Mattel 2012 Annual Report Download - page 41

Gross sales within the North American Region accounted for approximately 56% of consolidated gross sales in
2012 and 2011. Gross sales in the International Region, which includes the International segment, increased 4%
in 2012, as compared to 2011, with unfavorable changes in currency exchange rates of 6 percentage points.
Cost of Sales
Cost of sales as a percentage of net sales was 46.9% in 2012, as compared to 49.8% in 2011. Cost of sales
decreased by $108.5 million, or 3%, from $3.12 billion in 2011 to $3.01 billion in 2012, as compared to a 2%
increase in net sales. Within cost of sales, product and other costs decreased by $95.5 million, or 4%, from $2.53
billion in 2011 to $2.44 billion in 2012; royalty expenses decreased $22.2 million, or 8%, from $262.4 million in
2011 to $240.2 million in 2012; and freight and logistics expenses increased by $9.2 million, or 3%, from $323.7
million in 2011 to $332.9 million in 2012.
Gross Profit
Gross profit as a percentage of net sales increased to 53.1% in 2012 from 50.2% in 2011. The increase in
gross profit as a percentage of net sales was driven primarily by favorable product mix, savings from
manufacturing efficiency and Operational Excellence 2.0 programs, the benefit of HIT Entertainment’s licensing
business, and price increases partially offset by higher input costs and higher customer benefits.
Advertising and Promotion Expenses
Advertising and promotion expenses primarily consist of: (i) media costs, which primarily include the
media, planning, and buying fees for television, print, and online advertisements, (ii) non-media costs, which
primarily include commercial and website production, merchandising, and promotional costs, (iii) retail
advertising costs, which primarily include consumer direct catalogs, newspaper inserts, fliers, and mailers and
(iv) generic advertising costs, which primarily include trade show costs. Advertising and promotion expenses as
a percentage of net sales were flat at 11.2% in 2012 and 2011.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $1.67 billion in 2012, or 26.0% of net sales, as compared to
$1.41 billion in 2011, or 22.4% of net sales. The significant changes in other selling and administrative expenses
included the Litigation Charge of $137.8 million, the addition of HIT Entertainment’s ongoing other selling and
administrative expenses of approximately $47 million, and higher incentive compensation expense of
approximately $33 million, partially offset by lower legal fees of approximately $40 million. Additional drivers
for the increase included transaction and integration costs associated with the acquisition of HIT Entertainment
and investments in strategic initiatives, including American Girl retail expansion and information technology
initiatives.
Non-Operating Items
Interest expense was $88.8 million in 2012, as compared to $75.3 million in 2011, driven primarily by the
issuance of $600.0 million of senior notes in November 2011. Interest income decreased from $8.1 million in the
2011 to $6.8 million in 2012, driven primarily by lower average cash balances.
Provision for Income Taxes
Mattel’s effective tax rate on income before income taxes in 2012 was 17.8%, as compared to 20.8% in
2011. The 2012 and 2011 income tax provisions include net discrete tax benefits of $16.0 million and $6.8
million, respectively, primarily related to reassessments of prior years’ tax liabilities based on the status of audits
and tax filings in various jurisdictions around the world, settlements, and enacted tax law changes.
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