Mattel 2004 Annual Report Download - page 76

Differences between the provision for income taxes for continuing operations at the US federal statutory
income tax rate and the provision in the consolidated statements of income are as follows (in thousands):
For the Year
2004 2003 2002
Provision at US federal statutory rates ................................ $243,689 $259,299 $217,524
Increase (decrease) resulting from:
Foreign earnings taxed at different rates, including withholding taxes . . . (68,175) (56,620) (66,428)
Losses without income tax benefit ............................... 7,730 4,903 6,902
State and local taxes, net of US federal benefit ..................... 6,825 195 4,875
Change to reserve estimates after settlement of IRS examination ....... (65,100) — —
Other ...................................................... (1,438) (4,555) 3,582
Provision for income taxes ......................................... $123,531 $203,222 $166,455
In the normal course of business, Mattel is regularly audited by federal, state and foreign tax authorities. In
the fourth quarter of 2004, Mattel reached a settlement with the US Internal Revenue Service (“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 of $65.1 million from changes in tax estimates, and the benefit is reflected in the 2004
provision for income taxes in the consolidated statement of income. As part of the settlement, Mattel and the IRS
agreed that the loss on the sale of Learning Company originally deducted in Mattel’s 2000 US federal income tax
return should instead be deducted in 2005 for US income tax purposes. As a result of this agreement, amounts
previously characterized as “loss carryforwards” represent a temporary income tax and financial reporting
difference as of year end 2004.
Accounting principles generally accepted in the United States of America require that tax benefits related to
the exercise of nonqualified stock options and stock warrants be credited to additional paid-in capital. The
exercise of nonqualified stock options resulted in a decrease in additional paid-in capital totaling $0.4 million in
2004 and increases in additional paid-in capital totaling $8.0 million and $4.2 million, respectively, during 2003
and 2002. Stock warrants exercised in 2002 resulted in increases in additional paid-in capital during 2003 and
2002 of $4.3 million and $5.7 million, respectively.
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 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 FASB issued
FSP 109-2. 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. 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.
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