Mattel 2003 Annual Report Download - page 38

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attributable to payments made in 2003 related to year end 2002 accruals for incentive compensation and the
shareholder lawsuit settlement. Additionally, Mattel entered 2003 with relatively lower levels of accounts
receivable and inventories than in 2002 due to working capital improvements achieved during 2002. While
management of working capital was a key initiative in 2003, management did not expect this initiative to
generate the same magnitude of cash from working capital improvements as it did in 2002. The increase in cash
flows from operating activities in 2002 from 2001 was largely due to increased income from continuing
operations and improved working capital. The improvement in working capital in 2002 compared to 2001 was
driven by lower accounts receivable resulting from shorter payment terms to customers, and improved cash
collections and lower inventory levels due to supply chain initiatives.
Capital and Investment Framework
To guide future capital deployment decisions, with a goal of maximizing shareholder value, Mattel’s board
of directors in 2003 established the following capital and investment framework:
•Tomaintain approximately $800 million to $1 billion in year-end cash available to fund a substantial
portion of seasonal working capital;
•Tomaintain a year-end debt-to-capital ratio of about 25% with the target of achieving a long-term debt
rating of single-A;
•Toinvest approximately $180 million to $200 million in capital expenditures annually to maintain and
grow the business;
•Tomake strategic acquisitions consistent with Mattel’s vision of providing “the world’s premier toy
brands—today and tomorrow”; and
•Toreturn excess funds to shareholders through dividends and share repurchases.
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, depending on market conditions, share repurchases. However, 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.
Investing Activities
Mattel invested its cash flows during the last three years in tooling to support existing and new products, its
long-term information technology strategy, certain financial realignment plan initiatives (including the expansion
of certain North American manufacturing facilities) and construction of the new American Girl Place®in New
York City which opened in the fourth quarter of 2003. In 2001, Mattel acquired Pictionary®for approximately
$29 million, of which approximately $21 million was paid in 2001, $3 million in both 2002 and 2003, with the
remaining $2 million to be paid in 2004. In 2001 and 2003, Mattel received proceeds from sales of investments
of approximately $14 million and $24 million, respectively.
Financing Activities
During the last three years, Mattel utilized cash flows from operating activities to repay both long-term debt
and short-term borrowing obligations as part of its goal to improve its debt-to-capital ratio. In 2003, Mattel
repaid approximately $181 million in long-term debt obligations, largely related to repayment of its
$150.0 million 6% senior notes and $30.0 million of medium-term notes. In 2002, Mattel repaid approximately
$422 million in long-term debt obligations, largely related to its $200.0 million term loan, 200 million Euro notes
and $30.0 million of medium-term notes. In 2001, Mattel utilized cash flows from operating activities to repay
approximately $176 million of short-term borrowings and $30.5 million of medium-term notes.
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