What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-28 · 199 added, 224 removed, 354 unchanged (54% of the section changed)

3 unchanged sentences

Mattel has omitted discussion of 2020 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, 2021.

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.

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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.

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.

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• 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.

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.

Russia - Ukraine War

The ongoing war between Russia and Ukraine has led to volatility and disruption in these countries.

The length and impact of the ongoing war is highly unpredictable.

While Mattel has no direct operations in Ukraine, its operations in Russia have experienced significant disruption.

Mattel has paused all shipments into Russia and net sales in these countries have declined during the year ended December 31, 2022.

Mattel's net sales in these two countries represented less than 1% and 2% of total net sales during the years ended December 31, 2022 and 2021, respectively.

In addition, as of December 31, 2022, Mattel held $69.2 million of cash in Russia.

While this cash can be used within Russia, its movement out of Russia is currently limited.

Recent Developments

Mattel's 2022 results were impacted by a challenging macro-economic environment, with quarterly results significantly affected by the volatility and timing of retailer inventory movements throughout the year.

Through the third quarter of 2022, Mattel had accelerated its inventory production to meet demand levels and reduce supply chain risk while retailers had also increased their inventory levels to replenish low inventory levels entering 2022 and to meet expected growth in demand ahead of the holiday season.

These factors resulted in strong growth in net sales during the nine months ended September 30, 2022.

However, consumer demand was lower than expected during the holiday season, and occurred later in the fourth quarter of 2022, which caused retailers to reduce replenishment orders as they managed their inventory.

These factors contributed to a decline in net sales during the fourth quarter of 2022 and elevated retailer inventory levels entering 2023, which are expected to have an unfavorable impact to net sales in 2023, particularly in the first half of the year.

Despite the challenging macro-economic environment, including the fourth quarter decline, Mattel's full year net sales were approximately flat compared to prior year, including an unfavorable impact from currency exchange rates of three percentage points.

Cost inflation also had an unfavorable impact to Mattel's gross margin during 2022, due to a combination of cost increases in raw materials, ocean freight, and other supply chain costs.

Mattel's margins have also been negatively impacted by inventory management efforts, including higher close-out sales and inventory obsolescence, and increased royalty expense, reflecting increased sales of licensed properties.

These negative factors were partially offset by favorable pricing actions and incremental realized savings from the Optimizing for Growth program.

To the extent cost inflation becomes more significant than anticipated, or Mattel is unable to offset higher costs through mitigating actions, inflation may have a material effect on Mattel's results of operations and financial condition

Although operating results were below expectations, Mattel continued to improve its financial position during 2022 as cash flows generated from operating activities were used to reduce leverage through $250 million of long-term debt repayments, while ending the year with $761 million in cash and equivalents.

Additionally, on February 8, 2023, Mattel announced the resumption of its share repurchase program, which has approximately $203 million of remaining authorized capacity to repurchase common stock.

To the extent the existing macro-economic environment remains challenging, or worsens, it may have a material effect on Mattel's results of operations and financial condition.

Refer to Part I, Item 1A "Risk Factors" for further discussion regarding potential impacts on Mattel's business.

Results of Operations

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Income before income taxes 504.3 9.3 % 470.8 8.6 % 7 % 70

(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

Provision (benefit) for income taxes 135.9 (420.4)

(Income) from equity method investment (25.4) (11.8)

Net income $ 393.9 7.2 % $ 903.0 16.5 % -56 % (930)

Net sales in 2022 were $5.43 billion, a decrease of $23.1 million as compared to $5.46 billion in 2021.

The decrease in net sales was the result of declines in gross billings of $33.3 million, partially offset by declines in sales adjustments of $10.3 million.

Gross billings represents amounts invoiced to a customer and does not include the impact of sales adjustments, such as trade discounts and other allowances.

Changes in gross billings are discussed below because, while Mattel records the details of sales adjustments in its financial records at the time of sale, such sales adjustments are generally recorded by customer and are not associated with categories, brands, or individual products.

The following table provides a summary of Mattel's consolidated gross billings by categories, along with supplemental information by brand for 2022 and 2021:

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Gross Billings $ 6,048.3 $ 6,081.6 -1 % -4 %

Sales Adjustments (623.9) (554.2)

Net Sales $ 5,457.7 $ 4,588.4 19 % 1 %

Supplemental Gross Billings Disclosure

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Gross Billings $ 6,048.3 $ 6,081.6 -1 % -4 %

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.

Gross billings were $6.05 billion in 2022, a decrease of $33.3 million, or 1%, as compared to $6.08 billion in 2021, with an unfavorable impact from changes in currency exchange rates of four percentage points.

The decrease in gross billings was due to lower billings of Dolls and Infant, Toddler, and Preschool, partially offset by higher billings of Vehicles and Action Figures, Building Sets, Games, and Other.

Dolls gross billings decreased 9%, of which 8% was due to lower billings of Barbie products, 2% was due to lower billings of American Girl products, and 2% was due to lower billings of Spirit products.

This was partially offset by higher billings of Monster High products of 3% and higher billings of Disney Princess and Frozen products of 1%.

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

Vehicles gross billings increased 16%, of which 15% was due to higher billings of Hot Wheels products due to positive brand momentum and the successful launches of remote control vehicles and Hot Wheels Skate finger boards.

Action Figures, Building Sets, Games, and Other gross billings increased 7%, of which 11% was due to higher billings of Jurassic World products and 10% was due to higher billings of Lightyear products, as a result of their theatrical releases during the second quarter of 2022.

This was partially offset by lower billings of other Action Figures products of 7%, and lower billings of Games products of 5%.

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.

Sales adjustments decreased to $613.6 million in 2022, as compared to $623.9 million in 2021, due to lower gross billings.

Sales adjustments as a percentage of net sales was relatively flat at 11.3% in 2022, as compared to 11.4% in 2021.

Cost of Sales

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Within cost of sales, product and other costs increased by $65.6 million, or 3%, to $2.42 billion in 2022 from $2.35 billion in 2021;

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.

royalty expense increased by $46.5 million, or 25%, to $230.8 million in 2022 from $184.3 million in 2021, and freight and logistics expenses increased by $10.2 million, or 3%, to $302.6 million in 2022 from $292.4 million in 2021.

Gross margin decreased to 45.7% in 2022 from 48.1% in 2021.

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.

The decrease in gross margin was primarily due to cost inflation of 380 basis points, inventory management efforts of 110 basis points, including higher close-out sales and inventory obsolescence, and higher royalty expense and other of 60 basis points.

These negative factors were partially offset by favorable pricing actions of 200 basis points and incremental realized savings from the Optimizing for Growth program of 130 basis points.

Advertising and Promotion Expenses

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(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.

Advertising and promotion expenses as a percentage of net sales were relatively flat in 2022 at 9.8% in 2022, compared to 10.0% in 2021.

Other Selling and Administrative Expenses

Other selling and administrative expenses were $1.27 billion in 2022, as compared to $1.35 billion in 2021.

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.

The decrease in other selling and administrative expenses was primarily due to lower incentive compensation of $128.2 million and incremental realized savings from the Optimizing for Growth program of $30.9 million, partially offset by market-related pay increases of $50.8 million and increases in bad debt expense of $17.7 million.

Mattel's other selling and administrative expenses will increase in 2023 if incentive compensation expenses return to historical levels.

Interest Expense

Interest expense was $132.8 million in 2022, as compared to $253.9 million in 2021.

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 decrease in interest expense was primarily due to a loss on extinguishment of debt of $101.7 million as a result of the redemption of the 6.75% 2017/2018 Senior Notes due December 2025 (the "2025 Notes") in 2021 and lower interest expense of $19.3 million in 2022 due to the refinancing and repayment of the 2025 Notes in 2021.

Other Non-Operating Expense, Net

Other non-operating expense, net was $47.8 million in 2022, as compared to $8.4 million in 2021.

In the fourth quarter of 2022, Mattel substantially completed the liquidation of its subsidiary in Argentina and recognized $45.4 million of currency translation adjustments as a loss in other non-operating expense, net, as a result of the liquidation.

See Item 7A "Quantitative and Qualitative Disclosures About Market Risk—Argentina Operations" for more information.

Provision (Benefit) for Income Taxes

Mattel's provision for income taxes was $135.9 million in 2022, as compared to a benefit from income taxes of $420.4 million in 2021.

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 2022 income tax provision included an $11.0 million tax expense related to certain foreign subsidiaries' deferred tax liabilities of undistributed earnings and a $15.2 million tax benefit 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.

During the twelve months ended December 31, 2021, Mattel continued to see improved and sustained profitability, which presented 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 certain U.S.

federal, state and 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.

As of December 31, 2021, Mattel's valuation allowances on its U.S.

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 2022 primarily related to functional currency fluctuations.

As of December 31, 2022, Mattel's valuation allowances on its U.S.

federal and state deferred tax assets and foreign deferred tax assets were approximately $18 million and $74 million, respectively.

Segment Results

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Segment Operating Income 765.9 872.5 -12 %

Net sales for the North America segment in 2022 were $2.99 billion, an increase of $19.6 million or 1%, as compared to $2.97 billion in 2021.

The increase in net sales was the result of an increase in gross billings of $31.2 million, partially offset by an increase in sales adjustments of $11.7 million.

For the Year Ended % Change as

Reported Currency

Exchange Rate

December 31, 2022 December 31, 2021

(In millions, except percentage information)

Gross Billings by Categories

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Gross Billings $ 3,186.1 $ 3,154.9 1 % — %

Sales Adjustments (186.6) (163.2)

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

Supplemental Gross Billings Disclosure

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Gross Billings $ 3,186.1 $ 3,154.9 1 % — %

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.

Gross billings were $3.19 billion in 2022, an increase of $31.2 million, or 1%, as compared to $3.15 billion in 2021.

The increase in the North America segment gross billings was due to higher billings of Vehicles and Action Figures, Building Sets, Games, and Other, partially offset by lower billings of Dolls and Infant, Toddler, and Preschool.

Dolls gross billings decreased 7%, of which 13% was due to lower billings of Barbie products, partially offset by higher billings of Monster High products of 5%.

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

Vehicles gross billings increased 16%, of which 14% was due to higher billings of Hot Wheels products.

Action Figures, Building Sets, Games, and Other gross billings increased 8%, of which 13% was due to higher billings of Jurassic World products and 9% was due to higher billings of Lightyear products, as a result of their theatrical releases during the second quarter of 2022.

This was partially offset by lower billings of other Action Figures products of 7% and lower billings of Plush products of 6%.

Sales adjustments increased to $198.3 million in 2022, as compared to $186.6 million in 2021, due to higher gross billings.

Sales adjustments as a percentage of net sales was relatively consistent at 6.6% in 2022, as compared to 6.3% in 2021.

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.

Cost of sales increased by $90.6 million, or 6%, to $1.65 billion in 2022 from $1.56 billion in 2021, as compared to a 1% increase in net sales, primarily due to an increase of product and other costs of $58.0 million and higher royalty expense of $28.3 million.

Gross margin in 2022 decreased to 44.9% in 2022 from 47.4% in 2021, due to cost inflation of 370 basis points, higher royalty expense and other of 140 basis points, and inventory management efforts of 90 basis points, including higher close-out sales and inventory obsolescence.

These negative factors were partially offset by favorable pricing actions of 210 basis points and incremental realized savings from the Optimizing for Growth program of 140 basis points.

North America segment operating income was $765.9 million in 2022, as compared to segment operating income of $872.5 million in 2021, due to lower gross profit.

International Segment

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Segment Operating Income 295.8 350.0 -15 %

Net sales for the International segment in 2022 were $2.22 billion, relatively flat as compared to 2021.

Declines in gross billings of $20.6 million were offset by declines in sales adjustments of $21.4 million.

For the Year Ended % Change as

Reported Currency

Exchange Rate

December 31, 2022 December 31, 2021

(In millions, except percentage information)

Gross Billings by Categories

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Gross Billings $ 2,628.2 $ 2,648.8 -1 % -8 %

Sales Adjustments (429.6) (382.8)

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

Supplemental Gross Billings Disclosure

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Gross Billings $ 2,628.2 $ 2,648.8 -1 % -8 %

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.

Gross billings for the International segment were $2.63 billion in 2022, a decrease of $20.6 million, or 1%, as compared to $2.65 billion in 2021, with an unfavorable impact from changes in currency exchange rates of eight percentage points.

The decrease in International segment gross billings was due to lower billings of Dolls and Infant, Toddler, and Preschool, partially offset by higher billings of Vehicles and Action Figures, Building Sets, Games, and Other.

Dolls gross billings decreased 10%, of which 6% was due to lower billings of Barbie products, 2% was due to lower billings of Spirit products and 2% was due to lower billings of Enchantimals products.

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

Vehicles gross billings increased 15% due to higher billings of Hot Wheels products.

Action Figures, Building Sets, Games, and Other gross billings increased 5%, of which 10% was due to higher billings of Lightyear products and 8% was due to higher billings of Jurassic World products, in each case as a result of their theatrical releases during the second quarter of 2022.

This was partially offset by lower billings of other Action Figures products of 7% and lower billings of Games products of 7%.

Sales adjustments decreased to $408.2 million in 2022, as compared to $429.6 million in 2021, due to lower gross billings.

Sales adjustments as a percentage of net sales was 18.4% in 2022, as compared to 19.4% in 2021.

The decline was due to changes in the mix of sales as there were lower sales in markets with higher average sales adjustment rates.

Cost of sales increased by $63.2 million, or 5%, to $1.21 billion in 2022 from $1.15 billion in 2021, as compared to relatively flat net sales, primarily due to an increase of product and other costs of $35.8 million, higher royalty expense of $17.7 million, reflecting increased sales of licensed properties, and higher freight and logistics expenses of $9.7 million.

Gross margin in 2022 decreased to 45.6% in 2022 from 48.2% in 2021, due to cost inflation of 420 basis points, inventory management efforts of 160 basis points, including higher close-out sales and inventory obsolescence, and higher royalty expense and other of 30 basis points.

These negative factors were partially offset by favorable pricing actions of 210 basis points and incremental realized savings from the Optimizing for Growth program of 130 basis points.

International segment operating income was $295.8 million in 2022, as compared to segment operating income of $350.0 million in 2021, due to lower gross profit, partially offset by lower advertising and promotion expenses of $17.8 million.

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:

The following table provides a summary of Mattel's net sales and segment operating income for the American Girl segment for 2022 and 2021:

For the Year Ended % Change as

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Net Sales $ 226.9 $ 270.3 -16 % — %

Segment Operating Income (Loss) 5.4 (14.1)

American Girl Segment

Total Gross Billings $ 277.9 $ 266.5 4 % — %

Sales Adjustments (7.6) (8.1)

Total Net Sales $ 270.3 $ 258.4 5 % — %

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.

Segment Operating Income 0.2 5.4 N/M

N/M - Not meaningful

Net sales for the American Girl segment in 2022 were $226.9 million, a decrease of $43.4 million or 16%, as compared to $270.3 million in 2021.

The decrease in net sales was the result of declines in gross billings of $44.0 million or 16%, to $234.0 million in 2022 from $277.9 million in 2021.

The decrease was primarily due to lower billings of 2022 Girl of the Year dolls of $14.5 million and lower billings of historical character dolls products of $13.3 million.

Sales adjustments decreased to $7.1 million in 2022, as compared to $7.6 million in 2021, due to lower gross billings.

Sales adjustments as a percentage of net sales was relatively consistent at 3.1% in 2022, as compared to 2.8% in 2021.

Cost of sales decreased by $10.7 million, or 9%, to $106.1 million in 2022 from $116.8 million in 2021, as compared to a 16% decrease in net sales, primarily due to a decrease of product and other costs of $7.2 million.

Gross margin in 2022 decreased to 53.2% in 2022 from 56.8% in 2021, due to cost inflation of 230 basis points, royalty expense and other of 170 basis points, and inventory obsolescence of 30 basis points, partially offset by incremental realized savings from the Optimizing for Growth program of 80 basis points.

American Girl segment operating income was $0.2 million in 2022, as compared to segment operating income of $5.4 million in 2021, due to lower gross profit, partially offset by lower other selling and administrative expenses of $25.0 million, including $15.2 million from a gain on the sale of the American Girl corporate offices and distribution center during 2022.

Cost Savings Programs

Optimizing for Growth (formerly Capital Light)

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.

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"), which had targeted annual gross cost savings of $250 million from actions expected to be completed beginning 2021 through 2023.

In February 2023, Mattel expanded the Program and increased the targeted annual gross cost savings from $250 million to $300 million, reflecting additional initiatives, including actions to further streamline Mattel's organizational structure.

The additional initiatives are estimated to result in incremental employee severance charges of $10 million to $15 million during 2023.

Of the $300 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 expenses.

Estimated total cash expenditures associated with the Program, excluding previous actions taken under the Capital Light program, are expected to be approximately $135 to $165 million.

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Real estate/supply chain optimization and other restructuring costs $25 to $35 million

Non-cash charges $55 to $60 million

Non-cash charges (a) $55 to $60 million

Total estimated severance and restructuring costs $120 to $145 million

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Total estimated actions $190 to $225 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:

(a) Non-cash charges include $45.4 million of currency translation losses that were recognized within other non-operating expense, net, in the consolidated statement of operations during 2022 as a result of Mattel's liquidation of its subsidiary in Argentina, which was substantially completed in 2022.

Cumulatively, in conjunction with previous actions taken under the Capital Light program prior to 2021, targeted annual gross cost savings for the Program are $375 million by 2023, with total expected cash expenditures of approximately $175 to $205 million, and total expected non-cash charges of $70 to $75 million.

Of the $375 million in targeted gross cost savings, approximately 65% is expected to benefit cost of sales, 25% is expected to benefit other selling and administrative expenses, and 10% is expected to benefit advertising and promotion expenses.

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

For the Year Ended

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$ 34.3 $ 35.2 $ 12.9

(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, 2022, Mattel had recorded cumulative severance and other restructuring charges related to the Program of approximately $165 million, which include approximately $73 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.

Non-cash charges include $45.4 million recorded in non-operating expense, net, during 2022 related to the liquidation of Mattel's subsidiary in Argentina.

Mattel realized cumulative cost savings (before severance, restructuring costs, and cost inflation) of approximately $280 million, which represents approximately 80% benefit to cost of sales, 15% benefit to other selling and administrative expenses, and 5% benefit to advertising and promotion expenses, as of December 31, 2022, in connection with the Program.

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.

In connection with Mattel's continued efforts to streamline its organizational structure and restore profitability, in May 2020, Mattel committed to a planned 4% reduction in its non-manufacturing workforce.

During 2020, Mattel recorded severance and other restructuring charges of approximately $28 million, of which approximately $19 million related to actions taken to streamline Mattel's organizational structure and approximately $9 million related to actions associated with a prior cost savings program.

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.

Mattel's primary sources of liquidity are its domestic and foreign cash and equivalents balances, short-term borrowing facilities, including its $1.40 billion senior secured revolving credit facility (the "Revolving Credit Facility"), and access to capital markets to fund its operations and obligations.

Such obligations may include capital expenditures, debt service, future royalty payments pursuant to licensing agreements, future inventory and service purchases, and required cash contributions and payments related to benefit plans.

Of Mattel's $761.2 million in cash and equivalents at December 31, 2022, approximately $304.1 million was held by foreign subsidiaries, including $69.2 million held in Russia.

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.

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.

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 comply with its debt covenants and its Revolving Credit Facility covenants, or deterioration of Mattel's credit ratings.

However, based on Mattel's current business plan and factors known to date, it is expected that existing cash and equivalents, cash flows from operations, availability under the Revolving Credit Facility, and access to capital markets, will be sufficient to meet working capital and operating expenditure requirements for the next twelve months.

The Tax Cuts and Jobs Act, enacted on December 22, 2017 (the "U.S.

Tax Act"), 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 $28.0 million deferred tax liability as of December 31, 2022, related to approximately $2.60 billion of foreign earning that will not be indefinitely reinvested.

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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.

Consistent with prior periods, Mattel intends to utilize its existing cash and cash equivalents, cash flow from operations, and Revolving Credit Facility to meet its short-term liquidity needs.

At December 31, 2022, Mattel had no outstanding borrowings under the Revolving Credit Facility and approximately $8 million in outstanding letters of credit under the Revolving Credit Facility.

Market conditions could affect certain terms of other debt instruments that Mattel enters into from time to time.

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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.

Mattel monitors its customers' financial condition and their liquidity in order to mitigate 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.

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Cash flows provided by operating activities were $442.8 million in 2022, as compared to $485.5 million in 2021.

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.

The decrease in cash flows provided by operating activities was primarily due to $62.2 million of higher working capital usage, partially offset by changes in net income, excluding the impact of non-cash items.

Cash flows used for investing activities were $144.2 million in 2022, as compared to $105.1 million in 2021.

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.

The increase in cash flows used for investing activities was primarily due to an increase in capital expenditures of $35.2 million.

Cash flows used for financing activities were $260.6 million in 2022, as compared to $402.1 million in 2021.

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.

The decrease in cash flows used for financing activities was primarily due to $250.0 million repayment of the 3.15% Senior Notes due March 2023 in 2022, compared to $391.1 million of cash used for repayment and refinancing of the 6.75% 2017/2018 Senior Notes due December 2025 in 2021.

During 2022 and 2021, Mattel did not repurchase any shares of its common stock.

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At December 31, 2022, share repurchase authorizations of $203.0 million had not been executed.

The resumption of repurchases under this program was announced on February 8, 2023.

Repurchases under the program will take place from time to time, depending on market conditions.

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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.

In 2022, Fitch changed Mattel's long-term credit rating from BB to BB+ with a positive outlook.

In 2022, Moody's changed Mattel's long-term credit rating from Ba2 to Baa3 and maintained a stable outlook.

In 2022, Standard & Poor's changed Mattel's long-term credit rating from BB to BB+ and maintained 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.

Mattel's cash and equivalents increased $29.9 million to $761.2 million at December 31, 2022, as compared to $731.4 million at December 31, 2021, primarily due to cash flow provided by operating activities of $442.8 million and proceeds from the sale of assets of $38.1 million, partially offset by the redemption of the $250.0 million aggregate principal amount of the 3.15% Senior Notes due 2023, and capital expenditures of $186.5 million.

Accounts receivable decreased $212.5 million to $860.2 million at December 31, 2022, as compared to $1.07 billion at December 31, 2021, due to the decline in net sales in the fourth quarter of 2022.

Inventories increased $116.9 million to $894.1 million at December 31, 2022, as compared to $777.2 million at December 31, 2021, which reflects the impact of lower than anticipated sales and cost inflation.

Prepaid expenses and other current assets decreased $79.8 million to $213.5 million at December 31, 2022, as compared to $293.3 million at December 31, 2021, primarily due to the $86.0 million settlement of a receivable due from insurers related to a legal matter.

Accounts payable and accrued liabilities decreased $420.6 million to $1.15 billion at December 31, 2022, as compared to $1.57 billion at December 31, 2021, primarily due to a decrease in accounts payable of $107.7 million, lower accrued incentive compensation of $137.0 million, $86.0 million in settlement of an accrued legal matter, and a decrease in accrued advertising and promotion of $64.0 million.

A summary of Mattel's capitalization is as follows:

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Cash and equivalents $ 761.2 $ 731.4

Short-term borrowings — 1.0

2010 Senior Notes due October 2040 250.0 250.0

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2019 Senior Notes due December 2027 600.0 600.0

2021 Senior Notes due April 2026 600.0 600.0

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Total capitalization (debt plus equity) $ 4,381.9 100 % $ 4,139.8 100 %

On December 30, 2022, Mattel used cash on hand to redeem and retire $250 million aggregate principal amount of the 3.15% Senior Notes due 2023.

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.

Total debt, was $2.33 billion at December 31, 2022, as compared to $2.57 billion at December 31, 2021.

The decrease was due to the $250 million redemption of the 3.15% Senior Notes due 2023.

Stockholders' equity increased $487.4 million to $2.06 billion at December 31, 2022, as compared to $1.57 billion at December 31, 2021, primarily due to net income in 2022 of $393.9 million and the impact of share-based compensation on additional paid-in capital of $69.1 million.

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 $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.

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.

Outstanding letters of credit totaled approximately $8 million and $10 million as of December 31, 2022 and 2021, respectively.

In the normal course of business, Mattel enters into contractual arrangements to obtain and protect Mattel's right to create and market certain products, and for future purchases of goods and services, including for the purchase of future inventory to ensure availability of materials.

Mattel also enters into long-term debt arrangements that include periodic interest and principal payments.

Mattel also has defined benefit and postretirement benefit plans, which require future cash contributions and benefit payments.

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Interest on long-term debt 964.4 109.9 109.9 109.9 94.7 88.1 451.9

Leases (a) 437.9 92.3 79.8 67.3 57.1 45.3 96.2

Leases 419.8 93.9 83.6 71.0 58.5 31.7 81.1

Minimum guarantees under licensing and similar agreements 188.6 70.2 63.6 52.7 1.1 1.0 —

Defined benefit and postretirement benefit plans 361.9 37.5 36.1 38.5 36.8 35.7 177.3

Defined benefit and postretirement benefit plans (a) 349.6 36.0 36.5 35.9 34.6 34.8 171.8

Purchases of inventory, services, and other 461.4 301.9 61.3 40.1 27.4 24.6 6.1

Total $ 4,733.8 $ 611.9 $ 354.9 $ 309.6 $ 816.3 $ 780.2 $ 1,860.9

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

(a) Total defined benefit and postretirement benefit plans include obligations to be paid through 2032.

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.

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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."

Accounts Receivable—Allowance for Credit Losses

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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 North America segment are sold directly to retailers, including discount and freestanding toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers, and directly to consumers through Mattel's e-commerce platforms.

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.

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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.

For the years ended December 31, 2022 and 2021, Mattel recorded a charge related to its allowance for credit losses of approximately $18 million and $1 million, respectively, which was recognized as other selling and administrative expenses.

In general, Mattel's allowance for credit loss estimates has historically been within its expectations and in line with the reserves established, and although possible, significant variation is not expected in the future.

If significant changes in the assumptions used to develop the estimates occur, they could materially affect key financial measures, including other selling and administrative expenses and accounts receivable.

A hypothetical 1% increase or decrease to the allowance for credit losses as a percentage of accounts receivable would have impacted 2022 and 2021 other selling and administrative expenses by approximately $9 million and $11 million, respectively.

Inventories—Obsolescence Reserve

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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.

Management believes that the accounting estimate related to the obsolescence reserve is a "critical accounting estimate" because significant judgment is required to evaluate the level of 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.

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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.

These factors increase inventory valuation risk because Mattel's inventory levels may be adversely impacted by the need to prebuild 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.

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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.

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.

Management assesses the need for, and the amount of, an obsolescence reserve based on the following factors:

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As a percentage of gross inventory 4.5 % 3.9 %

For the years ended December 31, 2022 and 2021, Mattel recorded a charge related to its inventory obsolescence reserve of approximately $65 million and $41 million, which was recognized as cost of sales.

In general, Mattel's inventory obsolescence estimates have historically been within expectations and in line with the reserves established, and although possible, significant variation is not expected in the future.

If significant changes in the assumptions used to develop the estimate occur, they could materially affect key financial measures, including cost of sales and inventories.

A hypothetical 1% increase or decrease to inventory reserves as a percentage of gross inventory at December 31, 2022 and 2021 would have impacted 2022 and 2021 cost of sales by approximately $9 million and $8 million, respectively.

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

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(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.

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 amount.

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.

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

Mattel last performed a quantitative goodwill impairment assessment as of August 1, 2020, and the resulting calculations indicated the fair values exceeded the carrying amounts of Mattel's reporting units by 3.7 times, 1.8 times, and 1.6 times for the North America, International, and American Girl reporting units, respectively.

In the third quarter of 2022, 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”

There were no events or changes in circumstances subsequent to the third quarter assessment that indicate that the carrying amount of a reporting unit may exceed its fair value as of December 31, 2022.

Sales Adjustments

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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.

While certain sales adjustment amounts are readily determinable at year-end and do not require estimates, other sales adjustments, such as 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);

• 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."

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:

Expected life (in years) 6.2 5.9

Risk-free interest rate 0.8 % 0.3 %

Volatility factor 43.6 % 43.7 %

Dividend yield — % — %

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

Increase in Assumption Factor Increase (Decrease) in

Expected life (in years) 1 7.0 %

Risk-free interest rate 1 % 4.3 %

Volatility factor 1 % 1.9 %

Dividend yield 1 % (10.0) %

(Decrease) in Assumption Factor Increase (Decrease) in

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

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"

Sales adjustments for such programs totaled $613.6 million or 11.3% as a percentage of net sales in 2022 and $623.9 million or 11.4% as a percentage of net sales in 2021.

If significant changes in the assumptions used to develop the estimates occur, they could impact Mattel's results of operations or financial condition.

A hypothetical 1% increase or decrease in Mattel's sales adjustments as a percentage of net sales during the years ended December 31, 2022 and 2021 would have impacted 2022 and 2021 net sales by approximately $54 million and $55 million, respectively.

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.

federal 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.

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Management evaluates the level of Mattel's valuation allowances at least annually, and more frequently if actual operating results differ significantly from forecasted results.

During the year ended December 31, 2021, Mattel continued to see improved and sustained profitability, which presented 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 certain U.S.

federal, state and foreign deferred tax assets, except for certain tax assets that are primarily expected to expire before utilization.

As of December 31, 2021, Mattel's valuation allowances on its U.S.

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 2022 primarily related to utilization and expiration of tax attributes and functional currency fluctuations.

As of December 31, 2022, Mattel's valuation allowances on its U.S.

federal and state deferred tax assets and foreign deferred tax assets were approximately $18 million and $74 million, respectively.

As of December 31, 2022 and 2021, Mattel had recorded net deferred tax assets of $416.5 million and $486.9 million, respectively.

Mattel records unrecognized tax benefits for U.S.

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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.

As of December 31, 2022 and 2021, the unrecognized tax benefit balance, inclusive of interest and penalties, was $127.7 million and $137.9 million, respectively.

In the normal course of business, Mattel is regularly audited by U.S.

federal, state, local, and foreign tax authorities.

Many of the judgments made in adjusting uncertain tax positions involve assumptions and estimates regarding audit outcomes and the timing of audit settlements, which are often uncertain and subject to change.

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 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.

To supplement the financial results presented in accordance with 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.

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For entities reporting in currencies other than the U.S.

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.

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 and 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.

8 unchanged sentences

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.

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