Employee Benefit Plans

12 Months Ended

Dec. 31, 2012

Employee Benefit Plans

Note 4—Employee Benefit Plans

Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies. These plans include defined benefit pension plans, defined contribution retirement plans, postretirement benefit plans, and deferred compensation and excess benefit plans. In addition, Mattel makes contributions to government-mandated retirement plans in countries outside the US where its employees work.

A summary of retirement plan expense is as follows:

	For the Year
	2012		2011		2010
	(In millions)
Defined contribution retirement plans	$	40.3	$	36.9	$	33.3
Defined benefit pension plans		33.6		37.6		31.7
Deferred compensation and excess benefit plans		5.7		0.7		4.6
Postretirement benefit plans		1.6		1.6		1.9
	$	81.2	$	76.8	$	71.5

Defined Benefit Pension and Postretirement Benefit Plans

Mattel provides defined benefit pension plans for eligible domestic employees, which are intended to comply with the requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). Some of Mattel’s foreign subsidiaries have defined benefit pension plans covering substantially all of their eligible employees. Mattel funds these plans in accordance with the terms of the plans and local statutory requirements, which differ for each of the countries in which the subsidiaries are located. Mattel also has unfunded postretirement health insurance plans covering certain eligible domestic employees.

A summary of the components of Mattel’s net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31 is as follows:

	Defined Benefit Pension Plans									Postretirement Benefit Plans
	2012			2011			2010			2012		2011			2010
	(In thousands)
Net periodic benefit cost:
Service cost	$	13,285		$	13,610		$	12,441		$	79	$	73		$	76
Interest cost		29,530			28,433			27,934			1,411		1,576			1,820
Expected return on plan assets		(31,270	)		(25,714	)		(24,581	)		—		—			—
Amortization of prior service (credit) cost		(502	)		1,776			2,453			—		—			—
Recognized actuarial loss (gain)		19,020			19,492			13,499			117		(48	)		52
Settlement loss		3,534			—			—			—		—			—
Net periodic benefit cost	$	33,597		$	37,597		$	31,746		$	1,607	$	1,601		$	1,948
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial loss (gain)	$	27,144		$	62,687		$	482		$	4,755	$	(1,249	)	$	(9,502	)
Prior service (credit) cost		(11,789	)		2			(675	)		—		—			—
Amortization of prior service credit (cost)		501			(1,776	)		(2,453	)		—		—			—
Total recognized in other comprehensive income (a)	$	15,856		$	60,913		$	(2,646	)	$	4,755	$	(1,249	)	$	(9,502	)
Total recognized in net periodic benefit cost and other comprehensive income	$	49,453		$	98,510		$	29,100		$	6,362	$	352		$	(7,554	)

(a) Amounts exclude related tax (benefit) expense of $(2.3) million, $(21.6) million, and $4.4 million, during 2012, 2011, and 2010, respectively, which are also included in other comprehensive income.

Net periodic benefit cost for Mattel’s domestic defined benefit pension and postretirement benefit plans was calculated on January 1 of each year using the following assumptions:

	For the Year
	2012		2011		2010
Defined benefit pension plans:
Discount rate		4.5%		5.2%		5.6%
Weighted average rate of future compensation increases		3.8%		3.8%		3.8%
Long-term rate of return on plan assets		8.0%		8.0%		8.0%
Postretirement benefit plans:
Discount rate		4.5%		5.2%		5.6%
Annual increase in Medicare Part B premium		6.0%		6.0%		6.0%
Health care cost trend rate:
Pre-65		7.5%		8.0%		6.0%
Post-65		7.5%		8.0%		8.0%
Ultimate cost trend rate (pre- and post-65)		5.0%		5.0%		5.0%
Year that the rate reaches the ultimate cost trend rate:
Pre-65		2017		2017		2011
Post-65		2017		2017		2013

Discount rates, weighted average rates of future compensation increases, and long-term rates of return on plan assets for Mattel’s foreign defined benefit pension plans differ from the assumptions used for Mattel’s domestic defined benefit pension plans due to differences in local economic conditions from which the non-US plans are based. The rates shown in the preceding table are indicative of the weighted average rates of all Mattel’s defined benefit pension plans given the relative insignificance of the foreign plans to the consolidated total.

The estimated net actuarial loss and prior service cost for the domestic defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year is $15.2 million. The estimated net actuarial loss for the domestic postretirement benefit plans that will be amortized from accumulated other comprehensive loss into net period benefit cost over the next fiscal year is $0.1 million.

Mattel used a measurement date of December 31, 2012 for its defined benefit pension plans and postretirement benefit plans. A summary of the changes in benefit obligation and plans assets is as follows:

	Defined Benefit Pension Plans						Postretirement Benefit Plans
	2012			2011			2012			2011
	(In thousands)
Change in Benefit Obligation:
Benefit obligation, beginning of year	$	610,016		$	545,927		$	32,334		$	35,081
Service cost		13,285			13,610			79			73
Interest cost		29,530			28,433			1,411			1,576
Plan amendments		(11,791	)		—			—			—
Impact of currency exchange rate changes		1,713			(1,785	)		—			—
Actuarial loss (gain)		74,433			61,052			4,872			(1,297	)
Benefits paid		(47,835	)		(37,221	)		(3,263	)		(3,099	)
Benefit obligation, end of year	$	669,351		$	610,016		$	35,433		$	32,334
Change in Plan Assets:
Plan assets at fair value, beginning of year	$	338,081		$	316,795		$	—		$	—
Actual return on plan assets (a)		57,028			5,182			—			—
Employer contributions		55,752			53,859			3,263			3,099
Impact of currency exchange rate changes		3,137			(534	)		—			—
Benefits paid		(47,835	)		(37,221	)		(3,263	)		(3,099	)
Plan assets at fair value, end of year	$	406,163		$	338,081		$	—		$	—
Net Amount Recognized in Consolidated Balance Sheets:
Funded status, end of year	$	(263,188	)	$	(271,935	)	$	(35,433	)	$	(32,334	)
Current accrued benefit liability		(11,407	)		(23,215	)		(2,600	)		(2,700	)
Noncurrent accrued benefit liability		(251,781	)		(248,720	)		(32,833	)		(29,634	)
Total accrued benefit liability	$	(263,188	)	$	(271,935	)	$	(35,433	)	$	(32,334	)
Amounts Recognized in Accumulated Other Comprehensive Loss (b):
Net actuarial loss (gain)	$	300,835		$	273,691		$	3,649		$	(1,106	)
Prior service (credit) cost		(11,150	)		138			—			—
	$	289,685		$	273,829		$	3,649		$	(1,106	)

(a) The 2012 actual return on plan assets from defined benefit pension plan includes an increase of approximately $12 million related to assets transferred to the Fisher-Price Pension Plan resulting from its conversion to a cash balance plan.

(b) Amounts exclude related tax benefits of $102.7 million and $100.4 million for December 31, 2012 and 2011, respectively, which are also included in accumulated other comprehensive loss.

The accumulated benefit obligation differs from the projected benefit obligation in that it assumes future compensation levels will remain unchanged. Mattel’s accumulated benefit obligation for its defined benefit pension plans as of December 31, 2012 and 2011 totaled $597.6 million and $553.6 million, respectively.

The assumptions used in determining the projected and accumulated benefit obligations of Mattel’s domestic defined benefit pension and postretirement benefit plans are as follows:

	December 31,
	2012		2011
Defined benefit pension plans:
Discount rate		4.0%		4.5%
Weighted average rate of future compensation increases		3.8%		3.8%
Postretirement benefit plans:
Discount rate		4.0%		4.5%
Annual increase in Medicare Part B premium		6.0%		6.0%
Health care cost trend rate:
Pre-65		8.5%		7.5%
Post-65		7.5%		7.5%
Ultimate cost trend rate:
Pre-65		6.1%		5.0%
Post-65		5.4%		5.0%
Year that the rate reaches the ultimate cost trend rate:
Pre-65		2030		2017
Post-65		2030		2017

A one percentage point increase/(decrease) in the assumed health care cost trend rate for each future year would impact the postretirement benefit obligation as of December 31, 2012 by $1.8 million and $(1.5) million, respectively, while a one percentage point increase/(decrease) would impact the service and interest cost recognized for 2012 by $0.1 million and $(0.1) million, respectively.

The estimated future benefit payments for Mattel’s defined benefit pension and postretirement benefit plans are as follows:

	Defined Benefit Pension Plans		Postretirement Benefit Plans Before Subsidy		Benefit of Medicare Part D Subsidy
	(In thousands)
2013	$	34,006	$	3,000	$	(300	)
2014		26,370		2,900		(300	)
2015		27,352		2,800		(300	)
2016		29,015		2,800		(300	)
2017		30,352		2,800		(300	)
2018 – 2022		173,602		12,400		(1,300	)

Mattel expects to make cash contributions totaling approximately $37 million to its defined benefit pension and postretirement benefit plans in 2013, which includes approximately $16 million for benefit payments for its unfunded plans.

Mattel periodically commissions a study of the plans’ assets and liabilities to determine an asset allocation that would best match expected cash flows from the plans’ assets to expected benefit payments. Mattel monitors the returns earned by the plans’ assets and reallocates investments as needed. Mattel’s overall investment strategy is to achieve an adequately diversified asset allocation mix of investments that provides for both near-term benefit payments as well as long-term growth. The assets are invested in a combination of indexed and actively managed funds. The target allocations for Mattel’s domestic plan assets, which comprise 81% of Mattel’s total plan assets, are 35% in US equities, 35% in non-US equities, 20% in US long-term bonds, and 10% in US Treasury inflation protected securities. The US equities are benchmarked against the S&P 500, and the non-US equities are benchmarked against a combination of developed and emerging markets indices. Fixed income securities are long-duration bonds intended to closely match the duration of the liabilities and include US government treasuries and agencies, corporate bonds from various industries, and mortgage-backed and asset-backed securities.

Mattel’s defined benefit pension plan assets are measured and reported in the financial statements at fair value using inputs, which are more fully described in “Note 10 to the Consolidated Financial Statements—Fair Value Measurements,” as follows:

	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(In thousands)
Collective trust funds:
US equity securities	$	—	$	148,435	$	—	$	148,435
International equity securities		—		147,756		—		147,756
International fixed income securities		—		36,580		—		36,580
US government and US government agency securities		—		35,944		—		35,944
US corporate debt instruments		—		20,514		—		20,514
International corporate debt instruments		—		5,455		—		5,455
Mutual funds		1,422		3,661		—		5,083
Other		—		6,396		—		6,396
Total	$	1,422	$	404,741	$	—	$	406,163
	December 31, 2011
	Level 1		Level 2		Level 3		Total
	(In thousands)
Collective trust funds:
US equity securities	$	—	$	101,747	$	—	$	101,747
International equity securities		—		101,956		—		101,956
International fixed income securities		—		36,128		—		36,128
US government and US government agency securities		—		51,897		—		51,897
US corporate debt instruments		—		19,346		—		19,346
International corporate debt instruments		—		5,887		—		5,887
Mutual funds		4,883		—		—		4,883
Other		—		16,237		—		16,237
Total	$	4,883	$	333,198	$	—	$	338,081

The fair value of collective trust funds and mutual funds shares are determined based on the net asset value of shares held at year-end. The fair value of US government securities, US government agency securities, and corporate debt instruments are determined based on quoted market prices or are estimated using pricing models with observable inputs, quoted prices of securities with similar characteristics, or discounted cash flows.

Mattel’s defined benefit pension plan assets are not directly invested in Mattel common stock. Mattel believes that the long-term rate of return on plan assets of 8.0% as of December 31, 2012 is reasonable based on historical returns.

During 1999, Mattel amended the Fisher-Price Pension Plan to convert it from a career-average plan to a cash balance plan and applied for a determination letter from the IRS. In 2003 and 2011, Mattel further amended the Fisher-Price Pension Plan to reflect changes in regulations and court cases associated with cash balance plans and submitted applications for a determination letter to the IRS. Mattel received a favorable determination letter in February 2012 and converted the Fisher-Price Pension Plan to a cash balance plan in July 2012. The Fisher-Price Pension Plan was renamed the Mattel Cash Balance Plan in connection with the conversion. The plan conversion resulted in a reduction in the benefit obligation of approximately $12 million.

Defined Contribution Retirement Plans

Domestic employees are eligible to participate in a 401(k) savings plan, the Mattel, Inc. Personal Investment Plan (the “Plan”), sponsored by Mattel, which is a funded defined contribution plan intended to comply with ERISA’s requirements. Contributions to the Plan include voluntary contributions by eligible employees and employer automatic and matching contributions by Mattel. The Plan allows employees to allocate both their voluntary contributions and their employer automatic and matching contributions to a variety of investment funds, including a fund that is fully invested in Mattel common stock (the “Mattel Stock Fund”). Employees are not required to allocate any of their Plan account balance to the Mattel Stock Fund, which allows employees to limit or eliminate their exposure to market changes in Mattel’s stock price. Furthermore, the Plan limits the percentage of the employee’s total account balance that may be allocated to the Mattel Stock Fund to 25%. Employees may generally reallocate their account balances on a daily basis. However, pursuant to Mattel’s insider trading policy, employees classified as insiders and restricted personnel under Mattel’s insider trading policy are limited to certain periods in which they may make allocations into or out of the Mattel Stock Fund.

Certain non-US employees participate in other defined contribution retirement plans with varying vesting and contribution provisions.

Deferred Compensation and Excess Benefit Plans

Mattel maintains a deferred compensation plan that permits certain officers and key employees to elect to defer portions of their compensation. The deferred compensation plan, together with certain contributions made by Mattel and participating employees to an excess benefit plan, earns various rates of return. The liability for these plans as of December 31, 2012 and 2011 was $55.9 million and $51.6 million, respectively, and is included in other noncurrent liabilities in the consolidated balance sheets. Changes in the market value of the participant-selected investment options are recorded as retirement plan expense within other selling and administrative expenses. Separately, Mattel has purchased group trust-owned life insurance contracts designed to assist in funding these programs. The cash surrender value of these policies, valued at $54.3 million and $59.7 million as of December 31, 2012 and 2011, respectively, are held in an irrevocable grantor trust, the assets of which are subject to the claims of Mattel’s creditors and are included in other noncurrent assets in the consolidated balance sheets.

Incentive Compensation Plans

Mattel has annual incentive compensation plans under which officers and key employees may earn incentive compensation based on Mattel’s performance and subject to certain approvals of the Compensation Committee of the Board of Directors. For 2012, 2011, and 2010, $108.1 million, $75.3 million, and $106.7 million, respectively, was charged to expense for awards under these plans.

Mattel has had two long-term incentive program (“LTIP”) performance cycles in place for the time period between 2010 and 2012: (i) a January 1, 2008—December 31, 2010 performance cycle, which was established by the Compensation Committee of the Board of Directors in March 2008, and (ii) a January 1, 2011—December 31, 2013 performance cycle, which was established by the Compensation Committee of the Board of Directors in March 2011.

For the January 1, 2008—December 31, 2010 LTIP, Mattel granted performance-based restricted stock units (“Performance RSUs”) under the Mattel, Inc. 2005 Equity Compensation Plan to officers and certain employees providing services to Mattel. Performance RSUs are units that may become payable in shares of Mattel’s common stock at the end of the three-year performance cycle. The Performance RSUs granted under this performance cycle were earned based on an initial target number with the final number of Performance RSUs payable being determined based on the product of the initial target number of Performance RSUs multiplied by a performance factor based on measurements of Mattel’s performance with respect to: (i) annual operating result targets for each year in the performance cycle using a net operating profit after taxes less capital charge measure (“the 2008—2010 performance-related component”), and (ii) Mattel’s total stockholder return (“TSR”) for the three-year performance cycle relative to the TSR realized by companies comprising the S&P 500 as of the first day of the performance cycle (“the 2008—2010 market-related component”). For the January 1, 2008—December 31, 2010 LTIP, 1.3 million shares were earned relating to the performance-related component and 0.7 million shares were earned relating to the market-related component, resulting in a total of 2.0 million shares that vested in February 2011.

For the January 1, 2008—December 31, 2010 LTIP, the weighted average grant date fair value of the performance-related and market-related components of the Performance RSUs were $22.02 and $3.99 per share, respectively, for 2010. During 2010, $17.7 million was charged to expense relating to the 2008—2010 performance-related component as the 2010 actual results exceeded the 2010 performance threshold. Additionally, during 2010, Mattel recognized share-based compensation expense of $1.9 million for the market-related component.

For the January 1, 2011—December 31, 2013 LTIP, Mattel granted Performance RSUs under the Mattel, Inc. 2010 Equity and Long-Term Compensation Plan to officers and certain employees providing services to Mattel. Performance RSUs granted under this program are earned based on an initial target number with the final number of Performance RSUs payable being determined based on the product of the initial target number of Performance RSUs multiplied by a performance factor based on measurements of Mattel’s performance with respect to: (i) annual operating result targets for each year in the performance cycle using a net operating profit after taxes less capital charge measure and a net sales performance measure (“the 2011—2013 performance-related components”), and (ii) Mattel’s TSR for the three-year performance cycle relative to the TSR realized by companies comprising the S&P 500 as of the first day of the performance cycle (“the 2011—2013 market-related component”), adjusted for dividends declared during the three-year performance cycle. For the 2011—2013 performance-related components, the range of possible outcomes is that between zero and 0.5 million shares that can be earned for each of the three years during the three-year performance cycle. For the 2011—2013 market-related component, the possible outcomes range from an upward adjustment of 0.5 million shares to a downward adjustment of 0.5 million shares to the results of the performance-related components over the three-year performance cycle.

For the January 1, 2011—December 31, 2013 LTIP, the weighted average grant date fair value of the performance-related and market-related components of the Performance RSUs were $32.87 and $4.55 per share, respectively, for 2012, and $24.67 and $4.22 per share, respectively, for 2011. During 2012, $12.4 million was charged to expense relating to the performance-related components as the 2012 actual results exceeded the 2012 performance threshold. During 2011, $7.1 million was charged to expense relating to the performance-related components as the 2011 actual results exceeded the 2011 performance threshold. Additionally, during 2012 and 2011, Mattel recognized share-based compensation expense of $1.8 million and $1.2 million, respectively, for the market-related component.

The fair values of the 2008—2010 performance-related components were based on the closing stock price of Mattel’s common stock on each of the grant dates, reduced by the present value of estimated dividends to be paid during the applicable performance periods as the awards were not credited with dividend equivalents for actual dividends paid on Mattel’s common stock. The fair values of the 2011—2013 performance-related components were based on the closing stock prices of Mattel’s common stock on each of the grant dates. The fair values of the market-related components were estimated at the grant dates using a Monte Carlo valuation methodology. Share-based compensation is recognized as expense over the three-year performance cycle using a straight-line expense attribution approach reduced for estimated forfeitures.