Income Taxes

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



	For the Year Ended
	December 31, 2017			December 31, 2016		December 31, 2015
	(In thousands)
U.S. operations	$	(273,444	)	$	9,179	$	(3,435	)
Foreign operations	(231,543		)	400,563		467,350
	$	(504,987	)	$	409,742	$	463,915

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



	For the Year Ended
	December 31, 2017			December 31, 2016			December 31, 2015
	(In thousands)
Current
Federal	$	(3,153	)	$	(3,041	)	$	(1,405	)
State	1,885			2,455			1,946
Foreign	113,315			91,070			89,825
	112,047			90,484			90,366
Deferred
Federal	418,341			(4,624		)	(3,802		)
State	38,450			2,623			(2,200		)
Foreign	(19,989		)	3,237			10,135
	436,802			1,236			4,133
Provision for income taxes	$	548,849		$	91,720		$	94,499

Deferred income taxes are provided principally for tax credit carryforwards, net operating loss carryforwards, research and development expenses, 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, 2017			December 31, 2016
	(In thousands)
Tax credit carryforwards	$	222,353		$	59,426
Allowances and reserves	176,248			204,661
Net operating loss carryforwards	139,544			165,522
Research and development expenses	92,443			193,908
Deferred compensation	49,616			78,245
Postretirement benefits	30,564			47,732
Intangible assets	6,096			9,160
Other	50,554			62,057
Gross deferred income tax assets	767,418			820,711
Intangible assets	(175,921		)	(295,968		)
Gross deferred income tax liabilities	(175,921		)	(295,968		)
Deferred income tax asset valuation allowances	(579,245		)	(74,125		)
Net deferred income tax assets	$	12,252		$	450,618

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



	December 31, 2017			December 31, 2016
	(In thousands)
Other noncurrent assets	$	76,750		$	508,363
Other noncurrent liabilities	(64,498		)	(57,745		)
	$	12,252		$	450,618

As of December 31, 2017, Mattel had federal and foreign loss carryforwards totaling $632.9 million and tax credit carryforwards of $222.4 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)
2018 – 2022	$	39,939	$	7,085
Thereafter	317,915		193,867
No expiration date	275,061		21,401
Total	$	632,915	$	222,353

Mattel regularly assesses the need for a valuation allowance against its deferred tax assets. In making that assessment, Mattel considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets to determine, based on the weight of available evidence, whether it is more likely-than-not that some or all of the deferred tax assets will not be realized. As a result of evaluating the need for a valuation allowance, Mattel established a valuation allowance on its U.S. federal and state deferred tax assets as of September 30, 2017 in the amount of $561.9 million. As of December 31, 2017, the valuation allowance was reduced to $511.8 million, in large part due to the lowering of the federal corporate income tax rate from 35% to 21% effective January 1, 2018 and other changes in deferred taxes during the fourth quarter of 2017. The amount shown as a U.S. valuation allowance in the effective tax rate table below include certain other impacts on U.S. deferred taxes. The valuation allowance does not impact Mattel's actual ability under applicable tax laws to utilize deferred tax assets such as loss carryforwards and tax credits to reduce future cash tax payments if and when sufficient income is earned prior to the expiration of the deferred tax assets. Mattel will continue to assess the likelihood that the deferred tax assets will be realizable at each period end.

In addition, management determined that a valuation allowance of $67.4 million was required as of December 31, 2017 for those deferred tax assets for which there is not sufficient evidence as to their ultimate utilization, related to certain foreign affiliates. Changes in the valuation allowance for 2017 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 $12.3 million.

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



	For the Year Ended
	December 31, 2017			December 31, 2016			December 31, 2015
	(In thousands)
(Benefit) provision at U.S. federal statutory rate	$	(176,745	)	$	143,410		$	162,370
Increase (decrease) resulting from:
U.S. valuation allowance	554,551			—			—
Foreign earnings taxed at different rates, including withholding taxes	265,112			(51,711		)	(56,877		)
U.S. Tax Reform	(105,279		)	—			—
Foreign losses without income tax benefit	1,475			8,526			5,843
State and local taxes, net of U.S. federal benefit	1,885			3,385			482
Adjustments to previously accrued taxes	5,159			(12,537		)	(19,134		)
Other	2,691			647			1,815
Provision for income taxes	$	548,849		$	91,720		$	94,499

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 U.S. 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, 2017			December 31, 2016			December 31, 2015
	(In thousands)
Unrecognized tax benefits at January 1	$	109,347		$	118,099		$	100,357
Increases for positions taken in current year	4,171			2,925			5,724
Increases for positions taken in a prior year	19,318			921			22,584
Decreases for positions taken in a prior year	(5,637		)	(1,706		)	(4,242		)
Decreases for settlements with taxing authorities	(2,349		)	(1,097		)	(3,577		)
Decreases for lapses in the applicable statute of limitations	(8,780		)	(9,795		)	(2,747		)
Unrecognized tax benefits at December 31	$	116,070		$	109,347		$	118,099

Of the $116.1 million of unrecognized tax benefits as of December 31, 2017, $112.3 million would impact the effective tax rate if recognized, of which approximately $66.8 million would result in an increase in the valuation allowance.

Mattel recognized an increase of interest and penalties of approximately $2 million in 2017, a decrease of $2 million in 2016 and $0 million in 2015, related to unrecognized tax benefits, which are reflected in provision for income taxes in the consolidated statements of operations. As of December 31, 2017, Mattel accrued $18.6 million in interest and penalties related to unrecognized tax benefits. Of this balance, $17.7 million would impact the effective tax rate if recognized. As of December 31, 2016, Mattel accrued $17.1 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 2014 through 2017 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 2017 tax years, New York for the 2010 through 2017 tax years, and Wisconsin for the 2008 through 2017 tax years. Mattel files multiple foreign income tax returns and remains subject to examination in major foreign jurisdictions, including Hong Kong for the 2011 through 2017 tax years, Brazil, Mexico and Netherlands for the 2012 through 2017 tax years and Russia for the 2015 through 2017 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 $27.6 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 expense of $454.4 million in 2017, and net tax benefits of $16.8 million and $19.1 million in 2016 and 2015, respectively. The 2017 net tax expense primarily relates to the establishment of a valuation allowance in the third quarter on U.S. deferred tax assets that will likely not be realized and a provisional estimate of the impact of U.S. Tax Reform in the fourth quarter of 2017. 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, 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 cumulative amount of undistributed earnings of foreign subsidiaries that Mattel intends to indefinitely reinvest and upon which no deferred U.S. income taxes have been provided is approximately $7.0 billion as of December 31, 2017. 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.

On December 22, 2017, H.R.1, also known as the Tax Cuts and Jobs Act (“Tax Act” or "U.S. Tax Reform"), was enacted. The Tax Act significantly revises the U.S. corporate income tax by, among other things, lowering the federal corporate income tax rate from 35% to 21% effective January 1, 2018, implementing the territorial tax system, and imposing a transition tax on deemed repatriated earnings of foreign subsidiaries.

The changes included in the Tax Act are broad and complex. Furthermore, the Securities Exchange Commission has issued guidance under Staff Accounting Bulletin 118 that allows for companies to provide provisional amounts for certain income tax effects of the Tax Act for which the company can provide a reasonable estimate. The guidance also provides that a company may not have the necessary information available, prepared, or analyzed for certain income tax effects of the Tax Act, in which case the company would not be expected to provide a provisional amount for those specific items. Additionally, the guidance allows for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts.

In line with the above-mentioned guidance, Mattel has made a provisional assessment of the impact of the corporate tax rate change on its results of operations, cash flows and consolidated financial statements. Accordingly, a provisional income tax benefit of $105.3 million has been recorded for the year ended December 31, 2017. Of this amount, approximately $52.3 million relates to the remeasurement of the U.S. net deferred tax liabilities from the 35% to 21% tax rate and $53.0 million relates to the revised deferred tax netting from the third quarter of 2017 to the fourth quarter of 2017. Mattel has not yet determined a reasonable estimate of the impact of the deemed repatriation of accumulated foreign earnings due to the complexities inherent in the existing legal entity structure, history of acquisitions, and the current circumstance of carrying a valuation allowance against Mattel's U.S. deferred tax assets. Additionally, the accumulated foreign earnings charge may result in the utilization and realization of tax credit carryforwards, net operating loss carryforwards and other deferred tax assets that may further result in a change in the valuation allowance recorded on such items. All of the items noted may individually have a material impact on the effect of the toll charge and therefore we cannot make a reasonable estimate at this time. These factors also contribute significant complexity to determining the impact of other aspects of U.S. Tax Reform, including the impact of the Base Erosion Anti-Abuse Tax ("BEAT"), Global Intangible Low-Taxed Income ("GILTI"), and tax elections and methods that could impact the effect of the rate change on its deferred tax balances at the date of enactment of the Tax Act.

The final transition impact of the Tax Act may result in a material increase in taxes payable and tax expense, due to, among other things, changes in interpretations of the Tax Act, legislative action to address questions that arise because of the Tax Act, or changes in accounting standards for income taxes or related interpretations in response to the Tax Act. As Mattel completes its analysis of the accounting for the tax effects of enactment of the Tax Act, it may record additional provisional amounts or adjustments to provisional amounts as discrete items in future periods. The Company expects to complete the accounting for these impacts of the Tax Act in the fourth quarter of 2018 as it completes its analysis and receives additional guidance from the Internal Revenue Service pertaining to the Tax Act.