Mattel 2006 Annual Report Download - page 44

2006 income tax provision was also positively impacted by approximately $37 million as a result of the Tax Act
passed in May 2006.
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 the
Jobs Act. The 2005 effective tax rate also includes a tax benefit of $38.6 million primarily related to audit
settlements reached with certain tax authorities in both the US and abroad. In 2005, the IRS completed its
examination of Mattel’s US federal income tax returns through 2003.
Liquidity and Capital Resources
Mattel’s primary sources of liquidity are its cash balances and access to short-term borrowing facilities.
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.
Over the long-term, assuming cash flows from operating activities remain strong, Mattel plans to use its free
cash flows to invest in strategic acquisitions and to return funds to shareholders through cash dividends and,
depending on market conditions, share repurchases. However, the ability to implement successfully the capital
deployment plan is directly dependent on Mattel’s ability to generate strong cash flows from operating activities.
There is no assurance that Mattel will continue to generate strong cash flows from operating activities or achieve
its targeted goals from investing activities.
Operating Activities
Cash flows generated from operating activities were $875.9 million during 2006, compared to
$466.7 million in 2005 and $570.4 million in 2004. The increase in cash flows from operating activities in 2006
from 2005 was primarily the result of higher net income and lower working capital, mainly due to higher levels
of accounts payable and accrued expenses due primarily to higher incentive accruals, and the timing of vendor
payments, partially offset by higher accounts receivable at December 31, 2006. The decrease in cash flows from
operating activities in 2005 from 2004 was primarily due to lower net income and a change in working capital
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