Mattel 2002 Annual Report Download - page 78

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Note 8—Financial Instruments
Marketable Securities
Marketable securities totaling $71.0 million are stated at fair market value based on quoted market prices.
These securities are classified as securities available-for-sale and are included in other assets in the consolidated
balance sheet as of December 31, 2002. Unrealized gains of $28.3 million, net of tax, have been deferred in
accumulated other comprehensive income (loss) for 2002 related to these securities, which have a cost basis of
$26.0 million.
Upon the adoption of SFAS No. 133 on January 1, 2001, Mattel recorded a one-time transition adjustment
of $12.0 million, net of tax, (or $0.03 per share) as the cumulative effect of change in accounting principles
related to unrealized holding losses that had been previously deferred in accumulated other comprehensive
income (loss) on marketable securities received by Mattel as part of the sale of CyberPatrol.
Mattel entered into a derivative transaction designed to limit the impact of market fluctuations in the fair
value of the securities received as part of the sale of CyberPatrol on its results of operations. During the first
quarter of 2001, Mattel recorded a pre-tax loss of $5.5 million in other non-operating expense, net related to the
decrease in fair value of the derivative. In the second quarter of 2001, these securities were tendered for debt
repayment under the derivative agreement at fair market value, at no gain or loss to Mattel.
Foreign Exchange Risk Management
Exchange rate fluctuations may impact Mattel’s results of operations and cash flow. Inventory purchase
transactions denominated in the Euro, British pound sterling, Mexican peso, Hong Kong dollar and Indonesian
rupiah are the primary transactions that cause exchange rate exposure for Mattel. Mattel seeks to mitigate its
exposure to market risk by monitoring its currency exchange exposure for the year and partially or fully hedging
such exposure using foreign currency forward exchange and option contracts. These contracts primarily hedge
Mattel’s purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies.
These contracts generally have maturity dates of up to 18 months. Inventory purchase exposure in Mexico is
partially offset by Mexico’s cash position that is held in US dollars. Excluding the US dollar denominated
intercompany balances in Mexico, the majority of all other intercompany receivables and payables denominated
in foreign currencies are hedged or are short-term balances with minimal currency exposure. In addition, Mattel
manages its exposure through the selection of currencies used for international borrowings. Mattel does not trade
in derivative financial instruments for speculative purposes.
Transaction gains and losses included in the consolidated statements of operations are as follows (in
thousands):
For the Year
2002 2001 2000
Cost of sales ..................................................... $(24,697) $(30,939) $(12,552)
Other non-operating expense, net .................................... (10,539) 8,836 (2,979)
Net transaction (gain) .......................................... $(35,236) $(22,103) $(15,531)
Mattel’s financial position is also impacted by exchange rate fluctuations on its net investment in foreign
subsidiaries. Assets and liabilities of foreign subsidiaries are translated into US dollars at fiscal period-end
exchange rates. Income, expense and cash flow items are translated at weighted average exchange rates
prevailing during the fiscal period. The resulting currency translation adjustments are recorded as component of
accumulated other comprehensive income (loss) within stockholders’ equity. Mattel’s primary currency
exposures are on its net investment in entities having functional currencies denominated in the Euro, British
pound sterling, Mexican peso, Hong Kong dollar and Indonesian rupiah. For 2002, currency translation
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