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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-05647
MATTEL, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 95-1567322 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
333 Continental Blvd.
El Segundo, CA 90245-5012
(Address of principal executive offices)
(310) 252-2000
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| Common Stock, $1.00 par value | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ¨
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant calculated using the market price as of the close of business June 30, 2009 was $5,766,693,594.
Number of shares outstanding of registrant’s common stock, $1.00 par value, as of February 22, 2010:
363,657,823 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Mattel, Inc. 2009 Notice of Annual Meeting of Stockholders and Proxy Statement, to be filed with the Securities and Exchange Commission (“SEC”) within 120 days after the close of the registrant’s fiscal year (incorporated into Part III).
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| Item 1. | Business. |
Mattel, Inc. (“Mattel”) designs, manufactures, and markets a broad variety of toy products worldwide through sales to its customers and directly to consumers. Mattel’s vision is to provide “the world’s premier toy brands—today and tomorrow.” Management has set six key company strategies: (i) improve execution of the existing toy business; (ii) globalize the brands; (iii) extend the brands into new areas; (iv) catch new trends, create new brands, and enter new categories; (v) develop people; and (vi) improve productivity, simplify processes, and maintain customer service levels.
Mattel believes its products are among the most widely recognized toy products in the world. Mattel’s portfolio of brands and products are grouped in the following categories:
Mattel Girls & Boys Brands—including Barbie® fashion dolls and accessories (“Barbie®”), Polly Pocket®, Little Mommy®, Disney Classics®, and High School Musical® (collectively “Other Girls Brands”), Hot Wheels®, Matchbox® , Battle Force 5™, Speed Racer®, and Tyco R/C® vehicles and play sets (collectively “Wheels”), and CARS™, Radica®, Toy Story®, Max Steel®, Speed Racer®, Batman®, and Kung Fu Panda® products, and games and puzzles (collectively “Entertainment”).
Fisher-Price Brands—including Fisher-Price®, Little People®, BabyGear™, and View-Master® (collectively “Core Fisher-Price®”), Sesame Street® , Dora the Explorer®, Go Diego Go! ®, and See ‘N Say® (collectively “Fisher-Price® Friends”), and Power Wheels®.
American Girl Brands—including Just Like You®, the historical collection, and Bitty Baby®. American Girl Brands products are sold directly to consumers via its catalogue, website, and proprietary retail stores. Its children’s publications are also sold to certain retailers.
Mattel was incorporated in California in 1948 and reincorporated in Delaware in 1968. Its executive offices are located at 333 Continental Blvd., El Segundo, California 90245-5012, telephone number (310) 252-2000.
Business Segments
“Mattel” refers to Mattel, Inc. and its subsidiaries as a whole, unless the context requires otherwise. This narrative discussion applies to all segments except where otherwise stated. Mattel’s reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands US, Fisher-Price Brands US, and American Girl Brands.
For additional information on Mattel’s operating segment reporting, including revenues, segment income, and assets, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Operating Segment Results” and Item 8 “Financial Statements and Supplementary Data—Note 15 to the Consolidated Financial Statements—Segment Information.” For additional information regarding geographic areas, see Item 8 “Financial Statements and Supplementary Data—Note 15 to the Consolidated Financial Statements—Segment Information.” For a discussion of the risks inherent in the foreign operations of Mattel, which affect each segment, see Item 1A “Risk Factors—Factors That May Affect Future Results.”
Domestic Segment
The Domestic segment develops toys that it markets and sells through the Mattel Girls & Boys Brands US, Fisher-Price Brands US, and American Girl Brands segments.
In the Mattel Girls & Boys Brands US segment, Barbie® includes brands such as Barbie® fashion dolls and accessories, and Polly Pocket®, Little Mommy®, Disney Classics®, and High School Musical® are included
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within Other Girls Brands. Wheels includes Hot Wheels®, Matchbox®, Battle Force 5™, Speed Racer®, and Tyco R/C® vehicles and play sets. Entertainment includes CARS™, Radica®, Toy Story®, Speed Racer®, Batman®, and Kung Fu Panda® products, as well as games and puzzles.
In 2010, Mattel expects to introduce new products, as well as continue to leverage content within its core brands. For Mattel Girls Brands, Barbie® will be celebrating her aspirational career heritage with the introduction of twenty new careers, including Barbie®’s 125th career. Barbie® will be expanding the Fashionistas line and will continue to build the collector business with new introductions to the tween market. New Barbie® product introductions will support the full-length animated launches of Barbie in a Mermaid Tale™ in spring 2010 and Barbie® A Fashion Fairytale in fall 2010. Polly Pocket® will expand in 2010 with new styles, new characters, and new ways to play. Additionally, Disney Princess™ will feature new products based on a computer-animated feature film.
Also in 2010, Hot Wheels® will introduce extensions to its TrickTracks® and Color Shifters™ product lines, as well as new product lines such as Custom Motors. Hot Wheels® Battle Force 5™ will continue as an animated TV series on the Cartoon Network® and will be supported by a new product line. Matchbox® will follow up on its successful 2009 introduction of Rocky The Robot Truck™ with a new range of Big Rig Buddies™ products. The Entertainment business will expand in 2010 to include new products based on WWE® Wrestling, and Mattel will release new products based on Disney/Pixar’s upcoming Toy Story® 3 movie in 2010 and will continue to market new product extensions of Disney/Pixar’s successful CARS™ franchise. Mattel will also continue to release products based on the popular DC Comics line, including the Batman®: The Brave and the Bold® animated TV series. For games and puzzles, Mattel will continue to support extensions of its popular UNO®, Apples to Apples®, and Blokus® brands. Mattel will also continue to offer innovative ways to play, including the Mindflex™ game.
The Fisher-Price Brands US segment includes Fisher-Price®, Little People®, BabyGear™, View-Master®, Dora the Explorer®, Go Diego Go!®, Mickey Mouse® Clubhouse, Handy Manny®, See ‘N Say®, Ni Hao, Kai-lan®, and Power Wheels®. New product introductions for 2010 are expected to include the Laugh & Learn™ Learn & Move Music Station, IXL® Learning System, Lil’ Zoomers™ Spinnin’ Sounds Speedway, Little People® Wheelies Stand ‘n Play Rampway, Imaginext™ Bigfoot the Monster, Trio® Batcave™, Newborn Rock ‘n Play Sleeper, iGlide™, Dance Star Mickey®, We Did It Dora, Dora All-Seasons Dollhouse, Thomas the Tank Engine and Friends™, and the Thomas and Friends® Zip, Zoom & Logging Adventure™.
The American Girl Brands segment is a direct marketer, children’s publisher, and retailer best known for its flagship line of historical dolls, books, and accessories, as well as the Just Like You® and Bitty Baby® brands. American Girl Brands also publishes best-selling Advice & Activity books and the award-winning American Girl® magazine. In January 2010, American Girl® introduced Lanie™, the newest Girl of the Year® doll. American Girl Brands products are sold only in the US and Canada.
International Segment
Products marketed by the International segment are generally the same as those developed and marketed by the Domestic segment, with the exception of American Girl Brands, although some are developed or adapted for particular international markets. Mattel’s products are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia, Canada, and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence.
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Mattel’s International segment revenue represented 46% of worldwide consolidated gross sales in 2009. Within the International segment, Mattel operates in four regional groups that generated the following gross sales during 2009:
| Amount | Percentage of International Gross Sales |
|||||
| (In millions, except percentage information) |
||||||
| Europe |
$ | 1,442.5 | 52 | % | ||
| Latin America |
860.5 | 31 | ||||
| Asia Pacific |
267.4 | 10 | ||||
| Other |
187.9 | 7 | ||||
| $ | 2,758.3 | 100 | % | |||
No individual country within the International segment exceeded 5% of worldwide consolidated gross sales during 2009.
The strength of the US dollar relative to other currencies can significantly affect the revenues and profitability of Mattel’s international operations. Mattel enters into foreign currency forward exchange contracts, primarily to hedge its purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies, to limit the effect of exchange rate fluctuations on its results of operations and cash flows. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements—Derivative Instruments.” For financial information by geographic area, see Item 8 “Financial Statements and Supplementary Data—Note 15 to the Consolidated Financial Statements—Segment Information.”
Manufacturing and Materials
Mattel manufactures toy products for all segments in both company-owned facilities and through third-party manufacturers. Products are also purchased from unrelated entities that design, develop, and manufacture those products. To provide greater flexibility in the manufacture and delivery of its products, and as part of a continuing effort to reduce manufacturing costs, Mattel has concentrated production of most of its core products in company-owned facilities and generally uses third-party manufacturers for the production of non-core products.
Mattel’s principal manufacturing facilities are located in China, Indonesia, Thailand, Malaysia, and Mexico. To help avoid disruption of its product supply due to political instability, civil unrest, economic instability, changes in government policies, and other risks, Mattel produces its products in multiple facilities in multiple countries. Mattel believes that the existing production capacity at its own and its third-party manufacturers’ facilities is sufficient to handle expected volume in the foreseeable future. See Item 1A “Risk Factors—Factors That May Affect Future Results.”
Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research, and current market information. Actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or excess inventory in a particular product line.
The foreign countries in which most of Mattel’s products are manufactured (principally China, Indonesia, Thailand, Malaysia, and Mexico) all enjoy permanent “normal trade relations” (“NTR”) status under US tariff laws, which provides a favorable category of US import duties. China’s NTR status became permanent in 2002,
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following enactment of a bill authorizing such status upon the country’s accession to the World Trade Organization (“WTO”), which occurred in 2001. Membership in the WTO substantially reduces the possibility of China losing its NTR status, which would result in increased costs for Mattel and others in the toy industry.
All US duties on toys were completely eliminated upon implementation of the Uruguay Round WTO agreement in 1995. The European Union, Japan, and Canada eliminated their tariffs on most toy categories through staged reductions that were completed by January 1, 2004. The primary toy tariffs still maintained by these countries are a European Union tariff of 4.7% on dolls, play sets, most plastic toys, and die cast metal toy vehicles, a Japanese tariff on dolls of 3.9%, and a Canadian tariff of 8.0% on ride on toys, doll carriages, and wagons.
The majority of Mattel’s raw materials are available from numerous suppliers, but may be subject to fluctuations in price.
Competition and Industry Background
Competition in the manufacture, marketing, and sale of toys is based primarily on quality, play value, and price. Mattel offers a diverse range of products for children of all ages and families that include, among others, toys for infants and preschoolers, girls’ toys, boys’ toys, youth electronics, hand-held and other games, puzzles, educational toys, media-driven products, and fashion-related toys. The Mattel Girls & Boys Brands US and Fisher-Price Brands US segments compete with several large toy companies, including Bandai, Hasbro, Jakks Pacific, Leap Frog, Lego, MGA Entertainment, and VTech, many smaller toy companies, and several manufacturers of video games and consumer electronics. American Girl Brands competes with companies that manufacture girls’ toys and with children’s book publishers and retailers. Mattel’s International segment competes with global toy companies including Bandai, Hasbro, Lego, Tomy, and MGA Entertainment, and other national and regional toy companies and manufacturers of video games and consumer electronics. Foreign regions may include competitors that are strong in a particular toy line or geographical area, but do not compete with Mattel or other international toy companies worldwide.
Competition among the above companies is intensifying due to recent trends towards shorter life cycles for individual toy products, the phenomenon of children outgrowing toys at younger ages, and an increasing use of high technology in toys. In addition, a small number of retailers account for a large portion of all toy sales, control the shelf space from which toys are viewed, and have direct contact with parents and children through in-store purchases, coupons, and print advertisements. Such retailers can and do promote their own private-label toys, facilitate the sale of competitors’ toys, and allocate shelf space to one type of toys over another.
Seasonality
Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases during the traditional holiday season. A significant portion of Mattel’s customers’ purchasing occurs in the third and fourth quarters of Mattel’s fiscal year in anticipation of such holiday buying. These seasonal purchasing patterns and requisite production lead times cause risk to Mattel’s business associated with the underproduction of popular toys and the overproduction of less popular toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly in recent years, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase the risk that Mattel may not be able to meet demand for certain products at peak demand times, or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its sales to vary significantly from period to period.
In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three
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quarters of its fiscal year. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the respective levels of inventories and accounts receivable, which result in seasonal working capital financing requirements. See “Seasonal Financing.”
Product Design and Development
Through its product design and development group, Mattel regularly refreshes, redesigns, and extends existing toy product lines and develops innovative new toy product lines for all segments. Mattel believes its success is dependent on its ability to continue this activity effectively. See Item 1A “Risk Factors—Factors That May Affect Future Results.” Product design and development activities are principally conducted by a group of professional designers and engineers employed by Mattel. During 2009, 2008, and 2007, Mattel incurred expenses of $171.3 million, $190.2 million, and $189.4 million, respectively, in connection with the design and development of products, exclusive of royalty payments. See Item 8 “Financial Statements and Supplementary Data—Note 16 to the Consolidated Financial Statements—Supplemental Financial Information.”
Additionally, independent toy designers and developers bring concepts and products to Mattel and are generally paid a royalty on the net selling price of products licensed to Mattel. These independent toy designers may also create different products for other toy companies.
Advertising and Marketing
Mattel supports its product lines with extensive advertising and consumer promotions. Advertising takes place at varying levels throughout the year and peaks during the traditional holiday season. Advertising includes television and radio commercials, and magazine, newspaper, and internet advertisements. Promotions include in-store displays, sweepstakes, merchandising materials, and major events focusing on products and tie-ins with various consumer products companies.
During 2009, 2008, and 2007, Mattel incurred expenses of $609.8 million (11.2% of net sales), $719.2 million (12.2% of net sales), and $708.8 million (11.9% of net sales), respectively, for advertising and promotion.
Sales
Mattel’s products are sold throughout the world. Products within the Domestic segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets, and, to a limited extent, wholesalers by Mattel Girls & Boys Brands US and Fisher-Price Brands US. Mattel also operates several small retail outlets, generally near or at its corporate headquarters and distribution centers as a service to its employees and as an outlet for its products. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers. Mattel has seven retail stores, American Girl Place® in Chicago, Illinois, New York, New York, and Los Angeles, California, and American Girl Boutique and Bistro® in Atlanta, Georgia, Dallas, Texas, Natick, Massachusetts, and Bloomington, Minnesota, each of which features children’s products from the American Girl Brands segment. American Girl Brands also has a retail outlet in Oshkosh, Wisconsin that serves as an outlet for its products. Products within the International segment are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia, Canada, and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence. Mattel also has retail outlets in Latin America and Europe that serve as outlets for its products. Additionally, Mattel sells certain of its products online through its website.
During 2009, Mattel’s three largest customers (Wal-Mart at $1.0 billion, Toys “R” Us at $0.7 billion, and Target at $0.5 billion) accounted for approximately 40% of worldwide consolidated net sales in the aggregate. Within countries in the International segment, there is also a concentration of sales to certain large customers that do not operate in the US. The customers and the degree of concentration vary depending upon the region or
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nation. See Item 1A “Risk Factors—Factors That May Affect Future Results” and Item 8 “Financial Statements and Supplementary Data—Note 15 to the Consolidated Financial Statements—Segment Information.”
Licenses and Distribution Agreements
Mattel has license agreements with third parties that permit Mattel to utilize the trademark, characters, or inventions of the licensor in products that Mattel sells. A number of these licenses relate to product lines that are significant to Mattel’s business and operations.
Mattel has entered into agreements to license entertainment properties from, among others, Disney Enterprises, Inc. (including Disney® characters such as Disney Princess™, CARS™ and Toy Story® from Pixar, High School Musical®, Winnie the Pooh®, and all Disney® films and television properties for use in Mattel’s games), Viacom International, Inc. relating to its Nickelodeon® properties (including Dora the Explorer®, Go Diego Go!®, and SpongeBob SquarePants®), Warner Bros. Consumer Products (including Batman®, Superman®, Justice League®, and Speed Racer®), Sesame Workshop® (relating to its Sesame Street® properties including Elmo™), WWE® Wrestling, and HIT Entertainment™ relating to its Thomas and Friends® properties.
Royalty expense during 2009, 2008, and 2007 was $188.5 million, $241.2 million, and $243.3 million, respectively. See “Product Design and Development” and Item 8 “Financial Statements and Supplementary Data—Note 14 to the Consolidated Financial Statements—Commitments and Contingencies.”
Mattel also licenses a number of its trademarks, characters, and other property rights to others for use in connection with the sale of non-toy products that do not compete with Mattel’s products. Mattel distributes some third-party finished products that are independently designed and manufactured.
Trademarks, Copyrights and Patents
Most of Mattel’s products are sold under trademarks, trade names, and copyrights, and a number of those products incorporate patented devices or designs. Trade names and trademarks are significant assets of Mattel in that they provide product recognition and acceptance worldwide.
Mattel customarily seeks patent, trademark, or copyright protection covering its products, and it owns or has applications pending for US and foreign patents covering many of its products. A number of these trademarks and copyrights relate to product lines that are significant to Mattel’s business and operations. Mattel believes its rights to these properties are adequately protected, but there can be no assurance that its rights can be successfully asserted in the future or will not be invalidated, circumvented, or challenged.
Commitments
In the normal course of business, Mattel enters into contractual arrangements for future purchases of goods and services to ensure availability and timely delivery, and to obtain and protect Mattel’s right to create and market certain products. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the term of the contracts. Current and future commitments for guaranteed payments reflect Mattel’s focus on expanding its product lines through alliances with businesses in other industries.
As of December 31, 2009, Mattel had approximately $267 million of outstanding commitments for purchases of inventory, other assets, and services in fiscal year 2010. Licensing and similar agreements with terms extending through 2014 and beyond contain provisions for future guaranteed minimum payments aggregating approximately $241 million. See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Commitments” and Item 8 “Financial Statements and Supplementary Data—Note 14 to the Consolidated Financial Statements—Commitments and Contingencies.”
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Backlog
Mattel ships products in accordance with delivery schedules specified by its customers, which usually request delivery within three months. In the toy industry, orders are subject to cancellation or change at any time prior to shipment. In recent years, a trend toward just-in-time inventory practices in the toy industry has resulted in fewer advance orders and therefore less backlog of orders. Mattel believes that the amount of backlog orders at any given time may not accurately indicate future sales.
Financial Instruments
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel seeks to mitigate its exposure to market risk by monitoring its foreign currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts primarily to hedge its purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes.
For additional information regarding foreign currency contracts, see “International Segment” above, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” and Item 8 “Financial Statements and Supplementary Data—Note 11 to the Consolidated Financial Statements—Derivative Instruments.”
Seasonal Financing
See Item 8 “Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements—Seasonal Financing and Debt.”
Government Regulations and Environmental Quality
Mattel’s toy products sold in the US are subject to the provisions of the Consumer Product Safety Act, the Federal Hazardous Substances Act, and the Consumer Product Safety Improvement Act of 2008, and may also be subject to the requirements of the Flammable Fabrics Act or the Food, Drug, and Cosmetics Act, and the regulations promulgated pursuant to such statutes. These statutes ban from the market consumer products that fail to comply with applicable product safety regulations. The Consumer Product Safety Commission (“CPSC”) may require the recall, repurchase, replacement, or repair of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under certain circumstances. Similar laws exist in some states and in many international markets.
Mattel maintains a quality control program to help ensure compliance with various US federal, state, and applicable foreign product safety requirements. Nonetheless, Mattel has experienced, and may in the future experience, issues in products that result in recalls, withdrawals, or replacements of products. A product recall could have a material adverse effect on Mattel’s results of operations and financial condition, depending on the product affected by the recall and the extent of the recall efforts required. A product recall could also negatively affect Mattel’s reputation and the sales of other Mattel products. See Item 1A “Risk Factors—Factors That May Affect Future Results” and Item 8 “Financial Statements and Supplementary Data—Note 4 to the Consolidated Financial Statements—Product Recalls and Withdrawals.”
Mattel’s advertising is subject to the Federal Trade Commission Act, The Children’s Television Act of 1990, the rules and regulations promulgated by the Federal Trade Commission, and the Federal Communications Commission, as well as laws of certain countries that regulate advertising and advertising to children. In addition, Mattel’s websites that are directed towards children are subject to The Children’s Online Privacy Protection Act of 1998. Mattel is subject to various other federal, state, local and international laws and regulations applicable to its business. Mattel believes that it is in substantial compliance with these laws and regulations.
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Mattel’s world wide operations are subject to the requirements of various environmental laws and regulations in the jurisdictions where those operations are located. Mattel believes that it is in substantial compliance with those laws and regulations. Mattel’s operations are from time to time the subject of investigations, conferences, discussions, and negotiations with various federal, state and local environmental agencies within and outside the United States with respect to the discharge or cleanup of hazardous waste. We are not aware of any material cleanup liabilities.
Employees
The total number of persons employed by Mattel and its subsidiaries at any one time varies because of the seasonal nature of its manufacturing operations. At December 31, 2009, Mattel’s total number of employees was approximately 27,000.
Executive Officers of the Registrant
The current executive officers of Mattel, all of whom are appointed annually by and serve at the pleasure of the Board of Directors, are as follows:
| Name |
Age | Position |
Executive Officer Since | |||
| Robert A. Eckert |
55 | Chairman of the Board and Chief Executive Officer |
2000 | |||
| Ellen L. Brothers |
54 | Executive Vice President of Mattel and President, American Girl |
2003 | |||
| Thomas A. Debrowski |
59 | Executive Vice President, Worldwide Operations |
2000 | |||
| Kevin M. Farr |
52 | Chief Financial Officer |
1996 | |||
| Neil B. Friedman |
62 | President, Mattel Brands |
1999 | |||
| Alan Kaye |
56 | Senior Vice President, Human Resources |
2000 | |||
| Geoff Massingberd |
52 | Senior Vice President, Corporate Responsibility |
2007 | |||
| Robert Normile |
50 | Senior Vice President, General Counsel and Secretary |
1999 | |||
| Bryan Stockton |
56 | President, International |
2000 | |||
| Dianne Douglas |
53 | Senior Vice President, Investor Relations and Treasurer |
2008 | |||
| H. Scott Topham |
49 | Senior Vice President and Corporate Controller |
2004 |
Mr. Eckert has been Chairman of the Board and Chief Executive Officer since May 2000. He was formerly President and Chief Executive Officer of Kraft Foods, Inc., the largest packaged food company in North America, from October 1997 until May 2000. From 1995 to 1997, Mr. Eckert was Group Vice President of Kraft Foods, Inc. From 1993 to 1995, Mr. Eckert was President of the Oscar Mayer foods division of Kraft Foods, Inc. Mr. Eckert worked for Kraft Foods, Inc. for 23 years prior to joining Mattel.
Ms. Brothers has been Executive Vice President of Mattel and President, American Girl since July 2000. From November 1998 to July 2000, she was Senior Vice President of Operations, Pleasant Company (which merged with and into Mattel on December 31, 2003, followed immediately on January 1, 2004, by an asset transfer to Mattel’s subsidiary American Girl). From January 1997 to November 1998, she was Vice President of the Catalogue Division, Pleasant Company. She joined Pleasant Company in 1995, prior to its acquisition by Mattel in July 1998, as Vice President of Catalogue Marketing.
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Mr. Debrowski has been Executive Vice President, Worldwide Operations since November 2000. From February 1992 until November 2000, he was Senior Vice President-Operations and a director of The Pillsbury Company. From September 1991 until February 1992, he was Vice President of Operations for the Baked Goods Division of The Pillsbury Company. Prior to that, he served as Vice President and Director of Grocery Operations for Kraft U.S.A.
Mr. Farr has been Chief Financial Officer since February 2000. From September 1996 to February 2000, he was Senior Vice President and Corporate Controller. From June 1993 to September 1996, he served as Vice President, Tax. Prior to that, he served as Senior Director, Tax from August 1992 to June 1993.
Mr. Friedman has been President, Mattel Brands (which includes Mattel Girls & Boys Brands US and Fisher-Price Brands US) since October 2005. From March 1999 to October 2005, he was President, Fisher-Price Brands. From August 1995 to March 1999, he was President, Tyco Preschool. For more than five years prior to that time, he was President of MCA/Universal Merchandising, Senior Vice President-Sales, Marketing and Design of Just Toys, Vice President and General Manager of Baby Care for Gerber Products, Executive Vice President and Chief Operating Officer of Lionel Leisure, Inc., and President of Aviva/Hasbro.
Mr. Kaye has been Senior Vice President of Human Resources since July 1997. Prior to joining Mattel, he worked as head of Human Resources at two other Fortune 500 companies in the banking industry and construction industry, serving as a line executive for the latter. Earlier in his career, he worked with the Hay Group, a compensation consulting firm, and for 12 years with IBM in various human resources positions.
Mr. Massingberd has been Senior Vice President, Corporate Responsibility since September 2007. From February 1998 to August 2007, he served as Senior Vice President and General Manager of Mattel’s International divisions in Canada, Australia, New Zealand, Asia, and Latin America and from August 1997 to February 1998, he was Vice President, Sales for Mattel Canada. Prior to joining Mattel, Mr. Massingberd spent 18 years with Nestle S.A. and served in various roles, including Vice President, Sales and head of Nestle Canada’s Confectionery division.
Mr. Normile has been Senior Vice President, General Counsel and Secretary since March 1999. He served as Vice President, Associate General Counsel and Secretary from August 1994 to March 1999. From June 1992 to August 1994, he served as Assistant General Counsel. Prior to that, he was associated with the law firms of Latham & Watkins LLP and Sullivan & Cromwell LLP.
Mr. Stockton has been President, International since November 2007. He served as Executive Vice President, International from February 2003 to November 2007. He served as Executive Vice President, Business Planning and Development from November 2000 until February 2003. From April 1998 until November 2000, he was President and Chief Executive Officer of Basic Vegetable Products, the largest manufacturer of vegetable ingredients in the world. For more than 20 years prior to that, he was employed by Kraft Foods, Inc., the largest packaged food company in North America, and was President of Kraft North American Food Service from August 1996 to March 1998.
Ms. Douglas has been Senior Vice President, Investor Relations and Treasurer since September 2008. She served as Senior Vice President and Chief Information Officer from July 2005 to September 2008. From November 2003 until July 2005, she served as Senior Vice President of External Affairs, which included oversight of Investor Relations, Corporate Communications, Consumer Relations, Government Affairs, and Philanthropy. Prior to that, she served from March 2001 to October 2003 as Vice President, Investor Relations. Prior to joining Mattel, Ms. Douglas spent 17 years with Associates First Capital Corporation, most recently as Senior Vice President, Investor Relations.
Mr. Topham has been Senior Vice President and Corporate Controller since September 2005. He served as Senior Vice President and Treasurer from March 2005 to August 2005 and as Vice President and Treasurer from
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March 2004 to March 2005. Prior to that, he served as Vice President and Assistant Controller from May 2001 to March 2004. From August 2000 to May 2001, he served as Vice President and Treasurer of Premier Practice Management, Inc. From June 1999 to August 2000, he served as Division Vice President of Dataworks, Inc., a specialized publishing company. Prior to that, he spent eight years with Total Petroleum (North America) Ltd., most recently as Vice President of Human Resources.
Available Information
Mattel files its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) with the SEC. The public may read and copy any materials that Mattel files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Mattel’s Internet website address is http://www.mattel.com. Mattel makes available on its Internet website, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the SEC.
| Item 1A. | Risk Factors. |
Factors That May Affect Future Results
(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)
Mattel is including this Cautionary Statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”) for forward-looking statements. This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Act. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “seeks” or words of similar meaning, or future or conditional verbs, such as “will,” “should,” “could,” “may,” “aims,” “intends,” or “projects.” A forward-looking statement is neither a prediction nor a guarantee of future events or circumstances, and those future events or circumstances may not occur. Investors should not place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-K. These forward-looking statements are all based on currently available operating, financial, economic and competitive information and are subject to various risks and uncertainties. The Company’s actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed below.
If the current global economic conditions continue to deteriorate, Mattel’s business and financial results may continue to be adversely affected.
The global economic conditions adversely impacted Mattel’s business and financial results in 2009. Mattel designs, manufactures, and markets a wide variety of toy products worldwide through sales to customers and directly to consumers. Our performance is impacted by the level of discretionary consumer spending, which has deteriorated sharply in the United States and in many countries around the world in which Mattel does business. Consumers’ discretionary purchases of toy products may be impacted by job losses, foreclosures, bankruptcies, reduced access to credit, significantly falling home prices, lower consumer confidence and other macroeconomic factors that affect consumer spending behavior. If our customers encounter liquidity problems due to weak retail sales or their inability to raise sufficient capital due to credit constraints, we may not be able to collect the accounts receivable from the affected customers. Finally, many of the effects and consequences of the current
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global economic conditions are not yet known; any one or all of them could potentially have a material adverse effect on Mattel’s liquidity and capital resources, including increasing our cost of capital or our ability to raise additional capital if needed, or otherwise negatively impact Mattel’s business and financial results.
If Mattel does not successfully identify or satisfy consumer preferences, its results of operations may be adversely affected.
Mattel’s business and operating results depend largely upon the appeal of its toy products. Consumer preferences, particularly among end users of Mattel’s products–children–are continuously changing. Significant, sudden shifts in demand are caused by “hit” toys and trends, which are often unpredictable. Mattel offers a diverse range of products for children of all ages and families that includes, among others, toys for infants and preschoolers, girls’ toys, boys’ toys, youth electronics, digital media, hand-held and other games, puzzles, educational toys, media-driven products, and fashion-related toys. Mattel competes domestically and internationally with a wide range of large and small manufacturers, marketers and sellers of toys, video games, consumer electronics and other play products, as well as retailers, which means that Mattel’s market position is always at risk. Mattel’s ability to maintain its current product sales, and increase its product sales or establish product sales with new, innovative toys, will depend on Mattel’s ability to satisfy play preferences, enhance existing products, develop and introduce new products, and achieve market acceptance of these products. Competition for access to entertainment properties could lessen our ability to secure, maintain, and renew popular licenses to entertainment products or require us to pay licensors higher royalties and higher minimum guaranteed payments in order to obtain or retain these licenses. Competition is intensifying due to recent trends towards shorter life cycles for individual toy products, the phenomenon of children outgrowing toys at younger ages, and an increasing use of more sophisticated technology in toys. If Mattel does not successfully meet the challenges outlined above in a timely and cost-effective manner, demand for its products could decrease, and Mattel’s revenues, profitability and results of operations may be adversely affected.
Inaccurately anticipating changes and trends in popular culture, media and movies, fashion, or technology can negatively affect Mattel’s sales.
Successful movies and characters in children’s literature affect play preferences, and many toys depend on media-based intellectual property licenses. Media-based licenses can cause a line of toys to gain immediate success among children, parents, or families. Trends in media, movies, and children’s characters change swiftly and contribute to the transience and uncertainty of play preferences. In addition, certain developments in the entertainment industry, including labor strikes, could cause delay or interruption in the release of new movies and television programs and could adversely affect the sales of Mattel’s toys based on such movies and television programs. Mattel responds to such trends and developments by modifying, refreshing, extending, and expanding its product offerings on an annual basis. If Mattel does not accurately anticipate trends in popular culture, movies, media, fashion, or technology, its products may not be accepted by children, parents, or families and Mattel’s revenues, profitability, and results of operations may be adversely affected.
Mattel’s business is highly seasonal and its operating results depend, in large part, on sales during the relatively brief traditional holiday season. Any events that disrupt our business during our peak demand times could significantly, adversely and disproportionately affect Mattel’s business.
Mattel’s business is subject to risks associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Sales of toy products at retail are highly seasonal, with a majority of retail sales occurring during the period from September through December. As a result, Mattel’s operating results depend, in large part, on sales during the relatively brief traditional holiday season. Retailers attempt to manage their inventories tightly, which requires Mattel to ship products closer to the time the retailers expect to sell the products to consumers. This in turn results in shorter lead times for production. Management believes that the increase in “last minute” shopping during the holiday season and the popularity of gift cards (which often shift purchases to after the holiday season) may negatively impact customer re-orders
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during the holiday season. These factors may decrease sales or increase the risks that Mattel may not be able to meet demand for certain products at peak demand times or that Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are placed.
In addition, as a result of the seasonal nature of our business, Mattel may be significantly and adversely affected, in a manner disproportionate to the impact on a company with sales spread more evenly throughout the year, by unforeseen events, such as terrorist attacks, economic shocks, earthquakes or other catastrophic events, that harm the retail environment or consumer buying patterns during our key selling season, or by events, such as strikes, disruptions in transportation or port delays, that interfere with the manufacture or shipment of goods during the critical months leading up to the holiday purchasing season.
Mattel has significant customer concentration, so that economic difficulties or changes in the purchasing policies or patterns of its major customers could have a significant impact on Mattel’s business and operating results.
A small number of customers account for a large share of Mattel’s net sales. In 2009, Mattel’s three largest customers, Wal-Mart, Toys “R” Us and Target, in the aggregate, accounted for approximately 40% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 50% of net sales. The concentration of Mattel’s business with a relatively small number of customers may expose Mattel to a material adverse effect if one or more of Mattel’s large customers were to significantly reduce purchases for any reason, favor competitors or new entrants, or increase their direct competition with Mattel by expanding their private-label business. Customers make no binding long-term commitments to Mattel regarding purchase volumes and make all purchases by delivering one-time purchase orders. Any customer could reduce its overall purchases of Mattel’s products, reduce the number and variety of Mattel’s products that it carries and the shelf space allotted for Mattel’s products, or otherwise seek to materially change the terms of the business relationship at any time. Any such change could significantly harm Mattel’s business and operating results.
Significant increases in the price of commodities, transportation or labor, if not offset by declines in other input costs, or a reduction or interruption in the delivery of raw materials, components and finished products from Mattel’s vendors could negatively impact Mattel’s financial results.
Cost increases, whether resulting from rising costs of materials, compliance with existing or future regulatory requirements, transportation, services and labor could impact the profit margins realized by Mattel on the sale of its products. Because of market conditions, timing of pricing decisions, and other factors, there can be no assurance that Mattel will be able to offset any of these increased costs by adjusting the prices of its products. Increases in prices of Mattel’s products could result in lower sales. Mattel’s ability to meet customer demand depends, in part, on its ability to obtain timely and adequate delivery of materials, parts and components from its suppliers and internal manufacturing capacity. Mattel has experienced shortages in the past, including shortages of raw materials and components. Although Mattel works closely with suppliers to avoid these types of shortages, there can be no assurance that Mattel will not encounter these problems in the future. A reduction or interruption in supplies or in the delivery of finished products, whether resulting from more stringent regulatory requirements, suppliers, disruptions in transportation, port delays, labor strikes, lockouts, or otherwise, or a significant increase in the price of one or more supplies, such as fuel or resin (which is an oil-based product), could negatively impact Mattel’s financial results.
Significant changes in currency exchange rates or the ability to transfer capital across borders could have a significant adverse effect on Mattel’s business and results of operations.
Mattel’s net investment in its foreign subsidiaries and its results of operations and cash flows are subject to changes in currency exchange rates and regulations. Mattel seeks to mitigate the exposure of its results of operations to fluctuations in currency exchange rates by partially hedging this exposure using foreign currency forward exchange contracts. These contracts are primarily used to hedge Mattel’s purchase and sale of inventory,
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and other intercompany transactions denominated in foreign currencies. Government action may restrict Mattel’s ability to transfer capital across borders and may also impact the fluctuation of currencies in the countries where Mattel conducts business or has invested capital. Significant changes in currency exchange rates, reductions in Mattel’s ability to transfer its capital across borders, and changes in government-fixed currency exchange rates, including the Chinese yuan and Venezuelan bolivar fuerte, could have a significant adverse effect on Mattel’s business and results of operations.
Failure to successfully implement new initiatives could have a significant adverse effect on Mattel’s business, financial condition and results of operations.
Mattel has announced, and in the future may announce, initiatives to reduce its costs, increase its efficiency, improve the execution of its core business, globalize and extend Mattel’s brands, catch new trends, create new brands, and offer new innovative products, enhance product safety, develop people, improve productivity, simplify processes, maintain customer service levels, as well as initiatives designed to drive sales growth, capitalize on Mattel’s scale advantage, and improve its supply chain. These initiatives involve investment of capital and complex decision-making as well as extensive and intensive execution, and the success of these initiatives is not assured. Failure to successfully implement any of these initiatives, or the failure of any of these initiatives to produce the results anticipated by management, could have a significant adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel’s business depends in large part on the success of its vendors and outsourcers, and Mattel’s brands and reputation may be harmed by actions taken by third-parties that are outside Mattel’s control. In addition, any material failure, inadequacy or interruption resulting from such vendors or outsourcings could harm Mattel’s ability to effectively operate its business.
As a part of our efforts to cut costs, achieve better efficiencies and increase productivity and service quality, Mattel relies significantly on vendor and outsourcing relationships with third parties for services and systems including manufacturing, transportation, logistics and information technology. Any shortcoming of a Mattel vendor or outsourcer, particularly an issue affecting the quality of these services or systems, may be attributed by customers to Mattel, thus damaging Mattel’s reputation, brand value and potentially affecting the results of operations. In addition, problems with transitioning these services and systems or operating failures with these vendors and outsourcers could cause delays in product sales, reduce efficiency of Mattel’s operations, and significant capital investments could be required to remediate the problem.
Increases in interest rates, reduction of Mattel’s credit ratings, contraction of credit availability or the inability of Mattel to meet the debt covenant requirements in its credit facilities could negatively impact Mattel’s ability to conduct its operations.
Increases in interest rates, both domestically and internationally, could negatively affect Mattel’s cost of financing its operations. Any reduction in Mattel’s credit ratings could increase the cost of obtaining financing. Mattel may be hindered from obtaining, or incur additional costs to obtain, additional credit in light of the current tight credit market environment. Additionally, Mattel’s ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as market conditions and an inability to meet its debt covenant requirements, which include maintaining certain financial ratios. Mattel’s ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity.
Liquidity problems or bankruptcy of Mattel’s key customers could have a significant adverse effect on Mattel’s business, financial condition and results of operations.
Many of Mattel’s key customers are mass-market retailers. In the past, the mass-market retail channel in the US has experienced significant shifts in market share among competitors, causing some large retailers to
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experience liquidity problems. Certain of Mattel’s customers filed for bankruptcy in 2008 and 2009 and the current global economic conditions have adversely affected the financial condition of most retailers. Mattel’s sales to customers are typically made on credit without collateral. There is a risk that customers will not pay, or that payment may be delayed, because of bankruptcy, contraction of credit availability to such customers or other factors beyond the control of Mattel, which could increase Mattel’s exposure to losses from bad debts. In addition, if these or other customers were to cease doing business as a result of bankruptcy or significantly reduce the number of stores operated, it could have a significant adverse effect on Mattel’s business, financial condition, and results of operations.
If Mattel is not able to adequately protect its proprietary intellectual property and information, its results of operations could be adversely affected.
The value of Mattel’s business depends on its ability to protect its intellectual property and information, including its trademarks, trade names, copyrights, patents and trade secrets, in the US and around the world, as well as its customer, employee, and consumer data. If Mattel fails to protect its proprietary intellectual property and information, including any successful challenge to Mattel’s ownership of its intellectual property or material infringements of its intellectual property, could have a significant adverse effect on Mattel’s business, financial condition, and results of operations.
Unfavorable resolution of pending and future litigation matters, and disputes, including those arising from recalls, withdrawals, or replacements of Mattel products, could have a significant adverse effect on Mattel’s financial condition.
Mattel is involved in a number of litigation and regulatory matters, including those arising from recalls, withdrawals, or replacements of Mattel products. An unfavorable resolution of these pending matters could have a significant adverse effect on Mattel’s financial condition and its operations. Regardless of its outcome, litigation may result in substantial costs and expenses, and significantly divert the attention of management. There can be no assurance that Mattel will be able to prevail in, or achieve a favorable settlement of, pending matters. In addition to the pending matters, future litigation, government proceedings, labor disputes, or environmental matters could lead to increased costs or interruption of Mattel’s normal business operations.
Mattel is subject to various laws and government regulations, violation of which could subject it to sanctions. In addition, changes in such laws or regulations may lead to increased costs, changes in Mattel’s effective tax rate, or the interruption of normal business operations that would negatively impact Mattel’s financial condition and results of operations.
Mattel operates in a highly regulated environment in the US and international markets. US federal, state and local governmental entities, and foreign governments regulate many aspects of Mattel’s business, including its products and the importation and exportation of its products. These regulations may include accounting standards, taxation requirements (including changes in applicable income tax rates, new tax laws and revised tax law interpretations), product safety and other safety standards, trade restrictions, regulations regarding financial matters, environmental regulations, advertising directed toward children, product content, and other administrative and regulatory restrictions. While Mattel takes all the steps it believes are necessary to comply with these laws and regulations, there can be no assurance that Mattel will be in compliance in the future. Failure to comply could result in monetary liabilities and other sanctions which could have a negative impact on Mattel’s business, financial condition and results of operations.
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In addition, changes in laws or regulations may lead to increased costs, changes in Mattel’s effective tax rate, or the interruption of normal business operations that would negatively impact its financial condition and results of operations.
Product recalls, product liability claims, absence or cost of insurance, and associated costs could increase governmental scrutiny, divert resources, reduce sales and increase costs and could have a significant adverse effect on Mattel’s financial condition.
Mattel has experienced, and may in the future experience, issues in products that result in recalls, withdrawals, or replacements of products. Testing implemented by Mattel, as well as scrutiny by retailers, consumers, and other parties, may reveal issues in Mattel products that may lead to recalls, withdrawals, replacement of products, or regulatory actions by governmental authorities. In addition, individuals have asserted claims, and may in the future assert claims, that they have sustained injuries from Mattel’s products, and Mattel is and may be subject to lawsuits relating to these claims. There is a risk that these claims or liabilities may exceed, or fall outside of the scope of, Mattel’s insurance coverage. Moreover, Mattel may be unable to obtain adequate liability insurance in the future. Any of the issues mentioned above could result in increased governmental scrutiny, diversion of development and management resources, and reduced sales and increased costs, any of which could significantly and adversely affect Mattel’s financial condition.
Product recalls may harm Mattel’s reputation and acceptance of Mattel’s products by consumers, licensors and Mattel’s retailer customers, which may significantly and adversely affect its business operations, decrease sales and increase costs. Recalls may also increase competitive pressures from other toy manufacturers.
Product recalls, withdrawals, or replacements have resulted in coverage critical of Mattel in the press and media. While Mattel believes that it has acted responsibly and in the interests of safety, product recalls, withdrawals, or replacements may harm Mattel’s reputation and the acceptance of its products by consumers, licensors, and retailers. Mattel’s ability to enter into licensing agreements for products on competitive terms may be adversely affected if licensors believe that products sold by Mattel will be less favorably received in the market. Mattel’s retailer customers may be less willing to purchase Mattel products or to provide marketing support for those products, such as shelf space, promotions, and advertising, or have imposed or may impose additional requirements or product changes that would adversely affect Mattel’s business operations, decrease sales, and increase costs. Product recalls, withdrawals, or replacements may also increase the amount of competition that Mattel confronts from other manufacturers. Some competitors may attempt to differentiate themselves from Mattel by claiming that their products are produced in a manner or geographic area that is insulated from the issues that preceded recalls, withdrawals, or replacements of Mattel products. To the extent that competitive manufacturers choose not to implement enhanced safety and testing protocols comparable to those that Mattel has adopted, those competitors could enjoy a cost advantage that will enable them to offer products at lower prices than those charged by Mattel.
Mattel’s current and future safety procedures may increase costs, significantly and adversely affect its relationship with vendors and make it more difficult for Mattel to produce, purchase and deliver products on a timely basis to meet market demands. Future conditions may require Mattel to adopt further changes that may increase its costs and further affect its relationship with vendors.
Mattel’s current operating procedures and requirements, including testing requirements and standards, have imposed costs on both Mattel and the vendors from which it purchases products. Changes in business conditions, including those resulting from new legislative and regulatory requirements, will cause further revisions in Mattel’s operating procedures and requirements. Changes in Mattel’s operating procedures and requirements may delay delivery of products and increase costs. Mattel’s relationship with its existing vendors may be adversely affected as a result of these changes, making Mattel more dependent on a smaller number of vendors. Some vendors may choose not to continue to do business with Mattel or not to accommodate Mattel’s needs to
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the extent that they have done in the past. In addition, rising production costs, contraction of credit availability and labor shortages have caused a substantial contraction in the number of toy manufacturers in China, decreasing the number of potential vendors to manufacture Mattel’s products. Because of the seasonal nature of Mattel’s business and the demands of its customers for deliveries with short lead times, Mattel depends upon the cooperation of its vendors to meet market demand for its products in a timely manner. There can be no assurance that existing and future events will not require Mattel to adopt additional requirements and incur additional costs, and impose those requirements and costs on its vendors, which may adversely affect its relationship with those vendors and Mattel’s ability to meet market demand in a timely manner.
Political developments, including trade relations, and the threat or occurrence of war or terrorist activities could adversely impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions.
Mattel’s business is worldwide in scope, including operations in 43 countries and territories. The deterioration of the political situation in a country in which Mattel has significant sales or operations, or the breakdown of trade relations between the US and a foreign country in which Mattel has significant manufacturing facilities or other operations, could adversely affect Mattel’s business, financial condition, and results of operations. For example, a change in trade status for China could result in a substantial increase in the import duty of toys manufactured in China and imported into the US. In addition, the occurrence of war or hostilities between countries or threat of terrorist activities, and the responses to and results of these activities, could adversely impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets, and general economic conditions.
Disruptions in Mattel’s manufacturing operations due to political instability, civil unrest, or disease could negatively impact Mattel’s business, financial position and results of operations.
Mattel owns, operates and manages manufacturing facilities and utilizes third-party manufacturers throughout Asia, primarily in China, Indonesia, Malaysia and Thailand. The risk of political instability and civil unrest exists in certain of these countries, which could temporarily or permanently damage Mattel’s manufacturing operations located there. In the past, outbreaks of SARS have been significantly concentrated in Asia, particularly in Hong Kong, and in the Guangdong province of China, where many of Mattel’s manufacturing facilities and third-party manufacturers are located. The design, development and manufacture of Mattel’s products could suffer if a significant number of Mattel’s employees or the employees of its third-party manufacturers or their suppliers contract SARS, avian flu or other communicable diseases, or otherwise are unable to fulfill their responsibilities. Mattel has developed contingency plans designed to help mitigate the impact of disruptions in its manufacturing operations. Mattel’s business, financial position, and results of operations could be negatively impacted by a significant disruption to its manufacturing operations or suppliers.
Earthquakes or other catastrophic events out of our control may damage Mattel’s facilities or those of its contractors and harm Mattel’s results of operations.
Mattel has significant operations near major earthquake faults, including its corporate headquarters in Southern California. A catastrophic event where Mattel has important operations, such as an earthquake, tsunami, flood, typhoon, fire, or other natural or manmade disaster, could disrupt Mattel’s operations or those of its contractors and impair production or distribution of its products, damage inventory, interrupt critical functions, or otherwise affect its business negatively, harming Mattel’s results of operations.
The production and sale of private-label toys by Mattel’s retail customers may result in lower purchases of Mattel-branded products by those retail customers.
In recent years, consumer goods companies generally, including those in the toy business, have experienced the phenomenon of retail customers developing their own private-label products that directly compete with the
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products of traditional manufacturers. Some retail chains that are customers of Mattel sell private-label toys designed, manufactured and branded by the retailers themselves. These toys may be sold at prices lower than comparable toys sold by Mattel and may result in lower purchases of Mattel-branded products by these retailers. In some cases, retailers who sell these private-label toys are larger than Mattel and may have substantially more resources than Mattel.
Mattel’s failure to successfully market or advertise its products could have an adverse effect on Mattel’s business, financial condition and results of operations.
Mattel’s products are marketed worldwide through a diverse spectrum of advertising and promotional programs. Mattel’s ability to sell products is dependent in part upon the success of these programs. If Mattel does not successfully market its products or if media or other advertising or promotional costs increase, these factors could have an adverse effect on Mattel’s business, financial condition, and results of operations.
Mattel depends on key personnel and may not be able to hire, retain and integrate sufficient qualified personnel to maintain and expand its business.
Mattel’s future success depends partly on the continued contribution of key executives, designers, technical, sales, marketing, manufacturing, and administrative personnel. The loss of services of any of Mattel’s key personnel could harm Mattel’s business. Recruiting and retaining skilled personnel is costly and highly competitive. If Mattel fails to retain, hire, train, and integrate qualified employees and contractors, Mattel may not be able to maintain and expand its business.
Mattel may engage in acquisitions, mergers or dispositions, which may affect the profit, revenues, profit margins, debt-to-capital ratio, capital expenditures or other aspects of Mattel’s business. In addition, Mattel has certain anti-takeover provisions in its by-laws that may make it more difficult for a third party to acquire Mattel without its consent, which may adversely affect Mattel’s stock price.
Mattel may engage in acquisitions, mergers or dispositions, which may affect the profit, revenues, profit margins, debt-to-capital ratio, capital expenditures, or other aspects of Mattel’s business. There can be no assurance that Mattel will be able to identify suitable acquisition targets or merger partners or that, if identified, it will be able to acquire these targets on acceptable terms or agree to terms with merger partners. There can also be no assurance that Mattel will be successful in integrating any acquired company into its overall operations, or that any such acquired company will operate profitably or will not otherwise adversely impact Mattel’s results of operations. Further, Mattel cannot be certain that key talented individuals at these acquired companies will continue to work for Mattel after the acquisition or that they will continue to develop popular and profitable products or services. In addition, Mattel has certain anti-takeover provisions in its bylaws that may make it more difficult for a third party to acquire Mattel without its consent, which may adversely affect Mattel’s stock price.
The level of returns on pension plan assets and the actuarial assumptions used for valuation purposes could affect our earnings in future periods. Changes in standards and government regulations could also affect our pension plan expense and funding requirements.
Assumptions used in determining projected benefit obligations and the fair value of plan assets for our pension plan are evaluated by us in consultation with outside actuaries. In the event that we determine that changes are warranted in the assumptions used, such as the discount rate, expected long term rate of return, or health care costs, our future pension benefit expenses could increase or decrease. Due to changing market conditions or changes in the participant population, the actuarial assumptions that we use may differ from actual results, which could have a significant impact on our pension and postretirement liability and related costs. Funding obligations are determined based on the value of assets and liabilities on a specific date as required under relevant government regulations for each plan. Future pension funding requirements, and the timing of funding payments, could be affected by legislation enacted by the relevant governmental authorities.
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* * * * * * * * * * * * * * * * *
If any of the risks and uncertainties described in the cautionary factors listed above actually occurs, Mattel’s business, financial condition and results of operations could be significantly and adversely affected. The factors listed above are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact Mattel’s business, financial condition and results of operations. Moreover, Mattel operates in a very competitive and rapidly changing environment. New factors emerge from time to time, and it is not possible for management to predict the impact of all of these factors on Mattel’s business, financial condition or results of operations, or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by Mattel or its representatives may turn out to be wrong. Mattel expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new developments or otherwise.
| Item 1B. | Unresolved Staff Comments. |
None.
| Item 2. | Properties. |
Mattel owns its corporate headquarters in El Segundo, California, consisting of approximately 335,000 square feet, and an adjacent office building consisting of approximately 55,000 square feet. Mattel also leases buildings in El Segundo consisting of approximately 327,000 square feet. All segments use these facilities. Mattel’s Fisher-Price® subsidiary owns its headquarters facilities in East Aurora, New York, consisting of approximately 535,000 square feet, which is used by the Fisher-Price Brands US segment and for corporate support functions. American Girl Brands owns its headquarters facilities in Middleton, Wisconsin, consisting of approximately 180,000 square feet, a warehouse in Middleton, consisting of approximately 215,000 square feet, and distribution facilities in Middleton, DeForest and Wilmot, Wisconsin, consisting of a total of approximately 948,000 square feet, all of which are used by the American Girl Brands segment.
Mattel maintains leased sales offices in California, Illinois, Minnesota, New York, and Arkansas, and leased warehouse and distribution facilities in California, New Jersey, and Texas, all of which are used by the Domestic segment. Mattel has leased retail and related office space in Chicago, Illinois, New York, New York, and Los Angeles, California for its American Girl Place® stores, Dallas, Texas, Atlanta, Georgia, Natick, Massachusetts, Bloomington, Minnesota, and Denver, Colorado for its American Girl Boutique and Bistro® and leased retail space in Oshkosh, Wisconsin, which are used by the American Girl Brands segment, and Pomona, California, which is used by Mattel Brands. Mattel also has leased office space in Florida, which is used by the International segment. Mattel leases a computer facility in Phoenix, Arizona used by all segments. Internationally, Mattel has offices and/or warehouse space in Argentina, Australia, Austria, Belgium, Bermuda, Brazil, Canada, Chile, China, Colombia, Costa Rica, Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Italy, Japan, Macau, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Peru, Poland, Portugal, Puerto Rico, South Korea, Spain, Switzerland, Taiwan, Turkey, the United Kingdom, and Venezuela, which are leased (with the exception of office and warehouse space in Chile and certain warehouse space in France that is owned by Mattel) and used by the International segment. Mattel also has leased retail and related office space in China. Mattel’s principal manufacturing facilities are located in China, Indonesia, Thailand, Malaysia, and Mexico. See Item 1 “Business—Manufacturing and Materials.”
For leases that are scheduled to expire during the next twelve months, Mattel may negotiate new lease agreements, renew existing lease agreements, or utilize alternate facilities. See Item 8 “Financial Statements and Supplementary Data—Note 14 to the Consolidated Financial Statements—Commitments and Contingencies.” Mattel believes that its owned and leased facilities, in general, are suitable and adequate for its present and currently foreseeable needs.
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| Item 3. | Legal Proceedings. |
See Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Litigation” and Item 8 “Financial Statements and Supplementary Data—Note 14 to the Consolidated Financial Statements—Commitments and Contingencies.”
| Item 4. | Submission of Matters to a Vote of Security Holders. |
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
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| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
For information regarding the markets in which Mattel’s common stock, par value $1.00 per share, is traded, see the cover page hereof. For information regarding the high and low closing prices of Mattel’s common stock for the last two calendar years, see Item 8 “Financial Statements and Supplementary Data—Note 17 to the Consolidated Financial Statements—Quarterly Financial Information.”
Holders of Record
As of February 22, 2010, Mattel had approximately 36,000 holders of record of its common stock.
Dividends
In 2009, 2008, and 2007, Mattel paid a dividend per share of $0.75 to holders of its common stock. The Board of Directors declared the dividends in November, and Mattel paid the dividends in December of each year. The payment of dividends on common stock is at the discretion of the Board of Directors and is subject to customary limitations.
Recent Sales of Unregistered Securities
During the fourth quarter of 2009, Mattel did not sell any unregistered securities.
Issuer Purchases of Equity Securities
During 2009, Mattel did not repurchase any shares of its common stock. During 2008, Mattel repurchased 4.9 million shares at a cost of $90.6 million. During 2007, Mattel repurchased 35.9 million shares at a cost of $806.3 million. During 2008 and 2007, the Board of Directors authorized Mattel to increase its share repurchase program by $500.0 million and $750.0 million, respectively. At December 31, 2009, share repurchase authorizations of $410.3 million had not been executed. Repurchases will take place from time to time, depending on market conditions. Mattel’s share repurchase program has no expiration date.
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This table provides certain information with respect to Mattel’s purchases of its common stock during the fourth quarter of 2009:
| Period |
Total Number of Shares (or Units) Purchased |
Average Price Paid per Share (or Unit) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||
| October 1 – 31 |
||||||||||
| Repurchase program (1) |
— | — | — | $ | 410,324,916 | |||||
| Employee transactions (2) |
2,130 | $ | 19.19 | N/A | N/A | |||||
| November 1 – 30 |
||||||||||
| Repurchase program (1) |
— | — | — | $ | 410,324,916 | |||||
| Employee transactions (2) |
2,209 | $ | 19.56 | N/A | N/A | |||||
| December 1 – 31 |
||||||||||
| Repurchase program (1) |
— | — | — | $ | 410,324,916 | |||||
| Employee transactions (2) |
129 | $ | 19.98 | N/A | N/A | |||||
| Total |
||||||||||
| Repurchase program (1) |
— | — | — | $ | 410,324,916 | |||||
| Employee transactions (2) |
4,468 | $ | 19.40 | N/A | N/A | |||||
| (1) | During the fourth quarter, Mattel did not repurchase any shares of its common stock in the open market. Repurchases will take place from time to time, depending on market conditions. Mattel’s share repurchase program has no expiration date. |
| (2) | Includes the sale of restricted shares for employee tax withholding obligations that occur upon vesting. |
| N/A | Not applicable. |
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Performance Graph
The following graph compares the performance of Mattel common stock with that of the S&P 500 Index and the S&P 500 Consumer Staples Index. The Cumulative Total Return listed below assumes an initial investment of $100 on December 31, 2004 and reinvestment of dividends.
Comparison of Five Year Cumulative Total Return
Mattel, Inc., S&P 500, and S&P 500 Consumer Staples Index
| Cumulative Total Return |
2005 | 2006 | 2007 | 2008 | 2009 | ||||||||||
| Mattel, Inc. |
$ | 83.74 | $ | 123.38 | $ | 107.75 | $ | 94.79 | $ | 122.82 | |||||
| S&P 500 |
104.83 | 121.20 | 127.85 | 81.12 | 102.15 | ||||||||||
| S&P 500 Consumer Staples |
103.55 | 118.45 | 135.23 | 114.65 | 131.20 | ||||||||||
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| Item 6. | Selected Financial Data. |
| For the Year Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands, except per share and percentage information) | ||||||||||||||||||||
| Operating Results: |
||||||||||||||||||||
| Net sales |
$ | 5,430,846 | $ | 5,918,002 | $ | 5,970,090 | $ | 5,650,156 | $ | 5,179,016 | ||||||||||
| Gross profit |
2,714,697 | 2,684,406 | 2,777,300 | 2,611,793 | 2,372,868 | |||||||||||||||
| % of net sales |
50.0 | % | 45.4 | % | 46.5 | % | 46.2 | % | 45.8 | % | ||||||||||
| Operating income |
731,168 | 541,792 | 730,078 | 728,818 | 664,529 | |||||||||||||||
| % of net sales |
13.5 | % | 9.2 | % | 12.2 | % | 12.9 | % | 12.8 | % | ||||||||||
| Income before income taxes |
660,047 | 487,964 | 703,398 | 683,756 | 652,049 | |||||||||||||||
| Provision for income taxes (a) |
131,343 | 108,328 | 103,405 | 90,829 | 235,030 | |||||||||||||||
| Net income |
$ | 528,704 | $ | 379,636 | $ | 599,993 | $ | 592,927 | $ | 417,019 | ||||||||||
| Net income per common share—basic |
$ | 1.45 | $ | 1.04 | $ | 1.55 | $ | 1.54 | $ | 1.02 | ||||||||||
| Net income per common share—diluted |
$ | 1.45 | $ | 1.04 | $ | 1.53 | $ | 1.53 | $ | 1.01 | ||||||||||
| Dividends declared per common share |
$ | 0.75 | $ | 0.75 | $ | 0.75 | $ | 0.65 | $ | 0.50 | ||||||||||
| December 31, | |||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
| (In thousands) | |||||||||||||||
| Financial Position: |
|||||||||||||||
| Total assets |
$ | 4,780,555 | $ | 4,675,039 | $ | 4,805,455 | $ | 4,955,884 | $ | 4,372,313 | |||||
| Noncurrent liabilities |
1,188,692 | 1,297,930 | 928,284 | 940,390 | 807,395 | ||||||||||
| Stockholders’ equity |
2,530,989 | 2,117,135 | 2,306,742 | 2,432,974 | 2,101,733 | ||||||||||
| (a) | The provision for income taxes in 2009 was positively impacted by net tax benefits of $28.8 million related to reassessments of prior years’ tax exposures based on the status of current audits in various jurisdictions around the world, settlements, and enacted tax law changes. The provision for income taxes in 2007 was positively impacted by net tax benefits of $42.0 million related to reassessments of prior years’ tax exposures based on the status of audits in various jurisdictions around the world, including settlements, partially offset by enacted tax law changes. The provision for income taxes in 2006 was positively impacted by the Tax Increase Prevention and Reconciliation Act passed in May 2006, and tax benefits of $63.0 million related to tax settlements and refunds as a result of ongoing audits with foreign and state tax authorities. The provision for income taxes in 2005 was negatively impacted by incremental tax expense of $107.0 million, resulting from Mattel’s decision to repatriate $2.4 billion in previously unremitted foreign earnings under the American Jobs Creation Act, partially offset by $38.6 million of tax benefits primarily relating to tax settlements reached with various tax authorities and reassessments of tax exposures based on the status of audits in various jurisdictions around the world. |
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| 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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realistic revenue assumptions, but is more optimistic about its revenue in 2010 based on the momentum of its core brands from 2009, strong partnerships for licensed brands in 2010, including WWE® Wrestling, Disney/Pixar’s Toy Story®, and HIT Entertainment™’s Thomas and Friends®, and its evergreen licensed properties. In addition to its revenue generating activities, Mattel will also continue to take actions intended to improve profitability, including:
| • | Continuing to execute its Global Cost Leadership program; |
| • | Continuing its other cost and manufacturing efficiency programs; and |
| • | Pricing products consistent with its long-term operating margin goals given likely cost pressures, such as commodities and labor rates in China. |
Results of Operations
2009 Compared to 2008
Consolidated Results
Net sales for 2009 were $5.43 billion, an 8% decrease as compared to $5.92 billion in 2008, including unfavorable changes in currency exchange rates of 2 percentage points. Net income for 2009 was $528.7 million, or $1.45 per diluted share as compared to net income of $379.6 million, or $1.04 per diluted share, for 2008. Net income for 2009 was positively impacted by net tax benefits of $28.8 million related to reassessments of prior years’ tax exposures based on the status of current audits in various jurisdictions around the world, settlements, and enacted tax law changes.
Gross profit as a percentage of net sales increased to 50.0% in 2009 from 45.4% in 2008. The increase in gross profit as a percentage of net sales was primarily due to price increases and net cost savings related to the Global Cost Leadership program, partially offset by unfavorable changes in foreign exchange rates.
Income before income taxes as a percentage of net sales increased to 12.2% in 2009 from 8.2% in 2008. Contributing to this increase were higher gross profit and lower advertising and promotion expenses, partially offset by higher other selling and administrative expenses.
The following table provides a summary of Mattel’s consolidated results for 2009 and 2008 (in millions, except percentage and basis point information):
| For the Year | Year/Year Change | |||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||
| Amount | % of Net Sales |
Amount | % of Net Sales |
% | Basis Points of Net Sales |
|||||||||||||||
| Net sales |
$ | 5,430.8 | 100.0 | % | $ | 5,918.0 | 100.0 | % | –8 | % | ||||||||||
| Gross profit |
$ | 2,714.7 | 50.0 | % | $ | 2,684.4 | 45.4 | % | 1 | % | 460 | |||||||||
| Advertising and promotion expenses |
609.8 | 11.2 | 719.2 | 12.2 | –15 | % | (100 | ) | ||||||||||||
| Other selling and administrative expenses |
1,373.7 | 25.3 | 1,423.4 | 24.1 | –3 | % | 120 | |||||||||||||
| Operating income |
731.2 | 13.5 | 541.8 | 9.2 | 35 | % | 430 | |||||||||||||
| Interest expense |
71.8 | 1.3 | 81.9 | 1.4 | –12 | % | (10 | ) | ||||||||||||
| Interest (income) |
(8.1 | ) | –0.1 | (25.0 | ) | –0.4 | –68 | % | 30 | |||||||||||
| Other non-operating expense (income), net |
7.5 | (3.1 | ) | |||||||||||||||||
| Income before income taxes |
$ | 660.0 | 12.2 | % | $ | 488.0 | 8.2 | % | 35 | % | 400 | |||||||||
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Sales
Net sales for 2009 were $5.43 billion, an 8% decrease as compared to $5.92 billion in 2008, including unfavorable changes in currency exchange rates of 2 percentage points. Gross sales within the US decreased 4% from 2008, and accounted for 54% and 51% of consolidated gross sales in 2009 and 2008, respectively. Gross sales in international markets decreased 13% as compared to 2008, including unfavorable changes in currency exchange rates of 4 percentage points.
Worldwide gross sales of Mattel Girls & Boys Brands decreased 10% to $3.29 billion in 2009 as compared to 2008, including unfavorable changes in currency exchange rates of 3 percentage points. Domestic gross sales of Mattel Girls & Boys Brands decreased 2% and international gross sales of Mattel Girls & Boys Brands decreased 15%, including unfavorable changes in currency exchange rates of 4 percentage points. Worldwide gross sales of Barbie® decreased 3%, including unfavorable changes in currency exchange rates of 3 percentage points. Domestic gross sales of Barbie® increased 4% and international gross sales of Barbie® decreased 6%, including unfavorable changes in currency exchange rates of 4 percentage points. Worldwide gross sales of Other Girls Brands decreased 20%, including unfavorable changes in currency exchange rates of 2 percentage points, driven primarily by sales declines in High School Musical® products. Worldwide gross sales of Wheels products decreased 7%, including unfavorable changes in currency exchange rates of 3 percentage points, primarily due to sales declines in Speed Racer® and Tyco R/C® products, partially offset by higher sales of Core Hot Wheels® and Matchbox® products. Worldwide gross sales of Entertainment products decreased by 14%, including unfavorable changes in currency exchange rates of 2 percentage points, driven primarily by sales declines in Radica® products and products tied to last year’s three key summer movie properties: Batman®, Speed Racer®, and Kung Fu Panda®, partially offset by sales of products tied to Toy Story® and Toy Story® 2, and higher sales of CARS™ products domestically.
Worldwide gross sales of Fisher-Price Brands decreased 8% to $2.17 billion in 2009 as compared to 2008, including unfavorable changes in currency exchange rates of 1 percentage point. Domestic gross sales of Fisher-Price Brands decreased 8% and international gross sales decreased 9%, including unfavorable changes in currency exchange rates of 4 percentage points. Worldwide gross sales of Core Fisher-Price® decreased 6%, including unfavorable changes in currency exchange rates of 1 percentage point. Domestic gross sales of Core Fisher-Price® decreased 4% and international gross sales decreased 9%, including unfavorable changes in currency exchange rates of 4 percentage points. Worldwide gross sales of Fisher-Price® Friends decreased 13%, with no impact from changes in currency exchange rates. Domestic gross sales of Fisher-Price® Friends decreased 18% and international gross sales decreased 5%, with no impact from changes in currency exchange rates.
American Girl Brands gross sales were flat during 2009 as compared to 2008, driven primarily by the November 2008 openings of the American Girl Boutique and Bistro® in Boston and Minneapolis, offset by softness resulting primarily from a difficult comparison to strong entertainment-related sales in 2008.
Cost of Sales
Cost of sales decreased by $517.4 million, or 16%, from $3.23 billion in 2008 to $2.72 billion in 2009 as compared to an 8% decrease in net sales. On an overall basis, cost of sales decreased from 2008 primarily due to lower sales volume, cost savings from Mattel’s Global Cost Leadership program, and lower input costs. Within cost of sales, product costs decreased by $366.5 million, or 14%, from $2.60 billion in 2008 to $2.23 billion in 2009; freight and logistics expenses decreased by $98.2 million, or 25%, which included net cost savings from the Global Cost Leadership program, from $394.1 million in 2008 to $295.9 million in 2009; and royalty expense decreased $52.7 million, or 22%, from $241.2 million in 2008 to $188.5 million in 2009.
Gross Profit
Gross profit as a percentage of net sales increased from 45.4% in 2008 to 50.0% in 2009. The increase in gross profit as a percentage of net sales was primarily driven by price increases and net cost savings related to the Global Cost Leadership program, partially offset by unfavorable changes in currency exchange rates.
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Advertising and Promotion Expenses
Advertising and promotion expenses decreased to 11.2% of net sales in 2009, from 12.2% of net sales in 2008, due primarily to lower than expected sales volume in 2008 and savings of approximately $14 million related to Mattel’s Global Cost Leadership program.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $1.37 billion in 2009, or 25.3% of net sales in 2009 as compared to $1.42 billion in 2008, or 24.1% of net sales. The dollar decrease in other selling and administrative expenses was primarily due to incremental year-over-year savings related to the Global Cost Leadership program (approximately $88 million in gross savings along with approximately $3 million of lower severance in 2009), the impact of foreign currency exchange benefits, and lower litigation and legal settlement-related costs of approximately $27 million, partially offset by higher incentive compensation expense of approximately $81 million and higher equity compensation expense of approximately $14 million.
Non-Operating Items
Interest expense was $71.8 million in 2009 as compared to $81.9 million in 2008, due primarily to lower average borrowings and lower average interest rates. Interest income decreased from $25.0 million in 2008 to $8.1 million in 2009 due to lower average interest rates on lower average cash balances. Other non-operating expense was $7.4 million in 2009 as compared to other non-operating income of $3.1 million in 2008. The change in other non-operating income/expense relates primarily to foreign currency exchange gains and losses, largely caused by revaluations of US dollar cash balances held by Mattel’s Venezuelan subsidiary.
Provision for Income Taxes
Mattel’s effective tax rate on income before income taxes in 2009 was 19.9% as compared to 22.2% in 2008. The 2009 income tax provision includes net tax benefits of $28.8 million related to reassessments of prior years’ tax exposures based on the status of current audits in various jurisdictions around the world, settlements, and enacted law changes.
Operating Segment Results
Mattel’s operating segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands US, Fisher-Price Brands US and American Girl Brands. Operating segment results should be read in conjunction with Item 8 “Financial Statements and Supplementary Data—Note 15 to the Consolidated Financial Statements—Segment Information.”
Domestic Segment
Mattel Girls & Boys Brands US gross sales decreased 2% in 2009 as compared to 2008. Within this segment, gross sales of Barbie® increased 4% and gross sales of Other Girls Brands decreased 11%, primarily driven by lower sales of High School Musical® products. Gross sales of Wheels products increased 1%, primarily due to higher sales of Core Hot Wheels® and Matchbox® products, partially offset by sales declines in Speed Racer® and Tyco R/C® products. Gross sales of Entertainment products decreased 7%, primarily driven by lower sales of Radica® products and products tied to last year’s three key summer movie properties: Batman®, Speed Racer®, and Kung Fu Panda®, partially offset by sales of products tied to Toy Story® and Toy Story® 2 and higher sales of CARS™ products. Mattel Girls & Boys Brands US segment income increased 85% to $293.4 million in 2009 from $158.2 million in 2008, primarily driven by higher gross profit and lower other selling and administrative expenses.
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Fisher-Price Brands US gross sales decreased 8% in 2009 as compared to 2008. Within this segment, gross sales of Core Fisher-Price® products decreased 4% and gross sales of Fisher-Price® Friends products decreased 18%. Fisher-Price Brands US segment income increased 44% to $231.9 million in 2009 from $161.0 million in 2008, primarily driven by higher gross profit, lower other selling and administrative expenses, and lower advertising and promotion expenses, partially offset by lower sales volume.
American Girl Brands gross sales were flat during 2009 as compared to 2008, driven primarily by the November 2008 openings of the American Girl Boutique and Bistro® in Boston and Minneapolis, offset by softness resulting primarily from a difficult comparison to strong entertainment-related sales in 2008. American Girl Brands segment operating income increased 19% to $103.4 million in 2009 from $86.6 million in 2008, primarily driven by higher gross profit, lower other selling and administrative expenses, and lower advertising and promotion expenses.
International Segment
The following table provides a summary of percentage changes in gross sales within the International segment in 2009 versus 2008:
| Non-US Regions: |
% Change in Gross Sales |
Impact of Change in Currency Rates (in % pts) | ||
| Total International |
–13 | –4 | ||
| Europe |
–15 | –4 | ||
| Latin America |
–12 | –6 | ||
| Asia Pacific |
–7 | –2 | ||
| Other |
–11 | –1 |
International gross sales decreased 13% in 2009 as compared to 2008, including unfavorable changes in currency exchange rates of 4 percentage points. Gross sales of Mattel Girls & Boys Brands decreased 15%, including unfavorable change in currency exchange rates of 4 percentage points. Gross sales of Barbie® decreased 6%, including unfavorable changes in currency exchange rates of 4 percentage points. Gross sales of Other Girls Brands decreased 26%, including unfavorable changes in currency exchange rates of 3 percentage points, driven primarily by sales declines in High School Musical® products. Gross sales of Wheels products decreased 13%, including unfavorable changes in currency exchange rates of 5 percentage points driven primarily by sales declines in Speed Racer® and Tyco R/C® products. Gross sales of Entertainment products decreased by 19%, including unfavorable changes in currency exchange rates of 4 percentage points, driven primarily by lower sales of products tied to last year’s three key summer movie properties: Batman®, Speed Racer®, and Kung Fu Panda®, along with CARS™ products, and Radica® products, partially offset by sales of products tied to Toy Story® and Toy Story® 2. Fisher-Price Brands gross sales decreased 9%, including unfavorable changes in currency exchange rates of 4 percentage points. Gross sales of Core Fisher-Price® products decreased 9%, including unfavorable change in currency exchange rates of 4 percentage points and gross sales of Fisher-Price® Friends products decreased 5%, with no impact from changes in currency exchange rates. International segment income increased 18% to $422.5 million in 2009 from $357.6 million in 2008, primarily driven by higher gross margin, lower advertising and promotion expenses, and lower other selling and administrative expenses, partially offset by lower sales volume.
2008 Compared to 2007
Consolidated Results
Net sales for 2008 were $5.92 billion, a 1% decrease as compared to $5.97 billion in 2007, with no impact from changes in currency exchange rates. Net income for 2008 was $379.6 million, or $1.04 per diluted share, as compared to net income of $600.0 million, or $1.53 per diluted share, for 2007. Net income for 2007 was
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positively impacted by net tax benefits of $42.0 million as a result of 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.
Gross profit, as a percentage of net sales, decreased to 45.4% in 2008 from 46.5% in 2007. The decrease in gross profit was primarily due to higher product costs driven by higher commodities, labor, and product testing costs, along with appreciating Asian currencies (collectively, “input costs”), higher costs of distribution, and mix, partially offset by the benefit of price increases, favorable changes in currency exchange rates, and lower product recall costs as compared to 2007.
Income before income taxes as a percentage of net sales declined to 8.2% in 2008 from 11.8% in 2007. Contributing to this decline were lower gross margins, higher advertising and promotion expenses, and higher other selling and administrative expenses, which were all impacted by lower sales. The increase in other selling and administrative expense in 2008 was primarily due to incremental legal and settlement related costs of approximately $52 million, the impact of foreign exchange rates, and higher bad debt expense. Additionally, interest expense increased in 2008 due to higher average borrowings, partially offset by lower average interest rates and interest income decreased in 2008 due to lower average interest rates, partially offset by higher average invested cash balances.
The following table provides a summary of Mattel’s consolidated results for 2008 and 2007 (in millions, except percentage and basis point information):
| For the Year | ||||||||||||||||||||
| 2008 | 2007 | Year/Year Change | ||||||||||||||||||
| Amount | % of Net Sales |
Amount | % of Net Sales |
% | Basis Points of Net Sales |
|||||||||||||||
| Net sales |
$ | 5,918.0 | 100.0 | % | $ | 5,970.1 | 100.0 | % | –1 | % | ||||||||||
| Gross profit |
$ | 2,684.4 | 45.4 | % | $ | 2,777.3 | 46.5 | % | –3 | % | (110 | ) | ||||||||
| Advertising and promotion expenses |
719.2 | 12.2 | 708.8 | 11.9 | 1 | % | 30 | |||||||||||||
| Other selling and administrative expenses |
1,423.4 | 24.1 | 1,338.4 | 22.4 | 6 | % | 170 | |||||||||||||
| Operating income |
541.8 | 9.2 | 730.1 | 12.2 | –26 | % | (300 | ) | ||||||||||||
| Interest expense |
81.9 | 1.4 | 71.0 | 1.2 | 15 | % | 20 | |||||||||||||
| Interest (income) |
(25.0 | ) | –0.4 | (33.3 | ) | –0.6 | –25 | % | 20 | |||||||||||
| Other non-operating (income), net |
(3.1 | ) | (11.0 | ) | ||||||||||||||||
| Income before income taxes |
$ | 488.0 | 8.2 | % | $ | 703.4 | 11.8 | % | –31 | % | (360 | ) | ||||||||
Sales
Net sales for 2008 were $5.92 billion, a 1% decrease as compared to $5.97 billion in 2007, with no impact from changes in currency exchange rates. Gross sales within the US decreased 2% from 2007, and accounted for 51% of consolidated gross sales in both 2008 and 2007. Gross sales in international markets decreased 1% as compared to 2007, including a 1 percentage point benefit from changes in currency exchange rates.
Worldwide gross sales of Mattel Girls & Boys Brands decreased 2% to $3.64 billion in 2008 as compared to 2007, with no impact from changes in currency exchange rates. Domestic gross sales of Mattel Girls & Boys Brands decreased 1% and international gross sales of Mattel Girls & Boys Brands decreased 2%, including a 2 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Barbie® decreased 9%, with no impact from changes in currency exchange rates. Domestic gross sales of Barbie® decreased 7%, primarily driven by sales declines in Barbie Girls® MP3 Player and Barbie® Collector products, partially offset by increased sales in Barbie® Fantasy products. International gross sales of Barbie® decreased 9%, including a 2 percentage point benefit from changes in currency exchange rates, primarily driven by sales declines of Barbie®
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Fantasy, Barbie Girls® MP3 Player, and My Scene® products. Lower sales in Barbie® Fantasy products in international markets were driven by the underperformance of toys associated with the 2008 Barbie® entertainment property, Barbie & the Diamond Castle®, as compared to the 2007 entertainment property, Barbie as the Island Princess®. Worldwide gross sales of Other Girls Brands increased 11% from 2007, including a 1 percentage point benefit from changes in currency exchange rates, primarily driven by higher sales of High School Musical®, Little Mommy®, and Hannah Montana® internationally, partially offset by sales declines for Pixel Chix® and Polly Pocket®. Worldwide gross sales of Wheels products increased 4% as compared to 2007, including a 1 percentage point benefit from changes in currency exchange rates, primarily due to Speed Racer® sales. Worldwide gross sales of Entertainment products, which includes games and puzzles and Radica®, decreased by 4% as compared to 2007, including a 1 percentage point benefit from changes in currency exchange rates, primarily driven by sales declines in CARS™, interactive games, and Radica® products, partially offset by increased sales of products tied to the Batman®: The Dark Knight® movie property.
Worldwide gross sales of Fisher-Price Brands decreased 3% to $2.36 billion in 2008, as compared to 2007, including a 1 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Fisher-Price® Friends decreased 16% as compared to 2007, including a 1 percentage point unfavorable change in currency exchange rates, primarily driven by sales declines in Dora the Explorer® and Sesame Street® products as compared to strong levels in the prior year, partially offset by growth in sales of Disney® products. Worldwide gross sales of Core Fisher-Price® increased 1% as compared to 2007, including a 1 percentage point benefit from changes in currency exchange rates.
Gross sales of American Girl Brands increased 7% to $463.1 million in 2008 as compared to 2007, primarily driven by strong sales of products tied to the Kit Kittredge® movie and increased sales in the retail channel.
Cost of Sales
Cost of sales increased by $40.8 million, or 1%, from $3.19 billion in 2007 to $3.23 billion in 2008 as compared to a 1% decrease in net sales. On an overall basis, cost of sales increased primarily due to higher input costs and higher costs of distribution, partially offset by foreign currency exchanges benefits and lower product recall costs as compared to 2007. Within cost of sales, product costs increased by $27.8 million, or 1%, from $2.57 billion in 2007 to $2.60 billion in 2008. Royalty expense decreased by $2.1 million, or 1%, from $243.3 million in 2007 to $241.2 million in 2008. Freight and logistics expenses increased by $15.1 million, or 4%, from $379.0 million in 2007 to $394.1 million in 2008.
Gross Profit
Gross profit, as a percentage of net sales, decreased to 45.4% in 2008 from 46.5% in 2007. The decrease in gross profit was primarily driven by higher input costs, higher costs of distribution, and mix, partially offset by the benefit of price increases, favorable changes in currency exchange rates, and lower product recall costs as compared to 2007.
Advertising and Promotion Expenses
Advertising and promotion expenses increased to 12.2% of net sales in 2008, from 11.9% in 2007 due primarily to lower than expected sales volume.
Other Selling and Administrative Expenses
Other selling and administrative expenses were $1.42 billion in 2008, or 24.1% of net sales, as compared to $1.34 billion in 2007, or 22.4% of net sales. The increase in other selling and administrative expense in 2008 was primarily due to incremental legal and settlement related costs of approximately $52 million, the impact of
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foreign exchange rates, and higher bad debt expense. Compensation expense related to stock options and restricted stock units (“RSUs”) totaled $35.7 million in 2008, as compared to $22.2 million in 2007.
Non-Operating Items
Interest expense was $81.9 million in 2008, as compared to $71.0 million in 2007, due to higher average borrowings, partially offset by lower average interest rates. Interest income decreased from $33.3 million in 2007 to $25.0 million in 2008 due to lower average interest rates, partially offset by higher average invested cash balances. Other non-operating income was $3.1 million in 2008 and primarily related to foreign currency exchange gains caused by local currency revaluation of US dollar cash balances held by a Latin American subsidiary, partially offset by a $4.0 million investment impairment charge recorded during the third quarter of 2008. Other non-operating income was $11.0 million in 2007 and primarily related to foreign currency exchange gains caused by local currency revaluations of the US dollar cash balances held by a Latin American subsidiary.
Provision for 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 prior years’ tax exposures based on the status of audits in various jurisdictions around the world, including settlements, partially offset by enacted tax law changes.
Operating Segment Results
Mattel’s operating segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Girls & Boys Brands US, Fisher-Price Brands US and American Girl Brands. Operating segment results should be read in conjunction with Item 8 “Financial Statements and Supplementary Data—Note 15 to the Consolidated Financial Statements—Segment Information.”
Domestic Segment
Mattel Girls & Boys Brands US gross sales decreased 1% in 2008 as compared to 2007. Within this segment, gross sales of Barbie® decreased 7%, primarily driven by sales declines of Barbie Girls® MP3 Player and Barbie® Collector products, partially offset by increased sales of Barbie® Fantasy products. Gross sales of Other Girls Brands increased 13%, primarily driven by higher sales of High School Musical®, partially offset by sales declines for Polly Pocket® and Pixel Chix®. Gross sales of Wheels products increased 11%, primarily due to Speed Racer® sales. Gross sales in Entertainment products, which include games and puzzles and Radica® , decreased 10%, primarily driven by sale declines in CARS™, Radica®, and interactive games products, partially offset by increased sales of products tied to the Batman®: The Dark Knight® movie property. Mattel Girls & Boys Brands US segment income decreased 25% to $158.2 million in 2008, primarily due to lower gross profit driven by higher input costs, higher costs of distribution, and mix, partially offset by the benefit of price increases and lower product recall costs as compared to 2007.
Fisher-Price Brands US gross sales decreased 6%, reflecting sales declines of Fisher-Price® Friends, primarily driven by lower sales of Dora the Explorer® and Sesame Street® as compared to strong levels in the prior year, partially offset by growth in sales of Disney® products, and Core Fisher-Price® products. Fisher-Price Brands US segment income decreased 29% to $161.0 million in 2008, primarily due to lower gross profit driven by higher input costs, higher costs of distribution, and mix, partially offset by the benefit of price increases and lower product recall costs as compared to 2007, and higher advertising and promotion expenses due primarily to lower than expected sales volumes.
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American Girl Brands gross sales increased 7% from the prior year, primarily driven by strong sales of products tied to the Kit Kittredge® movie and increased sales in the retail channel. American Girl Brands segment operating income decreased 12% to $86.6 million in 2008, primarily due to higher other selling and administrative expenses related to retail pre-opening costs, partially offset by higher sales volume.
International Segment
The following table provides a summary of percentage changes in gross sales within the International segment in 2008 versus 2007:
| Non-US Regions: |
% Change in Gross Sales |
Impact of Change in Currency Rates (in % pts) | ||
| Total International |
–1 | 1 | ||
| Europe |
–6 | 2 | ||
| Latin America |
7 | 2 | ||
| Asia Pacific |
4 | 0 | ||
| Other |
–4 | –3 |
International gross sales decreased 1% in 2008 as compared to 2007, including a 1 percentage point benefit from changes in currency exchange rates. Gross sales of Barbie® decreased 9%, including a 2 percentage point benefit from changes in currency exchange rates, primarily driven by sales declines in Barbie® Fantasy, Barbie Girls® MP3 Player, and My Scene® products. Lower sales in Barbie® Fantasy products was driven by the underperformance of toys associated with the 2008 Barbie® entertainment property, Barbie & the Diamond Castle®, as compared to the 2007 entertainment property, Barbie as the Island Princess®. Gross sales of Other Girls Brands increased 10%, including a 1 percentage point benefit from changes in currency exchange rates, primarily due to sales of High School Musical® and Hanna Montana® products and higher sales of Little Mommy® , partially offset by sales declines for Pixel Chix® and Polly Pocket®. Gross sales of Wheels products decreased 2%, including a 2 percentage point benefit from changes in currency exchange rates. Gross sales of Entertainment products increased by 1%, including a 1 percentage point benefit from changes in currency exchange rates, primarily driven by sales of products tied to the Batman®: The Dark Knight®, Speed Racer®, and Kung Fu Panda® movie properties. Fisher-Price Brands gross sales increased 1%, with no impact from changes in currency exchange rates, primarily driven by strong sales of Core Fisher-Price® products, partially offset by sales declines of Fisher-Price® Friends products. International segment income decreased 15% to $357.6 million in 2008, primarily due to lower gross profit driven by higher input costs, higher costs of distribution, and mix, partially offset by the benefit of price increases, favorable changes in currency exchange rates, and lower product recall costs as compared to 2007, and higher other selling and administrative expenses.
Global Cost Leadership Program
During the middle of 2008, Mattel initiated its Global Cost Leadership program, which is designed to improve operating efficiencies and leverage Mattel’s global scale to improve profitability and operating cash flows. The major initiatives within Mattel’s Global Cost Leadership program include:
| • | A global reduction in Mattel’s professional workforce of approximately 1,000 employees that was initiated in November 2008, and an additional reduction in Mattel’s professional workforce initiated in the third quarter of 2009. |
| • | A coordinated efficiency strategic plan that includes structural changes designed to lower costs and improve efficiencies; for example, offshoring and outsourcing certain back office functions, and more clustering of management in international markets. |
| • | Additional procurement initiatives designed to fully leverage Mattel’s global scale in areas such as creative agency partnerships, legal services, and distribution, including ocean carriers and over-the-road freight vendors. |
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Mattel’s Global Cost Leadership program is intended to generate approximately $180 million to $200 million of cumulative net cost savings by the end of 2010. Mattel exceeded its 2009 goal of generating approximately $90 million to $100 million of net cost savings by realizing approximately $164 million of gross cost savings before severance charges of approximately $32 million (or $132 million in net cost savings). Of the gross cost savings in 2009, approximately $88 million is reflected within other selling and administrative expenses, approximately $62 million within gross profit, and approximately $14 million within advertising and promotion expenses. During 2008, Mattel recorded severance and other termination-related charges of approximately $34 million. Mattel expects to meet its 2010 goal of approximately $180 million to $200 million of cumulative net cost savings.
Income Taxes
Mattel’s effective tax rate on income before income taxes in 2009 was 19.9% as compared to 22.2% in 2008. The 2009 income tax provision includes net benefits of $28.8 million related to reassessments of prior years’ tax exposures based on the status of current audits in various jurisdictions around the world, settlements, and enacted tax law changes.
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 prior years’ tax exposures based on the status of audits in various jurisdictions around the world, including settlements, partially offset by enacted tax law changes.
Liquidity and Capital Resources
Mattel’s primary sources of liquidity are its cash and equivalents balances, access to short-term borrowing facilities, including its $1.08 billion domestic unsecured committed revolving credit facility, 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-earnings before interest, taxes, depreciation, and amortization 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 $1.08 billion domestic unsecured committed revolving credit facility, which it uses for seasonal working capital requirements. Mattel’s domestic credit facility was amended and restated effective March 23, 2009 and expires on March 23, 2012, as more fully described in Item 8 “Financial Statements Supplementary Data—Note 8 to the Consolidated Financial Statements—Seasonal Financing and Debt.” As of December 31, 2009, Mattel had available incremental borrowing resources totaling approximately $780 million under this unsecured committed revolving credit facility, and Mattel has not experienced any limitations on its ability to access this source of liquidity. Market conditions could affect certain 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
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those funds. Mattel diversifies its cash and equivalents among counterparties and securities to minimize exposure. As of December 31, 2009 and 2008, Mattel had a money market investment fund with an original cost basis of $85.3 million, which was classified within other current assets as a result of the money market investment fund halting redemption requests during 2008. During 2009 and 2008, Mattel recorded impairment charges of approximately $1 million and $4 million, respectively, associated with this investment. Additionally, during 2009, Mattel received cash proceeds of approximately $73 million related to this investment, and expects to receive the remaining proceeds, net of the impairment charges, during 2010. As of December 31, 2009, 2008, and 2007, Mattel 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 in the fair value measurements of Mattel’s foreign currency forward exchange contracts. 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 and customer terms and credit limits are adjusted, if necessary. Additionally, Mattel uses a variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring or purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
Mattel sponsors defined benefit pension plans and postretirement benefit plans for employees of the company. 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 stockholder 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 stockholders through dividends and share repurchases. |
Over the long term, 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 stockholders 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 successfully implement 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 for investing activities.
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Operating Activities
Cash flows generated from operating activities were $945.0 million during 2009 as compared to $436.3 million in 2008, and $560.5 million in 2007. The increase in cash flows from operating activities in 2009 from 2008 was primarily the result of higher profitability and lower working capital requirements, mainly due to lower levels of accounts receivable and inventories. 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.
Investing Activities
Cash flows used for investing activities were $33.5 million during 2009, primarily due to the purchase of tools, dies, and molds and property, plant, and equipment, partially offset by proceeds received from the sale of investments. Cash flows used for investing activities were lower in 2009 as compared to 2008 mainly due to lower purchases of property, plant, and equipment, an increase in other investments in 2008, of which the proceeds of the investments were received in 2009, and lower payments for businesses acquired. Cash flows used for investing activities were higher in 2008 as compared to 2007 mainly due to an increase in other investments and higher purchases of property, plant, and equipment and tools, dies, and molds, partially offset by lower payments for businesses acquired.
Financing Activities
Cash flows used for financing activities decreased to $376.1 million in 2009 from $395.7 million in 2008 primarily as a result of lower share repurchases, tax benefits from share-based payment arrangements, and higher proceeds from the exercise of stock options, partially offset by higher net payments of borrowings. Cash flows used for financing activities decreased to $395.7 million in 2008 from $587.8 million in 2007 as a result of lower share repurchases, partially offset by lower net borrowings and lower proceeds from the exercise of stock options.
During 2009, Mattel did not repurchase any shares of its common stock. During 2008, Mattel repurchased 4.9 million shares at a cost of $90.6 million. During 2007, Mattel repurchased 35.9 million shares at a cost of $806.3 million. During 2008 and 2007, the Board of Directors authorized Mattel to increase its share repurchase program by $500.0 million and $750.0 million, respectively. At December 31, 2009, share repurchase authorizations of $410.3 million had not been executed. Repurchases will take place from time to time, depending on market conditions. Mattel’s share repurchase program has no expiration date.
In 2009, 2008, and 2007, Mattel paid a dividend per share of $0.75 to holders of its common stock. The Board of Directors declared the dividends in November, and Mattel paid the dividends in December of each year. The dividend payments were $271.4 million, $268.9 million, and $272.3 million in 2009, 2008, and 2007, respectively.
Seasonal Financing
See Item 8 “Financial Statements and Supplementary Data—Note 8 to the Consolidated Financial Statements—Seasonal Financing and Debt.”
Financial Position
Mattel’s cash and equivalents were $1.12 billion at December 31, 2009, an increase of $499.3 million from 2008. The increase was primarily driven by cash flows generated from operating activities of $945.0 million, primarily due to higher profitability and lower working capital requirements, proceeds received from the sale of investments of $73.1 million, and proceeds from the exercise of stock options of $30.9 million, partially offset by dividend payments of $271.4 million, net repayments of $148.7 million of borrowings, and $120.5 million of purchases of tools, dies, and molds, and other property, plant, and equipment.
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Accounts receivable decreased $124.2 million from December 31, 2008 to $749.3 million at December 31, 2009, reflecting higher factored receivables and improved days of sales outstanding.
Inventories decreased $130.3 million from December 31, 2008 to $355.7 million at December 31, 2009, primarily driven by tight inventory management within the current economic environment and lower costs of producing inventory in 2009.
Accounts payable and accrued liabilities decreased $102.6 million from December 31, 2008 to $968.6 million at December 31, 2009, primarily due to the timing and amount of payments of accounts payable and various accrued liability balances, including receivable collections due bank related to the domestic receivable facility, freight, and royalty obligations, partially offset by an increase in accrued incentive compensation.
At December 31, 2009 and 2008, Mattel’s total short-term borrowings totaled $2.0 million and $0, respectively. The current portion of long-term debt decreased $100.0 million to $50.0 million at December 31, 2009 as compared to December 31, 2008 due to the repayments of $100.0 million of the 2006 Senior Notes and $50.0 million of Medium-term notes, partially offset by the reclassification of $50 million of Medium-term notes to current.
A summary of Mattel’s capitalization is as follows:
| December 31, | ||||||||||||
| 2009 | 2008 | |||||||||||
| (In millions, except percentage information) |
||||||||||||
| Medium-term notes |
$ | 150.0 | 4 | % | $ | 200.0 | 6 | % | ||||
| 2006 Senior Notes |
200.0 | 5 | 200.0 | 6 | ||||||||
| 2008 Senior Notes |
350.0 | 10 | 350.0 | 10 | ||||||||
| Total noncurrent long-term debt |
700.0 | 19 | 750.0 | 22 | ||||||||
| Other noncurrent liabilities |
488.7 | 13 | 547.9 | 16 | ||||||||
| Stockholders’ equity |
2,531.0 | 68 | 2,117.1 | 62 | ||||||||
| $ | 3,719.7 | 100 | % | $ | 3,415.0 | 100 | % | |||||
Total noncurrent long-term debt decreased $50.0 million at December 31, 2009 as compared to December 31, 2008, due to the reclassification of $50.0 million of Medium-term notes to current. Mattel expects to satisfy its future long-term capital needs through the generation of corporate earnings and issuance of long-term debt instruments, as needed. Other noncurrent liabilities decreased $59.2 million at December 31, 2009, as compared to December 31, 2008, due primarily to decreases in long-term defined benefit pension plan obligations and income taxes payable. Stockholders’ equity of $2.53 billion at December 31, 2009 increased by $413.9 million from December 31, 2008, primarily as a result of net income and favorable currency translation adjustments, partially offset by payment of the annual dividend on common stock in the fourth quarter of 2009.
Mattel’s debt-to-capital ratio, including short-term borrowings and the current portion of long-term debt, decreased to 22.9% at December 31, 2009 from 29.8% at December 31, 2008, due to the aforementioned increase in stockholders’ equity and decrease in debt. Mattel’s objective is to maintain a year-end debt-to-capital ratio of approximately 25%.
Off-Balance Sheet Arrangements
Mattel has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
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Commitments
In the normal course of business, Mattel enters into debt agreements, contractual arrangements to obtain and protect Mattel’s right to create and market certain products, and for future purchases of goods and services to ensure availability and timely delivery. These arrangements include commitments for future inventory purchases and royalty payments pursuant to licensing agreements. Certain of these commitments routinely contain provisions for guarantees or minimum expenditures during the term of the contracts.
| Total | 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | |||||||||||||||
| (In millions) | |||||||||||||||||||||
| Long-term debt |
$ | 750.0 | $ | 50.0 | $ | 250.0 | $ | 50.0 | $ | 400.0 | $ | — | $ | — | |||||||
| Interest on long-term debt |
117.9 | 44.5 | 35.0 | 25.3 | 13.1 | — | — | ||||||||||||||
| Capital leases* |
3.0 | 0.3 | 0.3 | 0.3 | 0.3 | 0.3 | 1.5 | ||||||||||||||
| Operating leases |
522.0 | 94.0 | 79.0 | 64.0 | 44.0 | 36.0 | 205.0 | ||||||||||||||
| Purchases of inventory, other assets, and services |
267.0 | 267.0 | — | — | — | — | — | ||||||||||||||
| Licensing minimum guarantees |
241.0 | 43.0 | 84.0 | 45.0 | 31.0 | 19.0 | 19.0 | ||||||||||||||
| Defined benefit and postretirement benefit plans |
349.8 | 44.7 | 44.5 | 28.6 | 29.5 | 30.3 | 172.2 | ||||||||||||||
| Total |
$ | 2,250.7 | $ | 543.5 | $ | 492.8 | $ | 213.2 | $ | 517.9 | $ | 85.6 | $ | 397.7 | |||||||
| * | Represents total obligation, including imputed interest of $0.9 million. |
Liabilities for uncertain tax positions for which a cash tax payment is not expected to be made in the next twelve months are classified as other noncurrent liabilities. Due to the uncertainty about the periods in which examinations will be completed and limited information related to current audits, Mattel is not able to make reasonably reliable estimates of the periods in which cash settlements will occur with taxing authorities for the noncurrent liabilities.
Litigation
The content of Note 14 (“Commitments and Contingencies—Litigation”) to the Consolidated Financial Statements of Mattel in this Annual Report on Form 10-K is hereby incorporated by reference in its entirety in this Item 7.
Derivative Litigation
A consolidated stockholder derivative action was filed in Los Angeles County Superior Court in California, captioned In re Mattel, Inc. Derivative Litigation, consolidating three derivative actions filed in September 2007 (the “Superior Court Action”), asserting claims ostensibly on behalf and for the benefit of Mattel. A second consolidated derivative action in US District Court, Central District of California, captioned In re Mattel, Inc. Derivative Litigation, consolidating three federal derivative actions filed in October 2007, asserting claims ostensibly on behalf and for the benefit of Mattel, was dismissed with prejudice by the federal court in August 2008.
The Superior Court Action alleged that past and present members of Mattel’s Board of Directors breached their fiduciary duties in connection with product safety and reporting practices allegedly related to Mattel’s product recalls during August and September 2007. Plaintiffs also sued certain executive officers of Mattel, and alleged that officers and current and former directors who sold stock during the first half of 2007 breached their fiduciary duties by selling while allegedly in possession of non-public information relating to alleged product defects. Defendants filed a demurrer to the complaint, which was sustained with leave to amend on December 22, 2008. Plaintiffs filed a First Amended Consolidated Complaint, to which Defendants again filed a
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demurrer. The Court sustained the demurrer without leave to amend, and entered an order of dismissal of the action with prejudice on July 7, 2009. Plaintiffs filed a notice of appeal on September 1, 2009. Pursuant to an agreement resolving the appeal, the appeal was dismissed on December 29, 2009. All stockholder derivative suits stemming from the 2007 product recalls are now resolved.
Effects of Inflation
Inflation rates in the US and in major foreign countries where Mattel does business have not had a significant impact on its results of operations or financial position during 2009, 2008, or 2007. Mattel receives some protection from the impact of inflation from high turnover of inventories and its ability, under certain circumstances and at certain times, to pass on higher prices to its customers.
Employee Savings Plan
Mattel sponsors a 401(k) savings plan, the Mattel, Inc. Personal Investment Plan (the “Plan”), for its domestic employees. Contributions to the Plan include voluntary contributions by eligible employees and employer automatic and matching contributions by Mattel. The Plan allows employees to allocate both their voluntary contributions and their employer automatic and matching contributions to a variety of investment funds, including a fund that is fully invested in Mattel common stock (the “Mattel Stock Fund”). Employees are not required to allocate any of their Plan account balance to the Mattel Stock Fund, which allows employees to limit or eliminate their exposure to market changes in Mattel’s stock price. Furthermore, the Plan limits the percentage of the employee’s total account balance that may be allocated to the Mattel Stock Fund to 25%. Employees may generally reallocate their account balances on a daily basis. However, pursuant to Mattel’s insider trading policy, employees classified as insiders and restricted personnel under Mattel’s insider trading policy are limited to certain periods in which they may make allocations into or out of the Mattel Stock Fund.
Application of Critical Accounting Policies and Estimates
Mattel makes certain estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses. The accounting policies and estimates described below are those Mattel considers most critical in preparing its consolidated financial statements. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of its Board of Directors, and the Audit Committee has reviewed the disclosures included below. The following is a review of the accounting policies and estimates that include significant judgments made by management using information available at the time the estimates are made. As described below, however, these estimates could change materially if different information or assumptions were used instead.
Note 1 to the consolidated financial statements includes a summary of Mattel’s significant accounting policies, estimates, and methods used in the preparation of Mattel’s consolidated financial statements. In most instances, Mattel must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America. See Item 8 “Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies.”
Accounts Receivable—Allowance for Doubtful Accounts
The allowance for doubtful accounts represents adjustments to customer trade accounts receivable for amounts deemed partially or entirely uncollectible. Management believes the accounting estimate related to the allowance for doubtful accounts is a “critical accounting estimate” because significant changes in the assumptions used to develop the estimate could materially affect key financial measures, including other selling and administrative expenses, net income, and accounts receivable. In addition, the allowance requires a high degree of judgment since it involves estimation of the impact of both current and future economic factors in relation to its customers’ ability to pay amounts owed to Mattel.
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Mattel’s products are sold throughout the world. Products within the Domestic segment are sold directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail outlets and, to a limited extent, wholesalers, and directly to consumers. Products within the International segment are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia, Canada, and New Zealand, and through agents and distributors in those countries where Mattel has no direct presence.
In recent years, the mass-market retail channel has experienced significant shifts in market share among competitors, causing some large retailers to experience liquidity problems. In addition, many of Mattel’s customers have been negatively impacted by worsening economic conditions. Certain of Mattel’s customers filed for bankruptcy in 2008, including KB Toys in the US and Woolworth’s in the UK, and the recent global economic crisis has adversely affected the financial position of other retailers. Mattel’s sales to customers are typically made on credit without collateral and are highly concentrated in the third and fourth quarters due to the cyclical nature of toy sales, which results in a substantial portion of trade receivables being collected during the latter half of the year and the first quarter of the following year. There is a risk that customers will not pay, or that payment may be delayed, because of bankruptcy or other factors beyond the control of Mattel. This could increase Mattel’s exposure to losses from bad debts.
A small number of customers account for a large share of Mattel’s net sales and accounts receivable. In 2009, Mattel’s three largest customers, Wal-Mart, Toys “R” Us, and Target, in the aggregate, accounted for approximately 40% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 50% of net sales. As of December 31, 2009, Mattel’s three largest customers accounted for approximately 31% of net accounts receivable, and its ten largest customers accounted for approximately 44% of net accounts receivable. The concentration of Mattel’s business with a relatively small number of customers may expose Mattel to a material adverse effect if one or more of Mattel’s large customers were to experience financial difficulty.
Mattel has procedures to mitigate its risk of exposure to losses from bad debts. Revenue is recognized upon shipment or upon receipt of products by the customer, depending on the terms, provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and collectibility is reasonably assured. Credit limits and payment terms are established based on the underlying criteria that collectibility must be reasonably assured at the levels set for each customer. Extensive evaluations are performed on an ongoing basis throughout the fiscal year of each customer’s financial performance, cash generation, financing availability and liquidity status. Customers are reviewed at least annually, with more frequent reviews being performed, if necessary, based on the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses prior to shipping to those customers on credit. Customer terms and credit limits are adjusted, if necessary, to reflect the results of the review. Mattel uses a variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring or purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
The following table summarizes Mattel’s allowance for doubtful accounts at December 31:
| 2009 | 2008 | 2007 | ||||||||||
| (In millions, except percentage information) | ||||||||||||
| Allowance for doubtful accounts |
$ | 24.5 | $ | 25.9 | $ | 21.5 | ||||||
| As a percentage of total accounts receivable |
3.2 | % | 2.9 | % | 2.1 | % | ||||||
Mattel’s allowance for doubtful accounts is based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, and customer disputes. Changes in the allowance for doubtful accounts reflect management’s assessment of the factors noted above, including past due accounts, disputed balances with customers, and the financial condition of customers. The allowance for doubtful accounts is also affected by the time at which uncollectible accounts receivable balances are actually written off.
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Mattel believes that its allowance for doubtful accounts at December 31, 2009 is adequate and proper. However, as described above, Mattel’s business is greatly dependent on a small number of customers. Should one or more of Mattel’s major customers experience liquidity problems, then the allowance for doubtful accounts may not be sufficient to cover such losses. Any incremental bad debt charges would negatively affect the results of operations of one or more of Mattel’s business segments.
Inventories—Allowance for Obsolescence
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Inventory obsolescence reserves are recorded for damaged, obsolete, excess and slow-moving inventory. Management believes that the accounting estimate related to the allowance for obsolescence is a “critical accounting estimate” because changes in the assumptions used to develop the estimate could materially affect key financial measures, including gross profit, net income, and inventories. As more fully described below, valuation of Mattel’s inventory could be impacted by changes in public and consumer preferences, demand for product, or changes in the buying patterns of both retailers and consumers and inventory management of customers.
In the toy industry, orders are subject to cancellation or change at any time prior to shipment since actual shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers and overall economic conditions. Unexpected changes in these factors could result in excess inventory in a particular product line, which would require management to record a valuation allowance on such inventory.
Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account historical trends, results of market research and current market information. Mattel ships products in accordance with delivery schedules specified by its customers, who usually request delivery within three months. In anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three quarters of its fiscal year. These seasonal purchasing patterns and requisite production lead times cause risk to Mattel’s business associated with the underproduction of popular toys and the overproduction of toys that do not match consumer demand. Retailers are also attempting to manage their inventories more tightly, requiring Mattel to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase inventory valuation risk since Mattel’s inventory levels may be adversely impacted by the need to pre-build products before orders are placed.
Additionally, current conditions in the domestic and global economies are uncertain. As a result, it is difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or contraction in various parts of the economy, including the economies in which Mattel participates. Because all components of Mattel’s budgeting and forecasting are dependent upon estimates of growth or contraction in the markets it serves and demand for its products, the prevailing economic uncertainties make estimates of future demand for product more difficult. Such economic changes may affect the sales of Mattel’s products and its corresponding inventory levels, which could potentially impact the valuation of its inventory.
At the end of each quarter, management within each business segment, Mattel Girls & Boys Brands US, Fisher-Price Brands US, American Girl Brands, and International, performs a detailed review of its inventory on an item-by-item basis and identifies products that are believed to be impaired. Management assesses the need for, and the amount of, an obsolescence reserve based on the following factors:
| • | Customer and/or consumer demand for the item; |
| • | Overall inventory positions of Mattel’s customers; |
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| • | Strength of competing products in the market; |
| • | Quantity on hand of the item; |
| • | Standard retail price of the item; |
| • | Mattel’s cost for the item; and |
| • | Length of time the item has been in inventory. |
The time frame between when an estimate is made and the time of disposal depends on the above factors and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.
The following table summarizes Mattel’s obsolescence reserve at December 31:
| 2009 | 2008 | 2007 | ||||||||||
| (In millions, except percentage information) | ||||||||||||
| Allowance for obsolescence |
$ | 40.8 | $ | 59.1 | $ | 51.7 | ||||||
| As a percentage of total inventory |
10.3 | % | 10.8 | % | 10.8 | % | ||||||
The decrease in the allowance for obsolescence from 2008 to 2009 was mainly due to lower levels of excess inventory in 2009. Management believes that its allowance for obsolescence at December 31, 2009 is adequate and proper. However, the impact resulting from the aforementioned factors could cause actual results to vary. Any incremental obsolescence charges would negatively affect the results of operations of one or more of Mattel’s business segments.
Recoverability of Goodwill and Intangible Assets
Mattel tests goodwill and nonamortizable intangible assets for impairment annually, or more often if an event or circumstance indicates that an impairment may have occurred. Management believes that the accounting estimate related to the recoverability of its goodwill and nonamortizable intangible assets is a “critical accounting estimate” because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income, goodwill, and other intangible assets.
The recoverability of goodwill involves a high degree of judgment since the first step of the required impairment test consists of a comparison of the fair value of a reporting unit with its book value. Based on the assumptions underlying the valuation, impairment is determined by estimating the fair value of a reporting unit and comparing that value to the reporting unit’s book value. If the fair value is more than the book value of the reporting unit, an impairment loss is not recognized. If an impairment exists, the fair value of the reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the excess amount representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s goodwill exceeds the estimated fair value of that goodwill.
For purposes of evaluating whether goodwill is impaired, goodwill is allocated to various reporting units, which are either at the operating segment level or one reporting level below the operating segment. Mattel’s reporting units are: Mattel Girls Brands US, Mattel Boys Brands US, Fisher-Price Brands US, American Girl Brands, and International. Goodwill is allocated to Mattel’s reporting units based on an allocation of brand-specific goodwill to the reporting units selling those brands. Mattel utilizes the fair value based upon the discounted cash flows that the business can be expected to generate in the future (the “Income Approach”) when evaluating goodwill for impairment. The Income Approach valuation method requires Mattel to make projections of revenue, operating costs and working capital investment for the reporting unit over a multi-year period. Additionally, management must make an estimate of a weighted average cost of capital that a market participant would use as a discount rate. Changes in these projections or estimates could result in a reporting unit either passing or failing the first step of the impairment model, which could significantly change the amount of any
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impairment ultimately recorded. As of September 30, 2009, Mattel performed the annual impairment test for goodwill as required and determined that its goodwill was not impaired since, for each of the reporting units, the fair value of the reporting unit substantially exceeded its carrying amount. Mattel also considered events and circumstances subsequent to the annual impairment tests in concluding there was no impairment at December 31, 2009.
Testing nonamortizable intangible assets for impairment also involves a high degree of judgment due to the assumptions that underlie the valuation. Mattel evaluates nonamortizable intangible assets, including trademarks and trade names, for impairment by comparing the estimated fair values with the carrying values. The fair value is measured using a multi-period royalty savings method, which reflects the savings realized by owning the trademarks and trade names, and thus not having to pay a royalty fee to a third party. As of September 30, 2009, Mattel performed the annual impairment test for nonamortizable intangible assets and determined that the fair value of certain of its nonamortizable intangible assets was below its carrying value. Mattel also tested its amortizable intangible assets for impairment during 2009. As a result of these impairment tests, Mattel recorded impairment charges of approximately $10 million, which are reflected within other selling and administrative expenses. Mattel also considered events and circumstances subsequent to these impairment tests in concluding there was no additional impairment at December 31, 2009.
Sales Adjustments
Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. Accruals for these programs are recorded as sales adjustments that reduce gross revenue in the period the related revenue is recognized. Sales adjustments for such programs totaled $503.5 million, $568.0 million, and $622.8 million during 2009, 2008, and 2007, respectively.
The above-described programs primarily involve fixed amounts or percentages of sales to customers. Accruals for such programs are calculated based on an assessment of customers’ purchases and performance under the programs and any other specified factors. While the majority of sales adjustment amounts are readily determinable at period end and do not require estimates, certain of the sales adjustments require management to make estimates. In making these estimates, management considers all available information, including the overall business environment, historical trends and information from customers. Management believes that the accruals recorded for customer programs at December 31, 2009 are adequate and proper.
Product Recalls and Withdrawals
During 2007, Mattel recalled products with high-powered magnets that may become dislodged and other products, some of which were produced using non-approved paint containing lead in excess of applicable regulatory and Mattel standards. During the second half of 2007, additional products were recalled, withdrawn from retail stores, or replaced at the request of consumers as a result of safety or quality issues (collectively, the “2007 Product Recalls”). In the second quarter of 2008, Mattel determined that certain products had been shipped into foreign markets in which the products did not meet all applicable regulatory standards for those markets. None of these deficiencies related to lead or magnets. Mattel withdrew these products from retail stores in these markets and, although not required to do so, also withdrew the products from the US and other markets because they did not meet Mattel’s internal standards (the “2008 Product Withdrawal”).
Mattel establishes a reserve for product recalls and withdrawals on a product-specific basis when circumstances giving rise to the recall or withdrawal become known. Facts and circumstances related to the recall or withdrawal, including where the product affected by the recall or withdrawal is located (e.g., with consumers, in customers’ inventory, or in Mattel’s inventory), cost estimates for shipping and handling for returns, whether the product is repairable, cost estimates for communicating the recall or withdrawal to consumers and customers,
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and cost estimates for parts and labor if the recalled or withdrawn product is deemed to be repairable, are considered when establishing a product recall or withdrawal reserve. These factors are updated and reevaluated each period and the related reserves are adjusted when these factors indicate that the recall or withdrawal reserve is either not sufficient to cover or exceeds the estimated product recall or withdrawal expenses.
Significant changes in the assumptions used to develop estimates for product recall or withdrawal reserves could affect key financial measures, including accounts receivable, inventory, net sales, cost of sales, other selling and administrative expenses, and net income. In addition, estimating product recall or withdrawal reserves requires a high degree of judgment in areas such as estimating the portion of recalled or withdrawn products sold to end consumers and the portion held by retailers, return rates, shipping and handling for returns, the way in which affected products held by consumers may be remediated (e.g., through redeemable vouchers, or a repair kit being provided), and the costs of meeting regulatory requirements in various countries (e.g., public notification).
The following table summarizes Mattel’s reserves and reserve activity for the 2007 Product Recalls and the 2008 Product Withdrawal (in thousands):
| Impairment of Inventory on Hand |
Product Returns/ Redemptions |
Other | Total | |||||||||||||
| 2007 Product Recall charges |
$ | 3,849 | $ | 60,887 | $ | 3,712 | $ | 68,448 | ||||||||
| Reserves used |
(3,849 | ) | (48,275 | ) | (1,352 | ) | (53,476 | ) | ||||||||
| Balance at December 31, 2007 |
— | 12,612 | 2,360 | 14,972 | ||||||||||||
| 2008 Product Withdrawal charges |
3,571 | 5,230 | 329 | 9,130 | ||||||||||||
| Reserves used |
(3,571 | ) | (15,961 | ) | (2,013 | ) | (21,545 | ) | ||||||||
| Changes in estimates |
— | 1,962 | 728 | 2,690 | ||||||||||||
| Impact of currency exchange rate changes |
— | (238 | ) | (66 | ) | (304 | ) | |||||||||
| Balance at December 31, 2008 |
— | 3,605 | 1,338 | 4,943 | ||||||||||||
| Reserves used |
— | (1,297 | ) | (311 | ) | (1,608 | ) | |||||||||
| Changes in estimates |
— | (2,370 | ) | 707 | (1,663 | ) | ||||||||||
| Impact of currency exchange rate changes |
— | 77 | (26 | ) | 51 | |||||||||||
| Balance at December 31, 2009 |
$ | — | $ | 15 | $ | 1,708 | $ | 1,723 | ||||||||
Mattel believes that its reserves for the 2007 Product Recalls and 2008 Product Withdrawal at December 31, 2009 are adequate and proper.
Benefit Plan Assumptions
Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering substantially all employees of these companies. See Item 8 “Financial Statements and Supplementary Data—Note 7 to the Consolidated Financial Statements—Employee Benefit Plans.”
Actuarial valuations are used in determining amounts recognized in the financial statements for retirement and other postretirement benefit plans. These valuations incorporate the following significant assumptions:
| • | Weighted average discount rate to be used to measure future plan obligations and interest cost component of plan income or expense; |
| • | Rate of future compensation increases (for defined benefit pension plans); |
| • | Expected long-term rate of return on plan assets (for funded plans); and |
| • | Health care cost trend rates (for other postretirement benefit plans). |
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Management believes that these assumptions are “critical accounting estimates” because significant changes in these assumptions could impact Mattel’s results of operations and financial position. Management believes that the assumptions utilized to record its obligations under its plans are reasonable based on the plans’ experience and advice received from its outside actuaries. Mattel reviews its benefit plan assumptions annually and modifies its assumptions based on current rates and trends as appropriate. The effects of such changes in assumptions are amortized as part of plan income or expense in future periods.
At the end of each fiscal year, Mattel determines the weighted average discount rate used to calculate the projected benefit obligation. The discount rate is an estimate of the current interest rate at which the benefit plan liabilities could be effectively settled at the end of the year. The discount rate also impacts the interest cost component of plan income or expense. At December 31, 2009, Mattel determined the discount rate for its domestic benefit plans used in determining the projected and accumulated benefit obligations to be 5.6%, as compared to 5.4% and 6.2% for December 31, 2008 and 2007, respectively. In estimating this rate, Mattel reviews rates of return on high-quality, corporate bond indices, which approximate the timing and amount of benefit payments. Assuming all other benefit plan assumptions remain constant, the increase in the discount rate from 5.4% to 5.6% will result in a decrease in benefit plan expense during 2010 of approximately $0.8 million.
The rate of future compensation increases used by Mattel for the benefit obligation of its domestic defined benefit pension plans averaged 3.8% for 2009, 2008, and 2007, based on plan demographics. The rate of future compensation increases used by Mattel for the net periodic pension cost of its domestic defined benefit pension plans averaged 3.8% for 2009 and 2008, and 4.0% for 2007, based on plan demographics. These assumptions are reviewed annually based on historical salary increases for participants in the defined benefit pension plans. This assumption impacts the service and interest cost components of plan income or expense.
The long-term rate of return on plan assets is based on management’s expectation of earnings on the assets that secure Mattel’s funded defined benefit pension plans, taking into account the mix of invested assets, the arithmetic average of past returns, economic and stock market conditions and future expectations and the long-term nature of the projected benefit obligation to which these investments relate. The long-term rate of return is used to calculate the expected return on plan assets that is used in calculating pension income or expense. The difference between this expected return and the actual return on plan assets is deferred, net of tax, and is included in accumulated other comprehensive loss. The net deferral of past asset gains or losses affects the calculated value of plan assets and, ultimately, future pension income or expense. Mattel’s long-term rate of return for its domestic defined benefit pension plans was 8.0% in 2009, 2008 and 2007. Assuming all other benefit plan assumptions remain constant, a one percentage point decrease in the expected return on plan assets would result in an increase in benefit plan expense during 2010 of approximately $2.5 million.
The health care cost trend rates used by Mattel for its other postretirement benefit plans reflect management’s best estimate of expected claim costs over the next ten years. These trend rates impact the service and interest cost components of plan expense. Rates ranging from 7% in 2009 to 5% in 2011, with rates assumed to stabilize in 2011 and thereafter, were used in determining plan expense for 2009. These rates are reviewed annually and are estimated based on historical costs for participants in the other postretirement benefit plans as well as estimates based on current economic conditions. As of December 31, 2009, Mattel adjusted the health care cost trend rates for its other postretirement benefit plan obligation to range from 6% in 2009 reducing to 5% in 2011, with rates assumed to stabilize in 2011 and thereafter. Assuming all other postretirement benefit plan assumptions remain constant, a one percentage point increase in the assumed health care cost trend rates would increase benefit plan expense during 2010 by approximately $0.1 million.
A one percentage point increase/(decrease) in the assumed health care cost trend rate for each future year would impact the postretirement benefit obligation as of December 31, 2009 by approximately $4.5 million and $(4.0) million, respectively, while a one percentage point increase/(decrease) would impact the service and interest cost recognized for 2009 by approximately $0.3 million and $(0.2) million, respectively.
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Share-Based Payments
Mattel recognizes the cost of employee share-based payment awards on a straight-line attribution basis over the requisite employee service period, net of estimated forfeitures. In determining when additional tax benefits associated with share-based payment exercises are recognized, Mattel follows the ordering of deductions under the tax law, which allows deductions for share-based payment exercises to be utilized before previously existing net operating loss carryforwards. In computing dilutive shares under the treasury stock method, Mattel does not reduce the tax benefit amount within the calculation for the amount of deferred tax assets that would have been recognized had Mattel previously expensed all share-based payment awards.
Determining the fair value of share-based awards at the measurement date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and the expected dividends. The fair value of options granted has been estimated using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues approximating the expected life. Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting. Management believes that these assumptions are “critical accounting estimates” because significant changes in the assumptions used to develop the estimates could materially affect key financial measures, including net income.
The following weighted average assumptions were used in determining the fair value of options granted:
| 2009 | 2008 | 2007 | ||||||||||
| Expected life (in years) |
4.9 | 4.8 | 4.7 | |||||||||
| Risk-free interest rate |
2.5 | % | 3.2 | % | 4.6 | % | ||||||
| Volatility factor |
33.6 | % | 25.6 | % | 22.8 | % | ||||||
| Dividend yield |
4.3 | % | 3.7 | % | 2.8 | % | ||||||
| Weighted average fair value per granted option |
$ | 3.71 | $ | 3.67 | $ | 4.76 | ||||||
The following table summarizes the sensitivity of valuation assumptions within the calculation of stock option fair values, if all other assumptions are held constant:
| Increase in Assumption Factor |
Increase (Decrease) in Fair Value (in % pts) |
|||||
| Expected life (in years) |
1 year | 3.8 | ||||
| Risk-free interest rate |
1 | % | 6.5 | |||
| Volatility factor |
1 | % | 3.2 | |||
| Dividend yield |
1 | % | (10.8 | ) | ||
| (Decrease) in Assumption Factor |
Increase (Decrease) in Fair Value (in % pts) |
|||||
| Expected life (in years) |
(1) year | (5.7 | ) | |||
| Risk-free interest rate |
(1 | )% | (6.5 | ) | ||
| Volatility factor |
(1 | )% | (3.5 | ) | ||
| Dividend yield |
(1 | )% | 11.9 | |||
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Mattel recognized compensation expense of $13.0 million, $9.5 million, and $7.4 million for stock options during 2009, 2008, and 2007, respectively, which is included within other selling and administrative expenses. Compensation expense recognized related to RSUs was $37.0 million, $26.2 million, and $14.8 million in 2009, 2008, and 2007, respectively, and is also included within other selling and administrative expenses. As of December 31, 2009, total unrecognized compensation cost related to unvested share-based payments totaled $69.8 million and is expected to be recognized over a weighted-average period of 2.0 years.
Income Taxes
Mattel’s income tax provision and related income tax assets and liabilities are based on actual and expected future income, US and foreign statutory income tax rates, and tax regulations and planning opportunities in the various jurisdictions in which Mattel operates. Management believes that the accounting estimate related to income taxes is a “critical accounting estimate” because significant judgment is required in interpreting tax regulations in the US and in foreign jurisdictions, evaluating Mattel’s worldwide uncertain tax positions, and assessing the likelihood of realizing certain tax benefits. Actual results could differ materially from those judgments, and changes in judgments could materially affect Mattel’s consolidated financial statements.
Certain income and expense items are accounted for differently for financial reporting and income tax purposes. As a result, the tax expense reflected in Mattel’s consolidated statements of operations is different than that reported in Mattel’s tax returns filed with the taxing authorities. Some of these differences are permanent, such as expenses that are not deductible in Mattel’s tax return, and some differences reverse over time, such as depreciation expense. These timing differences create deferred income tax assets and liabilities. Deferred income tax assets generally represent items that can be used as a tax deduction or credit in Mattel’s tax returns in future years for which Mattel has already recorded a tax benefit in its consolidated statement of operations. Mattel records a valuation allowance to reduce its deferred income tax assets if, based on the weight of available evidence, management believes expected future taxable income is not likely to support the use of a deduction or credit in that jurisdiction. Management evaluates the level of Mattel’s valuation allowances at least annually, and more frequently if actual operating results differ significantly from forecasted results.
Mattel records unrecognized tax benefits for US federal, state, local, and foreign tax positions related primarily to transfer pricing, tax credits claimed, tax nexus and apportionment. For each reporting period, management applies a consistent methodology to measure unrecognized tax benefits and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances warrant. Mattel’s measurement of its unrecognized tax benefits is based on management’s assessment of all relevant information, including prior audit experience, the status of current audits, conclusions of tax audits, lapsing of applicable statutes of limitations, identification of new issues, and any administrative guidance or developments. Mattel recognizes unrecognized tax benefits in the first financial reporting period in which information becomes available indicating that such benefits will more-likely-than-not be realized.
The 2009 income tax provision includes net tax benefits of $28.8 million related to reassessments of prior years’ tax exposures based on the status of current audits in various jurisdictions around the world, settlements, and enacted tax law changes. The 2007 income tax provision includes net tax benefits of $42.0 million related to reassessments of prior years’ tax exposures based on the status of audits in various jurisdictions around the world, including settlements, partially offset by enacted tax law changes.
In the normal course of business, Mattel is regularly audited by federal, state, local, and foreign tax authorities. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.
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New Accounting Pronouncements
See Item 8 “Financial Statements and Supplementary Data—Note 1 to the Consolidated Financial Statements—Summary of Significant Accounting Policies.”
Non-GAAP Financial Measure
In this Annual Report on Form 10-K, Mattel includes a non-GAAP financial measure, gross sales, which it uses to analyze its operations and to monitor, assess and identify meaningful trends in its operating and financial performance. Net sales, as reported in the consolidated statements of operations, include the impact of sales adjustments such as trade discounts and other allowances. Gross sales represent sales to customers, excluding the impact of sales adjustments, the 2007 Product Recalls, and the 2008 Product Withdrawal. Consistent with its segment reporting, Mattel presents changes in gross sales as a metric for comparing its aggregate, business unit, brand and geographic results to highlight significant trends in Mattel’s business. Changes in gross sales are discussed because, while Mattel records the detail of such sales adjustments in its financial accounting systems at the time of sale, such sales adjustments are generally not associated with individual products, making net sales less meaningful.
A reconciliation of gross sales to the most directly comparable GAAP financial measure, net sales, is as follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
| Revenues |
||||||||||||
| Domestic: |
||||||||||||
| Mattel Girls & Boys Brands US |
$ | 1,402,224 | $ | 1,437,933 | $ | 1,445,028 | ||||||
| Fisher-Price Brands US |
1,310,886 | 1,418,213 | 1,511,055 | |||||||||
| American Girl Brands |
462,899 | 463,056 | 431,510 | |||||||||
| Total Domestic |
3,176,009 | 3,319,202 | 3,387,593 | |||||||||
| International |
2,758,315 | 3,166,820 | 3,205,341 | |||||||||
| Gross sales |
5,934,324 | 6,486,022 | 6,592,934 | |||||||||
| Sales adjustments |
(503,478 | ) | (568,020 | ) | (622,844 | ) | ||||||
| Net sales |
$ | 5,430,846 | $ | 5,918,002 | $ | 5,970,090 | ||||||
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Foreign Currency Exchange Rate Risk
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Inventory purchase transactions denominated in the Euro, British pound sterling, Canadian dollar, Mexican peso, Hong Kong dollar, and Indonesian rupiah were the primary transactions that caused currency transaction exposure for Mattel during 2009, 2008, and 2007. Mattel seeks to mitigate its exposure to market risk by monitoring its currency transaction exposure for the year and partially hedging such exposure using foreign currency forward exchange contracts primarily to hedge its purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. For those intercompany receivables and payables that are not hedged along with US dollar cash balances held by certain international subsidiaries, the transaction gains or losses are recorded in the consolidated statement of operations in the period in which the exchange rate changes as part of operating income or other non-operating income, net based on the nature of the underlying transaction. Transaction gains or losses on hedged intercompany inventory transactions are recorded in the consolidated statement of operations in the period in which the inventory is sold to customers. In addition, Mattel manages its exposure to currency exchange rate fluctuations through the selection of currencies used for international borrowings. Mattel does not trade in financial instruments for speculative purposes.
Mattel’s financial position is also impacted by currency exchange rate fluctuations on translation of its net investment in subsidiaries with non-US dollar functional currencies. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at fiscal year-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the fiscal year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Mattel’s primary currency translation exposures during 2009 were related to its net investment in entities having functional currencies denominated in the Euro, Mexican peso, Indonesian rupiah, British pound sterling, and Brazilian real.
There are numerous factors impacting the amount by which Mattel’s financial results are affected by foreign currency translation and transaction gains and losses resulting from changes in currency exchange rates, including but not limited to the level of foreign currency forward exchange contracts in place at a given time and the volume of foreign currency denominated transactions in a given period. However, assuming that such factors were held constant, Mattel estimates that a 1 percent change in the US dollar Trade-Weighted Index would impact Mattel’s net sales by approximately 0.5% and its full year earnings per share by approximately $0.01 to $0.02.
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Mattel’s foreign currency forward exchange contracts that were used to hedge firm foreign currency commitments as of December 31, 2009 are shown in the following table. All contracts are against the US dollar and are maintained by reporting units with a US dollar functional currency, with the exception of the Indonesian rupiah contracts, which are maintained by entities with a rupiah functional currency.
| Buy | Sell | |||||||||||||||||
| Contract Amount |
Weighted Average Contract Rate |
Fair Value |
Contract Amount |
Weighted Average Contract Rate |
Fair Value |
|||||||||||||
| (In thousands of US dollars) | ||||||||||||||||||
| Euro* |
$ | 296,827 | 1.43 | $ | 845 | $ | 320,163 | 1.38 | $ | (10,233 | ) | |||||||
| Canadian dollar* |
4,161 | 0.87 | 569 | 37,246 | 0.87 | 662 | ||||||||||||
| British pound sterling* |
— | — | — | 16,779 | 1.61 | (108 | ) | |||||||||||
| Japanese yen |
9,896 | 89.74 | (344 | ) | 19,868 | 89.88 | 680 | |||||||||||
| Australian dollar* |
32,575 | 0.88 | 607 | 24,364 | 1.30 | (3,480 | ) | |||||||||||
| Swiss franc |
18,900 | 1.04 | 164 | — | — | — | ||||||||||||
| Mexican peso |
51,277 | 12.87 | (797 | ) | 1,500 | 14.44 | (132 | ) | ||||||||||
| Indonesian rupiah |
39,040 | 9,883 | 1,850 | 3,020 | 11,882 | (629 | ) | |||||||||||
| New Zealand dollar* |
9,178 | 0.71 | 224 | 1,769 | 1.73 | (416 | ) | |||||||||||
| Czech koruna |
5,597 | 18.35 | (17 | ) | — | — | — | |||||||||||
| Taiwan dollar |
— | — | — | 10,233 | 0.03 | (197 | ) | |||||||||||
| Singapore dollar |
— | — | — | 1,019 | 0.72 | 8 | ||||||||||||
| Hungarian forint |
2,879 | 192.86 | 73 | — | — | — | ||||||||||||
| Polish zloty |
9,997 | 2.93 | 344 | — | — | — | ||||||||||||
| New Turkish lira |
— | — | — | 5,798 | 0.65 | (79 | ) | |||||||||||
| $ | 480,327 | $ | 3,518 | $ | 441,759 | $ | (13,924 | ) | ||||||||||
| * | The weighted average contract rate for these contracts is quoted in US dollar per local currency. |
For the purchase of foreign currencies, fair value reflects the amount, based on dealer quotes, that Mattel would pay at maturity for contracts involving the same currencies and maturity dates, if they had been entered into as of December 31, 2009. For the sale of foreign currencies, fair value reflects the amount, based on dealer quotes, that Mattel would receive at maturity for contracts involving the same currencies and maturity dates, if they had been entered into as of December 31, 2009. The differences between the market forward amounts and the contract amounts are expected to be fully offset by currency transaction gains and losses on the underlying hedged transactions.
In addition to the contracts involving the US dollar detailed in the above table, Mattel also had contracts to sell British pound sterling for the purchase of Euro. As of December 31, 2009, these contracts had a contract amount of $40.8 million and a fair value of $0.5 million.
Had Mattel not entered into hedges to limit the effect of currency exchange rate fluctuations on its results of operations and cash flows, its income before income taxes would have decreased by approximately $13 million in 2009, decreased by approximately $16 million in 2008, and increased by approximately $7 million in 2007.
Venezuelan Operations
Mattel’s pricing decisions in Venezuela are intended to mitigate the risks of government imposed currency controls and significant inflation by aligning Mattel’s prices with its expectations of the local currency cost of acquiring inventory and distributing earnings in US dollars. Mattel applies to the Venezuelan government’s Foreign Exchange Administrative Commission, CADIVI, for the conversion of local currency to US dollars at the official exchange rate. The official exchange rate had been fixed at 2.15 Venezuelan bolivar fuertes to the US
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dollar through December 31, 2009. For US dollar needs exceeding conversions obtained through CADIVI, the parallel exchange market, with rates substantially less favorable than the official exchange rate, may be used to obtain US dollars without approval from CADIVI.
Effective December 31, 2009, Mattel changed the rate it uses to translate its Venezuelan subsidiary’s transactions and balances from the official exchange rate to the parallel exchange rate, which was quoted at 5.97 Venezuelan bolivar fuertes to the US dollar on December 31, 2009. The resulting foreign currency translation adjustment of approximately $15 million increased accumulated other comprehensive loss within stockholders’ equity as of December 31, 2009. Mattel’s considerations for changing the rate included recent indications that the Venezuelan government is not likely to continue to provide substantial currency exchange at the official rate for companies importing discretionary products, such as toys, recent difficulties in obtaining approval for the conversion of local currency to US dollars at the official exchange rate (for imported products and dividends), delays in previously obtained approvals being honored by CADIVI, and Mattel’s 2009 repatriation of dividends from its Venezuelan subsidiary at the parallel exchange rate. During 2009, Mattel’s Venezuelan subsidiary generated approximately $142 million of net sales and approximately $11 million of net income, which was translated at the official exchange rate. Had Mattel reported results of its Venezuelan operations for 2009 using the simple average of historical parallel exchange rates during 2009 of 6.13 Venezuelan bolivar fuertes to the US dollar instead of the official exchange rate, net sales would have been approximately $95 million lower and net income would have been approximately $7 million lower. Assuming that all else is equal, a 1% increase/(decrease) in the average historical parallel exchange rate would have further decreased/(increased) Mattel’s 2009 net sales and net income by approximately $500 thousand and $100 thousand, respectively.
Effective January 1, 2010, and as required by US GAAP, Mattel will account for Venezuela as a highly inflationary economy as the three-year cumulative inflation rate for Venezuela using the blended Consumer Price Index (which is associated with the city of Caracas) and the National Consumer Price Index (developed commencing in 2008 and covering the entire country of Venezuela) exceeded 100%. Accordingly, Mattel’s Venezuelan subsidiary will use the US dollar as its functional currency effective January 1, 2010. As of December 31, 2009, Mattel’s Venezuelan subsidiary had approximately $20 million of net monetary assets denominated in bolivar fuertes. As a result of the change to a US dollar functional currency, monetary assets and liabilities denominated in bolivar fuertes will generate income or expense in 2010 for changes in value associated with parallel exchange rate fluctuations against the US dollar. For every $10 million of net monetary assets denominated in bolivar fuertes, a 1% increase/(decrease) in the parallel rate would decrease/(increase) Mattel’s pre-tax income by approximately $100 thousand. While Mattel’s level of net monetary assets denominated in bolivar fuertes will vary from one period to another based on operating cycles and seasonality, Mattel does not expect the remeasurement adjustments to be material to Mattel’s consolidated financial statements.
On January 11, 2010, the Venezuelan government devalued the Venezuelan bolivar fuerte and changed to a two-tier exchange structure. The official exchange rate moved from 2.15 bolivar fuerte per US dollar to 2.60 for essential goods and 4.30 for non-essential goods and services, with Mattel’s products falling into the non-essential category. Due to the limited approvals obtained in 2009 for conversion of local currency to US dollars at the official exchange rate, this devaluation did not have a material impact on Mattel’s consolidated financial statements during 2009, and is not expected to materially impact Mattel’s 2010 consolidated financial statements. For any US dollars that Mattel obtains at the official rate, the benefits associated with the favorable exchange rate will be reflected within cost of sales.
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| Item 8. | Financial Statements and Supplementary Data. |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Mattel’s management, including Robert A. Eckert, its principal executive officer, and Kevin M. Farr, its principal financial officer, evaluated the effectiveness of Mattel’s internal control over financial reporting using the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that Mattel’s internal control over financial reporting was effective as of December 31, 2009. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Mattel, Inc.
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Mattel, Inc. and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 8. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 24, 2010
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CONSOLIDATED BALANCE SHEETS
| December 31, 2009 |
December 31, 2008 |
|||||||
| (In thousands, except share data) |
||||||||
| ASSETS |
||||||||
| Current Assets |
||||||||
| Cash and equivalents |
$ | 1,116,997 | $ | 617,694 | ||||
| Accounts receivable, less allowance of $24.5 million and $25.9 million in 2009 and 2008, respectively |
749,335 | 873,542 | ||||||
| Inventories |
355,663 | 485,925 | ||||||
| Prepaid expenses and other current assets |
332,624 | 409,689 | ||||||
| Total current assets |
2,554,619 | 2,386,850 | ||||||
| Property, plant, and equipment, net |
504,808 | 536,162 | ||||||
| Goodwill |
828,468 | 815,803 | ||||||
| Other noncurrent assets |
892,660 | 936,224 | ||||||
| Total Assets |
$ | 4,780,555 | $ | 4,675,039 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current Liabilities |
||||||||
| Short-term borrowings |
$ | 1,950 | $ | — | ||||
| Current portion of long-term debt |
50,000 | 150,000 | ||||||
| Accounts payable |
350,675 | 421,736 | ||||||
| Accrued liabilities |
617,881 | 649,383 | ||||||
| Income taxes payable |
40,368 | 38,855 | ||||||
| Total current liabilities |
1,060,874 | 1,259,974 | ||||||
| Noncurrent Liabilities |
||||||||
| Long-term debt |
700,000 | 750,000 | ||||||
| Other noncurrent liabilities |
488,692 | 547,930 | ||||||
| Total noncurrent liabilities |
1,188,692 | 1,297,930 | ||||||
| Commitments and Contingencies (See Note 14) |
||||||||
| Stockholders’ Equity |
||||||||
| Common stock $1.00 par value, 1.0 billion shares authorized; 441.4 million shares issued |
441,369 | 441,369 | ||||||
| Additional paid-in capital |
1,684,694 | 1,642,092 | ||||||
| Treasury stock at cost; 79.5 million shares and 82.9 million shares in 2009 and 2008, respectively |
(1,555,046 | ) | (1,621,264 | ) | ||||
| Retained earnings |
2,339,506 | 2,085,573 | ||||||
| Accumulated other comprehensive loss |
(379,534 | ) | (430,635 | ) | ||||
| Total stockholders’ equity |
2,530,989 | 2,117,135 | ||||||
| Total Liabilities and Stockholders’ Equity |
$ | 4,780,555 | $ | 4,675,039 | ||||
The accompanying notes are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands, except per share amounts) | ||||||||||||
| Net Sales |
$ | 5,430,846 | $ | 5,918,002 | $ | 5,970,090 | ||||||
| Cost of sales |
2,716,149 | 3,233,596 | 3,192,790 | |||||||||
| Gross Profit |
2,714,697 | 2,684,406 | 2,777,300 | |||||||||
| Advertising and promotion expenses |
609,753 | 719,159 | 708,768 | |||||||||
| Other selling and administrative expenses |
1,373,776 | 1,423,455 | 1,338,454 | |||||||||
| Operating Income |
731,168 | 541,792 | 730,078 | |||||||||
| Interest expense |
71,843 | 81,944 | 70,974 | |||||||||
| Interest (income) |
(8,083 | ) | (25,043 | ) | (33,305 | ) | ||||||
| Other non-operating expense (income), net |
7,361 | (3,073 | ) | (10,989 | ) | |||||||
| Income Before Income Taxes |
660,047 | 487,964 | 703,398 | |||||||||
| Provision for income taxes |
131,343 | 108,328 | 103,405 | |||||||||
| Net Income |
$ | 528,704 | $ | 379,636 | $ | 599,993 | ||||||
| Net Income Per Common Share—Basic |
$ | 1.45 | $ | 1.04 | $ | 1.55 | ||||||
| Weighted average number of common shares |
360,085 | 360,757 | 384,450 | |||||||||
| Net Income Per Common Share—Diluted |
$ | 1.45 | $ | 1.04 | $ | 1.53 | ||||||
| Weighted average number of common and potential common shares |
361,510 | 362,211 | 388,955 | |||||||||
| Dividends Declared Per Common Share |
$ | 0.75 | $ | 0.75 | $ | 0.75 | ||||||
The accompanying notes are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
| Cash Flows From Operating Activities: |
||||||||||||
| Net income |
$ | 528,704 | $ | 379,636 | $ | 599,993 | ||||||
| Adjustments to reconcile net income to net cash flows from operating activities: |
||||||||||||
| Net loss on sale of other property, plant, and equipment |
1,491 | 6,831 | 2,790 | |||||||||
| Depreciation |
152,065 | 160,048 | 160,790 | |||||||||
| Amortization |
17,765 | 12,047 | 11,290 | |||||||||
| Asset impairments |
11,146 | 4,000 | — | |||||||||
| Deferred income taxes |
(21,971 | ) | (13,535 | ) | 23,034 | |||||||
| Tax benefits from share-based payment arrangements |
(36,726 | ) | 2,303 | (5,706 | ) | |||||||
| Share-based compensation |
49,962 | 35,757 | 22,163 | |||||||||
| Increase (decrease) from changes in assets and liabilities: |
||||||||||||
| Accounts receivable, net |
154,909 | (20,159 | ) | 15,510 | ||||||||
| Inventories |
137,072 | (96,645 | ) | (17,218 | ) | |||||||
| Prepaid expenses and other current assets |
(5,350 | ) | (24,064 | ) | 41,859 | |||||||
| Accounts payable, accrued liabilities, and income taxes payable |
(10,472 | ) | (10,341 | ) | (306,235 | ) | ||||||
| Other, net |
(33,554 | ) | 460 | 12,262 | ||||||||
| Net cash flows from operating activities |
945,041 | 436,338 | 560,532 | |||||||||
| Cash Flows From Investing Activities: |
||||||||||||
| Purchases of tools, dies, and molds |
(76,994 | ) | (84,012 | ) | (68,275 | ) | ||||||
| Purchases of other property, plant, and equipment |
(43,493 | ) | (114,796 | ) | (78,358 | ) | ||||||
| Payments for businesses acquired |
(3,299 | ) | (58,396 | ) | (104,484 | ) | ||||||
| Increase in investments |
— | (85,300 | ) | (35,000 | ) | |||||||
| Proceeds from sale of investments |
73,132 | — | — | |||||||||
| Proceeds from sale of other property, plant, and equipment |
1,351 | 7,199 | 827 | |||||||||
| Proceeds from foreign currency forward exchange contracts |
15,774 | 23,633 | — | |||||||||
| Net cash flows used for investing activities |
(33,529 | ) | (311,672 | ) | (285,290 | ) | ||||||
| Cash Flows From Financing Activities: |
||||||||||||
| Payments of short-term borrowings |
(451,815 | ) | (976,266 | ) | (43,665 | ) | ||||||
| Proceeds from short-term borrowings |
453,090 | 633,410 | 389,926 | |||||||||
| Payments of long-term borrowings |
(150,000 | ) | (50,000 | ) | (100,000 | ) | ||||||
| Proceeds from long-term borrowings |
— | 347,183 | — | |||||||||
| Payment of credit facility renewal costs |
(11,452 | ) | — | — | ||||||||
| Share repurchases |
— | (90,570 | ) | (806,349 | ) | |||||||
| Payment of dividends on common stock |
(271,353 | ) | (268,854 | ) | (272,343 | ) | ||||||
| Proceeds from exercise of stock options |
30,896 | 18,303 | 222,561 | |||||||||
| Tax benefits from share-based payment arrangements |
36,726 | (2,303 | ) | 5,706 | ||||||||
| Other, net |
(12,182 | ) | (6,598 | ) | 16,399 | |||||||
| Net cash flows used for financing activities |
(376,090 | ) | (395,695 | ) | (587,765 | ) | ||||||
| Effect of Currency Exchange Rate Changes on Cash |
(36,119 | ) | (12,425 | ) | 8,119 | |||||||
| Increase (Decrease) in Cash and Equivalents |
499,303 | (283,454 | ) | (304,404 | ) | |||||||
| Cash and Equivalents at Beginning of Year |
617,694 | 901,148 | 1,205,552 | |||||||||
| Cash and Equivalents at End of Year |
$ | 1,116,997 | $ | 617,694 | $ | 901,148 | ||||||
| Supplemental Cash Flow Information: |
||||||||||||
| Cash paid during the year for: |
||||||||||||
| Income taxes, gross |
$ | 131,333 | $ | 118,347 | $ | 173,617 | ||||||
| Interest |
69,503 | 77,466 | 70,195 | |||||||||
The accompanying notes are an integral part of these statements.
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Common Stock |
Additional Paid-In Capital |
Treasury Stock |
Retained Earnings |
Accumulated Other Comprehensive (Loss) Income |
Total Stockholders’ Equity |
||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Balance, December 31, 2006 |
$ | 441,369 | $ | 1,613,307 | $ | (996,981 | ) | $ | 1,652,140 | $ | (276,861 | ) | $ | 2,432,974 | |||||||||
| Comprehensive income: |
|||||||||||||||||||||||
| Net income |
599,993 | 599,993 | |||||||||||||||||||||
| Change in net unrealized (loss) on derivative instruments |
(13,918 | ) | (13,918 | ) | |||||||||||||||||||
| Defined benefit pension plans, net prior service cost, and net actuarial loss |
28,316 | 28,316 | |||||||||||||||||||||
| Currency translation adjustments |
86,653 | 86,653 | |||||||||||||||||||||
| Comprehensive income |
599,993 | 101,051 | 701,044 | ||||||||||||||||||||
| Purchase of treasury stock |
(806,349 | ) | (806,349 | ) | |||||||||||||||||||
| Issuance of treasury stock for stock option exercises |
(5,395 | ) | 225,467 | 220,072 | |||||||||||||||||||
| Other issuance of treasury stock |
25 | 40 | 65 | ||||||||||||||||||||
| Restricted stock units |
(275 | ) | 266 | (9 | ) | ||||||||||||||||||
| Deferred compensation |
6,046 | 6,046 | |||||||||||||||||||||
| Share-based compensation |
21,870 | 21,870 | |||||||||||||||||||||
| Tax benefits from share-based payment arrangements |
5,706 | 5,706 | |||||||||||||||||||||
| Dividend equivalents for restricted stock units |
(2,334 | ) | (2,334 | ) | |||||||||||||||||||
| Dividends |
(272,343 | ) | (272,343 | ) | |||||||||||||||||||
| Balance, December 31, 2007 |
441,369 | 1,635,238 | (1,571,511 | ) | 1,977,456 | (175,810 | ) | 2,306,742 | |||||||||||||||
| Comprehensive income: |
|||||||||||||||||||||||
| Net income |
379,636 | 379,636 | |||||||||||||||||||||
| Change in net unrealized gain on derivative instruments |
25,388 | 25,388 | |||||||||||||||||||||
| Defined benefit pension plans, net prior service cost, and net actuarial loss |
(87,636 | ) | (87,636 | ) | |||||||||||||||||||
| Currency translation adjustments |
(192,577 | ) | (192,577 | ) | |||||||||||||||||||
| Comprehensive income |
379,636 | (254,825 | ) | 124,811 | |||||||||||||||||||
| Purchase of treasury stock |
(90,570 | ) | (90,570 | ) | |||||||||||||||||||
| Issuance of treasury stock for stock option exercises |
(10,334 | ) | 28,453 | 18,119 | |||||||||||||||||||
| Other issuance of treasury stock |
(1 | ) | 151 | 150 | |||||||||||||||||||
| Restricted stock units |
(16,147 | ) | 10,799 | (5,348 | ) | ||||||||||||||||||
| Deferred compensation |
1,414 | 1,414 | |||||||||||||||||||||
| Share-based compensation |
35,639 | 35,639 | |||||||||||||||||||||
| Tax benefits from share-based payment arrangements |
(2,303 | ) | (2,303 | ) | |||||||||||||||||||
| Dividend equivalents for restricted stock units |
(2,665 | ) | (2,665 | ) | |||||||||||||||||||
| Dividends |
(268,854 | ) | (268,854 | ) | |||||||||||||||||||
| Balance, December 31, 2008 |
441,369 | 1,642,092 | (1,621,264 | ) | 2,085,573 | (430,635 | ) | 2,117,135 | |||||||||||||||
| Comprehensive income: |
|||||||||||||||||||||||
| Net income |
528,704 | 528,704 | |||||||||||||||||||||
| Change in net unrealized (loss) on derivative instruments |
(19,805 | ) | (19,805 | ) | |||||||||||||||||||
| Defined benefit pension plans, net prior service cost, and net actuarial loss |
18,696 | 18,696 | |||||||||||||||||||||
| Currency translation adjustments |
52,210 | 52,210 | |||||||||||||||||||||
| Comprehensive income |
528,704 | 51,101 | 579,805 | ||||||||||||||||||||
| Issuance of treasury stock for stock option exercises |
(17,219 | ) | 48,115 | 30,896 | |||||||||||||||||||
| Other issuance of treasury stock |
(209 | ) | 209 | 0 | |||||||||||||||||||
| Restricted stock units |
(26,658 | ) | 18,566 | (8,092 | ) | ||||||||||||||||||
| Deferred compensation |
(672 | ) | (323 | ) | (995 | ) | |||||||||||||||||
| Share-based compensation |
49,962 | 49,962 | |||||||||||||||||||||
| Tax benefits from share-based payment arrangements |
36,726 | 36,726 | |||||||||||||||||||||
| Dividend equivalents for restricted stock units |
(3,095 | ) | (3,095 | ) | |||||||||||||||||||
| Dividends |
(271,353 | ) | (271,353 | ) | |||||||||||||||||||
| Balance, December 31, 2009 |
$ | 441,369 | $ | 1,684,694 | $ | (1,555,046 | ) | $ | 2,339,506 | $ | (379,534 | ) | $ | 2,530,989 | |||||||||
The accompanying notes are an integral part of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Preparation
The consolidated financial statements include the accounts of Mattel, Inc. and its subsidiaries (“Mattel”). All majority-owned subsidiaries are consolidated and included in Mattel’s consolidated financial statements. Mattel does not have any minority stock ownership interests in which it has a controlling financial interest that would require consolidation. All significant intercompany accounts and transactions have been eliminated in consolidation. In preparing these financial statements, Mattel evaluated the events and transactions that occurred between December 31, 2009 and February 24, 2010, the date these financial statements were issued.
On July 1, 2009, Mattel adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 105-10 (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162). ASC 105-10 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied in preparation of financial statements in conformity with generally accepted accounting principles in the United States of America. The adoption of this standard had no impact on Mattel’s consolidated financial statements.
Use of Estimates
Preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could ultimately differ from those estimates.
Cash and Equivalents
Cash and equivalents include short-term investments, which are highly liquid investments with maturities of three months or less when purchased. Such investments are stated at cost, which approximates market value.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is granted to customers on an unsecured basis. Credit limits and payment terms are established based on extensive evaluations made on an ongoing basis throughout the fiscal year of the financial performance, cash generation, financing availability, and liquidity status of each customer. Customers are reviewed at least annually, with more frequent reviews performed as necessary, based on the customer’s financial condition and the level of credit being extended. For customers who are experiencing financial difficulties, management performs additional financial analyses before shipping to those customers on credit. Mattel uses a variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit, factoring or purchasing various forms of credit insurance with unrelated third parties, or requiring cash in advance of shipment.
Mattel records an allowance for doubtful accounts based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging, and customer disputes.
Inventories
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.
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Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives of 10 to 40 years for buildings, 3 to 10 years for machinery and equipment, and 10 to 20 years, not to exceed the lease term, for leasehold improvements. Tools, dies, and molds are amortized using the straight-line method over 3 years. Estimated useful lives are periodically reviewed and, where appropriate, changes are made prospectively. The carrying value of property, plant, and equipment is reviewed when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Any potential impairment identified is assessed by evaluating the operating performance and future undiscounted cash flows of the underlying assets. When property is sold or retired, the cost of the property and the related accumulated depreciation are removed from the consolidated balance sheet and any resulting gain or loss is included in the results of operations.
Goodwill and Nonamortizable Intangible Assets
Goodwill is allocated to various reporting units, which are either at the operating segment level or one reporting level below the operating segment, for purposes of evaluating whether goodwill is impaired. Mattel’s reporting units are: Mattel Girls Brands US, Mattel Boys Brands US, Fisher-Price Brands US, American Girl Brands, and International. Mattel tests goodwill for impairment annually in the third quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, which is based on the fair value of the cash flows that the reporting units are expected to generate in the future.
Mattel also tests its nonamortizable intangible assets, including trademarks and trade names, for impairment by comparing the estimated fair values of the nonamortizable intangible assets with the carrying values. Mattel tests nonamortizable intangible assets annually in the third quarter, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The fair value of trademark and trade name intangibles is measured using a multi-period royalty savings method, which reflects the savings realized by owning the trademarks and trade names, and thus not having to pay a royalty fee to a third party.
Foreign Currency Translation Exposure
Mattel’s reporting currency is the US dollar. The translation of its net investment in subsidiaries with non-US dollar functional currencies subjects Mattel to currency exchange rate fluctuations in its results of operations and financial position. Assets and liabilities of subsidiaries with non-US dollar functional currencies are translated into US dollars at year-end exchange rates. Income, expense, and cash flow items are translated at weighted average exchange rates prevailing during the year. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Mattel’s primary currency translation exposures in 2009 were related to its net investment in entities having functional currencies denominated in the Euro, Mexican peso, Indonesian rupiah, British pound sterling, and Brazilian real.
Foreign Currency Transaction Exposure
Currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Mattel’s currency transaction exposures include gains and losses realized on unhedged inventory purchases and unhedged receivables and payables balances that are denominated in a currency other than the applicable functional currency. Gains and losses on unhedged inventory purchases and other transactions associated with operating activities are recorded in the components of operating income in the consolidated statement of operations. Gains and losses on unhedged intercompany loans and advances are recorded as a component of other non-operating expense (income), net in the consolidated statements of operations in the period in which the currency exchange rate changes. Inventory purchase transactions denominated in the Euro, British pound sterling, Canadian dollar, Mexican peso, Hong Kong dollar, and Indonesian rupiah were the primary transactions that cause foreign currency transaction exposure for Mattel in 2009.
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Venezuelan Operations
Mattel applies to the Venezuelan government’s Foreign Exchange Administrative Commission, CADIVI, for the conversion of local currency to US dollars at the official exchange rate. The official exchange rate had been fixed at 2.15 Venezuelan bolivar fuertes to the US dollar through December 31, 2009. For US dollar needs exceeding conversions obtained through CADIVI, the parallel exchange market, with rates substantially less favorable than the official exchange rate, may be used to obtain US dollars without approval from CADIVI.
Effective December 31, 2009, Mattel changed the rate it uses to translate its Venezuelan subsidiary’s transactions and balances from the official exchange rate to the parallel exchange rate, which was quoted at 5.97 Venezuelan bolivar fuertes to the US dollar on December 31, 2009. The resulting foreign currency translation adjustment of approximately $15 million increased accumulated other comprehensive loss within stockholders’ equity as of December 31, 2009. Mattel’s considerations for changing the rate included recent indicators that the Venezuelan government is not likely to continue to provide substantial currency exchange at the official rate for companies importing discretionary products, such as toys, recent difficulties in obtaining approval for the conversion of local currency to US dollars at the official exchange rate (for imported products and dividends), delays in previously obtained approvals being honored by CADIVI, and Mattel’s 2009 repatriation of dividends generated by its Venezuelan subsidiary at the parallel exchange rate.
Effective January 1, 2010, and as required by US GAAP, Mattel will account for Venezuela as a highly inflationary economy as the three-year cumulative inflation rate for Venezuela using the blended Consumer Price Index (which is associated with the city of Caracas) and the National Consumer Price Index (developed commencing in 2008 and covering the entire country of Venezuela) exceeded 100%. Accordingly, Mattel’s Venezuelan subsidiary will use the US dollar as its functional currency effective January 1, 2010.
On January 11, 2010, the Venezuelan government devalued the Venezuelan bolivar fuerte and changed to a two-tier exchange structure. The official exchange rate moved from 2.15 bolivar fuerte per US dollar to 2.60 for essential goods and 4.30 for non-essential goods and services, with Mattel’s products falling into the non-essential category.
Derivative Instruments
Mattel uses foreign currency forward exchange contracts as cash flow hedges primarily to hedge its purchases and sales of inventory denominated in foreign currencies. At the inception of the contracts, Mattel designates these derivatives as cash flow hedges and documents the relationship of the hedge to the underlying transaction. Hedge effectiveness is assessed at inception and throughout the life of the hedge to ensure the hedge qualifies for hedge accounting. Changes in fair value associated with hedge ineffectiveness, if any, are recorded in the results of operations. Changes in fair value of the cash flow hedge derivatives are deferred and recorded as part of accumulated other comprehensive income in stockholders’ equity until the underlying transaction affects earnings. In the event that an anticipated transaction is no longer likely to occur, Mattel recognizes the change in fair value of the derivative in its results of operations in the period the determination is made.
Additionally, Mattel uses foreign currency forward exchange contracts to hedge intercompany loans and advances denominated in foreign currencies. Due to the short-term nature of the contracts involved, Mattel does not use hedge accounting for these contracts, and as such, changes in fair value are recorded in the period of change in the consolidated statements of operations.
Revenue Recognition and Sales Adjustments
Revenue is recognized upon shipment or upon receipt of products by the customer, depending on terms, provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and collectibility is reasonably assured. Management assesses the business environment, the customer’s financial
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condition, historical collection experience, accounts receivable aging, and customer disputes to determine whether collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sale, Mattel does not recognize revenue until collection occurs. Mattel routinely enters into arrangements with its customers to provide sales incentives, support customer promotions, and provide allowances for returns and defective merchandise. Such programs are based primarily on customer purchases, customer performance of specified promotional activities, and other specified factors such as sales to consumers. The costs of these programs are recorded as sales adjustments that reduce gross revenue in the period the related revenue is recognized.
Advertising and Promotion Costs
Costs of media advertising are expensed the first time the advertising takes place, except for direct-response advertising, which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of catalog production and mailing costs that are generally amortized within three months from the date the catalogs are mailed.
Product Recalls and Withdrawals
Mattel establishes a reserve for product recalls and withdrawals on a product-specific basis when circumstances giving rise to the recall or withdrawal become known. Facts and circumstances related to the recall or withdrawal, including where the product affected by the recall or withdrawal is located (e.g., with consumers, in customers’ inventory, or in Mattel’s inventory), cost estimates for shipping and handling for returns, whether the product is repairable, cost estimates for communicating the recall or withdrawal to consumers and customers, and cost estimates for parts and labor if the recalled or withdrawn product is deemed to be repairable, are considered when establishing a product recall or withdrawal reserve. These factors are updated and reevaluated each period and the related reserves are adjusted when these factors indicate that the recall or withdrawal reserve is either not sufficient to cover or exceeds the estimated product recall or withdrawal expenses (see “Note 4 to the Consolidated Financial Statements—Product Recalls and Withdrawals”).
Design and Development Costs
Product design and development costs are charged to the results of operations as incurred.
Employee Benefit Plans
Mattel and certain of its subsidiaries have retirement and other postretirement benefit plans covering substantially all employees of these companies. Actuarial valuations are used in determining amounts recognized in the financial statements for retirement and other postretirement benefit plans (see “Note 7 to the Consolidated Financial Statements—Employee Benefit Plans”).
Share-Based Payments
Mattel recognizes the cost of employee share-based payment awards on a straight-line attribution basis over the requisite employee service period, net of estimated forfeitures. In determining when additional tax benefits associated with share-based payment exercises are recognized, Mattel follows the ordering of deductions under the tax law, which allows deductions for share-based payment exercises to be utilized before previously existing net operating loss carryforwards. In computing dilutive shares under the treasury stock method, Mattel does not reduce the tax benefit amount within the calculation for the amount of deferred tax assets that would have been recognized had Mattel previously expensed all share-based payment awards.
Determining the fair value of share-based awards at the measurement date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility, and
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the expected dividends. Mattel estimates the fair value of options granted using the Black-Scholes valuation model. The expected life of the options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience. Expected stock price volatility is based on the historical volatility of Mattel’s stock for a period approximating the expected life, the expected dividend yield is based on Mattel’s most recent actual annual dividend payout, and the risk-free interest rate is based on the implied yield available on US Treasury zero-coupon issues approximating the expected life. Judgment is also required in estimating the amount of share-based awards that will be forfeited prior to vesting.
Assumptions used in determining the fair value of options granted, and the resulting fair value, were as follows:
| 2009 | 2008 | 2007 | ||||||||||
| Expected life (in years) |
4.9 | 4.8 | 4.7 | |||||||||
| Risk-free interest rate |
2.5 | % | 3.2 | % | 4.6 | % | ||||||
| Volatility factor |
33.6 | % | 25.6 | % | 22.8 | % | ||||||
| Dividend yield |
4.3 | % | 3.7 | % | 2.8 | % | ||||||
| Weighted average fair value per granted option |
$ | 3.71 | $ | 3.67 | $ | 4.76 | ||||||
Mattel recognized compensation expense of $13.0 million, $9.5 million, and $7.4 million for stock options during 2009, 2008, and 2007, respectively, which is included within other selling and administrative expenses. Compensation expense recognized related to employee service based restricted stock units (“RSUs”) was $37.0 million, $26.2 million, and $14.8 million in 2009, 2008, and 2007, respectively, and is also included within other selling and administrative expenses. Additionally, the 2009 and 2008 compensation expense includes $5.3 million and $1.5 million, respectively, of compensation expense associated with performance RSUs granted under Mattel’s January 1, 2008—December 31, 2010 Long-Term Incentive Program, as more fully described in “Note 7 to the Consolidated Financial Statements—Employee Benefit Plans.” As of December 31, 2009, total unrecognized compensation expense related to unvested share-based payments totaled $69.8 million and is expected to be recognized over a weighted-average period of 2.0 years.
Income Taxes
Certain income and expense items are accounted for differently for financial reporting and income tax purposes. Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, applying enacted statutory income tax rates in effect for the year in which the differences are expected to reverse.
In the normal course of business, Mattel is regularly audited by federal, state, local, and foreign tax authorities. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.
New Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. SFAS No. 166 amends SFAS No. 140, Accounting for the Transfers and Servicing of Financial Assets and the Extinguishments of Liabilities, which seeks to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about transfers of financial assets; the effects of the transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009. Mattel does not expect the adoption of SFAS No. 166 to have a material impact on its consolidated financial statements.
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In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 amends FASB Interpretation No. (“FIN”) 46, Consolidation of Variable Interest Entities (revised December 2003)—an interpretation of ARB No. 51, which requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (i) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and (ii) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS No. 167 is effective for interim and annual reporting periods beginning after November 15, 2009. Mattel does not expect the adoption of SFAS No. 167 to have a material impact on its consolidated financial statements.
Note 2—Goodwill and Other Intangibles
The change in the carrying amount of goodwill by reporting unit for 2009 and 2008 is shown below. Brand-specific goodwill held by foreign subsidiaries is allocated to the US reporting units selling those brands, thereby causing foreign currency translation impact to the US reporting units.
| Mattel Girls Brands US Division |
Mattel Boys Brands US Division |
Fisher- Price Brands US |
American Girl Brands |
International | Total | ||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Balance at December 31, 2007 |
$ | 38,751 | $ | 124,469 | $ | 217,383 | $ | 207,571 | $ | 257,475 | $ | 845,649 | |||||||||||
| Additions/Adjustments |
— | 7,165 | — | — | 8,105 | 15,270 | |||||||||||||||||
| Impact of currency exchange rate changes |
(9,527 | ) | (751 | ) | (1,863 | ) | — | (32,975 | ) | (45,116 | ) | ||||||||||||
| Balance at December 31, 2008 |
29,224 | 130,883 | 215,520 | 207,571 | 232,605 | 815,803 | |||||||||||||||||
| Impact of currency exchange rate changes |
2,858 | (146 | ) | 560 | — | 9,393 | 12,665 | ||||||||||||||||
| Balance at December 31, 2009 |
$ | 32,082 | $ | 130,737 | $ | 216,080 | $ | 207,571 | $ | 241,998 | $ | 828,468 | |||||||||||
In 2009, Mattel performed the annually required impairment tests and determined that its goodwill was not impaired. Mattel has not recorded any goodwill impairment subsequent to its initial adoption of ASC 350-20 (formerly SFAS No. 142, Goodwill and Other Intangible Assets), which was on January 1, 2002.
Identifiable intangibles include the following:
| December 31, | ||||||
| 2009 | 2008 | |||||
| (In thousands) | ||||||
| Identifiable intangibles (net of amortization of $69.5 million and $61.8 million in 2009 and 2008, respectively) |
$ | 93,546 | $ | 107,447 | ||
| Nonamortizable identifiable intangibles |
122,223 | 128,382 | ||||
| $ | 215,769 | $ | 235,829 | |||
In 2009, Mattel performed the annual impairment test and determined that certain of its nonamortizable intangible assets was impaired. Mattel also tested its amortizable intangible assets for impairment during 2009. As a result of these impairment tests, Mattel recorded impairment charges of approximately $10 million, which are reflected within other selling and administrative expenses. Nonamortizable and amortizable intangible assets were determined to not be impaired in 2008 and 2007.
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In October 2008, Mattel acquired Sekkoia SAS, which owns the Blokus® trademark and trade name rights, for $35.1 million, including acquisition costs. In connection with the acquisition, Mattel recorded goodwill and amortizable identifiable intangible assets totaling $18.1 million and $22.9 million, respectively.
In August 2008, Mattel acquired the intellectual property rights related to Whac-a-Mole® for $23.5 million, including acquisition costs, which is included within amortizable identifiable intangibles.
Note 3—Income Taxes
Consolidated pre-tax income consists of the following:
| For the Year | ||||||||||
| 2009 | 2008 | 2007 | ||||||||
| (In thousands) | ||||||||||
| US operations |
$ | 107,593 | $ | (37,808 | ) | $ | 14,745 | |||
| Foreign operations |
552,454 | 525,772 | 688,653 | |||||||
| $ | 660,047 | $ | 487,964 | $ | 703,398 | |||||
The provision (benefit) for current and deferred income taxes consists of the following:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
| Current |
||||||||||||
| Federal |
$ | 9,251 | $ | 2,230 | $ | (36,626 | ) | |||||
| State |
9,975 | (1,790 | ) | (1,143 | ) | |||||||
| Foreign |
134,088 | 121,423 | 118,140 | |||||||||
| 153,314 | 121,863 | 80,371 | ||||||||||
| Deferred |
||||||||||||
| Federal |
564 | (15,043 | ) | 3,055 | ||||||||
| State |
(8,828 | ) | 151 | 11,039 | ||||||||
| Foreign |
(13,707 | ) | 1,357 | 8,940 | ||||||||
| (21,971 | ) | (13,535 | ) | 23,034 | ||||||||
| Provision for income taxes |
$ | 131,343 | $ | 108,328 | $ | 103,405 | ||||||
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Deferred income taxes are provided principally for tax credit carryforwards, research and development expenses, net operating loss carryforwards, employee compensation-related expenses and certain other reserves that are recognized in different years for financial statement and income tax reporting purposes. Mattel’s deferred income tax assets (liabilities) are composed of the following:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
| Tax credit carryforwards |
$ | 209,173 | $ | 258,671 | ||||
| Research and development expenses |
187,010 | 190,615 | ||||||
| Loss carryforwards |
56,228 | 92,153 | ||||||
| Allowances and reserves |
122,219 | 84,777 | ||||||
| Deferred compensation |
111,237 | 73,522 | ||||||
| Postretirement benefits |
66,220 | 81,092 | ||||||
| Other |
37,122 | 24,270 | ||||||
| Gross deferred income tax assets |
789,209 | 805,100 | ||||||
| Intangible assets |
(100,839 | ) | (83,245 | ) | ||||
| Other |
(9,255 | ) | (16,360 | ) | ||||
| Gross deferred income tax liabilities |
(110,094 | ) | (99,605 | ) | ||||
| Deferred income tax asset valuation allowances |
(112,048 | ) | (150,963 | ) | ||||
| Net deferred income tax assets |
$ | 567,067 | $ | 554,532 | ||||
Net deferred income tax assets are reported in the consolidated balance sheets as follows:
| December 31, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
| Prepaid expenses and other current assets |
$ | 131,402 | $ | 78,531 | ||||
| Other noncurrent assets |
481,240 | 524,451 | ||||||
| Accrued liabilities |
(775 | ) | (850 | ) | ||||
| Other noncurrent liabilities |
(44,800 | ) | (47,600 | ) | ||||
| $ | 567,067 | $ | 554,532 | |||||
As of December 31, 2009, Mattel has federal and foreign loss carryforwards totaling $143.8 million and tax credit carryforwards of $209.2 million, which does not include carryforwards that do not meet the threshold for recognition in the financial statements. Utilization of these loss and tax credit carryforwards is subject to annual limitations. Mattel’s loss and tax credit carryforwards expire in the following periods:
| Loss Carryforwards |
Tax Credit Carryforwards | |||||
| (In thousands) | ||||||
| 2010 – 2014 |
$ | 55,885 | $ | 69,471 | ||
| Thereafter |
6,606 | 130,258 | ||||
| No expiration date |
81,276 | 9,443 | ||||
| Total |
$ | 143,767 | $ | 209,172 | ||
Management considered all available evidence under existing tax law and anticipated expiration of tax statutes and determined that a valuation allowance of $112.0 million was required as of December 31, 2009 for those loss and tax credit carryforwards that are not expected to provide future tax benefits. Changes in the valuation allowance for 2009 include increases in the valuation allowance for 2009 foreign losses without
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benefits, and decreases in the valuation allowance for utilization and expiration of tax loss and tax credit carryforwards. Management believes it is more-likely-than-not that Mattel will generate sufficient taxable income in the appropriate future periods to realize the benefit of the remaining net deferred income tax assets of $567.1 million. Changes in enacted tax laws could negatively impact Mattel’s ability to fully realize all of the benefits of its remaining net deferred tax assets.
Differences between the provision for income taxes at the US federal statutory income tax rate and the provision in the consolidated statements of operations are as follows:
| For the Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (In thousands) | ||||||||||||
| Provision at US federal statutory rates |
$ | 231,016 | $ | 170,787 | $ | 246,189 | ||||||
| (Decrease) increase resulting from: |
||||||||||||
| Foreign earnings taxed at different rates, including withholding taxes |
(82,029 | ) | (70,399 | ) | (122,916 | ) | ||||||
| Foreign losses without income tax benefit |
6,148 | 10,985 | 15,581 | |||||||||
| State and local taxes, net of US federal benefit |
5,486 | (1,065 | ) | 3,263 | ||||||||
| Adjustments to previously accrued taxes |
(28,840 | ) | — | (42,008 | ) | |||||||
| Other |
(438 | ) | (1,980 | ) | 3,296 | |||||||
| Provision for income taxes |
$ | 131,343 | $ | 108,328 | $ | 103,405 | ||||||
In assessing whether uncertain tax positions should be recognized in its financial statements, Mattel first determines whether it is more-likely-than-not (a greater than 50 percent likelihood) that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, Mattel presumes that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. For tax positions that meet the more-likely-than-not recognition threshold, Mattel measures the amount of benefit recognized in the financial statements at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Mattel recognizes unrecognized tax benefits in the first financial reporting period in which information becomes available indicating that such benefits will more-likely-than-not be realized.
Mattel records unrecognized tax benefits for US federal, state, local, and foreign tax positions related primarily to transfer pricing, tax credits claimed, tax nexus, and apportionment. For each reporting period, management applies a consistent methodology to measure unrecognized tax benefits and all unrecognized tax benefits are reviewed periodically and adjusted as circumstances warrant. Mattel’s measurement of its unrecognized tax benefits is based on management’s assessment of all relevant information, including prior audit experience, the status of current audits, conclusions of tax audits, lapsing of applicable statutes of limitations, and any administrative guidance or developments.
A reconciliation of unrecognized tax benefits is as follows:
| 2009 | 2008 | 2007 | ||||||||||
| (In millions) | ||||||||||||
| Unrecognized tax benefits at January 1 |
$ | 80.3 | $ | 76.0 | $ | 122.0 | ||||||
| Increases for positions taken in current year |
9.4 | 14.4 | 17.4 | |||||||||
| Increases for positions taken in a prior year |
194.3 | 1.8 | 9.6 | |||||||||
| Decreases for positions taken in a prior year |
(30.2 | ) | (6.4 | ) | (44.1 | ) | ||||||
| Decreases for settlements with taxing authorities |
(23.0 | ) | (4.5 | ) | (27.1 | ) | ||||||
| Decreases for lapses in the applicable statute of limitations |
(0.8 | ) | (1.0 | ) | (1.8 | ) | ||||||
| Unrecognized tax benefits at December 31 |
$ | 230.0 | $ | 80.3 | $ | 76.0 | ||||||
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Of the $230.0 million of unrecognized tax benefits as of December 31, 2009, $223.0 million would impact the effective tax rate if recognized. However, a valuation allowance would likely be required for a substantial portion of this amount, thereby offsetting the effective tax rate benefit.
During 2009, Mattel recognized $1.0 million of interest and penalties related to unrecognized tax benefits. As of December 31, 2009, Mattel had accrued $14.9 million in interest and penalties related to unrecognized tax benefits. Of this balance, $14.3 million would impact the effective tax rate if recognized.
During 2009, Mattel finalized tax positions related to the recognition of a capital loss from the liquidation of certain Canadian subsidiaries acquired as part of The Learning Company acquisition, as well as capitalization of certain costs that had been previously deducted on its tax returns. These tax positions had no impact on Mattel’s consolidated financial statements. In the event the unrecognized tax benefit related to the capital loss tax position were to later meet the financial statement recognition requirements, it is uncertain as to whether there would be any benefit to Mattel’s provision for income taxes as projected capital gain income in the carryforward period to utilize this capital loss may not be sufficient and a valuation allowance, up to the full amount, would likely be required. These tax positions are reported in the table above as a $191.8 million increase in unrecognized tax benefits for positions taken in a prior year and a $21.4 million decrease in unrecognized tax benefits for settlements with taxing authorities.
In the normal course of business, Mattel is regularly audited by federal, state, local, and foreign tax authorities. The US Internal Revenue Service (“IRS”) is currently auditing Mattel’s 2006 and 2007 federal income tax returns. Mattel files multiple state and local income tax returns and remains subject to examination in various of these jurisdictions, including California for the 2005 through 2009 tax years, New York for the 2004 through 2009 tax years and Wisconsin for the 2007 through 2009 tax years. Mattel files multiple foreign income tax returns and remains subject to examination in major foreign jurisdictions, including Hong Kong and Venezuela for the 2003 through 2009 tax years, and Brazil, Mexico, and the Netherlands for the 2004 through 2009 tax years. Significant changes in unrecognized tax benefits are not expected during the next twelve months. The ultimate settlement of any particular issue with the applicable taxing authority could have a material impact on Mattel’s consolidated financial statements.
In 2009, net income was positively impacted by net tax benefits of $28.8 million related to reassessments of prior years’ tax exposures based on the status of current audits in various jurisdictions around the world, settlements, and enacted tax law changes. In 2007, net income was positively impacted by net tax benefits of $42.0 million related to reassessments of prior years’ tax exposures based on the status of audits in various jurisdictions around the world, including settlements, partially offset by enacted tax law changes.
The cumulative amount of undistributed earnings of foreign subsidiaries that Mattel intends to indefinitely reinvest and for which no deferred US income taxes have been provided is approximately $3.5 billion as of December 31, 2009. Management periodically reviews the undistributed earnings of its foreign subsidiaries and reassesses its intent to indefinitely reinvest such earnings.
The additional US income tax on unremitted foreign earnings, if repatriated, would be offset in whole or in part by foreign tax credits. The extent of this offset would depend on many factors, including the method of distribution, and specific earnings distributed.
Accounting principles generally accepted in the United States of America require that tax benefits related to the exercise of nonqualified stock options and stock warrants be credited to additional paid-in-capital in the period in which such amounts reduce current taxes payable. The exercise of nonqualified stock options and vesting of other stock compensation awards resulted in increases/(decreases) to additional paid-in-capital for related income tax benefits totaling $36.7 million, ($2.3) million, and $5.7 million, in 2009, 2008, and 2007, respectively.
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Note 4—Product Recalls and Withdrawals
During 2007, Mattel recalled products with high-powered magnets that may become dislodged and other products, some of which were produced using non-approved paint containing lead in excess of applicable regulatory and Mattel standards. During the second half of 2007, additional products were recalled, withdrawn from retail stores, or replaced at the request of consumers as a result of safety or quality issues (collectively, the “2007 Product Recalls”). In the second quarter of 2008, Mattel determined that certain products had been shipped into foreign markets in which the products did not meet all applicable regulatory standards for those markets. None of these deficiencies related to lead or magnets. Mattel withdrew these products from retail stores in these markets and, although not required to do so, also withdrew the products from the US and other markets because they did not meet Mattel’s internal standards (the “2008 Product Withdrawal”).
The following table summarizes Mattel’s reserves and reserve activity for the 2007 Product Recalls and the 2008 Product Withdrawal (in thousands):
| Impairment of Inventory on Hand |
Product Returns/ Redemptions |
Other | Total | |||||||||||||
| 2007 Product Recall charges |
$ | 3,849 | $ | 60,887 | $ | 3,712 | $ | 68,448 | ||||||||
| Reserves used |
(3,849 | ) | (48,275 | ) | (1,352 | ) | (53,476 | ) | ||||||||
| Balance at December 31, 2007 |
— | 12,612 | 2,360 | 14,972 | ||||||||||||
| 2008 Product Withdrawal charges |
3,571 | 5,230 | 329 | 9,130 | ||||||||||||
| Reserves used |
(3,571 | ) | (15,961 | ) | (2,013 | ) | (21,545 | ) | ||||||||
| Changes in estimates |
— | 1,962 | 728 | 2,690 | ||||||||||||
| Impact of currency exchange rate changes |
— | (238 | ) | (66 | ) | (304 | ) | |||||||||
| Balance at December 31, 2008 |
— | 3,605 | 1,338 | 4,943 | ||||||||||||
| Reserves used |
— | (1,297 | ) | (311 | ) | (1,608 | ) | |||||||||
| Changes in estimates |
— | (2,370 | ) | 707 | (1,663 | ) | ||||||||||
| Impact of currency exchange rate changes |
— | 77 | (26 | ) | 51 | |||||||||||
| Balance at December 31, 2009 |
$ | — | $ | 15 | $ | 1,708 | $ | 1,723 | ||||||||
Following the announcement of the 2007 Product Recalls, a number of lawsuits were filed against Mattel with respect to the recalled products, which are more fully described in “Note 14 to the Consolidated Financial Statements—Commitments and Contingencies.” During 2009, Mattel recorded charges of $27.4 million, which are included in other selling and administrative expenses, to reserve for the settlement of a portion of the above-described product liability-related litigation. Additionally, during 2009, Mattel recorded a $6.0 million benefit associated with an insurance recovery for product liability-related litigation.
Although management is not aware of any additional quality or safety issues that are likely to result in material recalls or withdrawals, there can be no assurance that additional issues will not be identified in the future.
Note 5—Restructuring Charges
During the second quarter of 2008, Mattel initiated its Global Cost Leadership program, which is designed to improve operating efficiencies and leverage Mattel’s global scale to improve profitability and operating cash flows. The major initiatives within Mattel’s Global Cost Leadership program include:
| • | A global reduction in Mattel’s professional workforce of approximately 1,000 employees that was initiated in November 2008, and an additional reduction in Mattel’s professional workforce initiated in the third quarter of 2009. |
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| • | A coordinated efficiency strategic plan that includes structural changes designed to lower costs and improve efficiencies; for example, offshoring and outsourcing certain back office functions, and more clustering of management in international markets. |
| • | Additional procurement initiatives designed to fully leverage Mattel’s global scale in areas such as creative agency partnerships, legal services, and distribution, including ocean carriers and over-the-road freight vendors. |
In connection with the Global Cost Leadership program, during 2008 and 2009, Mattel recorded severance and other termination-related charges of $34.4 million and $31.5 million, respectively, which are included in other selling and administrative expenses. The following table summarizes Mattel’s severance and other termination costs activity for 2008 and 2009 (in thousands):
| Severance | Other termination costs |
Total | ||||||||||
| Charges |
$ | 32,771 | $ | 1,656 | $ | 34,427 | ||||||
| Payments |
(15,656 | ) | (775 | ) | (16,431 | ) | ||||||
| Balance at December 31, 2008 |
17,115 | 881 | 17,996 | |||||||||
| Charges |
31,176 | 324 | 31,500 | |||||||||
| Payments |
(29,508 | ) | (980 | ) | (30,488 | ) | ||||||
| Balance at December 31, 2009 |
$ | 18,783 | $ | 225 | $ | 19,008 | ||||||
Note 6— Earnings Per Share
Effective January 1, 2009, Mattel adopted ASC 260-10 (formerly FASB Staff Position (“FSP”) Emerging Issues Task Force No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities). Under ASC 260-10, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Certain of Mattel’s RSUs are considered participating securities because they contain nonforfeitable rights to dividend equivalents. The retrospective application of this standard reduced previously reported basic and diluted earnings per share by $0.01 for 2008 and 2007.
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Under the two-class method, net income is reduced by the amount of dividends declared in the period for each class of common stock and participating securities. The remaining undistributed earnings are then allocated to common stock and participating securities as if all of the net income for the period had been distributed. Basic earnings per common share excludes dilution and is calculated by dividing net income allocable to common shares by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net income allocable to common shares by the weighted average number of common shares for the period, as adjusted for the potential dilutive effect of non-participating share-based awards. The following table reconciles earnings per common share:
| For the Year | ||||||||||||
| Basic: |
2009 | 2008 | 2007 | |||||||||
| (In thousands, except per share amounts) | ||||||||||||
| Net income |
$ | 528,704 | $ | 379,636 | $ | 599,993 | ||||||
| Less net income allocable to participating RSUs |
(5,992 | ) | (3,731 | ) | (4,280 | ) | ||||||
| Net income available for basic common shares |
$ | 522,712 | $ | 375,905 | $ | 595,713 | ||||||
| Weighted average common shares outstanding |
360,085 | 360,757 | 384,450 | |||||||||
| Basic net income per common share |
$ | 1.45 | $ | 1.04 | $ | 1.55 | ||||||
| Diluted: | ||||||||||||
| Net income |
$ | 528,704 | $ | 379,636 | $ | 599,993 | ||||||
| Less net income allocable to participating RSUs |
(5,981 | ) | (3,726 | ) | (4,258 | ) | ||||||
| Net income available for diluted common shares |
$ | 522,723 | $ | 375,910 | $ | 595,735 | ||||||
| Weighted average common shares outstanding |
360,085 | 360,757 | 384,450 | |||||||||
| Weighted average common equivalent shares arising from: |
||||||||||||
| Dilutive stock options and non-participating RSUs |
1,425 | 1,454 | 4,505 | |||||||||
| Weighted average number of common and potential common shares |
361,510 | 362,211 | 388,955 | |||||||||
| Diluted net income per common share |
$ | 1.45 | $ | 1.04 | $ | 1.53 | ||||||
The calculation of potential common shares assumes the exercise of dilutive stock options and vesting of non-participating RSUs, net of assumed treasury share repurchases at average market prices. Nonqualified stock options and non-participating RSUs totaling 19.0 million shares, 17.8 million shares, and 3.2 million shares were excluded from the calculation of diluted net income per common share for 2009, 2008, and 2007, respectively, because they were antidilutive.
Note 7—Employee Benefit Plans
Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies. These plans include defined benefit pension plans, defined contribution retirement plans, postretirement benefit plans, and deferred compensation and excess benefit plans. In addition, Mattel makes contributions to government-mandated retirement plans in countries outside the US where its employees work.
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A summary of retirement plan expense is as follows:
| For the Year | ||||||||||
| 2009 | 2008 | 2007 | ||||||||
| (In millions) | ||||||||||
| Defined contribution retirement plans |
$ | 33.4 | $ | 35.8 | $ | 34.5 | ||||
| Defined benefit pension plans |
27.7 | 19.6 | 22.2 | |||||||
| Deferred compensation and excess benefit plans |
6.0 | (6.7 | ) | 3.6 | ||||||
| Postretirement benefit plans |
2.6 | 3.4 | 3.8 | |||||||
| $ | 69.7 | $ | 52.1 | $ | 64.1 | |||||