Mattel 2002 Annual Report Download - page 28

Other selling and administrative expenses were $1.1 billion or 21.5% of net sales in 2002 compared to
$964.2 million or 20.6% of net sales in 2001. Other selling and administrative expenses increased in 2002
primarily due to higher incentive compensation accruals of approximately $63 million. Mattel’s incentive
compensation plans are based on net operating profit after-taxes less a capital charge, and substantial progress
was made in improving this metric since 2001. Other selling and administrative expenses also increased due to
financial realignment plan charges of $13.3 million in 2002 compared to $6.0 million in 2001, largely associated
with streamlining back office functions and asset writedowns and other costs associated with implementing the
North American Strategy. Offsetting the increase in other selling and administrative expenses were cost savings
resulting from continued execution of the financial realignment plan and tight management of costs.
Total bad debt expense was $53.4 million in 2002 compared to $57.7 million in 2001. Each quarter,
management evaluates Mattel’s credit exposure as it relates to all of its customers. Considering this review,
Mattel recorded an additional $33.5 million adjustment in 2002 to write down the Kmart pre-bankruptcy petition
accounts receivable. In the fourth quarter of 2001, Mattel recorded an initial $22.1 million charge related to the
bankruptcy filing of Kmart in January 2002 and approximately $9 million in bad debt expense in the third quarter
of 2001, largely related to the bankruptcy declared by another US retailer. To estimate the net realizable value of
the Kmart pre-bankruptcy petition accounts receivable, management considered the current post-petition market
price for the Kmart bank debt, bonds and trade receivables at the end of each quarter. In the fourth quarter of
2002, Mattel decided to sell its Kmart pre-bankruptcy petition accounts receivable and, accordingly, wrote them
down to liquidation value. Mattel’s remaining pre-bankruptcy petition net accounts receivable from Kmart at
December 31, 2002, after offsetting the reserve for customer benefits that were not earned by Kmart, was
$2.7 million. The $2.7 million reflects Mattel’s best estimate of the net realizable value of its pre-bankruptcy
petition trade claim as of December 31, 2002, considering the actual proceeds Mattel received upon the sale of
this trade claim in March 2003 to an unrelated third party.
The following is a summary of the activity related to Mattel’s net Kmart pre-bankruptcy petition accounts
receivable balance through December 31, 2002 (in millions):
Gross Kmart accounts receivable before bankruptcy filing .............................. $73.1
Balance of reserve, reclamation claim and unearned customer benefits accrued at time of
Kmart’s bankruptcy filing ..................................................... $(14.8)
Writedown for bad debt recorded in 2001 ........................................... (22.1)
Writedown for bad debt recorded in 2002 ........................................... (33.5)
Total reserves and unearned customer benefits at December 31, 2002 ................... (70.4)
Net Kmart pre-bankruptcy petition accounts receivable at December 31, 2002 .............. $ 2.7
Non-Operating Items
Interest expense was $113.9 million in 2002 compared to $155.1 million in 2001 due to lower average
borrowings resulting from improvements in working capital and higher cash at the beginning of the year,
repayment of approximately $422 million in long-term debt, and lower short-term interest rates. Interest income
was $17.7 million in 2002 compared to $15.5 million in 2001. Other non-operating expense, net was
$15.9 million in 2002 versus $9.7 million in 2001. Included in 2002 was a $25.4 million charge recorded in the
fourth quarter resulting from the settlement of shareholder litigation related to the 1999 acquisition of the
Learning Company. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Litigation—Litigation Related to Learning Company” and Item 8 “Financial Statements and
Supplementary Data—Note 9 to the Consolidated Financial Statements.” Excluding this charge, the decrease in
other non-operating expense, net was largely due to net foreign currency exchange gains totaling $10.5 million in
2002 compared to net foreign currency exchange losses totaling $8.8 million in 2001. Gains and losses on
unhedged intercompany receivables and payables balances denominated in a currency other than the applicable
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