Mattel 2004 Annual Report Download - page 38

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Income Taxes
Mattel’s effective tax rate on income from continuing operations in 2004 was 17.7% compared to 27.4% in
2003. During 2004, Mattel reached a settlement with the IRS regarding the examination of Mattel’s US federal
income tax returns for the years 1998 through 2001. The settlement resulted in a net benefit to Mattel of
$65.1 million, which lowered Mattel’s overall effective tax rate in 2004 as compared to 2003 and 2002. This
settlement did not have a significant impact on cash paid for income taxes during 2004.
Mattel’s effective tax rate on income from continuing operations increased in 2003 to 27.4% compared to
26.8% in 2002 due to goodwill, the tax benefit of deductible costs related to the financial realignment plan, and
other charges. Management believes the effective tax rate applied to income earned in future periods will be
more consistent with the rates in fiscal years prior to 2004.
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 IRS has completed its examination of the Mattel, Inc. US federal income tax returns through 2001 and
is currently examining the 2002 and 2003 US federal income tax returns.
On October 22, 2004, the American Jobs Creation Act of 2004 (the “Jobs Act”) was signed into law. Among
its various provisions, the Jobs Act creates a temporary incentive for US corporations to repatriate accumulated
income earned abroad by providing an 85% dividends received deduction for certain qualifying dividends. On
December 21, 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position 109-2
(“FSP 109-2”), Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the
American Jobs Creation Act of 2004. FSP 109-2 allows companies additional time beyond the financial reporting
period in which the Jobs Act was enacted to evaluate the effect of the Jobs Act on a company’s plan for
reinvestment or repatriation of unremitted foreign earnings for the purposes of applying SFAS No. 109,
Accounting for Income Taxes. As of December 31, 2004, management had not decided on whether, or to what
extent, Mattel may repatriate foreign earnings under the Jobs Act. Therefore, Mattel’s 2004 consolidated
financial statements do not include any provision for income taxes on the $3.1 billion cumulative balance of
unremitted foreign earnings as of year end 2004. Based on the analysis to date, Mattel may repatriate up to
approximately $2.4 billion in foreign earnings with a corresponding tax liability of up to approximately
$160 million. The computation of the tax liability does not include the potential favorable effects of the Tax
Technical Corrections Act of 2004, which was introduced to the US Congress on November 22, 2004. It is
anticipated that this bill will become law in 2005 and, when enacted, would change Mattel’s computation of the
tax liability associated with the repatriation of foreign earnings under the Jobs Act. Management expects to
finalize its assessment related to the Jobs Act in the first half of 2005.
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 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 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.
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