1.     Basis of Presentation

The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, consisting of only those of a normal recurring nature, considered necessary for a fair presentation of the financial position and interim results of Mattel, Inc. and its subsidiaries ("Mattel" or the "Company") as of and for the periods presented, have been included. Because Mattel's business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year.

The year-end balance sheet data was derived from audited financial statements, however, the accompanying interim notes to the consolidated financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America.

The financial information included herein should be read in conjunction with Mattel's consolidated financial statements and related notes in its 2010 Annual Report on Form 10-K.

2.     Accounts Receivable

Accounts receivable are net of allowances for doubtful accounts of $21.3 million, $20.5 million, and $21.8 million as of March 31, 2011, March 31, 2010, and December 31, 2010, respectively.

3.     Inventories

Inventories include the following:

 

		March 31, 2011				March 31, 2010				December 31, 2010
		(In thousands)
Raw materials and work in process		$	82,900			$	65,295			$	68,095
Finished goods			524,299				364,343				395,743
		$	607,199			$	429,638			$	463,838

4.     Property, Plant, and Equipment

Property, plant, and equipment, net include the following:

 

		March 31, 2011				March 31, 2010				December 31, 2010
		(In thousands)
Land		$	26,760			$	26,646			$	26,796
Buildings			252,517				243,425				249,542
Machinery and equipment			822,072				777,828				809,723
Tools, dies, and molds			607,753				581,946				589,156
Capital leases			23,271				23,271				23,271
Leasehold improvements			181,719				180,673				177,141
			1,914,092				1,833,789				1,875,629
Less: accumulated depreciation			(1,420,037	)			(1,341,568	)			(1,390,924	)
		$	494,055			$	492,221			$	484,705

5.     Goodwill

The change in the carrying amount of goodwill by reporting unit for the three months ended March 31, 2011 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the US reporting units selling those brands, thereby causing foreign currency translation impact for the US reporting units.

 

		December 31, 2010				Impact of Currency Exchange Rate Changes				March 31, 2011
		(In thousands)
Mattel Girls Brands US		$	31,071			$	754			$	31,825
Mattel Boys Brands US			130,658				59				130,717
Fisher-Price Brands US			215,879				148				216,027
American Girl Brands			207,571				—				207,571
International			238,828				3,064				241,892
		$	824,007			$	4,025			$	828,032

6.     Other Noncurrent Assets

Other noncurrent assets include the following:

 

		March 31, 2011				March 31, 2010				December 31, 2010
		(In thousands)
Deferred income taxes		$	497,194			$	485,809			$	477,320
Nonamortizable identifiable intangibles			122,223				122,223				122,223
Identifiable intangibles (net of amortization of $66.4 million, $72.0 million, and $64.2 million, respectively)			89,196				90,997				91,359
Other			199,645				190,094				191,509
		$	908,258			$	889,123			$	882,411

7.     Accrued Liabilities

Accrued liabilities include the following:

 

		March 31, 2011				March 31, 2010				December 31, 2010
		(In thousands)
Advertising and promotion		$	48,922			$	42,396			$	59,586
Taxes other than income taxes			44,941				35,547				68,686
Royalties			36,376				40,307				95,785
Derivatives payable			25,850				8,389				11,082
Other			315,191				285,682				407,072
		$	471,280			$	412,321			$	642,211

8.     Product Recalls

During 2007, Mattel recalled products with high-powered magnets that may become dislodged and other products, some of which were produced using non-approved paint containing lead in excess of applicable regulatory and Mattel standards. During the second half of 2007, additional products were recalled, withdrawn from retail stores, or replaced at the request of consumers as a result of safety or quality issues (collectively, the "2007 Product Recalls").

Following the announcement of the 2007 Product Recalls, a number of lawsuits were filed against Mattel with respect to the recalled products, which are more fully described in Note 14 to the Consolidated Financial Statements in Mattel's 2010 Annual Report on Form 10-K. During the three months ended March 31, 2010, based on actual experience to date under the settlement program related to the above-described product liability related litigation, Mattel reduced its estimate of these settlement costs, which had the effect of reducing other selling and administrative expenses by $7.5 million. During the three months ended March 31, 2011, there were no changes to Mattel's 2007 product recall and reserve estimates.

Although management is not aware of any additional quality or safety issues that are likely to result in material recalls or withdrawals, there can be no assurance that issues will not be identified in the future.

9.     Seasonal Financing

The borrowing capacity of the amended facility is $1.4 billion for four years, which exceeds the $1.1 billion for one year remaining on the facility prior to the amendment. The proportion of unamortized debt issuance costs from the prior facility renewal related to creditors involved in both the prior facility and amended facility, and borrowing costs incurred as a result of the amendment were deferred and will be amortized over the term of the amended facility.

Mattel is required to meet financial covenants at the end of each quarter and fiscal year, using the formulae specified in the credit facility agreement to calculate the ratios.

The domestic unsecured committed revolving credit facility is a material agreement and failure to comply with the financial covenant ratios may result in an event of default under the terms of the facility. If Mattel defaulted under the terms of the domestic unsecured committed revolving credit facility, its ability to meet its seasonal financing requirements could be adversely affected.

10.   Long-term Debt

Long-term debt includes the following:

 

		March 31, 2011				March 31, 2010				December 31, 2010
		(In thousands)
Medium-term notes due June 2011 to November 2013		$	150,000			$	200,000			$	150,000
2006 Senior Notes due June 2011			200,000				200,000				200,000
2008 Senior Notes due March 2013			350,000				350,000				350,000
2010 Senior Notes due October 2020 and October 2040			500,000				—				500,000
			1,200,000				750,000				1,200,000
Less: current portion			(250,000	)			(50,000	)			(250,000	)
Total long-term debt		$	950,000			$	700,000			$	950,000

 

In September 2010, Mattel issued $250.0 million of unsecured 4.35% senior notes ("4.35% Senior Notes") due October 1, 2020 and $250.0 million of unsecured 6.20% senior notes ("6.20% Senior Notes") due October 1, 2040 (collectively, "2010 Senior Notes").  Interest on the 2010 Senior Notes is payable semi-annually beginning April 1, 2011.  Mattel may redeem all or part of the 2010 Senior Notes at any time or from time to time at its option at a redemption price equal to the greater of (i) 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest to the redemption date, and (ii) a "make-whole" amount based on the yield of a comparable US Treasury security plus 25 basis points in respect of the 4.35% Senior Notes and 40 basis points in respect of the 6.20% Senior Notes. In May 2010 and October 2010, Mattel repaid $40.0 million and $10.0 million, respectively, of its Medium-term notes in connection with their scheduled maturities.

11.   Other Noncurrent Liabilities

Other noncurrent liabilities include the following:

 

		March 31, 2011				March 31, 2010				December 31, 2010
		(In thousands)
Benefit plan liabilities		$	224,264			$	250,548			$	257,195
Noncurrent tax liabilities			113,618				108,372				113,526
Other			136,597				125,364				118,146
		$	474,479			$	484,284			$	488,867

12.   Comprehensive Income (Loss)

The components of comprehensive income, net of tax, are as follows:

 

		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In thousands)
Net income		$	16,607			$	24,842
Currency translation adjustments			53,178				(29,076	)
Defined benefit pension plans net prior service cost and net actuarial loss			2,533				2,341
Net unrealized (losses) gains on derivative instruments:
Unrealized holding (losses) gains			(14,353	)			11,739
Reclassification adjustment for realized (gains) losses included in net income			(740	)			2,758
			(15,093	)			14,497
		$	57,225			$	12,604

 

The components of accumulated other comprehensive loss are as follows:

 

		March 31, 2011				March 31, 2010				December 31, 2010
		(In thousands)
Currency translation adjustments		$	(168,580	)		$	(251,717	)		$	(221,758	)
Defined benefit pension and other postretirement plans, net of tax			(131,781	)			(139,676	)			(134,314	)
Net unrealized loss on derivative instruments, net of tax			(18,220	)			(379	)			(3,127	)
		$	(318,581	)			$    (391,772	)		$	(359,199	)

Currency Translation Adjustments

Mattel's reporting currency is the US dollar. The translation of its net investment in subsidiaries with non-US dollar functional currencies subjects Mattel to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at fiscal period-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders' equity.For the three months ended March 31, 2011, currency translation adjustments resulted in a net gain of $53.2 million, with gains primarily from the strengthening of the Euro, Mexican peso, Brazilian real, and British pound sterling against the US dollar. For the three months ended March 31, 2010, currency translation adjustments resulted in a net loss of $29.1 million, with losses primarily from the weakening of the Euro and British pound sterling, partially offset by the strengthening of the Mexican peso against the US dollar.

13.   Derivative Instruments

Mattel seeks to mitigate its exposure to foreign currency transaction risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts. Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its purchases and sales of inventory denominated in foreign currencies. These contracts generally have maturity dates up to 18 months. These derivative instruments have been designated as effective cash flow hedges, whereby the unsettled hedges are reported in Mattel's consolidated balance sheets at fair value, with changes in the fair value of the hedges reflected in other comprehensive income ("OCI"). Realized gains and losses for these contracts are recorded in the consolidated statements of operations in the period in which the inventory is sold to customers. Additionally, Mattel uses foreign currency forward exchange contracts to hedge intercompany loans and advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these contracts, and as such, changes in fair value are recorded in the period of change in the consolidated statements of operations. As of March 31, 2011, March 31, 2010, and December 31, 2010, Mattel held foreign currency forward exchange contracts with notional amounts of approximately $1.4 billion, $1.1 billion, and $1.1 billion, respectively.

 

The following table presents Mattel's derivative assets and liabilities:

 

		Asset Derivatives
		Balance Sheet Classification				Fair Value
						March 31, 2011				March 31, 2010				December 31, 2010
										(In thousands)
Derivatives designated as hedging instruments:
Foreign currency forward exchange contracts			Prepaid expenses and other current assets			$	6,073			$	12,188			$	8,200
Foreign currency forward exchange contracts			Other noncurrent assets				298				83				579
Total derivatives designated as hedging instruments						$	6,371			$	12,271			$	8,779
Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts			Prepaid expenses and other current assets			$	3,394			$	2,590			$	8,799
Total						$	9,765			$	14,861			$	17,578
		Liability Derivatives
		Balance Sheet Classification				Fair Value
						March 31, 2011				March 31, 2010				December 31, 2010
										(In thousands)
Derivatives designated as hedging instruments:
Foreign currency forward exchange contracts			Accrued liabilities			$	25,850			$	8,389			$	11,082
Foreign currency forward exchange contracts			Other noncurrent liabilities				1,114				—				101
Total derivatives designated as hedging instruments						$	26,964			$	8,389			$	11,183

The following tables present the classification and amount of gains and losses, net of taxes, from derivatives reported in the consolidated statements of operations:

 

		For the Three Months Ended March 31, 2011								For the Three Months Ended March 31, 2010								Statements of Operations Classification
		Amount of Gain (Loss) Recognized in OCI				Amount of Gain (Loss) Reclassified from Accumulated OCI to Statements of Operations				Amount of Gain (Loss) Recognized in OCI				Amount of Gain (Loss) Reclassified from Accumulated OCI to Statements of Operations
		(In thousands)
Derivatives designated as hedging instruments:
Foreign currency forward exchange contracts		$	(14,353	)		$	740			$	11,739			$	(2,758	)			Cost of sales

 

The net gain (loss) of $0.7 million and $(2.8) million reclassified from accumulated OCI to the statements of operations for the three months ended March 31, 2011 and 2010, respectively, are offset by the changes in cash flows associated with the underlying hedged transactions.

 

		Amount of Gain (Loss) Recognized in the Statements of Operations								Statements of Operations Classification
		For the Three Months Ended March 31, 2011				For the Three Months Ended March 31, 2010
		(In thousands)
Derivatives not designated as hedging instruments:
Foreign currency forward exchange contracts		$	29,182			$	(12,397	)		Non-operating income/expense
Foreign currency forward exchange contracts			1,700				1,632			Cost of sales
Total		$	30,882			$	(10,765	)

The net gain (loss) of $30.9 million and $(10.8) million recognized in the statements of operations for the three months ended March 31, 2011 and 2010, respectively, are offset by foreign currency transaction gains and losses on the related hedged balances.

14.   Fair Value Measurements

The following table presents information about Mattel's assets and liabilities measured and reported in the financial statements at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value. The three levels of the fair value hierarchy are as follows:

 

•

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

 

•

Level 2 – Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

 

•

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Mattel's financial assets and liabilities include the following:

 

During 2010, Mattel adopted ASU 2010-11, Derivatives and Hedging (Topic 815): Scope Exception Related to Embedded Credit Derivatives, and elected the fair value option under this standard, which resulted in an $8.7 million, net of taxes, adjustment to beginning retained earnings relating to auction rate securities that contain embedded credit derivatives, that were previously reported at amortized cost.

The following table presents information about Mattel's assets measured and reported at fair value on a recurring basis using significant Level 3 inputs:

 

		Level 3
		(In thousands)
Balance at December 31, 2010		$	21,000
Unrealized change in fair value			—
Balance at March 31, 2011		$	21,000

15.   Fair Value of Financial Instruments

Mattel's financial instruments include cash and equivalents, accounts receivable and payable, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.

The estimated fair value of Mattel's long-term debt, including the current portion, was $1.23 billion (compared to a carrying amount of $1.20 billion) as of March 31, 2011, $799.7 million (compared to a carrying amount of $750.0 million) as of March 31, 2010, and $1.23 billion (compared to a carrying amount of $1.20 billion) as of December 31, 2010. The estimated fair values have been calculated based on broker quotes or rates for the same or similar instruments.

 

The fair value related disclosures for Mattel's derivative financial instruments are included in Note 13, "Derivative Instruments", and Note 14, "Fair Value Measurements".

16.   Earnings Per Share

 

 

The calculation of potential common shares assumes the exercise of dilutive stock options and vesting of non-participating RSUs, net of assumed treasury share repurchases at average market prices. Nonqualified stock options and non-participating RSUs totaling 0.1 million and 1.8 million shares were excluded from the calculation of diluted net income per common share for the three months ended March 31, 2011 and 2010, respectively, because they were antidilutive.

17.   Employee Benefit Plans

Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies, which are more fully described in Note 6 to the Consolidated Financial Statements in its 2010 Annual Report on Form 10-K.

A summary of the components of net periodic benefit cost for Mattel's defined benefit pension plans is as follows:

 

		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In thousands)
Service cost		$	3,213			$	3,317
Interest cost			7,329				8,155
Expected return on plan assets			(6,302	)			(7,239	)
Amortization of prior service cost			461				438
Recognized actuarial loss			3,636				3,668
		$	8,337			$	8,339

A summary of the components of net periodic benefit cost for Mattel's postretirement benefit plans is as follows:

 

		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In thousands)
Service cost		$	20			$	22
Interest cost			437				627
Recognized actuarial loss			36				149
		$	493			$	798

During the three months ended March 31, 2011, Mattel made cash contributions totaling approximately $28 million and $1 million to its defined benefit pension and postretirement benefit plans, respectively.

18.   Share-Based Payments

Mattel has various stock compensation plans, which are more fully described in Note 9 to the Consolidated Financial Statements in its 2010 Annual Report on Form 10-K. In May 2010, Mattel's stockholders approved the Mattel, Inc. 2010 Equity and Long-Term Compensation Plan ("the 2010 Plan"). Upon approval of the 2010 Plan, Mattel terminated the Mattel, Inc. 2005 Equity Compensation Plan ("the 2005 Plan"), except with regard to grants then outstanding under the 2005 Plan. All equity compensation grants are now being made under the 2010 Plan. Under the 2010 Plan, Mattel has the ability to grant nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent rights, and shares of common stock to officers, employees, and other persons providing services to Mattel. Stock options are granted with exercise prices at the fair market value of Mattel's common stock on the applicable grant date and expire no later than ten years from the date of grant. Both stock options and time-vesting RSUs generally provide for vesting over a period of three years from the date of grant.

 

Compensation expense, included within other selling and administrative expenses, related to stock options and RSUs is as follows:

 

		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In thousands)
Stock option compensation expense		$	3,089			$	2,684
RSU compensation expense			7,883				10,145
		$	10,972			$	12,829

As of March 31, 2011, total unrecognized compensation cost related to unvested share-based payments totaled $65.7 million and is expected to be recognized over a weighted-average period of 2.1 years.

Mattel uses treasury shares purchased under its share repurchase program to satisfy stock option exercises and the vesting of RSUs. Cash received for stock option exercises for the three months ended March 31, 2011 and 2010 was $14.0 million and $31.5 million, respectively.

19.   Other Selling and Administrative Expenses

Other selling and administrative expenses include the following:

 

		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In thousands)
Design and development		$	43,146			$	41,395
Identifiable intangible asset amortization			2,167				2,552

20.   Foreign Currency Transaction Gains and Losses

Currency exchange rate fluctuations may impact Mattel's results of operations and cash flows. Mattel's currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income to which they relate in the consolidated statements of operations.  For hedges of intercompany loans and advances, which do not qualify for hedge accounting treatment, the gains or losses on the hedges resulting from changes in fair value as well as the offsetting transaction gains or losses on the related hedged items, along with unhedged items, are recognized in non-operating income (expense), net in the consolidated statements of operations. Inventory purchase and sale transactions denominated in the Euro, British pound sterling, and Mexican peso are the primary transactions that cause foreign currency transaction exposure for Mattel.

Currency transaction (losses) gains included in the consolidated statements of operations are as follows:

 

		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In thousands)
Operating income		$	(11,555	)		$	9,865
Other non-operating income (expense), net			(25	)			(2,032	)
Net transaction (losses) gains		$	(11,580	)		$	7,833

21.    Income Taxes

Mattel's provision for income taxes was $4.7 million for the three months ended March 31, 2011, as compared to $8.4 million for the three months ended March 31, 2010. Mattel recognized discrete tax expense of $0.3 million during the three months ended March 31, 2010, primarily related to reassessments of prior years' tax exposure based on the status of audits and tax filings in various jurisdictions, settlements, and enacted tax law changes. There were no discrete tax items recognized during the three months ended March 31, 2011.

During the three months ended March 31, 2010, Mattel reached a resolution with the Internal Revenue Service ("IRS") regarding all open issues relating to the examination of Mattel's US federal income tax returns for the years 2006 and 2007. The resolution did not have a material impact on Mattel's first quarter 2010 consolidated financial statements.

22.    Contingencies

With regards to the claims against Mattel described below, Mattel intends to defend itself vigorously. Except as more fully described below, management cannot reasonably determine the scope or amount of possible liabilities that could result from an unfavorable settlement or resolution of these claims. However, it is possible that an unfavorable resolution of these claims could have a material adverse effect on Mattel's financial condition and results of operations, and there can be no assurance that Mattel will be able to achieve a favorable settlement or resolution of these claims.

 

Litigation Related to Carter Bryant and MGA Entertainment, Inc.

 

In April 2004, Mattel filed a lawsuit in Los Angeles County Superior Court against Carter Bryant ("Bryant"), a former Mattel design employee. The suit alleges that Bryant aided and assisted a Mattel competitor, MGA Entertainment, Inc. ("MGA"), during the time he was employed by Mattel, in violation of his contractual and other duties to Mattel. In September 2004, Bryant asserted counterclaims against Mattel, including counterclaims in which Bryant sought, as a putative class action representative, to invalidate Mattel's Confidential Information and Proprietary Inventions Agreements with its employees. Bryant also removed Mattel's suit to the United States District Court for the Central District of California. In December 2004, MGA intervened as a party-defendant in Mattel's action against Bryant, asserting that its rights to Bratz properties are at stake in the litigation.

Separately, in November 2004, Bryant filed an action against Mattel in the United States District Court for the Central District of California. The action sought a judicial declaration that Bryant's purported conveyance of rights in Bratz was proper and that he did not misappropriate Mattel property in creating Bratz.

In April 2005, MGA filed suit against Mattel in the United States District Court for the Central District of California. MGA's action alleges claims of trade dress infringement, trade dress dilution, false designation of origin, unfair competition, and unjust enrichment. The suit alleges, among other things, that certain products, themes, packaging, and/or television commercials in various Mattel product lines have infringed upon products, themes, packaging, and/or television commercials for various MGA product lines, including Bratz. The complaint also asserts that various alleged Mattel acts with respect to unidentified retailers, distributors, and licensees have damaged MGA and that various alleged acts by industry organizations, purportedly induced by Mattel, have damaged MGA. MGA's suit alleges that MGA has been damaged in an amount "believed to reach or exceed tens of millions of dollars" and further seeks punitive damages, disgorgement of Mattel's profits and injunctive relief.

In June 2006, the three cases were consolidated in the United States District Court for the Central District of California. On July 17, 2006, the Court issued an order dismissing all claims that Bryant had asserted against Mattel, including Bryant's purported counterclaims to invalidate Mattel's Confidential Information and Proprietary Inventions Agreements with its employees, and Bryant's claims for declaratory relief.

 

In November 2006, Mattel asked the Court for leave to file an Amended Complaint that included not only additional claims against Bryant, but also included claims for copyright infringement, RICO violations, misappropriation of trade secrets, intentional interference with contract, aiding and abetting breach of fiduciary duty and breach of duty of loyalty, and unfair competition, among others, against MGA, its CEO Isaac Larian, certain MGA affiliates and an MGA employee. The RICO claim alleged that MGA stole Bratz and then, by recruiting and hiring key Mattel employees and directing them to bring with them Mattel confidential and proprietary information, unfairly competed against Mattel using Mattel's trade secrets, confidential information, and key employees to build their business. On January 12, 2007, the Court granted Mattel leave to file these claims as counterclaims in the consolidated cases, which Mattel did that same day.

Mattel sought to try all of its claims in a single trial, but in February 2007, the Court decided that the consolidated cases would be tried in two phases, with the first trial to determine claims and defenses related to Mattel's ownership of Bratz works and whether MGA infringed those works. On May 19, 2008, Bryant reached a settlement agreement with Mattel and is no longer a defendant in the litigation. In the public stipulation entered by Mattel and Bryant in connection with the resolution, Bryant agreed that he was and would continue to be bound by all prior and future Court Orders relating to Bratz ownership and infringement, including the Court's summary judgment rulings.

The first phase of the first trial, which began on May 27, 2008, resulted in a unanimous jury verdict on July 17, 2008 in favor of Mattel. The jury found that almost all of the Bratz design drawings and other works in question were created by Bryant while he was employed at Mattel; that MGA and Isaac Larian intentionally interfered with the contractual duties owed by Bryant to Mattel, aided and abetted Bryant's breaches of his duty of loyalty to Mattel, aided and abetted Bryant's breaches of the fiduciary duties he owed to Mattel, and converted Mattel property for their own use. The same jury determined that defendants MGA, Larian, and MGA Entertainment (HK) Limited infringed Mattel's copyrights in the Bratz design drawings and other Bratz works, and awarded Mattel total damages of approximately $100 million against the defendants. On December 3, 2008, the Court issued a series of orders rejecting MGA's equitable defenses and granting Mattel's motions for equitable relief, including an order enjoining the MGA party defendants from manufacturing, marketing, or selling certain Bratz fashion dolls or from using the "Bratz" name. The Court stayed the effect of the December 3, 2008 injunctive orders until further order of the Court and entered a further specified stay of the injunctive orders on January 7, 2009.

The parties filed and argued additional motions for post-trial relief, including a request by MGA to enter judgment as a matter of law on Mattel's claims in MGA's favor and to reduce the jury's damages award to Mattel. Mattel additionally moved for the appointment of a receiver. On April 27, 2009, the Court entered an order confirming that Bratz works found by the jury to have been created by Bryant during his Mattel employment were Mattel's property and that hundreds of Bratz female fashion dolls infringe Mattel's copyrights. The Court also upheld the jury's award of damages in the amount of $100 million and ordered an accounting of post-trial Bratz sales. The Court further vacated the stay of the December 3, 2008 orders, except to the extent specified by the Court's January 7, 2009 modification.

MGA appealed the Court's equitable orders to the Court of Appeals for the Ninth Circuit. On December 9, 2009, the Ninth Circuit heard oral argument on MGA's appeal and issued an order staying the District Court's equitable orders pending a further order to be issued by the Ninth Circuit. The Ninth Circuit opinion vacating the relief ordered by the District Court was issued on July 22, 2010. The Ninth Circuit stated that, because of several jury instruction errors it identified, a significant portion—if not all—of the jury verdict and damage award should be vacated.

In its opinion, the Ninth Circuit found that the District Court erred in concluding that Mattel's Invention agreement unambiguously applied to "ideas;" that it should have considered extrinsic evidence in determining the application of the agreement; and if the conclusion turns on conflicting evidence, it should have been up to the jury to decide. The Ninth Circuit also concluded that the District Judge erred in transferring the entire brand to Mattel based on misappropriated names and that the Court should have submitted to the jury, rather than deciding itself, whether Bryant's agreement assigned works created outside the scope of his employment and whether Bryant's creation of the Bratz designs and sculpt was outside of his employment. The Court then went on to address copyright issues which would be raised after a retrial, since Mattel "might well convince a properly instructed jury" that it owns Bryant's designs and sculpt. The Ninth Circuit stated that the sculpt itself was entitled only to "thin" copyright protection against virtually identical works, while the Bratz sketches were entitled to "broad" protection against substantially similar works; in applying the broad protection, however, the Ninth Circuit found that the lower court had erred in failing to filter out all of the unprotectable elements of Bryant's sketches. This mistake, the Court said, caused the lower court to conclude that all Bratz dolls were substantially similar to Bryant's original sketches.

Judge Stephen Larson, who presided over the first trial, retired from the bench during the course of the appeal, and the case was transferred to Judge David O. Carter. After the transfer, Judge Carter granted Mattel leave to file a Fourth Amended Answer and Counterclaims which focused on RICO, trade secret and other claims, and added additional parties, and subsequently granted in part and denied in part a defense motion to dismiss those counterclaims. Later, on August 16, 2010, MGA asserted several new claims against Mattel in response to Mattel's Fourth Amended Answer and Counterclaims, including claims for alleged trade secret misappropriation, an alleged violation of RICO, and wrongful injunction. Mattel moved to strike and/or dismiss these claims, as well as certain MGA allegations regarding Mattel's motives for filing suit. The Court granted that motion as to the wrongful injunction claim, which it dismissed with prejudice, and as to the allegations about Mattel's motives, which it struck. The Court denied the motion as to MGA's trade secret misappropriation claim and its claim for violations of RICO.

The Court resolved summary judgment motions in late 2010. Among other rulings, the Court dismissed both parties' RICO claims; dismissed Mattel's claim for breach of fiduciary duty and portions of other claims as "preempted" by the trade secrets act; dismissed MGA's trade dress infringement claims; dismissed MGA's unjust enrichment claim; dismissed MGA's common law unfair competition claim; and dismissed portions of Mattel's copyright infringement claim as to "later generation" Bratz dolls.

Trial of all remaining claims began in early January 2011. During the trial, and before the case was submitted to the jury, the Court granted MGA's motions for judgment as to Mattel's claims for aiding and abetting breach of duty of loyalty and conversion. The Court also granted a defense motion for judgment on portions of Mattel's claim for misappropriation of trade secrets relating to thefts by former Mattel employees located in Mexico.

The jury reached verdicts on the remaining claims in April 2011. In those verdicts, the jury ruled against Mattel on its claims for ownership of Bratz-related works, for copyright infringement, and for misappropriation of trade secrets. The jury ruled for MGA on its claim of trade secret misappropriation as to 26 of its claimed trade secrets and awarded $88.5 million in damages. The jury ruled against MGA as to 88 of its claimed trade secrets. The jury found that Mattel's misappropriation was willful and malicious. The Court will determine whether an award of exemplary damages is appropriate, which may not exceed twice the $88.5 million award of compensatory damages. Additionally, attorney's fees may be awarded; however, the amount, if any cannot be determined at this time.

Mattel does not believe that it is probable that any of the damages awarded to MGA will be sustained based on the evidence presented at trial and, accordingly, a liability has not been accrued for this matter. Judgment has not yet been entered, and post-trial motions and appeals have not yet been filed. The Court has stated that it will address the parties' post-trial motions, including motions for a new trial, for judgment as a matter of law, for exemplary damages, and for attorneys' fees and costs, in May 2011.

 

The Court will rule separately on the parties' claims for unfair competition under California Business & Professions Code Section 17200. In February 2011, MGA commenced litigation in the United States District Court for the Central District of California alleging that Mattel's conduct in response to MGA's sale of Bratz violated both the federal antitrust statute and the California Business & Professions Code, and constituted abuse of process under California law. Mattel believes these claims are without merit. Mattel has moved to dismiss these claims and intends to vigorously defend against them.

 

Litigation Related to Gunther-Wahl Productions, Inc.

In April 1998, Mattel was sued in the Los Angeles County Superior Court by Gunther-Wahl Productions, Inc. ("Gunther-Wahl"), a producer of animated television shows, and Candy Wahl, the wife of the principal of Gunther-Wahl ("Gunther-Wahl I"). The lawsuit alleges that Mattel breached an implied contract with Gunther-Wahl arising from a pitch of an animated television show, in that Mattel allegedly used plaintiffs' ideas without compensating plaintiffs for the use of the ideas. Mattel denies that it used any of plaintiffs' ideas in any Mattel product. A jury trial was held in early 2000, which resulted in a judgment in favor of Mattel on every claim. On December 5, 2002, the California Court of Appeal reversed the judgment in favor of Mattel, and remanded the matter for a new trial. During the pendency of the Gunther-Wahl I appeal, plaintiffs filed an additional lawsuit against Mattel alleging Mattel further breached the implied contract by using plaintiffs' ideas in products released subsequent to the trial without compensating plaintiffs ("Gunther-Wahl II"). Between September 2004 and March 2008 and between December 2008 and March 2010, both Gunther-Wahl I and II were stayed as a result of a bankruptcy proceeding filed by one of the principals of Gunther-Wahl. In November 2008, while the stay was lifted, Mattel filed potentially case dispositive motions in both lawsuits. In the fourth quarter of 2010, the Court denied Mattel's motions. During that quarter, plaintiffs also expanded the list of Mattel products which they contend wrongfully use their ideas and form the basis for their alleged damages. Plaintiffs are seeking royalty-based damages on Mattel's entire Fairytopia line of products, as well as numerous other products. Trial was originally scheduled to begin in the first quarter of 2011, but in March 2011, the lawsuits were assigned to a new judge for purposes of trial. The new judge has not yet set a trial date. While awaiting the start of trial, the parties have engaged in settlement discussions, and believe there is a high probability that the lawsuits will settle prior to trial. The proposed settlement would include a payment from Mattel to plaintiffs in the amount of $7.5 million, which has been accrued as a contingent loss reserve at March 31, 2011. If the lawsuits are not settled, Mattel anticipates that trial will occur sometime in the third quarter of 2011.

23.    Segment Information

Description of Segments

Mattel's operating segments are separately managed business units and are divided on a geographic basis between domestic and international. Mattel's domestic operating segments include:

Mattel Girls & Boys Brands—including Barbie^® fashion dolls and accessories ("Barbie^®"), Polly Pocket^®, Little Mommy^®, Disney Classics^®, and Monster High^® (collectively "Other Girls Brands"), Hot Wheels^®, Matchbox^®, Battle Force 5^®, and Tyco R/C^® vehicles and play sets (collectively "Wheels"), and CARS™, Radica^®, Toy Story^®, Max Steel^®, WWE^® Wrestling, and Batman^® products, and games and puzzles (collectively "Entertainment").

Fisher-Price Brands—including Fisher-Price^®, Little People^®, BabyGear™, and View-Master^® (collectively "Core Fisher-Price^®"), Dora the Explorer^®, Go Diego Go!^®, Thomas and Friends^®, Sing-a-ma-jigs^™, and See 'N Say^® (collectively "Fisher-Price^® Friends"), and Power Wheels^®.

American Girl Brands—including My American Girl^®, the historical collection, and Bitty Baby^®. American Girl Brands products are sold directly to consumers via its catalogue, website, and proprietary retail stores. Its children's publications are also sold to certain retailers.

Additionally, the International segment sells products in all toy categories, except American Girl Brands.

 

Segment Data

The following tables present information about revenues, income, and assets by segment. Mattel does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues (referred to as "gross sales"). Mattel records these adjustments in its financial accounting systems at the time of sale to each customer, but the adjustments are not allocated to individual products. For this reason, Mattel's chief operating decision maker uses gross sales by segment as one of the metrics to measure segment performance. Such sales adjustments are included in the determination of segment income from operations based on the adjustments recorded in the financial accounting systems. Segment income from operations represents operating income, while consolidated income from operations represents income from operations before income taxes as reported in the consolidated statements of operations. The corporate and other category includes costs not allocated to individual segments, including charges related to incentive compensation, share-based payments, and corporate headquarters functions managed on a worldwide basis, and the impact of changes in foreign currency rates on intercompany transactions.

 

		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In thousands)
Revenues
Domestic:
Mattel Girls & Boys Brands US		$	303,765			$	259,306
Fisher-Price Brands US			172,659				183,249
American Girl Brands			72,954				70,206
Total Domestic			549,378				512,761
International			491,731				447,513
Gross sales			1,041,109				960,274
Sales adjustments			(89,253	)			(80,192	)
Net sales		$	951,856			$	880,082
Segment Income
Domestic:
Mattel Girls & Boys Brands US		$	61,337			$	40,854
Fisher-Price Brands US			2,262				12,292
American Girl Brands			4,138				3,000
Total Domestic			67,737				56,146
International			52,603				39,901
			120,340				96,047
Corporate and other expenses (a)			(83,582	)			(50,820	)
Operating income			36,758				45,227
Interest expense			18,816				13,623
Interest (income)			(3,163	)			(2,452	)
Other non-operating (income) expense, net			(156	)			774
Income before income taxes		$	21,261			$	33,282

(a)

Corporate and other expense includes (i) share-based compensation expense of $11.0 million and $12.8 million for the three months ended March 31, 2011 and 2010, respectively, (ii) $7.5 million reduction to the legal settlement reserve for product liability related litigation for the three months ended March 31, 2010 , (iii) $7.5 million proposed Gunther-Wahl Productions legal settlement for the three months ended March 31, 2011, and (iv) legal fees associated with MGA litigation matters.

 

		March 31, 2011				March 31, 2010				December 31, 2010
		(In thousands)
Assets
Domestic:
Mattel Girls & Boys Brands US		$	296,132			$	226,109			$	380,998
Fisher-Price Brands US			214,629				202,263				322,134
American Girl Brands			74,727				60,533				67,435
Total Domestic			585,488				488,905				770,567
International			692,438				546,067				779,875
			1,277,926				1,034,972				1,550,442
Corporate and other			87,893				56,547				59,502
Accounts receivable and inventories, net		$	1,365,819			$	1,091,519			$	1,609,944

Mattel sells a broad variety of toy products, which are grouped into three major categories: Mattel Girls & Boys Brands, Fisher-Price Brands, and American Girl Brands. The table below presents worldwide revenues by category:

 

		For the Three Months Ended
		March 31, 2011				March 31, 2010
		(In thousands)
Worldwide Revenues
Mattel Girls & Boys Brands		$	656,376			$	573,112
Fisher-Price Brands			309,866				316,193
American Girl Brands			72,954				70,206
Other			1,913				763
Gross sales			1,041,109				960,274
Sales adjustments			(89,253	)			(80,192	)
Net sales		$	951,856			$	880,082