Mattel 2004 Annual Report Download - page 30

Gross Profit
Gross profit, as a percentage of net sales, was 47.2% in 2004 compared to 49.0% in 2003. The decrease in
gross profit, as a percentage of net sales, resulted from 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. This decline was partially offset by a benefit from changes in currency exchange
rates and savings generated from continuous improvement programs. Mattel plans to continue to invest in value
enhancement initiatives and expects the external cost pressures to continue. Mattel is actively pursuing cost
saving actions and effective in January 2005, Mattel modestly increased the prices it charges to customers on a
worldwide basis across most product lines. Cost of sales in 2003 includes a charge of $4.1 million for the
financial realignment plan, primarily related to the consolidation of two of Mattel’s manufacturing facilities in
Mexico.
Advertising and Promotion Expenses
Advertising and promotion expenses were 12.6% of net sales in 2004, compared to 12.8% in 2003. Mattel
expects advertising spending levels for 2005 to be fairly consistent with 2004 to support its plan to invest in the
business to drive long-term performance.
Other Selling and Administrative Expenses
Other selling and administrative expenses increased $34.0 million to $1.04 billion compared to $1.0 billion
in 2003, with the percentage of net sales remaining flat at 20.3%. Other selling and administrative expenses
increased in 2004, primarily due to the following:
• A $16.2 million charge for severance related to the elimination of approximately 285 positions resulting
from headcount reductions at certain domestic and international locations and relocation of the
Matchbox®and Tyco®R/C brands from New Jersey to California to take advantage of synergies in the
Wheels business;
• Higher overhead costs associated with the American Girl Place®retail store in New York City that
opened in November 2003;
• The negative effect of changes in currency exchange rates on overhead expenses incurred in international
markets, primarily Europe; and
• Higher external cost pressures, including employee-related costs.
The overall increase in other selling and administrative expenses was partially mitigated by reduced
spending on continuous improvement initiatives, and net favorable legal settlements. Other selling and
administrative expenses in 2003 included an $8.6 million financial realignment plan charge, largely related to
streamlining back office functions and the termination of a licensing arrangement.
Non-Operating Items
Interest expense decreased from $80.6 million in 2003 to $77.8 million in 2004. Lower average long-term
debt in 2004, as a result of the repayment of $180.0 million in long-term debt during 2003, partially offset by
higher average short-term borrowings in 2004, were the primary causes of the decrease. Other non-operating
(income), net was $23.5 million in 2004, comprised mainly of a $22.1 million gain from the sale of investments.
Other non-operating (income), net was $16.8 million in 2003, including a $15.5 million gain from the sale of
investments and a $7.8 million gain from an insurance recovery related to the shareholder litigation related to the
1999 acquisition of Learning Company that was settled in 2002, partially offset by foreign currency transaction
losses of $10.0 million. Foreign currency transaction gains and losses on unhedged intercompany loans and
advances are recorded as a component of other non-operating (income) expense, net in the period in which the
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