Mattel 2003 Annual Report Download - page 33

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the Entertainment category grew 2% in 2002 compared to 2001, reflecting strong sales from licensed properties
such as He-Man®and Masters of the Universe®,Yu-Gi-Oh!™and SpongeBob SquarePants™lines, and games
and puzzles, which more than offset the elimination in 2002 of the Disney entertainment properties and a decline
in Harry Potter™sales.
Worldwide gross sales of Fisher-Price Brands increased 5% to $1.7 billion in 2002 compared to 2001.
International gross sales increased 10% and domestic gross sales increased 3%. The international gross sales
growth included a 2 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of
core Fisher-Price®products increased 9% due to a 15% increase in international sales and a 6% increase in
domestic sales. The growth in international gross sales of core Fisher-Price®included a 4 percentage point
benefit from changes in currency exchange rates. Sales of licensed character brands decreased in 2002 compared
to 2001 in both domestic and international markets.
Gross sales of American Girl Brands increased 3% to $350.2 million in 2002 compared 2001. Sales
increases in The American Girls Collection®,driven by the launch of the historical Kaya®doll, and higher sales
of Bitty Baby®boosted by the introduction of Bitty Twins®were partially offset by a decline in the American
Girl Today®brand, which benefited from the launch of the Lindsey®doll in 2001, and lower sales of AG
Mini*s™.
Gross profit, as a percentage of net sales, was 48.3% in 2002 compared to 45.8% in 2001. Gross profit was
positively impacted by savings realized from the financial realignment plan and supply chain initiatives.
Specifically, gross profit benefited from lower commodity and logistics costs, reduced manufacturing overhead
costs, lower material costs due to improved design and engineering processes, and lower product costs due to
movement of production to Mexico and Asia. Cost of sales in 2002 included a $10.4 million financial
realignment plan charge, largely related to the North American Strategy. Cost of sales in 2001 included a
$28.2 million financial realignment plan charge, largely related to the North American Strategy and termination
of a licensing agreement.
Advertising and promotion expense was 11.3% of net sales for 2002, compared to 11.6% in 2001. The
decrease in 2002 compared to 2001 was largely due to lower prices charged by media companies on a cost per
rating point basis.
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 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 writedown 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
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