Mattel 2004 Annual Report Download - page 28

Results of Continuing Operations
2004 Compared to 2003
Consolidated Results
Net sales for 2004 were $5.10 billion, a 3% increase compared to $4.96 billion in 2003, including a benefit
from changes in currency exchange rates of 2 percentage points. Net income for 2004 was $572.7 million, or
$1.35 per diluted share, as compared to net income of $537.6 million, or $1.22 per diluted share, for 2003. Gross
profit, as a percentage of net sales, declined from 49.0% in 2003 to 47.2% in 2004. Sales of lower margin
products, including the impact of sales mix, value enhancement initiatives, change in classification of close out
sales, higher royalty costs and ongoing external cost pressures were the primary drivers for the decline in gross
profit. Income generated from continuing operations before income taxes declined in absolute dollars and as a
percentage of net sales in 2004 compared to 2003. Contributing to this decline was a pre-tax charge of
$16.2 million, primarily related to the elimination of approximately 285 positions as a result of headcount
reductions at certain domestic and international locations, and integration of the Matchbox®and Tyco®R/C
business located in New Jersey into the Hot Wheels®business in California to take advantage of synergies in the
Wheels business. These increased costs were partially offset by gains on the sale of investments, net favorable
legal settlements and a positive benefit from changes in currency exchange rates. A settlement with the US
Internal Revenue Service (“IRS”) resulted in a net benefit of $65.1 million in the 2004 provision for income
taxes in the consolidated statement of income. Net income for 2003 included a pre-tax charge of $26.3 million
($20.0 million after-tax) related to the financial realignment plan, which was completed in 2003. In 2003, Mattel
also recognized pre-tax income of $7.9 million ($5.0 million after-tax) representing an adjustment to a reserve
accrued in 1999 associated with the closure of a manufacturing facility in Beaverton, Oregon. The combined
effect of these items was a net after-tax charge of $15.0 million for 2003.
Shares repurchased under Mattel’s share repurchase program resulted in a benefit to Mattel’s earnings per
share in 2004 when compared to 2003, by reducing the average number of common shares outstanding. Since
inception of the share repurchase program in July 2003, Mattel has repurchased 27.4 million shares, representing
6% of common shares outstanding.
In the second quarter of 2004, a major thunderstorm damaged a Mattel distribution center located in Texas,
which warehouses and distributes finished product for Mattel. Mattel carried insurance for this risk and in the
fourth quarter of 2004, Mattel settled its claim with its insurance carrier. This event had no material impact on
the results of operations for 2004.
The following table provides a summary of Mattel’s consolidated results for 2004 and 2003 (in millions,
except percentage and basis point information):
For the Year
2004 2003 Year/Year Change
Amount
% of Net
Sales Amount
% of Net
Sales %
Basis Points
of Net Sales
Net sales .............................. $5,102.8 100.0% $4,960.1 100.0% 3%
Gross profit ........................... $2,410.7 47.2% $2,429.5 49.0% –1% (180)
Advertising and promotion expenses ........ 643.0 12.6 636.1 12.8 1% (20)
Other selling and administrative expenses .... 1,036.9 20.3 1,002.9 20.3 3% —
Restructuring and other charges ........... — — 4.8 0.1 –100% (10)
Operating income ....................... 730.8 14.3 785.7 15.8 –7% (150)
Interest expense ........................ 77.8 1.5 80.6 1.6 –3%
Interest (income) ....................... (19.7) –0.4 (18.9) –0.4 4%
Other non-operating (income), net .......... (23.5) –0.4 (16.8) –0.3 40%
Income from continuing operations before
income taxes ......................... $ 696.2 13.6% $ 740.8 14.9% –6% (130)
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