What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-25 · 181 added, 193 removed, 397 unchanged (49% of the section changed)

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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 not associated with categories, brands, and individual products.

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, creating innovative products and experiences that inspire, entertain and develop children through play.

Mattel is focused on the following two-part strategy to transform Mattel into an intellectual property ("IP") driven, high-performing toy company:

• In the short-term, improve profitability by optimizing operations and accelerate topline growth by growing Mattel's Power Brands and expanding Mattel's brand portfolio.

• In the mid-to-long-term, continue to make progress on capturing the full value of Mattel's IP through franchise management and online retail and e-commerce.

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.

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;

• 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

A novel strain of coronavirus disease ("COVID-19") was reported in December 2019 and characterized as a pandemic by the World Health Organization in March 2020.

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

The negative impact of retail disruptions and closures resulting from COVID-19 was substantial during the first half of 2020 but abated during the second half of 2020.

Strong consumer demand for toys during the third and fourth quarters contributed to double digit year-over-year increases in net sales in the North America and Europe, the Middle East, and Africa ("EMEA") regions during those periods.

Toy consumer demand improved in the Asia Pacific and Latin America regions, contributing to an improved year-over-year net sales performance in the second half as compared to the first half of 2020.

American Girl retail channel net sales were negatively impacted by retail disruption and the permanent closure of certain retail stores in 2020.

The negative impact of retail disruption and lower external distribution net sales were more than offset by higher direct-to-consumer channel net sales, resulting in a slight increase in year-over-year net sales for the American Girl segment.

Mattel's manufacturing and distribution network was fully operational as of December 31, 2020.

Prolonged disruption to Mattel’s customers, supply chain, or other critical operations would result in material adverse effects to Mattel’s business and its liquidity.

The future impact of COVID-19 on Mattel’s results of operations, financial position, and cash flows remains uncertain at this time due to rapidly evolving circumstances.

Mattel is closely monitoring the situation and actively managing its business as developments occur.

Refer to Part I, Item 1A "Risk Factors" of this Annual Report on Form 10-K for further discussion regarding potential impacts of COVID-19 on Mattel’s business.

The specific line items that have been materially affected by these impacts of COVID-19 are noted as such within "Results of Operations" below.

Additional discussion of the impact of COVID-19 on Mattel's liquidity and capital resources is discussed in "Liquidity and Capital Resources" and in "Cost Savings Programs" below.

In addition to the impacts of COVID-19 discussed below, it is reasonably likely that the pandemic and its resulting effects could have other unforeseen consequences that affect Mattel’s business.

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.

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 provides a summary of Mattel’s consolidated results for 2020 and 2019:

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

For the Year Ended Year/Year Change

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Net sales $ 5,457.7 $ 4,588.4 19 % —

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)

5 unchanged sentences

Other non-operating expense, net 8.4 2.7

Income (loss) before income taxes 183.8 4.0 % (157.5) -3.5 % n/m 750

Provision for income taxes 68.6 55.2

Income (loss) from equity method investments 11.5 (0.8)

Net income (loss) $ 126.6 2.8 % $ (213.5) -4.7 % n/m 750

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

n/m - Not Meaningful

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Gross Billings $ 6,081.6 $ 5,142.6 18 % 1 %

Gross billings were $5.14 billion in 2020, an increase of $73.2 million, or 1%, as compared to $5.06 billion in 2019, with an unfavorable impact from changes in currency exchange rates of two percentage points.

The increase in gross billings was primarily driven by higher billings of Dolls.

Dolls gross billings increased 9%, of which 11% was driven by higher billings of Barbie products, primarily driven by positive brand momentum and point of sale demand ("POS").

This was partially offset by lower billings of Enchantimals products of 1% and lower billings of BTS products of 1%.

Infant, Toddler, and Preschool gross billings decreased 9%, of which 6% was due to lower billings of Fisher-Price and Thomas & Friends products and 3% was due to lower billings of Fisher-Price Friends products.

Vehicles gross billings increased 1%, of which 3% was driven by higher billings of Hot Wheels products , partially offset by lower billings of CARS products of 2% following its movie launch in a prior year.

Action Figures, Building Sets, Games, and Other gross billings increased 1%, of which 7% was driven by initial billings of Star Wars:

The Child plush products, 7% was driven by higher billings of card games products including UNO , and 3% was driven by higher billings of family games products including Pictionary and Scrabble.

This was partially offset by lower billings of Toy Story 4 products of 15% following its 2019 theatrical release.

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 as a percent of net sales was relatively consistent at 12.1% in 2020 as compared to 12.4% in 2019.

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 as a percentage of net sales was 51.1% in 2020, as compared to 56.0% in 2019.

Cost of sales decreased by $183.7 million, or 7%, to $2.34 billion in 2020 from $2.52 billion in 2019, as compared to a 2% increase in net sales.

Within cost of sales, product and other costs decreased by $128.6 million, or 6%, to $1.93 billion in 2020 from $2.06 billion in 2019;

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 decreased by $61.8 million, or 28%, to $158.5 million in 2020 from $220.2 million in 2019.

Cost of sales in 2019 included the impact of approximately $22 million related to the inclined sleeper product recalls.

Within cost of sales, certain inbound freight costs were previously classified as freight and logistics costs.

Mattel reclassified such inbound freight costs from freight and logistics expenses to present all inbound freight costs within product and other costs for the periods and segments presented.

Gross margin increased to 48.9% in 2020 from 44.0% in 2019.

The increase in gross margin was primarily driven by incremental realized savings from cost savings programs and a decrease in royalty expense resulting from lower sales of licensed products.

and royalty expense increased by $25.8 million, or 16%, to $184.3 million in 2021 from $158.5 million in 2020.

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, newspaper inserts, fliers, and mailers, and (iv) generic advertising costs, which include trade show costs.

Advertising and promotion expenses as a percentage of net sales decreased to 11.3% in 2020 from 12.2% in 2019, primarily driven by strategic reductions in advertising spend due to strong POS and the impact of COVID-19.

(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, or 29.4% of net sales, in 2020, as compared to $1.39 billion, or 30.9% of net sales, in 2019.

The decrease in other selling and administrative expenses was mainly driven by incremental realized savings from cost savings programs, the absence of write-offs of American Girl retail store assets of approximately $26 million in 2019, and lower severance and other restructuring charges.

This was partially offset by increased costs related to the impact of the inclined sleeper product recalls and higher incentive and share based compensation expense.

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 reduction in interest expense was due to debt extinguishment costs of $9.2 million in 2019 associated with the early redemption in the fourth quarter of 2019 of the 2010 Senior Notes due October 2020 and the 2016 Senior Notes due August 2021 as well as lower fees associated with the $1.60 billion senior secured revolving credit facilities.

The reduction in interest expense was partially offset by the higher interest rates associated with the 2019 Senior Notes due December 2027 issued in the fourth quarter of 2019 as compared to the 2010 Senior Notes and 2016 Senior Notes.

Provision for Income Taxes

Mattel’s provision for income taxes was $68.6 million in 2020, as compared to $55.2 million in 2019.

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.

The 2019 income tax provision included a $13.4 million tax benefit related to the release of valuation allowances in certain foreign tax jurisdictions, and a $16.9 million tax benefit related to reassessments of prior year's tax liabilities based on the status of audits and settlements in various jurisdictions.

Mattel recorded a valuation allowance against certain domestic and foreign deferred tax assets as of both December 31, 2020 and December 31, 2019.

Evaluating the need for and the amount of a valuation allowance for deferred tax assets often requires significant judgment and extensive analysis of all available evidence to determine whether it is more likely than not that these assets will be realized.

Mattel intends to continue maintaining a valuation allowance on its deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances.

However, given Mattel's improved operating results for the year ended December 31, 2020, and if its financial results continue to improve, sufficient positive evidence may become available to allow Mattel to reach a conclusion that a portion of the valuation allowance will no longer be needed.

Release of the valuation allowance would result in the recognition of a portion of these deferred tax assets and a decrease to income tax expense for the period the release is recorded.

However, the exact timing and amount of the valuation allowance release are subject to change depending on the level of profitability that Mattel is able to achieve in the tax jurisdictions in which a valuation allowance has been recorded.

Income (loss) From Equity Method Investments

Income from equity method investments was $11.5 million in 2020, as compared to a loss from equity method investments of $0.8 million in 2019.

The increase in income from equity method investments was largely due to higher net sales of an equity method investment.

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.

Segment Results

North America Segment

The following table provides a summary of Mattel’s net sales, segment income, and gross billings by categories, along with supplemental information by brand, for the North America segment for 2020 and 2019:

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:

For the Year Ended % Change as

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Net Sales $ 2,968.3 $ 2,426.5 22 % — %

Segment Income 608.1 357.0 70 %

Segment Operating Income 872.5 621.9 40 %

Gross Billings by Categories

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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 primarily driven by higher billings of Dolls.

Dolls gross billings increased 21%, of which 23% was due to higher billings of Barbie products, primarily driven by positive brand momentum and POS.

This was partially offset by lower billings of Lil Gleemerz products of 1% and lower billings of BTS products of 1%.

Infant, Toddler, and Preschool gross billings decreased 4%, of which 3% was due to lower billings of Fisher-Price Friends products.

Vehicles gross billings increased 4%, of which 6% was driven by higher billings of Hot Wheels products, partially offset by lower billings of CARS products of 2% following its movie launch in a prior year.

Action Figures, Building Sets, Games, and Other gross billings increased 6%, of which 11% was driven by initial billings of Star Wars:

The Child plush products, 8% was driven by higher billings of card games products including UNO , and 2% was driven by higher billings of family games products including Pictionary and Scrabble .

This was partially offset by lower billings of Toy Story 4 products of 16% following its 2019 theatrical release.

Sales adjustments as a percent of net sales was relatively consistent at 6.7% in 2020 as compared to 6.9% in 2019.

Cost of sales decreased 6% in 2020, as compared to a 7% increase in net sales, primarily driven by lower product and other costs and royalty expense.

Gross margin in 2020 increased primarily due to lower product costs driven by incremental realized savings from the cost savings programs, lower royalty expense, and the absence of the inclined sleeper product recall expense of approximately $26 million in 2019.

North America segment income was $608.1 million in 2020, as compared to segment income of $357.0 million in 2019, mainly driven by higher gross profit.

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.

International Segment

The following table provides a summary of Mattel’s net sales, segment income, and gross billings by categories, along with supplemental information by brand, for the International segment for 2020 and 2019:

For the Year Ended % Change as

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Net Sales $ 2,219.2 $ 1,903.5 17 % 2 %

Segment Income 251.2 166.9 51 %

Segment Operating Income 350.0 272.4 28 %

Gross Billings by Categories

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Gross Billings $ 2,648.8 $ 2,286.4 16 % 2 %

Gross billings for the International segment were $2.28 billion in 2020, a decrease of $80.3 million, or 3%, as compared to $2.36 billion in 2019, with an unfavorable impact from changes in currency exchange rates of two percentage points.

The decrease in International segment gross billings was primarily due to lower billings of Infant, Toddler, and Preschool.

Dolls gross billings increased 4%, of which 6% was driven by higher billings of Barbie products, partially offset by lower billings of Enchantimals products of 2%.

Infant, Toddler, and Preschool gross billings decreased 15%, of which 10% was due to lower billings of Fisher-Price and Thomas & Friends products, including the impact of retail store closures due to COVID-19, and 4% was due to lower billings of Fisher-Price Friends products, primarily driven by the exiting of certain licensing partnerships.

Vehicles gross billings decreased 2%, of which 3% was due to lower billings of CARS products following its movie launch in a prior year, partially offset by higher billings of Matchbox products of 1%.

Action Figures, Building Sets, Games, and Other gross billings decreased 5%, of which 16% was due to lower billings of Toy Story 4 products following its 2019 theatrical release.

This was partially offset by higher billings of card games products including UNO of 7%, and higher billings of family games products including Pictionary and Scrabble of 4%.

Sales adjustments as a percent of net sales was relatively consistent at 20.1% in 2020 as compared to 19.9% in 2019.

Cost of sales decreased 12% in 2020, as compared to a 4% decrease in net sales, primarily driven by lower product and other costs and royalty expense.

Gross margin in 2020 increased primarily due to lower product costs driven by incremental realized savings from the cost savings programs and lower royalty expense.

International segment income was $251.2 million in 2020, as compared to a segment income of $166.9 million in 2019, mainly driven by higher gross profit.

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.

American Girl Segment

The following table provides a summary of Mattel’s net sales, segment loss, and gross billings for the American Girl segment for 2020 and 2019:

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:

For the Year Ended % Change as

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Net Sales $ 270.3 $ 258.4 5 % — %

Segment Loss (14.4) (58.8) -75 %

Segment Operating Income (Loss) 5.4 (14.1)

American Girl Segment

2 unchanged sentences

Total Net Sales $ 270.3 $ 258.4 5 % — %

Gross billings for the American Girl segment were $266.5 million in 2020, a decrease of $2.0 million, or 1%, as compared to $268.5 million in 2019.

The decrease in American Girl gross billings was primarily due to lower billings in proprietary retail channels, which were negatively impacted by retail disruption due to COVID-19, the impact of the permanent closure of certain retail stores;

and lower billings of external distribution channels.

This was substantially offset by higher direct-to-consumer channel billings.

Sales adjustments as a percent of net sales decreased to 3.1% in 2020 as compared to 4.6% in 2019 due to lower wholesale returns.

Net sales for the American Girl segment were $258.4 million in 2020, an increase of $1.8 million, or 1%, as compared to $256.6 million in 2019.

American Girl retail channel net sales were negatively impacted by retail disruption and the permanent closure of certain retail stores in 2020.

Cost of sales increased 8% in 2020, as compared to a 1% increase in net sales, primarily due to higher freight and logistics expenses.

Gross margin in 2020 decreased primarily due to higher freight and logistics expenses due to higher direct-to-consumer channel sales.

American Girl segment loss was $14.4 million in 2020, as compared to segment loss of $58.8 million in 2019, driven largely by lower other selling and administrative expenses due to the absence of write-offs of American Girl retail store assets of approximately $26 million in 2019, the temporary closure of retail stores due to COVID-19, and the subsequent permanent closure of certain retail stores.

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)

On February 9, 2021, Mattel announced the Optimizing for Growth program, a multi-year cost savings program which integrates and expands upon the previously announced Capital Light program (the “Program”).

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 incremental targeted gross cost savings, approximately 50% is expected to benefit Cost of Sales, 40% to benefit Other Selling and Administrative Expenses, and 10% to benefit Advertising and Promotion Expense.

Incremental cash expenditures associated with the Program are expected to be approximately $100 to $125 million.

Mattel estimates the cost of incremental actions for the Program to be as follows:

Optimizing for Growth - Incremental Actions Estimate of Cost

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:

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

Asset impairments and other non-cash charges $25 to $30 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 incremental charges $125 to $155 million

Cumulatively, in conjunction with previous actions taken under the Capital Light program, targeted annual gross cost savings for the Program are $325 million by 2023, with total expected cash expenditures of approximately $140 to $165 million, and total non-cash charges of $40 to $45 million.

Of the $325 million in targeted gross cost savings, approximately 60% is expected to benefit Cost of Sales, 30% to benefit Other Selling and Administrative Expenses, and 10% to benefit Advertising and Promotion Expense.

Total estimated actions $155 to $185 million

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:

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December 31, 2020

December 31, 2019

(In millions)

Cost of sales (a) $ 2.9 $ 5.7 $ 18.6

Other selling and administrative (b) 7.2 19.0

Other selling and administrative expenses (b) 32.3 7.2 19.0

$ 35.2 $ 12.9 $ 37.6

(a) Severance and other restructuring costs recorded within cost of sales in the consolidated statements of operations are included in segment income (loss) in "Note 13 to the Consolidated Financial Statements—Segment Information." During the year 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 North America, International, and American Girl segments, respectively.

(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 Nor th 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, 2020, Mattel has recorded cumulative severance and other restructuring charges related to the Program of approximately $51 million, which include approximately $15 million of non-cash charges.

Mattel realized cumulative cost savings (before severance, restructuring costs, and cost inflation) of approximately $75 million, primarily within gross profit, as of December 31, 2020 in connection with the Program.

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, on May 4, 2020, Mattel committed to a planned 4% reduction in its non-manufacturing workforce.

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 further streamline its organizational structure.

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.

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Such obligations may include investing and financing activities such as capital expenditures and debt service.

Of Mattel’s $762.2 million in cash and equivalents as of December 31, 2020, approximately $446.3 million was held by foreign subsidiaries.

Of Mattel’s $731.4 million in cash and equivalents as of December 31, 2021, approximately $244.6 million were held by foreign subsidiaries.

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.

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

discussed above under Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Update" of this Annual Report on Form 10-K, many of the aforementioned factors have been and may be adversely affected by COVID-19.

However, based 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" of this Annual Report on Form 10-K for further discussion regarding potential impacts of COVID-19 on Mattel’s business.

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.

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 $12.0 million tax charge related to approximately $457 million of foreign earnings that will not be indefinitely reinvested.

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.

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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, factoring, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.

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.

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Cash Flow Activities

Cash flows provided by operating activities were $288.5 million during 2020, as compared to $181.0 million during 2019.

The increase in cash flows provided by operating activities in 2020 from 2019 was primarily driven by current year net income, excluding the impact of non-cash charges, partially offset by higher working capital usage.

Cash flows used for investing activities were $134.9 million during 2020, as compared to $114.2 million during 2019.

The increase in cash flows used for investing activities in 2020 from 2019 was mainly driven by higher payments for foreign currency forward exchange contracts.

Cash flows used for financing activities were $5.8 million during 2020, as compared to $33.1 million during 2019.

The decrease in cash flows from financing activities in 2020 from 2019 was primarily due to the refinancing in 2019 of both the 2010 Senior Notes due October 2020 and the 2016 Senior Notes due August 2021 with the 2019 Senior Notes due December 2027.

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.

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.

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Credit Ratings

In 2020, Fitch changed Mattel's long-term credit rating from B- to B and maintained a positive outlook.

In 2020, Moody's maintained Mattel's long-term credit rating of B1, with a stable outlook.

In 2020, Standard & Poor's changed Mattel's long-term credit rating of BB- to B+ and maintained a negative outlook.

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 increased $132.2 million to $762.2 million at December 31, 2020, as compared to $630.0 million at December 31, 2019.

The increase was largely driven by cash provided by operating activities, partially offset by capital expenditures and payments of foreign currency forward exchange contracts.

Accounts receivable increased $97.6 million to $1.03 billion at December 31, 2020, as compared to $936.4 million at December 31, 2019.

The increase in accounts receivable was primarily due to higher fourth quarter sales in 2020.

Inventory increased $19.2 million to $514.7 million at December 31, 2020, as compared to $495.5 million at December 31, 2019.

The increase in inventory was due to higher inventory to meet expected future demands.

Accounts payable and accrued liabilities increased $98.4 million to $1.33 billion at December 31, 2020, as compared to $1.23 billion at December 31, 2019.

The change in accounts payable and accrued liabilities was mostly due to higher fourth quarter advertising and promotion activity in 2020.

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.

A summary of Mattel’s capitalization is as follows:

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2019 Senior Notes due December 2027 600.0 600.0

2021 Senior Notes due April 2026 600.0 —

2021 Senior Notes due April 2029 600.0 —

Debt issuance costs and debt discount (29.0) (45.3)

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Total capitalization (debt plus equity) $ 4,139.8 100 % $ 3,465.8 100 %

Total long-term debt remained at $2.9 billion at December 31, 2020.

Stockholders’ equity increased $104.6 million to $596.3 million at December 31, 2020, as compared to $491.7 million at December 31, 2019, primarily due to the net income for the year.

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

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Although the letters of credit are off-balance sheet, the majority of the obligations to which they relate are reflected as liabilities in the consolidated balance sheets.

Outstanding letters of credit totaled approximately $11 million as of December 31, 2020.

Outstanding letters of credit totaled approximately $10 million and $11 million as of December 31, 2021 and December 31, 2020, respectively.

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.

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

Effects of Inflation

Inflation rates in the U.S.

and in major foreign countries where Mattel does business have not had a significant impact on its results of operations or financial position during 2020 or 2019.

Mattel receives some protection from the impact of inflation from high turnover of inventories and its ability, under certain circumstances and at certain times, to pass on higher prices to its customers.

Employee Savings Plan

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Contributions to the Plan include voluntary contributions by eligible employees and employer automatic and matching contributions by Mattel.

The automatic contributions by Mattel were temporarily suspended in May 2020 and reinstated in November 2020.

The Plan allows employees to allocate both their voluntary contributions and their employer automatic and matching contributions to a variety of investment funds, including a fund that is invested in Mattel common stock (the "Mattel Stock Fund").

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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." In most instances, Mattel must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America ("U.S.

Accounts Receivable—Allowance for Credit Losses

The allowance for credit losses is based on collection history and management's assessment of the current economic trends, business environment, customers' financial condition, accounts receivable aging, and customer disputes that may impact the level of future credit losses.

Management believes the accounting estimate related to the allowance for credit losses is a "critical accounting estimate" because significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including other selling and administrative expenses, net income, and accounts receivable.

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.

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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.

The concentration of Mattel’s business with a relatively small number of customers may expose Mattel to a material adverse effect if one or more of Mattel’s large customers were to experience financial difficulty.

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.

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Customers’ terms and credit limits are adjusted or revoked, if necessary, to reflect the results of the review.

Mattel uses a variety of financial arrangements to ensure collectability of accounts receivable of customers, including requiring letters of credit, factoring, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.

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:

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The allowance for credit losses is also affected by the time at which uncollectable accounts receivable balances are actually written off.

Mattel believes that its allowance for credit losses at December 31, 2020 is adequate and proper.

However, as described above, Mattel’s business is greatly dependent on a small number of customers.

Should one or more of Mattel’s major customers experience bankruptcy or financial difficulty, the allowance for credit losses may not be sufficient to cover such losses.

Any incremental bad debt charges would negatively affect the results of operations of one or more of Mattel’s business segments.

Inventories—Obsolescence Reserve

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Inventory obsolescence reserves are recorded for damaged, obsolete, excess, and slow-moving inventory.

Inventory obsolescence expense is charged to cost of sales and establish a lower cost basis for the inventory.

Management believes that the accounting estimate related to the obsolescence reserve is a "critical accounting estimate" because changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, net income, and inventories.

As more fully described below, valuation of Mattel’s inventory could be impacted by changes in public and consumer preferences, demand for product, or changes in the buying patterns of both retailers and consumers and inventory management of customers.

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.

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Obsolescence reserve $ 31.3 $ 34.8

As a percentage of total inventory 6.3 % 8.1 %

Management believes that its obsolescence reserve at December 31, 2020 is adequate and proper.

However, the impact resulting from the aforementioned factors could cause actual results to vary.

Any incremental obsolescence charges would negatively affect the results of operations of one or more of Mattel’s business segments.

As a percentage of gross inventory 3.9 % 6.2 %

Mattel tests goodwill for impairment annually or more often if an event or circumstance indicates that an impairment may have occurred.

Management believes that the accounting estimates related to the fair value estimates of its goodwill are "critical accounting estimates" because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income, goodwill, and other intangible assets.

Assessing goodwill for impairment involves a high degree of judgment due to the assumptions that underlie the valuation.

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.

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The market approach is utilized for the North America and International reporting units.

In the third quarter of 2020, Mattel performed its annual impairment test and determined that goodwill was not impaired since each reporting unit's fair value exceeded its carrying value.

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

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Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers.

Accruals for these programs are recorded as sales adjustments that reduce gross billings in the period the related sale is recognized.

Sales adjustments for such programs totaled $554.2 million and $560.0 million during 2020 and 2019, respectively.

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.

The above-described programs primarily involve fixed amounts or percentages of sales to customers.

The accrual for such programs, which can either be contractual or discretionary in nature, is based on an assessment of customer purchases, customer performance of specified promotional activities, and other specified factors such as customer sales volume.

While the majority of sales adjustment amounts are readily determinable at period end and do not require estimates, certain sales adjustments (i.e., discretionary sales adjustments) require management to make estimates.

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.

Management believes that the accruals recorded for customer programs as of December 31, 2020 are adequate and proper.

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 retirement and other postretirement benefit plans covering substantially all employees of these companies.

See Item 8 "Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements—Employee Benefit Plans."

Actuarial valuations are used in determining amounts recognized in the financial statements for certain retirement and other postretirement benefit plans.

These valuations incorporate the following significant assumptions:

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;

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

Management believes that these assumptions are "critical accounting estimates" because significant changes in these assumptions could impact Mattel’s results of operations and financial position.

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.

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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."

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.

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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, 2020, Mattel maintained the health care cost trend rates for its other postretirement benefit plan obligation at 7.0% for participants younger than age 65, and 6.8% for participants age 65 and older.

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.

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Share-Based Payments

Mattel recognizes the cost of service-based employee share-based payment awards on a straight-line attribution basis over the requisite employee service period, net of estimated forfeitures.

Determining the fair value of share-based awards at the measurement date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and the expected dividends.

With the exception of certain market-based options granted in 2018, which are valued using a Monte Carlo valuation methodology, Mattel estimates the fair value of options granted using the Black-Scholes valuation model.

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.

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Treasury zero-coupon issues approximating the expected life.

Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.

Management believes that these assumptions are "critical accounting estimates" because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income.

There were no market-based options granted during 2021 and 2020.

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Volatility factor (1) % (2.0) %

Dividend yield (1) % 10.7 %

Dividend yield N/A N/A

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.

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See Item 8 "Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements—Share-Based Payments"

Mattel accounts for income taxes in accordance with Accounting Standards Codification ("ASC") 740— Income Taxes .

Mattel’s income tax provision and related income tax assets and liabilities are based on actual and expected future income, U.S.

and foreign statutory income tax rates, and tax regulations and planning opportunities in the various jurisdictions in which Mattel operates.

Management believes that the accounting estimates related to income taxes are "critical accounting estimates" because significant judgment is required in interpreting tax regulations in the U.S.

and in foreign jurisdictions, evaluating Mattel’s worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits.

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.

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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

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Non-GAAP Financial Measure

To supplement the financial results presented in accordance with U.S.

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.

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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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis