Mattel 1998 Annual Report Download - page 41

Mattel, Inc. and Subsidiaries 39
recognized in different years for financial statement and income tax
purposes. The Company’s deferred income tax assets (liabilities)
were comprised of the following (in thousands):
As of Year End
1998 1997
Operating loss and tax credit carryovers $ 96,410 $102,713
Sales allowances and inventory reserves 83,573 71,990
Deferred compensation 36,123 27,680
Excess of tax basis over book basis 15,825 15,545
Restructuring and integration charges 15,349 36,446
Postretirement benefits 12,842 12,645
Other 42,000 20,651
Gross deferred income tax assets 302,122 287,670
Excess of book basis over tax basis (14,392) (13,453)
Retirement benefits (15,570) (12,752)
Other (9,159) (10,816)
Gross deferred income tax liabilities (39,121) (37,021)
Deferred income tax asset valuation allowances (63,654) (64,077)
Net deferred income tax assets $199,347 $186,572
Management considered all available evidence and deter-
mined that a valuation allowance of $63.7 million was required as
of December 31, 1998 for certain tax credit and net operating loss
carryforwards that would likely expire prior to their utilization.
However, management feels it is more likely than not that the
Company will generate sufficient taxable income in the appropriate
carryforward periods to realize the benefit of the remaining net
deferred tax assets of $199.3 million.
Differences between the provision for income taxes at the
US federal statutory income tax rate and the provision in the con-
solidated statements of operations were as follows (in thousands):
For the Year
1998 1997 1996
Provision at federal statutory rates $162,772 $148,779 $187,864
Increase (decrease) resulting from:
Losses without income tax benefit 1,821 1,468 835
Foreign earnings taxed at different
rates, including withholding taxes (44,301) (42,503) (30,517)
State and local taxes, net of federal benefit 2,665 12,287 9,230
Non-deductible restructuring costs - 20,150 -
Other 9,842 (4,893) (2,880)
Total provision for income taxes $132,799 $135,288 $164,532
Appropriate US and foreign income taxes have been provided
for earnings of foreign subsidiary companies that are expected to be
remitted in the near future. The cumulative amount of undistributed
earnings of foreign subsidiaries that the Company intends to perma-
nently invest and upon which no deferred US income taxes have
been provided is $1.2 billion at December 31, 1998. The additional
US income tax on the unremitted foreign earnings, if repatriated,
would be offset in whole or in part by foreign tax credits.
As of December 31, 1998, the Company has US net operating
loss and credit carryforwards for federal income tax purposes of
$40.0 million and $8.2 million, respectively. These carryforwards
were generated primarily by Tyco prior to the March 1997 merger
with Mattel. These net operating loss carryovers expire during the
years 2007 to 2011, while $4.5 million of the tax credits have no
expiration date and $3.7 million of the tax credits will expire during
the years 1999 to 2003. Both carryforwards are subject to an annual
limitation, but the Company expects to utilize the losses and credits
before the expiration of their carryforward periods.
In addition, the Company has a US net operating loss carry-
forward of approximately $46.1 million, which was generated by
Universal Matchbox Ltd. and subsidiaries (“Matchbox”) prior to their
acquisition by Tyco. These loss carryforwards expire during the years
2000 to 2005 and are subject to an annual limitation, but the Company
expects to utilize these losses before the expiration of the carryfor-
ward periods. Accordingly, the goodwill reported in the consolidated
balance sheets attributable to Tyco’s 1991 acquisition of Matchbox
has been reduced to reflect the adjustment related to the tax effect
of these losses.
Certain foreign subsidiaries have net operating loss carryfor-
wards totaling $119.9 million ($87.2 million with no expiration date,
$32.6 million expiring during the years 1999 to 2003, and $0.1 million
expiring after 2003).
Generally accepted accounting principles require that tax
benefits related to the exercise by employees of nonqualified stock
options be credited to additional paid-in capital. In 1998, 1997 and
1996, nonqualified stock options exercised resulted in credits to
additional paid-in capital totaling $38.7 million, $17.9 million and
$26.3 million, respectively.
The Internal Revenue Service has completed its examination of
the Company’s federal income tax returns through December 31, 1991.
Note 3 - Employee Benefits
The Company and certain of its subsidiaries have retirement plans
covering substantially all employees of these companies. Expense
related to these plans totaled $20.0 million, $19.0 million and
$16.2 million in 1998, 1997 and 1996, respectively.
Pension Plans
The Company provides defined benefit pension plans, which satisfy
the requirements of the Employee Retirement Income Security Act
of 1974 (“ERISA”). With the exception of the Fisher-Price Pension
Plan, activity related to the Company’s pension plans, including those
of foreign affiliates, was not significant during any year.
The components of net pension income for the Fisher-Price
Pension Plan, based upon an October valuation date, for the years
ended December 31, 1998, 1997 and 1996 are detailed below (in
thousands):
For the Period Ended
1998 1997 1996
Service cost $ 2,508 $ 2,594 $ 2,671
Interest cost 10,929 10,327 8,866
Expected return on plan assets (18,949) (16,163) (14,784)
Amortization of:
Unrecognized prior service cost 108 134 150
Unrecognized net asset (2,569) (2,569) (2,569)
Plan amendment loss (gain) 1,154 (826) -
Net pension income $ (6,819) $ (6,503) $ (5,666)