MATTEL : DE/ Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

The following discussion should be read in conjunction with the consolidated
financial statements and the related notes. See Item 8 "Financial Statements and
Supplementary Data." Note that amounts within this Item shown in millions may
not foot due to rounding.
Mattel has omitted discussion of 2017 results where it would be redundant to the
discussion previously included in Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations," of Mattel's Amended
Annual Report on Form 10-K/A for the year ended December 31, 2018.
The following discussion also includes gross sales and currency exchange rate
impact, non-GAAP financial measures within the meaning of Regulation G
promulgated by the Securities and Exchange Commission ("Regulation G"), to
supplement the financial results as reported in accordance with GAAP. Gross
sales represent sales to customers, excluding the impact of sales adjustments,
such as trade discounts and other allowances. The currency exchange rate impact
reflects the portion (expressed as a percentage) of changes in Mattel's reported
results that are attributable to fluctuations in currency exchange rates. Mattel
uses these non-GAAP financial measures to analyze its continuing operations and
to monitor, assess, and identify meaningful trends in its operating and
financial performance. These measures are not, and should not be viewed as, a
substitute for GAAP financial measures. Refer to "Non-GAAP Financial Measures"
in this Annual Report on Form 10-K for a more detailed discussion, including a
reconciliation of gross sales, a non-GAAP financial measure, to net sales, its
most directly comparable GAAP financial measure.
Overview
Mattel is a leading global children's entertainment company that specializes in
the design and production of quality toys and consumer products. Mattel's
products are among the most widely recognized toy products in the world.
Mattel's mission is to "create innovative products and experiences that inspire,
entertain, and develop children through play." In order to deliver on this
mission, Mattel is focused on the following two-part strategy to transform
Mattel from a toy manufacturing company into an intellectual property ("IP")
driven, high-performing toy company:
•          In the short- to mid-term, restore profitability by reshaping
           operations and regain topline growth by growing Mattel's Power Brands
           (Barbie, Hot Wheels, Fisher-Price and Thomas & Friends, and American
           Girl) and expanding Mattel's brand portfolio.


•          In the mid- to long-term, capture the full value of Mattel's IP
           through franchise management and the development of Mattel's online
           retail and e-commerce capabilities.


Reorganization of Gross Sales by Categories and Brand in 2019
Although there were no changes to Mattel's commercial operations that impacted
its operating segments, in the first quarter of 2019, Mattel modified its
reporting structure for revenues, as outlined below, and reorganized its
regional sales reporting structure within the International segment. Prior
period amounts have been reclassified to conform to the current period
presentation. Gross sales by categories are presented as follows:
Dolls-including brands such as Barbie, American Girl, Enchantimals, and Polly
Pocket.
Infant, Toddler, and Preschool-including brands such as Fisher-Price and Thomas
& Friends, Power Wheels, Fireman Sam, and Shimmer and Shine (Nickelodeon).
Vehicles-including brands such as Hot Wheels, Matchbox, and CARS (Disney Pixar).
Action Figures, Building Sets, and Games-including brands such as MEGA, UNO, Toy
Story (Disney Pixar), Jurassic World (NBCUniversal), and WWE.

                                                                            

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The following table provides a summary of Mattel's consolidated gross sales by
categories, along with supplemental information by brand for the years ended
December 31, 2018 and 2017, based on Mattel's current reporting structure for
revenues:

                                            For the Year Ended                                       Currency
                                                                               % Change as        Exchange Rate
                                  December 31, 2018     December 31, 2017        Reported             Impact
                                                   (In millions, except percentage information)
Revenues by Categories
Dolls                            $         1,730.9     $         1,725.9              -  %              -1  %
Infant, Toddler, and Preschool             1,417.8               1,677.2            -15  %               -  %
Vehicles                                   1,065.5               1,242.8            -14  %              -1  %
Action Figures, Building Sets,
and Games                                    861.3                 868.2             -1  %              -1  %
Gross Sales                      $         5,075.5     $         5,514.1             -8  %              -1  %
Sales Adjustments                           (560.7 )              (632.6 )
Net Sales                        $         4,514.8     $         4,881.5             -8  %              -1  %

Supplemental Revenue Disclosure
Revenues by Top 3 Power Brands
Barbie                           $         1,089.0     $           954.9             14  %              -1  %
Hot Wheels                                   834.1                 777.3              7  %              -2  %
Fisher-Price and Thomas &
Friends                                    1,185.7               1,370.5            -13  %               -  %
Other                                      1,966.8               2,411.3            -18  %               -  %
Gross Sales                      $         5,075.5     $         5,514.1             -8  %              -1  %


The following table provides a summary of Mattel's consolidated gross sales by
brand results for the years ended December 31, 2018 and 2017, as presented in
Mattel's Annual Report on Form 10-K/A for the year ended December 31, 2018:

                                             For the Year Ended                                       Currency
                                                                                % Change as        Exchange Rate
                                   December 31, 2018     December 31, 2017        Reported             Impact
                                                    (In millions, except percentage information)
Power Brands
Barbie                            $         1,089.0     $           954.9             14  %              -1  %
Hot Wheels                                    834.1                 777.3              7  %              -2  %
Fisher-Price and Thomas & Friends           1,185.7               1,370.5            -13  %               -  %
American Girl                                 342.4                 473.3            -28  %               -  %
Total Power Brands                          3,451.1               3,576.1             -3  %              -1  %

Toy Box
Owned Brands                                  887.4                 980.6            -10  %              -2  %
Partner Brands                                737.0                 957.5            -23  %              -1  %
Total Toy Box                               1,624.4               1,938.0            -16  %              -1  %

Total Gross Sales                           5,075.5               5,514.1             -8  %              -1  %
Sales Adjustments                            (560.7 )              (632.6 )
Total Net Sales                   $         4,514.8     $         4,881.5             -8  %              -1  %




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Results of Operations
2019 Compared to 2018
Consolidated Results
Net sales for 2019 were $4.50 billion, as compared to $4.51 billion in 2018. Net
loss for 2019 was $213.5 million, or $0.62 loss per share, as compared to a net
loss of $533.3 million, or $1.55 loss per share, in 2018, primarily due to
higher gross profit and lower selling and administrative expenses.  Net loss for
2019 included the impact of approximately $38 million related to the inclined
sleeper product recalls, of which approximately $6 million was a reduction to
net sales, approximately $22 million was included in cost of sales, and
approximately $10 million was included in other selling and administrative
expenses. Net loss for 2018 includes a sales reversal of approximately $30
million and bad debt expense, net of approximately $32 million as a result of
the Toys "R" Us liquidation.
The following table provides a summary of Mattel's consolidated results for 2019
and 2018:
                                        For the Year Ended
                           December 31, 2019           December 31, 2018             Year/Year Change
                                      % of Net                    % of Net                     Basis Points
                         Amount         Sales        Amount         Sales           %          of Net Sales
                                   (In millions, except percentage and basis point information)
Net sales              $ 4,504.6        100.0  %   $ 4,514.8        100.0  %          -  %               -
Gross profit           $ 1,980.8         44.0  %   $ 1,798.7         39.8  %         10  %             420
Advertising and
promotion expenses         551.5         12.2  %       524.3         11.6  %          5  %              60
Other selling and
administrative
expenses                 1,390.0         30.9  %     1,508.7         33.4  %         -8  %            (250 )
Operating income
(loss)                      39.2          0.9  %      (234.3 )       -5.2  %        n/m                n/m
Interest expense           201.0          4.5  %       181.9          4.0  %         11  %              50
Interest (income)           (6.2 )       -0.1  %        (6.5 )       -0.1  %         -5  %               -
Other non-operating
expense, net                 2.6                         7.3
Loss before income
taxes                  $  (158.3 )       -3.5  %   $  (417.1 )       -9.2  %        -62  %             570
Provision for income
taxes                  $    55.2          1.2  %   $   116.2          2.6  %        -52  %            (140 )
Net loss               $  (213.5 )       -4.7  %   $  (533.3 )      -11.8  %        -60  %             710


n/m - Not Meaningful

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Sales

Net sales for 2019 were $4.50 billion as compared to $4.51 billion in 2018. The following table provides a summary of Mattel's consolidated gross sales by categories, along with supplemental information by brand for 2019 and 2018:

                                            For the Year Ended                                       Currency
                                                                               % Change as        Exchange Rate
                                  December 31, 2019     December 31, 2018        Reported             Impact
                                                   (In millions, except percentage information)
Revenues by Categories (a)
Dolls                            $         1,724.0     $         1,730.9              -  %              -2  %
Infant, Toddler, and Preschool             1,257.6               1,417.8            -11  %              -1  %
Vehicles                                   1,101.3               1,065.5              3  %              -3  %
Action Figures, Building Sets,
and Games                                    981.6                 861.3             14  %              -1  %
Gross Sales                      $         5,064.6     $         5,075.5              -  %              -2  %
Sales Adjustments                           (560.0 )              (560.7 )
Net Sales                        $         4,504.6     $         4,514.8              -  %              -1  %

Supplemental Revenue Disclosure
Revenues by Top 3 Power Brands
Barbie                           $         1,159.8     $         1,089.0              7  %              -2  %
Hot Wheels                                   925.9                 834.1             11  %              -3  %
Fisher-Price and Thomas &
Friends                                    1,131.8               1,185.7             -5  %              -2  %
Other                                      1,847.2               1,966.8             -6  %              -1  %
Gross Sales                      $         5,064.6     $         5,075.5              -  %              -2  %

__________________________________________

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

                                                                            

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

                                                                            

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Segment Results
North America Segment
Net sales for the North America segment were $2.28 billion in 2019, an increase
of $3.0 million as compared to $2.27 billion in 2018.
The following table provides a summary of Mattel's gross sales for the North
America segment by categories, along with supplemental information by brand, for
2019 and 2018:

                                            For the Year Ended                                       Currency
                                                                               % Change as        Exchange Rate
                                  December 31, 2019     December 31, 2018        Reported             Impact
                                                   (In millions, except percentage information)
Revenues by Categories (a)
Dolls                            $           636.2     $           624.7              2  %               -  %
Infant, Toddler, and Preschool               730.3                 808.2            -10  %               -  %
Vehicles                                     510.8                 488.6              5  %               -  %
Action Figures, Building Sets,
and Games                                    555.0                 500.6             11  %               -  %
Gross Sales                      $         2,432.3     $         2,422.1              -  %              -1  %
Sales Adjustments                           (156.5 )              (149.3 )
Net Sales                        $         2,275.8     $         2,272.8              -  %               -  %

Supplemental Revenue Disclosure
Revenues by Top 3 Power Brands
Barbie                           $           558.3     $           535.7              4  %               -  %
Hot Wheels                                   419.0                 380.2             10  %               -  %
Fisher-Price and Thomas &
Friends                                      650.7                 665.9             -2  %               -  %
Other                                        804.2                 840.3             -4  %               -  %
Gross Sales                      $         2,432.3     $         2,422.1              -  %              -1  %

__________________________________________

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

                                                                            

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

                                            For the Year Ended                                       Currency
                                                                               % Change as        Exchange Rate
                                  December 31, 2019     December 31, 2018        Reported             Impact
                                                   (In millions, except percentage information)
Revenues by Categories (a)
Dolls                            $           819.4     $           765.6              7  %              -5  %
Infant, Toddler, and Preschool               527.3                 609.6            -13  %              -3  %
Vehicles                                     590.5                 576.9              2  %              -5  %
Action Figures, Building Sets,
and Games                                    426.5                 360.2             18  %              -4  %
Gross Sales                      $         2,363.8     $         2,312.2              2  %              -4  %
Sales Adjustments                           (391.6 )              (397.1 )
Net Sales                        $         1,972.2     $         1,915.2              3  %              -4  %

Supplemental Revenue Disclosure
Revenues by Top 3 Power Brands
Barbie                           $           601.4     $           553.2              9  %              -5  %
Hot Wheels                                   506.9                 453.9             12  %              -5  %
Fisher-Price and Thomas &
Friends                                      481.0                 519.8             -7  %              -3  %
Other                                        774.5                 785.4             -1  %              -3  %
Gross Sales                      $         2,363.8     $         2,312.2              2  %              -4  %

__________________________________________

(a) Mattel modified its reporting structure for revenues in the first quarter of
2019 to disclose revenues by categories.
Gross sales for the International segment were $2.36 billion in 2019, an
increase of $51.6 million, or 2%, as compared to $2.31 billion in 2018, with an
unfavorable impact from changes in currency exchange rates of 4 percentage
points. The increase in the International segment gross sales was primarily due
to higher sales of Action Figures, Building Sets, and Games, as well as Dolls,
and Vehicles, partially offset by lower sales of Infant, Toddler, and Preschool.
Of the 7% increase in Dolls gross sales, 6% was due to higher sales of Barbie
products, primarily driven by strong brand POS momentum in concert with Barbie's
60th anniversary, and 2% was due to higher sales of Polly Pocket products.
Of the 13% decrease in Infant, Toddler, and Preschool gross sales, 6% was due to
lower sales of Fisher-Price and Thomas & Friends products and 5% was due to
lower sales of Fisher-Price Friends products.

                                                                            

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Of the 2% increase in Vehicles gross sales, 8% was due to higher sales of Hot
Wheels products, partially offset by lower sales of CARS products of 4% and
lower sales of Jurassic World products of 1% following their movie launches in
prior years.
Of the 18% increase in Action Figures, Building Sets, and Games gross sales, 23%
was due to initial sales of Toy Story 4 products coinciding with its 2019
theatrical release, partially offset by lower sales of Jurassic World products
of 5% following the movie launch in the prior year.
Cost of sales decreased 5% in 2019, as compared to a 3% increase in net sales,
primarily due to lower product and other costs. Gross margin in 2019 increased
primarily due to incremental Structural Simplification savings and price
increases, partially offset by input cost inflation due to higher plant labor
costs.
International segment income was $166.9 million in 2019, as compared to a
segment income of $13.9 million in 2018, primarily due to higher gross profit
and lower other selling and administrative expenses.
American Girl Segment
Net sales for the American Girl segment were $256.6 million in 2019, a decrease
of $70.2 million as compared to $326.8 million in 2018.
The following table provides a summary of Mattel's gross sales for the American
Girl segment for 2019 and 2018:

                                            For the Year Ended                                       Currency
                                                                               % Change as        Exchange Rate
                                  December 31, 2019     December 31, 2018        Reported             Impact
                                                   (In millions, except percentage information)
American Girl Segment:
Total Gross Sales                $          268.5      $           341.2            -21  %               - %
Sales Adjustments                           (11.9 )                (14.4 )
Total Net Sales                  $          256.6      $           326.8            -21  %               - %


Gross sales for the American Girl segment were $268.5 million in 2019, a
decrease of $72.7 million, or 21%, as compared to $341.2 million in 2018. The
decrease in American Girl gross sales was primarily due to lower sales in
proprietary retail and direct channels.
Cost of sales decreased 23% in 2019, as compared to a 21% decrease in net sales,
primarily due to lower product and other costs. Gross margin in 2019 increased
primarily due to incremental Structural Simplification savings, lower
obsolescence expense, favorable product mix, partially offset by higher freight
and logistics expense, the unfavorable impact of fixed cost absorption due to
lower sales, and input cost inflation due to higher plant labor costs.
American Girl segment loss was $58.8 million in 2019, as compared to segment
loss of $17.7 million in 2018, driven primarily by lower net sales and a $25.9
million impairment charge related to certain American Girl retail store assets,
as a result of lower fourth quarter sales in certain retail stores.
Cost Savings Programs
Structural Simplification Cost Savings Program
During the third quarter of 2017, Mattel initiated its Structural Simplification
cost savings program. As of December 31, 2019, Mattel successfully completed its
Structural Simplification cost savings program and achieved $875 million of
run-rate savings, exceeding the program's target of $650 million.
The major initiatives of the Structural Simplification cost savings program
included:
•          Reducing manufacturing complexity, including SKU reduction, and
           implementing process improvement initiatives at owned and
           co-manufacturing facilities;

• Streamlining the organizational structure and reducing headcount

           expense to better align with the revenue base; and

• Optimizing advertising spend.

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Mattel realized cost savings (before severance, investments, and cost inflation)
of approximately $366 million (approximately $219 million within gross profit,
approximately $123 million within other selling and administrative expenses, and
approximately $24 million within advertising and promotion expenses) during the
year ended December 31, 2019 in connection with the program.
Mattel recorded severance and other restructuring charges of $21.5 million
during the year ended December 31, 2019 in connection with the program. Of the
total charges recorded during the year ended December 31, 2019, $11.7 million
relate to severance charges and $9.8 million relate to other restructuring
costs, which consisted primarily of consulting fees and other termination costs.
Mattel recorded severance and other restructuring charges of $109.8 million
during the year ended December 31, 2018. Of the total charges recorded during
the year ended December 31, 2018, $62.9 million relate to severance charges and
$47.0 million relate to other restructuring costs. Of the $47.0 million of other
restructuring costs, $5.7 million relate to non-cash plant restructuring
charges, and the remainder consists primarily of consulting fees. Mattel has
recorded cumulative severance and other restructuring charges of $176.5 million
in connection with the program.
Capital Light Program
During the first quarter of 2019, Mattel announced the commencement of its
Capital Light program to optimize Mattel's manufacturing footprint (including
the sale or consolidation of manufacturing facilities), increase the
productivity of its plant infrastructure, and achieve additional efficiencies
across its entire supply chain. In conjunction with the Capital Light program,
Mattel discontinued production in 2019 at certain plants located in China,
Indonesia, and Mexico. In addition to the discontinued production at the three
plants, Mattel announced that it will discontinue production in 2020 at its
plant located in Canada. Mattel recorded severance and other restructuring
charges of $37.6 million during the year ended December 31, 2019 in connection
with the program. Of the total charges recorded during the year ended December
31, 2019, $19.0 million was recorded within other selling and administrative
expenses which is included in Corporate and Other expense and of the $18.6
million recorded within cost of sales in the consolidated statements of
operations, $10.4 million, $8.0 million and $0.2 million are included in North
America, International, and American Girl segments, respectively, which is
presented within segment income (loss) in "Note 13 to the Consolidated Financial
Statements-Segment Information."
To date, Mattel has recorded cumulative severance and other restructuring
charges of $37.6 million, including non-cash charges of approximately $11
million, in connection with the program and currently expects to incur total
severance and restructuring charges, excluding non-cash charges, of
approximately $35 million. Mattel is currently evaluating other cost saving
measures, including the optimization of owned and operated manufacturing
facilities and the geographical footprint of co-manufacturing facilities, which
may result in incremental cost savings. Mattel expects to realize cumulative
run-rate cost savings of approximately $65 million in 2020, and $72 million by
2021 related to the Capital Light program actions taken to date.
Mattel realized cost savings (before severance, restructuring costs, and cost
inflation) of approximately $15 million, primarily within gross profit, during
the year ended December 31, 2019 in connection with the program.
Income Taxes
Mattel's provision for income taxes was $55.2 million in 2019, as compared to
$116.2 million in 2018. The 2019 income tax provision included a $13.4 million
tax benefit related to the release of valuation allowances in certain foreign
tax jurisdictions, and a $16.9 million tax benefit related to reassessments of
prior year's tax liabilities based on the status of audits and settlements in
various jurisdictions. The 2018 income tax provision included a $14.6 million
expense related to changes to Mattel's indefinite reinvestment assertion and a
$3.7 million expense related to the deemed repatriation of accumulated foreign
earnings (net of related valuation allowance change).
Liquidity and Capital Resources
Mattel's primary sources of liquidity are its cash and equivalents balances,
including access to earnings of its foreign subsidiaries, short-term borrowing
facilities, including its $1.60 billion senior secured revolving credit
facilities ("the senior secured revolving credit facilities"), and issuances of
long-term debt securities. Cash flows from operating activities could be
negatively impacted by decreased demand for Mattel's products, which could
result from factors such as adverse economic conditions and changes in public
and consumer preferences, or by increased costs associated with manufacturing
and distribution of products or shortages in raw materials or component parts.
Additionally, Mattel's ability to issue long-term debt and obtain seasonal
financing could be adversely affected by factors such as global economic crises
and tight credit environments, an inability to meet its debt covenant
requirements and its senior secured revolving credit facility covenants, or a
deterioration of Mattel's credit ratings. Mattel's ability to conduct its
operations could be negatively impacted should these or other adverse conditions
affect its primary sources of liquidity.

                                                                            

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Of Mattel's $630.0 million in cash and equivalents as of December 31, 2019,
approximately $338 million was held by foreign subsidiaries. Mattel has several
liquidity options to fund its operations and obligations; such obligations may
include investing and financing activities such as debt service, dividends, and
share repurchases. Cash flows generated by its worldwide operations, the senior
secured revolving credit facilities, alternative forms of financing, and access
to capital markets are available to fund Mattel's operations and obligations.
The U.S. Tax Act, enacted on December 22, 2017, provides Mattel with a reduced
cost to access the earnings of its foreign subsidiaries. As such, Mattel has
evaluated its intentions related to its indefinite reinvestment assertion and
has recorded a $11.9 million tax charge related to approximately $505 million of
foreign earnings that will not be indefinitely reinvested.
With the passage of the U.S. Tax Act, repatriations of foreign cash generally
will not be taxable for U.S. federal income tax, but may be subject to state
income tax and/or foreign withholding tax, in addition to any local country
distribution requirements.
Current Market Conditions
Mattel is exposed to financial market risk resulting from changes in interest
and foreign currency exchange rates. Mattel continues to actively manage its
capital structure and believes that it has sufficient liquidity to run its
business.
Subject to market conditions, Mattel intends to utilize its senior secured
revolving credit facilities or alternative forms of financing to meet its
short-term liquidity needs. As of December 31, 2019, there were no amounts
outstanding under the senior secured revolving credit facilities. Market
conditions could affect certain terms of other debt instruments that Mattel
enters into from time to time.
Mattel monitors the third-party depository institutions that hold Mattel's cash
and equivalents. Mattel's emphasis is primarily on safety and liquidity of
principal, and secondarily on maximizing the yield on those funds. Mattel
diversifies its cash and equivalents among counterparties and securities to
minimize risks.
Mattel is subject to credit risks relating to the ability of its counterparties
in hedging transactions to meet their contractual payment obligations. The risks
related to creditworthiness and nonperformance have been considered in the fair
value measurements of Mattel's foreign currency forward exchange contracts.
Mattel closely monitors its counterparties and takes action, as necessary, to
manage its counterparty credit risk.
Mattel expects that some of its customers and vendors may experience difficulty
in obtaining the liquidity required to buy inventory or raw materials. Mattel
monitors its customers' financial condition and their liquidity in order to
mitigate Mattel's accounts receivable collectibility risks, and customer terms
and credit limits are adjusted, if necessary. Additionally, Mattel uses a
variety of financial arrangements to ensure collectibility of accounts
receivable of customers deemed to be a credit risk, including requiring letters
of credit, factoring, purchasing various forms of credit insurance with
unrelated third parties, or requiring cash in advance of shipment. As a result
of the Toys "R" Us liquidation in the first quarter of 2018, Mattel reversed net
sales that occurred during the first quarter of 2018 and related accounts
receivable of approximately $30 million. In addition, for the year ended
December 31, 2018, Mattel recorded bad debt expense, net of approximately $32
million, related to outstanding Toys "R" Us receivables at the time of
liquidation.
Mattel sponsors defined benefit pension plans and postretirement benefit plans
for its employees. Actual returns below the expected rate of return, along with
changes in interest rates that affect the measurement of the liability, would
impact the amount and timing of Mattel's future contributions to these plans.
Operating Activities
Cash flows provided by operating activities were $181.0 million during 2019, as
compared to cash used for operating activities of $27.3 million during 2018. The
change in cash flows provided by (used for) operating activities in 2019 from
2018 was primarily driven by a lower net loss, excluding the impact of non-cash
charges.
Investing Activities
Cash flows used for investing activities were $114.2 million during 2019, as
compared to $160.8 million during 2018. The change in cash flows used for
investing activities in 2019 from 2018 was primarily driven by lower capital
spending and lower payments for foreign currency forward exchange contracts.

                                                                            

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Financing Activities
Cash flows used for financing activities were $33.1 million during 2019, as
compared to $285.2 million during 2018. The change in cash flows from financing
activities in 2019 from 2018 was primarily driven by repayments of long-term
borrowings, net of $278 million in 2018.
During 2019 and 2018, Mattel did not repurchase any shares of its common stock.
Mattel's share repurchase program was first announced on July 21, 2003. On July
17, 2013, the Board of Directors authorized Mattel to increase its share
repurchase program by $500.0 million. At December 31, 2019, share repurchase
authorizations of $203.0 million had not been executed. Repurchases under the
program will take place from time to time, depending on market conditions.
Mattel's share repurchase program has no expiration date.
During 2019 and 2018, Mattel did not pay any dividends to holders of its common
stock. The payment of dividends on common stock is at the discretion of the
Board of Directors and is subject to customary limitations.
Seasonal Financing
See Item 8 "Financial Statements and Supplementary Data-Note 5 to the
Consolidated Financial Statements-Seasonal Financing and Debt."
Credit Rating
In 2019, Fitch maintained Mattel's long-term credit rating of B- and changed its
outlook from negative to positive. In 2019, Moody's maintained Mattel's
long-term credit rating of B1, with a stable outlook. In 2019, Standard & Poor's
maintained Mattel's long-term credit rating of BB-, with a negative outlook.
Financial Position
Mattel's cash and equivalents increased $35.5 million to $630.0 million at
December 31, 2019, as compared to $594.5 million at December 31, 2018. The
increase was primarily due to cash provided by operating activities, partially
offset by capital expenditures and debt issuance costs related to refinancing of
senior notes.
Accounts receivable decreased $33.7 million to $936.4 million at December 31,
2019, as compared to $970.1 million at December 31, 2018. The decrease in
accounts receivable was primarily due to lower fourth quarter sales. Inventory
decreased $47.4 million to $495.5 million at December 31, 2019, as compared to
$542.9 million at December 31, 2018. The decrease in inventory was primarily due
to tighter inventory control and better demand management, and lower product
costs as a result of Structural Simplification cost savings.
Accounts payable and accrued liabilities remained flat at $1.23 billion at
December 31, 2019 and 2018. The change in accounts payable and accrued
liabilities was due to the establishment of short term lease liabilities in 2019
upon adoption of the new lease standard offset by lower accounts payable as a
result of timing of payments.
As of December 31, 2019 and 2018, Mattel had $0 and $4.2 million, respectively,
of short-term borrowings outstanding.

                                                                            

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A summary of Mattel's capitalization is as follows:

                                              December 31, 2019                  December 31, 2018
                                                (In millions, except percentage information)
Cash and equivalents                 $          630.0                       $      594.5

Short-term borrowings                               -                                4.2
2010 Senior Notes due October 2020
and October 2040                                250.0                       

500.0

2011 Senior Notes due November 2041             300.0                       

300.0

2013 Senior Notes due March 2023                250.0                       

250.0

2016 Senior Notes due August 2021                   -                       

350.0

2017/2018 Senior Notes due December
2025                                          1,500.0                       

1,500.0

2019 Senior Notes due December 2027             600.0                                  -
Debt issuance costs and debt
discount                                        (53.2 )                            (48.3 )
Total debt                                    2,846.8              85 %          2,855.9            81 %
Stockholders' equity                            491.7              15              666.9            19
Total capitalization (debt plus
equity)                              $        3,338.5             100 %     $    3,522.8           100 %


Total long-term debt remained flat at $2.8 billion at December 31, 2019. Mattel
used the proceeds from the issuance of $600.0 million aggregate principal amount
of 5.875% senior unsecured notes due December 15, 2027 ("2019 Senior Notes") to
redeem and retire its $250.0 million of 2010 Senior Notes due October 2020 and
$350.0 million of 2016 Senior Notes due August 2021.
Stockholders' equity decreased $175.2 million to $491.7 million at December 31,
2019, as compared to $666.9 million at December 31, 2018, primarily due to the
net loss for the year.
Off-Balance Sheet Arrangements
Mattel is required to provide standby letters of credit to support certain
obligations that arise in the ordinary course of business and may choose to
provide letters of credit in place of posting cash collateral. Although the
letters of credit are off-balance sheet, the majority of the obligations in
which they relate are reflected as liabilities in the consolidated balance
sheets. Outstanding letters of credit totaled approximately $57 million as of
December 31, 2019.
Commitments
In the normal course of business, Mattel enters into debt agreements, and
contractual arrangements to obtain and protect Mattel's right to create and
market certain products and for future purchases of goods and services to ensure
availability and timely delivery. These arrangements include commitments for
royalty payments pursuant to licensing agreements, which routinely contain
provisions for guarantees or minimum expenditures during the terms of the
contracts, and future inventory and service purchases. Mattel also has defined
benefit and postretirement benefit plans, which require future cash
contributions and benefit payments. Additionally, Mattel routinely enters into
noncancelable lease agreements for premises and equipment used, which contain
minimum rental payments.

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The following table summarizes Mattel's contractual commitments and obligations:

                       Total         2020         2021         2022         

2023 2024 Thereafter

                                                            (In millions)
Long-term debt      $ 2,900.0     $      -     $      -     $      -     $  250.0     $      -     $    2,650.0
Interest on
long-term debt        1,591.9        176.2        176.2        176.2       

170.0        168.4            724.9
Leases                  450.3         96.6         84.3         63.9         46.7         32.7            126.0
Minimum guarantees
under licensing and
similar agreements      184.3         85.4         53.7         42.9          1.5          0.8                -
Defined benefit and
postretirement
benefit plans           373.3         38.4         38.2         40.3         39.2         39.6            177.7
Purchases of
inventory,
services, and other     341.9        249.6         54.4         37.9            -            -                -
Total               $ 5,841.7     $  646.2     $  406.8     $  361.3     $  507.4     $  241.4     $    3,678.6


Liabilities for uncertain tax positions for which a cash tax payment is not
expected to be made in the next twelve months are classified as other noncurrent
liabilities. Due to the uncertainty about the periods in which examinations will
be completed and limited information related to current audits, Mattel is not
able to make reasonably reliable estimates of the periods in which cash
settlements will occur with taxing authorities for the noncurrent liabilities.
Litigation
The content of Item 8 "Financial Statements and Supplementary Data-Note 12 to
the Consolidated Financial Statements-Commitments and Contingencies-Litigation"
is hereby incorporated by reference in this Item 7.
Effects of Inflation
Inflation rates in the U.S. and in major foreign countries where Mattel does
business have not had a significant impact on its results of operations or
financial position during 2019 or 2018. Mattel receives some protection from the
impact of inflation from high turnover of inventories and its ability, under
certain circumstances and at certain times, to pass on higher prices to its
customers.
Employee Savings Plan
Mattel sponsors a 401(k) savings plan, the Mattel, Inc. Personal Investment Plan
(the "Plan"), for its domestic employees. Contributions to the Plan include
voluntary contributions by eligible employees and employer automatic and
matching contributions by Mattel. The Plan allows employees to allocate both
their voluntary contributions and their employer automatic and matching
contributions to a variety of investment funds, including a fund that is
invested in Mattel common stock (the "Mattel Stock Fund"). Employees are not
required to allocate any of their Plan account balance to the Mattel Stock Fund,
allowing employees to limit or eliminate their exposure to market changes in
Mattel's stock price. Furthermore, the Plan limits the percentage of the
employee's total account balance that may be allocated to the Mattel Stock Fund
to 25%. Employees may generally reallocate their account balances on a daily
basis. However, pursuant to Mattel's insider trading policy, employees
classified as insiders and restricted personnel under Mattel's insider trading
policy are limited to certain periods in which they may make allocations into or
out of the Mattel Stock Fund.
Application of Critical Accounting Policies and Estimates
Mattel makes certain estimates and assumptions that affect the reported amounts
of assets and liabilities and the reported amounts of revenues and expenses. The
accounting policies and estimates described below are those Mattel considers
most critical in preparing its consolidated financial statements. Management has
discussed the development and selection of these critical accounting policies
and estimates with the Audit Committee of its Board of Directors, and the Audit
Committee has reviewed the disclosures included below. These accounting policies
and estimates include significant judgments made by management using information
available at the time the estimates are made. As described below, however, these
estimates could change materially if different information or assumptions were
used instead.

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For a summary of Mattel's significant accounting policies, estimates, and
methods used in the preparation of Mattel's consolidated financial statements,
see Item 8 "Financial Statements and Supplementary Data-Note 1 to the
Consolidated Financial Statements-Summary of Significant Accounting Policies."
In most instances, Mattel must use an accounting policy or method because it is
the only policy or method permitted under accounting principles generally
accepted in the United States of America ("U.S. GAAP").
Accounts Receivable-Allowance for Doubtful Accounts
The allowance for doubtful accounts represents adjustments to customer trade
accounts receivable for amounts deemed partially or entirely uncollectible.
Management believes the accounting estimate related to the allowance for
doubtful accounts is a "critical accounting estimate" because significant
changes in the assumptions used to develop the estimate could materially affect
key financial measures, including other selling and administrative expenses, net
income, and accounts receivable. In addition, the allowance requires a high
degree of judgment since it involves estimation of the impact of both current
and future economic factors in relation to its customers' ability to pay amounts
owed to Mattel.
Mattel's products are sold throughout the world. Products within the North
America segment are sold directly to retailers, including discount and
free-standing toy stores, chain stores, department stores, other retail outlets
and, to a limited extent, wholesalers, and directly to consumers. Products
within the International segment are sold directly to retailers and wholesalers
in most European, Latin American, and Asian countries, and in Australia and New
Zealand, and through agents and distributors in those countries where Mattel has
no direct presence.
In recent years, the mass-market retail channel has experienced significant
shifts in market share among competitors, causing some large retailers to
experience liquidity problems. Mattel's sales to customers are typically made on
credit without collateral and are highly concentrated in the third and fourth
quarters due to the seasonal nature of toy sales, which results in a substantial
portion of trade receivables being collected during the latter half of the year
and the first quarter of the following year. There is a risk that customers will
not pay, or that payment may be delayed, because of bankruptcy or other factors
beyond the control of Mattel. This could increase Mattel's exposure to losses
from bad debts.
A small number of customers account for a large share of Mattel's net sales and
accounts receivable. In 2019, Mattel's two largest customers, Walmart and
Target, in the aggregate, accounted for approximately 32% of net sales, and its
ten largest customers, in the aggregate, accounted for approximately 49% of net
sales. As of December 31, 2019, Mattel's two largest customers accounted for
approximately 31% of net accounts receivable, and its ten largest customers
accounted for approximately 50% of net accounts receivable. The concentration of
Mattel's business with a relatively small number of customers may expose Mattel
to a material adverse effect if one or more of Mattel's large customers were to
experience financial difficulty.
Mattel has procedures to mitigate its risk of exposure to losses from bad debts.
Credit limits and payment terms are established based on the underlying criteria
that collectibility must be reasonably assured at the levels set for each
customer. Extensive evaluations are performed on an ongoing basis throughout the
fiscal year of each customer's financial performance, cash generation, financing
availability, and liquidity status. Customers are reviewed at least annually,
with more frequent reviews being performed, if necessary, based on the
customers' financial condition and the level of credit being extended. For
customers who are experiencing financial difficulties, management performs
additional financial analyses prior to shipping to those customers on credit.
Customers' terms and credit limits are adjusted or revoked, if necessary, to
reflect the results of the review. Mattel uses a variety of financial
arrangements to ensure collectibility of accounts receivable of customers deemed
to be a credit risk, including requiring letters of credit, factoring,
purchasing various forms of credit insurance with unrelated third parties, or
requiring cash in advance of shipment.
The following table summarizes Mattel's allowance for doubtful accounts:
                                                              December 31,                December 31,
                                                                  2019                        2018
                                                            (In millions, except percentage information)
Allowance for doubtful accounts                         $               18.5         $               22.0
As a percentage of total accounts receivable                             1.9 %                        2.2 %


Mattel's allowance for doubtful accounts is based on management's assessment of
the business environment, customers' financial condition, historical collection
experience, accounts receivable aging, and customer disputes. Changes in the
allowance for doubtful accounts reflect management's assessment of the factors
noted above, including past due accounts, disputed balances with customers, and
the financial condition of customers. The allowance for doubtful accounts is
also affected by the time at which uncollectible accounts receivable balances
are actually written off.

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Mattel believes that its allowance for doubtful accounts at December 31, 2019 is
adequate and proper. However, as described above, Mattel's business is greatly
dependent on a small number of customers. Should one or more of Mattel's major
customers experience liquidity problems, the allowance for doubtful accounts may
not be sufficient to cover such losses. Any incremental bad debt charges would
negatively affect the results of operations of one or more of Mattel's business
segments.
Inventories-Allowance for Obsolescence
Inventories, net of an allowance for excess quantities and obsolescence, are
stated at the lower of cost or net realizable value. Inventory obsolescence
reserves are recorded for damaged, obsolete, excess, and slow-moving inventory.
Inventory allowances are charged to cost of sales and establish a lower cost
basis for the inventory. Management believes that the accounting estimate
related to the allowance for obsolescence is a "critical accounting estimate"
because changes in the assumptions used to develop the estimate could materially
affect key financial measures, including gross profit, net income, and
inventories. As more fully described below, valuation of Mattel's inventory
could be impacted by changes in public and consumer preferences, demand for
product, or changes in the buying patterns of both retailers and consumers and
inventory management of customers.
In the toy industry, orders are typically subject to cancellation or change at
any time prior to shipment. Actual shipments of products ordered and order
cancellation rates are affected by consumer acceptance of product lines,
strength of competing products, marketing strategies of retailers, changes in
buying patterns of both retailers and consumers, and overall economic
conditions. Unexpected changes in these factors could result in excess inventory
in a particular product line, which would require management to record a
valuation adjustment on such inventory.
Mattel bases its production schedules for toy products on customer orders and
forecasts, taking into account historical trends, results of market research,
and current market information. Mattel ships products in accordance with
delivery schedules specified by its customers, who usually request delivery
within three months. In anticipation of retail sales in the traditional holiday
season, Mattel significantly increases its production in advance of the peak
selling period, resulting in a corresponding build-up of inventory levels in the
first three quarters of its fiscal year. These seasonal purchasing patterns and
requisite production lead times create risk to Mattel's business associated with
the underproduction of popular toys and the overproduction of toys that do not
match consumer demand. Retailers are also attempting to manage their inventories
more tightly, requiring Mattel to ship products closer to the time the retailers
expect to sell the products to consumers. These factors increase inventory
valuation risk since Mattel's inventory levels may be adversely impacted by the
need to pre-build products before orders are placed.
When current conditions in the domestic and global economies become uncertain,
it is difficult to estimate the level of growth or contraction for the economy
as a whole. It is even more difficult to estimate growth or contraction in
various parts of the economy, including the economies in which Mattel
participates. Because all components of Mattel's budgeting and forecasting are
dependent upon estimates of growth or contraction in the markets it serves and
demand for its products, economic uncertainty makes estimates of future demand
for product more difficult. Such economic changes may affect the sales of
Mattel's products and its corresponding inventory levels, which could
potentially impact the valuation of its inventory.
At the end of each quarter, management within each business segment, North
America, International, and American Girl, performs a detailed review of its
inventory on an item-by-item basis and identifies products that are believed to
be impaired. Management assesses the need for, and the amount of, an
obsolescence reserve based on the following factors:
• Customer and/or consumer demand for the item;

• Overall inventory positions of Mattel's customers;

• Strength of competing products in the market;

• Quantity on hand of the item;

• Sales price of the item;

• Mattel's cost for the item; and

• Length of time the item has been in inventory.

The timeframe between when an estimate is made and the time of disposal depends on the above factors and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.

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The following table summarizes Mattel's obsolescence reserve:

                                                              December 31,                December 31,
                                                                  2019                        2018
                                                            (In millions, except percentage information)
Allowance for obsolescence                              $               43.6         $               47.2
As a percentage of total inventory                                       8.1 %                        8.2 %


Management believes that its allowance for obsolescence at December 31, 2019 is
adequate and proper. However, the impact resulting from the aforementioned
factors could cause actual results to vary. Any incremental obsolescence charges
would negatively affect the results of operations of one or more of Mattel's
business segments.
Goodwill
Mattel tests goodwill for impairment annually or more often if an event or
circumstance indicates that an impairment may have occurred. Management believes
that the accounting estimates related to the fair value estimates of its
goodwill are "critical accounting estimates" because significant changes in the
assumptions used to develop the estimates could materially affect key financial
measures, including net income, goodwill, and other intangible assets.
Assessing goodwill for impairment involves a high degree of judgment due to the
assumptions that underlie the valuation. For purposes of evaluating whether
goodwill is impaired, goodwill is allocated to various reporting units, which
are at the operating segment level. Mattel's reporting units are: (i) North
America, (ii) International, and (iii) American Girl. Mattel then assesses
qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value. This qualitative
assessment is used as a basis for determining whether it is necessary to perform
the quantitative goodwill impairment test.
When the quantitative goodwill impairment test is necessary, impairment is
determined by estimating the fair value of a reporting unit and comparing that
value to the reporting unit's carrying value. In the third quarter of 2017,
Mattel early adopted ASU 2017-04 Intangibles - Goodwill and Other: Simplifying
the Test for Goodwill Impairment, which removes Step 2 of the goodwill
impairment test. If the carrying amount of the reporting unit exceeds its fair
value, an impairment charge is recognized in an amount equal to the excess,
limited by the amount of goodwill in that reporting unit.
When performing the quantitative goodwill impairment test, Mattel utilizes the
fair value based upon both the discounted cash flows that the business can be
expected to generate in the future (the "Income Approach") and the market
approach. The Income Approach valuation method requires Mattel to make
projections of revenue, operating costs, and working capital investment for the
reporting unit over a multi-year period. Additionally, management must make an
estimate of a weighted-average cost of capital that a market participant would
use as a discount rate. Changes in these projections or estimates would impact
the estimated fair value, which could significantly change the amount of any
impairment ultimately recorded. The market approach utilizes earnings multiples
of comparable public companies, which are reflective of the market in which each
respective reporting unit operates, and recent comparable market transactions.
The market approach is utilized for the North America and International
Reporting Units.
In the third quarter of 2019, Mattel performed its annual impairment test and
determined that goodwill was not impaired since each reporting unit's fair value
exceeded its carrying value.
Based upon the results of the annual impairment test, the fair value of the
North America reporting unit was substantially in excess of its carrying value.
The estimated fair value of the American Girl and International reporting units
had more than 25% excess fair value over its carrying value.
The fair value of the American Girl reporting unit is impacted by expected sales
growth, gross margin, operating costs, working capital investments, and discount
rate. The estimates of gross margin, operating costs and working capital
investments tend to be fairly predictable in relation to gross sales. The
estimates of future sales growth tend to be one of the more significant
estimates in determining the overall fair value of the American Girl reporting
unit. The current forecast includes significant moderation in the decline of
sales in the near term resulting from recently launched growth initiatives,
followed by significant growth in sales from current levels as it continues to
increase consumer engagement in the brand. In addition, the fair value of the
American Girl reporting unit decreased significantly from the prior year as a
result of the increase in discount rate from 9.5% to 12%, due to a specific risk
premium. If American Girl is unable to successfully execute its plan to increase
sales through the renewal of consumer interest in the brand and its products,
goodwill may be impaired.

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The fair value of the International reporting unit is impacted by expected sales
growth, gross margin, operating costs, working capital investments, and discount
rate. The valuation of the International reporting unit decreased as a result of
the increase in discount rate from the prior year, from 11% to 12.5%. The
valuation model assumes incremental growth in sales and gross margin from
current levels. If Mattel is unable to successfully execute its plans in
international markets to achieve further growth in emerging markets, improve
gross margin, or has lower-than-expected market demand, goodwill may be
impaired.
In the third quarter of 2018, Mattel performed its annual impairment test and
determined that goodwill was not impaired since each reporting unit's fair value
exceeded its carrying value.
Sales Adjustments
Mattel routinely enters into arrangements with its customers to provide sales
incentives, support customer promotions, and provide allowances for returns and
defective merchandise. Such programs are based primarily on customer purchases,
customer performance of specified promotional activities, and other specified
factors such as sales to consumers. Accruals for these programs are recorded as
sales adjustments that reduce gross sales in the period the related sale is
recognized. Sales adjustments for such programs totaled $560.0 million and
$560.7 million during 2019 and 2018, respectively.
The above-described programs primarily involve fixed amounts or percentages of
sales to customers. The accrual for such programs, which can either be
contractual or discretionary in nature, is based on an assessment of customer
purchases, customer performance of specified promotional activities, and other
specified factors such as customer sales volume. While the majority of sales
adjustment amounts are readily determinable at period end and do not require
estimates, certain of the sales adjustments (i.e., discretionary sales
adjustments) require management to make estimates. In making these estimates,
management considers all available information, including the overall business
environment, historical trends, and information from customers. Management
believes that the accruals recorded for customer programs as of December 31,
2019 are adequate and proper.
Benefit Plan Assumptions
Mattel and certain of its subsidiaries have retirement and other postretirement
benefit plans covering substantially all employees of these companies. See
Item 8 "Financial Statements and Supplementary Data-Note 4 to the Consolidated
Financial Statements-Employee Benefit Plans."
Actuarial valuations are used in determining amounts recognized in the financial
statements for certain retirement and other postretirement benefit plans. These
valuations incorporate the following significant assumptions:
•          Weighted-average discount rate to be used to measure future plan
           obligations and interest cost component of plan income or

expense;

• Rate of future compensation increases (for defined benefit pension plans);

• Expected long-term rate of return on plan assets (for funded plans); and

• Health care cost trend rates (for other postretirement benefit plans).

Management believes that these assumptions are "critical accounting estimates"
because significant changes in these assumptions could impact Mattel's results
of operations and financial position. Management believes that the assumptions
utilized to record its obligations under its plans are reasonable based on the
plans' experience and advice received from its outside actuaries. Mattel reviews
its benefit plan assumptions annually and modifies its assumptions based on
current rates and trends as appropriate. The effects of such changes in
assumptions are amortized as part of plan income or expense in future periods.
At the end of each fiscal year, Mattel determines the weighted-average discount
rate used to calculate the projected benefit obligation. The discount rate is an
estimate of the current interest rate at which the benefit plan liabilities
could be effectively settled at the end of the year. The discount rate also
impacts the interest cost component of plan income or expense. As of
December 31, 2019, Mattel determined the discount rate for its domestic benefit
plans used in determining the projected and accumulated benefit obligations to
be 3.0%, as compared to 4.1% as of December 31, 2018. In estimating this rate,
Mattel reviews rates of return on high-quality corporate bond indices, which
approximate the timing and amount of benefit payments. Assuming all other
benefit plan assumptions remain constant, the decrease in the discount rate from
4.1% to 3.0% would result in a decrease in benefit plan expense during 2020 of
$0.6 million.
As a result of the curtailment of Mattel's domestic defined benefit pension
plans, the rate of future compensation increase was not applicable for the 2019
and 2018 benefit obligation and net periodic pension cost calculations.

                                                                            

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The long-term rate of return on plan assets is based on management's expectation
of earnings on the assets that secure Mattel's funded defined benefit pension
plans, taking into account the mix of invested assets, the arithmetic average of
past returns, economic and stock market conditions and future expectations, and
the long-term nature of the projected benefit obligation to which these
investments relate. The long-term rate of return is used to calculate the
expected return on plan assets that is used in calculating pension income or
expense. The difference between this expected return and the actual return on
plan assets is deferred, net of tax, and is included in accumulated other
comprehensive loss. The net deferral of past asset gains or losses affects the
calculated value of plan assets and, ultimately, future pension income or
expense. Mattel's long-term rate of return used in determining plan expense for
its domestic defined benefit pension plans was 6.0% in 2019 and 2018. Assuming
all other benefit plan assumptions remain constant, a one percentage point
decrease in the expected return on plan assets would result in an increase in
benefit plan expense during 2020 of $3.0 million.
The health care cost trend rates used by Mattel for its other postretirement
benefit plans reflect management's best estimate of expected claim costs over
the next ten years. These trend rates impact the service and interest cost
components of plan expense. Rates ranging from 7.0% in 2019 to 4.5% in 2025,
with rates assumed to stabilize in 2025 and thereafter, were used in determining
plan expense for 2019. These rates are reviewed annually and are estimated based
on historical costs for participants in the other postretirement benefit plans
as well as estimates based on current economic conditions. As of December 31,
2019, Mattel maintained the health care cost trend rates for its other
postretirement benefit plan obligation at 7.0% for participants younger than age
65, and 6.8% for participants age 65 and older. For all participants, the cost
trend rates are estimated to reduce to 4.5% by 2026, with rates assumed to
stabilize in 2026. Assuming all other postretirement benefit plan assumptions
remain constant, a one percentage point increase in the assumed health care cost
trend rates would result in a minimal increase in benefit plan expense during
2020.
A one percentage point increase/(decrease) in the assumed health care cost trend
rate for each future year would result in a minimal impact to the postretirement
benefit obligation as of December 31, 2019 and the service and interest cost
recognized for 2019.
Share-Based Payments
Mattel recognizes the cost of service-based employee share-based payment awards
on a straight-line attribution basis over the requisite employee service period,
net of estimated forfeitures. Determining the fair value of share-based awards
at the measurement date requires judgment, including estimating the expected
term that stock options will be outstanding prior to exercise, the associated
volatility, and the expected dividends. With the exception of certain
market-based options granted in 2018, which are valued using a Monte Carlo
valuation methodology, Mattel estimates the fair value of options granted using
the Black-Scholes valuation model. The expected life of the options used in this
calculation is the period of time the options are expected to be outstanding and
has been determined based on historical exercise experience. Expected stock
price volatility is based on the historical volatility of Mattel's stock for a
period approximating the expected life, the expected dividend yield is based on
Mattel's most recent actual annual dividend payout, and the risk-free interest
rate is based on the implied yield available on U.S. Treasury zero-coupon issues
approximating the expected life. Judgment is also required in estimating the
amount of share-based awards that will be forfeited prior to vesting. Management
believes that these assumptions are "critical accounting estimates" because
significant changes in the assumptions used to develop the estimates could
materially affect key financial measures, including net income.
There were no market-based options granted during 2019. The weighted-average
grant-date fair value of market-based options granted during 2018 valued using a
Monte Carlo valuation methodology was $4.21. The weighted-average grant-date
fair value of options granted during 2019 and 2018, valued using the
Black-Scholes valuation model was $5.09 and $5.46, respectively. The following
weighted-average assumptions were used in determining the fair value of options
granted:
                          2019     2018
Expected life (in years)  5.5      5.1
Risk-free interest rate   1.7 %    2.8 %
Volatility factor        38.1 %   33.6 %
Dividend yield              - %      - %



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The following tables summarize the sensitivity of valuation assumptions within
the calculation of stock option fair values, if all other assumptions are held
constant:
                                                            Increase (Decrease) in
                          Increase in Assumption Factor           Fair Value
Expected life (in years)               1                                8.4  %
Risk-free interest rate                1 %                              4.8  %
Volatility factor                      1 %                              2.1  %
Dividend yield                         1 %                            (10.0 )%


                                                          (Decrease) in
                                                           Assumption       Increase (Decrease) in
                                                             Factor               Fair Value
Expected life (in years)                                        (1)                   (9.5 )%
Risk-free interest rate                                          (1 )%                (4.9 )%
Volatility factor                                                (1 )%                (2.2 )%
Dividend yield                                                   (1 )%                10.8  %


Mattel recognized compensation expense of $11.3 million and $8.4 million for
stock options during 2019 and 2018, respectively, which is included within other
selling and administrative expenses. Compensation expense recognized related to
grants of restricted stock units ("RSUs"), including performance-based
restricted stock units ("Performance RSUs"), was $44.6 million and $40.5 million
in 2019 and 2018, respectively, and is also included within other selling and
administrative expenses. As of December 31, 2019, total unrecognized
compensation cost related to unvested share-based payments totaled $81.4 million
and is expected to be recognized over a weighted-average period of 1.9 years.
Income Taxes
Mattel accounts for income taxes in accordance with Accounting Standards
Codification ("ASC") 740-Income Taxes. Mattel's income tax provision and related
income tax assets and liabilities are based on actual and expected future
income, U.S. and foreign statutory income tax rates, and tax regulations and
planning opportunities in the various jurisdictions in which Mattel operates.
Management believes that the accounting estimates related to income taxes are
"critical accounting estimates" because significant judgment is required in
interpreting tax regulations in the U.S. and in foreign jurisdictions,
evaluating Mattel's worldwide uncertain tax positions, and assessing the
likelihood of realizing certain tax benefits. Actual results could differ
materially from those judgments, and changes in judgments could materially
affect Mattel's consolidated financial statements.
Certain income and expense items are accounted for differently for financial
reporting and income tax purposes. As a result, the income tax expense reflected
in Mattel's consolidated statements of operations is different than that
reported in Mattel's tax returns filed with the taxing authorities. Some of
these differences are permanent, such as expenses that are not deductible in
Mattel's tax return, and some are temporary differences that reverse over time,
such as depreciation expense. These timing differences create deferred income
tax assets and liabilities. Deferred income tax assets generally represent items
that can be used as a tax deduction or credit in Mattel's tax returns in future
years for which Mattel has already recorded a tax benefit in its consolidated
statements of operations. Mattel records a valuation allowance to reduce its
deferred income tax assets if, based on the weight of available evidence,
management believes expected future taxable income is not likely to support the
use of a deduction or credit in that jurisdiction. Management evaluates the
level of Mattel's valuation allowances at least annually, and more frequently if
actual operating results differ significantly from forecasted results.
Mattel records unrecognized tax benefits for U.S. federal, state, local, and
foreign tax positions related primarily to transfer pricing, tax credits
claimed, tax nexus, and apportionment. For each reporting period, management
applies a consistent methodology to measure unrecognized tax benefits and all
unrecognized tax benefits are reviewed periodically and adjusted as
circumstances warrant. Mattel's measurement of its unrecognized tax benefits is
based on management's assessment of all relevant information, including prior
audit experience, the status of audits, conclusions of tax audits, lapsing of
applicable statutes of limitations, identification of new issues, and any
administrative guidance or developments. Mattel recognizes unrecognized tax
benefits in the first financial reporting period in which information becomes
available indicating that such benefits will more-likely-than-not (a greater
than 50 percent likelihood) be realized.

                                                                            

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In the normal course of business, Mattel is regularly audited by federal, state,
local, and foreign tax authorities. The ultimate settlement of any particular
issue with the applicable taxing authority could have a material impact on
Mattel's consolidated financial statements.
New Accounting Pronouncements
See Item 8 "Financial Statements and Supplementary Data-Note 1 to the
Consolidated Financial Statements-Summary of Significant Accounting Policies."
Non-GAAP Financial Measures
To supplement the financial results presented in accordance with U.S. GAAP,
Mattel presents certain non-GAAP financial measures within the meaning of
Regulation G promulgated by the Securities and Exchange Commission. The non-GAAP
financial measures that Mattel presents include currency exchange rate impact
and gross sales. Mattel uses these metrics to analyze its continuing operations
and to monitor, assess, and identify meaningful trends in its operating and
financial performance. Mattel believes that the disclosure of non-GAAP financial
measures provides useful supplemental information to investors to be able to
better evaluate ongoing business performance and certain components of Mattel's
results. These measures are not, and should not be viewed as, substitutes for
GAAP financial measures and may not be comparable to similarly-titled measures
used by other companies.
Currency Exchange Rate Impact
The currency exchange rate impact reflects the portion (expressed as a
percentage) of changes in Mattel's reported results that are attributable to
fluctuations in currency exchange rates.
For entities reporting in currencies other than the U.S. dollar, Mattel
calculates the percentage change of period-over-period results at constant
currency exchange rates (established as described below) by translating current
period and prior period results using these rates. It then determines the
currency exchange rate impact percentage by calculating the difference between
the percentage change at such constant currency exchange rates and the
percentage change at actual exchange rates.
The constant currency exchange rates are determined by Mattel at the beginning
of each year and are applied consistently during the year. They are generally
different from the actual exchange rates in effect during the current or prior
period due to volatility in actual foreign exchange rates. Mattel considers
whether any changes to the constant currency rates are appropriate at the
beginning of each year. The exchange rates used for these constant currency
calculations are generally based on prior year actual exchange rates.
Mattel believes that the disclosure of the percentage impact of foreign currency
changes is useful supplemental information for investors to be able to gauge
Mattel's current business performance and the longer-term strength of its
overall business since foreign currency changes could potentially mask
underlying sales trends. The disclosure of the percentage impact of foreign
exchange allows investors to calculate the impact on a constant currency basis
and also enhances their ability to compare financial results from one period to
another.
Gross Sales
Gross sales represent sales to customers, excluding the impact of sales
adjustments. Net sales, as reported, include the impact of sales adjustments,
such as trade discounts and other allowances. Mattel presents changes in gross
sales as a metric for comparing its aggregate, brand, and geographic results to
highlight significant trends in Mattel's business. Changes in gross sales are
discussed because, while Mattel records the details of such sales adjustments in
its financial accounting systems at the time of sale, such sales adjustments are
generally not associated with brands and individual products, making net sales
less meaningful. Because sales adjustments are not allocated to individual
products, net sales are only presented on a consolidated and segment basis and
not on a brand level.
Since sales adjustments are determined by customer rather than at the brand
level, Mattel believes that the disclosure of gross sales by brand is useful
supplemental information for investors to be able to assess the performance of
its underlying brands (e.g., Barbie) and also enhances their ability to compare
sales trends over time.

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A reconciliation from Mattel's consolidated net sales to its consolidated gross sales is as follows:

                                    For the Year Ended                                 2019 vs 2018                            2018 vs 2017
                    December 31,       December 31,       December 31,        % Change        Currency Exchange       % Change        Currency Exchange
                        2019               2018               2017          as Reported          Rate Impact        as Reported          Rate Impact
                                                               (In millions, except percentage information)
Net sales         $      4,504.6     $      4,514.8     $      4,881.5           - %                   -1  %            -8  %               -1  %
Sales adjustments          560.0              560.7              632.6
Gross sales       $      5,064.6     $      5,075.5     $      5,514.1           - %                   -2  %            -8  %               -1  %

A reconciliation from net sales to gross sales for the North America segment is as follows:

                                    For the Year Ended                                 2019 vs 2018                            2018 vs 2017
                    December 31,       December 31,       December 31,        % Change        Currency Exchange       % Change        Currency Exchange
                        2019               2018               2017          as Reported          Rate Impact        as Reported          Rate Impact
                                                               (In millions, except percentage information)
Net sales         $      2,275.8     $      2,272.8     $      2,373.9           - %                    -  %            -4  %                -  %
Sales adjustments          156.5              149.3              162.8
Gross sales       $      2,432.3     $      2,422.1     $      2,536.7           - %                   -1  %            -5  %               -1  %


A reconciliation from net sales to gross sales for the International segment is
as follows:
                                    For the Year Ended                              2019 vs 2018                     2018 vs 2017
                                                                                               Currency                         Currency
                    December 31,       December 31,       December 31,        % Change         Exchange        % Change         Exchange
                        2019               2018               2017          as Reported      Rate Impact     as Reported      Rate Impact
                                                        (In millions, except percentage information)
Net sales         $      1,972.2     $      1,915.2     $      2,060.4           3 %              -4  %          -7  %             -2  %
Sales adjustments          391.6              397.1              443.1
Gross sales       $      2,363.8     $      2,312.2     $      2,503.5           2 %              -4  %          -8  %             -2  %


A reconciliation from net sales to gross sales for the American Girl segment is
as follows:
                                  For the Year Ended                            2019 vs 2018                    2018 vs 2017
                                                                                           Currency                        Currency
                   December 31,      December 31,      December 31,       % Change         Exchange       % Change         Exchange
                       2019              2018              2017          as

Reported     Rate Impact     as Reported     Rate Impact
                                                     (In millions, except percentage information)
Net sales         $       256.6     $       326.8     $       447.2         -21  %             - %          -27  %             - %
Sales adjustments          11.9              14.4              26.7
Gross sales       $       268.5     $       341.2     $       473.9         -21  %             - %          -28  %             - %



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