Mattel 2002 Annual Report Download - page 32

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Gross profit, as a percentage of net sales, was 45.8% in 2001 compared to 43.7% in 2000. Gross profit
improvement was attributable to savings realized from the financial realignment plan and lower product costs
achieved through the supply chain initiative, partially offset by the negative impact of foreign currency exchange.
The supply chain initiative focuses on improving customer service levels by partnering with retailers to get the
right products in the right place at the right time, lowering costs by closing and consolidating Mattel’s
manufacturing and distribution facilities, and improving processes such as launching fewer new SKU’s by taking
advantage of multi-lingual packaging. The multi-lingual packaging provides Mattel with increased distribution
options for any given toy. In addition, cost of sales in 2001 included a $28.2 million charge, largely related to
accelerated depreciation resulting from the planned closure of the Murray, Kentucky, manufacturing and
distribution facilities and termination of a licensing agreement as part of the financial realignment plan. Cost of
sales in 2000 includes a $78.6 million charge related to the termination of a variety of licensing agreements and
other contractual arrangements and elimination of product lines that did not deliver an adequate level of
profitability.
Advertising and promotion expense was 11.6% of net sales for 2001, compared to 12.7% in 2000. The
decrease in 2001 compared to 2000 was primarily attributable to lower prices charged by media companies on a
cost per rating point basis. Mattel’s 2001 media plan was actually stronger than in 2000 in terms of gross rating
points. Advertising and promotion expense for 2001 and 2000 includes $0.3 million and $4.8 million of charges,
respectively, largely related to exiting certain product lines.
Other selling and administrative expenses were $964.2 million or 20.6% of net sales in 2001 compared to
$981.8 million or 21.5% of net sales in 2000. The improvement in selling and administrative expenses was
largely due to a $53.1 million charge in 2000 related to termination costs for the departure of certain senior
executives and lower financial realignment plan charges, partially offset by increased bad debt charges in 2001.
In the fourth quarter of 2001, Mattel recorded a $22.1 million charge related to the bankruptcy filing of Kmart in
January 2002. Mattel also recorded approximately $9 million in bad debt expense in the third quarter of 2001,
largely related to the bankruptcy declared by another US retailer. Excluding these charges, other selling and
administrative expenses, as a percentage of net sales, decreased largely due to tight management of costs, savings
realized from the financial realignment plan, and a reduction in management bonuses.
Non-Operating Items
Interest expense was $155.1 million in 2001 compared with $153.0 million in 2000. The increase was due to
the allocation in 2000 of $36.4 million in interest to discontinued operations. In 2001, lower average borrowing
rates and lower short-term seasonal borrowings resulted in a decrease in interest expense. Interest income was
$15.5 million in 2001 compared to $11.0 million in 2000. Other non-operating expense, net in 2001 was
$9.7 million versus $3.2 million in 2000. The increase in other non-operating expense, net was largely due to net
foreign currency exchange losses totaling $8.8 million in 2001 compared to net foreign currency exchange gains
totaling $3.0 million in 2000. Gains and losses on unhedged intercompany receivables and payables balances
denominated in a currency other than the applicable functional currency are recognized as a component of other
non-operating expense, net in the period in which the exchange rate changes. Partially offsetting the increase in
other non-operating expense, net were lower nonrecurring charges in 2001 relative to 2000. In 2001,
nonrecurring charges included a $5.5 million loss on derivative instruments. In 2000, nonrecurring charges
totaled $13.9 million, including $5.5 million of charges primarily related to the writeoff of certain noncurrent
assets and an $8.4 million charge related to losses realized on the disposition of a portion of the stock received as
part of the sale of CyberPatrol.
Business Segment Results
US Girls segment sales decreased by 4% in 2001 compared to 2000. A 12% decline in Barbie®sales was
partially offset by increased sales of Polly Pocket!®, Diva Starz™, What’s Her Face!™, and American Girl®. The
decrease in US Barbie®sales compared to 2000 was primarily due to lower shipments of Holiday Celebration™
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