Mattel 2005 Annual Report Download - page 87

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Note 8—Financial Instruments
Marketable Securities
As of December 31, 2005, Mattel held no marketable securities. As of December 31, 2004, Mattel held
marketable securities totaling $43.6 million, stated at fair market value based on quoted market prices. These equity
securities were classified as securities available-for-sale and included in other noncurrent assets in the consolidated
balance sheets. As of December 31, 2005 and 2004, Mattel held no marketable securities for which cost exceeded the
fair market value of the securities. Unrealized pre-tax gains of $26.1 million ($16.4 million net of tax) as of
December 31, 2004 were deferred in accumulated other comprehensive loss related to these securities.
During 2005 and 2004, Mattel sold marketable securities for proceeds totaling $42.0 million and
$28.2 million, respectively. Gains on sales of these securities totaling $25.8 million and $18.3 million, net of
transaction costs, were recorded in other non-operating (income), net in the consolidated statements of operations
for 2005 and 2004, respectively.
Derivative Financial Instruments
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Inventory
purchase transactions denominated in the Euro, British pound sterling, Mexican peso, Hong Kong dollar and
Indonesian rupiah are the primary transactions that caused currency transaction exposure for Mattel during 2005
and 2004. Mattel seeks to mitigate its exposure to market risk by monitoring its currency transaction exposure for
the year and partially hedging such exposure using foreign currency forward exchange and option contracts. Such
contracts are primarily used to hedge Mattel’s purchase and sale of inventory, and other intercompany
transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18
months. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of
currencies used for international borrowings. Mattel does not trade in financial instruments for speculative
purposes. The ineffectiveness related to cash flow hedges was not significant during any year.
Mattel uses fair value derivatives to hedge most intercompany loans and advances denominated in foreign
currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these
contracts. Changes in the fair value of these derivatives were not significant to the results of operations during
any year.
As of December 31, 2005 and 2004, Mattel held foreign currency forward exchange contracts with notional
amounts totaling $727.2 million and $859.2 million. The notional amounts of these contracts were equal to the
exposure hedged in both years.
The net loss on derivative financial instruments reclassified from accumulated other comprehensive loss to
Mattel’s results of operations was $3.9 million, $31.8 million and $50.2 million during 2005, 2004 and 2003,
respectively. As of December 31, 2005 and 2004, $4.5 million of pre-tax unrealized gains ($4.2 million net of
tax) and $28.5 million of pre-tax unrealized losses ($25.0 million net of tax), respectively, related to derivative
instruments have been recorded in accumulated other comprehensive loss. Mattel expects to reclassify the
unrealized gains as of December 31, 2005 from accumulated other comprehensive loss to its results of operations
over the life of the contracts, generally within 18 months or less.
Fair Value of Financial Instruments
Mattel’s financial instruments include cash, cash equivalents, marketable securities, investments, accounts
receivable and payable, short-term borrowings, and accrued liabilities. The carrying amount of these instruments
approximates fair value because of their short-term nature.
The estimated fair value of Mattel’s long-term debt, including the current portion, is $644.6 million
(compared to a carrying amount of $625.0 million) as of December 31, 2005 and $632.9 million (compared to a
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