Mattel 2009 Annual Report Download - page 36

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements and the
related notes. See Item 8 “Financial Statements and Supplementary Data.”
Overview
Mattel’s objective is to continue to create long-term stockholder value by generating strong cash flow and
deploying it in a disciplined and opportunistic manner as outlined in Mattel’s capital and investment
framework. To achieve this objective, management has established three overarching goals.
The first goal is to grow core brands by continuing to develop popular toys that are innovative and
responsive to current play patterns and other trends. Additionally, Mattel plans to pursue additional licensing
arrangements and strategic partnerships to extend its portfolio of brands into areas outside of traditional toys.
The second goal is to improve execution in areas including manufacturing, distribution, and selling. Mattel
continues to focus on improving the efficiency of its supply chain using Lean supply chain initiatives. The
objective of the Lean program is to improve the flow of processes, do more with less, and focus on the value
chain from beginning to end.
The third goal is to further capitalize on Mattel’s scale advantage. For example, as the world’s largest toy
company, Mattel believes it can realize cost savings when making purchasing decisions based on a One Mattel
philosophy.
2009 Overview
During 2009, Mattel improved execution across its supply chain and throughout the company by realigning
its infrastructure, controlling costs and expenses, tightly managing working capital, especially inventories, and
reducing capital spending by doing only business-critical projects. This resulted in improved profitability, a
stronger balance sheet, and improved cash flow, which Mattel used to lower debt, increase cash balances, and
continue to reward stockholders through its strong annual dividend. More specifically:
• Gross profit as a percentage of net sales increased from 45.4% in 2008 to 50.0% in 2009, primarily due
to price increases and net cost savings related to Mattel’s Global Cost Leadership program, partially
offset by unfavorable changes in foreign currency exchange rates.
• Operating income increased from $541.8 million in 2008 to $731.2 million in 2009, primarily due to
higher gross profit, lower advertising and promotion expenses, and lower other selling and
administrative expenses, partially offset by lower sales.
• The Global Cost Leadership program generated gross costs savings before severance charges of
approximately $164 million during 2009 (or approximately $132 million net of 2009 severance charges
of approximately $32 million).
• Cash flows from operations increased from $436.3 million in 2008 to $945.0 million in 2009.
• Capital expenditures decreased from $198.8 million in 2008 to $120.5 million in 2009.
2010 and Beyond
Mattel’s focus for 2010 is to build on its progress towards its long-term profitability goals, in light of what it
expects to be a challenging cost environment and a continuation of a difficult economic environment. Over the
long-term, Mattel’s goals are to achieve gross margin of approximately 50%, advertising expense of
approximately 11% to 13%, and other selling and administrative expenses of approximately 20%, which should
result in operating margins of approximately 15% to 20%. Mattel will continue to manage its business based on
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