Mattel 2002 Annual Report Download - page 37

Capital Deployment Plan
To guide future capital deployment decisions, with a goal of maximizing shareholder value, Mattel’s board
of directors has established the following capital and investment framework:
• To maintain approximately $800 million to $1 billion in year-end cash available to fund a substantial
portion of seasonal working capital,
• To maintain a year-end debt-to-capital ratio of about 25% with the target of achieving a long-term debt
rating of single-A, and
• To invest approximately $180 million to $200 million in capital expenditures annually to maintain and
grow the business.
In the first quarter of 2003, Mattel will use approximately $130 million of free cash flow to fund incentive
compensation and the shareholder litigation settlement. In 2003, Mattel will repay approximately $180 million in
long-term debt related to $30.0 million in medium-term notes maturing in May 2003 and $150.0 million in
6% senior notes maturing in July 2003. Over the long-range horizon, assuming cash flows from operating
activities remain strong, Mattel plans to use its free cash flows to invest in strategic acquisitions and to return
funds to shareholders through cash dividends and share repurchases. The ability to implement successfully the
capital deployment plan is directly dependent on Mattel’s ability to generate strong cash flows from operating
activities. There is no assurance that Mattel will continue to generate strong cash flows from operating activities
or achieve the targeted goals from its investing activities. Further, Mattel’s management may alter its current
plans in the future.
Seasonal Financing
Mattel expects to finance its seasonal working capital requirements for 2003 by using existing and internally
generated cash, issuing commercial paper, selling certain trade receivables, and using various short-term bank
lines of credit. In March 2002, Mattel amended and restated its existing $1.0 billion domestic unsecured
committed revolving credit facility into a $1.060 billion, 3-year facility that expires in 2005. This facility
provides short-term borrowings from a commercial bank group. Interest is charged at various rates selected by
Mattel, ranging from market commercial paper rates to the bank reference rate. The unsecured committed
revolving credit facility contains a variety of covenants, including financial covenants that require Mattel to
maintain certain consolidated debt-to-capital and interest coverage ratios. Specifically, Mattel is required to meet
these financial covenant ratios at the end of each fiscal quarter and fiscal year, using the formulae specified in the
credit agreement to calculate the ratios. Mattel was in compliance with such covenants at the end of each fiscal
quarter and fiscal year in 2002. As of December 31, 2002, Mattel’s consolidated debt-to-capital ratio, as
calculated per the terms of the credit agreement, was 0.37 to 1 (compared to a maximum allowed of 0.50 to 1)
and Mattel’s interest coverage ratio was 8.14 to 1 (compared to a minimum allowed of 3.50 to 1).
To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of
individual short-term foreign credit lines with a number of banks. Foreign credit lines total approximately
$266 million, a portion of which is used to support letters of credit. Mattel expects to extend these credit lines
throughout 2003. Mattel believes the cash on hand at the beginning of 2003, amounts available under its
domestic unsecured committed revolving credit facility, its uncommitted money market facility, and its foreign
credit lines will be adequate to meet its seasonal financing requirements in 2003.
Mattel sells certain domestic and foreign trade receivables as one of its means for financing seasonal
working capital requirements. Mattel has a $300.0 million domestic receivables sales facility which is a sub-
facility of Mattel’s $1.060 billion, 3-year domestic unsecured committed revolving credit facility. The
outstanding amount of receivables sold under the domestic receivables facility may not exceed $300.0 million at
any given time, and the $1.060 billion available to be borrowed under the credit facility is reduced to the extent
of any such outstanding receivables sold. Under the domestic receivables facility, certain trade receivables are
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