Mattel 2005 Annual Report Download - page 39

• 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 marketable
securities. Other non-operating (income), net was $16.8 million in 2003, including a $15.5 million gain from the
sale of marketable securities 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 exchange rate changes. See Item 8 “Financial Statements and Supplementary Data—
Note 9 to the Consolidated Financial Statements” for a discussion of the shareholder litigation.
At December 31, 2004, the pre-tax unrealized gains on marketable securities held by Mattel were
$26.1 million ($16.4 million after-tax).
Provision for Income Taxes
In the fourth quarter of 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
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 operations.
Operating Segment Results
Mattel’s operating segments are separately managed business units and are divided on a geographic basis
between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands
US, Fisher-Price Brands US and American Girl Brands. Operating Segment Results should be read in
conjunction with Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial
Statements.”
Domestic Segment
Mattel Girls & Boys Brands US gross sales decreased 5% in 2004 compared to 2003. Within this segment,
gross sales of Barbie®declined 15%, partially offset by strong sales growth in the Entertainment category.
Management believes that Mattel Girls & Boys Brands US segment sales continue to be negatively impacted by a
continued reduction in inventory of Mattel products held by retailers and continued competitive challenges.
During 2004, management developed a new strategy designed to regain relevance with girls by making
improvements in the product line and launching a new brand campaign highlighting a fresher image, which
resulted in improved performance at retail and increased category share. Mattel Girls & Boys Brands US
segment income decreased 16% to $326.3 million in 2004, primarily due to lower sales volume and a decline in
gross profit resulting from increased sales of lower margin products, including the impact of sales mix, value
enhancement initiatives, increased royalty costs and ongoing external cost pressures.
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