Mattel 2001 Annual Report Download - page 34

Income Taxes
The effective income tax rate on continuing operations was 27.7% in 2001 compared to 24.5% in 2000
and 36.3% in 1999. The difference in the overall tax rate on continuing operations between 1999, 2000 and
2001 was caused by the restructuring and other charges. In 1999, a significant portion of the restructuring
expenses consisted of transactional expenses which were not deductible for tax purposes, resulting in a lower
effective tax benefit on these restructuring charges, and a higher overall effective tax rate. In 2000 and 2001,
most of the restructuring and other charges were deductible for tax purposes and provided a benefit at or near
the effective US tax rate, resulting in a relatively lower overall effective tax rate for 2001 and 2000 as
compared to 1999.
The pre-tax income (loss) from US operations includes interest expense, amortization of intangibles and
corporate headquarters expenses. Therefore, the pre-tax income (loss) 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.
The Internal Revenue Service has completed its examination of the Mattel, Inc. federal income tax returns
through December 31, 1994 and is currently examining Mattel’s federal income tax returns for fiscal years 1995
through 1997.
Liquidity and Capital Resources
Mattel’s primary sources of liquidity over the last three years have been cash on hand at the beginning of
the year, cash flows generated from continuing operations, long-term debt issuances and short-term seasonal
borrowings. Cash flows from continuing operations could be negatively impacted by decreased demand for
Mattel’s products, which could result from factors such as adverse economic conditions and changes in public
and consumer preferences, or increased costs associated with manufacturing and distribution of products or
realized shortages in raw materials or component parts. Additionally, Mattel’s ability to issue long-term debt
and obtain seasonal borrowing could be adversely affected by factors such as an inability to meet its debt
covenant requirements, which include maintaining consolidated debt-to-capital and interest coverage ratios, or a
deterioration of Mattel’s credit ratings. Mattel’s ability to conduct its operations could be negatively impacted
should these or other adverse conditions affect its primary sources of liquidity.
Operating Activities
Operating activities generated cash flows from continuing operations of $756.8 million during 2001,
compared to $555.1 million in 2000 and $430.5 million in 1999.The increase in cash flows from operating
activities in 2001 was largely due to increased income from continuing operations and increased cash
collections. In addition, the disposition of Learning Company in the fourth quarter 2000 resulted in improved
cash flows since Mattel was no longer required to fund this business.
Investing Activities
Mattel invested its cash flows during the last three years mainly in tooling to support new products and
construction of new manufacturing facilities. In 2001, Mattel acquired Pictionaryfor approximately $29
million, of which approximately $21 million was paid in 2001 and the remaining $8 million will be paid over
the next 3 years.
Financing Activities
In 2001, as part of Mattel’s goal to improve its debt-to-capital ratio, cash flows from operating activities
were used to repay short-term borrowing obligations. Additionally, Mattel announced during the third quarter of
2000 a change in its dividend policy consisting of a reduction in the annual cash dividend from $0.36 per share
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