Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-05647

 

 

MATTEL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   95-1567322
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

333 Continental Blvd.

El Segundo, CA

  90245-5012
(Address of principal executive offices)   (Zip Code)

(310) 252-2000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report):

NONE

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  x     Accelerated filer  ¨
Non-accelerated filer  ¨   (Do not check if a smaller reporting company)   Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares outstanding of registrant’s common stock, $1.00 par value, as of October 18, 2013:

338,434,453 shares

 

 

 

 


Table of Contents

MATTEL, INC. AND SUBSIDIARIES

 

          Page  
   PART I   

Item 1.

   Financial Statements      3   
   Consolidated Balance Sheets      3   
   Consolidated Statements of Operations      4   
   Consolidated Statements of Comprehensive Income      5   
   Consolidated Statements of Cash Flows      6   
   Notes to Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      37   

Item 4.

   Controls and Procedures      38   
   PART II   

Item 1.

   Legal Proceedings      39   

Item 1A.

   Risk Factors      39   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      39   

Item 3.

   Defaults Upon Senior Securities      39   

Item 4.

   Mine Safety Disclosures      39   

Item 5.

   Other Information      39   

Item 6.

   Exhibits      40   
   Signature      41   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

MATTEL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     September  30,
2013
    September  30,
2012
    December  31,
2012
 
    

(Unaudited; in thousands,

except share data)

 

ASSETS

      

Current Assets

      

Cash and equivalents

   $ 406,461      $ 282,095      $ 1,335,711   

Accounts receivable, net

     1,885,181        1,828,211        1,226,833   

Inventories

     807,209        796,352        465,057   

Prepaid expenses and other current assets

     538,659        366,680        529,204   
  

 

 

   

 

 

   

 

 

 

Total current assets

     3,637,510        3,273,338        3,556,805   
  

 

 

   

 

 

   

 

 

 

Noncurrent Assets

      

Property, plant, and equipment, net

     634,773        575,288        593,213   

Goodwill

     1,080,090        1,079,979        1,080,798   

Other noncurrent assets

     1,343,882        1,390,124        1,295,969   
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 6,696,255      $ 6,318,729      $ 6,526,785   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

      

Current Liabilities

      

Short-term borrowings

   $ 77,814      $ 154,503      $ 9,844   

Current portion of long-term debt

     50,000        350,000        400,000   

Accounts payable

     394,857        376,896        385,375   

Accrued liabilities

     883,092        734,715        887,748   

Income taxes payable

     65,806        47,296        33,045   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     1,471,569        1,663,410        1,716,012   
  

 

 

   

 

 

   

 

 

 

Noncurrent Liabilities

      

Long-term debt

     1,600,000        1,150,000        1,100,000   

Other noncurrent liabilities

     616,517        601,461        643,729   
  

 

 

   

 

 

   

 

 

 

Total noncurrent liabilities

     2,216,517        1,751,461        1,743,729   
  

 

 

   

 

 

   

 

 

 

Stockholders’ Equity

      

Common stock $1.00 par value, 1.0 billion shares authorized; 441.4 million shares issued

     441,369        441,369        441,369   

Additional paid-in capital

     1,769,396        1,704,358        1,727,682   

Treasury stock at cost; 101.1 million shares, 98.6 million shares, and 99.1 million shares, respectively

     (2,387,663     (2,122,438     (2,152,702

Retained earnings

     3,672,646        3,316,642        3,515,181   

Accumulated other comprehensive loss

     (487,579     (436,073     (464,486
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     3,008,169        2,903,858        3,067,044   
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 6,696,255      $ 6,318,729      $ 6,526,785   
  

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

MATTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the Three Months Ended     For the Nine Months Ended  
     September  30,
2013
    September  30,
2012
    September  30,
2013
    September  30,
2012
 
    

(Unaudited; in thousands,

except per share amounts)

 

Net Sales

   $ 2,206,961      $ 2,077,816      $ 4,371,676      $ 4,164,976   

Cost of sales

     1,018,981        962,445        2,043,637        1,981,712   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

     1,187,980        1,115,371        2,328,039        2,183,264   

Advertising and promotion expenses

     249,386        234,793        467,329        445,047   

Other selling and administrative expenses

     410,419        393,211        1,171,914        1,090,681   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     528,175        487,367        688,796        647,536   

Interest expense

     19,576        22,723        58,172        65,352   

Interest (income)

     (1,394     (1,472     (4,083     (5,158

Other non-operating (income), net

     (4,350     (731     (2,530     (1,034
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Taxes

     514,343        466,847        637,237        588,376   

Provision for income taxes

     91,507        100,910        102,542        118,392   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 422,836      $ 365,937      $ 534,695      $ 469,984   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Common Share—Basic

   $ 1.22      $ 1.06      $ 1.54      $ 1.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares

     343,279        342,595        344,733        341,006   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Per Common Share—Diluted

   $ 1.21      $ 1.04      $ 1.52      $ 1.35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common and potential common shares

     346,695        347,122        348,626        345,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends Declared Per Common Share

   $ 0.36      $ 0.31      $ 1.08      $ 0.93   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

MATTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2013
    September 30,
2012
    September 30,
2013
    September 30,
2012
 
     (Unaudited; in thousands)  

Net Income

   $ 422,836      $ 365,937      $ 534,695      $ 469,984   

Other Comprehensive Income (Loss), Net of Tax:

        

Currency translation adjustments

     34,757        28,944        (30,005     10,593   

Defined benefit pension plans net prior service credit and net actuarial loss

     3,877        2,854        10,742        6,705   

Net unrealized (losses) gains on derivative instruments:

        

Unrealized holding (losses) gains

     (10,614     3,933        (3,348     14,713   

Reclassification adjustment for realized losses (gains) included in net income

     321        (12,573     (482     (21,439
  

 

 

   

 

 

   

 

 

   

 

 

 
     (10,293     (8,640     (3,830     (6,726
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss), Net of Tax

     28,341        23,158        (23,093     10,572   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 451,177      $ 389,095      $ 511,602      $ 480,556   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

MATTEL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Nine Months Ended  
     September 30,
2013
    September 30,
2012
 
     (Unaudited; in thousands)  

Cash Flows From Operating Activities:

    

Net income

   $ 534,695      $ 469,984   

Adjustments to reconcile net income to net cash flows used for operating activities:

    

Depreciation

     132,407        113,961   

Amortization

     12,743        12,474   

Asset impairment

     14,000        —    

Deferred income taxes

     11,287        38,692   

Tax benefits from share-based payment arrangements

     (47,807     (30,222

Share-based compensation

     47,213        42,822   

(Decrease) increase from changes in assets and liabilities, net of acquired assets and liabilities:

    

Accounts receivable

     (662,845     (541,715

Inventories

     (352,518     (288,903

Prepaid expenses and other current assets

     (21,209     (16,247

Accounts payable, accrued liabilities, and income taxes payable

     35,528        106,537   

Other, net

     (24,749     (8,526
  

 

 

   

 

 

 

Net cash flows used for operating activities

     (321,255     (101,143
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Purchases of tools, dies, and molds

     (90,432     (74,433

Purchases of other property, plant, and equipment

     (88,214     (82,117

Payments for acquisition, net of cash acquired

     —         (684,522

Proceeds from foreign currency forward exchange contracts

     4,839        6,943   

Other, net

     (2,076     844   
  

 

 

   

 

 

 

Net cash flows used for investing activities

     (175,883     (833,285
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Payments of short-term borrowings, net

     (9,844     (8,018

Proceeds from short-term borrowings, net

     77,814        154,503   

Payment of credit facility renewal costs

     (4,003     —    

Payments of long-term borrowings

     (350,000     (50,000

Proceeds from long-term borrowings, net

     495,260        —    

Share repurchases

     (400,161     (38,902

Payment of dividends on common stock

     (372,341     (317,021

Proceeds from exercise of stock options

     116,143        104,889   

Tax benefits from share-based payment arrangements

     47,807        30,222   

Other, net

     (21,991     (29,456
  

 

 

   

 

 

 

Net cash flows used for financing activities

     (421,316     (153,783
  

 

 

   

 

 

 

Effect of Currency Exchange Rate Changes on Cash

     (10,796     1,193   
  

 

 

   

 

 

 

Decrease in Cash and Equivalents

     (929,250     (1,087,018

Cash and Equivalents at Beginning of Period

     1,335,711        1,369,113   
  

 

 

   

 

 

 

Cash and Equivalents at End of Period

   $ 406,461      $ 282,095   
  

 

 

   

 

 

 

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

 

6


Table of Contents

MATTEL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of only those of a normal recurring nature, considered necessary for a fair presentation of the financial position and interim results of Mattel, Inc. and its subsidiaries (“Mattel” or the “Company”) as of and for the periods presented have been included. Because Mattel’s business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year.

The year-end balance sheet data was derived from audited financial statements; however, the accompanying interim notes to the consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America.

The financial information included herein should be read in conjunction with Mattel’s consolidated financial statements and related notes in its 2012 Annual Report on Form 10-K.

 

2. Accounts Receivable

Accounts receivable are net of allowances for doubtful accounts of $21.5 million, $20.6 million, and $33.5 million as of September 30, 2013, September 30, 2012, and December 31, 2012, respectively.

 

3. Inventories

Inventories include the following:

 

                                                                 
     September 30,
2013
     September 30,
2012
    December 31,
2012
 
     (In thousands)  

Raw materials and work in process

   $ 110,256       $ 112,555      $ 79,216   

Finished goods

     696,953         683,797        385,841   
  

 

 

    

 

 

   

 

 

 
   $ 807,209       $ 796,352      $ 465,057   
  

 

 

    

 

 

   

 

 

 

 

4. Property, Plant, and Equipment

Property, plant, and equipment, net includes the following:

 

                                                                 
     September 30,
2013
    September 30,
2012
    December 31,
2012
 
     (In thousands)  

Land

   $ 26,990      $ 26,703      $ 26,692   

Buildings

     268,961        266,653        268,381   

Machinery and equipment

     975,886        911,985        931,732   

Tools, dies, and molds

     710,521        663,532        674,119   

Capital leases

     23,271        23,271        23,271   

Leasehold improvements

     222,397        205,929        208,900   
  

 

 

   

 

 

   

 

 

 
     2,228,026        2,098,073        2,133,095   

Less: accumulated depreciation

     (1,593,253     (1,522,785     (1,539,882
  

 

 

   

 

 

   

 

 

 
   $ 634,773      $ 575,288      $ 593,213   
  

 

 

   

 

 

   

 

 

 

 

5. Goodwill

Goodwill is allocated to various reporting units, which are at the operating segment level, for purposes of evaluating whether goodwill is impaired. Mattel’s reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel tests its goodwill for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying amount may exceed its fair value.

In the third quarter of 2013, Mattel assessed its goodwill for impairment by evaluating qualitative factors for each of its reporting units in accordance with Accounting Standards Update (“ASU”) 2011-08, Testing Goodwill for Impairment, and determined that it was not more likely than not that the fair values of its reporting units were less than the carrying amounts. As a result of this determination, the quantitative two-step goodwill impairment test was deemed unnecessary.

 

7


Table of Contents

The change in the carrying amount of goodwill by operating segment for the nine months ended September 30, 2013 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the North America and American Girl operating segments selling those brands, thereby causing a foreign currency translation impact for these operating segments.

 

     December 31,
2012
    

Currency

Exchange Rate

Impact

    September 30,
2013
 
            (In thousands)        

North America

   $ 546,898       $ (160   $ 546,738   

International

     320,169         (704     319,465   

American Girl

     213,731         156        213,887   
  

 

 

    

 

 

   

 

 

 

Total goodwill

   $     1,080,798       $         (708   $     1,080,090   
  

 

 

    

 

 

   

 

 

 

Acquisition of HIT Entertainment™

On February 1, 2012, Mattel acquired Helium Holdings 1A Ltd, a private limited company existing under the laws of Jersey (“HIT Entertainment”), pursuant to the Stock Purchase Agreement dated as of October 23, 2011, between Mattel’s wholly-owned subsidiary, Mattel Entertainment Holdings Limited, a private limited company existing under the laws of England and Wales (the “Purchasing Sub”), HIT Entertainment’s parent company, HIT Entertainment Scottish Limited Partnership, a limited partnership existing under the laws of Scotland and majority-owned by a consortium of funds led by Apax Partners, LLP and its affiliates (the “Selling Stockholder”) and, with respect to certain provisions thereof, Mattel (the “Purchase Agreement”). Pursuant to the terms set forth in the Purchase Agreement, Mattel indirectly acquired, through the Purchasing Sub, 100% of the issued and outstanding shares of HIT Entertainment from the Selling Stockholder for total cash consideration of $713.5 million, including payment for acquired cash, subject to customary adjustments. HIT Entertainment owns and licenses a diverse portfolio of pre-school entertainment brands, including Thomas & Friends®.

The total consideration was allocated to the assets acquired and liabilities assumed based on their estimated fair values. As a result of the acquisition, Mattel recognized $510.7 million of identifiable intangible assets (primarily related to intellectual property rights), $49.4 million of net liabilities assumed (primarily related to deferred tax liabilities), and $252.2 million of goodwill, which is not deductible for tax purposes. The fair values of the identifiable intangible assets were estimated based on the multi-period excess earnings method, using Level 3 inputs within the fair value hierarchy, which included forecasted future cash flows, long-term revenue growth rates, and the weighted average cost of capital. Goodwill relates to a number of factors built into the purchase price, including the future earnings and cash flow potential of the business, as well as the complementary strategic fit and the resulting synergies it brings to Mattel’s existing operations.

Mattel finalized the valuation of the assets acquired and liabilities assumed in the fourth quarter of 2012, which resulted in adjustments to the purchase price allocation during the measurement period. As such, Mattel has retrospectively adjusted the provisional amounts recorded in its consolidated balance sheet as of September 30, 2012 as if the valuation of the assets acquired and liabilities assumed was finalized as of the acquisition date. The retrospective adjustments resulted in an increase to the net liabilities assumed of approximately $9 million and goodwill of approximately $9 million, including an adjustment to the consideration paid to acquire HIT Entertainment of less than $0.1 million, which was also recognized as a decrease to Mattel’s other current assets in the consolidated balance sheet. The adjustment to the consideration paid also resulted in a retrospective adjustment to the consolidated statement of cash flows, which increased cash flows used for investing activities and decreased cash flows used for operating activities by less than $0.1 million for the nine months ended September 30, 2012. No retrospective adjustments have been made to the consolidated statements of operations for the three and nine months ended September 30, 2012.

Additionally, during the three and nine months ended September 30, 2013, Mattel recognized approximately $2 million and $5 million of integration costs, respectively. During the three and nine months ended September 30, 2012, Mattel recognized approximately $3 million and $14 million of integration costs, respectively. Mattel also recognized approximately $6 million of transaction costs during the nine months ended September 30, 2012. No transaction costs were incurred during the three months ended September 30, 2012 or during the three and nine months ended September 30, 2013. Integration and transaction costs are recorded within other selling and administrative expenses in the consolidated statements of operations. The pro forma and actual results of operations for this acquisition have not been presented because they are not material.

 

8


Table of Contents
6. Other Noncurrent Assets

Other noncurrent assets include the following:

 

     September 30,
2013
     September 30,
2012
     December 31,
2012
 
     (In thousands)  

Nonamortizable identifiable intangibles

   $       504,241       $       617,223       $       617,223   

Deferred income taxes

     407,756         465,662         374,667   

Identifiable intangibles (net of amortization of $72.3 million, $61.8 million, and $64.9 million, respectively)

     178,569         91,369         88,786   

Other

     253,316         215,870         215,293   
  

 

 

    

 

 

    

 

 

 
   $ 1,343,882       $ 1,390,124       $ 1,295,969   
  

 

 

    

 

 

    

 

 

 

In connection with the acquisition of HIT Entertainment, as more fully described in “Note 5 to the Consolidated Financial Statements—Goodwill” of this Quarterly Report on Form 10-Q, Mattel recognized $495.0 million of nonamortizable identifiable intangible assets and $15.7 million of amortizable identifiable intangible assets, primarily related to intellectual property rights.

During the second quarter of 2013, Mattel changed its brand strategy for Polly Pocket®, which includes a more focused allocation of resources to support the Polly Pocket brand in specific markets, resulting in a reduction of the forecasted future cash flows of the brand. As a result of the change, Mattel tested the Polly Pocket trade name for impairment. The Polly Pocket trade name, which had a carrying value of approximately $113 million, was previously determined to be a nonamortizable intangible asset. Its fair value was determined to be approximately $99 million based on a discounted cash flow analysis using the multi-period excess earnings method. Level 3 inputs, including forecasted future cash flows, an estimated useful life, and a discount rate, were used in the valuation. Since the fair value of the asset was below the carrying value, Mattel recorded an impairment charge of approximately $14 million, which is reflected within other selling and administrative expenses for the North America and International operating segments.

In conjunction with the Polly Pocket trade name impairment test, Mattel reassessed the intangible asset’s nonamortizable classification and determined that the nonamortizable classification could no longer be supported. During the second quarter of 2013, the Polly Pocket trade name was reclassified as an amortizable intangible asset, and the remaining fair value of the asset is being amortized over its estimated remaining useful life.

Mattel tests nonamortizable intangible assets, including trademarks and trade names, for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying values may exceed the fair values. During the third quarter of 2013, Mattel performed annual quantitative impairment assessments and determined that the remaining nonamortizable intangible assets were not impaired.

Mattel also tests its amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Amortizable intangible assets were determined to not be impaired during the three and nine months ended September 30, 2013.

 

7. Accrued Liabilities

Accrued liabilities include the following:

 

     September 30,
2013
     September 30,
2012
     December 31,
2012
 
     (In thousands)  

Litigation accrual

   $       137,800       $ —         $       137,800   

Advertising and promotion

     112,013               138,036         87,878   

Royalties

     110,463         91,003         97,051   

Taxes other than income taxes

     93,665         87,132         80,673   

Other

     429,151         418,544         484,346   
  

 

 

    

 

 

    

 

 

 
   $ 883,092       $ 734,715       $ 887,748   
  

 

 

    

 

 

    

 

 

 

 

8. Seasonal Financing

Mattel maintains and periodically amends or replaces its domestic unsecured committed revolving credit facility with a commercial bank group. The facility is used as a back-up to Mattel’s commercial paper program, which is used as the primary source of financing for the seasonal working capital requirements of its domestic subsidiaries. The agreement governing the credit facility was amended and restated on March 11, 2013 to, among other things, (i) extend the maturity date of the credit facility to March 12,

 

9


Table of Contents

2018, (ii) increase aggregate commitments under the credit facility to $1.60 billion, with an “accordion feature,” which allows Mattel to increase the aggregate availability under the credit facility to $1.85 billion under certain circumstances, (iii) decrease the applicable interest rate margins to a range of 0.00% to 0.75% above the applicable base rate for base rate loans and 0.88% to 1.75% above the applicable London Interbank Borrowing Rate (“LIBOR”) for Eurodollar rate loans, in each case depending on Mattel’s senior unsecured long-term debt rating, and (iv) decrease commitment fees to a range of 0.08% to 0.28% of the unused commitments under the credit facility.

The amended facility has a borrowing capacity of up to $1.60 billion over a term of five years. Prior to the amendment, the facility permitted Mattel to borrow up to $1.40 billion and had two years remaining to maturity. The proportion of unamortized debt issuance costs from the prior facility renewal related to creditors involved in both the prior facility and amended facility and borrowing costs incurred as a result of the amendment were deferred and will be amortized over the term of the amended facility.

Mattel is required to meet financial ratio covenants at the end of each quarter and fiscal year, using the formulae specified in the credit facility agreement to calculate the ratios. Mattel was in compliance with such covenants at September 30, 2013.

The credit agreement is a material agreement and failure to comply with the financial ratio covenants may result in an event of default under the terms of the credit facility. If Mattel defaulted under the terms of the credit facility, its ability to meet its seasonal financing requirements could be adversely affected.

 

9. Long-term Debt

Long-term debt includes the following:

 

     September 30,
2013
    September 30,
2012
    December 31,
2012
 
     (In thousands)  

Medium-term notes due November 2013

   $ 50,000      $ 50,000      $ 50,000   

2008 Senior Notes

     —         350,000        350,000   

2010 Senior Notes due October 2020 and October 2040

     500,000        500,000        500,000   

2011 Senior Notes due November 2016 and November 2041

     600,000        600,000        600,000   

2013 Senior Notes due March 2018 and March 2023

     500,000        —         —    
  

 

 

   

 

 

   

 

 

 
     1,650,000        1,500,000        1,500,000   

Less: current portion

     (50,000     (350,000     (400,000
  

 

 

   

 

 

   

 

 

 

Total long-term debt

   $  1,600,000      $      1,150,000      $  1,100,000   
  

 

 

   

 

 

   

 

 

 

In March 2013, Mattel issued $250.0 million aggregate principal amount of 1.70% senior unsecured notes (“1.70% Senior Notes”) due March 15, 2018 and $250.0 million aggregate principal amount of 3.15% senior unsecured notes (“3.15% Senior Notes”) due March 15, 2023 (collectively, “2013 Senior Notes”). Interest on the 2013 Senior Notes is payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2013. Mattel may redeem all or part of the 1.70% Senior Notes at any time or from time to time at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest to but excluding the redemption date, and (ii) a “make-whole” amount based on the yield of a comparable US Treasury security plus 15 basis points. Mattel may redeem all or part of the 3.15% Senior Notes at any time or from time to time prior to December 15, 2022 (three months prior to the maturity date of the 3.15% Senior Notes) at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest to but excluding the redemption date, and (ii) a “make-whole” amount based on the yield of a comparable US Treasury security plus 20 basis points. Mattel may redeem all or part of the 3.15% Senior Notes at any time or from time to time on or after December 15, 2022 (three months prior to the maturity date for the 3.15% Senior Notes) at its option, at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest to but excluding the redemption date.

During the first quarter of 2013, Mattel repaid $350.0 million aggregate principal amount of its 5.625% senior unsecured notes due March 15, 2013 (“2008 Senior Notes”) in connection with their scheduled maturity using proceeds from the issuance of the 2013 Senior Notes.

 

10


Table of Contents
10. Other Noncurrent Liabilities

Other noncurrent liabilities include the following:

 

     September 30,
2013
     September 30,
2012
     December 31,
2012
 
     (In thousands)  

Benefit plan liabilities

   $       270,482       $       263,529       $       284,614   

Noncurrent tax liabilities

     188,122         192,143         213,658   

Other

     157,913         145,789         145,457   
  

 

 

    

 

 

    

 

 

 
   $ 616,517       $ 601,461       $ 643,729   
  

 

 

    

 

 

    

 

 

 

 

11. Accumulated Other Comprehensive Income (Loss)

In 2013, Mattel adopted ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to present either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The following tables present changes in the accumulated balances for each component of other comprehensive income, including current period other comprehensive income and reclassifications out of accumulated other comprehensive income:

 

     For the Three Months Ended September 30, 2013  
     Derivative
Instruments
    Defined Benefit
Pension Plans
    Currency
Translation
Adjustments
    Total  
     (In thousands)  

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of June 30, 2013

   $ 3,880      $ (183,791   $ (336,009   $ (515,920

Other comprehensive (loss) income before reclassifications

     (10,614     236        34,757       24,379   

Amounts reclassified from accumulated other comprehensive income (loss)

     321        3,641        —         3,962   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in other comprehensive income

     (10,293     3,877        34,757       28,341   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2013

     $      (6,413     $    (179,914     $    (301,252     $    (487,579
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended September 30, 2013  
     Derivative
Instruments
    Defined Benefit
Pension Plans
    Currency
Translation
Adjustments
    Total  
     (In thousands)  

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2012

   $ (2,583   $ (190,656   $ (271,247   $ (464,486

Other comprehensive (loss) income before reclassifications

     (3,348     861        (30,005     (32,492

Amounts reclassified from accumulated other comprehensive income (loss)

     (482     9,881        —         9,399   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in other comprehensive income

     (3,830     10,742        (30,005     (23,093
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2013

   $ (6,413   $ (179,914   $ (301,252   $ (487,579
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Three Months Ended September 30, 2012  
     Derivative
Instruments
    Defined Benefit
Pension Plans
    Currency
Translation
Adjustments
    Total  
     (In thousands)  

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of June 30, 2012

   $ 26,530      $ (168,547   $ (317,214   $ (459,231

Other comprehensive income (loss) before reclassifications

     3,933        (3,286     28,944        29,591   

Amounts reclassified from accumulated other comprehensive income (loss)

     (12,573     6,140        —         (6,433
  

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents
     For the Three Months Ended September 30, 2012  
     Derivative
Instruments
    Defined Benefit
Pension Plans
    Currency
Translation
Adjustments
    Total  
     (In thousands)  

Net (decrease) increase in other comprehensive income

     (8,640     2,854        28,944        23,158   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2012

   $         17,890        $    (165,693     $    (288,270     $    (436,073
  

 

 

   

 

 

   

 

 

   

 

 

 
     For the Nine Months Ended September 30, 2012  
     Derivative
Instruments
    Defined Benefit
Pension Plans
    Currency
Translation
Adjustments
    Total  
     (In thousands)  

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2011

   $ 24,616      $ (172,398   $ (298,863   $ (446,645

Other comprehensive income (loss) before reclassifications

     14,713        (7,597     10,593        17,709   

Amounts reclassified from accumulated other comprehensive income (loss)

     (21,439     14,302        —         (7,137
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in other comprehensive income

     (6,726     6,705        10,593        10,572   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss), Net of Tax, as of September 30, 2012

   $ 17,890      $ (165,693   $ (288,270   $ (436,073
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the classification and amount of the reclassifications from accumulated other comprehensive income to the statement of operations:

 

     For the Three
Months  Ended
September 30, 2013
    For the Three
Months  Ended
September 30, 2012
    Statements of Operations
Classification
     (In thousands)      

Derivative Instruments

      

(Loss) gain on foreign currency forward exchange contracts

   $ (589   $ 12,540      Cost of sales
     268        33      Provision for income taxes
  

 

 

   

 

 

   
   $ (321   $ 12,573      Net income
  

 

 

   

 

 

   

Defined Benefit Pension Plans

      

Prior service credit

   $             541      $ 398      (a)

Actuarial loss

     (4,406     (5,950   (a)

Settlement loss

     (1,835     (3,534   (a)
  

 

 

   

 

 

   
     (5,700     (9,086  
     2,059              2,946      Provision for income taxes
  

 

 

   

 

 

   
   $ (3,641   $ (6,140   Net income
  

 

 

   

 

 

   

 

     For the Nine
Months  Ended
September 30, 2013
    For the Nine
Months  Ended
September 30, 2012
    Statements of Operations
Classification
     (In thousands)      

Derivative Instruments

  

Gain on foreign currency forward exchange contracts

   $             224      $ 21,572      Cost of sales
     258              (133   Provision for income taxes
  

 

 

   

 

 

   
   $ 482      $ 21,439      Net income
  

 

 

   

 

 

   

 

12


Table of Contents
     For the Nine
Months  Ended
September 30, 2013
    For the Nine
Months  Ended
September 30, 2012
    Statements of Operations
Classification
     (In thousands)      

Defined Benefit Pension Plans

      

Prior service credit

   $             793      $ 377      (a)

Actuarial loss

     (14,698     (17,490   (a)

Settlement loss

     (1,835     (3,534   (a)
  

 

 

   

 

 

   
     (15,740     (20,647  
     5,859              6,345      Provision for income taxes
  

 

 

   

 

 

   
   $ (9,881   $ (14,302   Net income
  

 

 

   

 

 

   

 

(a) The amortization of prior service credit and actuarial loss and the settlement loss are included in the computation of net periodic benefit cost. Refer to “Note 15 to the Consolidated Financial Statements—Employee Benefit Plans” of this Quarterly Report on Form 10-Q for additional information regarding Mattel’s net periodic benefit cost.

Currency Translation Adjustments

Mattel’s reporting currency is the US dollar. The translation of its net investments in subsidiaries with non-US dollar functional currencies subjects Mattel to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at fiscal period-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Currency translation adjustments resulted in a net loss of $30.0 million for the nine months ended September 30, 2013, primarily due to the weakening of the Brazilian real, Indonesian rupiah, and Australian dollar against the US dollar, partially offset by the strengthening of the Euro against the US dollar. Currency translation adjustments resulted in a net gain of $10.6 million for the nine months ended September 30, 2012, primarily due to the strengthening of the Mexican peso and British pound sterling against the US dollar.

 

12. Derivative Instruments

Mattel seeks to mitigate its exposure to foreign currency transaction risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts. Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its purchases and sales of inventory denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. These derivative instruments have been designated as effective cash flow hedges, whereby the unsettled hedges are reported in Mattel’s consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in other comprehensive income (“OCI”). Realized gains and losses for these contracts are recorded in the consolidated statements of operations in the period in which the inventory is sold to customers. Additionally, Mattel uses foreign currency forward exchange contracts to hedge intercompany loans and advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these contracts, and as such, changes in fair value are recorded in the period of change in the consolidated statements of operations. As of September 30, 2013, September 30, 2012, and December 31, 2012, Mattel held foreign currency forward exchange contracts with notional amounts of approximately $1.46 billion, $1.33 billion, and $1.36 billion, respectively.

 

13


Table of Contents

The following table presents Mattel’s derivative assets and liabilities:

 

     Asset Derivatives  
     Balance Sheet Classification      Fair Value  
            September 30,
2013
     September 30,
2012
     December 31,
2012
 
                   (In thousands)         

Derivatives designated as hedging instruments:

           

Foreign currency forward exchange contracts

    
 
Prepaid expenses and
other current assets
  
  
   $ 1,146       $ 19,403       $ 3,064   

Foreign currency forward exchange contracts

    
 
Other noncurrent
assets
  
  
     —          465         4   
     

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

      $       1,146       $       19,868       $       3,068   
     

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

           

Foreign currency forward exchange contracts

    
 
Prepaid expenses and
other current assets
  
  
   $ 2,224       $ —        $ —    
     

 

 

    

 

 

    

 

 

 

Total

      $         3,370       $ 19,868       $ 3,068   
     

 

 

    

 

 

    

 

 

 
     Liability Derivatives  
     Balance Sheet Classification      Fair Value  
            September 30,
2013
     September 30,
2012
     December 31,
2012
 
                   (In thousands)         

Derivatives designated as hedging instruments:

           

Foreign currency forward exchange contracts

     Accrued liabilities       $ 13,171       $ 8,528       $ 8,093   

Foreign currency forward exchange contracts

    
 
Other noncurrent
liabilities
  
  
     1,234         394         177   
     

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

      $ 14,405       $ 8,922       $ 8,270   
     

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

           

Foreign currency forward exchange contracts

     Accrued liabilities       $ 703       $ 2,821       $ 487   
     

 

 

    

 

 

    

 

 

 

Total

      $     15,108       $     11,743       $       8,757   
     

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

The following tables present the classification and amount of gains and losses, net of tax, from derivatives reported in the consolidated statements of operations:

 

     For the Three Months Ended
September 30, 2013
    For the Three Months Ended
September 30, 2012
     Statements  of
Operations
Classification
     Amount of Gain
(Loss)  Recognized
in OCI
    Amount of
Gain (Loss)
Reclassified from
Accumulated  OCI
to Statements of
Operations
    Amount of Gain
(Loss)  Recognized
in OCI
     Amount of
Gain (Loss)
Reclassified from
Accumulated  OCI
to Statements of
Operations
    
           (In thousands)              

Derivatives designated as hedging instruments

            

Foreign currency forward exchange contracts

   $ (10,614   $ (321   $ 3,933       $ 12,573       Cost of sales
  

 

 

   

 

 

   

 

 

    

 

 

    
     For the Nine Months Ended
September 30, 2013
    For the Nine Months Ended
September 30, 2012
     Statements  of
Operations
Classification
     Amount of Gain
(Loss)  Recognized
in OCI
    Amount of
Gain (Loss)
Reclassified from
Accumulated  OCI
to Statements of
Operations
    Amount of Gain
(Loss)  Recognized
in OCI
     Amount of
Gain (Loss)
Reclassified from
Accumulated  OCI
to Statements of
Operations
    
           (In thousands)              

Derivatives designated as hedging instruments

            

Foreign currency forward exchange contracts

   $ (3,348   $     482      $ 14,713       $ 21,439       Cost of sales
  

 

 

   

 

 

   

 

 

    

 

 

    

The net loss of $0.3 million and net gain of $0.5 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three and nine months ended September 30, 2013, respectively, and the net gains of $12.6 million and $21.4 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three and nine months ended September 30, 2012, respectively, are offset by the changes in cash flows associated with the underlying hedged transactions.

 

     Amount of Gain
(Loss)  Recognized in the
Statements of Operations
   

Statements of Operations

Classification

     For the Three
Months  Ended
September 30, 2013
    For the Three
Months  Ended
September 30, 2012
   
     (In thousands)      

Derivatives not designated as hedging instruments

  

Foreign currency forward exchange contracts

   $         27,911      $         15,796      Non-operating income/expense

Foreign currency forward exchange contracts

     (3,775     (102   Cost of sales
  

 

 

   

 

 

   

Total

   $ 24,136      $ 15,694     
  

 

 

   

 

 

   
     Amount of Gain
(Loss)  Recognized in the
Statements of Operations
   

Statements of Operations

Classification

     For the Nine
Months  Ended
September 30, 2013
    For the Nine
Months  Ended
September 30, 2012
   
     (In thousands)      

Derivatives not designated as hedging instruments

  

Foreign currency forward exchange contracts

   $         10,590      $             7,689      Non-operating income/expense

Foreign currency forward exchange contracts

     (3,744     (637   Cost of sales
  

 

 

   

 

 

   

Total

   $ 6,846      $ 7,052     
  

 

 

   

 

 

   

 

15


Table of Contents

The net gains of $24.1 million and $6.8 million recognized in the consolidated statements of operations for the three and nine months ended September 30, 2013, respectively, and the net gains of $15.7 million and $7.1 million recognized in the consolidated statements of operations for the three and nine months ended September 30, 2012, respectively, are offset by foreign currency transaction gains and losses on the related hedged balances.

 

13. Fair Value Measurements

The following table presents information about Mattel’s assets and liabilities measured and reported in the financial statements at fair value and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:

 

   

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

 

   

Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

 

   

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Mattel’s financial assets and liabilities measured and reported at fair value on a recurring basis include the following:

 

     September 30, 2013  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Foreign currency forward exchange contracts (a)

   $     —        $ 3,370       $ —        $ 3,370   

Auction rate securities (b)

     —          —          26,758         26,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —        $ 3,370       $ 26,758       $ 30,128   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency forward exchange contracts (a)

   $ —        $ 15,108       $ —        $ 15,108   
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2012  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Foreign currency forward exchange contracts (a)

   $ —        $ 19,868       $ —        $ 19,868   

Auction rate securities (b)

     —          —          13,656         13,656   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —        $ 19,868       $ 13,656       $ 33,524   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency forward exchange contracts (a)

   $ —        $ 11,743       $ —        $ 11,743   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2012  
     Level 1      Level 2      Level 3      Total  
     (In thousands)  

Assets:

           

Foreign currency forward exchange contracts (a)

   $ —        $ 3,068       $ —        $ 3,068   

Auction rate securities (b)

     —          —          19,256         19,256   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —        $ 3,068       $ 19,256       $ 22,324   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency forward exchange contracts (a)

   $ —        $ 8,757       $ —        $ 8,757   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The fair value of the foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that Mattel would receive or pay at their maturity dates for contracts involving the same notional amounts, currencies, and maturity dates.
(b) The fair value of the auction rate securities is estimated using a discounted cash flow model based on (i) estimated interest rates, timing, and amount of cash flows, (ii) credit spreads, recovery rates, and credit quality of the underlying securities, (iii) illiquidity considerations, and (iv) market correlation.

 

16


Table of Contents

The following table presents information about Mattel’s assets measured and reported at fair value on a recurring basis using significant Level 3 inputs:

 

     Level 3  
     (In thousands)  

Balance at December 31, 2012

   $       19,256   

Unrealized gain

     7,502   
  

 

 

 

Balance at September 30, 2013

   $ 26,758   
  

 

 

 

Other Financial Instruments

Mattel’s financial instruments include cash and equivalents, accounts receivable and payable, short-term borrowings, and accrued liabilities. The carrying values of these instruments approximate their fair values because of their short-term nature.

The estimated fair value of Mattel’s long-term debt, including the current portion, was $1.69 billion (compared to a carrying value of $1.65 billion) as of September 30, 2013, $1.63 billion (compared to a carrying value of $1.50 billion) as of September 30, 2012, and $1.63 billion (compared to a carrying value of $1.50 billion) as of December 31, 2012. The estimated fair values have been calculated based on broker quotes or rates for the same or similar instruments and are classified as Level 2 within the fair value hierarchy.

 

14. Earnings Per Share

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Certain of Mattel’s restricted stock units (“RSUs”) are considered participating securities because they contain nonforfeitable rights to dividend equivalents.

Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic earnings per common share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net income allocable to common shares by the weighted average number of common shares for the period, as adjusted for the potential dilutive effect of non-participating share-based awards. The following table reconciles earnings per common share for the three and nine months ended September 30, 2013 and 2012:

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2013
    September 30,
2012
    September 30,
2013
    September 30,
2012
 
     (In thousands, except per share amounts)  

Basic:

        

Net income

   $ 422,836      $ 365,937      $ 534,695      $ 469,984   

Less net income allocable to participating RSUs (a)

     (3,642     (3,301     (4,889     (4,517
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available for basic common shares

   $ 419,194      $ 362,636      $ 529,806      $ 465,467   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

       343,279          342,595          344,733          341,006   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income per common share

   $ 1.22      $ 1.06      $ 1.54      $ 1.36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted:

        

Net income

   $ 422,836      $ 365,937      $ 534,695      $ 469,984   

Less net income allocable to participating RSUs (a)

     (3,615     (3,266     (4,872     (4,497
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available for diluted common shares

   $ 419,221      $ 362,671      $ 529,823      $ 465,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     343,279        342,595        344,733        341,006   

Weighted average common equivalent shares arising from:

        

Dilutive stock options and non-participating RSUs

     3,416        4,527        3,893        4,384   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common and potential common shares

     346,695        347,122        348,626        345,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per common share

   $ 1.21      $ 1.04      $ 1.52      $ 1.35   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) During the three and nine months ended September 30, 2013 and 2012, Mattel allocated a proportionate share of both dividends and undistributed earnings to participating RSUs.

 

17


Table of Contents

The calculation of potential common shares assumes the exercise of dilutive stock options and vesting of non-participating RSUs, net of assumed treasury share repurchases at average market prices. Nonqualified stock options and non-participating RSUs totaling 1.0 million and 1.1 million shares were excluded from the calculation of diluted net income per common share for the three months ended September 30, 2013 and 2012, respectively, because they were antidilutive. Nonqualified stock options and non-participating RSUs totaling 0.3 million and 0.4 million shares were excluded from the calculation of diluted net income per common share for the nine months ended September 30, 2013 and 2012, respectively, because they were antidilutive.

 

15. Employee Benefit Plans

Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies, which are more fully described in “Note 4 to the Consolidated Financial StatementsEmployee Benefit Plans” in its 2012 Annual Report on Form 10-K.

A summary of the components of net periodic benefit cost for Mattel’s defined benefit pension plans is as follows:

 

                                                                   
     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2013
    September 30,
2012
    September 30,
2013
    September 30,
2012
 
     (In thousands)  

Service cost

   $ 2,835      $ 3,326      $ 10,523      $ 9,827   

Interest cost

     6,150        7,501        19,415        22,472   

Expected return on plan assets

     (7,630     (7,837     (22,288     (23,361

Amortization of prior service credit

     (541     (398     (793     (377

Recognized actuarial loss

     4,053        5,923        14,265        17,403   

Settlement loss

     1,835        3,534        1,835        3,534   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 6,702      $ 12,049      $ 22,957      $ 29,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

A summary of the components of net periodic benefit cost for Mattel’s postretirement benefit plans is as follows:

 

                                                                   
     For the Three Months Ended      For the Nine Months Ended  
     September 30,
2013
     September 30,
2012
     September 30,
2013
     September 30,
2012
 
     (In thousands)  

Service cost

   $ 17       $ 21       $ 61       $ 59   

Interest cost

     512         369         1,188         1,059   

Recognized actuarial loss

     353         27         433         87   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $    882       $      417       $   1,682       $   1,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2013, Mattel made cash contributions totaling approximately $23 million and $1 million to its defined benefit pension and postretirement benefit plans, respectively.

 

16. Share-Based Payments

Mattel has various stock compensation plans, which are more fully described in “Note 7 to the Consolidated Financial StatementsShare-Based Payments” in its 2012 Annual Report on Form 10-K. Under the Mattel, Inc. 2010 Equity and Long-Term Compensation Plan, Mattel has the ability to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent rights, and shares of common stock to officers, employees, and other persons providing services to Mattel. Stock options are granted with exercise prices at the fair market value of Mattel’s common stock on the applicable grant date and expire no later than ten years from the date of grant. Both stock options and time-vesting RSUs generally provide for vesting over a period of three years from the date of grant.

 

18


Table of Contents

Compensation expense, included within other selling and administrative expenses, related to stock options and RSUs is as follows:

 

                                                       
     For the Three Months Ended      For the Nine Months Ended  
     September 30,
2013
     September 30,
2012
     September 30,
2013
     September 30,
2012
 
     (In thousands)  

Stock option compensation expense

   $ 3,493       $ 3,701       $ 7,711       $ 9,192   

RSU compensation expense

     16,139         13,928         39,502         33,630   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 19,632       $ 17,629       $   47,213       $   42,822   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2013, total unrecognized compensation cost related to unvested share-based payments totaled $90.5 million and is expected to be recognized over a weighted-average period of 2.1 years.

Mattel uses treasury shares purchased under its share repurchase program to satisfy stock option exercises and the vesting of RSUs. Cash received for stock option exercises for the nine months ended September 30, 2013 and 2012 was $116.1 million and $104.9 million, respectively.

 

17. Other Selling and Administrative Expenses

Other selling and administrative expenses include the following:

 

                                                       
     For the Three Months Ended      For the Nine Months Ended  
     September 30,
2013
     September 30,
2012
     September 30,
2013
     September 30,
2012
 
     (In thousands)  

Design and development

   $   52,659       $   52,070       $ 148,043       $ 146,231   

Identifiable intangible asset amortization

     3,468         3,081         9,199         8,797   

 

18. Foreign Currency Transaction Gains and Losses

Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income to which they relate in the consolidated statements of operations. For hedges of intercompany loans and advances, which do not qualify for hedge accounting treatment, the gains or losses on the hedges resulting from changes in fair value as well as the offsetting transaction gains or losses on the related hedged items, along with unhedged items, are recognized in non-operating income (expense), net in the consolidated statements of operations. Inventory purchase and sale transactions denominated in the Euro, British pound sterling, Mexican peso, Brazilian real, and Indonesian rupiah are the primary transactions that cause foreign currency transaction exposure for Mattel.

Currency transaction gains (losses) included in the consolidated statements of operations are as follows:

 

                                               
     For the Three Months Ended      For the Nine Months Ended  
     September 30,
2013
     September 30,
2012
     September 30,
2013
    September 30,
2012
 
     (In thousands)  

Operating income

   $ 13,260       $ 20,086       $ 27,375      $ 42,559   

Other non-operating income (expense), net

     224         1,308         (698     1,713   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net transaction gains

   $ 13,484       $ 21,394       $   26,677      $   44,272   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

19. Income Taxes

Mattel’s provision for income taxes was $102.5 million and $118.4 million for the nine months ended September 30, 2013 and 2012, respectively. During the three and nine months ended September 30, 2013, Mattel recognized net discrete tax benefits of $17.0 million and $32.2 million, respectively, primarily related to reassessments of prior years’ tax liabilities based on the status of current audits and tax filings in various jurisdictions, settlements, and enacted tax law changes. During the three and nine months ended September 30, 2012, Mattel recognized net discrete tax benefits of $5.5 million and $16.0 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions, settlements, and enacted tax law changes.

 

19


Table of Contents

In August of 2013, Mattel reached a settlement with the Internal Revenue Service (“IRS”) Office of Appeals regarding all unresolved issues in the IRS’s examination of Mattel’s 2008 and 2009 federal income tax returns. As a result, Mattel’s total unrecognized tax benefits decreased by $190.0 million. A majority of the decrease related to a capital loss for which Mattel recognized no financial statement benefit.

In the normal course of business, Mattel is regularly audited by the IRS. The IRS is currently auditing Mattel’s 2010 and 2011 federal income tax returns. The IRS audit plan calls for the completion of the current examination in the first quarter of 2014. While it is reasonably possible that a significant increase or decrease in Mattel’s unrecognized tax benefits may occur in the next twelve months related to this IRS audit, a current estimate of the range of reasonably possible outcomes cannot be made at this time.

Mattel is also regularly audited by state and foreign tax authorities. Based on the current status of state and foreign audits, Mattel believes it is reasonably possible that in the next twelve months, the total unrecognized tax benefits could decrease by approximately $5 million related to the settlement of tax audits and/or the expiration of statutes of limitations. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.

 

20. Contingencies

Litigation Related to Carter Bryant and MGA Entertainment, Inc.

In April 2004, Mattel filed a lawsuit in Los Angeles County Superior Court against Carter Bryant (“Bryant”), a former Mattel design employee. The suit alleges that Bryant aided and assisted a Mattel competitor, MGA Entertainment, Inc. (“MGA”), during the time he was employed by Mattel, in violation of his contractual and other duties to Mattel. In September 2004, Bryant asserted counterclaims against Mattel, including counterclaims in which Bryant sought, as a putative class action representative, to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees. Bryant also removed Mattel’s suit to the United States District Court for the Central District of California. In December 2004, MGA intervened as a party-defendant in Mattel’s action against Bryant, asserting that its rights to Bratz properties are at stake in the litigation.

Separately, in November 2004, Bryant filed an action against Mattel in the United States District Court for the Central District of California. The action sought a judicial declaration that Bryant’s purported conveyance of rights in Bratz was proper and that he did not misappropriate Mattel property in creating Bratz.

In April 2005, MGA filed suit against Mattel in the United States District Court for the Central District of California. MGA’s action alleges claims of trade dress infringement, trade dress dilution, false designation of origin, unfair competition, and unjust enrichment. The suit alleges, among other things, that certain products, themes, packaging, and/or television commercials in various Mattel product lines have infringed upon products, themes, packaging, and/or television commercials for various MGA product lines, including Bratz. The complaint also asserts that various alleged Mattel acts with respect to unidentified retailers, distributors, and licensees have damaged MGA and that various alleged acts by industry organizations, purportedly induced by Mattel, have damaged MGA. MGA’s suit alleges that MGA has been damaged in an amount “believed to reach or exceed tens of millions of dollars” and further seeks punitive damages, disgorgement of Mattel’s profits and injunctive relief.

In June 2006, the three cases were consolidated in the United States District Court for the Central District of California. On July 17, 2006, the Court issued an order dismissing all claims that Bryant had asserted against Mattel, including Bryant’s purported counterclaims to invalidate Mattel’s Confidential Information and Proprietary Inventions Agreements with its employees, and Bryant’s claims for declaratory relief.

In November 2006, Mattel asked the Court for leave to file an Amended Complaint that included not only additional claims against Bryant, but also included claims for copyright infringement, Racketeer Influenced and Corrupt Organizations (“RICO”) violations, misappropriation of trade secrets, intentional interference with contract, aiding and abetting breach of fiduciary duty and breach of duty of loyalty, and unfair competition, among others, against MGA, its Chief Executive Officer Isaac Larian, certain MGA affiliates and an MGA employee. The RICO claim alleged that MGA stole Bratz and then, by recruiting and hiring key Mattel employees and directing them to bring with them Mattel confidential and proprietary information, unfairly competed against Mattel using Mattel’s trade secrets, confidential information, and key employees to build their business. On January 12, 2007, the Court granted Mattel leave to file these claims as counterclaims in the consolidated cases, which Mattel did that same day.

Mattel sought to try all of its claims in a single trial, but in February 2007, the Court decided that the consolidated cases would be tried in two phases, with the first trial to determine claims and defenses related to Mattel’s ownership of Bratz works and whether MGA infringed those works. On May 19, 2008, Bryant reached a settlement agreement with Mattel and is no longer a defendant in the litigation. In the public stipulation entered by Mattel and Bryant in connection with the resolution, Bryant agreed that he was and would continue to be bound by all prior and future Court Orders relating to Bratz ownership and infringement, including the Court’s summary judgment rulings.

The first phase of the first trial, which began on May 27, 2008, resulted in a unanimous jury verdict on July 17, 2008 in favor of Mattel. The jury found that almost all of the Bratz design drawings and other works in question were created by Bryant while he was employed at Mattel; that MGA and Isaac Larian intentionally interfered with the contractual duties owed by Bryant to Mattel, aided and abetted Bryant’s breaches of his duty of loyalty to Mattel, aided and abetted Bryant’s breaches of the fiduciary duties he owed to

 

20


Table of Contents

Mattel, and converted Mattel property for their own use. The same jury determined that defendants MGA, Larian, and MGA Entertainment (HK) Limited infringed Mattel’s copyrights in the Bratz design drawings and other Bratz works, and awarded Mattel total damages of approximately $100 million against the defendants. On December 3, 2008, the Court issued a series of orders rejecting MGA’s equitable defenses and granting Mattel’s motions for equitable relief, including an order enjoining the MGA party defendants from manufacturing, marketing, or selling certain Bratz fashion dolls or from using the “Bratz” name. The Court stayed the effect of the December 3, 2008 injunctive orders until further order of the Court and entered a further specified stay of the injunctive orders on January 7, 2009.

The parties filed and argued additional motions for post-trial relief, including a request by MGA to enter judgment as a matter of law on Mattel’s claims in MGA’s favor and to reduce the jury’s damages award to Mattel. Mattel additionally moved for the appointment of a receiver. On April 27, 2009, the Court entered an order confirming that Bratz works found by the jury to have been created by Bryant during his Mattel employment were Mattel’s property and that hundreds of Bratz female fashion dolls infringe Mattel’s copyrights. The Court also upheld the jury’s award of damages in the amount of $100 million and ordered an accounting of post-trial Bratz sales. The Court further vacated the stay of the December 3, 2008 orders, except to the extent specified by the Court’s January 7, 2009 modification.

MGA appealed the Court’s equitable orders to the Court of Appeals for the Ninth Circuit. On December 9, 2009, the Ninth Circuit heard oral argument on MGA’s appeal and issued an order staying the District Court’s equitable orders pending a further order to be issued by the Ninth Circuit. The Ninth Circuit opinion vacating the relief ordered by the District Court was issued on July 22, 2010. The Ninth Circuit stated that, because of several jury instruction errors it identified, a significant portion—if not all—of the jury verdict and damage award should be vacated.

In its opinion, the Ninth Circuit found that the District Court erred in concluding that Mattel’s Invention agreement unambiguously applied to “ideas;” that it should have considered extrinsic evidence in determining the application of the agreement; and if the conclusion turns on conflicting evidence, it should have been up to the jury to decide. The Ninth Circuit also concluded that the District Judge erred in transferring the entire brand to Mattel based on misappropriated names and that the Court should have submitted to the jury, rather than deciding itself, whether Bryant’s agreement assigned works created outside the scope of his employment and whether Bryant’s creation of the Bratz designs and sculpt was outside of his employment. The Court then went on to address copyright issues which would be raised after a retrial, since Mattel “might well convince a properly instructed jury” that it owns Bryant’s designs and sculpt. The Ninth Circuit stated that the sculpt itself was entitled only to “thin” copyright protection against virtually identical works, while the Bratz sketches were entitled to “broad” protection against substantially similar works; in applying the broad protection, however, the Ninth Circuit found that the lower court had erred in failing to filter out all of the unprotectable elements of Bryant’s sketches. This mistake, the Court said, caused the lower court to conclude that all Bratz dolls were substantially similar to Bryant’s original sketches.

Judge Stephen Larson, who presided over the first trial, retired from the bench during the course of the appeal, and the case was transferred to Judge David O. Carter. After the transfer, Judge Carter granted Mattel leave to file a Fourth Amended Answer and Counterclaims which focused on RICO, trade secret and other claims, and added additional parties, and subsequently granted in part and denied in part a defense motion to dismiss those counterclaims. Later, on August 16, 2010, MGA asserted several new claims against Mattel in response to Mattel’s Fourth Amended Answer and Counterclaims, including claims for alleged trade secret misappropriation, an alleged violation of RICO, and wrongful injunction. Mattel moved to strike and/or dismiss these claims, as well as certain MGA allegations regarding Mattel’s motives for filing suit. The Court granted that motion as to the wrongful injunction claim, which it dismissed with prejudice, and as to the allegations about Mattel’s motives, which it struck. The Court denied the motion as to MGA’s trade secret misappropriation claim and its claim for violations of RICO.

The Court resolved summary judgment motions in late 2010. Among other rulings, the Court dismissed both parties’ RICO claims; dismissed Mattel’s claim for breach of fiduciary duty and portions of other claims as “preempted” by the trade secrets act; dismissed MGA’s trade dress infringement claims; dismissed MGA’s unjust enrichment claim; dismissed MGA’s common law unfair competition claim; and dismissed portions of Mattel’s copyright infringement claim as to “later generation” Bratz dolls.

Trial of all remaining claims began in early January 2011. During the trial, and before the case was submitted to the jury, the Court granted MGA’s motions for judgment as to Mattel’s claims for aiding and abetting breach of duty of loyalty and conversion. The Court also granted a defense motion for judgment on portions of Mattel’s claim for misappropriation of trade secrets relating to thefts by former Mattel employees located in Mexico.

The jury reached verdicts on the remaining claims in April 2011. In those verdicts, the jury ruled against Mattel on its claims for ownership of Bratz-related works, for copyright infringement, and for misappropriation of trade secrets. The jury ruled for MGA on its claim of trade secret misappropriation as to 26 of its claimed trade secrets and awarded $88.5 million in damages. The jury ruled against MGA as to 88 of its claimed trade secrets. The jury found that Mattel’s misappropriation was willful and malicious.

In early August 2011, the Court ruled on post-trial motions. The Court rejected MGA’s unfair competition claims and also rejected Mattel’s equitable defenses to MGA’s misappropriation of trade secrets claim. The Court reduced the jury’s damages award of $88.5 million to $85.0 million. The Court awarded MGA an additional $85.0 million in punitive damages and approximately $140 million in attorney’s fees and costs. The Court entered a judgment which totaled approximately $310 million in favor of MGA.

 

21


Table of Contents

Mattel appealed the judgment, challenging on appeal the entirety of the District Court’s monetary award in favor of MGA, including both the award of $170 million in damages for alleged trade secret misappropriation and approximately $140 million in attorney’s fees and costs. On January 24, 2013, the Ninth Circuit Court of Appeals issued a ruling on Mattel’s appeal. In that ruling, the Court found that MGA’s claim for trade secrets misappropriation was not compulsory to any Mattel claim and could not be filed as a counterclaim-in-reply. Accordingly, the Court of Appeals vacated the portion of the judgment awarding damages and attorney’s fees and costs to MGA for prevailing on its trade secrets misappropriation claim, totaling approximately $172.5 million. It ruled that, on remand, the District Court must dismiss MGA’s trade secret claim without prejudice. In its ruling, the Court of Appeals also affirmed the District Court’s award of attorney’s fees and costs under the Copyright Act. Accordingly, Mattel recorded a litigation accrual of $137.8 million during the fourth quarter of 2012 to cover these fees and costs.

On February 27, 2013, MGA filed a motion to amend its complaint to reassert the trade secret claim that the Court of Appeals ordered dismissed without prejudice. Mattel believes that it has strong arguments that such an amendment is improper in federal court because the claim is purely one of state law and that even if amendment is allowed, or if MGA were to file the claim in state court, the claim is barred by the statute of limitations, among other defenses, and should be dismissed without a trial.

Litigation Related to Yellowstone do Brasil Ltda.

Yellowstone do Brasil Ltda. (formerly known as Trebbor Informática Ltda.) was a customer of Mattel’s subsidiary Mattel do Brasil Ltda. when a commercial dispute arose between Yellowstone and Mattel do Brasil regarding the supply of product and related payment terms. As a consequence of the dispute, in April 1999, Yellowstone filed a declarative action against Mattel do Brasil requesting the annulment of its security bonds and promissory notes given to Mattel as well as requesting the court to find Mattel do Brasil liable for damages incurred as a result of Mattel do Brasil’s alleged abrupt and unreasonable breach of an oral exclusive distribution agreement between the parties relating to the supply and sale of toys in Brazil. Yellowstone’s complaint sought alleged loss of profits of approximately $0.5 million, plus an unspecified amount of damages consisting of: (i) compensation for all investments made by Yellowstone to develop Mattel do Brasil’s business; (ii) reimbursement of the amounts paid by Yellowstone to terminate labor and civil contracts in connection with the business; (iii) compensation for alleged unfair competition and for the goodwill of trade; and (iv) compensation for non-pecuniary damages.

Mattel do Brasil filed its defenses to these claims and simultaneously presented a counterclaim for unpaid accounts receivable for goods supplied to Yellowstone in the approximate amount of $3.5 million.

During the evidentiary phase a first accounting report was submitted by a court-appointed expert. Such report stated that Yellowstone had invested approximately $2.8 million in its business. Additionally, the court-appointed expert calculated a loss of profits compensation of approximately $1.2 million. Mattel do Brasil challenged the report since it was not made based on the official accounting documents of Yellowstone and since the report calculated damages based only on documents unilaterally submitted by Yellowstone.

The trial court accepted the challenge and ruled that a second accounting examination should take place in the lawsuit. Yellowstone appealed the decision but it was upheld by the appeals court.

The second court-appointed expert’s report submitted at trial did not assign a value to any of Yellowstone’s claims and found no evidence of causation between Mattel do Brasil’s actions and such claims.

In January 2010, the trial court ruled in favor of Mattel do Brasil and denied all of Yellowstone’s claims based primarily on the lack of any causal connection between the acts of Mattel do Brasil and Yellowstone’s alleged damages. Additionally, the court upheld Mattel do Brasil’s counterclaim and ordered Yellowstone to pay Mattel do Brasil approximately $3.8 million. The likelihood of Mattel do Brasil recovering this amount was uncertain due to the fact that Yellowstone was declared insolvent and filed for bankruptcy protection. In February 2010, Yellowstone filed a motion seeking clarification of the decision which was denied.

In September 2010, Yellowstone filed a further appeal. Under Brazilian law, the appeal was de novo and Yellowstone restated all of the arguments it made at the trial court level. Yellowstone did not provide any additional information supporting its unspecified alleged damages. The appeals court held hearings on the appeal in March and April 2013. On July 26, 2013, the appeals court awarded Yellowstone $19 million in damages, as adjusted for inflation and interest. The court also awarded Mattel approximately $8 million on its counterclaim, as adjusted for inflation. On August 2, 2013, Mattel filed a motion for clarification since the written decision contained clear errors in terms of amounts awarded and interest and inflation adjustments. Mattel’s motion also asked the court to decide whether Yellowstone’s award could be offset by the counterclaim award, despite Yellowstone’s status as a bankrupt entity. A decision on the clarification motion is expected in the fourth quarter of 2013. Mattel intends to appeal the decision to the Superior Court based on both procedural and substantive grounds.

Mattel believes that it is reasonably possible that a loss in this matter could range from $0 to approximately $19 million. The high end of this range, approximately $19 million, is based on the calculation of the current amount of the damages and loss of profits, including interest and inflation adjustments, reported in the first court-appointed examination report submitted in the lawsuit, plus attorney’s fees. Mattel do Brasil may be entitled to offset its counterclaim award of approximately $8 million, including inflation

 

22


Table of Contents

adjustment, against such loss. The existence of pending motions for clarification filed by both parties and the resulting clarification decision expected to be issued in the fourth quarter of 2013, as well as the procedural aspects of an appeal to the Superior Court, adds some uncertainty to the final outcome of the matter. Mattel believes however that it has good legal grounds for appeal of the decision and does not believe that a loss is probable for this matter. Accordingly, a liability has not been accrued as of September 30, 2013. Mattel may be required to place the full amount of the damage award in escrow pending an appeal decision by the Superior Court.

 

21. Segment Information

Mattel sells a broad variety of toy products which are grouped into three major brand categories:

Mattel Girls & Boys Brands—including Barbie® fashion dolls and accessories (“Barbie”), Polly Pocket, Little Mommy®, Disney Classics®, and Monster High® (collectively “Other Girls Brands”), Hot Wheels®, Matchbox®, and Tyco R/C® vehicles and play sets (collectively “Wheels”), and CARS®, Disney Planes™, Radica®, Toy Story®, Max Steel®, WWE® Wrestling, Batman®, and games and puzzles (collectively “Entertainment”).

Fisher-Price Brands—including Fisher-Price®, Little People®, BabyGear™, Laugh & Learn®, and Imaginext® (collectively “Core Fisher-Price”), Dora the Explorer®, Thomas & Friends, Mickey Mouse® Clubhouse, and Disney Jake and the Never Land Pirates® (collectively “Fisher-Price Friends”), and Power Wheels®.

American Girl Brands—including My American Girl®, the historical collection, and Bitty Baby®. American Girl Brands products are sold directly to consumers via its catalog, website, and proprietary retail stores. Its children’s publications are also sold to certain retailers.

Mattel’s operating segments are: (i) North America, which consists of the US and Canada, (ii) International, and (iii) American Girl. The North America and International segments sell products in the Mattel Girls & Boys Brands and Fisher-Price Brands categories, although some are developed and adapted for particular international markets.

Segment Data

The following tables present information about revenues, income, and assets by segment. Mattel does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues (referred to as “gross sales” and reconciled to net sales in Part I, Item 2 “Non-GAAP Financial Measure” of this Quarterly Report on Form 10-Q). Mattel records these adjustments in its financial accounting systems at the time of sale to each customer, but the adjustments are not allocated to individual products. For this reason, Mattel’s chief operating decision maker uses gross sales by segment as one of the metrics to measure segment performance. Such sales adjustments are included in the determination of segment income from operations based on the adjustments recorded in the financial accounting systems. Segment income represents each segment’s operating income, while consolidated operating income represents income from operations before net interest, other non-operating income, and income taxes as reported in the consolidated statements of operations. The corporate and other expense category includes costs not allocated to individual segments, including charges related to incentive compensation, share-based payments, and corporate headquarters functions managed on a worldwide basis, and the impact of changes in foreign currency rates on intercompany transactions.

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2013
    September 30,
2012
    September 30,
2013
    September 30,
2012
 
     (In thousands)  

Revenues by Segment

        

North America

   $ 1,211,544      $ 1,190,946      $ 2,234,484      $ 2,228,979   

International

     1,061,829        973,590        2,216,736        2,063,776   

American Girl

     128,951        109,204        317,658        264,877   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross sales

     2,402,324        2,273,740        4,768,878        4,557,632   

Sales adjustments

     (195,363     (195,924     (397,202     (392,656
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

   $ 2,206,961      $ 2,077,816      $ 4,371,676      $ 4,164,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment Income

        

North America

   $ 358,171      $ 334,540      $ 510,264      $ 503,285   

International

     250,170        225,297        389,265        348,731   

American Girl

     16,144        10,286        23,307        4,936   
  

 

 

   

 

 

   

 

 

   

 

 

 
     624,485        570,123        922,836        856,952   

Corporate and other expense (a)

     (96,310     (82,756     (234,040     (209,416
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     528,175        487,367        688,796        647,536   

Interest expense

     19,576        22,723        58,172        65,352   

Interest (income)

     (1,394     (1,472     (4,083     (5,158

Other non-operating (income), net

     (4,350     (731     (2,530     (1,034
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

   $ 514,343      $ 466,847      $ 637,237      $ 588,376   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

 

(a) Corporate and other expense includes share-based compensation expense of $19.6 million and $47.2 million for the three and nine months ended September 30, 2013, respectively, and $17.6 million and $42.8 million for the three and nine months ended September 30, 2012, respectively, and severance expense of $2.4 million and $15.9 million for the three and nine months ended September 30, 2013, respectively, and $1.1 million and $9.2 million for the three and nine months ended September 30, 2012, respectively.

Segment assets are comprised of accounts receivable and inventories, net of applicable reserves and allowances.

 

     September 30,
2013
     September 30,
2012
     December 31,
2012
 
     (In thousands)  

Assets by Segment

        

North America

   $ 1,097,763       $ 1,104,314       $ 694,479   

International

     1,385,467         1,322,520         807,911   

American Girl

     142,648         128,681         90,335   
  

 

 

    

 

 

    

 

 

 
     2,625,878         2,555,515         1,592,725   

Corporate and other

     66,512         69,048         99,165   
  

 

 

    

 

 

    

 

 

 

Accounts receivable and inventories, net

   $ 2,692,390       $ 2,624,563       $ 1,691,890   
  

 

 

    

 

 

    

 

 

 

The table below presents worldwide revenues by brand category:

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2013
    September 30,
2012
    September 30,
2013
    September 30,
2012
 
     (In thousands)  

Worldwide Revenues by Brand Category

        

Mattel Girls & Boys Brands

   $ 1,480,696      $ 1,371,130      $ 2,965,294      $ 2,775,016   

Fisher-Price Brands

     789,303        790,416        1,473,298        1,507,854   

American Girl Brands

     122,302        101,972        300,931        246,681   

Other

     10,023        10,222        29,355        28,081   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross sales

     2,402,324        2,273,740        4,768,878        4,557,632   

Sales adjustments

     (195,363     (195,924     (397,202     (392,656
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

   $ 2,206,961      $ 2,077,816      $ 4,371,676      $ 4,164,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22. Subsequent Event

On October 16, 2013, Mattel announced that its Board of Directors declared a fourth quarter dividend of $0.36 per common share. The dividend is payable on December 13, 2013 to stockholders of record on November 27, 2013.

 

24


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial information and related notes that appear in Part I, Item 1 of this Quarterly Report on Form 10-Q. Mattel’s business is seasonal; therefore, results of operations are comparable only with corresponding periods.

Factors That May Affect Future Results

(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

Mattel is including this Cautionary Statement to caution readers and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”) for forward-looking statements. This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of the Act. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “seeks,” “aims,” “estimates,” “projects” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” or “may.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q. These forward-looking statements are all based on currently available operating, financial, economic and competitive information and are subject to various risks and uncertainties. The Company’s actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties detailed in Part 1, Item 1A “Risk Factors” in Mattel’s 2012 Annual Report on Form 10-K.

Overview

Mattel designs, manufactures, and markets a broad variety of toy products worldwide which are sold to its customers and directly to consumers. Mattel’s vision is “creating the future of play.” Mattel’s objectives are to grow its share in the marketplace, continue to improve its operating margins, and create long-term stockholder value. To achieve these objectives, management has established the following strategies:

The first strategy is to deliver consistent growth by continuing the momentum in its core brands, optimizing entertainment partnerships, building new franchises, and working to expand and leverage its international footprint.

The second strategy is to optimize operating margins through sustaining gross margins within the low-to-mid 50% range in the near-term and above 50% in the long-term, and delivering on cost savings initiatives.

The third strategy is to generate significant cash flow and continue its disciplined, opportunistic, and value-enhancing deployment.

Mattel believes its products are among the most widely recognized toy products in the world. Mattel’s portfolio of brands and products are grouped in the following categories:

Mattel Girls & Boys Brands—including Barbie fashion dolls and accessories (“Barbie”), Polly Pocket, Little Mommy, Disney Classics, and Monster High (collectively “Other Girls Brands”), Hot Wheels, Matchbox, and Tyco R/C vehicles and play sets (collectively “Wheels”), and CARS, Disney Planes, Radica, Toy Story, Max Steel, WWE Wrestling, Batman, and games and puzzles (collectively “Entertainment”).

Fisher-Price Brands—including Fisher-Price, Little People, BabyGear, Laugh & Learn, and Imaginext (collectively “Core Fisher-Price”), Dora the Explorer, Thomas & Friends, Mickey Mouse Clubhouse, and Disney Jake and the Never Land Pirates, (collectively “Fisher-Price Friends”), and Power Wheels.

American Girl Brands—including My American Girl, the historical collection, and Bitty Baby. American Girl Brands products are sold directly to consumers via its catalog, website, and proprietary retail stores. Its children’s publications are also sold to certain retailers.

Third Quarter 2013 Overview

During the third quarter of 2013, Mattel delivered strong operating results with sales growth across its global portfolio of brands, gross margin expansion, and improved other selling and administrative spending leverage. More specifically:

 

   

Net sales for the third quarter of 2013 were $2.21 billion, up 6% as compared to 2012, primarily due to higher sales of its Girls portfolio, which experienced growth in each of its major brands, Barbie, Monster High, Disney Princess®, and American Girl, as well as higher sales of Fisher-Price Friends products.

 

   

Gross profit as a percentage of net sales was 53.8% in the third quarter 2013 as compared to 53.7% in 2012, which is consistent with Mattel’s near-term goal of sustaining gross margins within the low-to-mid 50% range. Gross margin drivers included favorable product mix, savings from Mattel’s Operational Excellence 3.0 programs, and price increases offset by higher input costs, which were partially offset by unfavorable changes in foreign currency exchange rates.

 

25


Table of Contents
   

Operating income in the third quarter of 2013 was $528.2 million, as compared to $487.4 million in 2012. The increase in operating income was primarily a result of higher gross profit, partially offset by higher other selling and administrative expenses and higher advertising and promotion expenses.

 

   

Mattel’s Operational Excellence 3.0 program generated gross cost savings of approximately $15 million during the third quarter of 2013.

Results of Operations—Third Quarter

Consolidated Results

Net sales for the third quarter of 2013 were $2.21 billion, a 6% increase, as compared to $2.08 billion in 2012, with an unfavorable change in currency exchange rates of 1 percentage point. Net income for the third quarter of 2013 was $422.8 million, or $1.21 per diluted share, as compared to net income of $365.9 million, or $1.04 per diluted share, in 2012. Net income for the third quarter of 2013 was positively impacted by higher net sales, higher gross margins, and a lower effective tax rate, partially offset by higher other selling and administrative expenses and higher advertising and promotion expenses.

The following table provides a summary of Mattel’s consolidated results for the third quarter of 2013 and 2012 (in millions, except percentage and basis point information):

 

     For the Three Months Ended September 30,     Year/Year Change  
     2013     2012    
     Amount     % of Net
Sales
    Amount     % of Net
Sales
    %     Basis Points
of Net Sales
 

Net sales

   $ 2,207.0        100.0   $ 2,077.8        100.0     6     —    
  

 

 

     

 

 

       

Gross profit

   $ 1,188.0        53.8   $ 1,115.4        53.7     7     10   

Advertising and promotion expenses

     249.4        11.3        234.8        11.3        6     —    

Other selling and administrative expenses

     410.4        18.6        393.2        18.9        4     –30   
  

 

 

     

 

 

       

Operating income

     528.2        23.9        487.4        23.5        8     40   

Interest expense

     19.6        0.9        22.7        1.1        –14     –20   

Interest (income)

     (1.4     –0.1        (1.5     –0.1        –5     —    

Other non-operating (income), net

     (4.3       (0.6      
  

 

 

     

 

 

       

Income before income taxes

   $ 514.3        23.3   $ 466.8        22.5     10     80   
  

 

 

     

 

 

       

Sales

Net sales for the third quarter of 2013 were $2.21 billion, a 6% increase, as compared to $2.08 billion in 2012, with an unfavorable change in currency exchange rates of 1 percentage point.

The following table provides a summary of Mattel’s consolidated gross sales by brand for the third quarter of 2013 and 2012:

 

     For the Three Months
Ended September 30,
        
     2013      2012      % Change  
     (In millions, except percentage information)  

Mattel Girls & Boys Brands:

        

Barbie

   $ 444.3       $ 430.4         3

Other Girls

     447.7         350.4         28

Wheels

     241.7         266.6         –9

Entertainment

     347.0         323.7         7
  

 

 

    

 

 

    
     1,480.7         1,371.1         8

Fisher-Price Brands:

        

Core Fisher-Price

     513.6         529.4         –3

Fisher-Price Friends

     220.6         193.7         14

Other Fisher-Price

     55.1         67.3         –18
  

 

 

    

 

 

    
     789.3         790.4         —    

American Girl Brands

     122.3         102.0         20

Other

     10.0         10.2      
  

 

 

    

 

 

    

Total Gross Sales

   $ 2,402.3       $ 2,273.7         6
  

 

 

    

 

 

    

 

26


Table of Contents

Gross sales were $2.40 billion in the third quarter of 2013, up $128.6 million or 6%, as compared to $2.27 billion in 2012, with no impact from changes in currency exchange rates. The increase in gross sales was due to higher sales of Other Girls, Fisher-Price Friends, and American Girl products. Of the 28% increase in Other Girls gross sales, 27% was due to higher sales of Monster High products. Of the 14% increase in Fisher-Price Friends gross sales, 6% was due to higher sales of Thomas & Friends products, which benefited from this year’s introduction of the Thomas & Friends wood line, and 6% was due to the initial release of the Mike the Knight® product line. Of the 20% increase in American Girl Brands gross sales, 6% was due to higher sales of Historical Character products, 4% was due to higher sales of the 2013 Girl of the Year, Saige™, and 3% was due to higher sales of My American Girl products.

Cost of Sales

Cost of sales as a percentage of net sales was 46.2% in the third quarter of 2013, as compared to 46.3% in 2012. Cost of sales increased by $56.6 million, or 6%, from $962.4 million in the third quarter of 2012 to $1.02 billion in 2013, which is consistent with the 6% increase in net sales. Within cost of sales, product and other costs increased by $45.8 million, or 6%, from $784.4 million in the third quarter of 2012 to $830.2 million in 2013; freight and logistics expenses increased by $5.9 million, or 6%, from $93.0 million in the third quarter of 2012 to $98.9 million in 2013; and royalty expenses increased by $4.9 million, or 6%, from $85.0 million in the third quarter of 2012 to $89.9 million in 2013.

Gross Profit

Gross profit as a percentage of net sales increased from 53.7% in the third quarter of 2012 to 53.8% in 2013. Gross profit as a percentage of net sales was impacted by favorable product mix, savings from Operational Excellence 3.0 programs, and price increases offset by higher input costs, which were partially offset by unfavorable changes in foreign currency exchange rates.

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, and (iii) generic advertising costs, which primarily include trade show costs. Advertising and promotion expenses, as a percentage of net sales, were flat at 11.3% during the third quarter of 2013 and 2012.

Other Selling and Administrative Expenses

Other selling and administrative expenses were $410.4 million, or 18.6% of net sales, in the third quarter of 2013, as compared to $393.2 million, or 18.9% of net sales, in 2012. The significant changes in other selling and administrative expenses included higher employee-related expenses and investments in strategic initiatives of approximately $21 million.

Non-Operating Items

Interest expense decreased from $22.7 million in the third quarter of 2012 to $19.6 million in 2013, primarily due to lower average interest rates related to long-term borrowings.

Provision for Income Taxes

Mattel’s provision for income taxes was $91.5 million in the third quarter of 2013, as compared to $100.9 million in 2012. Mattel recognized net discrete tax benefits of $17.0 million and $5.5 million in the third quarter of 2013 and 2012, respectively, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions, settlements, and enacted tax law changes.

North America Segment

The following table provides a summary of Mattel’s gross sales by brand for the North America segment for the third quarter of 2013 and 2012:

 

       For the Three  Months
Ended September 30,
          
       2013        2012        % Change  
       (In millions, except percentage information)  

Mattel Girls & Boys Brands:

              

Barbie

     $ 189.9         $ 191.3           –1

Other Girls

       219.1           166.5           32

Wheels

       125.5           143.3           –12

Entertainment

       148.8           160.2           –7
    

 

 

      

 

 

      
       683.3           661.3           3

 

27


Table of Contents
       For the Three  Months
Ended September 30,
          
       2013        2012        % Change  
       (In millions, except percentage information)  

Fisher-Price Brands:

              

Core Fisher-Price

       330.9           345.1           –4

Fisher-Price Friends

       142.5           119.3           19

Other Fisher-Price

       51.5           62.2           –17
    

 

 

      

 

 

      
       524.9           526.6           —    

Other

       3.3           3.0        
    

 

 

      

 

 

      

Total Gross Sales

     $ 1,211.5         $ 1,190.9           2
    

 

 

      

 

 

      

Gross sales for the North America segment were $1.21 billion in the third quarter of 2013, up $20.6 million or 2%, with no impact from changes in currency exchange rates, as compared to $1.19 billion in 2012. The increase in the North America segment gross sales was due to higher sales of Other Girls and Fisher-Price Friends products, partially offset by lower sales of Wheels products. Of the 32% increase in Other Girls gross sales, 21% was due to higher sales of Monster High products, and 12% was due to higher sales of Disney Princess products, including Sofia the First™ products. Of the 19% increase in Fisher-Price Friends gross sales, 7% was due to higher sales of Thomas & Friends products, which benefited from this year’s introduction of the Thomas & Friends wood line, 7% was due to the initial release of the Octonauts® product line, and 6% was due to the initial release of the Mike the Knight product line. Of the 12% decrease in Wheels products, 11% was due to lower sales of radio-controlled vehicles and Matchbox products. Cost of sales increased 3% in the third quarter of 2013, consistent with the 3% increase in net sales, due to higher product and other costs and higher royalty expenses. Gross margins increased as a result of savings from Operational Excellence 3.0 programs and price increases offset by higher input costs, which were partially offset by unfavorable product mix, including higher sales of royalty-related products.

North America segment income increased 7% to $358.2 million in the third quarter of 2013, as compared to $334.5 million in 2012, primarily due to higher gross profit and lower advertising and promotion expenses.

International Segment

The following table provides a summary of percentage changes in gross sales within the International segment in the third quarter of 2013 versus 2012:

 

           % Change in       
Gross Sales
     Impact of Change
in Currency Rates
(in % pts)
 

Total International Segment

     9         –2   

Europe

     13         3   

Latin America

     4         –6   

Asia Pacific

     8         –6   

The following table provides a summary of Mattel’s gross sales by brand for the International segment for the third quarter of 2013 and 2012:

 

       For the Three  Months
Ended September 30,
          
       2013        2012        % Change  
       (In millions, except percentage information)  

Mattel Girls & Boys Brands:

              

Barbie

     $ 254.4         $ 239.2           6

Other Girls

       228.6           183.9           24

Wheels

       116.2           123.3           –6

Entertainment

       198.2           163.4           21
    

 

 

      

 

 

      
       797.4           709.8           12

Fisher-Price Brands:

              

Core Fisher-Price

       182.7           184.3           –1

Fisher-Price Friends

       78.1           74.4           5

Other Fisher-Price

       3.6           5.1           –29
    

 

 

      

 

 

      
       264.4           263.8           —    
    

 

 

      

 

 

      

Total Gross Sales

     $ 1,061.8         $ 973.6           9
    

 

 

      

 

 

      

 

28


Table of Contents

Gross sales for the International segment were $1.06 billion in the third quarter of 2013, up $88.2 million or 9%, as compared to $973.6 million in 2012, with unfavorable changes in currency exchange rates of 2 percentage points. The increase in the International segment gross sales was due to higher sales of Other Girls and Entertainment products. Of the 24% increase in Other Girls gross sales, 32% was due to higher sales of Monster High products. Of the 21% increase in Entertainment gross sales, 25% was due to the initial release of Disney Planes products in conjunction with the theatrical release in 2013. Cost of sales increased 9% in the third quarter of 2013, consistent with the 9% increase in net sales, due to higher product and other costs and higher freight and logistics expenses. Gross margins increased slightly as a result of savings from Operational Excellence 3.0 programs, favorable product mix, and price increases partially offset by higher input costs, which were partially offset by unfavorable changes in foreign currency exchange rates.

International segment income increased 11% to $250.2 million in the third quarter of 2013, as compared to $225.3 million in 2012, primarily due to higher gross profit, partially offset by higher other selling and administrative expenses and higher advertising and promotion expenses.

American Girl Segment

The following table provides a summary of Mattel’s gross sales by brand for the American Girl segment for the third quarter of 2013 and 2012:

 

       For the Three  Months
Ended September 30,
          
       2013        2012        % Change  
       (In millions, except percentage information)  

American Girl Segment:

              

American Girl Brands

     $ 122.3         $ 102.0           20

Other Brands

       6.7           7.2           –8
    

 

 

      

 

 

      

Total American Girl Segment

     $ 129.0         $ 109.2           18
    

 

 

      

 

 

      

Gross sales for the American Girl segment were $129.0 million in the third quarter of 2013, up $19.8 million or 18%, as compared to $109.2 million in 2012, with no impact from changes in currency exchange rates. Of the 20% increase in American Girl Brands gross sales, 6% was due to higher sales of Historical Character products, 4% was due to higher sales of the 2013 Girl of the Year, Saige, and 3% was due to higher sales of My American Girl products. Cost of sales increased 13% in the third quarter of 2013, as compared to an 18% increase in net sales, due to higher product and other costs and higher freight and logistics expenses. Gross margins increased as a result of favorable product mix and price increases partially offset by higher input costs.

American Girl segment income increased 57% to $16.1 million in the third quarter of 2013, as compared to $10.3 million in 2012, primarily due to higher gross profit, partially offset by higher other selling and administrative expenses.

Results of Operations—First Nine Months of 2013

Consolidated Results

Net sales for the first nine months of 2013 were $4.37 billion, a 5% increase, as compared to $4.17 billion in 2012, with an unfavorable change in currency exchange rates of 1 percentage point. Net income for the first nine months of 2013 was $534.7 million, or $1.52 per diluted share, as compared to net income of $470.0 million, or $1.35 per diluted share, in 2012. Net income for the first nine months of 2013 was positively impacted by higher net sales, higher gross margins, and a lower effective tax rate, partially offset by higher other selling and administrative expenses and higher advertising and promotion expenses.

 

29


Table of Contents

The following table provides a summary of Mattel’s consolidated results for the first nine months of 2013 and 2012 (in millions, except percentage and basis point information):

 

     For the Nine Months Ended September 30,     Year/Year Change  
     2013     2012    
     Amount     % of Net
Sales
    Amount     % of Net
Sales
    %     Basis Points
of Net Sales
 

Net sales

   $ 4,371.7        100.0   $ 4,165.0        100.0     5     —    
  

 

 

     

 

 

       

Gross profit

   $ 2,328.0        53.3   $ 2,183.3        52.4     7     90   

Advertising and promotion expenses

     467.3        10.7        445.0        10.7        5     —    

Other selling and administrative expenses

     1,171.9        26.8        1,090.8        26.2        7     60   
  

 

 

     

 

 

       

Operating income

     688.8        15.8        647.5        15.5        6     30   

Interest expense

     58.2        1.3        65.4        1.6        –11     –30   

Interest (income)

     (4.1     –0.1        (5.2     –0.1        –21     —    

Other non-operating (income), net

     (2.5       (1.1      
  

 

 

     

 

 

       

Income before income taxes

   $ 637.2        14.6   $ 588.4        14.1     8     50   
  

 

 

     

 

 

       

Sales

Net sales for the first nine months of 2013 were $4.37 billion, a 5% increase, as compared to $4.17 billion in 2012, with an unfavorable change in currency exchange rates of 1 percentage point.

The following table provides a summary of Mattel’s consolidated gross sales by brand for the first nine months of 2013 and 2012:

 

       For the Nine Months
Ended September 30,
          
       2013        2012        % Change  
       (In millions, except percentage information)  

Mattel Girls & Boys Brands:

              

Barbie

     $ 831.6         $ 847.0           –2

Other Girls

       891.4           675.1           32

Wheels

       519.9           556.5           –7

Entertainment

       722.4           696.4           4
    

 

 

      

 

 

      
       2,965.3           2,775.0           7

Fisher-Price Brands:

              

Core Fisher-Price

       964.9           1,029.6           –6

Fisher-Price Friends

       421.4           369.0           14

Other Fisher-Price

       87.0           109.3           –20
    

 

 

      

 

 

      
       1,473.3           1,507.9           –2

American Girl Brands

       300.9           246.7           22

Other

       29.4           28.0        
    

 

 

      

 

 

      

Total Gross Sales

     $ 4,768.9         $ 4,557.6           5
    

 

 

      

 

 

      

Gross sales were $4.77 billion in the first nine months of 2013, up $211.3 million or 5%, as compared to $4.56 billion in 2012, with no impact from changes in currency exchange rates. The increase in gross sales was due to higher sales of Other Girls, American Girl, and Fisher-Price Friends products. Of the 32% increase in Other Girls gross sales, 34% was due to higher sales of Monster High products. Of the 22% increase in American Girl Brands gross sales, 6% was due to higher sales of the 2013 Girl of the Year, Saige, 6% was due to higher sales of My American Girl products, and 5% was due to higher sales of Historical Character products. Of the 14% increase in Fisher-Price Friends gross sales, 8% was due to higher sales of Thomas & Friends products, which benefited from this year’s introduction of the Thomas & Friends wood line, and 5% was due to the initial release of the Mike the Knight product line.

Cost of Sales

Cost of sales as a percentage of net sales was 46.7% in the first nine months of 2013, as compared to 47.6% in 2012. Cost of sales increased by $62.0 million, or 3%, from $1.98 billion in the first nine months of 2012 to $2.04 billion in 2013, compared to a 5% increase in net sales. Within cost of sales, product and other costs increased by $40.5 million, or 3%, from $1.61 billion in the first nine months of 2012 to $1.65 billion in 2013; freight and logistics expenses increased by $11.4 million, or 5%, from $212.7 million in the first nine months of 2012 to $224.1 million in 2013; and royalty expenses increased by $10.1 million, or 6%, from $164.0 million in the first nine months of 2012 to $174.1 million in 2013.

 

30


Table of Contents

Gross Profit

Gross profit as a percentage of net sales increased to 53.3% in the first nine months of 2013 from 52.4% in 2012. The increase in gross profit as a percentage of net sales was primarily due to favorable product mix, savings from Operational Excellence 3.0 programs, and price increases partially offset by higher input costs, which were partially offset by unfavorable changes in foreign currency exchange rates.

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, and (iii) generic advertising costs, which primarily include trade show costs. Advertising and promotion expenses, as a percentage of net sales, were flat at 10.7% during the first nine months of 2013 and 2012.

Other Selling and Administrative Expenses

Other selling and administrative expenses were $1.17 billion, or 26.8% of net sales, in the first nine months of 2013, as compared to $1.09 billion, or 26.2% of net sales, in 2012. The significant changes in other selling and administrative expenses included higher employee-related expenses and higher investments in strategic initiatives of approximately $69 million and an asset impairment charge of approximately $14 million, partially offset by lower acquisition and integration costs associated with the 2012 HIT acquisition of approximately $15 million.

Non-Operating Items

Interest expense decreased from $65.4 million in the first nine months of 2012 to $58.2 million in 2013, primarily due to lower average interest rates related to long-term borrowings.

Provision for Income Taxes

Mattel’s provision for income taxes was $102.5 million in the first nine months of 2013, as compared to $118.4 million in 2012. Mattel recognized net discrete tax benefits of $32.2 million and $16.0 million in the first nine months of 2013 and 2012, respectively, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions, settlements, and enacted tax law changes.

North America Segment

The following table provides a summary of Mattel’s gross sales by brand for the North America segment for the first nine months of 2013 and 2012:

 

       For the Nine Months
Ended September 30,
          
       2013        2012        % Change  
       (In millions, except percentage information)  

Mattel Girls & Boys Brands:

              

Barbie

     $ 324.0         $ 348.6           –7

Other Girls

       409.4           319.3           28

Wheels

       250.0           281.0           –11

Entertainment

       325.1           333.4           –2
    

 

 

      

 

 

      
       1,308.5           1,282.3           2

Fisher-Price Brands:

              

Core Fisher-Price

       580.0           624.8           –7

Fisher-Price Friends

       255.7           211.5           21

Other Fisher-Price

       81.2           102.0           –20
    

 

 

      

 

 

      
       916.9           938.3           –2

Other

       9.1           8.4        
    

 

 

      

 

 

      

Total Gross Sales

     $ 2,234.5         $ 2,229.0           —    
    

 

 

      

 

 

      

Gross sales for the North America segment were flat at $2.23 billion in the first nine months of 2013 and 2012, with no impact from changes in currency exchange rates. The change in the North America segment gross sales was due to higher sales of Other Girls and Fisher-Price Friends products, partially offset by lower sales of Wheels products. Of the 28% increase in Other Girls gross sales, 26% was due to higher sales of Monster High products. Of the 21% increase in Fisher-Price Friends gross sales, 10% was due to

 

31


Table of Contents

higher sales of Thomas & Friends products, which benefited from this year’s introduction of the Thomas & Friends wood line, 6% was due to the initial release of the Octonauts product line, and 6% was due to the initial release of the Mike the Knight product line. Of the 11% decrease in Wheels gross sales, 8% was due to lower sales of radio-controlled vehicles and Matchbox products. Cost of sales in the first nine months of 2013 was flat with 2012, as compared to a 1% increase in net sales, due to higher royalty expense offset by lower product and other costs. Gross margins increased as a result of savings from Operational Excellence 3.0 programs and price increases offset by higher input costs.

North America segment income increased 1% to $510.3 million in the first nine months of 2013, as compared to $503.3 million in 2012, primarily due to higher gross profit and lower advertising and promotion expenses, partially offset by higher other selling and administrative expenses.

International Segment

The following table provides a summary of percentage changes in gross sales within the International segment in the first nine months of 2013 versus 2012:

 

           % Change in       
Gross Sales
     Impact of Change
in Currency Rates
(in % pts)
 

Total International Segment

     7         –2   

Europe

     10         1   

Latin America

     3         –4   

Asia Pacific

     7         –4   

The following table provides a summary of Mattel’s gross sales by brand for the International segment for the first nine months of 2013 and 2012:

 

       For the Nine Months
Ended September 30,
          
       2013        2012        % Change  
       (In millions, except percentage information)  

Mattel Girls & Boys Brands:

              

Barbie

     $ 507.6         $ 498.4           2

Other Girls

       481.9           355.7           35

Wheels

       270.1           275.6           –2

Entertainment

       397.2           363.0           9
    

 

 

      

 

 

      
       1,656.8           1,492.7           11

Fisher-Price Brands:

              

Core Fisher-Price

       384.9           404.7           –5

Fisher-Price Friends

       165.7           157.5           5

Other Fisher-Price

       5.8           7.4           –19
    

 

 

      

 

 

      
       556.4           569.6           –2

Other

       3.5           1.5        
    

 

 

      

 

 

      

Total Gross Sales

     $ 2,216.7         $ 2,063.8           7
    

 

 

      

 

 

      

Gross sales for the International segment were $2.22 billion in the first nine months of 2013, up $152.9 million or 7%, as compared to $2.06 billion in 2012, with an unfavorable change in currency exchange rates of 2 percentage points. The increase in the International segment gross sales was due to higher sales of Other Girls and Entertainment products. Of the 35% increase in Other Girls gross sales, 41% was due to higher sales of Monster High products. Of the 9% increase in Entertainment gross sales, 14% was due to the initial release of Disney Planes products in conjunction with the theatrical release in 2013. Cost of sales increased 4% in the first nine months of 2013, as compared to a 7% increase in net sales, due to higher product and other costs and higher freight and logistics expense. Gross margins increased as a result of favorable product mix, savings from Operational Excellence 3.0 programs, and price increases partially offset by higher input costs, which were partially offset by unfavorable changes in currency exchange rates.

International segment income increased 12% to $389.3 million in the first nine months of 2013, as compared to $348.7 million in 2012, primarily due to higher gross profit, partially offset by higher other selling and administrative expenses and higher advertising and promotion expenses.

 

32


Table of Contents

American Girl Segment

The following table provides a summary of Mattel’s gross sales by brand for the American Girl segment for the first nine months of 2013 and 2012:

 

       For the Nine Months
Ended September 30,
          
       2013        2012        % Change  
       (In millions, except percentage information)  

American Girl Segment:

              

American Girl Brands

     $ 300.9         $ 246.7           22

Other Brands

       16.8           18.2           –8
    

 

 

      

 

 

      

Total American Girl Segment

     $ 317.7         $ 264.9           20
    

 

 

      

 

 

      

Gross sales for the American Girl segment were $317.7 million in the first nine months of 2013, up $52.8 million or 20%, as compared to $264.9 million in 2012, with no impact from changes in currency exchange rates. Of the 22% increase in American Girl Brands gross sales, 6% was due to higher sales of the 2013 Girl of the Year, Saige, 6% was due to higher sales of My American Girl products, and 5% was due to higher sales of Historical Character products. Cost of sales increased 13% in the first nine months of 2013, as compared to a 20% increase in net sales, due to higher product and other costs and higher freight and logistics expenses. Gross margins increased as a result of favorable product mix and price increases partially offset by higher input costs.

American Girl segment income increased $18.4 million to $23.3 million in the first nine months of 2013, as compared to $4.9 million in 2012, primarily due to higher gross profit partially offset by higher other selling and administrative expenses.

Operational Excellence 3.0

During 2012, Mattel completed the second phase of its cost savings program, Operational Excellence 2.0, which delivered cumulative gross cost savings of $187 million (or approximately $148 million in net cost savings) in 2011 and 2012. Beginning in 2013, Mattel initiated the third phase of its cost savings program, Operational Excellence 3.0, which is targeting gross cost savings of approximately $50 million in 2013 and cumulative gross cost savings of approximately $150 million by the end of 2014, with up to 70% of the expected cumulative savings to be realized in gross margin. The cost savings program is designed to generate sustainable cost savings through the following primary initiatives:

 

   

Manufacturing efficiencies through automation, Lean manufacturing principles, design for manufacturing, enterprise quality, and packaging optimization,

 

   

Indirect procurement, and

 

   

Operational efficiencies related to enhanced International clustering and realignment of North America operations

In the third quarter of 2013, Mattel recognized gross cost savings before severance charges and investments of approximately $15 million. Of the gross cost savings realized, approximately $11 million was reflected within gross profit and approximately $4 million was reflected within other selling and administrative expenses.

In the first nine months of 2013, Mattel recognized gross cost savings before severance charges and investments of approximately $29 million. Of the gross cost savings realized, approximately $21 million was reflected within gross profit and approximately $8 million was reflected within other selling and administrative expenses.

Income Taxes

Mattel’s provision for income taxes was $102.5 million and $118.4 million for the first nine months of 2013 and 2012, respectively. During the third quarter and first nine months of 2013, Mattel recognized net discrete tax benefits of $17.0 million and $32.2 million, respectively, primarily related to reassessments of prior years’ tax liabilities based on the status of current audits and tax filings in various jurisdictions, settlements, and enacted tax law changes. During the third quarter and first nine months of 2012, Mattel recognized net discrete tax benefits of $5.5 million and $16.0 million, primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions, settlements, and enacted tax law changes.

In August of 2013, Mattel reached a settlement with the IRS Office of Appeals regarding all unresolved issues in the IRS’s examination of Mattel’s 2008 and 2009 federal income tax returns. As a result, Mattel’s total unrecognized tax benefits decreased by $190.0 million. A majority of the decrease related to a capital loss for which Mattel recognized no financial statement benefit.

In the normal course of business, Mattel is regularly audited by the IRS. The IRS is currently auditing Mattel’s 2010 and 2011 federal income tax returns. The IRS audit plan calls for the completion of the current examination in the first quarter of 2014. While it is reasonably possible that a significant increase or decrease in Mattel’s unrecognized tax benefits may occur in the next twelve months related to this IRS audit, a current estimate of the range of reasonably possible outcomes cannot be made at this time.

 

33


Table of Contents

Mattel is also regularly audited by state and foreign tax authorities. Based on the current status of state and foreign audits, Mattel believes it is reasonably possible that in the next twelve months, the total unrecognized tax benefits could decrease by approximately $5 million related to the settlement of tax audits and/or the expiration of statutes of limitations. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.

Liquidity and Capital Resources

Mattel’s primary sources of liquidity are its cash and equivalents balances, access to short-term borrowing facilities, including Mattel’s commercial paper program and its $1.60 billion domestic unsecured committed revolving credit facility, and issuances of long-term debt securities. Cash flows from operating activities could be negatively impacted by decreased demand for Mattel’s products, which could result from factors such as adverse economic conditions and changes in public and consumer preferences, or by increased costs associated with manufacturing and distribution of products or shortages in raw materials or component parts. Additionally, Mattel’s ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as global economic crises and tight credit environments, an inability to meet its debt covenant requirements, which include maintaining consolidated debt-to-earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and interest coverage ratios, or a deterioration of Mattel’s credit ratings. Mattel’s ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity.

Of Mattel’s $406.5 million in cash and equivalents as of September 30, 2013, approximately $356 million is held by foreign subsidiaries. Mattel may need to accrue and pay additional income taxes if some or all of the undistributed earnings of foreign subsidiaries were repatriated. Mattel does not intend nor foresee a need to repatriate undistributed earnings of foreign subsidiaries. Mattel has several liquidity options to fund its domestic operations and obligations, including investing and financing activities such as dividends, share repurchases, and debt service. Positive cash flows generated by its domestic operations, the unused credit facility of $1.60 billion as of September 30, 2013, and access to both long-term and short-term public and private debt markets at highly competitive interest rates are available to fund domestic operations and obligations. If these sources are not adequate, Mattel also has the ability to repatriate highly taxed foreign earnings, receive repayment of intercompany loans to foreign subsidiaries, and distribute liquidating dividends from foreign subsidiaries, all of which would have a very nominal impact, if any, on Mattel’s tax liabilities. Mattel believes that its policy to indefinitely reinvest the earnings of its foreign subsidiaries will not result in and is not reasonably likely to result in a material change to Mattel’s liquidity position.

Current Market Conditions

Mattel is exposed to financial market risk resulting from changes in interest and foreign currency rates. Mattel believes that it has ample liquidity to fund its business needs, including beginning of year cash and equivalents, cash flows from operations, and access to the commercial paper market and its $1.60 billion domestic unsecured committed revolving credit facility, which it uses for seasonal working capital requirements. As of September 30, 2013, Mattel had available incremental borrowing resources totaling $1.60 billion under its domestic unsecured committed revolving credit facility, and Mattel has not experienced any limitations on its ability to access this source of liquidity. Market conditions could affect certain terms of other debt instruments that Mattel enters into from time to time.

Mattel monitors the third-party depository institutions that hold its cash and equivalents. Mattel’s emphasis is primarily on the 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 of 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.

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.

 

34


Table of Contents

Capital and Investment Framework

To guide future capital deployment decisions, with a goal of maximizing stockholder value, Mattel’s Board of Directors established the following capital and investment framework:

 

   

To maintain approximately $800 million to $1 billion in year-end cash available to fund a substantial portion of seasonal working capital;

 

   

To maintain a year-end debt-to-capital ratio of about 35%;

 

   

To invest approximately $180 million to $200 million in capital expenditures annually to maintain and grow the business;

 

   

To make strategic opportunistic acquisitions; and

 

   

To return excess funds to stockholders through dividends and share repurchases.

Over the long term, assuming cash flows from operating activities remain strong, Mattel plans to use its free cash flows to invest in strategic acquisitions and to return funds to stockholders through cash dividends and share repurchases. Mattel’s share repurchase program has no expiration date, and repurchases will take place from time to time, depending on market conditions. The ability to successfully implement the capital deployment plan is directly dependent on Mattel’s ability to generate strong cash flows from operating activities. There is no assurance that Mattel will continue to generate strong cash flows from operating activities or achieve its targeted goals for investing activities.

Operating Activities

Cash flows used for operating activities were $321.3 million in the first nine months of 2013, as compared to $101.1 million for the same period in 2012. The increase in cash flows used for operating activities was primarily due to higher working capital usage, partially offset by higher net income.

Investing Activities

Cash flows used for investing activities were $175.9 million in the first nine months of 2013, as compared to $833.3 million for the same period in 2012. The decrease in cash flows used for investing activities was primarily due to the acquisition of HIT Entertainment in 2012.

Financing Activities

Cash flows used for financing activities were $421.3 million in the first nine months of 2013, as compared to $153.8 million for the same period in 2012. The increase in cash flows used for financing activities were primarily due to higher share repurchases and repayments of long-term borrowings, partially offset by net proceeds from long-term borrowings.

Seasonal Financing

Mattel maintains and periodically amends or replaces its domestic unsecured committed revolving credit facility with a commercial bank group. The facility is used as a back-up to Mattel’s commercial paper program, which is used as the primary source of financing for the seasonal working capital requirements of its domestic subsidiaries. The agreement governing the credit facility was amended and restated on March 11, 2013 to, among other things, (i) extend the maturity date of the credit facility to March 12, 2018, (ii) increase aggregate commitments under the credit facility to $1.60 billion, with an “accordion feature,” which allows Mattel to increase the aggregate availability under the credit facility to $1.85 billion under certain circumstances, (iii) decrease the applicable interest rate margins to a range of 0.00% to 0.75% above the applicable base rate for base rate loans and 0.88% to 1.75% above the applicable LIBOR for Eurodollar rate loans, in each case depending on Mattel’s senior unsecured long-term debt rating, and (iv) decrease commitment fees to a range of 0.08% to 0.28% of the unused commitments under the credit facility.

Mattel is required to meet financial ratio covenants at the end of each quarter and fiscal year, using the formulae specified in the credit agreement to calculate the ratios. Mattel was in compliance with such covenants at the end of the nine months ended September 30, 2013. As of September 30, 2013, Mattel’s consolidated debt-to-EBITDA ratio, as calculated per the terms of the credit agreement, was 1.35 to 1 (compared to a maximum allowed of 3.00 to 1), and Mattel’s interest coverage ratio was 15.72 to 1 (compared to a minimum required of 3.50 to 1).

The credit agreement is a material agreement, and failure to comply with the financial ratio covenants may result in an event of default under the terms of the credit facility. If Mattel were to default under the terms of the credit facility, its ability to meet its seasonal financing requirements could be adversely affected.

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term credit lines with a number of banks. Mattel expects to extend the majority of these credit lines throughout 2013.

 

35


Table of Contents

Mattel believes its cash on hand, amounts available under its domestic unsecured committed revolving credit facility, and its foreign credit lines will be adequate to meet its seasonal financing requirements in 2013.

Financial Position

Mattel’s cash and equivalents decreased $929.3 million to $406.5 million at September 30, 2013, as compared to $1.34 billion at December 31, 2012. The decrease was primarily due to working capital usage, share repurchases, dividend payments, and repayment of the 2008 Senior Notes, partially offset by the net proceeds from the issuance of the 2013 Senior Notes.

Accounts receivable increased $658.3 million to $1.89 billion at September 30, 2013, as compared to $1.23 billion at December 31, 2012. Inventory increased $342.1 million to $807.2 million at September 30, 2013, as compared to $465.1 million at December 31, 2012. The increases in accounts receivable and inventory were primarily due to the seasonality of Mattel’s business.

Accounts payable and accrued liabilities increased $4.8 million to $1.28 billion at September 30, 2013, as compared to $1.27 billion at December 31, 2012. The change was primarily due to the timing and amount of payments for various liabilities, including advertising and promotion, royalties, and incentive compensation.

As of September 30, 2013, Mattel had foreign short-term bank loans outstanding of $77.8 million, an increase of $68.0 million from December 31, 2012. The current portion of long-term debt decreased $350.0 million to $50.0 million at September 30, 2013, as compared to $400.0 million at December 31, 2012, due to the repayment of the 2008 Senior Notes. Long-term debt, net of current portion, increased $500.0 million to $1.60 billion as of September 30, 2013, compared to $1.10 billion as of December 31, 2012, due to the $500.0 million issuance of 2013 Senior Notes.

A summary of Mattel’s capitalization is as follows:

 

     September 30,
2013
    September 30,
2012
    December 31,
2012
 
     (In millions, except percentage information)  

Medium-term notes

   $ —          —     $ 50.0         1   $ —          —  

2010 Senior Notes

     500.0         10        500.0         11        500.0         10   

2011 Senior Notes

     600.0         11        600.0         13        600.0         13   

2013 Senior Notes

     500.0         10        —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total noncurrent long-term debt

     1,600.0         31        1,150.0         25        1,100.0         23   

Other noncurrent liabilities

     616.5         12        601.5         13        643.7         13   

Stockholders’ equity

     3,008.2         57        2,903.9         62        3,067.0         64   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 5,224.7         100   $ 4,655.4         100   $ 4,810.7         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Mattel’s debt-to-total-capital ratio, including short-term borrowings and the current portion of long-term debt, increased from 36.3% at September 30, 2012 to 36.5% at September 30, 2013 as a result of higher borrowings, partially offset by the increase in stockholders’ equity. Mattel’s objective is to maintain a year-end debt-to-capital ratio of about 35%.

Litigation

See Item 1“Financial Statements—Note 20 to the Consolidated Financial Statements—Contingencies” in Part I of this Quarterly Report on Form 10-Q.

Application of Critical Accounting Policies and Estimates

Mattel’s critical accounting policies and estimates are included in its Annual Report on Form 10-K for the year ended December 31, 2012 and did not change during the first nine months of 2013.

New Accounting Pronouncements

There have been no new accounting pronouncements issued but not yet adopted that are expected to materially affect Mattel’s financial condition or results of operations.

Non-GAAP Financial Measure

In this Quarterly Report on Form 10-Q, Mattel includes a non-GAAP financial measure, gross sales, which it uses to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Net sales, as reported in the consolidated statements of operations, include the impact of sales adjustments, such as trade discounts and other allowances. Gross sales represent sales to customers, excluding the impact of sales adjustments.

 

36


Table of Contents

Consistent with its segment reporting, Mattel presents changes in gross sales as a metric for comparing its aggregate, business unit, brand, and geographic results to highlight significant trends in Mattel’s business. Changes in gross sales are discussed because, while Mattel records the detail of such sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with individual products, making net sales less meaningful. A reconciliation of gross sales to the most directly comparable GAAP financial measure, net sales, is as follows:

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2013
    September 30,
2012
    September 30,
2013
    September 30,
2012
 
     (In thousands)  

Revenues by Segment

        

North America

   $ 1,211,544      $ 1,190,946      $ 2,234,484      $ 2,228,979   

International

     1,061,829        973,590        2,216,736        2,063,776   

American Girl

     128,951        109,204        317,658        264,877   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross sales

     2,402,324        2,273,740        4,768,878        4,557,632   

Sales adjustments

     (195,363     (195,924     (397,202     (392,656
  

 

 

   

 

 

   

 

 

   

 

 

 

Net sales

   $ 2,206,961      $ 2,077,816      $ 4,371,676      $ 4,164,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Rate Risk

Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Inventory purchase and sale transactions denominated in the Euro, British pound sterling, Mexican peso, Brazilian real, and Indonesian rupiah are the primary transactions that caused foreign currency transaction exposure for Mattel. 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 statement of operations in the period in which the exchange rate changes as part of operating income or other non-operating (income) expense, net based on the nature of the underlying transaction. Transaction gains or losses on hedged intercompany inventory transactions are recorded in the consolidated statement 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-US dollar functional currencies. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at fiscal period-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Mattel’s primary currency translation exposures were related to its net investments in entities having functional currencies denominated in the Euro, British pound sterling, Brazilian real, Indonesian rupiah, Australian dollar, and Mexican peso.

There are numerous factors impacting the amount by which Mattel’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 the US dollar Trade-Weighted Index would impact Mattel’s net sales by approximately 0.5% and its full year earnings per share by approximately $0.01 to $0.02.

Venezuelan Operations

Since January 1, 2010, Mattel has accounted for its operations in Venezuela as a highly inflationary economy as the three-year cumulative inflation rate for Venezuela exceeded 100%. Accordingly, Mattel’s Venezuelan subsidiary uses the US dollar as its functional currency, and monetary assets and liabilities denominated in Venezuelan bolivar fuertes generate income or expense for changes in value associated with foreign currency exchange rate fluctuations against the US dollar. Since 2010, Mattel’s Venezuelan subsidiary used the Sistema de Transacciones con Titulos en Moneda Extranjera (“SITME”) rate, which was controlled by the Central Bank of Venezuela, to remeasure monetary assets and liabilities denominated in Venezuelan bolivar fuertes. The SITME rate was quoted at 5.30 Venezuelan bolivar fuertes per US dollar at December 31, 2012.

 

37


Table of Contents

During February 2013, the Central Bank of Venezuela revised its official exchange rate to 6.30 Venezuelan bolivar fuertes per US dollar and eliminated the SITME rate. The change in the exchange rate resulted in an unrealized foreign currency exchange loss of approximately $5 million, which was primarily recognized within other non-operating (income) expense, net in the consolidated statements of operations in the first quarter of 2013.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of September 30, 2013, Mattel’s disclosure controls and procedures were evaluated, with the participation of Mattel’s principal executive officer and principal financial officer, to assess whether they are effective in providing reasonable assurance that information required to be disclosed by Mattel in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and to provide reasonable assurance that such information is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Based on this evaluation, Bryan G. Stockton, Mattel’s principal executive officer, and Kevin M. Farr, Mattel’s principal financial officer, concluded that these disclosure controls and procedures were effective as of September 30, 2013.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2013, Mattel made no changes to its internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

38


Table of Contents

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

The content of Item 1 “Financial Statements—Note 20 to the Consolidated Financial Statements—Contingencies” in Part I of this Quarterly Report on Form 10-Q is hereby incorporated by reference in its entirety in this Item 1.

 

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed under Part I, Item 1A “Risk Factors” in Mattel’s 2012 Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Recent Sales of Unregistered Equity Securities

During the third quarter of 2013, Mattel did not sell any unregistered equity securities.

Issuer Purchases of Equity Securities

This table provides certain information with respect to Mattel’s purchases of its common stock during the third quarter of 2013:

 

Period

   Total Number of
Shares (or Units)
Purchased (1)
     Average Price Paid
per Share (or Unit)
     Total Number of Shares
(or Units) Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs (2)
 

July 1—31

     1,845,778      $ 43.07         1,842,940       $ 642,717,816   

August 1—31

     2,529,433        42.50         2,120,050         552,717,896   

September 1—30

     2,162,870         41.64         2,161,196         462,717,905   
  

 

 

    

 

 

    

 

 

    

Total

     6,538,081       $ 42.38         6,124,186       $ 462,717,905   
  

 

 

    

 

 

    

 

 

    

 

(1) The total number of shares purchased includes 413,895 shares withheld from employees to satisfy minimum tax withholding obligations that occur upon vesting of restricted stock units. These shares were not purchased as part of a publicly announced repurchase plan or program.
(2) On July 17, 2013, Mattel’s Board of Directors authorized the repurchase of an additional $500.0 million of Mattel’s common stock under its share repurchase program. Mattel’s share repurchase program was first announced on July 21, 2003. Repurchases under the program will take place from time to time, depending on market conditions. Mattel’s share repurchase program does not expire.

 

Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

Item 5. Other Information.

None.

 

39


Table of Contents
Item 6. Exhibits.

 

Exhibit No.

 

Exhibit Description

  10.1*+   Amendment No. 1 to the Mattel Incentive Plan
  10.2*+   Amendment No. 1 to the Mattel, Inc. Deferred Compensation and PIP Excess Plan (Post-2004) (the “DCPEP”)
  10.3*+   Amendment No. 2 to the DCPEP
  10.4*+   Amendment No. 1 to the Mattel, Inc. Deferred Compensation Plan for Non-Employee Directors (as amended and restated effective January 1, 2009)
  10.5*+   Amendment No. 1 to the Mattel, Inc. 2005 Supplemental Executive Retirement Plan (as amended and restated effective January 1, 2009)
  10.6*+   Amendment No. 1 to the Mattel, Inc. Executive Severance Plan
  10.7*+   Amendment No. 1 to the Mattel Cash Balance Excess Benefit Plan (as amended and restated effective July 1, 2012)
  10.8*+   Amendment No. 3 to the Mattel, Inc. 2005 Equity Compensation Plan
  10.9*+   Amendment No. 1 to the Mattel, Inc. 2010 Equity and Long-Term Compensation Plan
  12.0*   Computation of Earnings to Fixed Charges
  31.0*   Certification of Principal Executive Officer dated October 24, 2013 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.1*   Certification of Principal Financial Officer dated October 24, 2013 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.0**   Certifications of Principal Executive Officer and Principal Financial Officer dated October 24, 2013 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

+ 

Management contract or compensatory plan or arrangement.

* Filed herewith.
** Furnished herewith. This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.

 

40


Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

MATTEL, INC.

Registrant

By:    /s/ H. Scott Topham
 

H. Scott Topham

Senior Vice President and Corporate

Controller (Duly authorized officer and

chief accounting officer)

Date: October 24, 2013

 

41