Mattel 2000 Annual Report Download - page 43

forty one
Mattel, Inc. and Subsidiaries
Mattel believes that the purported class actions and derivative
suits are without merit and intends to defend them vigorously.
Environmental
Fisher-Price
Fisher-Price has executed a consent order with the State of New York
to implement a groundwater remediation system at one of its former
manufacturing plants. Mattel anticipates that the New York State
Department of Environmental Conservation will issue a Record of
Decision in March 2001. The ultimate liability associated with this
cleanup presently is estimated to be approximately $1.76 million,
approximately $1.26 million of which has been incurred through
December 31, 2000.
Beaverton, Oregon
Mattel previously operated a manufacturing facility on a leased prop-
erty in Beaverton, Oregon that was acquired as part of the March
1997 merger with Tyco. In March 1998, samples of groundwater used
by the facility for process water and drinking water disclosed elevated
levels of certain chemicals, including trichloroethylene. Mattel imme-
diately closed the water supply and self-reported the sample results
to the Oregon Department of Environmental Quality and the Oregon
Health Division. Mattel also implemented a community outreach pro-
gram to employees, former employees and surrounding landowners.
In November 1998, Mattel and another potentially responsible
party entered into a consent order with the Oregon Department of
Environmental Quality to conduct a remedial investigation/feasibility
study at the property, to propose an interim remedial action measure,
and to continue the community outreach program. Mattel has recorded
pre-tax charges totaling $19.0 million for environmental remediation
costs related to this property, based on the completion and approval
of the remediation plan and feasibility study.
General
Mattel is also involved in various other litigation and legal matters,
including claims related to intellectual property, product liability and
labor, which Mattel is addressing or defending in the ordinary course
of business. Management believes that any liability that may poten-
tially result upon resolution of such matters will not have a material
adverse effect on Mattel’s business, financial condition or results of
operations.
NOTE 8 - FINANCIAL INSTRUMENTS
Marketable Securities
Marketable securities totaling $16.3 million are stated at fair value
based on quoted market prices and are classified as securities available-
for-sale as of December 31, 2000. These marketable securities had a
cost basis of $28.3 million as of December 31, 2000.
Foreign Exchange Risk Management
Mattel’s results of operations and cash flows may be impacted by
exchange rate fluctuations. Mattel seeks to mitigate its exposure to
market risk by monitoring its currency exchange exposure for the year
and partially or fully hedging such exposure using foreign currency
forward exchange and option contracts primarily to hedge its pur-
chase and sale of inventory, and other intercompany transactions
denominated in foreign currencies. These contracts generally have
maturity dates of up to 18 months. In addition, Mattel manages its
exposure through the selection of currencies used for international
borrowings and intercompany invoicing. Mattel’s results of opera-
tions can also be affected by the translation of foreign revenues and
earnings into US dollars. Mattel does not trade in financial instru-
ments for speculative purposes.
Mattel entered into a cross currency interest rate swap to con-
vert the interest rate and principal amount from Euros to US dollars
on its 200 million Euro Notes due 2002. The weighted average interest
rate after the swap is 9.00% in US dollars.
As of year end, Mattel held the following foreign exchange risk
management contracts (in thousands):
2000 1999
Notional Exposure Notional Exposure
Amount Hedged Amount Hedged
Foreign exchange forwards $569,173 $569,173 $487,073 $487,073
Cross-currency swaps 190,710 190,710 - -
$759,883 $759,883 $487,073 $487,073
Had Mattel not entered into hedges to limit the effect of
exchange rate fluctuations on results of operations and cash flows,
pre-tax income would have been reduced by approximately $35 mil-
lion and $16 million for 2000 and 1999, respectively. Pre-tax income
would have been increased by approximately $5 million for 1998 if
Mattel had not entered into its hedging contracts.
Fair Value of Financial Instruments
Mattel’s financial instruments included cash, cash equivalents, market-
able securities, investments, accounts receivable and payable, short-
term borrowings, long-term debt, and foreign currency contracts as
of December 31, 2000 and 1999.
The fair values of cash, cash equivalents, accounts receivable
and payable, and short-term borrowings approximated carrying values
because of the short-term nature of these instruments. The estimated
fair values of other financial instruments subject to fair value disclo-
sure, determined based on broker quotes or rates for the same or sim-
ilar instruments, and the related carrying amounts are as follows as of
year end (in millions):
2000 1999
Book Value Fair Value Book Value Fair Value
Long-term debt $1,275.1 $1,170.9 $ 986.1 $ 907.5
Risk management contracts:
Foreign exchange forwards 569.2 566.6 487.1 479.6
$1,844.3 $1,737.5 $1,473.2 $1,387.1