Mattel 2002 Annual Report Download - page 18

Mattel ships products in accordance with delivery schedules specified by its customers, which usually
request delivery within three months. In the toy industry, orders are subject to cancellation or change at any time
prior to shipment. In recent years, a trend toward just-in-time inventory practices in the toy industry has resulted
in fewer advance orders and therefore less backlog of orders. Mattel believes backlog orders at any given time
may not accurately indicate future sales.
Financial Instruments
Exchange rate fluctuations may impact Mattel’s results of operations and cash flows. 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
purchase 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
operations can also be affected by the translation of foreign revenues and earnings into US dollars. Mattel does
not trade in financial instruments for speculative purposes.
For additional information regarding foreign currency contracts, see “International Segment” above,
Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Item 8 “Financial Statements and
Supplementary Data—Note 8 to the Consolidated Financial Statements.”
Seasonal Financing
Mattel’s financing of seasonal working capital typically grows throughout the first half of the year and
peaks in the third or fourth quarter, when inventories are at their highest levels in anticipation of expected second
half sales volume and when accounts receivable are at their highest levels due to increased sales volume,
consistent with the industry taken as a whole. See “Seasonality.” Mattel expects to finance its seasonal working
capital requirements for 2003 by using existing and internally generated cash, issuing commercial paper, selling
certain trade receivables, and using various short-term bank lines of credit. In addition, Mattel avails itself of
individual short-term foreign credit lines with a number of banks, which will be used as needed to finance the
seasonal working capital requirements of certain foreign subsidiaries.
In March 2002, Mattel amended and restated its existing domestic unsecured committed revolving credit
facility into a $1.060 billion, 3-year facility that expires in 2005. Mattel’s domestic unsecured credit facility
contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated
debt-to-capital and interest coverage ratios. Specifically, Mattel is required to meet these financial covenant
ratios at the end of each fiscal quarter and fiscal year. The credit agreement for the domestic unsecured credit
facility specifies the formulae to be used in calculating the ratios. Mattel was in compliance with such covenants
at the end of each fiscal quarter and fiscal year in 2002. As of December 31, 2002, Mattel’s consolidated debt-to-
capital ratio, as calculated per the terms of the credit agreement, was 0.37 to 1 (compared to a maximum allowed
of 0.50 to 1) and Mattel’s interest coverage ratio was 8.14 to 1 (compared to a minimum allowed of 3.50 to 1).
See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Liquidity and Capital Resources—Seasonal Financing” and Item 8 “Financial Statements and Supplementary
Data—Note 5 to the Consolidated Financial Statements.”
To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of
individual short-term foreign credit lines with a number of banks. Foreign credit lines total approximately
$266 million, a portion of which is used to support letters of credit. Mattel expects to extend these credit lines
throughout 2003.
Mattel believes the cash on hand at the beginning of 2003, amounts available under its domestic unsecured
committed revolving credit facility, its uncommitted money market facility, and its foreign credit lines will be
adequate to meet its seasonal financing requirements for 2003.
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