Income Taxes

Consolidated pre-tax income (loss) consists of the following:



	For the Year Ended
	December 31, 2016		December 31, 2015			December 31, 2014
	(In thousands)
US operations	$	9,179	$	(3,435	)	$	39,149
Foreign operations	400,563		467,350			547,761
	$	409,742	$	463,915		$	586,910

The provision (benefit) for current and deferred income taxes consists of the following:



	For the Year Ended
	December 31, 2016			December 31, 2015			December 31, 2014
	(In thousands)
Current
Federal	$	(3,041	)	$	(1,405	)	$	(25,075	)
State	2,455			1,946			(2,029		)
Foreign	91,070			89,825			106,998
	90,484			90,366			79,894
Deferred
Federal	(4,624		)	(3,802		)	21,987
State	2,623			(2,200		)	8,233
Foreign	3,237			10,135			(22,078		)
	1,236			4,133			8,142
Provision for income taxes	$	91,720		$	94,499		$	88,036

Deferred income taxes are provided principally for tax credit carryforwards, research and development expenses, net operating loss carryforwards, employee compensation-related expenses, and certain other reserves that are recognized in different years for financial statement and income tax reporting purposes. Mattel’s deferred income tax assets (liabilities) are composed of the following:



	December 31, 2016			December 31, 2015
	(In thousands)
Allowances and reserves	$	204,661		$	211,538
Research and development expenses	193,908			191,057
Loss carryforwards	165,522			150,270
Deferred compensation	78,245			98,832
Tax credit carryforwards	59,426			50,309
Postretirement benefits	47,732			48,648
Intangible assets	9,160			14,035
Other	62,057			71,453
Gross deferred income tax assets	820,711			836,142
Intangible assets	(295,968		)	(305,818		)
Other	—			(2,905		)
Gross deferred income tax liabilities	(295,968		)	(308,723		)
Deferred income tax asset valuation allowances	(74,125		)	(77,334		)
Net deferred income tax assets	$	450,618		$	450,085

Net deferred income tax assets are reported in the consolidated balance sheets as follows:



	December 31, 2016			December 31, 2015
	(In thousands)
Other noncurrent assets	$	508,363		$	510,928
Other noncurrent liabilities	(57,745		)	(60,843		)
	$	450,618		$	450,085

In the first quarter of 2016, Mattel retrospectively adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which generally simplifies the classification of all deferred tax assets and liabilities, along with any related valuation allowance, into noncurrent amounts on the balance sheet. As of December 31, 2015, prepaid expenses and other current assets decreased by $195.8 million, other noncurrent assets increased by $193.6 million, and other noncurrent liabilities decreased by $2.2 million from the previously reported amounts.

As of December 31, 2016, Mattel had federal and foreign loss carryforwards totaling $639.1 million and tax credit carryforwards of $60.6 million, which excludes carryforwards that do not meet the threshold for recognition in the financial statements. Utilization of these loss and tax credit carryforwards is subject to annual limitations. Mattel’s loss and tax credit carryforwards expire in the following periods:



	Loss Carryforwards		Tax Credit Carryforwards
	(In thousands)
2017 – 2021	$	52,614	$	1,578
Thereafter	321,859		54,376
No expiration date	264,674		4,637
Total	$	639,147	$	60,591

Management considered all available evidence under existing tax law and anticipated expiration of tax statutes and determined that a valuation allowance of $65.2 million was required as of December 31, 2016 for those loss and tax credit carryforwards that are not expected to provide future tax benefits. In addition, management determined that a valuation allowance of $8.9 million was required as of December 31, 2016 for those deferred tax assets for which there is not sufficient evidence as to their ultimate utilization, primarily related to certain foreign affiliates. Changes in the valuation allowance for 2016 primarily relate to increases in the valuation allowance related to losses without benefits, offset by decreases in the valuation allowance for certain deferred tax assets and expirations of tax loss and/or tax credit carryforwards. Management believes it is more-likely-than-not (a greater than 50 percent likelihood) that Mattel will generate sufficient taxable income in the appropriate future periods to realize the benefit of the remaining net deferred income tax assets of $450.6 million. Changes in enacted tax laws, audits in various jurisdictions around the world, settlements, or acquisitions could negatively impact Mattel’s ability to fully realize all of the benefits of its remaining net deferred tax assets.

Differences between the provision for income taxes at the US federal statutory income tax rate and the provision in the consolidated statements of operations are as follows:



	For the Year Ended
	December 31, 2016			December 31, 2015			December 31, 2014
	(In thousands)
Provision at US federal statutory rate	$	143,410		$	162,370		$	205,419
(Decrease) increase resulting from:
Foreign earnings taxed at different rates, including withholding taxes	(51,711		)	(56,877		)	(107,409		)
Foreign losses without income tax benefit	8,526			5,843			20,140
State and local taxes, net of US federal benefit	3,385			482			3,760
Adjustments to previously accrued taxes	(12,537		)	(19,134		)	(55,026		)
Adoption of ASU 2016-09	(4,308		)	—			—
Tax restructuring	—			—			12,400
Other	4,955			1,815			8,752
Provision for income taxes	$	91,720		$	94,499		$	88,036

In the fourth quarter of 2016, Mattel early adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which requires all excess tax benefits and tax deficiencies to be recognized in the income statement when the awards vest or are settled. Upon adoption of ASU 2016-09, Mattel recognized $4.3 million in discrete tax benefits related to share-based payment accounting.

Prior to the adoption of ASU 2016-09, the tax effect of deductions in excess of compensation cost (“windfalls”) related to the exercise of nonqualified stock options and vesting of other share-based compensation awards were recorded in equity and tax deficiencies (“shortfalls”) were recorded in equity to the extent of previously recognized windfalls. The exercise of nonqualified stock options and vesting of other share-based compensation awards resulted in a (decrease)/increase to additional paid-in capital totaling $(2.8) million and $21.2 million in 2015 and 2014, respectively.

In assessing whether uncertain tax positions should be recognized in its financial statements, Mattel first determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, Mattel presumes that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. For tax positions that meet the more-likely-than-not recognition threshold, Mattel measures the amount of benefit recognized in the financial statements at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Mattel recognizes unrecognized tax benefits in the first financial reporting period in which information becomes available indicating that such benefits will more-likely-than-not be realized.

Mattel records a reserve for unrecognized tax benefits for US federal, state, local, and foreign tax positions related primarily to transfer pricing, tax credits claimed, tax nexus, and apportionment. For each reporting period, management applies a consistent methodology to measure unrecognized tax benefits, and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances warrant. Mattel’s measurement of its reserve for unrecognized tax benefits is based on management’s assessment of all relevant information, including prior audit experience, the status of audits, conclusions of tax audits, lapsing of applicable statutes of limitations, identification of new issues, and any administrative guidance or developments.

A reconciliation of the reserve for unrecognized tax benefits is as follows:



	For the Year Ended
	December 31, 2016			December 31, 2015			December 31, 2014
	(In thousands)
Unrecognized tax benefits at January 1	$	118,099		$	100,357		$	111,370
Increases for positions taken in current year	2,925			5,724			9,886
Increases for positions taken in a prior year	921			22,584			53,221
Decreases for positions taken in a prior year	(1,706		)	(4,242		)	(51,421		)
Decreases for settlements with taxing authorities	(1,097		)	(3,577		)	(9,493		)
Decreases for lapses in the applicable statute of limitations	(9,795		)	(2,747		)	(13,206		)
Unrecognized tax benefits at December 31	$	109,347		$	118,099		$	100,357

Of the $109.3 million of unrecognized tax benefits as of December 31, 2016, $105.8 million would impact the effective tax rate if recognized.

Mattel recognized a decrease of interest and penalties of approximately $2 million during 2016, and increase of interest and penalties of approximately $0 and $2 million during 2015 and 2014, respectively, related to unrecognized tax benefits, which are reflected in provision for income taxes in the consolidated statements of operations. As of December 31, 2016, Mattel accrued $17.1 million in interest and penalties related to unrecognized tax benefits. Of this balance, $16.2 million would impact the effective tax rate if recognized. As of December 31, 2015, Mattel accrued $18.3 million in interest and penalties related to unrecognized tax benefits.

In the normal course of business, Mattel is regularly audited by federal, state, local and foreign tax authorities. In May 2014, the IRS completed its audit of Mattel’s 2010 and 2011 federal income tax returns. Mattel remains subject to IRS examination for the 2013 through 2016 tax years. Mattel files multiple state and local income tax returns and remains subject to examination in various of these jurisdictions, including California for the 2008 through 2016 tax years, New York for the 2010 through 2016 tax years, and Wisconsin for the 2008 through 2016 tax years. Mattel files multiple foreign income tax returns and remains subject to examination in major foreign jurisdictions, including Hong Kong for the 2010 through 2016 tax years, Brazil, Mexico and Netherlands for the 2011 through 2016 tax years and Russia for the 2014 through 2016 tax years. Based on the current status of federal, state, local and foreign audits, Mattel believes it is reasonably possible that in the next 12 months, the total unrecognized tax benefits could decrease by approximately $11 million related to the settlement of tax audits and/or the expiration of statutes of limitations. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.

The income tax provision included net tax benefits of $16.8 million, $19.1 million, and $42.6 million in 2016, 2015, and 2014, respectively. The 2016 net tax benefits primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes, and the adoption of ASU 2016-09. The 2015 net tax benefits primarily related to reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes. The 2014 net tax benefits primarily related to the reassessments of prior years’ tax liabilities based on the status of audits and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes, partially offset by a tax charge related to a 2014 tax restructuring for the HIT Entertainment^® and MEGA Brands operations.

The cumulative amount of undistributed earnings of foreign subsidiaries that Mattel intends to indefinitely reinvest and upon which no deferred US income taxes have been provided is approximately $7.0 billion as of December 31, 2016. Management periodically reviews the undistributed earnings of its foreign subsidiaries and reassesses the intent to indefinitely reinvest such earnings. It is not practicable for Mattel to determine the deferred tax liability associated with these undistributed earnings due to the availability of foreign tax credits, the complexity of Mattel's international holding company structure, the rules governing the utilization of foreign tax credits, and the interplay between utilization of such foreign tax credits and Mattel’s other significant tax attributes.