Mattel 2006 Annual Report Download - page 42

• Investments in growth initiatives including new product design and development and higher overhead
costs in 2005 associated with the third American Girl Place®retail store that opened in April 2006; and
• Net favorable legal settlements in 2004 that did not recur in 2005.
The consolidation of its Mattel Girls & Boys Brands US and Fisher-Price Brands US divisions into one
division included the elimination of executive-level positions and resulted in severance charges totaling
$7.1 million in 2005, of which $6.1 million resulted from the elimination of the position of president of the
Mattel Girls & Boys Brands US division. The overall increase in other selling and administrative expenses was
partially offset by a $16.2 million charge for severance in 2004 related to the elimination of approximately
285 positions, resulting from headcount reductions and the relocation of the Matchbox®and Tyco®R/C brands
from New Jersey to California and lower incentive compensation in 2005.
Non-Operating Items
Interest expense decreased from $77.8 million in 2004 to $76.5 million in 2005 due to lower average debt in
2005, partially offset by higher average short-term borrowing rates. Interest income increased from $19.7 million
in 2004 to $34.2 million in 2005, primarily as a result of higher interest rates. Other non-operating (income), net
was $29.8 million in 2005, comprised mainly of a $25.8 million gain from the sale of marketable securities.
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.
As of December 31, 2005, Mattel held no marketable securities. As of 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
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 and was
positively impacted by $38.6 million of tax benefit primarily relating to audit settlements with certain tax
authorities in both the US and abroad. Net income in 2004 was positively impacted by a $65.1 million tax benefit
related to an audit settlement with the IRS.
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 decreased 10% in 2005 compared to 2004. Within this segment,
gross sales of Barbie®declined 21% and gross sales of Other Girls Brands increased double-digits, primarily
driven by increased sales of Disney Princesses, Pound Puppies™and Pixel Chix™. Gross sales in the Wheels
category decreased 8% driven by sales declines in all the Wheels brands. Gross sales in the Entertainment
category decreased double digits, primarily driven by sales declines in Yu-Gi-Oh!™and JuiceBox™which offset
strong sales of Batman™products. Mattel Girls & Boys Brands US segment income decreased 37% to
$206.5 million in 2005, 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, increased royalty costs and ongoing external
cost pressures.
33