Mattel 2002 Annual Report Download - page 33

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Barbie®in response to lower demand at retail, lower sales of adult-targeted collector dolls resulting from a
weakening retail climate for higher-priced collectible items, and continuing inventory management by retailers.
US Boys-Entertainment segment sales increased 2%. The US Entertainment business grew 6%, largely due to
increased sales of Harry Potter™products. The US Wheels business was flat with 2000 as increased sales of Hot
Wheels®products were offset by declines in Tyco®Radio Control and Matchbox®. US Infant & Preschool
segment sales were flat with 2000. Growth in sales of core Fisher-Price®and Power Wheels®products was offset
by a decline in sales of licensed character brand products. Management believes the difficult retail environment,
especially combined with the events of September 11, 2001, caused its retail customers to curtail their orders
across all of the US segments during the fourth quarter, resulting in an 8% decline in total US sales for the fourth
quarter. However, despite weaker-than-expected shipments to retailers, all of Mattel’s major brands showed
strength with consumers and posted sales increases at retail. According to NPD industry data for toy sales at the
consumer level, Mattel gained market share in the US in dolls, vehicles, action figures, games and puzzles and
core infant and preschool categories.
International segment sales increased by 10% in 2001 compared to 2000. Excluding the unfavorable foreign
currency exchange impact, sales grew by 13% due to double digit growth in Barbie®, Polly Pocket!®,core
Fisher-Price®and Hot Wheels®products combined with the expansion of Diva Starz™and Harry Potter™
products. On a regional basis, Europe sales grew by 11% (13% in local currency), Asia-Pacific sales were down
7% (down 1% in local currency), Latin America sales were up 16% (20% in local currency), and Canada sales
grew by 6% (10% in local currency). Mattel also recorded strong market share gains outside the US, with market
share growing in the five major European markets, as well as in Canada, Mexico and Australia. Improved
product availability, better alignment of worldwide marketing and sales plans and strong product launches were
the primary drivers for the growth in International segment sales and market share.
US Girls segment income decreased by 2% to $372.5 million, primarily due to lower sales volume. US
Boys-Entertainment segment income increased by 38% to $82.1 million, primarily due to increased sales volume
and improved margins. US Infant & Preschool segment income increased by 3% to $157.0 million, primarily due
to improved margins, partially offset by higher selling and administrative expenses to support certain new
product lines. All the US segments benefited from lower costs for media purchases due to lower costs per rating
point. The International segment income grew by 29% to $198.2 million, largely due to increased sales volume
and improved margins, partially offset by lower operating income in certain Latin American countries. In 2001,
Mattel appointed a new management team in Latin America with the goal of converting sales growth into
increased cash flows and profitability in this region.
Financial Realignment Plan
During the third quarter of 2000, Mattel initiated a financial realignment plan designed to improve gross
margin; selling and administrative expenses; operating income; and cash flows. The financial realignment plan,
together with the disposition of Learning Company, was part of management’s strategic plan to focus on growing
Mattel’s core brands and lowering operating costs and interest expense. The plan will require a total pre-tax
charge estimated at approximately $250 million, or $170 million, after-tax, of which approximately $120 million
represents cash expenditures and $50 million represents non-cash writedowns. Mattel intends to fund the cash
outlay from existing cash balances and internally generated cash flows from operations.
Under the plan, Mattel is on track to deliver at least the targeted initial cumulative pre-tax cost savings of
approximately $200 million by year end 2003. Over the last two years, Mattel recognized cumulative pre-tax cost
savings of approximately $142 million, of which approximately $55 million and $87 million were realized in
2001 and 2002, respectively. The $87 million of savings achieved in 2002 exceeded the previously expected
amount by approximately $22 million, largely due to the accelerated execution of the North American Strategy.
In 2003, Mattel expects to achieve pre-tax cost savings of approximately $80 million. There is no assurance,
however, that Mattel will be able to successfully implement all phases of its financial realignment plan or that it
will realize the anticipated cost savings and improved cash flows.
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