NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of only those of a normal recurring nature, considered necessary for a fair statement of the financial position and interim results of Mattel, Inc. and its subsidiaries ("Mattel") as of and for the periods presented have been included.
The December 31, 2019 balance sheet data was derived from audited financial statements; however, the accompanying interim notes to the consolidated financial statements do not include all of the annual disclosures required by GAAP. As Mattel's business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year. The financial information included herein should be read in conjunction with Mattel's consolidated financial statements and related notes in the 2019 Annual Report on Form 10-K.
Mattel estimates current expected credit losses based on collection history and management’s assessment of the current economic trends, business environment, customers’ financial condition, accounts receivable aging, and customer disputes that may impact the level of future credit losses. Accounts receivable are net of allowances for credit losses of $20.9 million, $24.3 million, and $18.5 million as of March 31, 2020, March 31, 2019, and December 31, 2019, respectively.
Inventories include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
(In thousands)
|
Raw materials and work in process
|
$
|
107,880
|
|
|
$
|
118,143
|
|
|
$
|
103,123
|
|
Finished goods
|
452,765
|
|
|
497,685
|
|
|
392,381
|
|
|
$
|
560,645
|
|
|
$
|
615,828
|
|
|
$
|
495,504
|
|
|
|
4.
|
Property, Plant, and Equipment
|
Property, plant, and equipment, net includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
(In thousands)
|
Land
|
$
|
24,856
|
|
|
$
|
25,071
|
|
|
$
|
25,112
|
|
Buildings
|
297,910
|
|
|
298,022
|
|
|
302,956
|
|
Machinery and equipment
|
769,761
|
|
|
885,178
|
|
|
812,509
|
|
Software
|
367,143
|
|
|
398,071
|
|
|
364,391
|
|
Tools, dies, and molds
|
719,615
|
|
|
814,078
|
|
|
747,706
|
|
Leasehold improvements
|
179,872
|
|
|
241,769
|
|
|
183,250
|
|
|
2,359,157
|
|
|
2,662,189
|
|
|
2,435,924
|
|
Less: accumulated depreciation
|
(1,839,380
|
)
|
|
(2,039,938
|
)
|
|
(1,885,785
|
)
|
|
$
|
519,777
|
|
|
$
|
622,251
|
|
|
$
|
550,139
|
|
During the three months ended December 31, 2019, in conjunction with the Capital Light program, Mattel discontinued production at one of its plants based in Mexico and has committed to a plan to dispose of the land and building. These assets meet the held for sale criteria, are actively being marketed for sale, and are included within property, plant and equipment, net in the consolidated balance sheets.
Goodwill is allocated to various reporting units, which are at the operating segment level, for the purpose of evaluating whether goodwill is impaired. Mattel's reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel tests its goodwill for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying value of a reporting unit may exceed its fair value.
The change in the carrying amount of goodwill by operating segment for the three months ended March 31, 2020 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the North America segment, thereby causing a foreign currency translation impact.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
Currency
Exchange Rate
Impact
|
|
March 31,
2020
|
|
(In thousands)
|
North America
|
$
|
732,430
|
|
|
$
|
(1,945
|
)
|
|
$
|
730,485
|
|
International
|
450,713
|
|
|
(5,917
|
)
|
|
444,796
|
|
American Girl
|
207,571
|
|
|
—
|
|
|
207,571
|
|
|
$
|
1,390,714
|
|
|
$
|
(7,862
|
)
|
|
$
|
1,382,852
|
|
|
|
6.
|
Other Noncurrent Assets
|
Other noncurrent assets include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
(In thousands)
|
Identifiable intangible assets (net of accumulated amortization of $258.0 million, $218.3 million, and $248.0 million, respectively)
|
$
|
534,044
|
|
|
$
|
580,497
|
|
|
$
|
553,114
|
|
Deferred income taxes
|
62,674
|
|
|
50,510
|
|
|
67,900
|
|
Other
|
199,627
|
|
|
217,846
|
|
|
212,198
|
|
|
$
|
796,345
|
|
|
$
|
848,853
|
|
|
$
|
833,212
|
|
Mattel's amortizable intangible assets primarily consist of trademarks. Mattel 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. Mattel's amortizable intangible assets were not impaired during the three months ended March 31, 2020 and 2019.
Accrued liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
(In thousands)
|
Incentive compensation
|
$
|
135,833
|
|
|
$
|
87,504
|
|
|
$
|
122,923
|
|
Current lease liabilities
|
78,247
|
|
|
77,092
|
|
|
74,065
|
|
Advertising and promotion
|
71,563
|
|
|
61,793
|
|
|
93,804
|
|
Royalties
|
22,701
|
|
|
36,385
|
|
|
94,228
|
|
Other
|
348,910
|
|
|
394,279
|
|
|
384,493
|
|
|
$
|
657,254
|
|
|
$
|
657,053
|
|
|
$
|
769,513
|
|
On December 20, 2017, Mattel entered into a syndicated facility agreement, which was subsequently amended in 2018 and 2019 (as amended, the "Credit Agreement"), as a borrower (in such capacity, the "Borrower") and guarantor thereunder, along with certain of the Borrower's domestic and foreign subsidiaries as additional borrowers and/or guarantors thereunder, Bank of America, N.A., as global administrative agent, collateral agent and Australian security trustee, and the other lenders and financial institutions from time to time party thereto, providing for $1.60 billion in aggregate principal amount of senior secured revolving credit facilities (the "senior secured revolving credit facilities") consisting of (i) an asset based lending facility with aggregate commitments of $1.31 billion, subject to borrowing base capacity, secured by substantially all of the accounts receivable and inventory of the Borrower and certain of its subsidiaries who are borrowers and/or guarantors under the Credit Agreement, as well as (ii) a revolving credit facility with $294.0 million in aggregate commitments secured by certain fixed assets and intellectual property of the U.S. borrowers under the Credit Agreement, and certain equity interests in the borrower and guarantor subsidiaries under the Credit Agreement. The senior secured revolving credit facilities will mature on November 18, 2022.
Borrowings under the senior secured revolving credit facilities (i) are limited by jurisdiction-specific borrowing base calculations based on the sum of specified percentages of eligible accounts receivable, eligible inventory and certain fixed assets and intellectual property, as applicable, minus the amount of any applicable reserves, and (ii) bear interest at a floating rate, which can be either, at the Borrower's option, (a) an adjusted LIBOR rate plus an applicable margin ranging from 1.25% to 2.75% per annum or (b) an alternate base rate plus an applicable margin ranging from 0.25% to 1.75% per annum, in each case, such applicable margins to be determined based on the Borrower's average borrowing availability remaining under the senior secured revolving credit facilities.
In addition to paying interest on the outstanding principal under the senior secured revolving credit facilities, the Borrower is required to pay (i) an unused line fee per annum of the average daily unused portion of the senior secured revolving credit facilities, (ii) a letter of credit fronting fee based on a percentage of the aggregate face amount of outstanding letters of credit, and (iii) certain other customary fees and expenses of the lenders and agents.
Mattel had borrowings under the senior secured revolving credit facilities of $150.0 million as of March 31, 2020 and had no borrowings under the senior secured revolving credit facilities as of March 31, 2019 and December 31, 2019. Outstanding letters of credit under the senior secured revolving credit facilities totaled approximately $13 million, $70 million, and $55 million as of March 31, 2020, March 31, 2019, and December 31, 2019, respectively.
The Credit Agreement contains customary covenants, including, but not limited to, restrictions on the Borrower's and its subsidiaries' ability to merge and consolidate with other companies, incur indebtedness, grant liens or security interests on assets, make acquisitions, loans, advances, or investments, pay dividends, sell or otherwise transfer assets outside of the ordinary course, optionally prepay or modify terms of any junior indebtedness, enter into transactions with affiliates, or change their line of business.
The Credit Agreement requires the maintenance of a fixed charge coverage ratio of 1.00 to 1.00 at the end of each fiscal quarter when excess availability under the senior secured revolving credit facilities is less than the greater of (x) $100 million and (y) 10% of the aggregate amount available thereunder (the "Availability Threshold") and on the last day of each subsequent fiscal quarter ending thereafter until no event of default exists and excess availability is greater than the Availability Threshold for at least 30 consecutive days.
Since the execution of the Credit Agreement, the fixed charge coverage ratio covenant has not been in effect, as no event of default has occurred and as Mattel's excess availability has been greater than $100 million and the Availability Threshold. As of March 31, 2020, Mattel was in compliance with all covenants contained in the Credit Agreement. The Credit Agreement is a material agreement, and failure to comply with the covenants may result in an event of default under the terms of the senior secured revolving credit facilities. If Mattel were to default under the terms of the senior secured revolving credit facilities, its ability to meet its seasonal financing requirements could be adversely affected.
Long-term debt includes the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
(In thousands)
|
2010 Senior Notes due October 2020
|
$
|
—
|
|
|
$
|
250,000
|
|
|
$
|
—
|
|
2010 Senior Notes due October 2040
|
250,000
|
|
|
250,000
|
|
|
250,000
|
|
2011 Senior Notes due November 2041
|
300,000
|
|
|
300,000
|
|
|
300,000
|
|
2013 Senior Notes due March 2023
|
250,000
|
|
|
250,000
|
|
|
250,000
|
|
2016 Senior Notes due August 2021
|
—
|
|
|
350,000
|
|
|
—
|
|
2017/2018 Senior Notes due December 2025
|
1,500,000
|
|
|
1,500,000
|
|
|
1,500,000
|
|
2019 Senior Notes due December 2027
|
600,000
|
|
|
—
|
|
|
600,000
|
|
Debt issuance costs and debt discount
|
(51,076
|
)
|
|
(46,546
|
)
|
|
(53,249
|
)
|
|
2,848,924
|
|
|
2,853,454
|
|
|
2,846,751
|
|
Less: current portion
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
2,848,924
|
|
|
$
|
2,853,454
|
|
|
$
|
2,846,751
|
|
|
|
10.
|
Other Noncurrent Liabilities
|
Other noncurrent liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
(In thousands)
|
Benefit plan liabilities
|
$
|
205,694
|
|
|
$
|
183,294
|
|
|
$
|
212,280
|
|
Noncurrent income tax liabilities
|
125,798
|
|
|
143,723
|
|
|
125,515
|
|
Other
|
77,438
|
|
|
82,298
|
|
|
101,206
|
|
|
$
|
408,930
|
|
|
$
|
409,315
|
|
|
$
|
439,001
|
|
|
|
11.
|
Accumulated Other Comprehensive Income (Loss)
|
The following tables present changes in the accumulated balances for each component of other comprehensive income (loss), including other comprehensive income (loss) and reclassifications out of accumulated other comprehensive income (loss) for each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2020
|
|
Derivative
Instruments
|
|
Available-for-Sale Security
|
|
Employee
Benefit Plans
|
|
Currency
Translation
Adjustments
|
|
Total
|
|
(In thousands)
|
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2019
|
$
|
11,041
|
|
|
$
|
(8,260
|
)
|
|
$
|
(169,857
|
)
|
|
$
|
(702,408
|
)
|
|
$
|
(869,484
|
)
|
Other comprehensive income (loss) before reclassifications
|
9,190
|
|
|
195
|
|
|
1,702
|
|
|
(145,634
|
)
|
|
(134,547
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(3,210
|
)
|
|
—
|
|
|
1,358
|
|
|
—
|
|
|
(1,852
|
)
|
Net increase (decrease) in other comprehensive income (loss)
|
5,980
|
|
|
195
|
|
|
3,060
|
|
|
(145,634
|
)
|
|
(136,399
|
)
|
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of March 31, 2020
|
$
|
17,021
|
|
|
$
|
(8,065
|
)
|
|
$
|
(166,797
|
)
|
|
$
|
(848,042
|
)
|
|
$
|
(1,005,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, 2019
|
|
Derivative
Instruments
|
|
Available-for-Sale Security
|
|
Employee
Benefit Plans
|
|
Currency
Translation
Adjustments
|
|
Total
|
|
(In thousands)
|
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of December 31, 2018
|
$
|
11,411
|
|
|
$
|
(6,547
|
)
|
|
$
|
(142,763
|
)
|
|
$
|
(721,327
|
)
|
|
$
|
(859,226
|
)
|
Other comprehensive income (loss) before reclassifications
|
5,818
|
|
|
1,877
|
|
|
(1,206
|
)
|
|
14,133
|
|
|
20,622
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
(759
|
)
|
|
—
|
|
|
1,429
|
|
|
—
|
|
|
670
|
|
Net increase in other comprehensive income (loss)
|
5,059
|
|
|
1,877
|
|
|
223
|
|
|
14,133
|
|
|
21,292
|
|
Accumulated Other Comprehensive Income (Loss), Net of Tax, as of March 31, 2019
|
$
|
16,470
|
|
|
$
|
(4,670
|
)
|
|
$
|
(142,540
|
)
|
|
$
|
(707,194
|
)
|
|
$
|
(837,934
|
)
|
The following table presents the classification and amount of the reclassifications from accumulated other comprehensive income (loss) to the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
Statements of Operations
Classification
|
|
(In thousands)
|
|
|
Derivative Instruments
|
|
Gain on foreign currency forward exchange contracts and other
|
$
|
3,193
|
|
|
$
|
927
|
|
|
Cost of sales
|
Tax effect
|
17
|
|
|
(168
|
)
|
|
Provision for income taxes
|
|
$
|
3,210
|
|
|
$
|
759
|
|
|
Net loss
|
Employee Benefit Plans
|
|
|
|
|
|
Amortization of prior service credit (a)
|
$
|
466
|
|
|
$
|
493
|
|
|
Other non-operating expense, net
|
Recognized actuarial loss (a)
|
(2,340
|
)
|
|
(1,737
|
)
|
|
Other non-operating expense, net
|
|
(1,874
|
)
|
|
(1,244
|
)
|
|
|
Tax effect
|
516
|
|
|
(185
|
)
|
|
Provision for income taxes
|
|
$
|
(1,358
|
)
|
|
$
|
(1,429
|
)
|
|
Net loss
|
_______________________________________
|
|
(a)
|
The amortization of prior service credit and recognized actuarial loss are included in the computation of net periodic benefit cost. Refer to "Note 15 to the Consolidated Financial Statements—Employee Benefit Plans" of this Quarterly Report on Form 10-Q for additional information regarding Mattel's net periodic benefit cost.
|
Currency Translation Adjustments
Mattel's reporting currency is the U.S. dollar. The translation of its net investments in subsidiaries with non-U.S. dollar functional currencies subjects Mattel to the impact of foreign currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at fiscal period-end exchange rates. Income and expense items are translated at weighted-average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity. Currency translation adjustments resulted in a net loss of $145.6 million for the three months ended March 31, 2020, primarily due to the weakening of the Mexican peso, Russian ruble, Brazilian real, and the British pound sterling against the U.S. dollar. Currency translation adjustments resulted in a net gain of $14.1 million for the three months ended March 31, 2019, primarily due to the strengthening of the British pound sterling and Russian ruble against the U.S. 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. Mattel also 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. Additionally, Mattel utilizes derivative contracts to hedge commodities including certain raw materials. As of March 31, 2020, March 31, 2019, and December 31, 2019, Mattel held foreign currency forward exchange contracts and other commodity derivative instruments, with notional amounts of $1.37 billion, $1.10 billion, and $742.0 million, respectively.
The following tables present Mattel's derivative assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
|
(In thousands)
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other
|
$
|
21,121
|
|
|
$
|
16,703
|
|
|
$
|
10,227
|
|
|
Prepaid expenses and
other current assets
|
Foreign currency forward exchange contracts and other
|
2,525
|
|
|
3,041
|
|
|
715
|
|
|
Other noncurrent assets
|
Total derivatives designated as hedging instruments
|
$
|
23,646
|
|
|
$
|
19,744
|
|
|
$
|
10,942
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other
|
$
|
13,811
|
|
|
$
|
377
|
|
|
$
|
4,060
|
|
|
Prepaid expenses and
other current assets
|
|
$
|
37,457
|
|
|
$
|
20,121
|
|
|
$
|
15,002
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
Fair Value
|
|
Balance Sheet Classification
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
|
(In thousands)
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other
|
$
|
6,841
|
|
|
$
|
1,045
|
|
|
$
|
2,500
|
|
|
Accrued liabilities
|
Foreign currency forward exchange contracts and other
|
2,507
|
|
|
146
|
|
|
213
|
|
|
Other noncurrent liabilities
|
Total derivatives designated as hedging instruments
|
$
|
9,348
|
|
|
$
|
1,191
|
|
|
$
|
2,713
|
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other
|
$
|
1,594
|
|
|
$
|
4,992
|
|
|
$
|
263
|
|
|
Accrued liabilities
|
Foreign currency forward exchange contracts and other
|
224
|
|
|
—
|
|
|
—
|
|
|
Other noncurrent liabilities
|
Total derivatives not designated as hedging instruments
|
$
|
1,818
|
|
|
$
|
4,992
|
|
|
$
|
263
|
|
|
|
|
$
|
11,166
|
|
|
$
|
6,183
|
|
|
$
|
2,976
|
|
|
|
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
|
|
|
|
March 31, 2020
|
|
March 31, 2019
|
|
Statements of
Operations
Classification
|
|
Amount of Gain Recognized in OCI
|
|
Amount of Gain Reclassified from Accumulated OCI to Statement of Operations
|
|
Amount of Gain Recognized in OCI
|
|
Amount of Gain Reclassified from Accumulated OCI to Statement of Operations
|
|
|
(In thousands)
|
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other
|
$
|
9,190
|
|
|
$
|
3,210
|
|
|
$
|
5,818
|
|
|
$
|
759
|
|
|
Cost of sales
|
The net gains of $3.2 million and $0.8 million reclassified from accumulated other comprehensive loss to the consolidated statements of operations for the three months ended March 31, 2020 and 2019, respectively, are offset by the changes in cash flows associated with the underlying hedged transactions.
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Loss) Gain Recognized in the Statements of Operations
|
|
Statements of Operations
Classification
|
|
For the Three Months Ended
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
|
(In thousands)
|
|
|
Derivatives not designated as hedging instruments
|
|
Foreign currency forward exchange contracts and other
|
$
|
(38,369
|
)
|
|
$
|
(498
|
)
|
|
Other non-operating expense, net
|
The net losses of $38.4 million and $0.5 million recognized in the consolidated statements of operations for the three months ended March 31, 2020 and 2019, respectively, are offset by foreign currency transaction gains and losses on the related hedged balances.
|
|
13.
|
Fair Value Measurements
|
The following tables present information about Mattel's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis as of March 31, 2020, March 31, 2019, and December 31, 2019 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, either directly or indirectly.
|
|
|
•
|
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 include the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other (a)
|
$
|
—
|
|
|
$
|
37,457
|
|
|
$
|
—
|
|
|
$
|
37,457
|
|
Available-for-sale security (b)
|
3,725
|
|
|
—
|
|
|
—
|
|
|
3,725
|
|
Total assets
|
$
|
3,725
|
|
|
$
|
37,457
|
|
|
$
|
—
|
|
|
$
|
41,182
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other (a)
|
$
|
—
|
|
|
$
|
11,166
|
|
|
$
|
—
|
|
|
$
|
11,166
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other (a)
|
$
|
—
|
|
|
$
|
20,121
|
|
|
$
|
—
|
|
|
$
|
20,121
|
|
Available-for-sale security (b)
|
7,150
|
|
|
—
|
|
|
—
|
|
|
7,150
|
|
Total assets
|
$
|
7,150
|
|
|
$
|
20,121
|
|
|
$
|
—
|
|
|
$
|
27,271
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other (a)
|
$
|
—
|
|
|
$
|
6,183
|
|
|
$
|
—
|
|
|
$
|
6,183
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(In thousands)
|
Assets
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other (a)
|
$
|
—
|
|
|
$
|
15,002
|
|
|
$
|
—
|
|
|
$
|
15,002
|
|
Available-for-sale security (b)
|
3,530
|
|
|
—
|
|
|
—
|
|
|
3,530
|
|
Total assets
|
$
|
3,530
|
|
|
$
|
15,002
|
|
|
$
|
—
|
|
|
$
|
18,532
|
|
Liabilities
|
|
|
|
|
|
|
|
Foreign currency forward exchange contracts and other (a)
|
$
|
—
|
|
|
$
|
2,976
|
|
|
$
|
—
|
|
|
$
|
2,976
|
|
____________________________________________
|
|
(a)
|
The fair value of the foreign currency forward exchange contracts and other commodity derivative instruments 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 available-for-sale security is based on the quoted price on an active public exchange.
|
Other Financial Instruments
Mattel's financial instruments include cash and equivalents, accounts receivable and payable, accrued liabilities, short-term borrowings, and long-term debt. The fair values of these instruments, excluding long-term debt, approximate their carrying values because of their short-term nature. Cash and equivalents are classified as Level 1 and all other financial instruments are classified as Level 2 within the fair value hierarchy.
The estimated fair value of Mattel's long-term debt was $2.77 billion (compared to a carrying value of $2.90 billion) as of March 31, 2020, $2.71 billion (compared to a carrying value of $2.90 billion) as of March 31, 2019, and $3.00 billion (compared to a carrying value of $2.90 billion) as of December 31, 2019. 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.
The following table reconciles basic and diluted earnings per common share for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands, except per share amounts)
|
Basic (a)
|
|
|
|
Net loss
|
$
|
(210,741
|
)
|
|
$
|
(176,296
|
)
|
Weighted-average number of common shares
|
346,867
|
|
|
345,852
|
|
Basic net loss per common share
|
$
|
(0.61
|
)
|
|
$
|
(0.51
|
)
|
|
|
|
|
Diluted (a)
|
|
|
|
Net loss
|
$
|
(210,741
|
)
|
|
$
|
(176,296
|
)
|
Weighted-average number of common shares
|
346,867
|
|
|
345,852
|
|
Dilutive stock options and restricted stock units ("RSUs") (b)
|
—
|
|
|
—
|
|
Weighted-average number of common and potential common shares
|
346,867
|
|
|
345,852
|
|
Diluted net loss per common share
|
$
|
(0.61
|
)
|
|
$
|
(0.51
|
)
|
_______________________________________
|
|
(a)
|
Mattel did not have participating RSUs for the three months ended March 31, 2020 and 2019.
|
|
|
(b)
|
Mattel was in a net loss position for the three months ended March 31, 2020 and 2019, and, accordingly, all outstanding nonqualified stock options and RSUs were excluded from the calculation of diluted net loss per common share because their effect would be antidilutive.
|
|
|
15.
|
Employee Benefit Plans
|
Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies, which are more fully described in Part II, Item 8 "Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements–Employee Benefit Plans" in the 2019 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
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Service cost
|
$
|
1,109
|
|
|
$
|
956
|
|
Interest cost
|
3,781
|
|
|
4,840
|
|
Expected return on plan assets
|
(4,921
|
)
|
|
(5,444
|
)
|
Amortization of prior service cost
|
43
|
|
|
16
|
|
Recognized actuarial loss
|
2,359
|
|
|
1,833
|
|
|
$
|
2,371
|
|
|
$
|
2,201
|
|
A summary of the components of net periodic benefit credit for Mattel's postretirement benefit plans is as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Interest cost
|
$
|
35
|
|
|
$
|
50
|
|
Amortization of prior service credit
|
(509
|
)
|
|
(509
|
)
|
Recognized actuarial gain
|
(19
|
)
|
|
(96
|
)
|
|
$
|
(493
|
)
|
|
$
|
(555
|
)
|
During the three months ended March 31, 2020, Mattel made cash contributions totaling approximately $1 million related to its defined benefit pension and postretirement benefit plans. During the remainder of 2020, Mattel expects to make additional cash contributions of approximately $10 million.
Mattel has various stock compensation plans, which are more fully described in Part II, Item 8 "Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements—Share-Based Payments" in the 2019 Annual Report on Form 10-K. Under the Mattel, Inc. Amended and Restated 2010 Equity and Long-Term Compensation Plan, Mattel has the ability to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent rights, and shares of common stock to officers, employees, and other persons providing services to Mattel. Stock options are granted with exercise prices at the fair market value of Mattel's common stock on the applicable grant date and expire no later than 10 years from the date of grant. Stock options and RSUs generally provide for vesting over a period of three years from the date of grant.
As of March 31, 2020, two long-term incentive programs were in place with the following performance cycles: (i) a January 1, 2018–December 31, 2020 performance cycle and (ii) a January 1, 2019–December 31, 2021 performance cycle.
Compensation expense, included within other selling and administrative expenses in the consolidated statements of operations, related to stock options and RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Stock option compensation expense
|
$
|
3,131
|
|
|
$
|
2,406
|
|
RSU compensation expense (a)
|
11,144
|
|
|
9,459
|
|
|
$
|
14,275
|
|
|
$
|
11,865
|
|
_______________________________________
|
|
(a)
|
Includes compensation expense of $3.8 million and $0.8 million associated with Mattel's long-term incentive programs for the three months ended March 31, 2020 and 2019, respectively.
|
As of March 31, 2020, total unrecognized compensation expense related to unvested share-based payments totaled $68.4 million and is expected to be recognized over a weighted-average period of 1.8 years.
Mattel uses treasury shares purchased under its share repurchase program to satisfy stock option exercises and the vesting of RSUs. No cash was received for stock option exercises during the three months ended March 31, 2020 and 2019.
|
|
17.
|
Other Selling and Administrative Expenses
|
Other selling and administrative expenses include the following:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Design and development
|
$
|
44,628
|
|
|
$
|
42,445
|
|
Identifiable intangible asset amortization
|
$
|
9,965
|
|
|
$
|
10,429
|
|
|
|
18.
|
Foreign Currency Transaction Exposure
|
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 loss in the consolidated statements of operations. Gains and losses on unhedged intercompany loans and advances are recorded as a component of other non-operating expense, net in the consolidated statements of operations in the period in which the currency exchange rate changes. Inventory transactions denominated in the Euro, Mexican peso, British pound sterling, Australian dollar, Russian ruble, Brazilian real, and Canadian dollar were the primary transactions that caused foreign currency transaction exposure for Mattel during the three months ended March 31, 2020.
Currency transaction gains (losses) included in the consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Operating loss
|
$
|
224
|
|
|
$
|
(3,770
|
)
|
Other non-operating expense, net
|
(832
|
)
|
|
(1,668
|
)
|
Currency transaction gains (losses), net
|
$
|
(608
|
)
|
|
$
|
(5,438
|
)
|
|
|
19.
|
Restructuring Charges
|
Capital Light Program
During the first quarter of 2019, Mattel announced the commencement of its Capital Light program to optimize Mattel's manufacturing footprint (including the sale or consolidation of manufacturing facilities), increase the productivity of its plant infrastructure, and achieve additional efficiencies across its entire supply chain.
In connection with the Capital Light program, Mattel recorded severance and other restructuring charges within the consolidated statements of operations as follows:
|
|
|
|
|
|
For the Three Months Ended March 31, 2020
|
|
(In thousands)
|
Cost of sales (a)
|
$
|
3,057
|
|
Other selling and administrative expenses (b)
|
2,746
|
|
|
$
|
5,803
|
|
_______________________________________
|
|
(a)
|
Severance and other restructuring costs recorded within cost of sales in the consolidated statements of operations include charges associated with the consolidation of manufacturing facilities.
|
|
|
(b)
|
Severance and other restructuring costs recorded within other selling and administrative expenses in the consolidated statements of operations are included in corporate and other expense in "Note 22 to the Consolidated Financial Statements—Segment Information."
|
The following table summarizes Mattel's severance and other restructuring charges activity related to the Capital Light program for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at December 31, 2019
|
|
Charges (a)
|
|
Payments/Utilization
|
|
Liability at March 31, 2020
|
|
(In thousands)
|
Severance
|
$
|
6,151
|
|
|
$
|
2,606
|
|
|
$
|
(1,481
|
)
|
|
$
|
7,276
|
|
Other restructuring charges
|
11,484
|
|
|
3,197
|
|
|
(5,622
|
)
|
|
9,059
|
|
|
$
|
17,635
|
|
|
$
|
5,803
|
|
|
$
|
(7,103
|
)
|
|
$
|
16,335
|
|
_______________________________________
|
|
(a)
|
Other restructuring charges consist primarily of expenses associated with the consolidation of manufacturing facilities.
|
As of March 31, 2020, Mattel has recorded cumulative severance and other restructuring charges related to the Capital Light program of $43.4 million, which include non-cash charges. Mattel has recorded cumulative non-cash charges of approximately $13 million. Mattel expects to incur total severance and other restructuring charges, excluding non-cash charges, of approximately $35 million related to the Capital Light program.
Other Cost Savings Actions
During the three months ended March 31, 2020, Mattel recorded severance and other restructuring charges of $4.8 million, primarily related to actions taken to further streamline its organizational structure.
Mattel's provision for income taxes was $11.9 million and $2.7 million for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, Mattel recognized a net discrete tax expense of $6.4 million primarily related to an expense for reassessments of prior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. During the three months ended March 31, 2019, Mattel recognized a net discrete tax benefit of $1.9 million, primarily related to a benefit for reassessments of prior years' tax liabilities and income taxes recorded on a discrete basis in various jurisdictions. As a result of the establishment of a valuation allowance on U.S. deferred tax assets in 2017, there was no U.S. tax benefit provided for U.S. losses during the three months ended March 31, 2020 and 2019.
In the normal course of business, Mattel is regularly audited by federal, state, and foreign tax authorities. Based on the current status of federal, state, and foreign audits, Mattel believes it is reasonably possible that in the next twelve months, the total unrecognized tax benefits could decrease by approximately $12 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.
In April 2020, Mattel initiated an analysis of withholding tax regimes in Europe and potential changes in the interpretation of withholding tax rules which may subject Mattel to withholding tax for years remaining open under the applicable statute of limitation. Due to the age and diversity of the laws in question, as well as the applicability of numerous tax treaties, the analysis is complex and ongoing. Though Mattel believes it is in compliance with all tax laws in the jurisdictions in which it operates, the completion of its analysis in the second quarter of 2020 could result in an adjustment to its income tax expense. A reasonable estimate of the potential impact cannot be made at this time.
Litigation Related to Yellowstone do Brasil Ltda.
Yellowstone do Brasil Ltda. (formerly known as Trebbor Informática Ltda.) was a customer of Mattel's subsidiary Mattel do Brasil Ltda. when a commercial dispute arose between Yellowstone and Mattel do Brasil regarding the supply of product and related payment terms. As a consequence of the dispute, in April 1999, Yellowstone filed a declarative action against Mattel do Brasil before the 15th Civil Court of Curitiba – State of Parana (the "Trial Court"), requesting the annulment of its security bonds and promissory notes given to Mattel do Brasil as well as requesting the Trial Court to find Mattel do Brasil liable for damages incurred as a result of Mattel do Brasil’s alleged abrupt and unreasonable breach of an oral exclusive distribution agreement between the parties relating to the supply and sale of toys in Brazil. Yellowstone's complaint sought alleged loss of profits of approximately $1 million, plus an unspecified amount of damages consisting of: (i) compensation for all investments made by Yellowstone to develop Mattel do Brasil's business; (ii) reimbursement of the amounts paid by Yellowstone to terminate labor and civil contracts in connection with the business; (iii) compensation for alleged unfair competition and for the goodwill of trade; and (iv) compensation for non-pecuniary damages.
Mattel do Brasil filed its defenses to these claims and simultaneously presented a counterclaim for unpaid accounts receivable for goods supplied to Yellowstone in the approximate amount of $4 million.
During the evidentiary phase a first accounting report was submitted by a court-appointed expert. Such report stated that Yellowstone had invested approximately $3 million in its business. Additionally, the court-appointed expert calculated a loss of profits compensation of approximately $1 million. Mattel do Brasil challenged the report since it was not made based on the official accounting documents of Yellowstone and since the report calculated damages based only on documents unilaterally submitted by Yellowstone.
The Trial Court accepted the challenge and ruled that a second accounting examination should take place in the lawsuit. Yellowstone appealed the decision to the Court of Appeals of the State of Parana (the "Appeals Court"), but it was upheld by the Appeals Court.
The second court-appointed expert’s report submitted at trial did not assign a value to any of Yellowstone’s claims and found no evidence of causation between Mattel do Brasil's actions and such claims.
In January 2010, the Trial Court ruled in favor of Mattel do Brasil and denied all of Yellowstone’s claims based primarily on the lack of any causal connection between the acts of Mattel do Brasil and Yellowstone’s alleged damages. Additionally, the Trial Court upheld Mattel do Brasil's counterclaim and ordered Yellowstone to pay Mattel do Brasil approximately $4 million. The likelihood of Mattel do Brasil recovering this amount was uncertain due to the fact that Yellowstone was declared insolvent and filed for bankruptcy protection. In February 2010, Yellowstone filed a motion seeking clarification of the decision which was denied.
In September 2010, Yellowstone filed a further appeal with the Appeals Court. Under Brazilian law, the appeal was de novo and Yellowstone restated all of the arguments it made at the Trial Court level. Yellowstone did not provide any additional information supporting its unspecified alleged damages. The Appeals Court held hearings on the appeal in March and April 2013. On July 26, 2013, the Appeals Court awarded Yellowstone approximately $17 million in damages, plus attorney's fees, as adjusted for inflation and interest. The Appeals Court also awarded Mattel do Brasil approximately $7.5 million on its counterclaim, as adjusted for inflation. On August 2, 2013, Mattel do Brasil filed a motion with the Appeals Court for clarification since the written decision contained clear errors in terms of amounts awarded and interest and inflation adjustments. Mattel do Brasil's motion also asked the Appeals Court to decide whether Yellowstone’s award could be offset by the counterclaim award, despite Yellowstone's status as a bankrupt entity. Yellowstone also filed a motion for clarification on August 5, 2013. A decision on the clarification motions was rendered on November 11, 2014, and the Appeals Court accepted partially the arguments raised by Mattel do Brasil. As a result, the Appeals Court awarded Yellowstone approximately $14.5 million in damages, as adjusted for inflation and interest, plus attorney's fees. The Appeals Court also awarded Mattel do Brasil approximately $7.5 million on its counterclaim, as adjusted for inflation. The decision also recognized the existence of legal rules that support Mattel do Brasil's right to offset its counterclaim award of approximately $7.5 million. Mattel do Brasil filed a new motion for clarification with the Appeals Court on January 21, 2015, due to the incorrect statement made by the reporting judge of the Appeals Court, that the court-appointed expert analyzed the "accounting documents" of Yellowstone. On April 26, 2015, a decision on the motion for clarification was rendered. The Appeals Court ruled that the motion for clarification was denied and imposed a fine on Mattel do Brasil equal to 1% of the value of the claims made for the delay caused by the motion. On July 3, 2015, Mattel do Brasil filed a special appeal to the Superior Court of Justice based upon both procedural and substantive grounds. This special appeal sought to reverse the Appeals Court's decision of July 26, 2013, and to reverse the fine as inappropriate under the law. This special appeal was submitted to the Appeals Court.
Yellowstone also filed a special appeal with the Appeals Court in February 2015, which was made available to Mattel do Brasil on October 7, 2015. Yellowstone's special appeal sought to reverse the Appeals Court decision with respect to: (a) the limitation on Yellowstone's loss of profits claim to the amount requested in the complaint, instead of the amount contained in the first court-appointed experts report, and (b) the award of damages to Mattel do Brasil on the counterclaim, since the specific amount was not requested in Mattel do Brasil's counterclaim brief.
On October 19, 2015, Mattel do Brasil filed its answer to the special appeal filed by Yellowstone and Yellowstone filed its answer to the special appeal filed by Mattel do Brasil. On April 4, 2016, the Appeals Court rendered a decision denying the admissibility of Mattel's and Yellowstone's special appeals. On May 11, 2016, both Mattel and Yellowstone filed interlocutory appeals.
On August 31, 2017, the reporting justice for the Appeals Court denied Yellowstone’s interlocutory appeal. As to Mattel, the reporting justice reversed the fine referenced above that had been previously imposed on Mattel for filing a motion for clarification. However, the reporting justice rejected Mattel’s arguments on the merits of Yellowstone’s damages claims. On September 22, 2017, Mattel filed a further appeal to the full panel of five appellate justices to challenge the merits of Yellowstone's damages claims. Yellowstone did not file a further appeal.
In April 2018, Mattel do Brasil entered into a settlement agreement to resolve this matter, but the settlement was later rejected by the courts, subject to a pending appeal by Mattel.
On October 2, 2018, the Appeals Court rejected Mattel's merits appeal, and affirmed the prior rulings in favor of Yellowstone. In October 2019, Mattel reached an agreement with Yellowstone's former counsel regarding payment of the attorney's fees portion of the judgment. In November 2019, Yellowstone initiated an action to enforce its judgment against Mattel, but did not account for an offset for Mattel's counterclaim. On January 27, 2020, Mattel obtained an injunction, staying Yellowstone's enforcement action pending resolution of Mattel's appeal to enforce the parties' April 2018 settlement. As of March 31, 2020, Mattel assessed its probable loss related to the Yellowstone matter and has accrued a reserve, which was not material.
2017 Securities Litigation
A purported class action lawsuit is pending in the United States District Court for the Central District of California, (consolidating Waterford Township Police & Fire Retirement System v. Mattel, Inc., et al., filed June 27, 2017; and Lathe v. Mattel, Inc., et al., filed July 6, 2017) against Mattel, Christopher A. Sinclair, Richard Dickson, Kevin M. Farr, and Joseph B. Johnson alleging federal securities laws violations in connection with statements allegedly made by the defendants during the period October 20, 2016 through April 20, 2017. In general, the lawsuit asserts allegations that the defendants artificially inflated Mattel's common stock price by knowingly making materially false and misleading statements and omissions to the investing public about retail customer inventory, the alignment between point-of-sale and shipping data, and Mattel's overall financial condition. The lawsuit alleges that the defendants' conduct caused the plaintiff and other stockholders to purchase Mattel common stock at artificially inflated prices. On May 24, 2018, the Court granted Mattel's motion to dismiss the class action lawsuit, and on June 25, 2018, the plaintiff filed a motion informing the Court he would not be filing an amended complaint. Judgment was entered in favor of Mattel and the individual defendants on September 19, 2018. The plaintiff filed his Notice of Appeal on October 16, 2018 and his opening appellate brief on February 25, 2019. On April 26, 2019, Mattel filed its responsive appellate brief, and on June 17, 2019, plaintiff filed his reply brief. Oral argument occurred on February 4, 2020, and on February 20, 2020, the Court of Appeals affirmed the dismissal of the lawsuit.
In addition, a stockholder has filed a derivative action in the United States District Court for the District of Delaware (Lombardi v. Sinclair, et al., filed December 21, 2017) making allegations that are substantially identical to, or are based upon, the allegations of the class action lawsuit. The defendants in the derivative action are the same as those in the class action lawsuit plus Margaret H. Georgiadis, Michael J. Dolan, Trevor A. Edwards, Frances D. Fergusson, Ann Lewnes, Dominic Ng, Vasant M. Prabhu, Dean A. Scarborough, Dirk Van de Put, and Kathy W. Loyd. On February 26, 2018, the derivative action was stayed pending further developments in the class action litigation. On April 16, 2020, the stockholder filed an amended complaint, which is based on new allegations and which names a new set of defendants. The amended complaint is discussed in more detail below under “Litigation and Investigations Related to Whistleblower Letter.”
The lawsuits seek unspecified compensatory damages, attorneys' fees, expert fees, costs, and/or injunctive relief. Mattel believes that the allegations in the lawsuits are without merit and intends to vigorously defend against them. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
Litigation Related to the Fisher-Price Rock 'n Play Sleeper
A number of putative class action lawsuits are pending against Fisher-Price, Inc. and/or Mattel, Inc. asserting claims for false advertising, negligent product design, breach of warranty, fraud, and other claims in connection with the marketing and sale of the Fisher-Price Rock 'n Play Sleeper (the "Sleeper"). In general, the lawsuits allege that the Sleeper should not have been marketed and sold as safe and fit for prolonged and overnight sleep for infants. The putative class action lawsuits propose nationwide and over 15 statewide consumer classes comprised of those who purchased the Sleeper as marketed as safe for prolonged and overnight sleep. The class actions have been consolidated before a single judge for pre-trial purposes pursuant to the federal courts’ Multi-District Litigation program.
Thirty-one additional lawsuits are pending against Fisher-Price, Inc. and Mattel, Inc. alleging that a product defect in the Sleeper caused the fatalities of or injuries to thirty-five children. Additionally, Fisher-Price, Inc. and/or Mattel, Inc. have also received letters from lawyers purporting to represent additional plaintiffs who are threatening to assert similar claims.
The lawsuits seek compensatory damages, punitive damages, statutory damages, restitution, disgorgement, attorneys’ fees, costs, interest, declaratory relief, and/or injunctive relief. Mattel believes that the allegations in the lawsuits are without merit and intends to vigorously defend against them.
A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
Litigation and Investigations Related to Whistleblower Letter
In December 2019 and January 2020, two stockholders filed separate complaints styled as class actions against Mattel, Inc., and certain of its current and former officers, alleging violations of federal securities laws. The complaints rely on the results of an investigation announced by Mattel in October 2019 regarding allegations in a whistleblower letter and claim that Mattel misled the market in several of its financial statements beginning in the third quarter of 2017. The lawsuits allege that the defendants' conduct caused the plaintiff and other stockholders to purchase Mattel common stock at artificially inflated prices.
In addition, a stockholder has filed a derivative action in the United States District Court for the District of Delaware (Moher v. Kreiz, et al., filed April 9, 2020) making allegations that are substantially identical to, or are based upon, the allegations of the class action lawsuits. The defendants in the derivative action are Ynon Kreiz, Margaret H. Georgiadis, Joseph J. Euteneuer, Joseph B. Johnson, R. Todd Bradley, Adriana Cisneros, Michael J. Dolan, Trevor A. Edwards, Frances D. Fergusson, Soren T. Laursen, Ann Lewnes, Kathy W. Loyd, Roger Lynch, Dominic Ng, Judy D. Olian, Vasant M. Prabhu, Dean A. Scarborough, Christopher A. Sinclair, Mattel, Inc., and PricewaterhouseCoopers LLP. Subsequently, a nearly identical derivative action was filed by a different stockholder against the same defendants (Lombardi v. Kreiz, et al., filed April 16, 2020). The second lawsuit is styled as an amended complaint and replaces a complaint making unrelated allegations in a previously filed lawsuit already pending in Delaware federal court (discussed above under “2017 Securities Litigation”).
The lawsuits seek unspecified compensatory damages, attorneys' fees, expert fees, costs and/or injunctive relief. Mattel believes that the allegations in the lawsuits are without merit and intends to vigorously defend against them. A reasonable estimate of the amount of any possible loss or range of loss cannot be made at this time.
Mattel also received a subpoena in December 2019 from the SEC, seeking documents related to the whistleblower letter and subsequent investigation, and is responding to the SEC's subpoena. Mattel is also responding to requests from the United States Attorney's Office for the Southern District of New York ("SDNY") related to this matter. Mattel cannot predict the eventual scope, duration or outcome of potential legal action by the SEC or SDNY, if any, or whether any such action could have a material impact on Mattel's financial condition, results of operations or cash flows.
Mattel designs, manufactures, and markets a broad variety of toy products worldwide, which are sold to its customers and directly to consumers.
Gross Sales
Gross sales by categories are presented as follows:
Dolls—including brands such as Barbie, American Girl, Enchantimals, and Polly Pocket.
Infant, Toddler, and Preschool—including brands such as Fisher-Price and Thomas & Friends, Power Wheels, Fireman Sam, and Shimmer and Shine (Nickelodeon).
Vehicles—including brands such as Hot Wheels, Matchbox, CARS (Disney Pixar), and Jurassic World (NBCUniversal).
Action Figures, Building Sets, and Games—including brands such as MEGA, UNO, Toy Story (Disney Pixar), Jurassic World (NBCUniversal), and WWE.
Segment Data
Mattel's operating segments are: (i) North America, which consists of the U.S. and Canada; (ii) International; and (iii) American Girl. The North America and International segments sell products across categories, although some products are developed and adapted for particular international markets.
The following tables present information about revenues, income (loss), 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 the tables below). 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 and net sales by segment as metrics to measure segment performance. Such sales adjustments are included in the determination of segment income (loss) from operations based on the adjustments recorded in the financial accounting systems. Segment income (loss) represents each segment's operating income (loss), while consolidated operating loss represents loss from operations before net interest, other non-operating expense, net, and income taxes as reported in the consolidated statements of operations. The corporate and other expense category includes costs not allocated to individual segments, including charges related to incentive compensation, severance and other restructuring costs, share-based compensation, corporate headquarters functions managed on a worldwide basis, and the impact of changes in foreign currency exchange rates on intercompany transactions.
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Revenues by Segment
|
|
|
|
North America
|
$
|
305,754
|
|
|
$
|
369,391
|
|
International
|
326,119
|
|
|
365,178
|
|
American Girl
|
38,092
|
|
|
45,557
|
|
Gross sales
|
669,965
|
|
|
780,126
|
|
Sales adjustments
|
(75,896
|
)
|
|
(90,880
|
)
|
Net sales
|
$
|
594,069
|
|
|
$
|
689,246
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Segment Income (Loss)
|
|
|
|
North America (a)
|
$
|
8,031
|
|
|
$
|
(19,741
|
)
|
International (a)
|
(34,082
|
)
|
|
(24,303
|
)
|
American Girl
|
(17,441
|
)
|
|
(14,059
|
)
|
|
(43,492
|
)
|
|
(58,103
|
)
|
Corporate and other expense (b)
|
(106,318
|
)
|
|
(68,908
|
)
|
Operating loss
|
(149,810
|
)
|
|
(127,011
|
)
|
Interest expense
|
48,980
|
|
|
46,958
|
|
Interest (income)
|
(2,084
|
)
|
|
(2,272
|
)
|
Other non-operating expense, net
|
2,143
|
|
|
1,904
|
|
Loss before income taxes
|
$
|
(198,849
|
)
|
|
$
|
(173,601
|
)
|
_______________________________________
|
|
(a)
|
Segment income (loss) for the three months ended March 31, 2020 included severance and restructuring expenses of $3.1 million which were allocated to the North America and International segments. North America segment loss for the three months ended March 31, 2019 included a charge of approximately $27 million attributable to the inclined sleeper product recalls.
|
|
|
(b)
|
Corporate and other expense included severance and restructuring charges of $7.5 million and $8.7 million for the three months ended March 31, 2020 and 2019, respectively, and share-based compensation expense of $14.3 million and $11.9 million for the three months ended March 31, 2020 and 2019, respectively.
|
Segment assets are comprised of accounts receivable and inventories, net of applicable allowances and reserves.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2020
|
|
March 31,
2019
|
|
December 31,
2019
|
|
(In thousands)
|
Assets by Segment
|
|
|
|
|
|
North America
|
$
|
480,738
|
|
|
$
|
520,812
|
|
|
$
|
569,819
|
|
International
|
455,918
|
|
|
569,214
|
|
|
721,251
|
|
American Girl
|
36,427
|
|
|
39,998
|
|
|
35,004
|
|
|
973,083
|
|
|
1,130,024
|
|
|
1,326,074
|
|
Corporate and other
|
116,084
|
|
|
110,281
|
|
|
105,789
|
|
Accounts receivable and inventories, net
|
$
|
1,089,167
|
|
|
$
|
1,240,305
|
|
|
$
|
1,431,863
|
|
The table below presents worldwide revenues by categories:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Revenues by Categories
|
|
|
|
Dolls
|
$
|
225,869
|
|
|
$
|
252,886
|
|
Infant, Toddler, and Preschool
|
140,320
|
|
|
193,626
|
|
Vehicles
|
185,651
|
|
|
183,361
|
|
Action Figures, Building Sets, and Games
|
118,125
|
|
|
150,253
|
|
Gross sales
|
669,965
|
|
|
780,126
|
|
Sales adjustments
|
(75,896
|
)
|
|
(90,880
|
)
|
Net sales
|
$
|
594,069
|
|
|
$
|
689,246
|
|
The table below presents supplemental disclosure of worldwide revenues:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Revenues by Top 3 Power Brands
|
|
|
|
Barbie
|
$
|
147,485
|
|
|
$
|
163,478
|
|
Hot Wheels
|
158,618
|
|
|
150,536
|
|
Fisher-Price and Thomas & Friends
|
128,750
|
|
|
172,398
|
|
Other
|
235,112
|
|
|
293,714
|
|
Gross sales
|
669,965
|
|
|
780,126
|
|
Sales adjustments
|
(75,896
|
)
|
|
(90,880
|
)
|
Net sales
|
$
|
594,069
|
|
|
$
|
689,246
|
|
Geographic Information
The table below presents information by geographic area. Revenues are attributed to countries based on location of the customer.
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
March 31,
2020
|
|
March 31,
2019
|
|
(In thousands)
|
Revenues by Geographic Area
|
|
|
|
North America
|
$
|
343,846
|
|
|
$
|
414,948
|
|
International
|
|
|
|
EMEA
|
215,286
|
|
|
216,349
|
|
Latin America
|
59,661
|
|
|
75,250
|
|
Asia Pacific
|
51,172
|
|
|
73,579
|
|
Total International
|
326,119
|
|
|
365,178
|
|
Gross sales
|
669,965
|
|
|
780,126
|
|
Sales adjustments
|
(75,896
|
)
|
|
(90,880
|
)
|
Net sales
|
$
|
594,069
|
|
|
$
|
689,246
|
|
|
|
23.
|
New Accounting Pronouncements
|
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments - Credit Losses (Topic 326), which changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. This update replaces the existing incurred loss impairment model with an expected loss model (referred to as the Current Expected Credit Loss model, or "CECL"). In November 2018, the FASB issued ASU 2018-19, Codifications Improvements to Topic 326, Financial Instruments-Credit Losses" which clarifies that receivables arising from operating leases are accounted for using lease guidance and not as financial instruments. Mattel adopted ASU 2016-13 and its related amendments (ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, ASU 2019-11 and ASU 2020-02) on January 1, 2020. The adoption of this new accounting standard did not have a material impact on Mattel's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. ASU 2018-13 was effective for interim and annual reporting periods beginning on January 1, 2020. The amendments on changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty will be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments will be applied retrospectively to all periods presented upon their effective date. Mattel adopted ASU 2018-13 on January 1, 2020. The adoption of this new accounting standard did not have a material impact on Mattel's consolidated financial statements.
In March 2019, the FASB issued ASU 2019-02, Entertainment - Films - Other Assets - Film Costs (Subtopic 926-20): Improvements to Accounting for Costs of Films and License Agreements for Program Materials, which aligns the accounting for production costs of episodic television series with the accounting of films by removing the content distinction for capitalization. Mattel adopted ASU 2019-02 on January 1, 2020. The adoption of this new accounting standard did not have a material impact on Mattel's consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 will become effective for the fiscal year beginning on January 1, 2021. Early adoption is permitted and the amendments will be applied on a retrospective basis to all periods presented. Mattel is currently evaluating the impact of the adoption of ASU 2018-14 on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for incomes taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify the accounting for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will become effective for the fiscal year beginning on January 1, 2021. Early adoption is permitted. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries will be applied on a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2007. The amendments related to franchise taxes that are partially based on income will be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative effect adjustment to retained earnings as of January 1, 2007. All other amendments will be applied on a prospective basis. Mattel is currently evaluating the impact of the adoption of ASU 2019-12 on its consolidated financial statements.
During April 2020, Mattel drew down an incremental $250.0 million under the senior secured revolving credit facilities for a total outstanding balance of $400.0 million as of April 30, 2020. Mattel accelerated the timing of its borrowings under the senior secured revolving credit facilities in anticipation of its projected seasonal working capital requirements and in light of uncertainties surrounding the impact of COVID-19.
In connection with Mattel’s continued efforts to streamline its organizational structure and restore profitability, on May 4, 2020, Mattel committed to a planned 4% reduction in its non-manufacturing workforce. The timing of this action was accelerated due to the impact of COVID-19. Mattel expects to incur severance and restructuring charges of approximately $13 million, consisting solely of cash expenditures for employee termination and severance costs, starting in the second quarter of 2020 through the end of 2020.