Mattel 2004 Annual Report Download - page 39

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Capital and Investment Framework
To guide future capital deployment decisions, with a goal of maximizing shareholder value, Mattel’s board
of directors in 2003 established the following capital and investment framework:
• To maintain approximately $800 million to $1 billion in year-end cash available to fund a substantial
portion of seasonal working capital;
• To maintain a year-end debt-to-capital ratio of about 25%;
• To invest approximately $180 million to $200 million in capital expenditures annually to maintain and
grow the business;
• To make strategic acquisitions consistent with Mattel’s vision of providing “the world’s premier toy
brands—today and tomorrow”; and
• To return excess funds to shareholders through dividends and share repurchases.
Over the long term, assuming cash flows from operating activities remain strong, Mattel plans to use its free
cash flows to invest in strategic acquisitions and to return funds to shareholders through cash dividends and,
depending on market conditions, share repurchases. However, the ability to implement successfully the capital
deployment plan is directly dependent on Mattel’s ability to generate strong cash flows from operating activities.
There is no assurance that Mattel will continue to generate strong cash flows from operating activities or achieve
its targeted goals from investing activities.
Operating Activities
Cash flows generated from operating activities of continuing operations were $570.4 million during 2004,
compared to $604.8 million in 2003 and $1.16 billion in 2002. The decrease in cash flows from operating
activities in 2004 from 2003 was primarily due to higher working capital requirements caused mainly by higher
accounts receivable resulting from a shift in timing of customer purchases to later in the fourth quarter, partially
offset by increased income from continuing operations. The decrease in cash flows from operating activities in
2003 from 2002 was primarily due to higher working capital requirements attributable to payments made in 2003
related to year end 2002 accruals for incentive compensation and the shareholder litigation settlement.
Additionally, Mattel entered 2003 with relatively lower levels of accounts receivable and inventories than in
2002 due to working capital improvements achieved during 2002.
Investing Activities
Mattel used cash flows for investing activities of continuing operations of $108.1 million during 2004,
primarily to invest in tooling to support existing and new products and its long-term information technology
strategy. In 2004, capital expenditures were partially offset by proceeds from the sales of investments and
property, plant and equipment, primarily related to the disposal of property in Mexico that was no longer needed
when manufacturing operations in Mexico were combined as part of the financial realignment plan. The decrease
in cash flows used for investing activities in 2004 was mainly due to higher spending in 2003 associated with the
construction of the new American Girl Place®in New York City, and expansion of manufacturing facilities in
Mexico as part of the financial realignment plan, and reduced spending in 2004 on information technology. In
2003 and 2002, Mattel used cash flows for investing activities of $180.8 million and $158.4 million, respectively,
primarily to support existing and new products, its long-term information strategy, certain financial realignment
plan initiatives (including the expansion of manufacturing facilities in Mexico) and the construction of the new
American Girl Place®in New York City that opened in the fourth quarter of 2003. These costs were partially
offset by the sale of investments in 2003.
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