Mattel 2007 Annual Report Download - page 40

Results of Operations
2007 Compared to 2006
Consolidated Results
Net sales for 2007 were $5.97 billion, a 6% increase as compared to $5.65 billion in 2006, including
a 3 percentage point benefit from changes in currency exchange rates. Net income for 2007 was $600.0 million,
or $1.54 per diluted share, as compared to net income of $592.9 million, or $1.53 per diluted share, for 2006.
Gross profit, as a percentage of net sales, increased to 46.5% in 2007 from 46.2% in 2006. The increase in
gross profit was driven by price increases and favorable changes in currency exchange rates, which were partially
offset by external cost pressures and the impact of the 2007 Product Recalls, which reduced gross profit by
approximately $71 million.
Income before income taxes as a percentage of net sales declined to 11.8% in 2007 from 12.1% in 2006.
Contributing to this decline were higher selling and administrative expenses as a percentage of net sales and higher
advertising expenses as a percentage of net sales, partially offset by higher gross margins, lower interest expense, and
higher other non-operating income. The increase in other selling and administrative expenses in 2007 is primarily
attributable to the impact of the 2007 Product Recalls, which increased other selling and administrative expenses by
approximately $35 million. Higher investments in the business, including design and development costs and expansion
in international markets, the impact of foreign exchange rates, increases in employee-related costs, and the inclusion of
Radica costs also contributed to the increase. These costs increases were partially offset by lower 2007 incentive and
equity compensation expenses. Other selling and administrative expenses in 2006 included $19.3 million for prior
period unintentional stock option accounting errors. Other non-operating income, net increased from $4.3 million in
2006 to $11.0 million in 2007, primarily due to foreign currency exchange gains.
Net income in 2007 was positively impacted by net tax benefits related to prior years of $42.0 million due to
reassessments of tax exposures based on the status of current audits in various jurisdictions around the world,
including settlements, partially offset by enacted tax law changes. Net income in 2006 was positively impacted
by the Tax Act passed in May 2006 and tax benefits of $63.0 million related to settlements and refunds of
multiple ongoing audits by foreign and state tax authorities.
The following table provides a summary of Mattel’s consolidated results for 2007 and 2006 (in millions,
except percentage and basis point information):
For the Year
2007 2006 Year/Year Change
Amount
% of Net
Sales Amount
% of Net
Sales %
Basis Points
of Net Sales
Net sales .................................. $5,970.1 100.0% $5,650.2 100.0% 6%
Gross profit ................................ $2,777.3 46.5% $2,611.8 46.2% 6% 30
Advertising and promotion expenses ............ 708.8 11.9 651.0 11.5 9% 40
Other selling and administrative expenses ........ 1,338.4 22.4 1,232.0 21.8 9% 60
Operating income ........................... 730.1 12.2 728.8 12.9 0% (70)
Interest expense ............................ 71.0 1.2 79.9 1.4 –11% (20)
Interest (income) ........................... (33.3) –0.6 (30.5) –0.5 9% (10)
Other non-operating (income), net .............. (11.0) (4.4)
Income before income taxes ................... $ 703.4 11.8% $ 683.8 12.1% 3% (30)
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