MATTEL INC /DE/ | 2013 | FY |

Note 2—Goodwill and Other Intangibles

Goodwill is allocated to various reporting units, which are at the operating segment level, for purposes of evaluating whether goodwill is impaired. As more fully described in “Note 12 to the Consolidated Financial Statements—Segment Information,” on January 1, 2012, Mattel changed its operating segments to align with its new organizational structure, which resulted in changes to its reporting units. The new reporting units are: (i) North America, (ii) International, and (iii) American Girl. Components of the operating segments have been aggregated into a single reporting unit as the components have similar economic characteristics. The similar economic characteristics include the nature of the products, the nature of the production processes, the customers, and the manner in which the products are distributed. Mattel reassigned the 2011 goodwill balances to the new reporting units based on a relative fair value approach.

The change in the carrying amount of goodwill by operating segment for 2013 and 2012 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the North America and American Girl operating segments selling those brands, thereby causing a foreign currency translation impact for these operating segments.

 

		North America				International				American Girl				Total
		(In thousands)
Balance at December 31, 2011		$	393,905			$	214,612			$	213,622			$	822,139
Acquisition			151,348				100,898				—				252,246
Currency exchange rate impact			1,645				4,659				109				6,413
Balance at December 31, 2012			546,898				320,169				213,731				1,080,798
Currency exchange rate impact			697				1,487				257				2,441
Balance at December 31, 2013		$	547,595			$	321,656			$	213,988			$	1,083,239

In the third quarter of 2013, Mattel assessed its goodwill for impairment by evaluating qualitative factors for each of its reporting units in accordance with ASU 2011-08, Testing Goodwill for Impairment, and determined that it was not more likely than not that the fair values of its reporting units were less than the carrying amounts. As a result of this determination, the quantitative two-step goodwill impairment test was deemed unnecessary. Mattel has not recorded any impairment of goodwill subsequent to its initial adoption of Accounting Standards Codification (“ASC”) 350-20, Goodwill, on January 1, 2002.

Acquisition of HIT Entertainment

On February 1, 2012, Mattel acquired Helium Holdings 1A Ltd, a private limited company existing under the laws of Jersey (“HIT Entertainment”), pursuant to the Stock Purchase Agreement dated as of October 23, 2011, between Mattel’s wholly-owned subsidiary, Mattel Entertainment Holdings Limited, a private limited company existing under the laws of England and Wales (the “Purchasing Sub”), HIT Entertainment’s parent company, HIT Entertainment Scottish Limited Partnership, a limited partnership existing under the laws of Scotland and majority-owned by a consortium of funds led by Apax Partners, LLP and its affiliates (the “Selling Stockholder”) and, with respect to certain provisions thereof, Mattel (the “Purchase Agreement”). Pursuant to the terms set forth in the Purchase Agreement, Mattel indirectly acquired, through the Purchasing Sub, 100% of the issued and outstanding shares of HIT Entertainment from the Selling Stockholder for total cash consideration of $713.5 million, including payment for acquired cash, subject to customary adjustments. HIT Entertainment owns and licenses a diverse portfolio of pre-school entertainment brands, including Thomas & Friends.

The total consideration was allocated to the assets acquired and liabilities assumed based on their estimated fair values. As a result of the acquisition, Mattel recognized $510.7 million of identifiable intangible assets (primarily related to intellectual property rights), $49.4 million of net liabilities assumed (primarily related to deferred tax liabilities), and $252.2 million of goodwill, which is not deductible for tax purposes. The fair values of the identifiable intangible assets were estimated based on the multi-period excess earnings method, using Level 3 inputs within the fair value hierarchy, which included forecasted future cash flows, long-term revenue growth rates, and the weighted average cost of capital. Goodwill relates to a number of factors built into the purchase price, including the future earnings and cash flow potential of the business, as well as the complementary strategic fit and the resulting synergies it brings to Mattel’s existing operations.

Mattel recognized approximately $5 million and $18 million of integration costs during 2013 and 2012, respectively. During 2012, Mattel recognized approximately $6 million of transaction costs. No transaction costs were incurred during 2013. Integration and transaction costs are recorded within other selling and administrative expenses in the consolidated statements of operations. The pro forma and actual results of operations for this acquisition have not been presented because they are not material.

Other Intangibles

Identifiable intangibles include the following:

 

		December 31,
		2013				2012
		(In thousands)
Nonamortizable identifiable intangibles		$	504,241			$	617,223
Identifiable intangibles (net of amortization of $68.3 million and $64.9 million at December 31, 2013 and 2012, respectively)			176,579				88,786
		$	680,820			$	706,009

In connection with the acquisition of HIT Entertainment during 2012, Mattel recognized $495.0 million of nonamortizable identifiable intangible assets and $15.7 million of amortizable identifiable intangible assets, primarily related to intellectual property rights.

During the second quarter of 2013, Mattel changed its brand strategy for Polly Pocket, which includes a more focused allocation of resources to support the Polly Pocket brand in specific markets, resulting in a reduction of the forecasted future cash flows of the brand. As a result of the change, Mattel tested the Polly Pocket trade name for impairment. The Polly Pocket trade name, which had a carrying value of approximately $113 million, was previously determined to be a nonamortizable intangible asset. Its fair value was determined to be approximately $99 million based on a discounted cash flow analysis using the multi-period excess earnings method. Level 3 inputs, including forecasted future cash flows, an estimated useful life, and a discount rate, were used in the valuation. As the fair value of the asset was below the carrying value, Mattel recorded an impairment charge of approximately $14 million, which is reflected within other selling and administrative expenses in the consolidated statement of operations for the North America and International operating segments.

 

In conjunction with the Polly Pocket trade name impairment test, Mattel reassessed the intangible asset’s nonamortizable classification and determined that the nonamortizable classification could no longer be supported. During the second quarter of 2013, the Polly Pocket trade name was reclassified as an amortizable intangible asset, and the remaining fair value of the asset is being amortized over its estimated remaining useful life.

Mattel tests nonamortizable intangible assets, including trademarks and trade names, for impairment annually in the third quarter and whenever events or changes in circumstances indicate that the carrying values may exceed the fair values. During 2013 and 2012, Mattel performed the annual impairment tests and determined that the remaining nonamortizable intangible assets were not impaired.

Mattel also tests its amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Mattel determined that its amortizable intangible assets were not impaired during 2013 and 2012.