Mattel 1998 Annual Report Download - page 29

Mattel, Inc. and Subsidiaries 27
1998 Compared to 1997
Net income for 1998 was $332.3 million or $1.10 per diluted share as
compared to $285.2 million or $0.93 per diluted share in 1997. 1998
net income was impacted by a $27.2 million after-tax charge ($0.09
per diluted share) related to a voluntary recall of certain Power
Wheels®ride-on vehicles and a one-time charge of $4.3 million after
taxes ($0.01 per diluted share) in connection with the proposed Toys
R Us-related antitrust litigation settlement. Net sales for 1998 reached
$4.78 billion, a decrease of 1% from $4.83 billion in 1997. Cutbacks in
purchases by retailers to adjust to a just-in-time buying pattern nega-
tively impacted sales. Sales in the Girls category decreased 4% largely
due to a 14% decline in Barbie®products, as a result of high retail
inventory levels entering 1998. As a result of the Pleasant Company
acquisition in July 1998, the American Girl®brand contributed
$213.2 million in gross sales, which helped to partially offset the
decline in Barbie®. Sales in the Infant and Preschool category
decreased 3%, largely attributable to declines in Sesame Street®
and Fisher-Price®products, partially offset by an increase in Disney’s
Winnie the Pooh®. Sales in the Wheels category grew 21%, reflecting
growth in both Hot Wheels®and Matchbox®vehicles and playsets.
Sales in the Entertainment category, which includes Disney and
Nickelodeon®, increased 14% largely due to this year’s introduction
of toys associated with the feature motion pictures “A Bug’s Life” and
“The Rugrats Movie”.
Sales to customers within the US declined 2% and accounted
for 66% of consolidated gross sales in both 1998 and 1997. Sales to
customers outside the US were down 1%, including an unfavorable
foreign exchange effect of approximately $30 million due to the
generally stronger US dollar relative to 1997. At comparable foreign
exchange rates, sales internationally grew 1%.
Gross profit as a percentage of net sales remained relatively
constant at 49.4% compared to 49.6% in 1997. As a percentage of
net sales, advertising and promotion expenses increased approximately
one percentage point to 17.0%, and selling and administrative expenses
increased two percentage points to 18.5%. Both these ratios increased
relative to last year as a result of unanticipated cutbacks in buying by
retailers due to a continuing shift by these retailers to just-in-time
inventory management. To respond to such shifts, the Company
took appropriate actions to adjust its own shipping to more of a
just-in-time pattern. As a result, products that would have previously
been shipped in December will be shipped closer to the time that
they will be purchased by the consumer. The Company plans to
manage its advertising and selling and administrative levels in 1999
to bring them back in line with its historical ratios. Amortization of
intangibles increased by $9.8 million, mainly due to the amortization
of goodwill in connection with the 1998 acquisitions of Pleasant
Company and Bluebird Toys PLC (“Bluebird”).
Interest expense increased $20.7 million primarily due to
increased short- and long-term borrowings to finance the Company’s
1998 acquisitions of Pleasant Company and Bluebird.
1997 Compared to 1996
Net income for 1997 was $285.2 million or $0.93 per diluted share
as compared to $372.2 million or $1.23 per diluted share in 1996.
1997 net income was impacted by a $209.7 million after-tax charge
($0.71 per diluted share) related to a nonrecurring charge for trans-
action, integration and restructuring costs related to the Mattel
restructuring and Tyco integration, and an extraordinary loss of $4.6
million net of taxes ($0.01 per diluted share) for the early retirement
of debt assumed as part of the Tyco merger. Net sales for 1997
were $4.83 billion, an increase of 7% from $4.54 billion in 1996.
Sales growth included a $138.5 million unfavorable foreign exchange
effect from the generally stronger US dollar relative to 1996. Sales
in the Girls category grew 4% due to the strength in Barbie®and
Barbie®-related products, partially offset by declines in large and
small dolls. Sales in the Infant and Preschool category increased
15%, led by strength in Sesame Street®and Disney’s Winnie the
Pooh®, partially offset by a decline in Fisher-Price®products. The
Wheels category increased 21%, driven by an increase in Hot
Wheels®. Sales in the Entertainment category, which includes
Disney and Nickelodeon®, decreased 4%.
Sales to customers within the US grew 14% and accounted
for 66% of consolidated gross sales in 1997 compared to 62% in
1996. Sales to customers outside the US decreased 5%, including
the unfavorable foreign exchange effect of the generally stronger US
dollar relative to the prior year. At comparable foreign exchange
rates, sales internationally grew 3%.
Gross profit as a percentage of net sales increased to
49.6% from 48.9%, principally due to improved product mix.
As a percentage of net sales, advertising and promotion expenses
decreased approximately one percentage point to 16.1%, primarily
due to cost savings realized from the Company’s merger with Tyco.
As a percentage of net sales, other selling and administrative expenses
decreased to 16.5% from 17.0%, reflecting the impact of the
Company’s effort to control costs and direct cost savings realized
from the 1997 Tyco integration and Mattel restructuring plan.
Interest expense decreased $10.1 million largely due to
lower average domestic short-term borrowings during 1997.
Income Taxes
The effective income tax rate was approximately 29% in 1998
compared to 32% in 1997 and 31% in 1996. The effective tax rate
decreased in 1998 due to an increase in income earned in locations
with lower tax rates and a reduction in restructuring expenses with-
out income tax benefits.
Pre-tax income earned from US operations as a percentage of
the consolidated pre-tax income is less than the sales to US customers
as a percentage of the consolidated gross sales. This difference results
from corporate headquarters expenses incurred n the US that
decreased US pre-tax income and from profits from foreign manufac-
turing activities that relate to sales ultimately made to US customers.
Financial Position
The Company’s financial position remained strong in 1998 primarily
due to its profitable operating results. At December 31, 1998, the
Company’s cash position was $212.4 million, compared to $694.9
million as of the end of 1997. Cash decreased $482.5 million primarily
due to cash consideration paid in connection with the acquisitions
of Pleasant Company and Bluebird. Accounts receivable decreased
$108.4 million to $983.1 million due to lower orders by major