Mattel 2005 Annual Report Download - page 42

Income Taxes
Mattel’s effective tax rate on income before income taxes in 2005 was 36.0% compared to 17.7% in 2004.
The 2005 income tax provision includes estimated US federal and state taxes of $107.0 million related to
Mattel’s repatriation of $2.4 billion in qualifying dividends from Mattel’s foreign subsidiaries pursuant to AJCA.
The 2005 effective tax rate also includes a tax benefit of $38.6 million related to settlements reached with various
tax authorities and a reassessment of tax exposures based on the status of current audits in various jurisdictions
around the world. The IRS has completed its examination of Mattel’s US federal income tax returns through
2003.
On October 22, 2004, AJCA was signed into law. Among its various provisions, AJCA creates a temporary
incentive for US corporations to repatriate accumulated income earned abroad by providing an 85% dividends
received deduction for certain dividends from controlled foreign corporations. Mattel repatriated $2.4 billion in
foreign earnings during 2005. The statement of operations for the year ended December 31, 2005, includes a
provision for income taxes of $107.0 million for the total amount of earnings repatriated. Management’s
domestic reinvestment plan for the reinvestment and repatriation of foreign earnings under AJCA was completed
and approved by Robert A. Eckert, Mattel’s Chairman and Chief Executive Officer, on April 14, 2005. Mattel’s
Board of Directors approved this domestic reinvestment plan on November 18, 2005.
Mattel’s effective tax rate on income before income taxes decreased in 2004 to 17.7% as compared to 27.4%
in 2003 due to a net benefit of $65.1 million resulting from a settlement with the IRS regarding the examination
of Mattel’s US federal income tax returns for the years 1998 through 2001.
Management believes the effective tax rate applied to income earned in future periods will be more
consistent with the effective tax rate in 2003.
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 operations and short-term borrowings. Cash flows from 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.
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.
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