Mattel 1998 Annual Report Download - page 48

Mattel, Inc. and Subsidiaries 46
Royalty expense for the years ended December 31, 1998,
1997 and 1996 was $200.8 million, $194.1 million and $155.3 million,
respectively.
As of December 31, 1998, the Company had outstanding com-
mitments for 1999 purchases of inventory of approximately $60 million.
Foreign Currency Contracts
To limit the exposure associated with exchange rate movements, the
Company enters into foreign currency forward exchange and option
contracts primarily as hedges of inventory purchases, sales and other
intercompany transactions denominated in foreign currencies. These
contracts generally have maturity dates of up to 18 months. Gains or
losses related to firm commitments, which qualify for hedge accounting,
are deferred and are recognized in the results of operations as part
of the underlying transaction. Contracts that do not qualify for hedge
accounting are marked to market with gains and losses recognized in
the results of operations currently. Had the Company not entered
into hedges to limit the effect of exchange rate fluctuations on results
of operations and cash flows, the favorable effect on 1998 pre-tax
income would have approximated $5 million.
As of December 31, 1998 and 1997, the Company held the
following contracts to sell foreign currencies (in thousands):
1998 1997
Amount Fair Value Amount Fair Value
Forwards $392,972 $394,340 $353,085 $351,169
Options - - 93,547 90,500
$392,972 $394,340 $446,632 $441,669
Fair value for forwards reflects the amount, based on dealer
quotes, the Company would receive at maturity for contracts involving
the same currencies and maturity dates, if they had been entered
into as of year-end 1998 and 1997, respectively. During 1998, the
Company did not enter into any new option contracts and no
option contracts remained outstanding as of December 31, 1998.
As of December 31, 1997, the fair value for options reflects the
amount of US dollars the Company would receive from the current
contracts, less the respective year-end option value. The option
value is determined based on dealer quotes for contracts involving
the same currencies and maturity dates.
As of December 31, 1998 and 1997, the Company held
$189.1 million and $362.1 million, respectively, of foreign currency
forward exchange contracts to purchase foreign currencies. The fair
value of these contracts was $201.8 million and $346.5 million as of
December 31, 1998 and 1997, respectively. Fair value reflects the
amount, based on dealer quotes, the Company would pay at maturity
for contracts involving the same currencies and maturity dates, if they
had been entered into as of year-end 1998 and 1997, respectively.
The following table summarizes the Company’s foreign currency
contracts by major currency as of December 31, 1998 and 1997 (in
thousands of US dollars):
1998 1997
Buy Sell Buy Sell
US dollars $392,972 $189,122 $446,632 $362,083
German marks 19,119 144,660 19,179 73,977
Italian lira 20,014 68,358 38,277 53,161
Malaysian ringgits - - 53,304 -
Hong Kong dollars 55,829 - 148,084 2,527
French francs 27,435 9,105 - 52,756
British pounds sterling 6,548 66,856 32,548 72,580
Canadian dollars 16,144 18,794 22,608 -
Spanish pesetas 5,625 2,899 - 19,363
Dutch guilders 5,079 8,086 12,778 49,967
Japanese yen - 12,501 - 7,956
Australian dollars 4,988 21,610 6,398 -
Belgian francs - 11,641 - 60,038
Swiss francs 18,341 - 13,677 -
Mexican peso - 22,000 - 50,200
Indonesian rupiah 10,000 - 15,230 -
Other (under $5,000) - 6,462 - 4,107
$582,094 $582,094 $808,715 $808,715
In order to minimize the risk of counterparty non-performance,
the Company executes its foreign currency forward exchange and
option contracts with financial institutions believed to be credit-
worthy, generally those that provide the Company with its working
capital lines of credit.
Market risk exposures exist with respect to the settlement
of foreign currency transactions during the year because currency
fluctuations cannot be predicted with certainty. The Company seeks
to mitigate its exposure to market risk by monitoring its currency
exchange exposure for the year and partially or fully hedging such
exposure. In addition, the Company manages its exposure through
the selection of currencies used for international borrowings and
intercompany invoicing. The Company does not trade in financial
instruments for speculative purposes.
Litigation
- Beaverton, Oregon
The Company operates a manufacturing facility on a leased property
in Beaverton, Oregon that was acquired as part of the Tyco merger.
In March 1998, samples of groundwater used by the facility for process
water and drinking water disclosed elevated levels of certain chemicals
including trichloroethylene (“TCE”). The Company immediately
closed the water supply and self-reported the sample results to the
Oregon Department of Environmental Quality (“DEQ”) and Oregon
Health Division. The Company also implemented an employee
communication and medical screening program.
In November 1998, the Company and another potentially
responsible party entered into a consent order with the DEQ to
conduct a remedial investigation/feasibility study at the facility, to
propose an interim remedial action measure and to continue the
community outreach program to employees, former employees and