Mattel 2015 Annual Report Download - page 64

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On April 30, 2014, Mattel acquired MEGA Brands Inc., a corporation incorporated under the laws of Canada (“MEGA
Brands”), pursuant to the Arrangement Agreement dated as of February 27, 2014, between MEGA Brands, Mattel Overseas
Operations Ltd., a corporation incorporated under the laws of Bermuda, Mattel-MEGA Holdings Inc., a corporation
incorporated under the laws of Canada (the “Purchasing Subsidiary”), and, with respect to certain provisions thereof, Mattel
(the “Arrangement Agreement”). Pursuant to the terms set forth in the Arrangement Agreement, Mattel indirectly acquired,
through the Purchasing Subsidiary, 100% of the issued and outstanding common shares and warrants of MEGA Brands for total
cash consideration of $454.9 million, including payment for cash acquired of $31.6 million. The acquisition of MEGA Brands
builds upon Mattel’s portfolio of brands by expanding into the construction building sets and arts and crafts categories.
The total purchase consideration was allocated to the assets acquired and liabilities assumed based on their estimated fair
values. As a result of the acquisition, Mattel recognized $95.0 million of identifiable intangible assets (primarily related to trade
names and existing product lines), $40.6 million of net assets acquired (which included $31.6 million of cash, $36.6 million of
accounts receivable, $83.0 million of inventory, $32.5 million of property, plant, and equipment, $66.6 million of accounts
payable and accrued liabilities, $44.6 million of long-term debt, and $31.9 million of other net liabilities), and $319.3 million of
goodwill, which is not deductible for tax purposes. The fair values of the identifiable intangible assets related to trade names
were based on the relief from royalty method, using Level 3 inputs within the fair value hierarchy, which included forecasted
future cash flows, long-term revenue growth rates, royalty rates, and discount rates. The fair values of the identifiable
intangible assets related to existing product lines 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
discount rates. 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 finalized the valuation of the assets acquired and liabilities assumed in the first quarter of 2015, which resulted in
adjustments to the purchase price allocation during the measurement period. As such, Mattel has retrospectively adjusted the
provisional amounts recorded in its consolidated balance sheet as of December 31, 2014 as if the valuation of the assets
acquired and liabilities assumed was finalized on the acquisition date. For the consolidated balance sheet as of December 31,
2014, the retrospective adjustments resulted in an increase to net assets acquired of approximately $1 million and a decrease to
goodwill of approximately $1 million.
During 2015, Mattel recognized approximately $11 million of integration costs. There were no transaction costs during
2015. During 2014, Mattel recognized approximately $21 million and $7 million of integration costs and transaction costs,
respectively. 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,
2015 2014
(In thousands)
Nonamortizable identifiable intangibles $ 488,144 $ 498,517
Identifiable intangibles (net of amortization of $131.5 and $103.6 million at December 31,
2015 and 2014, respectively) 212,161 240,227
$ 700,305 $ 738,744
In connection with the acquisition of MEGA Brands during 2014, Mattel recognized $95.0 million of amortizable
identifiable intangible assets, primarily related to trade names and existing product lines.
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