Mattel 2003 Annual Report Download - page 29

Kailey®doll, as well as introduction of the Hopscotch Hill School™brand. Mattel intends to invigorate the
American Girl Brands category in 2004 through initiatives such as a made for TV movie scheduled to air in the
fall of 2004 featuring Samantha Parkington®,aclassic American Girl character. Additionally, the American Girl
Place®in New York City, which opened in November 2003, surpassed the performance of the Chicago store in
its opening holiday season and is expected to have a positive impact on invigorating sales of American Girl
products during 2004.
Gross profit, as a percentage of net sales, was 49.0% in 2003 compared to 48.3% in 2002. The gross profit
improvement was due to savings realized from the financial realignment plan and supply chain initiatives
(including global procurement initiatives designed to reduce costs) and lower royalty costs. The improvement in
gross profit was partially offset by investments in initiatives designed to drive sales momentum, such as more
open packaging to enhance value perception with consumers and packaging multiple products together at special
value prices, and higher commodity and logistics costs. Continued value enhancement strategies in 2004 will put
pressure on gross profit. Mattel intends to mitigate the impact of increased cost pressures in 2004 through
continued execution of its supply chain initiatives. Management believes more opportunities exist to optimize
further its manufacturing through sourcing and global procurement initiatives.
Advertising and promotion expense was 12.8% of net sales in 2003, compared to 11.3% in 2002. The
increase in 2003 compared to 2002 was largely due to increased spending to support the launch of several new
product lines and Mattel’s attempt to rebuild volume momentum in core brands as well as the unfavorable effect
of currency exchange rate changes. While some advertising and promotion programs were successful, other
programs did not meet expectations in terms of rebuilding volume momentum and stimulating revenue growth.
In light of these mixed results from its 2003 advertising and promotion programs, management is currently
reviewing its 2004 advertising strategy and spending objectives.
Other selling and administrative expenses were $1.0 billion, or 20.3% of net sales, in 2003 compared to
$1.1 billion, or 21.5% of net sales, in 2002. The decrease in 2003 was primarily due to lower incentive
compensation accruals of approximately $80 million and reduced bad debt expense of approximately
$43 million, partially offset by higher employee benefit and insurance costs, spending related to continuous
improvement initiatives and the unfavorable impact of currency exchange rates. The decrease in bad debt
expense was largely due to a $33.5 million writedown of the Kmart pre-bankruptcy accounts receivable in 2002.
Other selling and administrative expenses in 2003 included an $8.6 million financial realignment plan charge,
largely related to streamlining back office functions and the termination of a licensing arrangement. Other selling
and administrative expenses in 2002 included a $13.3 million financial realignment plan charge, largely related
to streamlining back office functions and asset writedowns and other costs associated with the closure of its
manufacturing and distribution facilities in Murray, Kentucky (“North American Strategy”). Management
expects that some or all of these cost pressures will continue in 2004. Management intends to continue to focus
on controlling costs to reduce the impact of such cost pressures through its continuous improvement initiatives.
Non-Operating Items
Interest expense decreased from $113.9 million in 2002 to $80.6 million in 2003 due to lower average
borrowings resulting from higher cash on hand at the beginning of the year, lower short-term interest rates and
repayment of long-term debt. Other non-operating (income), net was $16.8 million in 2003, including a
$15.5 million gain from the sale of marketable securities and a $7.8 million gain from an insurance recovery related
to the shareholder lawsuit settled in 2002, partially offset by foreign currency transaction losses of $10.0 million.
Other non-operating expense, net was $15.9 million in 2002, including a $25.4 million charge resulting from the
settlement of shareholder litigation related to the 1999 acquisition of the Learning Company, partially offset by
foreign currency transaction gains of $10.5 million. Foreign currency transaction gains and losses on unhedged
intercompany loans and advances are recorded as a component of other non-operating (income) expense, net in the
period in which the exchange rate changes. 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.”
20