Mattel 2008 Annual Report Download - page 40

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Income Taxes
Mattel’s effective tax rate on income before income taxes in 2008 was 22.2% as compared to 14.7% in
2007. The 2007 income tax provision includes net benefits of $42.0 million related 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.
The 2006 income tax provision includes a benefit of $63.0 million related to settlements with foreign and
state tax authorities. Of the total benefit recorded in 2006, $57.5 million represents refunds of previously paid
taxes, recorded as an expense in previous years. These refunds were recorded as a reduction to income tax
expense in the period the refunds were received by Mattel. The balance of the tax benefit recorded in 2006 was a
net reduction to total income tax reserves resulting from tax settlements with foreign and state tax authorities.
Liquidity and Capital Resources
Mattel’s primary sources of liquidity are its cash and equivalents balances, access to short-term borrowing
facilities, and issuances of long-term debt securities. Cash flows from operating activities 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 the current
global economic crisis and tight credit environment, 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.
Current Market Conditions
Mattel is exposed to financial market risk resulting from changes in interest and foreign currency rates, and
recent developments in the financial markets have increased Mattel’s exposure to the possible liquidity and credit
risks of its counterparties. Mattel believes that it has ample liquidity to fund its business needs, including
beginning of the year cash and equivalents, cash flows from operations, and access to its $1.3 billion domestic
unsecured committed revolving credit facility, which it uses for seasonal working capital requirements. As of
December 31, 2008, Mattel had available incremental borrowing resources totaling approximately $1.0 billion
under this unsecured committed revolving credit facility, and Mattel has not experienced any limitations on its
ability to access this source of liquidity. Mattel’s domestic credit facility expires on March 23, 2010, and market
conditions could affect the size and certain terms of the replacement facility along with terms of other debt
instruments that Mattel enters into from time to time.
Mattel monitors the third-party depository institutions that hold the company’s cash and equivalents.
Mattel’s emphasis is primarily on safety and liquidity of principal and secondarily on maximizing the yield on
those funds. Mattel diversifies its cash and equivalents among counterparties and securities to minimize
exposure. As of December 31, 2008, Mattel had a money market investment with an original cost basis of
$85.3 million, which was reclassified from cash and equivalents to other current assets as a result of the money
market investment fund halting redemption requests in September 2008. Additionally, during the third quarter of
2008, Mattel recorded a $4.0 million non-operating loss to recognize the estimated impairment of underlying
securities associated with this investment. In January 2009, Mattel received proceeds of approximately $55
million related to this investment, and expects to receive the remaining proceeds, net of the impairment charge,
by the end of 2009, when the underlying securities will have matured. As of December 31, 2008 and 2007,
Mattel also had additional long-term investments of $35.0 million.
Mattel is subject to credit risks relating to the ability of counterparties of hedging transactions to meet their
contractual payment obligations. The risks related to creditworthiness and nonperformance have been considered
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