ENERGIZE GLOBALIZE MOBILIZE 2001 MATTEL, INC. ANNUAL REPORT e - op.ti.mize (op˘ ‘t -miz’) tr.v. -mized, -miz.ing, -miz.es 1. To make as perfect or effective as possible. 2. To increase the computing speed and efficiency of. 3. To make the most of. 1 To our shareholders DESPITE THE SIGNIFICANT CHALLENGES WE FACED DURING 2001, MATTEL HAD A SUCCESSFUL YEAR AND IS POISED TO CONTINUE IMPROVING ITS PERFORMANCE IN THE YEARS AHEAD. 2001 presented substantial obstacles for international performance. Our business our company. Global economies softened; also grew strongly in Latin America the September 11th terrorist attacks eroded (20 percent), Canada (10 percent) and U.S. consumer confidence; and as a result, Australia/New Zealand (3 percent). several important U.S. retailers canceled holiday reorders as they intensified their In last year’s letter to shareholders, I wrote focus on inventory management in light of that one of our key priorities for 2001 was uncertain consumer spending prospects. to strengthen core brand momentum in the U.S. and abroad. And we did just that. As a result, despite reaching record levels, Consumer demand for our brands grew Mattel’s three percent worldwide net rev- around the world as we gained market enue growth for the year was at the low end share in virtually every country where of our expectations. A precipitous eight we sell our products. In the U.S., despite percent decline in U.S. shipments during weaker-than-expect- the fourth quarter brought full-year gross ed shipments to revenues down one percent in the U.S., retailers, all of our the world’s largest toy market. Offsetting major brands weak U.S. sales, our international gross showed strength revenues grew 10 percent for the year and with consumers we have now experienced six consecutive and posted sales quarters of growth internationally. A turn- increases at retail. around in our European business, which According to NPD industry data for toy grew 13 percent for the year, led the sales at the consumer level, we gained 2 market share in the U.S. in the dolls, vehi- to get the right product to the right place cles, action figures, games and puzzles and at the right time, all with lower costs. core infant and preschool categories. Our This improvement allowed retailers to market share of total traditional toys grew better plan and execute merchandising 1.2 percentage points to 23.5 percent. programs, which supported our market share growth. We also recorded strong market share gains outside the U.S., Our market share grew In 2001, perhaps as our market share the most dramatic grew in the five major in the five major evidence of our European markets, European markets, as improved supply as well as in Canada, well as in Canada, Mexico chain performance Mexico and Australia. and Australia. was seen in the suc- We began reaping the cessful, worldwide benefits of our strategic partnership launch of our Harry Potter™ toys to coin- with Bandai, Japan’s largest toy cide with the global theatrical debut of maker, eliminating chronic operating Harry Potter and the losses in that country and building our Sorcerer’s Stone™, brands in the world’s second largest last year’s box office toy-purchasing nation. smash. This was particularly challeng- Our brands benefited from strong market- ing, as never before ing programs, which promoted product had we launched so lines such as Barbie in the Nutcracker™, many products on a the innovative What’s Her Face?™ doll, global basis in such close proximity to the which combines fashion and activity play, holiday season. I am pleased to report the Fisher-Price® that our supply chain teams executed Rescue Heroes™ line tremendously well. of positive role models, and Hot Wheels®, I also wrote in last year’s annual report which once again about the importance of executing our claimed the title of best- financial realignment plan and delivering selling toy of the year. the cost savings we promised. I am delighted to say that we are on track to We further gained market share by improving realize the full $200 million in savings that the performance of our supply chain. we projected. In 2001, gross margin Our customer service levels strengthened increased by 110 basis points, while measurably as we partnered with retailers selling, general and administrative costs 3 decreased by 40 basis points, excluding invested in manufacturing capacity in the bad debt expense related to Kmart Mexico to absorb Corporation’s bankruptcy filing. (Printing production from our this report in conjunction with our Form Kentucky plant, 10-K is just one example among hundreds which will cease of projects to lower overhead costs.) As operations this year a result, operating profit advanced as part of a phased 15 percent and represented 13.3 We are on track to realize percent of sales. the full $200 million in closure. We improved savings that we projected. efficiencies by moving Worldwide income more product designers from continuing operations was $351.6 and engineers closer to production locations. million or $0.81 per share, excluding We developed and have begun executing restructuring and non-recurring charges. a three-year plan to fully integrate and This represents 20 percent growth from upgrade our information systems and $293.3 million or $0.69 per share in 2000. technology infrastructure. We have added Including restructuring and non-recurring warehouse and office space in China to charges, full-year earnings per share from capitalize on the region’s structural cost continuing operations were $0.71, com- advantages. pared to $0.40 in 2000. We also acquired Pictionary, Inc., the Most encouragingly, as a result of our owner of the strong cash flow from operations in Pictionary® board 2001, we ended the year with more than game, obtained a $600 million in cash, an increase of more license for the than $380 million from the prior year. We rights to Barney™, also reduced debt by more than $230 million. and renewed our global alliance with Year-end debt as a percentage of total capi- Sesame Workshop® and our license for tal was 42 percent, down from 52 percent the Disney character brands. Licensing at year-end 2000. This puts us well on our agreements with Vivendi Universal way to achieving our stated long-term Publishing and THQ also were finalized to objective of having debt represent approxi- extend our core brands, including Barbie® mately one-third of total capital. and Hot Wheels®, to console games and personal computers. While delivering on our near-term financial objectives, we also made investments Most importantly, we have invested in the aimed at ensuring a strong future. We people of Mattel, whose talents provide 4 our most prized schools in Indonesia and a daycare center competitive in China. Here in the U.S., construction of advantage. While the new, world-class Mattel Children’s our workforce was Hospital at the University of California, smaller in 2001, Los Angeles is underway thanks to the gen- and has been further reduced in 2002, erosity of the Mattel Children’s Foundation. we have enhanced employee development with performance tracking, leadership Our work with the Mattel Independent classes, global employee Monitoring Council surveys and follow-up We have invested (MIMCO) is another action plans. The result in the people of Mattel, source of great is a smaller, and we whose talents provide pride. Since 1997, believe, more our most prized MIMCO has devel- productive workforce. oped standards for competitive advantage. and audited the Finally, our progress working conditions continues in the important areas of and welfare of our manufacturing employ- corporate governance and social responsi- ees around the world. In 2001, MIMCO bility. We strengthened our Board of broadened its reach by advising and Directors with the addition of G. Craig assisting Mattel’s suppliers in an effort to Sullivan, Chairman and Chief Executive improve the lives of more people who Officer of The Clorox Company and are associated with Mattel’s products. Kathy Brittain White, Executive Vice President and Chief Information Officer While we have successfully begun to turn of Cardinal Health, Inc. in 2001. These around Mattel’s performance, there still is well-respected, highly successful business much work ahead of us. First-rate compa- leaders add invaluable new perspectives nies consistently perform well and that is to board discussions. what we intend to do. We continued to Last year, the inculcation of our vision improve the commu- allowed us to refocus on what we do better nities where Mattel than any other company in the world – employees live and design, manufacture and market the most work. We provided innovative toys. While our vision of being the time, talent and the "world’s premier toy brands for today resources needed to and tomorrow" remains unchanged, our build a children’s hos- mindset for 2002 is progressing from pital in Tijuana, Mexico, several elementary “refocus” to “optimize.” We will accom- 5 plish this by adhering to the four priorities listened-to scores. New action figures sup- I outlined in last year’s shareholder letter. porting Yu-Gi-Oh!™ will debut based on I would like to tell you how we intend to the successful cartoon and card game from build upon these objectives this year: Japan. Masters of the Universe®, includ- 1. Strengthen core brand momentum in ing He-Man®, will be the U.S. and abroad. In 2002, we will build relaunched to a new on the strong point-of- sale momentum that Last year, the inculcation we experienced in 2001. of our vision allowed us to refocus on what we do better than any other generation of hero worshippers.