MATTEL INC /DE/ (MAT) FY 2022 MD&A

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

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

Mattel has omitted discussion of 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 in the United States ("GAAP"). The currency exchange rate impact reflects the portion (expressed as a percentage) of changes in Mattel's reported results that are attributable to fluctuations in currency exchange rates. Mattel uses this non-GAAP financial measure to analyze its continuing operations and to monitor, assess, and identify meaningful trends in its operating and financial performance. Management believes that the disclosure of this non-GAAP financial measure provides useful supplemental information to investors to allow them to better evaluate ongoing business performance and certain components of Mattel's results. This measure is not, and should not be viewed as, a substitute for GAAP financial measures.

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

Overview

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

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

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

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.

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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

Consolidated Results

The following table includes Mattel's consolidated results for 2022 and 2021:

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Sales

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 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 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

Cost of sales increased by $122.3 million, or 4%, to $2.95 billion in 2022 from $2.83 billion in 2021. 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; 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

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

Advertising and promotion expenses primarily consist of: (i) media costs, which include the media, planning, and buying fees for television, print, and online advertisements, (ii) non-media costs, which include commercial and website production, merchandising, and promotional costs, (iii) retail advertising costs, which include consumer direct catalogs, and (iv) generic advertising costs, which include trade show costs. Advertising and promotion expenses as a percentage of net sales 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 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.

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Interest Expense

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

North America Segment

The following table provides a summary of Mattel's net sales, segment operating income, and gross billings by categories, along with supplemental information by brand, for the North America segment for 2022 and 2021:

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.

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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 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.

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International Segment

The following table provides a summary of Mattel's net sales, segment operating income, and gross billings by categories, along with supplemental information by brand, for the International segment for 2022 and 2021:

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.

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.

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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 and segment operating income for the American Girl segment for 2022 and 2021:

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.

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Cost Savings Programs

Optimizing for Growth (formerly Capital Light)

In February 2021, Mattel announced the Optimizing for Growth program, a multi-year cost savings program that integrates and expands upon the previously announced Capital Light program (the "Program"), 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.

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

(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:

(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".

(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. 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.

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Other Cost Savings Actions

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.

Income Taxes

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

Liquidity and Capital Resources

Mattel's primary sources of liquidity are its 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 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.

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

Current Market Conditions

Mattel is exposed to financial market risk resulting from changes in interest and foreign currency exchange rates.

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.

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

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

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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 accounts receivable collectability risks, and customer terms and credit limits are adjusted, if necessary. Additionally, Mattel uses a variety of financial arrangements to ensure collectability of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.

Mattel sponsors defined benefit pension plans and postretirement benefit plans for its employees. Actual returns below the expected rate of return, along with changes in interest rates that affect the measurement of the liability, would impact the amount and timing of Mattel's future contributions to these plans.

Cash Flow Activities

Cash flows provided by operating activities were $442.8 million in 2022, as compared to $485.5 million in 2021. 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 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 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. Mattel's share repurchase program was first announced on July 21, 2003. On July 17, 2013, the Board of Directors authorized Mattel to increase its share repurchase program by $500.0 million. At December 31, 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. Mattel's share repurchase program has no expiration date.

During 2022 and 2021, Mattel did not pay any dividends to holders of its common stock. The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations.

Seasonal Financing

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

Credit Ratings

In 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 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.

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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:

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, 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

Mattel is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business and may choose to provide letters of credit in place of posting cash collateral. Although the letters of credit are off-balance sheet, the majority of the obligations to which they relate are reflected as liabilities in the consolidated balance sheets. Outstanding letters of credit totaled approximately $8 million and $10 million as of December 31, 2022 and 2021, respectively.

Commitments

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. 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. 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. Additionally, Mattel routinely enters into noncancelable lease agreements for premises and equipment used, which contain minimum rental payments.

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

(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. Due to the uncertainty regarding the periods in which examinations will be completed and limited information related to current audits, Mattel is not able to make reasonably reliable estimates of the periods in which cash settlements will occur with taxing authorities for the noncurrent liabilities.

Litigation

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

Employee Savings Plan

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

Application of Critical Accounting Policies and Estimates

Mattel makes certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those Mattel considers most critical in preparing its consolidated financial statements. 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.

Accounts Receivable—Allowance for Credit Losses

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

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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 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.

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

A small number of customers account for a large share of Mattel's net sales and accounts receivable. In 2022, Mattel's three largest customers, Walmart, Target, and Amazon, in the aggregate, accounted for approximately 43% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 52% of net sales. As of December 31, 2022, Mattel's three largest customers accounted for approximately 38% of net accounts receivable, and its ten largest customers accounted for approximately 48% of net accounts receivable. Should one or more of Mattel's large customers experience bankruptcy or financial difficulty, the allowance for credit losses may not be sufficient to cover such losses.

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

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

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

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.

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Inventories—Obsolescence Reserve

Inventories are stated at the lower of cost or net realizable value. Inventory obsolescence reserves are recorded for damaged, obsolete, excess, and slow-moving inventory. Inventory obsolescence expense is charged to cost of sales and establishes a lower cost basis for the inventory. Management believes that the accounting estimate related to the obsolescence reserve is a "critical accounting estimate" because significant judgment is required to evaluate 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. Significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, net income, and inventories.

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

Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research, and current market information. Mattel ships products in accordance with delivery schedules specified by its customers, who usually request delivery within three months. In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of its fiscal year. These seasonal purchasing patterns and requisite production lead times create risk to Mattel's business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase inventory valuation risk because Mattel's inventory levels may be adversely impacted by the need to 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. It is even more difficult to estimate growth or contraction in various parts of the economy, including the economies in which Mattel participates. Because all components of Mattel's budgeting and forecasting are dependent upon estimates of growth or contraction in the markets it serves and demand for its products, economic uncertainty makes estimates of future demand for products more difficult. Such economic changes may affect the sales of Mattel's products and its corresponding inventory levels, which could potentially impact the valuation of its inventory.

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

•Customer and/or consumer demand for the item;

•Overall inventory positions of Mattel's customers;

•Strength of competing products in the market;

•Quantity on hand of the item;

•Sales price of the item;

•Mattel's cost for the item; and

•Length of time the item has been in inventory.

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

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The following table summarizes Mattel's obsolescence reserve:

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.

Goodwill

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

For purposes of evaluating whether goodwill is impaired, goodwill is allocated to various reporting units, which are at the operating segment level. Mattel's reporting units are: (i) North America, (ii) International, and (iii) American Girl. Mattel then assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying 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 amount. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized in an amount equal to the excess, limited by the amount of goodwill in that reporting unit.

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

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 amount of a reporting unit may exceed its fair value as of December 31, 2022.

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Sales Adjustments

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

The above-described programs primarily involve fixed amounts or percentages of sales to customers. The accruals for such programs, which can either be contractual or discretionary in nature, are based on an assessment of customer purchases, customer performance of specified promotional activities, and other specified factors such as customer sales volume. While certain sales adjustment amounts are readily determinable at year-end and do not require estimates, other sales adjustments, 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 $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.

Income Taxes

Mattel's income tax provision and related income tax assets and liabilities are based on actual and expected future income, U.S. 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. Actual results could differ materially from those judgments, and changes in judgments could materially affect Mattel's consolidated financial statements.

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

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. 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 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.

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

New Accounting Pronouncements

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

Non-GAAP Financial Measure

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

Currency Exchange Rate Impact

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

For entities reporting in currencies other than the U.S. dollar, Mattel calculates the percentage change of period-over-period results at constant currency exchange rates (established as described below) by translating current period and prior period results using these rates 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. They are generally different from the actual exchange rates in effect during the current or prior period due to volatility in actual foreign exchange rates. Mattel considers whether any changes to the constant currency rates are appropriate at the beginning of each year. The exchange rates used for these constant currency calculations are generally based on prior year actual exchange rates.

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

Key Performance Indicator

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

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