# MATTEL INC /DE/ (MAT) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MATTEL INC /DE/'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/63276/000162828022004260/mat-20211231.htm
Accession: 0001628280-22-004260
Filing date: 2022-02-28
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MAT/
All MD&A years: /company/MAT/mda/
Next year: /company/MAT/mda/fy2022/ (FY 2022)

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial statements and the related notes. See Item 8 "Financial Statements and Supplementary Data." Note that amounts within this Item shown in millions may not foot due to rounding.

Mattel has omitted discussion of 2019 results where it would be redundant to the discussion previously included in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations," of Mattel’s Annual Report on Form 10-K for the year ended December 31, 2020.

The following discussion includes currency exchange rate impact, a non-GAAP financial measure within the meaning of Regulation G promulgated by the SEC ("Regulation G"), to supplement the financial results as reported in accordance with generally accepted accounting principles ("GAAP"). The currency exchange rate impact reflects the portion (expressed as a percentage) of changes in Mattel's reported results that are attributable to fluctuations in currency exchange rates. Mattel uses this non-GAAP financial measure to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Management believes that the disclosure of this non-GAAP financial measure provides useful supplemental information to investors to allow them to better evaluate ongoing business performance and certain components of Mattel's results. This measure is not, and should not be viewed as, a substitute for GAAP financial measures.

The following discussion also includes the use of gross billings, a key performance indicator. Gross billings represent amounts invoiced to customers. It does not include the impact of sales adjustments, such as trade discounts and other allowances. Mattel presents changes in gross billings as a metric for comparing its aggregate, categorical, brand, and geographic results to highlight significant trends in Mattel's business. Changes in gross billings are discussed because, while Mattel records the details of sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally recorded by customer and not associated with categories, brands, and individual products.

Overview

Mattel is a leading global toy company and owner of one of the strongest catalogs of children’s and family entertainment franchises in the world. Mattel creates innovative products and experiences that inspire, entertain, and develop children through play. Mattel is focused on the following evolved strategy to grow its IP-driven toy business and expand its entertainment offering:

•Accelerate topline growth through scaling Mattel’s portfolio, growing franchise brands, and advancing e-commerce and direct-to-consumer business, and increasing profitability by continuing to optimize operations; and

•Expand entertainment offering to capture the full value of Mattel's IP in highly accretive business verticals, including content, consumer products, and digital experiences.

COVID-19 Update

The impact of the coronavirus disease ("COVID-19") and the actions taken by governments, businesses, and individuals in response to it have resulted in significant global economic disruption, including, but not limited to, temporary business closures, reduced retail traffic, volatility in financial markets, and restrictions on travel.

Strong consumer demand for toys in 2021 contributed to year-over-year increases in net sales across all reportable segments and brand categories, despite COVID-19 disruption and local restrictions negatively impacting certain segments and locations. Mattel’s first half of 2020 results and net sales were significantly and negatively impacted by COVID-19.

While COVID-19 has caused manufacturing and distribution disruption for Mattel and the manufacturers and distribution network it relies upon, to date, this disruption, including temporary plant and port closures, has not materially impacted Mattel’s ability to meet demand for its products. To the extent COVID-19 causes further manufacturing and distribution disruption, particularly during seasonally-high periods of production and/or distribution, Mattel’s ability to meet demand may be materially impacted.

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Input cost inflation adversely affected Mattel’s gross margin in 2021 due to the increased demand for raw materials and distribution services associated with the impact of COVID-19. Mattel has been able to mitigate a portion of the adverse impact with the benefits of fixed cost absorption, pricing actions, and cost savings programs. Mattel anticipates that input cost inflation will have a significant adverse impact on Mattel’s gross margin in the first half of 2022. To the extent input cost inflation becomes more widespread and/or more significant than anticipated, it may have a material effect on Mattel’s results of operations and financial condition.

Prolonged disruption to Mattel’s customers, supply chain, or other critical operations during 2022 would result in material adverse effects to Mattel’s business. The future impact of COVID-19 on Mattel’s business, results of operations, financial position, and cash flows remains uncertain at this time due to rapidly evolving circumstances. Mattel continues to closely monitor the situation and is actively managing its business as developments occur. It is reasonably likely that the pandemic and its resulting effects could have other unforeseen consequences that affect Mattel’s business. Refer to Part I, Item 1A "Risk Factors" for further discussion regarding potential impacts of COVID-19 on Mattel’s business.

Results of Operations

Consolidated Results

The following table includes Mattel’s consolidated results for 2021 and 2020:

[[GREPCENT_TABLE]]
[["","For the Year Ended","","Year/Year Change"],["","December 31, 2021","","December 31, 2020"],["","Amount","","% of Net Sales","","Amount","","% of Net Sales","","%","","Basis Points of Net Sales"],["","(In millions, except percentage and basis point information)"],["Net sales","$","5,457.7","","","","","$","4,588.4","","","","","19","%","","\u2014"],["Cost of sales","2,831.1","","","51.9","%","","2,345.3","","","51.1","%","","21","%","","80"],["Gross profit","$","2,626.7","","","48.1","%","","$","2,243.1","","","48.9","%","","17","%","","(80)"],["Advertising and promotion expenses","545.7","","","10.0","%","","525.8","","","11.5","%","","4","%","","(150)"],["Other selling and administrative expenses","1,351.4","","","24.8","%","","1,342.6","","","29.3","%","","1","%","","(450)"],["Operating income","729.6","","","13.4","%","","374.7","","","8.2","%","","95","%","","520"],["Interest expense","253.9","","","4.7","%","","198.3","","","4.3","%","","28","%","","40"],["Interest (income)","(3.5)","","","-0.1","%","","(3.9)","","","-0.1","%","","-11","%","","\u2014"],["Other non-operating expense, net","8.4","","","","","2.7"],["Income before income taxes","470.8","","","8.6","%","","177.7","","","3.9","%","","165","%","","470"],["(Benefit) provision for income taxes","(420.4)","","","","","65.5"],["Income from equity method investments","11.8","","","","","11.5"],["Net income","$","903.0","","","16.5","%","","$","123.6","","","2.7","%","","n/m","","1,380"]]
[[/GREPCENT_TABLE]]

n/m - Not Meaningful

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Sales

The following table provides a summary of Mattel’s consolidated gross billings by categories, along with supplemental information by brand for 2021 and 2020:

[[GREPCENT_TABLE]]
[["","For the Year Ended","","% Change as Reported","","Currency Exchange Rate Impact"],["","December 31, 2021","","December 31, 2020"],["","(In millions, except percentage information)"],["Gross Billings by Categories"],["Dolls","$","2,299.1","","","$","1,886.4","","","22","%","","1","%"],["Infant, Toddler, and Preschool","1,220.9","","","1,154.5","","","6","%","","1","%"],["Vehicles","1,252.8","","","1,110.0","","","13","%","","1","%"],["Action Figures, Building Sets, Games, and Other","1,308.9","","","991.6","","","32","%","","1","%"],["Gross Billings","$","6,081.6","","","$","5,142.6","","","18","%","","1","%"],["Sales Adjustments","(623.9)","","","(554.2)"],["Net Sales","$","5,457.7","","","$","4,588.4","","","19","%","","1","%"],["Supplemental Gross Billings Disclosure"],["Gross Billings by Top 3 Power Brands"],["Barbie","$","1,679.3","","","$","1,350.1","","","24","%","","\u2014","%"],["Hot Wheels","1,068.3","","","954.2","","","12","%","","1","%"],["Fisher-Price and Thomas & Friends","1,128.2","","","1,065.5","","","6","%","","1","%"],["Other","2,205.8","","","1,772.8","","","24","%","","1","%"],["Gross Billings","$","6,081.6","","","$","5,142.6","","","18","%","","1","%"]]
[[/GREPCENT_TABLE]]

Gross billings were $6.08 billion in 2021, an increase of $939.0 million, or 18%, as compared to $5.14 billion in 2020, with a favorable impact from changes in currency exchange rates of one percentage point. The increase in gross billings was due to higher billings across all categories.

Dolls gross billings increased 22%, of which 18% was driven by higher billings of Barbie products, primarily due to positive brand momentum and point of sale demand ("POS"), and 3% was due to initial billings of Spirit products.

Infant, Toddler, and Preschool gross billings increased 6%, driven by higher billings of Fisher-Price and Thomas & Friends, primarily due to higher billings of infant and newborn products.

Vehicles gross billings increased 13%, of which 10% was due to higher billings of Hot Wheels products driven by positive brand momentum and POS, which benefited from in-store impulse shopping.

Action Figures, Building Sets, Games, and Other gross billings increased 32%, of which 12% was driven by higher billings of Jurassic World, 10% was driven by initial billings of Masters of the Universe, and 6% was driven by higher billings from Plush.

Sales adjustments represent arrangements with Mattel’s customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Sales adjustments increased to $623.9 million in 2021, as compared to $554.2 million in 2020, due to higher gross billings. Sales adjustments as a percentage of net sales was relatively consistent at 11.4% in 2021, as compared to 12.1% in 2020.

Cost of Sales

Cost of sales increased by $485.7 million, or 21%, to $2.83 billion in 2021 from $2.35 billion in 2020. Within cost of sales, product and other costs increased by $426.0 million, or 22%, to $2.36 billion in 2021 from $1.93 billion in 2020; freight and logistics expenses increased by $33.9 million, or 13%, to $285.9 million in 2021 from $252.1 million in 2020; and royalty expense increased by $25.8 million, or 16%, to $184.3 million in 2021 from $158.5 million in 2020.

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Gross Margin

Gross margin decreased to 48.1% in 2021 from 48.9% in 2020. The decrease in gross margin was primarily due to cost inflation resulting from higher raw material and freight costs and unfavorable foreign exchange, partially offset by favorable fixed cost absorption, incremental realized savings from cost savings programs, and pricing actions.

Advertising and Promotion Expenses

Advertising and promotion expenses primarily consist of: (i) media costs, which include the media, planning, and buying fees for television, print, and online advertisements, (ii) non-media costs, which include commercial and website production, merchandising, and promotional costs, (iii) retail advertising costs, which include consumer direct catalogs, and (iv) generic advertising costs, which include trade show costs. Advertising and promotion expenses as a percentage of net sales decreased to 10.0% in 2021 from 11.5% in 2020 driven by a 19% increase in net sales, as compared to an increase in advertising and promotion expense of 4%, or $19.9 million. The increase in advertising and promotion expense to $545.7 million in 2021 from $525.8 million in 2020 was due to higher media spend.

Other Selling and Administrative Expenses

Other selling and administrative expenses were $1.35 billion in 2021, as compared to $1.34 billion in 2020. The increase in other selling and administrative expenses was primarily due to higher employee compensation costs, including comparisons to cost-savings actions taken in the prior year in response to COVID-19, partially offset by incremental realized savings from cost savings programs.

Interest Expense

Interest expense was $253.9 million in 2021, as compared to $198.3 million in 2020. The increase in interest expense was due to losses on extinguishment of debt of $101.7 million from the redemptions of the 6.75% Senior Notes due December 2025 ("2025 Notes") in 2021. This was partially offset by lower interest expense in 2021 due to the impact of the aggregate repayments of the 2025 Notes and a lower interest rate associated with the partial refinancing of the 2025 Notes.

(Benefit) Provision for Income Taxes

Mattel’s benefit from income taxes was $420.4 million in 2021, as compared to a provision for income taxes of $65.5 million in 2020. The 2021 benefit from income taxes included a $540.8 million release of valuation allowances related to U.S. federal, state, and certain foreign deferred tax assets and a $19.1 million tax benefit related to reassessments of prior year's tax liabilities based on the status of audits and settlements in various jurisdictions. The 2020 income tax provision included a $5.1 million tax expense related to enacted tax law changes and the assessment of the future realizability of certain deferred tax assets, and a $4.3 million tax expense related to reassessments of prior year's tax liabilities based on the status of audits and settlements in various jurisdictions.

Evaluating the need for and the amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence to determine whether it is more likely than not that these assets will be realizable. Mattel routinely assesses the positive and negative evidence for this realizability, including the evaluation of sustained profitability and three years of cumulative pretax income for each tax jurisdiction. During the twelve months ended December 31, 2021, Mattel continued to see improved and sustained profitability, which presents objective positive evidence for the realizability of certain deferred tax assets. As such, based on the overall analysis of the positive and negative evidence in each tax jurisdiction, during 2021 Mattel released the valuation allowances related to U.S. federal, state, and certain foreign deferred tax assets, except for certain tax assets that are primarily expected to expire before utilization. Valuation allowance releases for the year ended December 31, 2021 resulted in recognition of a portion of these deferred tax assets and a benefit to Mattel's provision for income taxes of $540.8 million. As of December 31, 2021, Mattel’s valuation allowances on its federal and state deferred tax assets and foreign deferred tax assets were approximately $18 million and $83 million, respectively. Changes in the valuation allowances in 2020 primarily related to interest limitations and credits generated. As of December 31, 2020, Mattel's valuation allowances on its federal and state deferred tax assets and foreign deferred tax assets were approximately $319 million and $313 million, respectively.

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Segment Results

North America Segment

The following table provides a summary of Mattel’s net sales, segment operating income, and gross billings by categories, along with supplemental information by brand, for the North America segment for 2021 and 2020:

[[GREPCENT_TABLE]]
[["","For the Year Ended","","% Change as Reported","","Currency Exchange Rate Impact"],["","December 31, 2021","","December 31, 2020"],["","(In millions, except percentage information)"],["Net Sales","$","2,968.3","","","$","2,426.5","","","22","%","","\u2014","%"],["Segment Operating Income","872.5","","","621.9","","","40","%"],["Gross Billings by Categories"],["Dolls","$","1,011.1","","","$","770.6","","","31","%","","\u2014","%"],["Infant, Toddler, and Preschool","758.8","","","703.3","","","8","%","","\u2014","%"],["Vehicles","633.0","","","529.2","","","20","%","","1","%"],["Action Figures, Building Sets, Games, and Other","752.0","","","586.6","","","28","%","","\u2014","%"],["Gross Billings","$","3,154.9","","","$","2,589.7","","","22","%","","1","%"],["Sales Adjustments","(186.6)","","","(163.2)"],["Net Sales","$","2,968.3","","","$","2,426.5","","","22","%","","\u2014","%"],["Supplemental Gross Billings Disclosure"],["Gross Billings by Top 3 Power Brands"],["Barbie","$","903.5","","","$","704.2","","","28","%","","\u2014","%"],["Hot Wheels","529.5","","","446.6","","","19","%","","1","%"],["Fisher-Price and Thomas & Friends","685.5","","","634.9","","","8","%","","\u2014","%"],["Other","1,036.4","","","804.0","","","29","%","","\u2014","%"],["Gross Billings","$","3,154.9","","","$","2,589.7","","","22","%","","1","%"]]
[[/GREPCENT_TABLE]]

Gross billings for the North America segment were $3.15 billion in 2021, an increase of $565.2 million, or 22%, as compared to $2.59 billion in 2020. The increase in the North America segment gross billings was due to higher billings across all categories.

Dolls gross billings increased 31%, of which 26% was due to higher billings of Barbie products and 4% was due to initial billings of Spirit products.

Infant, Toddler, and Preschool gross billings increased 8%, of which 7% was due to higher billings of Fisher-Price and Thomas & Friends products.

Vehicles gross billings increased 20%, of which 16% was driven by higher billings of Hot Wheels products.

Action Figures, Building Sets, Games, and Other gross billings increased 28%, of which 11% was driven by higher billings of Jurassic World, 10% was driven by initial billings of Masters of the Universe, and 6% was driven by higher billings of Plush.

Sales adjustments increased to $186.6 million in 2021, as compared to $163.2 million in 2020, due to higher gross billings. Sales adjustments as a percentage of net sales was relatively consistent at 6.3% in 2021, as compared to 6.7% in 2020.

Cost of sales increased 21% in 2021, as compared to a 22% increase in net sales, primarily due to higher product and other costs. Gross margin in 2021 increased primarily due to favorable fixed cost absorption, incremental realized savings from cost savings programs, and pricing actions, partially offset by cost inflation due to higher raw materials and freight costs. North America segment operating income was $872.5 million in 2021, as compared to segment operating income of $621.9 million in 2020, driven by higher gross profit.

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International Segment

The following table provides a summary of Mattel’s net sales, segment operating income, and gross billings by categories, along with supplemental information by brand, for the International segment for 2021 and 2020:

[[GREPCENT_TABLE]]
[["","For the Year Ended","","% Change as Reported","","Currency Exchange Rate Impact"],["","December 31, 2021","","December 31, 2020"],["","(In millions, except percentage information)"],["Net Sales","$","2,219.2","","","$","1,903.5","","","17","%","","2","%"],["Segment Operating Income","350.0","","","272.4","","","28","%"],["Gross Billings by Categories"],["Dolls","$","1,010.1","","","$","849.4","","","19","%","","1","%"],["Infant, Toddler, and Preschool","462.1","","","451.2","","","2","%","","1","%"],["Vehicles","619.8","","","580.8","","","7","%","","2","%"],["Action Figures, Building Sets, Games, and Other","556.8","","","405.0","","","38","%","","3","%"],["Gross Billings","$","2,648.8","","","$","2,286.4","","","16","%","","2","%"],["Sales Adjustments","(429.6)","","","(382.8)"],["Net Sales","$","2,219.2","","","$","1,903.5","","","17","%","","2","%"],["Supplemental Gross Billings Disclosure"],["Gross Billings by Top 3 Power Brands"],["Barbie","$","775.8","","","$","645.9","","","20","%","","1","%"],["Hot Wheels","538.8","","","507.6","","","6","%","","1","%"],["Fisher-Price and Thomas & Friends","442.7","","","430.6","","","3","%","","2","%"],["Other","891.4","","","702.2","","","27","%","","2","%"],["Gross Billings","$","2,648.8","","","$","2,286.4","","","16","%","","2","%"]]
[[/GREPCENT_TABLE]]

Gross billings for the International segment were $2.65 billion in 2021, an increase of $362.4 million, or 16%, as compared to $2.29 billion in 2020, with a favorable impact from changes in currency exchange rates of two percentage points. The increase in International segment gross billings was due to higher billings across all categories.

Dolls gross billings increased 19%, of which 15% was driven by higher billings of Barbie products and 3% was due to initial billings of Spirit products.

Infant, Toddler, and Preschool gross billings increased 2%, due to higher billings of Fisher-Price and Thomas & Friends products.

Vehicles gross billings increased 7%, of which 6% was due to higher billings of Hot Wheels products.

Action Figures, Building Sets, Games, and Other gross billings increased 38%, due to higher billings of the following products: 13% from Jurassic World, 11% from initial billings of Masters of the Universe, 5% from Plush, and 4% from MEGA.

Sales adjustments increased to $429.6 million in 2021, as compared to $382.8 million in 2020, due to higher gross billings. Sales adjustments as a percentage of net sales was relatively consistent at 19.4% in 2021, as compared to 20.1% in 2020.

Cost of sales increased 24% in 2021, as compared to a 17% increase in net sales, primarily driven by higher product and other costs. Gross margin in 2021 decreased primarily due to cost inflation resulting from higher raw materials and freight costs, unfavorable foreign exchange and product mix, partially offset by pricing actions, incremental realized savings from cost savings programs, and the favorable impact of fixed cost absorption. International segment operating income was $350.0 million in 2021, as compared to a segment operating income of $272.4 million in 2020, primarily driven by higher gross profit, partially offset by higher advertising and promotion expenses.

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American Girl Segment

The following table provides a summary of Mattel’s net sales, segment operating income (loss), and gross billings for the American Girl segment for 2021 and 2020:

[[GREPCENT_TABLE]]
[["","For the Year Ended","","% Change as Reported","","Currency Exchange Rate Impact"],["","December 31, 2021","","December 31, 2020"],["","(In millions, except percentage information)"],["Net Sales","$","270.3","","","$","258.4","","","5","%","","\u2014","%"],["Segment Operating Income (Loss)","5.4","","","(14.1)"],["American Girl Segment"],["Total Gross Billings","$","277.9","","","$","266.5","","","4","%","","\u2014","%"],["Sales Adjustments","(7.6)","","","(8.1)"],["Total Net Sales","$","270.3","","","$","258.4","","","5","%","","\u2014","%"]]
[[/GREPCENT_TABLE]]

Gross billings for the American Girl segment were $277.9 million in 2021, an increase of $11.4 million, or 4%, as compared to $266.5 million in 2020. The increase in American Girl gross billings was driven by higher billings in proprietary retail channels, which in the prior year was negatively impacted by retail disruption due to COVID-19.

Sales adjustments as a percentage of net sales remained relatively consistent at 2.8% in 2021, as compared to 3.1% in 2020.

Cost of sales increased 3% in 2021, as compared to a 5% increase in net sales, primarily due to higher product and other costs. Gross margin in 2021 increased slightly, primarily driven by the incremental realized savings from cost savings programs and favorable fixed cost absorption, substantially offset by product mix and input cost inflation. American Girl segment operating income was $5.4 million in 2021, as compared to segment operating loss of $14.1 million in 2020; the improvement was primarily due to higher net sales, lower other selling and administrative expenses, and lower advertising and promotion expenses.

Cost Savings Programs

Optimizing for Growth (formerly Capital Light)

In February 2021, Mattel announced the Optimizing for Growth program, a multi-year cost savings program that integrates and expands upon the previously announced Capital Light program (the “Program”). Targeted annual gross cost savings from actions that are expected to be completed beginning 2021 through 2023 are $250 million. Of the $250 million in targeted gross cost savings, approximately 50% is expected to benefit cost of sales, 40% is expected to benefit other selling and administrative expenses, and 10% is expected to benefit advertising and promotion expense. Estimated total cash expenditures associated with the Program, excluding previous actions taken under the Capital Light program, are expected to be approximately $100 to $125 million.

Mattel estimates the cost of actions for the Program, excluding previous actions taken under the Capital Light program, to be as follows:

[[GREPCENT_TABLE]]
[["Optimizing for Growth - Actions","Estimate of Cost"],["Employee severance","$20 to $25 million"],["Real estate/supply chain optimization and other restructuring costs","$15 to $25 million"],["Non-cash charges","$55 to $60 million"],["Total estimated severance and restructuring costs","$90 to $110 million"],["Information technology enhancements and other investments","$65 to $75million"],["Total estimated actions","$155 to $185 million"]]
[[/GREPCENT_TABLE]]

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Cumulatively, in conjunction with previous actions taken under the Capital Light program prior to 2021, targeted annual gross cost savings for the Program are $325 million by 2023, with total expected cash expenditures of approximately $140 to $165 million, and total non-cash charges of $70 to $75 million. Of the $325 million in targeted gross cost savings, approximately 60% is expected to benefit cost of sales, 30% is expected to benefit other selling and administrative expenses, and 10% is expected to benefit advertising and promotion expense.

In connection with the Program, Mattel has recorded severance and other restructuring costs in the following cost and expense categories within the consolidated statements of operations:

[[GREPCENT_TABLE]]
[["","For the Year Ended"],["","December 31, 2021","","December 31, 2020","","December 31, 2019"],["","(In millions)"],["Cost of sales (a)","$","2.9","","","$","5.7","","","$","18.6"],["Other selling and administrative expenses (b)","32.3","","","7.2","","","19.0"],["","$","35.2","","","$","12.9","","","$","37.6"]]
[[/GREPCENT_TABLE]]

(a)Severance and other restructuring costs recorded within cost of sales in the consolidated statements of operations are included in segment operating income (loss) in "Note 13 to the Consolidated Financial Statements—Segment Information." During the year ended December 31, 2021, $2.9 million was recorded within cost of sales, of which $2.0 million and $0.9 million are included in the North America and International segments, respectively. During the year ended December 31, 2020, $5.7 million was recorded within cost of sales, of which $3.5 million and $2.2 million are included in the North America and International segments, respectively. During the year ended December 31, 2019, $18.6 million was recorded within cost of sales, of which $10.4 million, $8.0 million, and $0.2 million are included in the North America, International, and American Girl segments, respectively.

(b)Severance and other restructuring costs recorded within other selling and administrative expenses in the consolidated statements of operations are included in corporate and other expense in "Note 13 to the Consolidated Financial Statements—Segment Information."

As of December 31, 2021, Mattel had recorded cumulative severance and other restructuring charges related to the Program of approximately $86 million, which include approximately $21 million of non-cash charges. As of December 31, 2021, Mattel realized cumulative cost savings (before severance, restructuring costs, and cost inflation) in connection with the Program of approximately $172 million, which include $144 million within cost of sales, $20 million within other selling and administrative expenses, and $9 million within advertising and promotion expenses.

Other Cost Savings Actions

In connection with Mattel's continued efforts to further streamline its organizational structure and restore profitability, in May 2020, Mattel committed to a planned 4% reduction in its non-manufacturing workforce. The timing of this action was accelerated due to the impact of COVID-19. As a result of the reduction in force actions initiated in 2020, Mattel realized approximately $40 million of run-rate cost savings exiting 2020. During the year ended December 31, 2020, Mattel recorded severance charges of approximately $19 million, primarily related to actions taken to streamline its organizational structure.

During the year ended December 31, 2020, Mattel recorded additional severance and other restructuring charges of approximately $9 million, related to actions initiated in the prior year associated with the Structural Simplification cost savings program.

Income Taxes

See Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Provision for Income Taxes."

Liquidity and Capital Resources

Mattel’s primary sources of liquidity are its cash and equivalents balances, including access to earnings of certain foreign subsidiaries, short-term borrowing facilities, including its $1.40 billion senior secured revolving credit facilities, and access to capital markets to fund its operations and obligations. Such obligations may include investing and financing activities such as capital expenditures and debt service. Of Mattel’s $731.4 million in cash and equivalents as of December 31, 2021, approximately $244.6 million were held by foreign subsidiaries.

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Cash flows from operating activities could be negatively impacted by decreased demand for Mattel's products, which could result from factors such as, but not limited to, adverse economic conditions and changes in public and consumer preferences, or by increased costs associated with manufacturing and distribution of products or shortages in raw materials or component parts. Additionally, Mattel's ability to issue long-term debt and obtain seasonal financing could be adversely

affected by factors such as, but not limited to, global economic crises and tight credit environments, an inability to meet its debt

covenant requirements and its senior secured revolving credit facilities covenants, or deterioration of Mattel's credit ratings. As

discussed above under Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Update," many of the aforementioned factors have been and may be adversely affected by COVID-19. However, based on Mattel’s current business plan and factors known to date, including the currently known impacts of COVID-19, it is expected that existing cash and equivalents, cash flows from operations, availability under the senior secured credit revolving facilities, and access to capital markets will be sufficient to meet working capital and operating expenditure requirements for the next twelve months. Refer to Part I, Item 1A "Risk Factors" for further discussion regarding potential impacts of COVID-19 on Mattel’s business.

The U.S. Tax Act, enacted on December 22, 2017, provides Mattel with a reduced cost to access the earnings of its foreign subsidiaries. As such, Mattel has evaluated its intentions related to its indefinite reinvestment assertion and has recorded a $19.0 million deferred tax liability as of December 31, 2021, related to approximately $3.45 billion of foreign earning that will not be indefinitely reinvested.

With the passage of the U.S. Tax Act, repatriations of foreign cash generally will not be taxable for U.S. federal income tax, but may be subject to state income tax and/or foreign withholding tax, in addition to any local country distribution requirements.

Current Market Conditions

Mattel is exposed to financial market risk resulting from changes in interest and foreign currency exchange rates. Mattel continues to actively manage its capital structure and believes that it has sufficient liquidity to run its business.

Subject to market conditions, Mattel intends to utilize its senior secured revolving credit facilities or alternative forms of financing to meet its short-term liquidity needs. As of December 31, 2021, there were no amounts outstanding under the senior secured revolving credit facilities. Market conditions could affect certain terms of other debt instruments that Mattel enters into from time to time.

Mattel monitors the third-party depository institutions that hold Mattel's cash and equivalents. Mattel’s emphasis is primarily on safety and liquidity of principal, and secondarily on maximizing the yield on those funds. Mattel diversifies its cash and equivalents among counterparties and securities to minimize risks.

Mattel is subject to credit risks relating to the ability of its counterparties in hedging transactions to meet their contractual payment obligations. The risks related to creditworthiness and nonperformance have been considered in the fair value measurements of Mattel’s foreign currency forward exchange contracts. Mattel closely monitors its counterparties and takes action, as necessary, to manage its counterparty credit risk.

Mattel expects that some of its customers and vendors may experience difficulty in obtaining the liquidity required to buy inventory or raw materials. Mattel monitors its customers’ financial condition and their liquidity in order to mitigate Mattel’s accounts receivable collectability risks, and customer terms and credit limits are adjusted, if necessary. Additionally, Mattel uses a variety of financial arrangements to ensure collectability of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, 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.

Cash Flow Activities

Cash flows provided by operating activities were $485.5 million in 2021, as compared to $285.7 million in 2020. The increase in cash flows provided by operating activities was primarily due to higher net income, excluding the impact of the release of valuation allowances on deferred tax assets and other non-cash charges, partially offset by higher working capital usage.

36

Cash flows used for investing activities were $105.1 million in 2021, as compared to $132.1 million in 2020. The decrease in cash flows used for investing activities was primarily due to proceeds from the disposal of assets and a business of $43.6 million and higher proceeds for foreign currency forward exchange contracts in 2021, partially offset by an increase in capital expenditures in 2021.

Cash flows used for financing activities were $402.1 million in 2021, as compared to $5.8 million in 2020. The increase in cash flows used from financing activities in 2021 was primarily due to cash used for repayment and refinancing of the 2025 Notes in 2021.

During 2021 and 2020, Mattel did not repurchase any shares of its common stock. Mattel's share repurchase program was first announced on July 21, 2003. On July 17, 2013, the Board of Directors authorized Mattel to increase its share repurchase program by $500.0 million. At December 31, 2021, share repurchase authorizations of $203.0 million had not been executed. Repurchases under the program will take place from time to time, depending on market conditions. Mattel's share repurchase program has no expiration date.

During 2021 and 2020, Mattel did not pay any dividends to holders of its common stock. The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations.

Seasonal Financing

See Item 8 "Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt."

Credit Ratings

In 2021, Fitch changed Mattel's long-term credit rating from B to BB with a stable outlook. In February 2022, Fitch further changed Mattel's long-term credit rating from BB to BB+ with a positive outlook. In 2021, Moody's changed Mattel's long-term credit rating from B1 to Ba2 and maintained a stable outlook. In 2021, Standard & Poor's changed Mattel's long-term credit rating from B to BB with a positive outlook. In February 2022, Standard & Poor's further changed Mattel's long-term credit rating from BB to BB+ with a positive outlook.

Financial Position

Mattel’s cash and equivalents decreased $30.8 million to $731.4 million at December 31, 2021, as compared to $762.2 million at December 31, 2020, primarily due to cash used for repayment and refinancing of the 2025 Notes in 2021, and capital expenditures. The decreases were partially offset by cash flow provided by operating activities and proceeds from the disposal of assets and a business during 2021.

Accounts receivable increased $38.7 million to $1.07 billion at December 31, 2021, as compared to $1.03 billion at December 31, 2020, driven by higher net sales in the fourth quarter of 2021, as compared to the fourth quarter of 2020, partially offset by improved collections.

Inventory increased $248.7 million to $777.2 million at December 31, 2021, as compared to $528.5 million at December 31, 2020, primarily due to cost inflation and higher inventory to meet expected future demands.

Prepaid expenses and other current assets increased $121.2 million to $293.3 million at December 31, 2021, as compared to $172.1 million at December 31, 2020, primarily due to receivables from insurers related to a legal settlement.

Accounts payable and accrued liabilities increased $243.5 million to $1.57 billion at December 31, 2021, as compared to $1.33 billion at December 31, 2020, primarily due to an accrued legal settlement and increased payables associated with cost inflation.

37

A summary of Mattel’s capitalization is as follows:

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020"],["","(In millions, except percentage information)"],["Cash and equivalents","$","731.4","","","","","$","762.2"],["Short-term borrowings","\u2014","","","","","1.0"],["2010 Senior Notes due October 2040","250.0","","","","","250.0"],["2011 Senior Notes due November 2041","300.0","","","","","300.0"],["2013 Senior Notes due March 2023","250.0","","","","","250.0"],["2017/2018 Senior Notes due December 2025","\u2014","","","","","1,500.0"],["2019 Senior Notes due December 2027","600.0","","","","","600.0"],["2021 Senior Notes due April 2026","600.0","","","","","\u2014"],["2021 Senior Notes due April 2029","600.0","","","","","\u2014"],["Debt issuance costs and debt discount","(29.0)","","","","","(45.3)"],["Total debt","2,571.0","","","62","%","","2,855.7","","","82","%"],["Stockholders\u2019 equity","1,568.8","","","38","","","610.1","","","18"],["Total capitalization (debt plus equity)","$","4,139.8","","","100","%","","$","3,465.8","","","100","%"]]
[[/GREPCENT_TABLE]]

In 2021, Mattel used the net proceeds from the issuance of $600 million of 3.375% Senior Notes due 2026 and $600 million of 3.750% Senior Notes due 2029, plus cash on hand, to redeem and retire $1.50 billion in aggregate principal amount of the 2025 Notes and pay related prepayment premiums and transaction fees and expenses. As a result of the redemptions, Mattel incurred losses on extinguishment of debt of $101.7 million, comprised of $76.0 million of prepayment premiums and a $25.7 million write-off of the unamortized debt issuance costs, which was recorded within interest expense in the consolidated statements of operations.

Total debt, including short-term borrowings, was $2.57 billion at December 31, 2021, as compared to $2.86 billion at December 31, 2020. The decrease was due to the aggregate repayments of the 2025 Notes.

Stockholders’ equity increased $958.7 million to $1.57 billion at December 31, 2021, as compared to $610.1 million at December 31, 2020, primarily due to net income in 2021.

Off-Balance Sheet Arrangements

Mattel is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business and may choose to provide letters of credit in place of posting cash collateral. Although the letters of credit are off-balance sheet, the majority of the obligations to which they relate are reflected as liabilities in the consolidated balance sheets. Outstanding letters of credit totaled approximately $10 million and $11 million as of December 31, 2021 and December 31, 2020, respectively.

Commitments

In the normal course of business, Mattel enters into debt agreements, and contractual arrangements to obtain and protect Mattel’s right to create and market certain products and for future purchases of goods and services to ensure availability and timely delivery. These arrangements include commitments for royalty payments pursuant to licensing agreements, which routinely contain provisions for guarantees or minimum expenditures during the terms of the contracts, and future inventory and service purchases. Mattel also has defined benefit and postretirement benefit plans, which require future cash contributions and benefit payments. Additionally, Mattel routinely enters into noncancelable lease agreements for premises and equipment used, which contain minimum rental payments.

38

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

[[GREPCENT_TABLE]]
[["","Total","","2022","","2023","","2024","","2025","","2026","","Thereafter"],["","(In millions)"],["Long-term debt","$","2,600.0","","","$","\u2014","","","$","250.0","","","$","\u2014","","","$","\u2014","","","$","600.0","","","$","1,750.0"],["Interest on long-term debt","1,083.8","","","117.7","","","111.5","","","109.9","","","109.9","","","94.7","","","540.1"],["Leases (a)","437.9","","","92.3","","","79.8","","","67.3","","","57.1","","","45.3","","","96.2"],["Minimum guarantees under licensing and similar agreements","284.4","","43.7","","","117.7","","","73.7","","","49.4","","","\u2014","","","\u2014"],["Defined benefit and postretirement benefit plans","361.9","","","37.5","","","36.1","","","38.5","","","36.8","","","35.7","","","177.3"],["Purchases of inventory, services, and other","449.6","","","370.0","","","49.3","","","22.2","","","5.3","","","2.8","","","\u2014"],["Total","$","5,217.6","","","$","661.2","","","$","644.4","","","$","311.6","","","$","258.5","","","$","778.5","","","$","2,563.6"]]
[[/GREPCENT_TABLE]]

(a) See Item 8 "Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements—Leases."

Liabilities for uncertain tax positions for which a cash tax payment is not expected to be made in the next twelve months are classified as other noncurrent liabilities. Due to the uncertainty regarding the periods in which examinations will be completed and limited information related to current audits, Mattel is not able to make reasonably reliable estimates of the periods in which cash settlements will occur with taxing authorities for the noncurrent liabilities.

Litigation

The content of Item 8 "Financial Statements and Supplementary Data—Note 12 to the Consolidated Financial Statements—Commitments and Contingencies—Litigation" is hereby incorporated by reference in this Item 7.

Employee Savings Plan

Mattel sponsors a 401(k) savings plan, the Mattel, Inc. Personal Investment Plan (the "Plan"), for its domestic employees. Contributions to the Plan include voluntary contributions by eligible employees and employer automatic and matching contributions by Mattel. The Plan allows employees to allocate both their voluntary contributions and their employer automatic and matching contributions to a variety of investment funds, including a fund that is invested in Mattel common stock (the "Mattel Stock Fund"). Employees are not required to allocate any of their Plan account balance to the Mattel Stock Fund, allowing employees to limit or eliminate their exposure to market changes in Mattel’s stock price. Furthermore, the Plan limits the percentage of the employee’s total account balance that may be allocated to the Mattel Stock Fund to 25%. Employees may generally reallocate their account balances on a daily basis. However, pursuant to Mattel’s insider trading policy, employees classified as insiders under Mattel’s insider trading policy are limited to certain periods in which they may make allocations into or out of the Mattel Stock Fund.

Application of Critical Accounting Policies and Estimates

Mattel makes certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those Mattel considers most critical in preparing its consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of its Board of Directors, and the Audit Committee has reviewed the disclosures included below. These accounting policies and estimates include significant judgments made by management using information available at the time the estimates are made. As described below, however, these estimates could change materially if different information or assumptions were used instead.

For a summary of Mattel’s significant accounting policies, estimates, and methods used in the preparation of Mattel’s consolidated financial statements, see Item 8 "Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies."

39

Accounts Receivable—Allowance for Credit Losses

The allowance for credit losses is based on collection history and management's assessment of the current economic trends, business environment, customers' financial condition, accounts receivable aging, and customer disputes that may impact the level of future credit losses. Management believes the accounting estimate related to the allowance for credit losses is a "critical accounting estimate" because significant judgment is required to evaluate the creditworthiness of its customers when estimating the collectability of its accounts receivable. In addition, the allowance requires a high degree of judgment since it involves estimation of the impact of both current and future economic factors in relation to its customers’ ability to pay amounts owed to Mattel. Significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including other selling and administrative expenses, net income, and accounts receivable.

Mattel’s products are sold throughout the world. Products within the North America segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers, and directly to consumers. Products within the International segment are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence.

In recent years, the mass-market retail channel has experienced significant shifts in market share among competitors, causing some large retailers to experience liquidity problems. Mattel’s sales to customers are typically made on credit without collateral and are highly concentrated in the third and fourth quarters due to the seasonal nature of toy sales, which results in a substantial portion of trade receivables being collected during the latter half of the year and the first quarter of the following year. There is a risk that customers will not pay, or that payment may be delayed, because of bankruptcy, financial difficulty, or other factors beyond the control of Mattel. This could increase Mattel’s exposure to losses from bad debts.

A small number of customers account for a large share of Mattel’s net sales and accounts receivable. In 2021, Mattel’s three largest customers, Walmart, Target, and Amazon, in the aggregate, accounted for approximately 46% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 53% of net sales. As of December 31, 2021, Mattel’s three largest customers accounted for approximately 47% of net accounts receivable, and its ten largest customers accounted for approximately 56% of net accounts receivable. Should one or more of Mattel’s large customers experience bankruptcy or financial difficulty, the allowance for credit losses may not be sufficient to cover such losses.

Mattel has procedures to mitigate its risk of exposure to losses from bad debts. Credit limits and payment terms are established based on the underlying criteria that collectability must be reasonably assured at the levels set for each customer. Extensive evaluations are performed on an ongoing basis throughout the fiscal year of each customer’s financial performance, cash generation, financing availability, and liquidity status. Customers are reviewed at least annually, with more frequent reviews being performed, if necessary, based on the customers’ financial condition and the level of credit being extended. For customers who are experiencing financial difficulty, management performs additional financial analyses prior to shipping to those customers on credit. Customers’ terms and credit limits are adjusted or revoked, if necessary, to reflect the results of the review. Mattel uses a variety of financial arrangements to ensure collectability of accounts receivable of customers, including requiring letters of credit, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.

The following table summarizes Mattel’s allowance for credit losses:

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020"],["","(In millions, except percentage information)"],["Allowance for credit losses","$","10.7","","","$","15.9"],["As a percentage of total accounts receivable","1.0","%","","1.5","%"]]
[[/GREPCENT_TABLE]]

Changes in the allowance for credit losses reflect management’s assessment of the factors noted above, including changes in current economic trends, business environment, past due accounts, disputed balances with customers, and the financial condition of customers. The allowance for credit losses is also affected by the time at which uncollectable accounts receivable balances are actually written off.

40

Inventories—Obsolescence Reserve

Inventories are stated at the lower of cost or net realizable value. Inventory obsolescence reserves are recorded for damaged, obsolete, excess, and slow-moving inventory. Inventory obsolescence expense is charged to cost of sales and establishes a lower cost basis for the inventory. Management believes that the accounting estimate related to the obsolescence reserve is a "critical accounting estimate" because significant judgment is required to evaluate whether there will be future demand for inventories held by Mattel as well as the prices at which customers are willing to pay for Mattel’s inventories. As more fully described below, obsolescence reserves required for Mattel’s inventory could be impacted by changes in public and consumer preferences, demand for product, or changes in the buying patterns of both retailers and consumers and inventory management of customers. Significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, net income, and inventories.

In the toy industry, orders are typically subject to cancellation or change at any time prior to shipment. Actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these factors could result in excess inventory in a particular product line, which would require management to record a valuation adjustment on such inventory.

Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research, and current market information. Mattel ships products in accordance with delivery schedules specified by its customers, who usually request delivery within three months. In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of its fiscal year. These seasonal purchasing patterns and requisite production lead times create risk to Mattel’s business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase inventory valuation risk because Mattel’s inventory levels may be adversely impacted by the need to pre-build products before orders are placed.

When conditions in the domestic and global economies become uncertain, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or contraction in various parts of the economy, including the economies in which Mattel participates. Because all components of Mattel’s budgeting and forecasting are dependent upon estimates of growth or contraction in the markets it serves and demand for its products, economic uncertainty makes estimates of future demand for products more difficult. Such economic changes may affect the sales of Mattel’s products and its corresponding inventory levels, which could potentially impact the valuation of its inventory.

At the end of each quarter, management within each business segment, North America, International, and American Girl, performs a detailed review of its inventory on an item-by-item basis and identifies products that are believed to be impaired. Management assesses the need for, and the amount of, an obsolescence reserve based on the following factors:

•Customer and/or consumer demand for the item;

•Overall inventory positions of Mattel’s customers;

•Strength of competing products in the market;

•Quantity on hand of the item;

•Sales price of the item;

•Mattel’s cost for the item; and

•Length of time the item has been in inventory.

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

41

The following table summarizes Mattel’s obsolescence reserve:

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020"],["","(In millions, except percentage information)"],["Obsolescence reserve","$","31.3","","","$","34.8"],["As a percentage of gross inventory","3.9","%","","6.2","%"]]
[[/GREPCENT_TABLE]]

Goodwill

Mattel tests goodwill for impairment annually or more often if an event or circumstance indicates that an impairment may have occurred. Management believes that the accounting estimates related to the fair value estimates of its goodwill are “critical accounting estimates” because assessing goodwill for impairment involves a high degree of judgment due to the prospective assumptions that underlie the fair value assessments, such as projecting future cash flows for Mattel’s reporting units and estimating the weighted-average cost of capital that a market participant would use as a discount rate. Significant changes in the assumptions used in the goodwill impairment tests could materially affect key financial measures, including net income and goodwill.

For purposes of evaluating whether goodwill is impaired, goodwill is allocated to various reporting units, which are at the operating segment level. Mattel’s reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel then assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. This qualitative assessment is used as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test.

When the quantitative goodwill impairment test is necessary, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to the excess, limited by the amount of goodwill in that reporting unit.

When performing the quantitative goodwill impairment test, Mattel determines the fair value based upon both the discounted cash flows that the business can be expected to generate in the future (the "Income Approach") and the market approach. The Income Approach valuation method requires Mattel to make projections of revenue, gross margin, operating costs, and working capital investment for the reporting unit over a multi-year period. Additionally, management must make an estimate of a weighted-average cost of capital that a market participant would use as a discount rate. Changes in these projections or estimates would impact the estimated fair value, which could significantly change the amount of any impairment ultimately recorded. The Income Approach valuation method is utilized for all reporting units. The market approach determines fair value utilizing earnings multiples of comparable public companies, which are reflective of the market in which each respective reporting unit operates, and recent comparable market transactions. The market approach is utilized for the North America and International reporting units.

In the third quarter of 2021, Mattel performed a qualitative assessment to determine whether it was more likely than not that the book value of each reporting unit exceeded its fair value. As a result of Mattel's qualitative assessment, it was determined that goodwill was not impaired. There were no events or changes in circumstances subsequent to the third quarter assessment that indicate that the carrying value of a reporting unit may exceed its fair value as of December 31, 2021. See Item 8 “Financial Statements and Supplementary Data—Note 3 to the Consolidated Financial Statements—Goodwill and Other Intangibles”

Sales Adjustments

Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Management believes that the accounting estimates related to sales adjustments are “critical accounting estimates” because significant judgment is required to estimate related accruals, such as estimating future customer sales volume to support volume-based sales incentives, estimating volumes of defective products to support reserves for defective merchandise, and estimating future customer performance and consumer preferences that could impact the discretionary sales promotions. Significant changes in the assumptions used to develop the estimates could impact Mattel’s results of operations or financial condition.

42

The above-described programs primarily involve fixed amounts or percentages of sales to customers. The accruals for such programs, which can either be contractual or discretionary in nature, are based on an assessment of customer purchases, customer performance of specified promotional activities, and other specified factors such as customer sales volume. While certain sales adjustment amounts are readily determinable at year-end and do not require estimates, other sales adjustments (i.e., discretionary sales adjustments) require significant judgment by management to make these estimates. In making these estimates, management considers all available information, including the overall business environment, historical trends, and information from customers.

Accruals for these programs are recorded as sales adjustments that reduce gross billings in the period the related sale is recognized. Sales adjustments for such programs totaled $623.9 million or 11.4% as a percent of net sales in 2021 and $554.2 million or 12.1% as a percent of net sales in 2020.

Benefit Plan Assumptions

Mattel and certain of its subsidiaries have defined benefit and other postretirement benefit plans covering substantially all employees of these companies. Mattel’s benefit plan obligations and related expenses are determined using actuarial valuations based on specific assumptions used for each plan. Management believes that benefit plan obligations and related expenses are "critical accounting estimates" because significant judgment is required when determining the assumptions used in the actuarial valuations, due to their forward-looking nature, such as:

•Weighted-average discount rate to be used to measure future plan obligations and interest cost component of plan income or expense;

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

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

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

Significant changes in these assumptions could impact Mattel’s results of operations or financial condition. Management believes that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’ experience and advice received from its outside actuaries. Mattel reviews its benefit plan assumptions annually and modifies its assumptions based on current rates and trends as appropriate. The effects of such changes in assumptions are amortized as part of plan income or expense in future periods.

At the end of each fiscal year, Mattel determines the weighted-average discount rate used to calculate the projected benefit obligation. The discount rate is an estimate of the current interest rate at which the benefit plan liabilities could be effectively settled at the end of the year. The discount rate also impacts the interest cost component of plan income or expense. As of December 31, 2021, Mattel determined the discount rate for its domestic benefit plans used in determining the projected and accumulated benefit obligations to be 2.5%, as compared to 2.2% as of December 31, 2020. In estimating this rate, Mattel reviews rates of return on high-quality corporate bond indices, which approximate the timing and amount of benefit payments. Assuming all other benefit plan assumptions remain constant, a one percentage point decrease in the discount rate would result in an immaterial change in benefit plan expense during 2022.

As a result of the curtailment of Mattel's domestic defined benefit pension plans, the rate of future compensation increase was not applicable for the 2021 and 2020 benefit obligation and net periodic pension cost calculations.

The long-term rate of return on plan assets is based on management’s expectation of earnings on the assets that secure Mattel’s funded defined benefit pension plans, taking into account the mix of invested assets, the arithmetic average of past returns, economic and stock market conditions and future expectations, and the long-term nature of the projected benefit obligation to which these investments relate. The long-term rate of return is used to calculate the expected return on plan assets that is used in calculating pension income or expense. The difference between this expected return and the actual return on plan assets is deferred, net of tax, and is included in accumulated other comprehensive loss. The net deferral of past asset gains or losses affects the calculated value of plan assets and, ultimately, future pension income or expense. Mattel’s long-term rate of return used in determining plan expense for its domestic defined benefit pension plans was 5.0% in 2021 and 5.5% in 2020. Assuming all other benefit plan assumptions remain constant, a one percentage point decrease in the expected return on plan assets would result in an immaterial change in benefit plan expense during 2022. See Item 8 "Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements—Employee Benefit Plans."

43

The health care cost trend rates used by Mattel for its other postretirement benefit plans reflect management’s best estimate of expected claim costs over the next ten years. These trend rates impact the service and interest cost components of plan expense. Rates ranging from 7.0% in 2021 to 4.5% in 2027, with rates assumed to stabilize in 2027 and thereafter, were used in determining plan expense for 2021. These rates are reviewed annually and are estimated based on historical costs for participants in the other postretirement benefit plans as well as estimates based on current economic conditions. As of December 31, 2021, Mattel maintained the health care cost trend rates for its other postretirement benefit plan obligation at 7.0% for all participants. For all participants, the cost trend rates are estimated to reduce to 4.5% by 2028, with rates assumed to stabilize in 2028. Assuming all other postretirement benefit plan assumptions remain constant, a one percentage point increase in the assumed health care cost trend rates would result in an immaterial change in benefit plan expense during 2022.

Share-Based Payments

Mattel recognizes the cost of service-based employee share-based payment awards based on the estimated fair value of the award as of the grant date. The related expense is recognized on a straight-line attribution basis over the requisite employee service period, net of estimated forfeitures. Management believes that the estimated fair value of share-based payment awards include "critical accounting estimates" because significant judgement is required to determine the estimated fair value, including the expected life of the award, expected volatility of Mattel’s stock price, expected dividend yield, and the amount of awards that will be forfeited prior to vesting. Significant changes in the assumptions used to develop the estimated fair value of share-based payment awards could materially affect key financial measures, including net income.

With the exception of certain market-based options granted in 2018, which were valued using a Monte Carlo valuation methodology, Mattel estimates the fair value of options granted using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues approximating the expected life.

There were no market-based options granted during 2021 and 2020. The weighted-average grant-date fair value of options granted during 2021 and 2020, valued using the Black-Scholes valuation model was $9.31 and $4.60, respectively. The following weighted-average assumptions were used in determining the fair value of options granted:

[[GREPCENT_TABLE]]
[["","2021","","2020"],["Expected life (in years)","6.2","","5.9"],["Risk-free interest rate","0.8","%","","0.3","%"],["Volatility factor","43.6","%","","43.7","%"],["Dividend yield","\u2014","%","","\u2014","%"]]
[[/GREPCENT_TABLE]]

The following tables summarize the sensitivity of valuation assumptions within the calculation of stock option fair values, if all other assumptions are held constant:

[[GREPCENT_TABLE]]
[["","Increase in Assumption Factor","","Increase (Decrease) in Fair Value"],["Expected life (in years)","1","","7.0","%"],["Risk-free interest rate","1","%","","4.3","%"],["Volatility factor","1","%","","1.9","%"],["Dividend yield","1","%","","(10.0)","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(Decrease) in Assumption Factor","","Increase (Decrease) in Fair Value"],["Expected life (in years)","(1)","","(7.8)","%"],["Risk-free interest rate","(1)","%","","(4.3)","%"],["Volatility factor","(1)","%","","(2.0)","%"],["Dividend yield","N/A","","N/A"]]
[[/GREPCENT_TABLE]]

44

Mattel recognized total share-based compensation expense related to stock options, restricted stock units ("RSUs"), and performance RSUs ("performance awards") of $60.1 million and $60.2 million during 2021 and 2020, respectively, which is included in other selling and administrative expenses in the consolidated statements of operations. As of December 31, 2021, total unrecognized compensation cost related to unvested share-based payments totaled $89.5 million and is expected to be recognized over a weighted-average period of 2.1 years. See Item 8 "Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements—Share-Based Payments"

Income Taxes

Mattel’s income tax provision and related income tax assets and liabilities are based on actual and expected future income, U.S. and foreign statutory income tax rates, and tax regulations and planning opportunities in the various jurisdictions in which Mattel operates. Management believes that the accounting estimates related to income taxes are "critical accounting estimates" because significant judgment is required in interpreting tax regulations in the United States and in foreign jurisdictions, evaluating Mattel’s worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits. Actual results could differ materially from those judgments, and changes in judgments could materially affect Mattel’s consolidated financial statements.

Certain income and expense items are accounted for differently for financial reporting and income tax purposes. As a result, the income tax expense reflected in Mattel’s consolidated statements of operations is different than that reported in Mattel’s tax returns filed with the taxing authorities. Some of these differences are permanent, such as expenses that are not deductible in Mattel’s tax return, and some are temporary differences that reverse over time, such as depreciation expense. These timing differences create deferred income tax assets and liabilities. Deferred income tax assets generally represent items that can be used as a tax deduction or credit in Mattel’s tax returns in future years for which Mattel has already recorded a tax benefit in its consolidated statements of operations. Mattel records a valuation allowance to reduce its deferred income tax assets if, based on the weight of available evidence, management believes expected future taxable income is not likely to support the use of a deduction or credit in that jurisdiction. Management evaluates the level of Mattel’s valuation allowances at least annually, and more frequently if actual operating results differ significantly from forecasted results.

Mattel records unrecognized tax benefits for U.S. federal, state, local, and foreign tax positions related primarily to transfer pricing, tax credits claimed, tax nexus, and apportionment. For each reporting period, management applies a consistent methodology to measure unrecognized tax benefits and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances warrant. Mattel’s measurement of its unrecognized tax benefits is based on management’s assessment of all relevant information, including prior audit experience, the status of audits, conclusions of tax audits, lapsing of applicable statutes of limitations, identification of new issues, and any administrative guidance or developments. Mattel recognizes unrecognized tax benefits in the first financial reporting period in which information becomes available indicating that such benefits will more likely than not (a greater than 50 percent likelihood) be realized.

In the normal course of business, Mattel is regularly audited by federal, state, local, and foreign tax authorities. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements. See Item 8 "Financial Statements and Supplementary Data—Note 15 to the Consolidated Financial Statements—Income Taxes."

New Accounting Pronouncements

See Item 8 "Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies."

Non-GAAP Financial Measure

To supplement the financial results presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), Mattel presents a non-GAAP financial measure within the meaning of Regulation G promulgated by the SEC. The non-GAAP financial measure that Mattel presents is currency exchange rate impact. Mattel uses this measure to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Mattel believes that the disclosure of this non-GAAP financial measure provides useful supplemental information to investors to be able to better evaluate ongoing business performance and certain components of Mattel's results. This measure is not, and should not be viewed as, a substitute for GAAP financial measures and may not be comparable to similarly-titled measures used by other companies.

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Currency Exchange Rate Impact

The currency exchange rate impact reflects the portion (expressed as a percentage) of changes in Mattel's reported results that are attributable to fluctuations in currency exchange rates.

For entities reporting in currencies other than the U.S. dollar, Mattel calculates the percentage change of period-over-period results at constant currency exchange rates (established as described below) by translating current period and prior period results using these rates. It then determines the currency exchange rate impact percentage by calculating the difference between the percentage change at such constant currency exchange rates and the percentage change at actual exchange rates.

The constant currency exchange rates are determined by Mattel at the beginning of each year and are applied consistently during the year. They are generally different from the actual exchange rates in effect during the current or prior period due to volatility in actual foreign exchange rates. Mattel considers whether any changes to the constant currency rates are appropriate at the beginning of each year. The exchange rates used for these constant currency calculations are generally based on prior year actual exchange rates.

Mattel believes that the disclosure of the percentage impact of foreign currency changes is useful supplemental information for investors to be able to gauge Mattel’s current business performance and the longer-term strength of its overall business since foreign currency changes could potentially mask underlying sales trends. The disclosure of the percentage impact of foreign exchange allows investors to calculate the impact on a constant currency basis and also enhances their ability to compare financial results from one period to another.

Key Performance Indicator

Gross billings represent amounts invoiced to customers. It does not include the impact of sales adjustments, such as trade discounts and other allowances. Mattel presents changes in gross billings as a metric for comparing its aggregate, categorical, brand, and geographic results to highlight significant trends in Mattel's business. Changes in gross billings are discussed because, while Mattel records the details of sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally recorded by customer and not associated with categories, brands, and individual products.