a motion for clarification. However, the reporting justice rejected Mattel’s arguments on the merits of Yellowstone’s damages claims. On September 22, 2017, Mattel filed a further appeal to the full panel of five appellate justices to challenge the merits of Yellowstone’s damages claims. Yellowstone did not file a further appeal.
Mattel believes that it is reasonably possible that a loss in this matter could range from $0 to approximately $18.5 million. The high end of this range, approximately $18.5 million, is based on the calculation of the current amount of the damages (reported in the first court-appointed examination report submitted in the lawsuit), and loss of profits (indicated in the complaint by Yellowstone), including interest, inflation, currency adjustments, plus attorney's fees. Mattel do Brasil will be entitled to offset its counterclaim award of approximately $7.5 million, the current amount including inflation, and currency adjustment, against such loss. The existence of procedural matters that will be addressed to the Superior Court of Justice adds some uncertainty to the final outcome of the matter. Mattel do Brasil believes, however, that it has valid legal grounds for an appeal of the Appeals Court decision. Mattel do Brasil may be required by the Trial Court to place a bond for the full amount of the damage award in escrow pending an appeal decision by the Superior Court. As Mattel believes a loss in this matter is reasonably possible but not probable, no liability has been accrued to date.

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Securities Litigation
Two stockholders have filed purported class action lawsuits in the United States District Court for the Central District of California (Waterford Township Police & Fire Retirement System v. Mattel, Inc., et al., filed June 27, 2017; and Lathe v. Mattel, Inc., et al., filed July 6, 2017) against Mattel, Christopher A. Sinclair, Richard Dickson, Kevin M. Farr, and Joseph B. Johnson alleging federal securities laws violations in connection with statements allegedly made by the defendants during the period October 20, 2016 through April 20, 2017. In general, the lawsuits assert the same or similar allegations, including that the defendants artificially inflated Mattel’s common stock price by knowingly making materially false and misleading statements and omissions to the investing public about retail customer inventory, the alignment between point-of-sale and shipping data, and Mattel’s overall financial condition. The lawsuits allege that the defendants’ conduct caused the plaintiffs and other stockholders to purchase Mattel common stock at artificially inflated prices. By an order dated September 29, 2017, the two actions were ordered consolidated and a lead plaintiff was appointed.
The lawsuits seek unspecified compensatory damages, attorneys’ fees, expert fees, and costs. Mattel believes that the allegations are without merit and intends to vigorously defend against them.  A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
21.
Segment Information
Mattel, through its subsidiaries, sells a broad variety of toy products which are grouped into four major brand categories:
Mattel Girls & Boys Brands—including Barbie® fashion dolls and accessories (“Barbie”), Monster High®, Ever After High®, Polly Pocket®, and DC Super Hero Girls™ (collectively “Other Girls”), Hot Wheels® and Matchbox® vehicles and play sets (collectively “Wheels”), and CARS®, DC Comics®, WWE® Wrestling, Minecraft®, Max Steel®, BOOMco.®, Toy Story®, and games and puzzles (collectively “Entertainment”).
Fisher-Price Brands—including Fisher-Price®, Little People®, BabyGear™, Laugh & Learn®, and Imaginext® (collectively “Core Fisher-Price”), Thomas & Friends®, Dora the Explorer®, Mickey Mouse® Clubhouse, and Disney Jake and the Never Land Pirates® (collectively “Fisher-Price Friends”), and Power Wheels®.
American Girl Brands—including Truly Me®, Girl of the Year®, BeForever®, Bitty Baby®, and WellieWishers™. American Girl® Brands products are sold directly to consumers via its catalog, website, and proprietary retail stores, as well as sold directly to certain retailers.
Construction and Arts & Crafts Brands—including MEGA BLOKS® and RoseArt®.
Mattel’s operating segments are: (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 are developed and adapted for particular international markets.
Segment Data
The following tables present information about revenues, income, and assets by segment. In the following tables, Mattel does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues (referred to as “gross sales” and reconciled to net sales in Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Non-GAAP Financial Measures” of this Quarterly Report on Form 10-Q). Mattel records these adjustments in its financial accounting systems at the time of sale to each customer, but the adjustments are not allocated to brands or individual products. For this reason, Mattel’s chief operating decision maker uses gross sales by segment as one of the metrics to measure segment performance. Such sales adjustments are included in the determination of segment income from operations based on the adjustments recorded in the financial accounting systems. Segment income represents each segment’s operating income, while consolidated operating income represents income from operations before net interest, other non-operating expense/income, net, and income taxes as reported in the consolidated statements of operations. The corporate and other expense category includes costs not allocated to individual segments, including charges related to incentive compensation, share-based payments, and corporate headquarters functions managed on a worldwide basis, and the impact of changes in foreign currency exchange rates on intercompany transactions.

27



 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
(In thousands)
Revenues by Segment
 
 
 
 
 
 
 
North America
$
839,341

 
$
1,071,030

 
$
1,708,901

 
$
2,077,147

International
776,947

 
774,211

 
1,637,031

 
1,614,169

American Girl
93,876

 
130,109

 
247,376

 
298,933

Gross sales
1,710,164

 
1,975,350

 
3,593,308

 
3,990,249

Sales adjustments
(149,181
)
 
(179,775
)
 
(322,230
)
 
(367,999
)
Net sales
$
1,560,983

 
$
1,795,575

 
$
3,271,078

 
$
3,622,250

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2017