please complete the answer sheet using 2016 annual report

Financial Statement Analysis Project ANSWER SHEET Name(s): No. Question 1. Who is responsible for the financial statements and maintaining effective internal control over financial reporting? Where did you find this in the annual report? 2. What accounting rules are required to prepare the financial statements and accompanying footnotes? Where is this stated in the annual report? 3. What independent auditors (public accounting firm) performed the audit? On what date did the independent auditors complete their work? 4. What type of audit opinion (unqualified, qualified, adverse, or disclaimer) did the independent auditors issue on the company's financial statements? What type of audit opinion did they issue on the company's internal control over financial reporting? 5. What rules (standards) did the outside auditors follow when conducting their audit of the financial statements? 6. What is the percentage increase in sales (or revenues) from Year 1 to Year 2 and from Year 2 to Year 3? Based on this information, is the company growing? 7. Calculate the gross margin (profit) percentage (the ratio, not the amount) for Years 1, 2, and 3. Is the trend going in the right direction? Explain. Page Number No. Question 8. What is the company's largest expense for Year 3? Did you expect this to be the case? Why or why not? 9. What is the amount of depreciation expense and amortization expense for Year 3? 10. What is the amount of advertising/marketing expense that the company incurred to promote its products and services in Year 3? What is the percentage of this expense to sales (or revenues)? 11. What is net income for Year 1, Year 2, and Year 3? Is the trend going in the right direction? Explain. 12. Compute the return-on-sales ratio for Year 1, Year 2, and Year 3. In what year did the company do the best job of controlling expenses? Explain how you came to this conclusion. 13. Compute the return-on-assets ratio for Year 2 and Year 3. Explain what this ratio means and indicate whether the trend is positive or negative. 14. Compute the return-on-equity ratio for Year 2 and Year 3. Explain what this ratio means. Indicate whether the ratio is improving or deteriorating from Year 2 to Year 3 and why. 15. What is basic earnings per share (EPS), also known as net income per common share, for Year 3? 16. Write the accounting equation (A = L + E) for Year 3, using the three numbers provided in the financial statements. Page Number No. Question 17. What is the largest asset for Year 3? Does this surprise you? Why or why not? 18. Determine the average days to collect accounts receivable for Year 3. Do you feel this is reasonable considering your company's operations? Why or why not? 19. What is the allowance for uncollectible receivables for Year 2 and Year 3? What percent of the gross receivables portfolio is reserved for each of those years? Does this tell you anything about the company's concern for bad debts? 20. Calculate the inventory turnover for Year 3 and also the average days in inventory ratio. Is this reasonable considering your company's line of business? Explain. 21. What is the cost of property, plant, and equipment held by your company as of the end of Year 3? 22. What is the net book value of property, plant, and equipment as of the end of Year 3? 23. What method of depreciation (e.g., units of production, declining balance, straight line) is used for property, plant and equipment? 24. What is the amount of intangible assets owned by the company as of the end of Year 3? What kind are they (i.e., identify them)? 25. Calculate the current ratio for Year 2 and for Year 3. Explain the ratio and what the trend is telling you. Page Number No. Question 26. Compute the debt-to-assets ratio for Year 2 and Year 3. Explain whether debt is financing a larger or smaller proportion of the company's assets in Year 3 compared to Year 2. Is the company more or less risky from Year 2 to Year 3? Explain. 27. Prepare a schedule that reconciles retained earnings at the beginning of Year 3 with retained earnings at the end of Year 3. Use these three captions to reconcile - Net Income/(Loss), Dividends, and Other. 28. What is the par value of the common stock? 29. How many shares of common stock are authorized at the end of Year 3? 30. How many shares of common stock are outstanding at the end of Year 3? 31. What is the total amount of cash dividends declared on common stock during Year 3? What is the total amount of cash dividends paid on common stock during Year 3? [Hint: They may not be the same amount.] 32. What percentage of net income did the company pay out in cash dividends? If the company did not pay cash dividends, why do you think it did not? 33. What is the amount of difference between net income and net cash provided (used) by operating activities for Year 3? What one or two items are most responsible for the difference? 34. How much cash did your company pay to purchase property, plant, and equipment during Year 3? Page Number No. Question 35. Did cash and cash equivalents increase or decrease from Year 2 to Year 3? By how much? Page Number Financial Statement Analysis Project INSTRUCTIONS To complete the financial statement analysis project, use the company selected by your instructor, which you also used to complete the FSA introductory assignment. Complete the answer sheet, convert it to a PDF document, and submit it to Canvas. There are 35 questions listed on the answer sheet, and because some of these questions may not directly apply to your company or you may not be certain of the answer, you are to select only 30 questions. Type your answer below each question that you select; the cell should expand to accommodate your answer. If you answer more than 30 questions, the first 30 questions that you answer will be the ones that are graded. Make certain to follow these additional instructions and requirements: 1. The questions refer to Year 1, Year 2, and Year 3. When determining which year to use for your specific company, use Year 3 as the most recent (current) year. 2. Your company might include the results of other entities in the consolidated financial statements even though it owns less than 100%. What your company does not own is called noncontrolling interest. To be consistent, use the net income number from the income statement and total equity from the balance sheet that include the noncontrolling interest as shown in the screen captures below for Kellogg Company. 3. You may show your numbers in thousands or millions, depending on how they are presented in your company's annual report. In other words, you do not need to add 000s to your numbers. However, if the numbers for a particular answer are not in thousands or millions, make sure this is apparent. 1 4. Provide documentation for all of your calculations. You may either type your calculations (a) directly on the answer sheet or (b) cut/paste calculations from an Excel worksheet like these examples: (a) Year 3: 7366/90093 = 8.18% (b) Year 3: 7366 = 8.18% 90093 5. For ratios, use the formulas presented during this course (see Appendix C of textbook) even though you might find variations or more sophisticated formulas for these ratios elsewhere. Although you might find an already calculated ratio in your company's financial information (often in the financial highlights chart), calculate the ratio yourself and include your calculations. Use two decimal places for all ratios, for example 8.43% or 1.56. 6. Indicate on which page(s) you found the answer to each question in the column provided on the answer sheet. 2 TO OUR SHAREHOLDERS We knew 2016 was going to be a particularly challenging year, and as I look back, I believe we executed well against our key strategic priorities and made signicant progress on resetting the Company's foundation for growth. And this progress continues under new leadership, with Margaret Georgiadis taking the helm as the Company's CEO in 2017. As such, we both wanted to contribute to this year's letter to our shareholders. I will start o with some thoughts on 2016 and Margo will close with her thoughts on Mattel going forward. 2016: Setting the Foundation In the midst of our ongoing cultural and organizational transformation, political and economic uncertainty, a category slowdown, and foreign exchange headwinds, we made great progress on our key strategic priorities, particularly in our core brands and our licensed entertainment portfolio progress which I believe sets a very strong foundation for Mattel going forward. In 2016: Our top three core brands - Barbie, Hot Wheels and Fisher-Price - had strong growth globally and exited the year with positive POS momentum, which has not happened for several years.1 We strengthened our franchise partnerships with strong performance on new properties for 2016 and won key additional licenses with top partners. For example: We partnered with Warner Brothers and successfully launched a new doll brand, DC SuperHero GirlsTM, which won the Toy Industry Association's Toy of the Year Award in the Action Figure category, and grew the DC Comics license with the hit movie, Batman v Superman. We renewed our license with Disney Consumer Products for the iconic CARS franchise and the upcoming Disney Pixar lm, Cars 3. NBCUniversal awarded us the worldwide master toy license for the Jurassic World and Fast and FuriousTM franchises. We continued to invest for growth by building out our infrastructure in emerging markets and saw considerable growth in China and Russia. We achieved the high end of our cost savings program, delivering $295 million in gross cost savings over 2015 and 2016.2 And we continued to invest in innovation by expanding our relationships with the inventor community, building partnerships in the gaming space, and making strategic investments in digital technology platforms. Unfortunately, our fourth quarter nancial results, impacted by a signicant category slowdown in the holiday season, mask a signicant amount of progress made by this organization. I believe this progress and the investments we've made provide very solid building blocks for the future and the opportunity for Mattel to grow in 2017 and beyond. Let me nish by saying I could not be more proud of what this organization has accomplished over the past two years. I know it's been challenging, but I am condent that Margo, her leadership team and the entire Mattel family will continue to build on the progress that we've made. It's been an honor to be a part of this team and I look forward to continuing the work as we pivot to growth in the days ahead. At this point, let me pass the pen over to Margo. _________________________________________________________________________ 1 2 Mattel Internal Financials 2015/2016 Annual Report on Form 10-K 2017: The Opportunity to Grow As Chris wrote, Mattel has made considerable progress in 2016 that will allow us to pivot to growth going forward. Mattel is truly a creations company that inspires the wonder of childhood and I am committed to working with Chris and this strong organization to deliver on its mission to be the recognized leader in play, learning and development worldwide. I joined Mattel because I believe early childhood development is crucial in creating the leaders of tomorrow and no company has done more in that space than Mattel. And while I have only been here a short time, I am impressed with the Mattel organization and their focus on executing Mattel's mission and creating shareholder value. As a company, we will continue to focus on the ve strategic priorities set by Chris and Richard Dickson, Mattel's President and Chief Operating Ocer, in 2015 as we accelerate progress against them as we move forward: 1. 2. 3. 4. 5. Build powerful brand franchises Establish Toy Box as the partner of choice Develop unmatched commercial excellence Rapidly build emerging market leadership Drive continuous cost improvement I believe my background in running large, complex, ever-changing global companies will complement our progress to date on each of our priorities. Further, as we recognize shifts in consumer buying patterns and the importance of content to drive brand passion, and shape compelling omnichannel programs to win the path to purchase, I believe that my experience will help enable us to accelerate our growth. There is a signicant amount of untapped potential at Mattel when you consider how we can innovate what we make, how we make it, how we distribute it, and how we develop lasting relationships with our customers. Mattel has many strengths for us to build on: Coveted and unrivaled portfolio of iconic consumer brands POS momentum Solid slate of licensed properties Strong foothold in key emerging markets Very talented and experienced leadership team Chris and Richard have been investing to grow the business and we will continue to do so going forward. I recognize that there is still much more work to be done, but rest assured, Mattel will remain focused on growing the top-line and expanding operating margins as we work toward our long-term nancial objectives. We will look at ways to reprioritize spending and improve eciencies and productivity to fund additional growth. As your new CEO and Board member, I remain committed to the Company's capital deployment framework and will continue to invest to grow the business and maximize shareholder value. And, most importantly, Mattel will remain driven by a collective passion and determination, one that has pushed us forward during the challenging times and one that has dened Mattel for more than 70 years. On behalf of everyone at Mattel, we thank all of our shareholders for their continued support as we continue the work to return Mattel to growth and protability. Sincerely, Christopher A. Sinclair Executive Chairman Margaret H. Georgiadis Chief Executive Ocer Mattel, Inc. )RUP\u0003\u0014\u0013\u0010.\u0003\u0015\u0013\u0014\u0019 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________________________________ FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016 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) (310) 252-2000 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1.00 par value 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 No Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No 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 No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of \"large accelerated filer,\" \"accelerated filer,\" and \"smaller reporting company\" in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was $10,657,561,740 based upon the closing market price as of the close of business June 30, 2016, 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 10, 2017: 342,445,392 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the Mattel, Inc. 2017 Proxy Statement, to be filed with the Securities and Exchange Commission (\"SEC\") within 120 days after the close of the registrant's fiscal year (incorporated into Part III). MATTEL, INC. AND SUBSIDIARIES Page PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures 3 10 18 18 18 18 PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Item 10. Item 11. Item 12. Item 13. Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information PART III Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accountant Fees and Services Item 15. Exhibits and Financial Statement Schedules Signature 19 21 22 46 49 98 98 98 99 99 99 99 99 PART IV 100 106 (Cautionary Statement Under the Private Securities Litigation Reform Act of 1995) Mattel is including this Cautionary Statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the \"Act\") for forward-looking statements. This Annual Report on Form 10K 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. They often include words such as \"believes,\" \"expects,\" \"anticipates,\" \"estimates,\" \"intends,\" \"plans,\" \"seeks,\" \"aims,\" \"estimates,\" \"projects,\" \"on track,\" or words of similar meaning, or future or conditional verbs, such as \"will,\" \"should,\" \"could,\" or \"may.\" A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. These forward-looking statements are all based on currently available operating, financial, economic and competitive information and are subject to various risks and uncertainties. The Company's actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed below. Mattel expressly disclaims any obligation to update or revise any forward-looking statement, whether as a result of new developments or otherwise. PART I Item 1. Business. Throughout this report \"Mattel\" refers to Mattel, Inc. and/or one or more of its family of companies. Mattel designs, manufactures, and markets a broad variety of toy products worldwide which are sold to its customers and directly to consumers. Mattel is a creations company that inspires the wonder of childhood. Mattel's objectives are to grow its share in the marketplace, continue to improve its operating margins, and create long-term stockholder value. To achieve these objectives, management has established the following strategies: First, Mattel is focused on embracing brand building, creativity, and innovation, and management will put a premium on speed and personal accountability. Management is focused on putting Mattel back on track for growth and improved profitability. Additionally, Mattel is organizing around the following five strategic priorities: Build powerful brand franchises; Establish Toy Box as the partner of choice; Develop unmatched commercial excellence; Drive continuous cost improvement; and Build emerging market leadership. Mattel believes its products are among the most widely recognized toy products in the world. Mattel's portfolio of brands and products are grouped into four major brand categories. Mattel Girls & Boys Brandsincluding Barbie fashion dolls and accessories (\"Barbie\"), Monster High, Ever After High, Polly Pocket, and DC Super Hero Girls (collectively \"Other Girls\"), Hot Wheels and Matchbox vehicles and play sets (collectively \"Wheels\"), and CARS, DC Comics, WWE Wrestling, Minecraft, Max Steel, BOOMco., Toy Story, and games and puzzles (collectively \"Entertainment\"). Fisher-Price Brandsincluding Fisher-Price, Little People, BabyGear, Laugh & Learn, and Imaginext (collectively \"Core Fisher-Price\"), Thomas & Friends, Dora the Explorer, Mickey Mouse Clubhouse, and Disney Jake and the Never Land Pirates (collectively \"Fisher-Price Friends\"), and Power Wheels. American Girl Brandsincluding Truly Me, Girl of the Year, BeForever, Bitty Baby, and WellieWishers. American Girl Brands products are sold directly to consumers via its catalog, website, and proprietary retail stores, as well as sold directly to certain retailers. Construction and Arts & Crafts Brandsincluding MEGA BLOKS and RoseArt. 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 US and Canada, (ii) International, and (iii) American Girl. The North America and International segments sell products in the Mattel Girls & Boys Brands, Fisher-Price Brands, and Construction and Arts & Crafts Brands categories, although some products are developed and adapted for particular international markets. For additional information on Mattel's segment reporting, including revenues and segment income, see Part II, Item 7 \"Management's Discussion and Analysis of Financial Condition and Results of OperationsResults of Operations\" and Part II, Item 8 \"Financial Statements and Supplementary DataNote 12 to the Consolidated Financial StatementsSegment Information.\" For additional information regarding segment assets and geographic areas, see Part II, Item 8 \"Financial Statements and Supplementary DataNote 12 to the Consolidated Financial StatementsSegment Information.\" For additional information regarding revenues by brand category, see Part II, Item 8 \"Financial Statements and Supplementary Data Note 12 to the Consolidated Financial StatementsSegment Information.\" For a discussion of the risks inherent in the foreign operations of Mattel, which affect each segment, see Item 1A \"Risk Factors.\" 3 North America Segment The North America segment markets and sells toys in the US and Canada through the Mattel Girls & Boys Brands, Fisher-Price Brands, and Construction and Arts & Crafts Brands categories. In the Mattel Girls & Boys Brands category, Barbie includes Barbie fashion dolls and accessories. Other Girls includes Monster High, Ever After High, Little Mommy, and Polly Pocket. Wheels includes Hot Wheels and Matchbox vehicles and play sets. Entertainment includes key licensing partnerships with The Walt Disney Company, Warner Bros. Entertainment Inc., NBCUniversal Media, LLC, and WWE, as well as owned brands and products, including games and puzzles. Barbie continues to evolve the \"You Can Be Anything\" campaign by highlighting role models throughout 2017, beginning with Dads in the spring. Technology and connectivity will continue to be infused into new Barbie products for the holiday season and will feature new products to support Barbie's animated content including, Barbie: Video Game Hero, Barbie Dreamtopia, and Barbie: Dreamhouse Adventures. In 2017, Hot Wheels will introduce new track sets, designed cars, and a new digital gaming experience. The new Hot Wheels Track Builder sets will include building bricks in their construction compatible sets. Additionally, Hot Wheels will continue to partner with the best in the automotive and entertainment world, including Star Wars, DC Comics, and Marvel. Mattel's Toy Box will continue to focus on bringing products to the global marketplace with speed and innovation. Toy Box will continue to partner with leading entertainment companies such as Disney, Warner Bros. Entertainment Inc., Nickelodeon, NBCUniversal Media, LLC, and WWE. Key product lines based on entertainment franchises for 2017 include Disney Pixar's Cars 3, Warner Bros.'s Justice League and Wonder Woman, Nickelodeon's Shimmer & Shine, and Universal's Fast & Furious. The Fisher-Price Brands category includes Fisher-Price BabyGear, Laugh & Learn, Little People, Think & Learn, Imaginext, Thomas & Friends, Dora & Friends, Blaze and The Monster Machines, Shimmer and Shine, Mickey Mouse Clubhouse, Minnie Mouse, Octonauts, and Power Wheels. In 2017, Fisher-Price will introduce the next phase of the Best Possible Start campaign, with the core message that parental love and play is the best possible start for child development. With the addition of Jonathan Adler as the Creative Director of Fisher-Price brands, existing and new product lines to be launched in 2017 will have a contemporary design catering to millennial parents. Fisher-Price will introduce simple sleep solutions, including the Revolve Swing, which features a natural soothing motion. For infants, Fisher-Price is debuting the new Laugh & Learn First Words line focused on early language development by exposing babies to their first 100 words. Additionally, the Little People brand will evolve in 2017 by integrating emotional intelligence traits, including sharing, caring, and helping others. The Think & Learn preschool learning line will continue to keep the minds and bodies of preschoolers active with the Think & Learn Smart Cycle and Teach 'n Tag Movi products. Thomas & Friends will also introduce its first global brand campaign, Set Friendship in Motion, while releasing the Thomas & Friends Super Station playset, designed to work with all Thomas & Friends engines. The Construction and Arts & Crafts Brands category includes MEGA BLOKS, RoseArt, and Board Dudes. In 2017, MEGA BLOKS will continue to expand its line of building sets. With its articulated micro figures, build-to-play features, and authentic details, kids and collectors will be invited to Build Beyond with Mega Construx. New Halo construction sets will be released leading up to the highly-anticipated launch of the Halo Wars 2 video game. Wellie Wishers from American Girl, Thomas & Friends, Pokmon, and Shimmer & Shine will be introduced to the MEGA BLOCKS lineup, which includes Despicable Me, Destiny, and Teenage Mutant Ninja Turtles. Parents and preschoolers who love to build with the MEGA BLOKS Big Building Bag and Block Scooping Wagon can also add the all-new Elephant Parade to their building basics collection this Fall. 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. 4 Mattel's International segment revenue represented 40% of worldwide consolidated gross sales in 2016. Within the International segment, Mattel operates in three regional groups that generated the following gross sales during 2016: Percentage of International Amount Gross Sales (In millions, except percentage information) Europe Latin America Asia Pacific $ $ 1,293.3 636.5 517.8 2,447.6 53% 26% 21% 100% No individual country within the International segment exceeded 6% of worldwide consolidated gross sales during 2016. The strength of the US dollar relative to other currencies can significantly affect the revenues and profitability of Mattel's international operations. Mattel enters into foreign currency forward exchange contracts, primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies, to limit the impact of exchange rate fluctuations on its results of operations and cash flows. See Part II, Item 7A \"Quantitative and Qualitative Disclosures About Market Risk\" and Part II, Item 8 \"Financial Statements and Supplementary DataNote 9 to the Consolidated Financial StatementsDerivative Instruments.\" For financial information by geographic area, see Part II, Item 8 \"Financial Statements and Supplementary DataNote 12 to the Consolidated Financial StatementsSegment Information.\" American Girl Segment The American Girl segment is a direct marketer, children's publisher, and retailer best known for its BeForever flagship line of historical dolls, books, and accessories, as well as the Truly Me, Girl of the Year, Bitty Baby, and WellieWishers brands. American Girl also publishes best-selling fiction and non-fiction titles, plus the award-winning American Girl magazine. The American Girl segment sells products directly to consumers via its catalog, website, in its proprietary retail stores in the US, and at select retailers nationwide, as well as in specialty boutiques at select Indigo and Chapters stores in Canada and El Palacio de Hierro locations in Mexico City. In January 2017, American Girl introduced Gabriela McBride, the new Girl of the Year. American Girl will also introduce a new series of contemporary characters and stories in 2017. The first two new characters launched in February, which also included American Girl's first boy doll. The third new character will debut in late April and will come to life by means of an Amazon Original Special. During the summer of 2017, American Girl will feature more personalized customization options within its Truly Me line, and add a new historical character from 1940's Hawaii. 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. See Item 1A \"Risk Factors.\" 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. 5 Competition and Industry Background Mattel is a worldwide leader in the manufacture, marketing, and sale of toys, games, and other products related to 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, girls' toys, boys' toys, youth electronics, hand-held and other games, puzzles, educational toys, technologyrelated 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 girls' toys 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 in toys. In addition, as a result of the phenomenon of \"children getting older younger\" resulting from children outgrowing toys at younger ages, Mattel competes with companies that sell products outside the toy aisle, such as electronic consumer products and video games. 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 purchases, coupons, and print advertisements. Such retailers can and do promote their own private-label toys, facilitate the sale of competitors' toys, and allocate shelf space to one type of toy over another. Competition is also intensifying due to the availability of online-only distributors, including Amazon.com, which 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 DataNote 5 to the Consolidated Financial StatementsSeasonal Financing and Debt.\" Product Design and Development Through its product design and development group, Mattel regularly refreshes, redesigns, and extends existing toy product lines and develops innovative new toy product lines for all segments. Mattel believes its success is dependent on its ability to continue these activities effectively. See Item 1A \"Risk Factors.\" Product design and development activities are principally conducted by a group of professional designers and engineers employed by Mattel. During 2016, 2015, and 2014, Mattel incurred expenses of $215.3 million, $217.8 million, and $209.5 million, respectively, in connection with the design and development of products, exclusive of royalty payments. See Part II, Item 8 \"Financial Statements and Supplementary Data Note 13 to the Consolidated Financial StatementsSupplemental Financial Information.\" Additionally, independent toy designers and developers bring concepts and products to Mattel and are generally paid a royalty on the net selling price of products licensed to Mattel. These independent toy designers may also create different products for other toy companies. 6 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, magazine, newspaper, and internet advertisements, and social media. Promotions include in-store displays, sweepstakes, merchandising materials, major events focusing on products, and tie-ins with various consumer products companies. During 2016, 2015, and 2014, Mattel incurred expenses of $634.9 million (11.6% of net sales), $717.9 million (12.6% of net sales), and $733.2 million (12.2% 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 several small retail outlets, generally near or at its corporate headquarters and distribution centers 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, Chesterfield, Missouri, 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, 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 2016, Mattel's three largest customers (Wal-Mart at $1.1 billion, Toys \"R\" Us at $0.6 billion, and Target at $0.4 billion) accounted for approximately 39% of worldwide consolidated net sales. Within countries in the International segment, there is also a concentration of sales to certain large customers that do not operate in the US, none of which exceed 10% of net sales. The customers and the degree of concentration vary depending upon the region or nation. See Item 1A \"Risk Factors\" and Part II, Item 8 \"Financial Statements and Supplementary DataNote 12 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. Mattel has entered into agreements to license entertainment properties from, among others, Disney Enterprises, Inc. (including Disney characters such as Star Wars, Mickey Mouse, Jake and the Never Land Pirates, Disney Planes, CARS and Toy Story from Pixar, and certain Disney films and television properties), NBCUniversal Media, LLC (including the Fast & Furious and Jurassic World franchises), Viacom International, Inc. relating to its Nickelodeon properties (including Dora the Explorer, Blaze and the Monster Machines, and SpongeBob SquarePants), Warner Bros. Consumer Products (including Batman, Superman, Wonder Woman, Justice League, and DC Super Hero Girls), Microsoft (including Halo), Mojang (including Minecraft), and WWE Wrestling. Royalty expense for 2016, 2015, and 2014 was $228.9 million, $264.6 million, and $242.4 million, respectively. See \"Commitments\" and Part II, Item 8 \"Financial Statements and Supplementary DataNote 11 to the Consolidated Financial StatementsCommitments and Contingencies." Mattel's license agreement with Disney Enterprises, Inc. for the global rights to produce and sell toys based on Disney Princess characters expired at the end of 2015 and was not renewed. Gross sales of Disney Princess products were $455.6 million in 2015. However, Mattel's license of CARS 3 and Toy Story 4 were renewed in 2016, with theatrical releases in 2017 and 2019, respectively. Mattel also licenses a number of its trademarks and other property rights to others for use in connection with the sale of their products. Mattel distributes some third-party finished products that are independently designed and manufactured. 7 Trademarks, Copyrights, and Patents Most of Mattel's products are sold under trademarks, trade names, and copyrights, and a number of these products incorporate patented devices or designs. Trademarks, copyrights, and patents are significant assets of Mattel in that they provide product recognition and acceptance worldwide. Mattel customarily seeks trademark, copyright, and patent protection covering its products, and it owns or has applications pending for US and foreign trademarks, copyrights, and patents covering many of its products. Although a number of these trademarks, copyrights, and patents relate to product lines that are significant to Mattel's business and operations, Mattel does not believe it is dependent on a single trademark, copyright or patent. Mattel believes its rights to these properties are adequately protected, but there can be no assurance that its rights can be successfully asserted in the future or will not be invalidated, circumvented, or challenged. Commitments In the normal course of business, Mattel enters into contractual arrangements for future purchases of goods and services to ensure availability and timely delivery and to obtain and protect Mattel's right to create and market certain products. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the term of the contracts. Current and future commitments for guaranteed payments reflect Mattel's focus on expanding its product lines through alliances with businesses in other industries. Additionally, Mattel routinely enters into noncancelable lease agreements for premises and equipment used in the normal course of business. Agreements to purchase inventory, services, and other items with terms extending through 2021 contain future minimum payments totaling approximately $445 million. Licensing and similar agreements with terms extending through 2021 and beyond contain provisions for future guaranteed minimum payments totaling approximately $392 million. Operating lease commitments with terms extending through 2021 and beyond contain future minimum obligations totaling approximately $620 million. See Part II, Item 7 \"Management's Discussion and Analysis of Financial Condition and Results of Operations Commitments\" and Part II, Item 8 \"Financial Statements and Supplementary DataNote 11 to the Consolidated Financial StatementsCommitments and Contingencies.\" Backlog Mattel ships products in accordance with delivery schedules specified by its customers, which usually request delivery within three months. In the toy industry, orders are subject to cancellation or change at any time prior to shipment. In recent years, a trend toward just-in-time inventory practices in the toy industry has resulted in fewer advance orders and therefore less backlog of orders. Mattel believes that the amount of backlog orders at any given time may not accurately indicate future sales. Financial Instruments Currency exchange rate fluctuations may impact Mattel's results of operations and cash flows. Mattel seeks to mitigate its exposure to foreign exchange risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts primarily to hedge its purchase and sale of inventory and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes. For additional information regarding foreign currency contracts, see \"International Segment\" above, Part II, Item 7A \"Quantitative and Qualitative Disclosures About Market Risk,\" and Part II, Item 8 \"Financial Statements and Supplementary DataNote 9 to the Consolidated Financial StatementsDerivative Instruments.\" Seasonal Financing See Part II, Item 8 \"Financial Statements and Supplementary DataNote 5 to the Consolidated Financial Statements Seasonal Financing and Debt.\" Government Regulations and Environmental Quality Mattel's products sold in the US are subject to the provisions of the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008, the Federal Hazardous Substances Act, and the Consumer Product Safety Improvement Act of 2008, and may also be subject to the requirements of the Flammable Fabrics Act or the Food, Drug, and Cosmetics Act and the regulations promulgated pursuant to such statutes. These statutes and the related regulations ban from 8 the market consumer products that fail to comply with applicable product safety laws, regulations, and standards. The Consumer Product Safety Commission may require the recall, repurchase, replacement, or repair of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances. Similar laws exist in some US states. Mattel believes that it is in substantial compliance with these federal and state laws and regulations. Mattel's products sold worldwide are subject to the provisions of similar laws and regulations in many jurisdictions, including the European Union and Canada. Mattel believes that it is in substantial compliance with these laws and regulations. Mattel maintains a quality control program to help ensure compliance with applicable product safety requirements. Nonetheless, Mattel has experienced, and may in the future experience, issues in products that result in recalls, withdrawals, or replacements of products. A product recall could have a material adverse effect on Mattel's results of operations and financial condition, depending on the product affected by the recall and the extent of the recall efforts required. A product recall could also negatively affect Mattel's reputation and the sales of other Mattel products. See Item 1A \"Risk Factors.\" Mattel's advertising is subject to the Federal Trade Commission Act, The Children's Television Act of 1990, the rules and regulations promulgated by the Federal Trade Commission, and the Federal Communications Commission, as well as laws of certain countries that regulate advertising and advertising to children. In addition, Mattel's web-based products and services and other online and digital communications activity are or may be subject to US and foreign privacy-related regulations, including the US Children's Online Privacy Protection Act of 1998 and the EU Data Protection Directive (Directive 95/46/EC) and related national regulations. Mattel believes that it is in substantial compliance with these laws and regulations. Mattel's worldwide operations are subject to the requirements of various environmental laws and regulations in the jurisdictions where those operations are located. Mattel believes that it is in substantial compliance with those laws and regulations. Mattel's operations are from time to time the subject of investigations, conferences, discussions, and negotiations with various federal, state and local environmental agencies within and outside the US with respect to the discharge or cleanup of hazardous waste. Mattel is not aware of any material cleanup liabilities. Mattel is subject to various other federal, state, local and international laws and regulations applicable to its business. Mattel believes that it is in substantial compliance with these laws and regulations. Employees The total number of persons employed by Mattel and its subsidiaries at any one time varies because of the seasonal nature of its manufacturing operations. As of December 31, 2016, Mattel's total number of employees was approximately 32,000. Research and Development See \"Design and Development\" in Part II, Item 8 \"Financial Statements and Supplementary DataNote 13 to the Consolidated Financial StatementsSupplemental Financial Information.\" Available Information Mattel files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the \"Exchange Act\") with the SEC. The public may read and copy any materials that Mattel files with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Mattel's Internet website address is http://corporate.mattel.com. Mattel makes available on its Internet website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC. 9 Item 1A. Risk Factors. If Mattel does not successfully identify or satisfy consumer preferences, its results of operations may be adversely affected. Mattel's business and operating results depend largely upon the appeal of its products, driven by both innovation and marketing. Consumer preferences, particularly with children as the end users of Mattel's products, are continuously changing. Significant, sudden shifts in demand are caused by \"hit\" toys and trends, which are often unpredictable. Mattel offers a diverse range of products for children of all ages and families that includes, among others, toys for infants and preschoolers, girls' toys, boys' toys, youth electronics, digital media, hand-held and other games, puzzles, educational toys, media-driven products, and fashion-related toys. Mattel competes domestically and internationally with a wide range of large and small manufacturers, marketers and sellers of toys, video games, consumer electronics such as tablets and mobile devices, and other play products, as well as retailers, which means that Mattel's market position is always at risk. Mattel's ability to maintain its current product sales, and increase its product sales or establish product sales with new, innovative toys, will depend on Mattel's ability to satisfy play preferences, enhance existing products, develop and introduce new products, and achieve market acceptance of these products. These challenges are intensifying due to trends towards shorter life cycles for individual toy products, the phenomenon of children outgrowing traditional toys at younger ages, an increasing use of more sophisticated technology in toys, and an evolving path to purchase. If Mattel does not successfully meet the challenges outlined above in a timely and costeffective manner, demand for its products could decrease, and Mattel's revenues, profitability and results of operations may be adversely affected. High levels of competition and low barriers to entry make it difficult to achieve, maintain, or build upon the success of Mattel's brands, products, and product lines. Mattel faces competitors who are also constantly monitoring and attempting to anticipate consumer tastes, seeking ideas which will appeal to consumers, and introducing new products that compete with Mattel's products. In addition, competition for access to entertainment properties could lessen Mattel's ability to secure, maintain, and renew popular licenses to entertainment products developed by other parties and licensed to Mattel or require Mattel to pay licensors higher royalties and higher minimum guaranteed payments in order to obtain or retain these licenses. As a licensee of entertainment properties, Mattel has no guarantee that a particular property or brand will translate into a successful toy, game, or other product. In addition, the barriers to entry for new participants in the toy products industry are low. In a very short period of time, new market participants with a popular product idea or entertainment property can become a significant source of competition for Mattel and its products. If demand for Mattel's brands, products and product lines is reduced as a result of these factors, Mattel's results of operations may be adversely affected. Inaccurately anticipating changes and trends in popular culture, media and movies, fashion, or technology can negatively affect Mattel's sales. Successful movies and characters in children's literature affect play preferences, and many products depend on mediabased intellectual property licenses. Media-based licenses can cause a line of toys or other products to gain immediate success among children, parents, or families. Trends in media, movies, and children's characters change swiftly and contribute to the transience and uncertainty of play preferences. In addition, certain developments in the entertainment industry, including labor strikes, could cause delay or interruption in the release of new movies and television programs and could adversely affect the sales of Mattel's products based on such movies and television programs. Mattel responds to such trends and developments by modifying, refreshing, extending, and expanding its product offerings on an annual basis. If Mattel does not accurately anticipate trends in popular culture, movies, media, fashion, or technology, its products may not be accepted by children, parents, or families and Mattel's revenues, profitability, and results of operations may be adversely affected. Mattel's failure to successfully market or advertise its products could have an adverse effect on Mattel's business, financial condition, and results of operations. Mattel's products are marketed worldwide through a diverse spectrum of advertising and promotional programs. Mattel's ability to sell products is dependent in part upon the success of these programs. If Mattel does not successfully market its products or if media or other advertising or promotional costs increase, these factors could have an adverse effect on Mattel's business, financial condition, and results of operations. 10 Mattel's business is highly seasonal and its operating results depend, in large part, on sales during the relatively brief traditional holiday season. Any events that disrupt Mattel's business during its peak demand times could significantly, adversely, and disproportionately affect Mattel's business. Mattel's business is subject to risks associated with the underproduction of popular toys and the overproduction of toys that are less popular with consumers. Sales of toy products at retail are highly seasonal, with a majority of retail sales occurring during the period from September through December. In recent years, many consumers have delayed their purchases until just before the holidays. As a result, Mattel's operating results depend, in large part, on sales during the relatively brief traditional holiday season. Retailers attempt to manage their inventories tightly, which requires Mattel to ship products closer to the time the retailers expect to sell the products to consumers. This in turn results in shorter lead times for production. Management believes that the recent increase in \"last minute\" shopping during the holiday season and the popularity of gift cards (which often shift purchases to after the holiday season) may negatively impact customer re-orders during the holiday season. These factors may decrease sales or increase the risks 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. In addition, as a result of the seasonal nature of Mattel's business, Mattel may be significantly and adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events, such as terrorist attacks, economic shocks, severe weather, earthquakes or other catastrophic events, that harm the retail environment or consumer buying patterns during its key selling season, or by events, such as strikes, disruptions in transportation, or port delays, that interfere with the manufacture or shipment of goods during the critical months leading up to the holiday purchasing season. Mattel has significant customer concentration, so that economic difficulties or changes in the purchasing policies or patterns of its key customers could have a significant impact on Mattel's business and operating results. A small number of customers account for a large share of Mattel's net sales. In 2016, Mattel's three largest customers, Wal-Mart, Toys \"R\" Us, and Target, in the aggregate, accounted for approximately 39% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 49% of net sales. While the concentration of Mattel's business with a relatively small number of customers may provide certain benefits to Mattel, such as potentially more efficient product distribution and decreased costs of sales and distribution, this concentration may expose Mattel to a material adverse effect if one or more of Mattel's large customers were to significantly reduce purchases for any reason, favor competitors or new entrants, or increase their direct competition with Mattel by expanding their private-label business. Customers make no binding long-term commitments to Mattel regarding purchase volumes and make all purchases by delivering one-time purchase orders. Any customer could reduce its overall purchases of Mattel's products, reduce the number and variety of Mattel's products that it carries and the shelf space allotted for Mattel's products, or otherwise seek to materially change the terms of the business relationship at any time. Any such change could significantly harm Mattel's business and operating results. Furthermore, the bankruptcy or other lack of success of one or more of Mattel's significant retail customers could negatively impact Mattel's revenues and profitability. Liquidity problems or bankruptcy of Mattel's key customers could have a significant adverse effect on Mattel's business, financial condition and results of operations. Mattel's sales to customers are typically made on credit without collateral. There is a risk that key customers will not pay, or that payment may be delayed, because of bankruptcy, contraction of credit availability to such customers, weak retail sales or other factors beyond the control of Mattel, which could increase Mattel's exposure to losses from bad debts. In addition, if key customers were to cease doing business as a result of bankruptcy or significantly reduce the number of stores operated, it could have a significant adverse effect on Mattel's business, financial condition, and results of operations. Significant increases in the price of commodities, transportation, or labor, if not offset by declines in other input costs, or a reduction or interruption in the delivery of raw materials, components, and finished products from Mattel's vendors could negatively impact Mattel's financial results. Cost increases, whether resulting from rising costs of materials, transportation, services, labor, or compliance with existing or future regulatory requirements, could impact the profit margins realized by Mattel on the sale of its products. Because of market conditions, timing of pricing decisions, and other factors, there can be no assurance that Mattel will be able to offset any of these increased costs by adjusting the prices of its products. Increases in prices of Mattel's products may not be sustainable and could result in lower sales. Mattel's ability to meet customer demand depends, in part, on its ability to obtain timely and adequate delivery of materials, parts and components from its suppliers and internal manufacturing capacity. Mattel has experienced shortages in the past, including shortages of raw materials and components. Additionally, as Mattel cannot 11 guarantee the stability of its major suppliers, major suppliers may stop manufacturing components at any time with little or no notice. If Mattel is required to use alternative sources, it may be required to redesign some aspects of the affected products, which may involve delays and additional expense. Although Mattel works closely with suppliers to avoid these types of shortages, there can be no assurance that Mattel will not encounter these problems in the future. A reduction or interruption in supplies or in the delivery of finished products, whether resulting from more stringent regulatory requirements, disruptions in transportation, port delays, labor strikes, lockouts, an outbreak of a severe public health pandemic, severe weather, the occurrence or threat of wars or other conflicts, or a significant increase in the price of one or more