MATTEL INC /DE/ 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Foreign Currency Exchange Rate Risk Currency exchange rate fluctuations impact Mattel’s results of operations and cash flows. Inventory transactions denominated in the Euro, Mexican peso, British pound sterling, Canadian dollar, Russian ruble, Australian dollar, and Polish zloty were the primary transactions that caused foreign currency transaction exposure for Mattel in 2021. Mattel seeks to mitigate its exposure to market risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 24 months. For those intercompany receivables and payables that are not hedged, the transaction gains or losses are recorded in the consolidated statements of operations in the period in which the exchange rate changes as part of operating income or other non-operating expense, net based on the nature of the underlying transaction. Transaction gains or losses on hedged intercompany inventory transactions are recorded in the consolidated statements of operations in the period in which the inventory is sold to customers. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes. Mattel’s financial position is also impacted by currency exchange rate fluctuations on translation of its net investments in subsidiaries with non-U.S. dollar functional currencies. Assets and liabilities of subsidiaries with non-U.S. dollar functional currencies are translated into U.S. dollars at fiscal year-end exchange rates. Income, expense, and cash flow items are translated at weighted-average exchange rates prevailing during the fiscal year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Mattel’s primary currency translation adjustments in 2021 were related to its net investments in entities having functional currencies denominated in the Turkish lira, Chilean peso, Mexican peso, Euro, and Brazilian real. 46 There are numerous factors impacting the amount by which Mattel’s financial results are affected by foreign currency translation and transaction gains and losses resulting from changes in currency exchange rates, including, but not limited to, the level of foreign currency forward exchange contracts in place at a given time and the volume of foreign currency-denominated transactions in a given period. However, assuming that such factors were held constant, Mattel estimates that a one percent change in the U.S. dollar would have impacted Mattel's 2021 net sales by approximately 0.4% and net income per share by approximately $0.01. Mattel’s foreign currency forward e xchange contracts that were used to hedge firm commitments and anticipated transactions as of December 31, 2021 are shown below. All contracts in the following table are against the U.S. dollar and are maintained by reporting units with a U.S. dollar functional currency, with the exception of the Indonesian rupiah contracts, which are maintained by entities with an Indonesian rupiah functional currency. Buy Sell Contract Amount Weighted-Average Contract Rate Fair Value Contract Amount Weighted-Average Contract Rate Fair Value (In thousands of U.S. dollars, except for rates) Australian dollar (a) $ — — $ — $ 80,337 0.73 $ 895 British pound sterling (a) 45,557 1.34 335 — — — Canadian dollar (a) 37,509 0.78 536 58,806 0.79 343 Czech koruna 11,959 22.36 309 — — — Danish krone 2,915 6.60 32 — — — Euro (a) 73,122 1.13 395 301,661 1.18 10,139 Hungarian forint 6,029 325.92 66 — — — Indonesian rupiah 59,955 14,921 1,486 — — — Japanese yen — — — 10,093 114 88 Mexican peso 23,298 20.73 262 3,839 20.51 20 New Zealand dollar (a) 6,783 0.67 106 — — — Polish zloty 22,470 4.10 423 — — — Russian ruble 63,163 73.78 (723) — — — Singapore dollar 11,854 1.37 205 — — — South African rand — — — 1,326 15.92 7 Swiss franc 26,803 0.92 429 — — — Turkish lira — — — 3,032 12.71 213 $ 391,417 $ 3,861 $ 459,094 $ 11,705 (a) The weighted-average contract rate for these contracts is quoted in U.S. dollar per local currency. For the purchase of foreign currencies, fair value reflects the amount, based on dealer quotes, that Mattel would pay at maturity for contracts involving the same notional amounts, currencies, and maturity dates, if they had been entered into as of December 31, 2021. For the sale of foreign currencies, fair value reflects the amount, based on dealer quotes, that Mattel would receive at maturity for contracts involving the same notional amounts, currencies, and maturity dates, if they had been entered into as of December 31, 2021. The differences between the market forward amounts and the contract amounts are expected to be fully offset by currency transaction gains and losses on the underlying hedged transactions. In addition to the contracts involving the U.S. dollar detailed in the above table, Mattel also had contracts to sell British pound sterling for the purchase of Euro. As of December 31, 2021, these contracts had a contract amount of $68.6 million and a fair value liability of $1.2 million. Had Mattel not entered into hedges to limit the effect of currency exchange rate fluctuations on its results of operations and cash flows, its earnings before income taxes would have decreased by approximately $3 million in 2021 and increased by approximately $18 million in 2020. 47 United Kingdom Operations During June 2016, the referendum by British voters to exit the EU ("Brexit") adversely impacted global markets and resulted in a sharp decline of the British pound sterling against the U.S. dollar. In February 2017, the British Parliament voted in favor of allowing the British government to begin the formal process of Brexit and discussions with the EU began in March 2017. On January 29, 2020, the British Parliament approved a withdrawal agreement, and the United Kingdom ("U.K.") officially withdrew from the EU on January 31, 2020 and entered into a transition period that ended on December 31, 2020. On December 24, 2020, the U.K. and EU agreed upon The EU-UK Trade and Cooperation Agreement. The agreement was provisionally applicable beginning January 1, 2021 and sets new rules and arrangements between the U.K. and EU in areas such as the trade of goods and services, intellectual property, transportation, and more. As a result of the agreement, the U.K. is no longer considered a member of the EU Single Market and Customs Union and exited all EU policies and trade agreements. The transfer of goods between the U.K. and EU is subject to additional inspections and checkpoints causing possible delays in the movement of inventory. On April 27, 2021, the European Parliament gave final approval to the EU-UK Trade and Cooperation Agreement, and on April 29, 2021, the EU approved the conclusion of the agreement by way of a Council Decision. As a result, the agreements between the U.K. and the EU came into effect on May 1, 2021. This was the last official step in formalizing the new relationship between the U.K. and the EU. Although the agreement has mitigated a portion of the risk that arose due to the U.K.'s withdrawal from the EU, the overall impact on Mattel's operations is still being evaluated, including the volatility of the British pound sterling. Mattel's U.K. operations represented approximately 6% of Mattel's consolidated net sales for the year ended December 31, 2021. 48