Mattel 2007 Annual Report Download - page 104

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Stock Option Review
During 2006, Mattel recognized non-cash compensation expense of $19.3 million ($13.3 million net of
income tax) related to prior period unintentional stock option accounting errors associated with the use of
incorrect measurement dates for certain grants. The correcting adjustment also had the effect of increasing
noncurrent deferred tax assets by $3.5 million and additional paid in capital by $16.8 million as of
December 31, 2006.
Stock Options
Mattel recognized compensation expense of $7.4 million and $23.9 million for stock options during 2007
and 2006, respectively, as a component of other selling and administrative expenses. Income tax benefits related
to stock option compensation expense recognized in the consolidated statements of operations during 2007 and
2006 totaled $2.5 million and $5.2 million, respectively.
Prior to January 1, 2006, no compensation expense was recognized in the consolidated statements of
operations for stock options. Had compensation expense in 2005 for nonqualified stock options granted been
determined based on their fair value at the measurement date, consistent with the fair value method of accounting
prescribed by SFAS No. 123, Mattel’s net income and net income per common share would have been adjusted
as follows (amounts in millions, except per share amounts):
2005
Net income
As reported ................................................................... $417.0
Pro forma compensation cost, net of tax ............................................. (49.0)
Pro forma net income ........................................................... $368.0
Net income per common share
Basic
As reported ................................................................... $ 1.02
Pro forma compensation cost, net of tax ............................................. (0.12)
Pro forma net income per common share—basic ...................................... $ 0.90
Diluted
As reported ................................................................... $ 1.01
Pro forma compensation cost, net of tax ............................................. (0.11)
Pro forma net income per common share—diluted ..................................... $ 0.90
The fair value of options granted has been estimated using the Black-Scholes valuation model. The expected
life of the options used in this calculation is the period of time the options are expected to be outstanding, and has
been determined based on historical exercise experience. Expected stock price volatility is based on the historical
volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on
Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is based on the implied yield
available on US Treasury zero-coupon issues approximating the expected life. The following weighted average
assumptions were used in determining the fair value of options granted:
2007 2006 2005
Options granted at market price
Expected life (in years) ................................................. 4.7 5.1 4.9
Risk-free interest rate .................................................. 4.6% 4.9% 4.1%
Volatility factor ....................................................... 22.8% 28.0% 27.6%
Dividend yield ........................................................ 2.8% 2.8% 2.4%
94