Mattel 2003 Annual Report Download - page 37

Download and view the complete annual report

Please find page 37 of the 2003 Mattel annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 118

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118

In 2003, Mattel recorded a net restructuring charge totaling $4.8 million in the consolidated statement of
operations, representing $12.7 million of restructuring charges related to the financial realignment plan that were
partially offset by income of $7.9 million, representing an adjustment resulting from updated estimates related to
amounts accrued in 1999 associated with the closure of the Beaverton facility.
In connection with the financial realignment plan, Mattel recorded $75.9 million of pre-tax restructuring
charges, of which $1.1 million was not yet paid as of year end 2003. These charges were largely related to the
elimination of positions at its US-based headquarters locations in El Segundo, Fisher-Price and American Girl,
implementation of the North American Strategy, closure of certain international offices, and consolidation of
facilities. From the inception of the plan through year end 2003, a total of $59.5 million has been incurred related
to the termination of nearly 2,570 employees, of which approximately 220 were terminated during 2003. Of the
2,570 employee terminations, approximately 1,300 related to the North American Strategy.
Income Taxes
Mattel’s effective income tax rate on income from continuing operations was 27.4% in 2003 compared to
26.8% in 2002 and 27.7% in 2001. Certain financial realignment plan charges have no tax benefit in their local
jurisdictions, resulting in a lower effective tax benefit in 2003 for these items and a higher overall effective
income tax rate. In 2002, most of the financial realignment plan charges were deductible for income tax
purposes, resulting in a lower overall effective income tax rate in 2002 compared to 2003. The difference in the
overall income tax rate on income from continuing operations between 2001 and 2002 was caused by goodwill,
financial realignment plan and other charges. In 2001, goodwill was expensed in the consolidated statement of
operations but a portion was not deductible for income tax purposes. In addition, certain financial realignment
plan and other charges were also not deductible in 2001. These nondeductible items resulted in a lower effective
tax benefit in 2001 for these items and a higher overall effective income tax rate.
The pre-tax income from US operations includes interest expense and corporate headquarters expenses.
Therefore, the pre-tax income from US operations, as a percentage of consolidated pre-tax income from
continuing operations, was less than the sales to US customers as a percentage of consolidated gross sales.
The Internal Revenue Service (“IRS”) has completed its examination of the Mattel, Inc. federal income tax
returns through year end 1997 and is currently examining the 1998 through 2001 federal income tax returns.
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 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 by
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 financing 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 $604.8 million during 2003,
compared to $1.16 billion in 2002 and $756.8 million in 2001.The decrease in cash flows from operating
activities in 2003 from 2002 was primarily due to an increase in working capital, partially offset by increased
income from continuing operations. The increase in working capital during 2003 compared to 2002 was partially
28