Mattel 1999 Annual Report Download - page 15

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Mattel, Inc. and Subsidiaries
Disney and Nickelodeon®, increased 1 4% largely due to the 1998 introduction of toys
associated with the feature motion pictures “ A Bug’s Life” and “ The Rugrats Movie” .
Sales of Learning Company consumer software products increased 3 5%, mainly due to the
acquisition of Mindscape, Inc. which added $1 88 .1 million to 19 98 sales, introduction of
new software titles such as The ClueFinders™4th Grade Adventures, Arthur’s®Computer
Adventures, and upgraded products.
Gross profit as a percentage of net sales remained relatively constant at 51.8 %
compared to 51 .7% in 1 99 7. As a percentage of net sales, advertising and promotion
expenses increased approximately one percentage point to 16 .3%, and selling and
administrative expenses increased 1.7 percentage points to 2 0.3 %. Both ratios
increased relative to 1 99 7 as a result of unanticipated cutbacks in buying by domestic
toy retailers due to a continuing shift by these retailers to just-in-time inventory manage-
ment. To respond to such shifts, Mattel took appropriate actions to adjust its own ship-
ping to more of a just-in-time pattern. As a result, toy products that would have previ-
ously been shipped in December of 19 98 were shipped closer to the time that they
were purchased by the consumer. Amortization of intangibles decreased by $ 35 7.5 mil-
lion, mainly as a result of completed amortization of intangibles related to certain
Learning Company acquisitions, partially offset by amortization resulting from the 19 98
acquisitions of Pleasant Company, Sofsource, Inc., Bluebird Toys PLC ( “ Bluebird” ) and
Mindscape, Inc.
Interest expense increased $1 5.9 million primarily due to increased short-
and long-term borrowings to finance the 19 98 acquisitions of Pleasant Company and
Bluebird, partially offset by the repurchase of certain of the 5-1/ 2 % Senior Notes of
Learning Company.
Other income, net increased $ 8.3 million, mainly due to an $ 11 .1 million
gain realized on sale of investments.
Business Segment Results
The USA Toys segment sales were down 5% in 1 99 8 compared to 19 97 , largely due
to lower sales of Barbie®products, as a result of high retail inventory levels entering
19 98 and domestic toy retailers shift to a just-in-time buying pattern. This decrease
was partially offset by increased sales of Wheels and Entertainment products. The US
Fisher-Price/ Tyco Preschool segment sales declined by 1 3% due to decreased sales of
Sesame Street®and Fisher-Price®products. Sales in the Other segment increased to
$2 56 .1 million in 1 99 8 from $ 58 .3 million in 1 99 7 due to American Girl®sales
generated from the July 19 98 acquisition of Pleasant Company. The International
Toy Marketing segment sales decreased 1% due to lower sales of Barbie®products,
partially offset by stronger sales of Wheels and Infant/ Preschool products. Consumer
Software segment sales increased 35 %, mainly due to the acquisition of Mindscape,
Inc. which added $ 18 8.1 million to 19 98 net sales, introduction of new software
titles such as The ClueFinders™4th Grade Adventures and Arthur’s®Computer
Adventures, and upgraded products.
Operating profit in the USA Toys and International Toy Marketing segments
declined by 27 % and 2 9%, respectively. The decline in operating profit in each of these
segments was largely attributable to lower sales volume and unfavorable shift in product
mix. The US Fisher-Price/ Tyco Preschool segment operating profit increased 1 1%, driven
by improved profitability in the Fisher-Price®product line, partially offset by unfavorable
shift in product mix of Tyco Preschool products. The Other segment operating profit
increased to $20.2 million in 1 99 8 from $ 7.3 million in 1 99 7 mainly due to the July
19 98 acquisition of Pleasant Company. The Consumer Software segment realized profit
of $1 14 .3 million in 1 99 8 compared to a loss of $312.5 million in 1 99 7, largely due
to increased sales and lower amortization.
Income Taxes
The effective income tax rate for 1 99 9 w as 2 5.6%, favorably impacted by domestic loss-
es incurred by Learning Company, and by income earned in foreign jurisdictions taxed at
lower rates. This represents a substantial reduction from 1998 and 19 97 , during which
the effective income tax rates w ere in excess of the US federal tax rate of 35 %. The
reduction in the tax rate is the result of a decrease in the amount of non-deductible items,
particularly the writeoff of incomplete technology and other non-deductible expenses
incurred in connection with business acquisitions, that unfavorably impacted the 19 98
and 1 99 7 tax rates.
Pre-tax losses from US operations as a percentage of the consolidated pre-tax
income was less than the sales to US customers as a percentage of the consolidated
gross sales. This difference results from operating losses, amortization of intangibles
and corporate headquarters expenses incurred in the US that decreased US pre-tax
income, and foreign profits related to sales ultimately made to US customers.
Financial Position
Mattel’s cash position was $ 27 5.0 million, compared to $4 69 .2 million as of the end
of 19 98 . Cash decreased $1 94 .2 million primarily due to the payment of restructur-
ing and integration costs related to the Learning Company merger, repayment of
Learning Company’s credit lines and the termination of Learning Company’s receivable
factoring facilities. Accounts receivable, net increased by $1 20 .0 million to
$1 ,27 0.0 million at year end 1 99 9 principally due to the cancellation of Learning
Company’s receivable factoring facilities. Inventories decreased by $ 10 0.0 million to
$5 44 .3 million at year end 1 99 9, reflecting Mattel’s shift to just-in-time production
and shipping programs, partially offset by higher Learning Company inventory. Prepaid
expenses and other current assets decreased by $ 41 .1 million to $330.7 million at
year end 19 99 , primarily due to the reclassification of certain deferred income tax
assets related to operating losses to noncurrent assets, partially offset by higher pre-
paid royalties and softw are development costs. Property, plant and equipment, net
decreased $1 3.6 million to $7 49 .5 million at year end 1 99 9 largely due to asset
writedowns related to the 19 99 restructuring. Intangibles, net decreased $9 1.3 mil-
lion to nearly $1.4 billion at year end 1 99 9, mainly due to goodwill amortization.
Other noncurrent assets increased by $ 29 9.9 million to $5 64 .2 million at year end
19 99 , principally due to increased noncurrent deferred tax assets related to operating
losses.
Short-term borrowings increased $170.5 million compared to 19 98 year
end, primarily due to the funding of Learning Company’s cash requirements.
A summary of Mattel’s capitalization is as follows:
As of Year End
( In millions, except percentage information) 19 9 9 19 9 8
Senior notes $ 6 0 1 .0 18 % $ 6 0 1 .0 17 %
Medium-term notes 54 0 .5 17 54 0 .5 16
Other long-term debt obligations 42 .4 1 43 .0 1
Total long-term debt 1,1 8 3 .9 36 1,1 8 4 .5 34
Other long-term liabilities 16 2 .9 5 14 9 .1 4
Stockholders’ equity 1,9 6 2 .7 59 2,1 7 0 .8 62
$3 ,3 0 9 .5 100 % $3 ,504.4 1 0 0 %