Mattel 2008 Annual Report Download - page 41

in the fair value measurements of Mattel’s foreign currency forward exchange contracts and interest rate swaps.
Mattel continues to closely monitor its counterparties and will take action, as appropriate, to further manage its
counterparty credit risk.
Mattel expects that some of its customers and vendors may experience difficulty in obtaining the liquidity
required to buy inventory or raw materials. Mattel monitors its customers’ financial condition and their liquidity
in order to mitigate Mattel’s accounts receivable collectibility risks. During 2008, bad debt expense increased by
approximately $13 million as compared to 2007 as a result of certain customers facing financial difficulties.
Mattel sponsors defined benefit pension plans and postretirement benefit plans for employees of the
company. In 2008, actual returns for Mattel’s defined benefit pension plans were below the expected rate of
return due to adverse conditions in the equity and debt markets. Continued actual returns below the expected rate
of return, along with changes in interest rates that affect the measurement of the liability, would impact the
amount and timing of Mattel’s future contributions to these plans.
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.
Mattel’s focus for 2009 is on strengthening its balance sheet and managing costs in line with realistic
revenues with the goal of improving the profitability and cash flows generated by its business. Management
expects to conserve cash and lower debt to strengthen its balance sheet in the near-term. Given the current
volatile global economic environment, Mattel is prioritizing protecting its dividend to shareholders and
minimizing strategic acquisitions and share repurchases in 2009.
Over the long-term, after the full impact of the current economic and financial crisis is understood and
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 share repurchases. Mattel’s
share repurchase program has no expiration date and repurchases will take place from time to time, depending on
market conditions. 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 $436.3 million during 2008, as compared to
$560.5 million in 2007, and $875.9 million in 2006. The decrease in cash flows from operating activities in 2008
from 2007 was primarily the result of lower profitability, partially offset by lower working capital requirements,
mainly due to lower usage of cash to reduce levels of accounts payable and accrued expenses. The decrease in
cash flows from operating activities in 2007 from 2006 was primarily the result of higher working capital
requirements, mainly due to lower sales of receivables, the timing of vendor payments, and lower accruals for
incentive and royalty obligations.
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