Mattel 2005 Annual Report Download - page 32

result in the consolidation of some management and support functions, is expected to more effectively and
efficiently leverage Mattel’s scale, and will preserve the natural marketing and design groups that are empowered
to create and market toys based on gender and age groups. These changes are consistent with Mattel’s ongoing
strategy to build brands, cut costs and develop people in a streamlined organization that is focused on scale,
innovation and execution. In connection with this consolidation, Mattel began executing an initiative in 2006 to
streamline its workforce, primarily in El Segundo, California. It is expected that this initiative will result in a net
reduction of over 200 positions, expenses of approximately $10 to $13 million, and will be substantially
completed during the first quarter of 2006. The consolidation of these divisions does not change Mattel’s
operating segments.
Management believes that the business environment for Mattel in 2006 will be similar to that of 2005.
Mattel expects to continue facing challenges both domestically and internationally as certain retailers continue to
rationalize stores and tightly manage inventory. In 2005, sales increases across much of Mattel’s portfolio were
partially offset by declines in the Barbie®brand. Additionally, Mattel has experienced continued cost pressures
in the areas of product costs, including oil-based resin, the impact of the strengthening of the Chinese yuan
against the US dollar, transportation costs, and employee-related costs. Management believes that Mattel will
continue to encounter a challenging retail environment, along with cost pressures and the possibility of continued
sales declines in the Barbie®brand.
Mattel’s objective is to continue to create long-term shareholder value by generating strong cash flow and
deploying it in a disciplined and opportunistic manner as outlined in Mattel’s capital and investment framework.
To achieve this objective, management has established two overarching goals. The first goal is to drive sales
growth by reinvigorating the Barbie®brand, while maintaining growth in other core brands by continuing to
develop innovative toys. Management’s principal strategies for driving sales growth are as follows: (i) focusing
on Mattel’s core brands and core markets; (ii) aligning more effectively with growing retail customers by
building closer partnerships with these customers around the world; (iii) investing in developing markets;
(iv) expanding its presence in categories in which Mattel does not currently have an extensive presence; and
(v) growing alternative sales channels. Additionally, Mattel plans to pursue additional licensing arrangements
and strategic partnerships to extend its portfolio of brands into areas outside of traditional toys.
The second goal is to continue rationalizing manufacturing and vendor sourcing to reduce the cost of
manufacturing, purchasing and distributing Mattel’s products, and improve Mattel’s cost structure by gaining
further efficiencies in the supply chain through implementation of new spend management and e-procurement
policies, procedures and information systems, as well as Lean manufacturing principles, a management
philosophy focused on reduction of wastes in manufactured products.
Results of Operations
2005 Compared to 2004
Consolidated Results
Net sales for 2005 were $5.18 billion, a 1% increase compared to $5.10 billion in 2004, including a
1 percentage point benefit from changes in currency exchange rates. Net income for 2005 was $417.0 million, or
$1.01 per diluted share, as compared to net income of $572.7 million, or $1.35 per diluted share, for 2004.
Gross profit, as a percentage of net sales, declined from 47.2% in 2004 to 45.8% in 2005. Higher external
cost pressures, higher sales of lower margin products, including the impact of sales mix, and higher royalty costs
were the primary drivers for the decline in gross profit, partially offset by a moderate price increase implemented
in January 2005 and favorable changes in currency exchange rates.
Income before income taxes declined as a percentage of net sales in 2005 compared to 2004. Contributing to
this decline were overall lower gross margins, higher selling, general and administrative costs due to upward cost
pressures for employee-related expenses and ongoing investments in growth strategies including new product
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