Mattel 2006 Annual Report Download - page 35

On October 10, 2005, Mattel announced the consolidation of its domestic Mattel Girls & Boys Brands and
Fisher-Price Brands divisions into one division. The creation of the “Mattel Brands” division, which resulted in
the consolidation of some management and support functions, preserves the natural marketing and design groups
that are empowered to create and market toys based on gender and age groups and is expected to more effectively
and efficiently leverage Mattel’s scale. These changes are consistent with Mattel’s ongoing goals to enhance
innovation and improve execution. In connection with this consolidation, Mattel executed an initiative in 2006 to
streamline its workforce, primarily in El Segundo, California. The consolidation of these divisions did not change
Mattel’s operating segments.
Management believes that the business environment for Mattel in 2007 will be similar to that of 2006.
Mattel expects to continue facing challenges both domestically and internationally as retailers continue to tightly
manage inventory. Additionally, Mattel has experienced continued cost pressures in the areas of product costs,
including oil-based resin and zinc, and employee-related costs. Management believes that Mattel will continue to
encounter a challenging retail environment, along with cost pressures and the possibility of 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 three overarching goals.
The first goal is to enhance innovation in order to reinvigorate the Barbie®brand, while maintaining growth
in other core brands by continuing to develop popular toys. 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 improve execution in areas including manufacturing, distribution and selling. In 2006,
Mattel is continuing to focus on improving the efficiency of its supply chain using Lean supply chain initiatives.
The objective of the Lean program is to improve the flow of processes, do more with less and focus on the value
chain from beginning to end.
The third goal is to further capitalize on Mattel’s scale advantage. For example, as the world’s largest toy
company, Mattel believes it can realize cost savings when making purchasing decisions based on a One Mattel
philosophy.
Results of Operations
2006 Compared to 2005
Consolidated Results
Net sales for 2006 were $5.65 billion, a 9% increase compared to $5.18 billion in 2005, including
a 1 percentage point benefit from changes in currency exchange rates. Net income for 2006 was $592.9 million,
or $1.53 per diluted share, as compared to net income of $417.0 million, or $1.01 per diluted share, for 2005.
Gross profit, as a percentage of net sales, increased to 46.2% in 2006 from 45.8% in 2005. The increase in
gross profit was driven by price increases and savings from supply chain initiatives, which were partially offset
by unfavorable mix, external cost pressures and higher royalty costs.
Income before income taxes as a percentage of net sales declined to 12.1% in 2006 from 12.6% in 2005.
Contributing to this decline were higher selling and administrative expenses as a percentage of net sales and
lower other non-operating income, partially offset by higher gross margins and lower advertising expenses as a
percentage of net sales. Higher selling and administrative expenses were primarily attributed to increased
incentive compensation accruals, stock-based compensation including a pre-tax charge of $19.3 million for prior
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