Mattel 2006 Annual Report Download - page 38

Other Selling and Administrative Expenses
Other selling and administrative expenses were $1.23 billion in 2006, or 21.8% of net sales, compared to
$1.08 billion in 2005, or 20.8% of net sales. The increase in other selling and administrative expenses in 2006 is
primarily attributable to an $86.3 million increase in incentive compensation accruals, an increase of
$27.3 million in stock-based compensation, including a pre-tax charge of $19.3 million for prior period
unintentional stock option accounting errors (see Item 8 “Financial Statements and Supplementary Data—Note 7
to the Consolidated Financial Statements”), costs associated with the third American Girl Place®retail store, and
additional selling and administrative expenses for Radica (acquired in October 2006), partially offset by savings
related to the 2006 streamlining of the Mattel Brands organization.
Non-Operating Items
Interest expense was $79.9 million in 2006 compared to $76.5 million in 2005 due to higher average
long-term borrowings and higher short-term interest rates, partially offset by lower average short-term
borrowings. Interest income decreased from $34.2 million in 2005 to $30.5 million in 2006 due to lower average
invested cash balances. Other non-operating (income), net was $4.3 million compared to $29.8 million in 2005.
Other non-operating income in 2005 included gains from the sale of marketable securities of $25.8 million. There
were no gains or losses from the sale of marketable securities in 2006.
As of December 31, 2006 and 2005, Mattel held no marketable securities.
Provision for Income Taxes
Net income in 2006 was positively impacted by the Tax Act passed in May 2006, and income tax benefits of
$63.0 million related to settlements of ongoing audits with foreign tax authorities and a settlement with a state
tax authority for tax years 1997 and 1998, which were recorded in the first two quarters of 2006. Net income in
2005 was negatively impacted by incremental tax expense of $107.0 million, resulting from Mattel’s decision to
repatriate $2.4 billion in previously unremitted foreign earnings under the Jobs Act, partially offset by
$38.6 million of tax benefits primarily relating to audit settlements with certain tax authorities in both the US and
abroad.
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 10 to the Consolidated Financial Statements.”
Domestic Segment
Mattel Girls & Boys Brands US gross sales increased 10% in 2006 compared to 2005. Within this segment,
gross sales of Barbie®increased 3% and gross sales of Other Girls Brands decreased 5%. Gross sales in the
Wheels category decreased 9% driven by sales declines in Hot Wheels®and Tyco®R/C product lines. Gross
sales in the Entertainment category, which includes games and puzzles and Radica:®products, increased 61%
driven by the success of CARS™and Superman™products and Radica:®products, which more than offset sales
declines in Batman™and Yu-Gi-Oh!™. Mattel Girls & Boys Brands US segment income increased 29% to
$267.2 million in 2006, primarily due to higher sales volume and improved gross profit, partially offset by higher
other selling and administrative expenses. The increase in gross profit is due to higher sales volume, including
Radica:®products, price increases and supply chain savings, partially offset by external cost pressures and
unfavorable mix.
Fisher-Price Brands US gross sales increased 8%, reflecting an increase in sales of Core Fisher Price®and
Fisher Price®Friends products. Sale increases in Core Fisher Price®products reflected strong sales of
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