Mattel 2000 Annual Report Download - page 24

twenty two
Mattel, Inc. and Subsidiaries
The following table provides a comparison of the reported
results for 1999 versus 1998 (in millions):
For the Year
1999 1998
Net sales $4,595 $4,698
Gross profit $2,182 48% $2,310 49%
Advertising and promotion expenses 684 15 787 17
Other selling and admin. expenses 868 19 863 18
Amortization of intangibles 52 1 41 1
Restructuring and other charges 281 6 44 1
Other (income) expense, net (5) - 5 -
Operating income 302 7 570 12
Interest expense 132 3 111 2
Income from continuing operations
before income taxes $ 170 4% $ 459 10%
Net sales for 1999 were $4.6 billion, a decrease of 2% from
$4.7 billion in 1998. In local currency, sales declined 1% compared to
1998. Sales in the US remained relatively flat and accounted for 70%
and 68% of consolidated net sales in 1999 and 1998, respectively.
Sales outside the US were down 8%. Excluding the unfavorable for-
eign exchange impact, international sales declined by 5%.
Worldwide sales in the Girls category decreased 9%, largely
due to declines in Barbie® and Cabbage Patch Kids® products. Barbie®
sales were up 2% in the US and down 13% in international markets.
Excluding the unfavorable exchange, Barbie® sales were down 10% in
international markets.
Sales in the Boys-Entertainment category were up 9% world-
wide. Sales in the Wheels category grew 4%, largely due to increased
sales of Hot Wheels® product. Sales in the Entertainment category
increased 19% worldwide, largely due to the success in 1999 of toys
associated with Disney’s feature motion picture Toy Story 2.
Sales in the Infant &Preschool category declined 3% world-
wide, largely attributable to the success of Sesame Street® products
in 1998 including ‘Tickle Me Elmo’, and decreased sales of Disney’s
Winnie the Pooh® products, partially offset by an increase in sales
of core Fisher-Price® and Power Wheels® products.
Direct marketing sales, which include Pleasant Company,
Barbie® collector and Fisher-Price® catalogs, increased by 24% com-
pared to 1998, largely due to incremental sales of American Girl®
product resulting from the Pleasant Company acquisition. Pleasant
Company was acquired in July 1998 and, therefore, the results of
operations for 1998 only reflect six months of results.
Gross profit, as a percentage of net sales, was 47.5% in 1999,
down from 49.2% in 1998. This decline was largely due to overall
change in product mix, unfavorable foreign exchange rates and higher
shipping costs. As a percentage of net sales, advertising and promo-
tion expenses were 14.9%, a decrease of 1.8 percentage points versus
1998. Other selling and administrative expenses increased from
18.4% of net sales in 1998 to 18.9% of net sales in 1999. Amortization
of intangibles increased by $10.7 million, mainly as a result of a full
year of incremental amortization for Pleasant Company and Bluebird
Toys PLC acquired in mid-year 1998.
Interest expense increased $20.8 million, primarily due to
increased short- and long-term borrowings to fund Learning Company’s
cash requirements and to finance Mattel’s 1998 acquisitions.
Business Segment Results
The US Girls segment sales reached $1.0 billion in 1999, consistent
with 1998. Increased sales of Barbie® product was offset by declines
in sales of Cabbage Patch Kids® products. The US Boys-Entertainment
segment sales increased slightly from 1998, as a 4% increase in sales
of Entertainment product was offset by a 2% decrease in sales of
Wheels product. The US Infant &Preschool segment sales declined
by 1%, mainly due to lower sales of Sesame Street®, Disney preschool
and Winnie the Pooh® product, offset by increased sales of core
Fisher-Price® and Power Wheels® products. Sales in the Other segment
increased by 13%, largely due to incremental sales resulting from the
July 1998 acquisition of the Pleasant Company. The International Toy
Marketing segment sales decrease of 8% was partially attributable to
unfavorable foreign exchange rates and unfavorable industry-wide
trends, especially the shift amongst European retailers to just-in-time
inventory management. By brand, the International Toy Marketing
segment experienced lower sales of Barbie® and core Fisher-Price®
products, partially offset by sales increases in Wheels and
Entertainment products.
Operating profit for the US Girls, US Boys-Entertainment
and US Infant &Preschool segments in total declined by 4%, largely
due to unfavorable product mix partially offset by lower advertising
costs. Operating profit in the Other segment declined by 69%, largely
due to incremental amortization and overhead expenses resulting
from the July 1998 acquisition of Pleasant Company. The International
Toy Marketing segment operating profit decreased by 25%, primarily
due to lower sales volume and unfavorable product mix partially
offset by lower advertising costs.
INCOME TAXES
The effective income tax rate on continuing operations was 24.5% in
2000 compared to 36.3% in 1999 and 28.6% in 1998. The effective
rate on continuing operations, excluding restructuring and nonrecurring
charges, was 27.6% for 2000 and 1999, and was favorably impacted by
income earned in foreign jurisdictions taxed at lower rates.
The difference in the overall tax rate on continuing operations
between 1999 and 2000 is caused by the restructuring and nonrecur-
ring charges. In 1999, a significant portion of the restructuring
expenses consisted of expenses which were not deductible for tax pur-
poses, resulting in a lower effective tax benefit on these restructuring
charges, and a higher overall effective tax rate. In 2000, most of the
restructuring and nonrecurring charges are deductible for tax purposes
and provide a benefit at or near the effective US tax rate, resulting
in a lower overall effective tax rate for 2000 as compared to 1999.
The pre-tax loss from US operations includes interest expense,
amortization of intangibles and corporate headquarters expenses.
Therefore, the pre-tax losses from US operations as a percentage of
the consolidated pre-tax income was less than the sales to US cus-
tomers as a percentage of the consolidated gross sales.