MATTEL, INC. 
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 2018 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," ofMattel 's Annual Report on Form 10-K for the year endedDecember 31, 2019 . The following discussion includes currency exchange rate impact, a non-GAAP financial measure within the meaning of Regulation G promulgated by theSEC ("Regulation G"), to supplement the financial results as reported in accordance with generally accepted accounting principles ("GAAP"). The currency exchange rate impact reflects the portion (expressed as a percentage) of changes inMattel 's reported results that are attributable to fluctuations in currency exchange rates.Mattel uses this non-GAAP financial measure to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Management believes that the disclosure of this non-GAAP financial measure provides useful supplemental information to investors to allow them to better evaluate ongoing business performance and certain components ofMattel 's results. This measure is not, and should not be viewed as, a substitute for GAAP financial measures. The following discussion also includes the use of gross billings, a key performance indicator. Gross billings represent amounts invoiced to customers. It does not include the impact of sales adjustments, such as trade discounts and other allowances.Mattel presents changes in gross billings as a metric for comparing its aggregate, categorical, brand, and geographic results to highlight significant trends inMattel 's business. Changes in gross billings are discussed because, whileMattel records the details of sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with categories, brands, and individual products. OverviewMattel is a leading global toy company and owner of one of the strongest catalogs of children's and family entertainment franchises in the world, creating innovative products and experiences that inspire, entertain and develop children through play.Mattel is focused on the following two-part strategy to transformMattel into an intellectual property ("IP") driven, high-performing toy company: •In the short-term, improve profitability by optimizing operations and accelerate topline growth by growingMattel 's Power Brands and expandingMattel 's brand portfolio. •In the mid-to-long-term, continue to make progress on capturing the full value ofMattel 's IP through franchise management and online retail and e-commerce. COVID-19 Update A novel strain of coronavirus disease ("COVID-19") was reported inDecember 2019 and characterized as a pandemic by theWorld Health Organization inMarch 2020 . The impact of COVID-19 and the actions taken by governments, businesses, and individuals in response to it have resulted in significant global economic disruption, including, but not limited to, temporary business closures, reduced retail traffic, volatility in financial markets, and restrictions on travel. The negative impact of retail disruptions and closures resulting from COVID-19 was substantial during the first half of 2020 but abated during the second half of 2020. Strong consumer demand for toys during the third and fourth quarters contributed to double digit year-over-year increases in net sales in theNorth America andEurope , theMiddle East , andAfrica ("EMEA") regions during those periods. Toy consumer demand improved in theAsia Pacific andLatin America regions, contributing to an improved year-over-year net sales performance in the second half as compared to the first half of 2020. American Girl retail channel net sales were negatively impacted by retail disruption and the permanent closure of certain retail stores in 2020. The negative impact of retail disruption and lower external distribution net sales were more than offset by higher direct-to-consumer channel net sales, resulting in a slight increase in year-over-year net sales for the American Girl segment.
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Mattel 's manufacturing and distribution network was fully operational as ofDecember 31, 2020 . Prolonged disruption toMattel 's customers, supply chain, or other critical operations would result in material adverse effects toMattel 's business and its liquidity. The future impact of COVID-19 onMattel 's results of operations, financial position, and cash flows remains uncertain at this time due to rapidly evolving circumstances.Mattel is closely monitoring the situation and actively managing its business as developments occur. Refer to Part I, Item 1A "Risk Factors" of this Annual Report on Form 10-K for further discussion regarding potential impacts of COVID-19 onMattel 's business. The specific line items that have been materially affected by these impacts of COVID-19 are noted as such within "Results of Operations" below. Additional discussion of the impact of COVID-19 onMattel 's liquidity and capital resources is discussed in "Liquidity and Capital Resources" and in "Cost Savings Programs" below. In addition to the impacts of COVID-19 discussed below, it is reasonably likely that the pandemic and its resulting effects could have other unforeseen consequences that affectMattel 's business. Results of Operations Consolidated Results The following table provides a summary ofMattel 's consolidated results for 2020 and 2019: For the Year Ended December 31, 2020 December 31, 2019 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$ 4,583.7 100.0 %$ 4,504.6 100.0 % 2 % - Gross profit$ 2,243.6 48.9 %$ 1,980.8 44.0 % 13 % 490 Advertising and promotion expenses 516.8 11.3 % 551.5 12.2 % -6 % (90) Other selling and administrative expenses 1,345.9 29.4 % 1,390.0 30.9 % -3 % (150) Operating income 380.9 8.3 % 39.2 0.9 % 871 % 740 Interest expense 198.3 4.3 % 201.0 4.5 % -1 % (20) Interest (income) (3.9) -0.1 % (6.2) -0.1 % -36 % - Other non-operating expense, net 2.7 1.9 Income (loss) before income taxes 183.8 4.0 % (157.5) -3.5 % n/m 750 Provision for income taxes 68.6 55.2 Income (loss) from equity method investments 11.5 (0.8) Net income (loss)$ 126.6 2.8 %$ (213.5) -4.7 % n/m 750 n/m - Not Meaningful 28
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Sales
The following table provides a summary ofMattel 's consolidated gross billings by categories, along with supplemental information by brand for 2020 and 2019: For the Year Ended Currency December 31, December 31, % Change as Exchange Rate 2020 2019 Reported Impact (In millions, except percentage information) Gross Billings by Categories Dolls$ 1,886.4 $ 1,724.0 9 % -2 % Infant, Toddler, and Preschool 1,149.7 1,257.6 -9 % -1 % Vehicles 1,110.0 1,101.3 1 % -2 % Action Figures,Building Sets , Games, and Other 991.6 981.6 1 % -1 % Gross Billings$ 5,137.8 $ 5,064.6 1 % -2 % Sales Adjustments (554.2) (560.0) Net Sales$ 4,583.7 $ 4,504.6 2 % -1 % Supplemental Gross Billings Disclosure Gross Billings by Top 3 Power Brands Barbie$ 1,350.1 $ 1,159.8 16 % -2 % Hot Wheels 954.2 925.9 3 % -2 % Fisher-Price and Thomas & Friends 1,065.5 1,131.8 -6 % -1 % Other 1,768.0 1,847.2 -4 % -1 % Gross Billings$ 5,137.8 $ 5,064.6 1 % -2 % Gross billings were$5.14 billion in 2020, an increase of$73.2 million , or 1%, as compared to$5.06 billion in 2019, with an unfavorable impact from changes in currency exchange rates of two percentage points. The increase in gross billings was primarily driven by higher billings of Dolls. Dolls gross billings increased 9%, of which 11% was driven by higher billings of Barbie products, primarily driven by positive brand momentum and point of sale demand ("POS"). This was partially offset by lower billings of Enchantimals products of 1% and lower billings of BTS products of 1%. Infant, Toddler, and Preschool gross billings decreased 9%, of which 6% was due to lower billings of Fisher-Price and Thomas & Friends products and 3% was due to lower billings ofFisher-Price Friends products. Vehicles gross billings increased 1%, of which 3% was driven by higher billings of Hot Wheels products, partially offset by lower billings of CARS products of 2% following its movie launch in a prior year. Action Figures,Building Sets , Games, and Other gross billings increased 1%, of which 7% was driven by initial billings of Star Wars: The Child plush products, 7% was driven by higher billings of card games products including UNO, and 3% was driven by higher billings of family games products including Pictionary and Scrabble. This was partially offset by lower billings of Toy Story 4 products of 15% following its 2019 theatrical release. Sales adjustments represent arrangements withMattel 's customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Sales adjustments as a percent of net sales was relatively consistent at 12.1% in 2020 as compared to 12.4% in 2019.
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Cost of Sales Cost of sales as a percentage of net sales was 51.1% in 2020, as compared to 56.0% in 2019. Cost of sales decreased by$183.7 million , or 7%, to$2.34 billion in 2020 from$2.52 billion in 2019, as compared to a 2% increase in net sales. Within cost of sales, product and other costs decreased by$128.6 million , or 6%, to$1.93 billion in 2020 from$2.06 billion in 2019; freight and logistics expenses increased by$6.59 million , or 3%, to$253.5 million in 2020 from$247.0 million in 2019; and royalty expense decreased by$61.8 million , or 28%, to$158.5 million in 2020 from$220.2 million in 2019. Cost of sales in 2019 included the impact of approximately$22 million related to the inclined sleeper product recalls. Within cost of sales, certain inbound freight costs were previously classified as freight and logistics costs.Mattel reclassified such inbound freight costs from freight and logistics expenses to present all inbound freight costs within product and other costs for the periods and segments presented. Gross Margin Gross margin increased to 48.9% in 2020 from 44.0% in 2019. The increase in gross margin was primarily driven by incremental realized savings from cost savings programs and a decrease in royalty expense resulting from lower sales of licensed products. Advertising and Promotion Expenses Advertising and promotion expenses primarily consist of: (i) media costs, which include the media, planning, and buying fees for television, print, and online advertisements, (ii) non-media costs, which include commercial and website production, merchandising, and promotional costs, (iii) retail advertising costs, which include consumer direct catalogs, newspaper inserts, fliers, and mailers, and (iv) generic advertising costs, which include trade show costs. Advertising and promotion expenses as a percentage of net sales decreased to 11.3% in 2020 from 12.2% in 2019, primarily driven by strategic reductions in advertising spend due to strong POS and the impact of COVID-19. Other Selling and Administrative Expenses Other selling and administrative expenses were$1.35 billion , or 29.4% of net sales, in 2020, as compared to$1.39 billion , or 30.9% of net sales, in 2019. The decrease in other selling and administrative expenses was mainly driven by incremental realized savings from cost savings programs, the absence of write-offs of American Girl retail store assets of approximately$26 million in 2019, and lower severance and other restructuring charges. This was partially offset by increased costs related to the impact of the inclined sleeper product recalls and higher incentive and share based compensation expense. Interest Expense Interest expense was$198.3 million in 2020, as compared to$201.0 million in 2019. The reduction in interest expense was due to debt extinguishment costs of$9.2 million in 2019 associated with the early redemption in the fourth quarter of 2019 of the 2010 Senior Notes dueOctober 2020 and the 2016 Senior Notes dueAugust 2021 as well as lower fees associated with the$1.60 billion senior secured revolving credit facilities. The reduction in interest expense was partially offset by the higher interest rates associated with the 2019 Senior Notes dueDecember 2027 issued in the fourth quarter of 2019 as compared to the 2010 Senior Notes and 2016 Senior Notes. Provision for Income TaxesMattel 's provision for income taxes was$68.6 million in 2020, as compared to$55.2 million in 2019. The 2020 income tax provision included a$5.1 million tax expense related to enacted tax law changes and the assessment of the future realizability of certain deferred tax assets, and a$4.3 million tax expense related to reassessments of prior year's tax liabilities based on the status of audits and settlements in various jurisdictions. 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.
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Mattel recorded a valuation allowance against certain domestic and foreign deferred tax assets as of bothDecember 31, 2020 andDecember 31, 2019 . Evaluating the need for and the amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence to determine whether it is more likely than not that these assets will be realized.Mattel intends to continue maintaining a valuation allowance on its deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. However, givenMattel 's improved operating results for the year endedDecember 31, 2020 , and if its financial results continue to improve, sufficient positive evidence may become available to allowMattel to reach a conclusion that a portion of the valuation allowance will no longer be needed. Release of the valuation allowance would result in the recognition of a portion of these deferred tax assets and a decrease to income tax expense for the period the release is recorded. However, the exact timing and amount of the valuation allowance release are subject to change depending on the level of profitability thatMattel is able to achieve in the tax jurisdictions in which a valuation allowance has been recorded. Income (loss) From Equity Method Investments Income from equity method investments was$11.5 million in 2020, as compared to a loss from equity method investments of$0.8 million in 2019. The increase in income from equity method investments was largely due to higher net sales of an equity method investment. Segment Results North America Segment The following table provides a summary ofMattel 's net sales, segment income, and gross billings by categories, along with supplemental information by brand, for theNorth America segment for 2020 and 2019: For the Year Ended Currency December 31, December 31, % Change as Exchange Rate 2020 2019 Reported Impact (In millions, except percentage information) Net Sales$ 2,424.6 $ 2,275.8 7 % - % Segment Income 608.1 357.0 70 % Gross Billings by Categories Dolls$ 770.6 $ 636.2 21 % - % Infant, Toddler, and Preschool 701.4 730.3 -4 % - % Vehicles 529.2 510.8 4 % - % Action Figures,Building Sets , Games, and Other 586.6 555.0 6 % - % Gross Billings$ 2,587.8 $ 2,432.3 6 % - % Sales Adjustments (163.2) (156.5) Net Sales$ 2,424.6 $ 2,275.8 7 % - % Supplemental Gross Billings Disclosure Gross Billings by Top 3 Power Brands Barbie$ 704.2 $ 558.3 26 % - % Hot Wheels 446.6 419.0 7 % - % Fisher-Price and Thomas & Friends 634.9 650.7 -2 % - % Other 802.1 804.2 - % - % Gross Billings$ 2,587.8 $ 2,432.3 6 % - % Gross billings for theNorth America segment were$2.59 billion in 2020, an increase of$155.5 million , or 6%, as compared to$2.43 billion in 2019. The increase in theNorth America segment gross billings was primarily driven by higher billings of Dolls. Dolls gross billings increased 21%, of which 23% was due to higher billings of Barbie products, primarily driven by positive brand momentum and POS. This was partially offset by lower billings of Lil Gleemerz products of 1% and lower billings of BTS products of 1%.
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Infant, Toddler, and Preschool gross billings decreased 4%, of which 3% was due to lower billings ofFisher-Price Friends products. Vehicles gross billings increased 4%, of which 6% was driven by higher billings of Hot Wheels products, partially offset by lower billings of CARS products of 2% following its movie launch in a prior year. Action Figures,Building Sets , Games, and Other gross billings increased 6%, of which 11% was driven by initial billings of Star Wars: The Child plush products, 8% was driven by higher billings of card games products including UNO, and 2% was driven by higher billings of family games products including Pictionary and Scrabble. This was partially offset by lower billings of Toy Story 4 products of 16% following its 2019 theatrical release. Sales adjustments as a percent of net sales was relatively consistent at 6.7% in 2020 as compared to 6.9% in 2019. Cost of sales decreased 6% in 2020, as compared to a 7% increase in net sales, primarily driven by lower product and other costs and royalty expense. Gross margin in 2020 increased primarily due to lower product costs driven by incremental realized savings from the cost savings programs, lower royalty expense, and the absence of the inclined sleeper product recall expense of approximately$26 million in 2019.North America segment income was$608.1 million in 2020, as compared to segment income of$357.0 million in 2019, mainly driven by higher gross profit. International Segment The following table provides a summary ofMattel 's net sales, segment income, and gross billings by categories, along with supplemental information by brand, for the International segment for 2020 and 2019: For the Year Ended Currency December 31, December 31, % Change as Exchange Rate 2020 2019 Reported Impact (In millions, except percentage information) Net Sales$ 1,900.7 $ 1,972.2 -4 % -3 % Segment Income 251.2 166.9 51 % Gross Billings by Categories Dolls$ 849.4 $ 819.4 4 % -3 % Infant, Toddler, and Preschool 448.4 527.3 -15 % -2 % Vehicles 580.8 590.5 -2 % -4 % Action Figures,Building Sets , Games, and Other 405.0 426.5 -5 % -2 % Gross Billings$ 2,283.5 $ 2,363.8 -3 % -2 % Sales Adjustments (382.8) (391.6) Net Sales$ 1,900.7 $ 1,972.2 -4 % -3 % Supplemental Gross Billings Disclosure Gross Billings by Top 3 Power Brands Barbie$ 645.9 $ 601.4 7 % -3 % Hot Wheels 507.6 506.9 - % -4 % Fisher-Price and Thomas & Friends 430.6 481.0 -10 % -2 % Other 699.3 774.5 -10 % -3 % Gross Billings$ 2,283.5 $ 2,363.8 -3 % -2 % Gross billings for the International segment were$2.28 billion in 2020, a decrease of$80.3 million , or 3%, as compared to$2.36 billion in 2019, with an unfavorable impact from changes in currency exchange rates of two percentage points. The decrease in International segment gross billings was primarily due to lower billings of Infant, Toddler, and Preschool. Dolls gross billings increased 4%, of which 6% was driven by higher billings of Barbie products, partially offset by lower billings of Enchantimals products of 2%.
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Infant, Toddler, and Preschool gross billings decreased 15%, of which 10% was due to lower billings of Fisher-Price and Thomas & Friends products, including the impact of retail store closures due to COVID-19, and 4% was due to lower billings ofFisher-Price Friends products, primarily driven by the exiting of certain licensing partnerships. Vehicles gross billings decreased 2%, of which 3% was due to lower billings of CARS products following its movie launch in a prior year, partially offset by higher billings of Matchbox products of 1%. Action Figures,Building Sets , Games, and Other gross billings decreased 5%, of which 16% was due to lower billings of Toy Story 4 products following its 2019 theatrical release. This was partially offset by higher billings of card games products including UNO of 7%, and higher billings of family games products including Pictionary and Scrabble of 4%. Sales adjustments as a percent of net sales was relatively consistent at 20.1% in 2020 as compared to 19.9% in 2019. Cost of sales decreased 12% in 2020, as compared to a 4% decrease in net sales, primarily driven by lower product and other costs and royalty expense. Gross margin in 2020 increased primarily due to lower product costs driven by incremental realized savings from the cost savings programs and lower royalty expense. International segment income was$251.2 million in 2020, as compared to a segment income of$166.9 million in 2019, mainly driven by higher gross profit. American Girl Segment The following table provides a summary ofMattel 's net sales, segment loss, and gross billings for the American Girl segment for 2020 and 2019: For the Year Ended Currency December 31, % Change as Exchange Rate December 31, 2020 2019 Reported Impact (In millions, except percentage information) Net Sales$ 258.4 $ 256.6 1 % - % Segment Loss (14.4) (58.8) -75 % American Girl Segment Total Gross Billings$ 266.5 $ 268.5 -1 % - % Sales Adjustments (8.1) (11.9) Total Net Sales$ 258.4 $ 256.6 1 % - % Gross billings for the American Girl segment were$266.5 million in 2020, a decrease of$2.0 million , or 1%, as compared to$268.5 million in 2019. The decrease in American Girl gross billings was primarily due to lower billings in proprietary retail channels, which were negatively impacted by retail disruption due to COVID-19, the impact of the permanent closure of certain retail stores; and lower billings of external distribution channels. This was substantially offset by higher direct-to-consumer channel billings. Sales adjustments as a percent of net sales decreased to 3.1% in 2020 as compared to 4.6% in 2019 due to lower wholesale returns. Net sales for the American Girl segment were$258.4 million in 2020, an increase of$1.8 million , or 1%, as compared to$256.6 million in 2019. American Girl retail channel net sales were negatively impacted by retail disruption and the permanent closure of certain retail stores in 2020. The negative impact of retail disruption and lower external distribution net sales were more than offset by higher direct-to-consumer channel net sales, resulting in a slight increase in year-over-year net sales for the American Girl segment. Cost of sales increased 8% in 2020, as compared to a 1% increase in net sales, primarily due to higher freight and logistics expenses. Gross margin in 2020 decreased primarily due to higher freight and logistics expenses due to higher direct-to-consumer channel sales. American Girl segment loss was$14.4 million in 2020, as compared to segment loss of$58.8 million in 2019, driven largely by lower other selling and administrative expenses due to the absence of write-offs of American Girl retail store assets of approximately$26 million in 2019, the temporary closure of retail stores due to COVID-19, and the subsequent permanent closure of certain retail stores.
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Cost Savings Programs Optimizing for Growth (formerly Capital Light) OnFebruary 9, 2021 ,Mattel announced the Optimizing for Growth program, a multi-year cost savings program which integrates and expands upon the previously announced Capital Light program (the "Program"). Targeted annual gross cost savings from actions that are expected to be completed beginning 2021 through 2023 are$250 million . Of the$250 million in incremental targeted gross cost savings, approximately 50% is expected to benefit Cost of Sales, 40% to benefit Other Selling and Administrative Expenses, and 10% to benefit Advertising and Promotion Expense. Incremental cash expenditures associated with the Program are expected to be approximately$100 to$125 million .Mattel estimates the cost of incremental actions for the Program to be as follows: Optimizing for Growth - Incremental Actions Estimate of Cost Employee severance$40 to$50 million Real estate/supply chain optimization and other restructuring costs$15 to$20 million Asset impairments and other non-cash charges$25 to$30 million Total estimated severance and restructuring costs$80 to$100 million Information technology enhancements and other investments$45 to$55 million Total estimated incremental charges
Cumulatively, in conjunction with previous actions taken under the Capital Light program, targeted annual gross cost savings for the Program are$325 million by 2023, with total expected cash expenditures of approximately$140 to$165 million , and total non-cash charges of$40 to$45 million . Of the$325 million in targeted gross cost savings, approximately 60% is expected to benefit Cost of Sales, 30% to benefit Other Selling and Administrative Expenses, and 10% to benefit Advertising and Promotion Expense. In connection with the Program,Mattel has recorded severance and other restructuring costs in the following cost and expense categories within the consolidated statements of operations: For the Year Ended December 31, 2020 December 31, 2019 (In millions) Cost of sales (a)$ 5.7 $ 18.6 Other selling and administrative (b) 7.2 19.0$ 12.9 $ 37.6 (a)Severance and other restructuring costs recorded within cost of sales in the consolidated statements of operations are included in segment income (loss) in "Note 13 to the Consolidated Financial Statements-Segment Information." During the year endedDecember 31, 2020 ,$5.7 million was recorded within cost of sales, of which$3.5 million and$2.2 million are included in theNorth America and International segments, respectively. During the year endedDecember 31, 2019 ,$18.6 million was recorded within cost of sales, of which$10.4 million ,$8.0 million , and$0.2 million are included inNorth America , International, and American Girl segments, respectively. (b)Severance and other restructuring costs recorded within other selling and administrative expenses in the consolidated statements of operations are included in corporate and other expense in "Note 13 to the Consolidated Financial Statements-Segment Information." As ofDecember 31, 2020 ,Mattel has recorded cumulative severance and other restructuring charges related to the Program of approximately$51 million , which include approximately$15 million of non-cash charges.Mattel realized cumulative cost savings (before severance, restructuring costs, and cost inflation) of approximately$75 million , primarily within gross profit, as ofDecember 31, 2020 in connection with the Program.
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Other Cost Savings Actions In connection withMattel 's continued efforts to further streamline its organizational structure and restore profitability, onMay 4, 2020 ,Mattel committed to a planned 4% reduction in its non-manufacturing workforce. The timing of this action was accelerated due to the impact of COVID-19. As a result of the reduction in force actions initiated in 2020,Mattel realized approximately$40 million of run-rate cost savings exiting 2020. During the year endedDecember 31, 2020 ,Mattel recorded severance charges of approximately$19 million , primarily related to actions taken to further streamline its organizational structure. During the year endedDecember 31, 2020 ,Mattel recorded additional severance and other restructuring charges of approximately$9 million , related to actions initiated in the prior year associated with the Structural Simplification cost savings program. Income Taxes See Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Provision for Income Taxes." Liquidity and Capital ResourcesMattel 's primary sources of liquidity are its cash and equivalents balances, including access to earnings of certain foreign subsidiaries, short-term borrowing facilities, including its$1.60 billion senior secured revolving credit facilities, and access to capital markets to fund its operations and obligations. Such obligations may include investing and financing activities such as capital expenditures and debt service. OfMattel 's$762.2 million in cash and equivalents as ofDecember 31, 2020 , approximately$446.3 million was held by foreign subsidiaries. Cash flows from operating activities could be negatively impacted by decreased demand forMattel 's products, which could result from factors such as, but not limited to, adverse economic conditions and changes in public and consumer preferences, or by increased costs associated with manufacturing and distribution of products or shortages in raw materials or component parts. Additionally,Mattel 's ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as, but not limited to, global economic crises and tight credit environments, an inability to meet its debt covenant requirements and its senior secured revolving credit facilities covenants, or deterioration ofMattel 's credit ratings. As discussed above under Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations-COVID-19 Update" of this Annual Report on Form 10-K, many of the aforementioned factors have been and may be adversely affected by COVID-19. However, based onMattel 's current business plan and factors known to date, including the currently known impacts of COVID-19, it is expected that existing cash and equivalents, cash flows from operations, availability under the senior secured credit revolving facilities, and access to capital markets, will be sufficient to meet working capital and operating expenditure requirements for the next twelve months. Refer to Part I, Item 1A "Risk Factors" of this Annual Report on Form 10-K for further discussion regarding potential impacts of COVID-19 onMattel 's business. TheU.S. Tax Act, enacted onDecember 22, 2017 , providesMattel 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$12.0 million tax charge related to approximately$457 million of foreign earnings that will not be indefinitely reinvested. With the passage of theU.S. Tax Act, repatriations of foreign cash generally will not be taxable forU.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 ConditionsMattel 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 ofDecember 31, 2020 , there were no amounts outstanding under the senior secured revolving credit facilities. Market conditions could affect certain terms of other debt instruments thatMattel enters into from time to time.Mattel monitors the third-party depository institutions that holdMattel '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.
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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 ofMattel '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 mitigateMattel 's accounts receivable collectability risks, and customer terms and credit limits are adjusted, if necessary. Additionally,Mattel uses a variety of financial arrangements to ensure collectability of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.Mattel sponsors defined benefit pension plans and postretirement benefit plans for its employees. Actual returns below the expected rate of return, along with changes in interest rates that affect the measurement of the liability, would impact the amount and timing ofMattel 's future contributions to these plans. Cash Flow Activities Cash flows provided by operating activities were$288.5 million during 2020, as compared to$181.0 million during 2019. The increase in cash flows provided by operating activities in 2020 from 2019 was primarily driven by current year net income, excluding the impact of non-cash charges, partially offset by higher working capital usage. Cash flows used for investing activities were$134.9 million during 2020, as compared to$114.2 million during 2019. The increase in cash flows used for investing activities in 2020 from 2019 was mainly driven by higher payments for foreign currency forward exchange contracts. Cash flows used for financing activities were$5.8 million during 2020, as compared to$33.1 million during 2019. The decrease in cash flows from financing activities in 2020 from 2019 was primarily due to the refinancing in 2019 of both the 2010 Senior Notes dueOctober 2020 and the 2016 Senior Notes dueAugust 2021 with the 2019 Senior Notes dueDecember 2027 . During 2020 and 2019,Mattel did not repurchase any shares of its common stock.Mattel 's share repurchase program was first announced onJuly 21, 2003 . OnJuly 17, 2013 , the Board of Directors authorizedMattel to increase its share repurchase program by$500.0 million . AtDecember 31, 2020 , 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 2020 and 2019,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 Ratings In 2020, Fitch changedMattel 's long-term credit rating from B- to B and maintained a positive outlook. In 2020, Moody's maintainedMattel 's long-term credit rating of B1, with a stable outlook. In 2020,Standard & Poor's changedMattel 's long-term credit rating of BB- to B+ and maintained a negative outlook. Financial PositionMattel 's cash and equivalents increased$132.2 million to$762.2 million atDecember 31, 2020 , as compared to$630.0 million atDecember 31, 2019 . The increase was largely driven by cash provided by operating activities, partially offset by capital expenditures and payments of foreign currency forward exchange contracts. Accounts receivable increased$97.6 million to$1.03 billion atDecember 31, 2020 , as compared to$936.4 million atDecember 31, 2019 . The increase in accounts receivable was primarily due to higher fourth quarter sales in 2020. Inventory increased$19.2 million to$514.7 million atDecember 31, 2020 , as compared to$495.5 million atDecember 31, 2019 . The increase in inventory was due to higher inventory to meet expected future demands.
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Accounts payable and accrued liabilities increased$98.4 million to$1.33 billion atDecember 31, 2020 , as compared to$1.23 billion atDecember 31, 2019 . The change in accounts payable and accrued liabilities was mostly due to higher fourth quarter advertising and promotion activity in 2020. A summary ofMattel 's capitalization is as follows: December 31, 2020 December 31, 2019 (In millions, except percentage information) Cash and equivalents$ 762.2 $ 630.0 Short-term borrowings 1.0 - 2010 Senior Notes due October 2040 250.0 250.0 2011 Senior Notes due November 2041 300.0 300.0 2013 Senior Notes due March 2023 250.0 250.0 2017/2018 Senior Notes due December 2025 1,500.0 1,500.0 2019 Senior Notes due December 2027 600.0 600.0 Debt issuance costs and debt discount (45.3) (53.2) Total debt 2,855.7 83 % 2,846.8 85 % Stockholders' equity 596.3 17 491.7 15 Total capitalization (debt plus equity)$ 3,452.0 100 %$ 3,338.5 100 % Total long-term debt remained at$2.9 billion atDecember 31, 2020 . Stockholders' equity increased$104.6 million to$596.3 million atDecember 31, 2020 , as compared to$491.7 million atDecember 31, 2019 , primarily due to the net income for the year. Off-Balance Sheet ArrangementsMattel 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 to which they relate are reflected as liabilities in the consolidated balance sheets. Outstanding letters of credit totaled approximately$11 million as ofDecember 31, 2020 . Commitments In the normal course of business,Mattel enters into debt agreements, and contractual arrangements to obtain and protectMattel 's right to create and market certain products and for future purchases of goods and services to ensure availability and timely delivery. These arrangements include commitments for royalty payments pursuant to licensing agreements, which routinely contain provisions for guarantees or minimum expenditures during the terms of the contracts, and future inventory and service purchases.Mattel also has defined benefit and postretirement benefit plans, which require future cash contributions and benefit payments. Additionally,Mattel routinely enters into noncancelable lease agreements for premises and equipment used, which contain minimum rental payments.
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The following table summarizesMattel 's contractual commitments and obligations: Total 2021 2022 2023 2024 2025 Thereafter (In millions) Long-term debt$ 2,900.0 $ - $ -$ 250.0 $ -$ 1,500.0 $ 1,150.0 Interest on long-term debt 1,415.7 176.2 176.2 170.0 168.4 168.4 556.5 Leases (a) 421.4 95.1 72.0 53.5 44.2 35.3 121.3 Minimum guarantees under licensing and similar agreements 132.9 52.8 43.1 35.7 1.3 0.1 - Defined benefit and postretirement benefit plans 381.3 48.3 37.8 37.3 39.9 38.4
179.6
Purchases of inventory, services, and other 322.1 244.2 48.2 29.7 - - - Total$ 5,573.4 $ 616.6 $ 377.3 $ 576.2 $ 253.8 $ 1,742.2 $ 2,007.4 (a) See Item 8 "Financial Statements and Supplementary Data-Note 7 to the Consolidated Financial Statements-Leases." 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 regarding 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 theU.S. and in major foreign countries whereMattel does business have not had a significant impact on its results of operations or financial position during 2020 or 2019.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 PlanMattel sponsors a 401(k) savings plan, theMattel, 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 byMattel . The automatic contributions byMattel were temporarily suspended inMay 2020 and reinstated inNovember 2020 . 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 inMattel common stock (the "Mattel Stock Fund "). Employees are not required to allocate any of their Plan account balance to theMattel Stock Fund , allowing employees to limit or eliminate their exposure to market changes inMattel 's stock price. Furthermore, the Plan limits the percentage of the employee's total account balance that may be allocated to theMattel Stock Fund to 25%. Employees may generally reallocate their account balances on a daily basis. However, pursuant toMattel 's insider trading policy, employees classified as insiders underMattel 's insider trading policy are limited to certain periods in which they may make allocations into or out of theMattel Stock Fund . Application of Critical Accounting Policies and EstimatesMattel 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 thoseMattel 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 ofMattel 's significant accounting policies, estimates, and methods used in the preparation ofMattel '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 inthe United States of America ("U.S. GAAP"). Accounts Receivable-Allowance for Credit Losses The allowance for credit losses is based on collection history and management's assessment of the current economic trends, business environment, customers' financial condition, accounts receivable aging, and customer disputes that may impact the level of future credit losses. Management believes the accounting estimate related to the allowance for credit losses 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 toMattel .Mattel 's products are sold throughout the world. Products within theNorth 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 inAustralia and New Zealand , and through agents and distributors in those countries whereMattel 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, financial difficulty, or other factors beyond the control ofMattel . This could increaseMattel 's exposure to losses from bad debts. A small number of customers account for a large share ofMattel 's net sales and accounts receivable. In 2020,Mattel 's three largest customers, Walmart, Target, and Amazon, in the aggregate, accounted for approximately 47% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 54% of net sales. As ofDecember 31, 2020 ,Mattel 's three largest customers accounted for approximately 46% of net accounts receivable, and its ten largest customers accounted for approximately 56% of net accounts receivable. The concentration ofMattel 's business with a relatively small number of customers may exposeMattel to a material adverse effect if one or more ofMattel '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 collectability 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 difficulty, 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 collectability of accounts receivable of customers, 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 summarizesMattel 's allowance for credit losses: December 31, December 31, 2020 2019 (In millions, except percentage information) Allowance for credit losses $ 15.9$ 18.5 As a percentage of total accounts receivable 1.5 % 1.9 % Changes in the allowance for credit losses reflect management's assessment of the factors noted above, including changes in current economic trends, business environment, past due accounts, disputed balances with customers, and the financial condition of customers. The allowance for credit losses is also affected by the time at which uncollectable accounts receivable balances are actually written off.
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Mattel believes that its allowance for credit losses atDecember 31, 2020 is adequate and proper. However, as described above,Mattel 's business is greatly dependent on a small number of customers. Should one or more ofMattel 's major customers experience bankruptcy or financial difficulty, the allowance for credit losses may not be sufficient to cover such losses. Any incremental bad debt charges would negatively affect the results of operations of one or more ofMattel 's business segments. Inventories-Obsolescence Reserve Inventories 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 obsolescence expense is charged to cost of sales and establish a lower cost basis for the inventory. Management believes that the accounting estimate related to the obsolescence reserve 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 ofMattel '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 toMattel '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, requiringMattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase inventory valuation risk becauseMattel 's inventory levels may be adversely impacted by the need to pre-build products before orders are placed. When 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 whichMattel participates. Because all components ofMattel '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 products more difficult. Such economic changes may affect the sales ofMattel '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 ofMattel '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
December 31, December 31,
2020 2019
(In millions, except percentage information)
Obsolescence reserve $ 34.8 $ 43.6
As a percentage of total inventory 6.3 % 8.1 %
Management believes that its obsolescence reserve at December 31, 2020 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. 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 determines 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, gross margin, 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 Income Approach
valuation method is utilized for all reporting units. The market approach
determines fair value utilizing 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 2020, 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 billings in the period the related sale is
recognized. Sales adjustments for such programs totaled $554.2 million and
$560.0 million during 2020 and 2019, 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 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, 2020 are adequate and
proper.
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Benefit Plan AssumptionsMattel 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 certain 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 impactMattel '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 ofDecember 31, 2020 ,Mattel determined the discount rate for its domestic benefit plans used in determining the projected and accumulated benefit obligations to be 2.2%, as compared to 3.0% as ofDecember 31, 2019 . 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, a one percentage point decrease in the discount rate would result in an immaterial change in benefit plan expense during 2021. As a result of the curtailment ofMattel 's domestic defined benefit pension plans, the rate of future compensation increase was not applicable for the 2020 and 2019 benefit obligation and net periodic pension cost calculations. The long-term rate of return on plan assets is based on management's expectation of earnings on the assets that secureMattel '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 5.5% in 2020 and 6.0% in 2019. Assuming all other benefit plan assumptions remain constant, a one percentage point decrease in the expected return on plan assets would result in an immaterial change in benefit plan expense during 2021. The health care cost trend rates used byMattel 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 2020 to 4.5% in 2026, with rates assumed to stabilize in 2026 and thereafter, were used in determining plan expense for 2020. 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 ofDecember 31, 2020 ,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 2027, with rates assumed to stabilize in 2027. Assuming all other postretirement benefit plan assumptions remain constant, a one percentage point increase in the assumed health care cost trend rates would result in an immaterial change in benefit plan expense during 2021.
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Share-Based PaymentsMattel 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 aMonte 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 ofMattel 's stock for a period approximating the expected life, the expected dividend yield is based onMattel 's most recent actual annual dividend payout, and the risk-free interest rate is based on the implied yield available onU.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 2020 and 2019. The weighted-average grant-date fair value of options granted during 2020 and 2019, valued using the Black-Scholes valuation model was$4.60 and$5.09 , respectively. The following weighted-average assumptions were used in determining the fair value of options granted: 2020 2019 Expected life (in years) 5.9 5.5 Risk-free interest rate 0.3 % 1.7 % Volatility factor 43.7 % 38.1 % Dividend yield - % - % 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 7.3 % Risk-free interest rate 1 % 4.3 % Volatility factor 1 % 2.0 % Dividend yield 1 % (9.9) % Increase (Decrease) in (Decrease) in Assumption Factor Fair Value Expected life (in years) (1) (8.2) % Risk-free interest rate (1) % (4.3) % Volatility factor (1) % (2.1) % Dividend yield (1) % 10.7 %Mattel recognized total share-based compensation expense related to stock options, restricted stock units ("RSUs"), and performance RSUs ("performance awards") of$60.2 million and$56.0 million during 2020 and 2019, respectively, which is included in other selling and administrative expenses in the consolidated statements of operations. As ofDecember 31, 2020 , total unrecognized compensation cost related to unvested share-based payments totaled$77.7 million and is expected to be recognized over a weighted-average period of 1.9 years. See Item 8 "Financial Statements and Supplementary Data-Note 8 to the Consolidated Financial Statements-Share-Based Payments"
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Income TaxesMattel 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 whichMattel 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 theU.S. and in foreign jurisdictions, evaluatingMattel '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 affectMattel '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 inMattel 's consolidated statements of operations is different than that reported inMattel 's tax returns filed with the taxing authorities. Some of these differences are permanent, such as expenses that are not deductible inMattel '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 inMattel 's tax returns in future years for whichMattel 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 ofMattel 's valuation allowances at least annually, and more frequently if actual operating results differ significantly from forecasted results.Mattel records unrecognized tax benefits forU.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. 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 onMattel '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 Measure To supplement the financial results presented in accordance withU.S. GAAP,Mattel presents a non-GAAP financial measure within the meaning of Regulation G promulgated by theSEC . The non-GAAP financial measure thatMattel presents is currency exchange rate impact.Mattel uses this measure to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance.Mattel believes that the disclosure of this non-GAAP financial measure provides useful supplemental information to investors to be able to better evaluate ongoing business performance and certain components ofMattel 's results. This measure is not, and should not be viewed as, a substitute for GAAP financial measures and may not be comparable to similarly-titled measures used by other companies. Currency Exchange Rate Impact The currency exchange rate impact reflects the portion (expressed as a percentage) of changes inMattel 's reported results that are attributable to fluctuations in currency exchange rates. For entities reporting in currencies other than theU.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.
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The constant currency exchange rates are determined byMattel 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 gaugeMattel '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. Key Performance Indicator Gross billings represent amounts invoiced to customers. It does not include the impact of sales adjustments, such as trade discounts and other allowances.Mattel presents changes in gross billings as a metric for comparing its aggregate, categorical, brand, and geographic results to highlight significant trends inMattel 's business. Changes in gross billings are discussed because, whileMattel records the details of sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with categories, brands, and individual products. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Foreign Currency Exchange Rate Risk Currency exchange rate fluctuations impactMattel 's results of operations and cash flows. Inventory transactions denominated in the Euro, Mexican peso, British pound sterling, Canadian dollar, Russian ruble, Australian dollar and Brazilian real were the primary transactions that caused foreign currency transaction exposure forMattel in 2020.Mattel seeks to mitigate its exposure to market risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. For those intercompany receivables and payables that are not hedged, the transaction gains or losses are recorded in the consolidated statements of operations in the period in which the exchange rate changes as part of operating income (loss) or other non-operating expense, net based on the nature of the underlying transaction. Transaction gains or losses on hedged intercompany inventory transactions are recorded in the consolidated statements of operations in the period in which the inventory is sold to customers. In addition,Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings.Mattel does not trade in financial instruments for speculative purposes.Mattel 's financial position is also impacted by currency exchange rate fluctuations on translation of its net investments in subsidiaries with non-U.S. dollar functional currencies. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated intoU.S. dollars at fiscal year-end exchange rates. Income, expense, and cash flow items are translated at weighted-average exchange rates prevailing during the fiscal year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders' equity.Mattel 's primary currency translation adjustments in 2020 were related to its net investments in entities having functional currencies denominated in the Brazilian real, Russian ruble, British pound sterling and the Mexican peso. There are numerous factors impacting the amount by whichMattel 's financial results are affected by foreign currency translation and transaction gains and losses resulting from changes in currency exchange rates, including, but not limited to, the level of foreign currency forward exchange contracts in place at a given time and the volume of foreign currency-denominated transactions in a given period. However, assuming that such factors were held constant,Mattel estimates that a 1 percent change in theU.S. dollar Trade-Weighted Index would impactMattel 's net sales by approximately 0.4% and its full year earnings per share by approximately$0.00 to$0.01 .Mattel 's foreign currency forward exchange contracts that were used to hedge firm foreign currency commitments as ofDecember 31, 2020 are shown below. All contracts in the following table are against theU.S. dollar and are maintained by reporting units with aU.S. dollar functional currency, with the exception of the Indonesian rupiah contracts, which are maintained by entities with an Indonesian rupiah functional currency.
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Buy Sell
Weighted-Average Weighted-Average
Contract Contract Fair Contract Contract Fair
Amount Rate Value Amount Rate Value
(In thousands of U.S. dollars, except for rates)
Australian dollar (a) $ - - $ - $ 63,670 0.72 $ (4,791)
British pound sterling (a) 38,047 1.35 638 - - -
Canadian dollar (a) 29,595 0.78 297 39,128 0.76 (1,419)
Czech koruna 15,697 21.53 75 - - -
Danish krone 3,068 6.09 - - - -
Euro (a) 75,606 1.22 3 318,360 1.16 (18,219)
Hungarian forint 6,888 298.05 51 - - -
Indonesian rupiah 42,725 14,639.64 2,001 - - -
Japanese yen 5,758 103.78 35 674 103.82 (3)
Mexican peso 6,178 20.07 72 7,403 20.61 (194)
New Zealand dollar (a) 9,536 0.71 125 - - -
Polish zloty 30,797 3.68 (350) - - -
Russian ruble 55,700 73.86 165 - - -
Singapore dollar 11,191 1.33 111 - - -
South African rand - - - 6,158 14.67 17
Swiss franc 26,201 0.89 147 - - -
Turkish lira - - - 5,189 7.43 33
$ 356,987 $ 3,370 $ 440,582 $ (24,576)
(a) The weighted-average contract rate for these contracts is quoted in U.S.
dollar per local currency.
For the purchase of foreign currencies, fair value reflects the amount, based on
dealer quotes, that Mattel would pay at maturity for contracts involving the
same notional amounts, currencies, and maturity dates, if they had been entered
into as of December 31, 2020 . For the sale of foreign currencies, fair value
reflects the amount, based on dealer quotes, that Mattel would receive at
maturity for contracts involving the same notional amounts, currencies, and
maturity dates, if they had been entered into as of December 31, 2020 . The
differences between the market forward amounts and the contract amounts are
expected to be fully offset by currency transaction gains and losses on the
underlying hedged transactions.
In addition to the contracts involving the U.S. dollar detailed in the above
table, Mattel also had contracts to sell British pound sterling for the purchase
of Euro. As of December 31, 2020 , these contracts had a contract amount of $43.1
million and a fair value of $1.1 million .
Had Mattel not entered into hedges to limit the effect of currency exchange rate
fluctuations on its results of operations and cash flows, its earnings before
income taxes would have increased by approximately $13.7 million in 2020 and
decreased by approximately $20 million in 2019.
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United Kingdom Operations DuringJune 2016 , the referendum by British voters to exit the EU ("Brexit") adversely impacted global markets and resulted in a sharp decline of the British pound sterling against theU.S. dollar. InFebruary 2017 , theBritish Parliament voted in favor of allowing the British government to begin the formal process of Brexit and discussions with the EU began inMarch 2017 . OnJanuary 29, 2020 , theBritish Parliament approved a withdrawal agreement, and theUnited Kingdom ("U.K.") officially withdrew from the EU onJanuary 31, 2020 and entered into a transition period, ending onDecember 31, 2020 . OnDecember 24, 2020 , theU.K. and EU agreed upon The EU-UK Trade and Cooperation Agreement. The agreement was provisionally applicable beginningJanuary 1, 2021 and sets new rules and arrangements between theU.K. and EU in areas such as the trade of goods and services, intellectual property, transportation, and more. As a result of the agreement, theU.K. will no longer be considered a member of theEU Single Market andCustoms Union and will exit all EU policies and trade agreements. The transfer of goods between theU.K. and EU will be subject to additional inspections and checkpoints causing possible delays in the movement of inventory. Although the agreement has mitigated a portion of the risk that arose due to theU.K.'s withdrawal from the EU, the overall impact caused onMattel 's operations is still being evaluated, including in the volatility of the British pound sterling.Mattel 'sU.K. operations represented approximately 6% ofMattel 's consolidated net sales for the year endedDecember 31, 2020 . Argentina Operations EffectiveJuly 1, 2018 ,Mattel accounted forArgentina as a highly inflationary economy, as the projected three-year cumulative inflation rate exceeded 100%. As such, beginningJuly 1, 2018 ,Mattel 'sArgentina subsidiary has designated theU.S. dollar as its functional currency.Mattel 'sArgentina subsidiary represented less than 1% ofMattel 's consolidated net sales for the years endedDecember 31, 2020 and 2019.
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