Mattel 2003 Annual Report Download - page 84

Note 8—Financial Instruments
Marketable Securities
Marketable securities totaling $78.6 million and $71.0 million as of year end 2003 and 2002, respectively,
are stated at fair market value based on quoted market prices. These equity securities are classified as securities
available-for-sale and are included in other assets in the consolidated balance sheets. Unrealized gains of
$52.1 million pre-tax ($32.8 million net of tax) and $45.0 million pre-tax ($28.3 million net of tax) as of year end
2003 and 2002, respectively, have been deferred in accumulated other comprehensive loss related to these
securities.
Upon the adoption of SFAS No. 133 on January 1, 2001, Mattel recorded a 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 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
Foreign currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows.
Inventory purchase transactions denominated in the Euro, British pound sterling, Mexican peso, Hong Kong
dollar and Indonesian rupiah are the primary transactions that cause foreign currency transaction exposure for
Mattel. Mattel seeks to mitigate its exposure to market risk by monitoring its foreign currency transaction
exposure for the year and partially or fully hedging such exposure using foreign currency forward exchange and
option contracts. Such contracts are primarily used to 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. The majority of all intercompany receivables and payables denominated in foreign currencies
are hedged. For those intercompany receivables and payables that are not hedged, the transaction gains or losses
are recorded in the consolidated statement of operations in the period in which the exchange rate changes as part
of operating income or other non-operating (income) expense, net based on the nature of the underlying
transaction. In addition, Mattel manages its exposure through the selection of currencies used for international
borrowings. Mattel does not trade in financial instruments for speculative purposes.
Transaction gains and losses included in the consolidated statements of operations are as follows (in
thousands):
For the Year
2003 2002 2001
Transaction (gain)/loss included in:
Operating income ................................................. $(17,864) $(24,697) $(30,939)
Other non-operating expense (income), net ............................. 9,962 (10,539) 8,836
Net transaction (gain) .......................................... $ (7,902) $(35,236) $(22,103)
Mattel’s financial position is also impacted by foreign currency exchange rate fluctuations on its net
investment in foreign subsidiaries. Assets and liabilities of foreign subsidiaries are translated into US dollars at
fiscal year-end exchange rates. Income, expense and cash flow items are translated at weighted average exchange
rates prevailing during the fiscal year. The resulting currency translation adjustments are recorded as a
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