Mattel Annual Report 2019

Form 10-K (NASDAQ:MAT)

Published: November 12th, 2019

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______FORM 10-K/A (Amendment No.1) (Mark One)

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018. or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-05647 ______MATTEL, INC. (Exact name of registrant as specified in its charter)

Delaware 95-1567322 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 333 Continental Blvd. El Segundo, CA 90245-5012 (Address of principal executive offices) Registrant’s telephone number, including area code (310) 252-2000 Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered Common stock, $1.00 per share MAT The Nasdaq Global Select Market ______Securities registered pursuant to Section 12(g) of the Act: NONE ______Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý Accelerated filer ¨

Non-accelerated filer ¨ Smaller reporting company ¨

Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $5,650,844 based upon the closing market price as of the close of business June 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter. Number of shares outstanding of registrant’s common stock, $1.00 par value, as of February 8, 2019: 345,396,232 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Mattel, Inc. 2019 Proxy Statement, filed with the Securities and Exchange Commission (“SEC”) on April 4, 2019 (incorporated into Part III to the extent stated herein).

MATTEL, INC. AND SUBSIDIARIES

Page PART I Item 1. Business 6 Item 1A. Risk Factors 12 Item 1B. Unresolved Staff Comments 26 Item 2. Properties 26 Item 3. Legal Proceedings 26 Item 4. Mine Safety Disclosures 27 PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 28 Item 6. Selected Financial Data 30 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 55 Item 8. Financial Statements and Supplementary Data 58 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 125 Item 9A. Controls and Procedures 125 Item 9B. Other Information 126 PART III Item 10. Directors, Executive Officers and Corporate Governance 127 Item 11. Executive Compensation 127 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 127 Item 13. Certain Relationships and Related Transactions, and Director Independence 127 Item 14. Principal Accountant Fees and Services 127 PART IV Item 15. Exhibits and Financial Statement Schedules 128 Item 16. Form 10-K Summary 136 Signature 137 (Cautionary Statement Under the Private Securities Litigation Reform Act of 1995) Mattel is including this Cautionary Statement to caution investors and qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Act") for forward-looking statements. This Annual Report on Form 10-K/A includes forward-looking statements within the meaning of the Act. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. The use of words such as "anticipates," "expects," "intends," "plans," "confident that" and "believes," among others, generally identify forward-looking statements. These forward-looking statements are based on currently available operating, financial, economic and other information, and are subject to a number of significant risks and uncertainties. A variety of factors, many of which are beyond our control, could cause actual future results to differ materially from those projected in the forward-looking statements. Specific factors that might cause such a difference include, but are not limited to: (i) Mattel’s ability to design, develop, produce, manufacture, source and ship products on a timely and cost-effective basis, as well as interest in and purchase of those products by retail customers and consumers in quantities and at prices that will be sufficient to profitably recover Mattel’s costs; (ii) downturns in economic conditions affecting Mattel’s markets which can negatively impact retail customers and consumers, and which can result in lower employment levels, lower consumer disposable income and spending, including lower spending on purchases of Mattel’s products; (iii) other factors which can lower discretionary consumer spending, such as higher costs for fuel and food, drops in the value of homes or other consumer assets, and high levels of consumer debt; (iv) potential difficulties or delays Mattel may experience in implementing cost savings and efficiency enhancing initiatives; (v) other economic and public health conditions or regulatory changes in the markets in which Mattel and its customers and suppliers operate, which could create delays or increase Mattel’s costs, such as higher commodity prices, labor costs or transportation costs, or outbreaks of disease; (vi) currency fluctuations, including movements in foreign exchange rates, which can lower Mattel’s net revenues and earnings, and significantly impact Mattel’s costs; (vii) the concentration of Mattel’s customers, potentially increasing the negative impact to Mattel of difficulties experienced by any of Mattel’s customers, including the bankruptcy and liquidation of Toys "R" Us, Inc., or changes in their purchasing or selling patterns; (viii) the future willingness of licensors of entertainment properties for which Mattel currently has licenses or would seek to have licenses in the future to license those products to Mattel; (ix) the inventory policies of Mattel’s retail customers, including retailers’ potential decisions to lower their inventories, even if it results in lost sales, as well as the concentration of Mattel’s revenues in the second half of the year, which coupled with reliance by retailers on quick response inventory management techniques increases the risk of underproduction of popular items, overproduction of less popular items and failure to achieve compressed shipping schedules; (x) the increased costs of developing more sophisticated digital and smart technology products, and the corresponding supply chain and design challenges associated with such products; (xi) work disruptions, which may impact Mattel’s ability to manufacture or deliver product in a timely and cost-effective manner; (xii) the bankruptcy and liquidation of Toys "R" Us, Inc. or other of Mattel’s significant retailers, or the general lack of success of one of Mattel’s significant retailers which could negatively impact Mattel’s revenues or bad debt exposure; (xiii) the impact of competition on revenues, margins and other aspects of Mattel’s business, including the ability to offer products which consumers choose to buy instead of competitive products, the ability to secure, maintain and renew popular licenses and the ability to attract and retain talented employees; (xiv) the risk of product recalls or product liability suits and costs associated with product safety regulations; (xv) changes in laws or regulations in the United States and/or in other major markets, such as China, in which Mattel operates, including, without limitation, with respect to taxes, tariffs, trade policies, or product safety, which may increase Mattel’s product costs and other costs of doing business, and reduce Mattel’s earnings, (xvi) failure to realize the planned benefits from any investments or acquisitions made by Mattel, (xvii) the impact of other market conditions, third party actions or approvals and competition which could reduce demand for Mattel’s products or delay or increase the cost of implementation of Mattel’s programs or alter Mattel’s actions and reduce actual results; (xviii) changes in financing markets or the inability of Mattel to obtain financing on attractive terms (xix) the impact of litigation or arbitration decisions or settlement actions; (xx) uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark; (xxi) an inability to remediate the material weakness in our internal control over financial reporting or additional material weaknesses or other deficiencies in the future or the failure to maintain an effective system of internal controls; and (xxii) other risks and uncertainties detailed in Part 1, Item 1A "Risk Factors." Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law.

Explanatory Note This Amendment No. 1 to Form 10-K (this "Amendment" or "Form 10-K/A") amends the Annual Report on Form 10-K for the year ended December 31, 2018 originally filed with the Securities and Exchange Commission ("SEC") on February 22, 2019 (the "Original Filing") by Mattel, Inc. (the "Company," "Mattel," "we," "our" or "us").

Restatement and Revision As previously announced in a Form 8-K filed on October 29, 2019, the Company, in consultation with the Audit Committee of its Board of Directors (the "Audit Committee"), concluded that the Company’s previously issued unaudited consolidated financial statements for the three and nine months ended September 30, 2017, which are included in the Company’s Quarterly Report on Form 10-Q for the three months ended September 30, 2017, and the unaudited consolidated financial information for the three months ended December 31, 2017, which is included in the Company’s 2018 Annual Report on Form 10-K, should no longer be relied upon due to material misstatements.

The purpose of this Amendment is to restate the Company’s previously issued unaudited consolidated financial statements as of and for the three and nine month periods ended September 30, 2017, respectively, and the Company’s previously reported unaudited consolidated financial information for the three months ended December 31, 2017, to correct for material tax misstatements. In connection with such restatement, the Company has also elected to revise the Company’s previously issued consolidated financial statements as of December 31, 2018 and 2017 and for each of the three years in the period ended December 31, 2018, and relevant interim periods, to correct for other misstatements which the Company has determined to be immaterial, both individually and in the aggregate. The revision of the annual periods has been reflected within Part II, Item 8 "Financial Statements and Supplementary Data-Note 1 to the Consolidated Financial Statements - Summary of Significant Accounting Policies," and the restatement of the interim consolidated financial statements for the three and nine months ended September 30, 2017 and the restatement of the financial information for the three months ended December 31, 2017 have been reflected within Part II, Item 8 "Financial Statements and Supplementary Data-Note 17 to the Consolidated Financial Statements-Restatement of Quarterly Financial Information (Unaudited).”

The revision of the Company's previously issued unaudited consolidated financial statements for the three months ended March 31, 2018, the three and six months ended June 30, 2018, and the three and nine months ended September 30, 2018 will be included in the Company's future Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019.

The Company will also be revising its unaudited consolidated financial statements for the three months ended March 31, 2019 and the three and six months ended June 30, 2019 to correct for immaterial prior period misstatements, which will be disclosed in the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2019, and these revisions will be affected in connection with the future filing of the Company’s Quarterly Reports on Form 10-Q for the three months ended March 31, 2020 and the three and six months ended June 30, 2020. Restatement Background On August 6, 2019, Mattel was made aware of an anonymous whistleblower letter, which was announced in a Form 8-K on August 8, 2019. An independent investigation by the Audit Committee was initiated in August 2019 on matters discussed in the letter. The investigation concluded there were material tax related misstatements in the interim consolidated financial statements for the three and nine months ended September 30, 2017 and financial information for the three months ended December 31, 2017. Specifically, the investigation concluded that Mattel had failed to properly consider an indefinite-lived intangible asset in its tax valuation allowance calculation for the three months ended September 30, 2017, which caused the provision for income taxes to be understated by $109.0 million. In the fourth quarter of 2017, Mattel determined that the intangible asset was no longer indefinite- lived. This change resulted in an effective correction of the tax misstatement for the 2017 annual results. However, the provision for income taxes remained uncorrected for the three months ended September 30, 2017, which resulted in an overstatement of the tax expense for the three months ended December 31, 2017. The investigation did not find that management engaged in fraud. For additional information see Part II, Item 8 "Financial Statements and Supplementary Data-Note 17 to the Consolidated Financial Statements-Restatement of Quarterly Financial Information (Unaudited)." Other Adjustments In addition to the material tax misstatement described above, there are other immaterial prior period misstatements, including certain misstatements that were previously corrected for as out of period adjustments in the relevant period of identification, that are now being corrected through the revision of prior annual periods and the restatement and revision of prior interim periods. For additional information regarding the revision of prior annual periods see Part II, Item 8 "Financial Statements and Supplementary Data-Note 1 to the Consolidated Financial Statements - Summary of Significant Accounting Policies." For additional information regarding the restatement and revision of prior interim periods, see Part II, Item 8 "Financial Statements and Supplementary Data-Note 17 to the Consolidated Financial Statements-Restatement of Quarterly Financial Information (Unaudited).” Internal Control Over Financial Reporting Management has reassessed its evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2018, based on the framework established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that, due to a material weakness related to the failure to properly design and operate monitoring control activities, the Company did not maintain effective internal control over financial reporting as of December 31, 2018. As such, Management’s Report on Internal Control over Financial Reporting as of December 31, 2018 should no longer be relied upon. For a description of the material weakness in internal control over financial reporting and actions taken, and to be taken, to address the material weakness, see Part II, Item 8 "Financial Statements and Supplementary Data" and Item 9A. “Controls and Procedures” of this Annual Report on Form 10-K/A. In addition, the Company's independent registered public accounting firm has restated their report on the Company’s internal control over financial reporting and issued an adverse opinion.

PART I

Item 1. Business. Throughout this report "Mattel" refers to Mattel, Inc. and/or one or more of its family of companies. Mattel is a leading global children’s entertainment company that specializes in the design and production of quality toys and consumer products. Mattel's products are among the most widely recognized toy products in the world. Mattel's mission is to "create innovative products and experiences that inspire, entertain, and develop children through play." In order to deliver on this mission, Mattel is focused on the following two-part strategy to transform Mattel from a toy manufacturing company into an intellectual property ("IP")-driven, high-performing toy company: • In the short- to mid-term, restore profitability by reshaping operations and regain topline growth by growing Mattel's Power Brands ( Barbie, Hot Wheels, Fisher-Price and Thomas & Friends, and American Girl) and expanding Mattel's brand portfolio. • In the mid- to long-term, capture the full value of Mattel's IP through franchise management and the development of Mattel's online retail and e-commerce capabilities.

Mattel is the owner of a portfolio of global brands with vast intellectual property potential. Mattel's portfolio of brands and products are classified as Power Brands and Toy Box: Power Brands include: Barbie—Empowering girls since 1959, Barbie has inspired the limitless potential of every girl by showing them that they can be anything. With an extensive portfolio of dolls and accessories, content, gaming, and lifestyle products, Barbie is the premier fashion doll for children around the world. Hot Wheels—In production for over 50 years, Hot Wheels continues to push the limits of performance and design and ignites the challenger spirit of kids, adults, and collectors. From diecast cars, to tracks, playsets, and advanced play products, the Hot Wheels portfolio has broad appeal that engages and excites kids. Fisher-Price and Thomas & Friends—An institution in learning and child development for over 85 years, Fisher-Price is driven to enrich children's lives from birth to school readiness, helping families provide their children with the best possible start. Thomas & Friends, a key property in the Fisher-Price portfolio, is an award-winning preschool train brand franchise that brings meaningful life lessons of friendship and teamwork to kids through content, toy, live events, and other lifestyle categories. American Girl—A beloved brand since the first catalog debuted in 1986, American Girl is best known for imparting valuable life lessons through its inspiring dolls and books, featuring diverse characters from past and present. Its products are sold directly to consumers via its catalog, website, and proprietary retail stores. Toy Box includes new and innovative products, as well as time-tested classics, from Mattel-owned and licensed entertainment properties: Owned Brands—Mattel has an engaging portfolio of owned brands such as MEGA, Polly Pocket, Uno, Enchantimals, Fireman Sam, and Matchbox. Partner Brands—Mattel brings top entertainment properties to life through innovative toy design, in partnership with Disney ( CARS, Mickey Mouse Clubhouse), WWE Wrestling, Nickelodeon (Shimmer and Shine, Blaze and the Monster Machines ), Warner Bros. Consumer Products (DC Comics—Batman, DC Comics Superhero Girls ), NBCUniversal (Jurassic World, Fast and Furious ), and Mojang (Minecraft).

Mattel, Inc. was incorporated in California in 1948 and reincorporated in Delaware in 1968. Its executive offices are located at 333 Continental Blvd., El Segundo, California 90245-5012, telephone number (310) 252-2000.

Business Segments Mattel’s operating segments are separately managed business units, consisting of: (i) North America, which consists of the U.S. and Canada, (ii) International, and (iii) American Girl. The North America and International segments sell products in both the Power Brands, excluding American Girl, and Toy Box categories, although some are developed and adapted for particular international markets.

For additional information on Mattel’s worldwide revenues by brand category, see Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations" and Part II, Item 8 "Financial Statements and Supplementary Data—Note 13 to the Consolidated Financial Statements—Segment Information." North America Segment The North America segment markets and sells toys in the U.S. and Canada from the Power Brands, excluding American Girl, and Toy Box categories.

In the Power Brands category, 2019 will be a milestone year for Barbie, as the brand celebrates its 60th anniversary by honoring global role models and celebrating firsts for girls and women. In 2019, new product lines will include travel and exploration, and the Fashionistas line will continue to celebrate diversity with even more additions to the line. Barbie products will also continue to be supported by new animated content, including new episodes of Barbie: Dreamhouse Adventures.

Hot Wheels will launch several core product and marketing initiatives in 2019, including an expansion of the Hot Wheels Legends Tour and the launch of the kid-favorite dinosaur theme for Hot Wheels City. The brand will also launch Hot Wheels Monster Trucks globally, backed by the full-year touring live event Hot Wheels Monster Trucks Live in the U.S., and in the fall will launch an exciting partnership with Nintendo’s Mario Kart.

In 2019, Fisher-Price will return its focus to being a partner to parents with infants and children up to five years old through a combination of new product launches and a new brand platform with renewed relevance. Building off of its 89-year heritage of delivering early childhood development through play, Fisher-Price will launch three new categories that provide growth opportunities by leveraging classic play patterns with mixed materials. Thomas & Friends will continue its journey around the world with the fall 2019 release of the twenty-third season of Thomas & Friends: Big World! Big Adventures!, featuring new animated content in which Thomas and the Steam Team will meet new friends and learn about new cultures while traveling farther than ever before, visiting Italy, Brazil, China, Australia, India, and of course—Sodor.

In the Toy Box category, which consists of Owned Brands and Partner Brands, Mattel will continue to focus on developing its owned brands and being a partner of choice for leading entertainment properties by bringing products to the global marketplace with speed and innovation.

Toy Box Owned Brands includes brands such as MEGA, Polly Pocket, and Enchantimals, as well as games and other growth properties . MEGA will be launching a Detective Pikachu product line in spring 2019, based on the May 2019 theatrical release of Warner Bros. Entertainment Inc.'s Pokemon Detective Pikachu. Building off of its content distribution, Mattel will continue to revitalize its brands Polly Pocket and Enchantimals by streaming animated content on Netflix. Additionally, Polly Pocket animated content will continue streaming on Hulu, allowing for further exposure and connection points to the brand. In the games category, Mattel has a strong slate of new kids and preschool games that will launch in the spring of 2019.

Toy Box Partner Brands will continue to partner with Disney, Warner Bros. Consumer Products, Nickelodeon and NBCUniversal, bringing innovative products to the global marketplace. Key 2019 product lines based on entertainment franchises include Disney’s Toy Story 4 with a theatrical release in June 2019, continued franchise support of NBCUniversal’s Jurassic World, and the highly anticipated global launch of BTS products , modeled after the world's leading South Korean boy band, which has become a cultural sensation with global appeal.

International Segment Products marketed by the International segment are generally the same as those developed and marketed by the North America segment, although some are developed or adapted for particular international markets. Mattel’s products 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. No individual country within the International segment exceeded 7% of worldwide consolidated gross sales during 2018.

American Girl Segment The American Girl segment is a direct marketer, children’s publisher, and retailer dedicated to its mission to help build girls of strong character. American Girl is best known for its line of historical and contemporary characters that feature books, dolls, and accessories that inspire girls with important lessons from America’s past to today. For girls who are ready to tell their own stories, Bitty Baby introduces girls to nurturing play until they are ready for WellieWishers, a sweet group of girls who teach about empathy and being a good friend. Truly Me allows girls to express what’s on their minds and in their hearts by choosing a doll—or creating their own—from more than 1.3 million possibilities. American Girl also publishes best-selling fiction and non-fiction titles that help girls navigate the changes and challenges of growing up. The American Girl segment sells products directly to consumers via its catalog, website, in its proprietary retail stores in the U.S., at select retailers nationwide, and at specialty boutiques and franchise stores in Canada, Dubai, and Bahrain. In January 2019, American Girl introduced its newest Girl of the Year character, Blaire Wilson, a young chef-in-training who is growing up on her family’s sustainable farm and finds that cultivating sustainable relationships is the key to true happiness. Throughout 2019, American Girl will continue to increase visibility of its exclusive content by continuing the Character Matters brand campaign, which focuses on creating girls of strong character through stories and experiences.

Manufacturing and Materials Mattel manufactures toy products for all segments in both company-owned facilities and through third-party manufacturers. Products are also purchased from unrelated entities that design, develop, and manufacture those products. To provide greater flexibility in the manufacture and delivery of its products, and as part of a continuing effort to reduce manufacturing costs, Mattel has concentrated production of most of its core products in company-owned facilities and generally uses third-party manufacturers for the production of non-core products.

Mattel’s principal manufacturing facilities are located in Canada, China, Indonesia, Malaysia, Mexico, and Thailand. To help avoid disruption of its product supply due to political instability, civil unrest, economic instability, changes in government policies or regulations, and other risks, Mattel produces its products in multiple facilities across multiple countries. Mattel believes that the existing production capacity at its own and its third-party manufacturers’ facilities is sufficient to handle expected volume in the foreseeable future. Mattel continues to evaluate its manufacturing footprint in connection with its Structural Simplification cost savings program.

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. 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 a lack of product availability or excess inventory in a particular product line.

The majority of Mattel’s raw materials are available from numerous suppliers but may be subject to fluctuations in price. See Part I, Item 1A "Risk Factors."

Competition and Industry Background Mattel is a worldwide leader in the manufacture, marketing, and sale of toys, games, and other products related to play, learning, and development. Competition in the toy industry is based primarily on quality, play value, brands, and price. Mattel offers a diverse range of products for children of all ages and families that include, among others, toys for infants and preschoolers, dolls, vehicles, action figures, construction toys, youth electronics, hand- held and other games, puzzles, educational toys, technology-related products, media-driven products, and fashion-related toys. The North America segment competes with several large toy companies, including Hasbro, JAKKS Pacific, Just Play Products, LEGO, MGA Entertainment, Moose Toys, Spin Master, and VTech, many smaller toy companies, and manufacturers of video games and consumer electronics. The International segment competes with global toy companies including Famosa, Giochi Preziosi, Hasbro, LEGO, MGA Entertainment, Playmobil, Ravensburger, Simba, Spin Master, and VTech, other national and regional toy companies, and manufacturers of video games and consumer electronics. Foreign regions may include competitors that are strong in a particular toy line or geographical area but do not compete with Mattel or other international toy companies worldwide. The American Girl segment competes with companies that manufacture dolls and accessories and with children’s book publishers and retailers.

Competition among the above companies is intensifying due to trends towards shorter life cycles for individual toy products and an increasing use of high technology among consumers. As a result of children outgrowing toys at younger ages, Mattel competes with companies that sell non-toy products, such as electronic consumer products, video games, as well as content and other entertainment companies. Competition continues to be heavily influenced by the fact that a small number of retailers account for a large portion of all toy sales, allocate the shelf space from which toys are viewed, and have direct contact with parents and children through in-store and online purchases. Such retailers can and do promote their own private- label toys, facilitate the sale of competitors’ toys, showcase toys online based on proprietary algorithms, and allocate shelf space to one type of toy over another. Online distributors are able to promote a wide variety of toys and represent a wide variety of toy manufacturers, and, with limited overhead, do so at a lower cost. Seasonality Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases during the traditional holiday season. A significant portion of Mattel’s customers’ purchasing occurs in the third and fourth quarters of Mattel’s fiscal year in anticipation of holiday buying. 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 less popular toys that do not match consumer demand. Retailers have also been attempting to manage their inventories more tightly in recent years, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase the risk that Mattel may not be able to meet demand for certain products at peak demand times or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its sales to vary significantly from period to period.

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. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the respective levels of inventories and accounts receivable, which result in seasonal working capital financing requirements. See Part II, Item 8 "Financial Statements and Supplementary Data—Note 5 to the Consolidated Financial Statements—Seasonal Financing and Debt."

Advertising and Marketing Mattel supports its product lines with extensive advertising and consumer promotions. Advertising takes place at varying levels throughout the year and peaks during the traditional holiday season. Advertising includes television and radio commercials, social media, and magazine, newspaper, and internet advertisements. Promotions include in-store displays, sweepstakes, merchandising materials, major events focusing on products, and tie-ins with various consumer products companies.

During 2018, 2017, and 2016, Mattel incurred expenses of $524.3 million (11.6% of net sales), $642.3 million (13.2% of net sales), and $634.9 million (11.6% of net sales), respectively, for advertising and promotion.

Sales 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. Mattel also operates two small retail outlets at certain corporate offices as a service to its employees and as an outlet for its products. 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. Mattel also has retail outlets in Latin America and Europe that serve as outlets for its products. American Girl products and its children's publications are sold directly to consumers and select retailers nationwide. Mattel has 20 American Girl retail stores: American Girl Place in Chicago, Illinois, Los Angeles, California, and New York, New York, and American Girl stores in Alpharetta, Georgia, Bloomington, Minnesota, Charlotte, North Carolina, Columbus, Ohio, Dallas, Texas, Houston, Texas, Lone Tree, Colorado, Lynnwood, Washington, McLean, Virginia, Miami, Florida, Nashville, Tennessee, Natick, Massachusetts, Orlando, Florida, Overland Park, Kansas, Palo Alto, California, Hershey, Pennsylvania, and Scottsdale, Arizona, each of which features children’s products from the American Girl segment. Additionally, Mattel sells certain of its products online through websites of one or more of its subsidiaries.

During 2018, Mattel’s two largest customers (Walmart at $1.07 billion and Target at $ 0.45 billion) accounted for approximately 34% of worldwide consolidated net sales. During 2017 and 2016, Toys "R" Us accounted for $0.40 billion and $0.64 billion, respectively, of worldwide consolidated net sales. Substantially all of Mattel's sales to its two largest customers were in North America. Within countries in the International segment, there is also a concentration of sales to certain large customers that do not operate in the U.S., none of which exceeded 10% of worldwide consolidated net sales. The customers and the degree of concentration vary depending upon the region or nation. See Part I, Item 1A "Risk Factors" and Part II, Item 8 "Financial Statements and Supplementary Data—Note 13 to the Consolidated Financial Statements—Segment Information."

Licenses and Distribution Agreements Mattel has license agreements with third parties that permit Mattel to utilize the trademark, characters, or inventions of the licensor in products that Mattel sells. A number of these licenses relate to product lines that are significant to Mattel’s business and operations.

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