MATTEL INC /DE/ - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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 Boulevard, El Segundo, California		90245-5012
(Address of principal executive offices)		(Zip Code)

(310) 252-2000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

Number of shares outstanding of registrant’s common stock, $1.00 par value, as of July 30, 2004:

414,107,543 shares

Mattel, Inc. and Subsidiaries


		Page
Part I.	Financial Information

Item 1.	Financial Statements.

	Consolidated Balance Sheets	3-4

	Consolidated Statements of Operations	5

	Consolidated Statements of Cash Flows	6

	Notes to Consolidated Financial Information	7-17

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	18-40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	40-41

Item 4.	Controls and Procedures.	41

Part II.	Other Information

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.	42

Item 4.	Submission of Matters to a Vote of Security Holders.	42-43

Item 6.	Exhibits and Reports on Form 8-K.	43

Signatures		44

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

Mattel, Inc. and Subsidiaries

Consolidated Balance Sheets


(In thousands)	June 30, 2004 (Unaudited)			June 30, 2003 (Unaudited)			Dec. 31, 2003
Assets
Current Assets
Cash and short-term investments	$	363,520		$	582,821		$	1,152,681
Accounts receivable, net		622,662			603,689			543,888
Inventories		557,537			540,352			388,658
Prepaid expenses and other current assets		266,867			258,686			309,629

Total current assets		1,810,586			1,985,548			2,394,856

Property, Plant and Equipment
Land		35,175			33,471			33,611
Buildings		259,862			254,356			267,068
Machinery and equipment		692,597			649,893			680,367
Tools, dies and molds		544,493			486,583			520,292
Capitalized leases		23,271			23,271			23,271
Leasehold improvements		103,857			88,213			96,448

		1,659,255			1,535,787			1,621,057
Less: accumulated depreciation		(1,056,059	)		(931,418	)		(995,164	)

Property, plant and equipment, net		603,196			604,369			625,893

Other Noncurrent Assets
Goodwill		723,845			709,247			722,249
Other assets		770,369			782,710			767,952

Total Assets	$	3,907,996		$	4,081,874		$	4,510,950

The accompanying notes are an integral part of these financial statements.

Mattel, Inc. and Subsidiaries

Consolidated Balance Sheets (Continued)


(In thousands, except share data)	June 30, 2004 (Unaudited)			June 30, 2003 (Unaudited)			Dec. 31, 2003
Liabilities and Stockholders’ Equity
Current Liabilities
Short-term borrowings	$	76,283		$	23,946		$	19,590
Current portion of long-term debt		40,988			162,180			52,274
Accounts payable		293,426			293,453			289,680
Accrued liabilities		467,747			513,300			852,978
Income taxes payable		219,390			163,927			253,224

Total current liabilities		1,097,834			1,156,806			1,467,746

Long-Term Liabilities
Long-term debt		588,624			629,612			589,130
Other		241,935			202,551			237,853

Total long-term liabilities		830,559			832,163			826,983

Stockholders’ Equity
Common stock $1.00 par value, 1.0 billion shares authorized; 441.4 million shares, 440.0 million shares and 441.2 million shares issued, respectively		441,369			440,011			441,212
Additional paid-in capital		1,600,059			1,577,396			1,599,278
Treasury stock at cost; 27.0 million shares, 6.7 thousand shares and 12.7 million shares, respectively		(492,655	)		(245	)		(244,691	)
Retained earnings		739,975			394,868			707,429
Accumulated other comprehensive loss		(309,145	)		(319,125	)		(287,007	)

Total stockholders’ equity		1,979,603			2,092,905			2,216,221

Total Liabilities and Stockholders’ Equity	$	3,907,996		$	4,081,874		$	4,510,950

The accompanying notes are an integral part of these financial statements.

Mattel, Inc. and Subsidiaries

Consolidated Statements of Operations


	For the Three Months Ended						For the Six Months Ended
(Unaudited; in thousands, except per share amounts)	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003

Net Sales (see Note 9)	$	804,002		$	768,994		$	1,584,946		$	1,514,277
Cost of sales (see Note 9)		437,654			412,670			866,921			789,947

Gross Profit		366,348			356,324			718,025			724,330
Advertising and promotion expenses		84,421			80,748			171,839			164,554
Other selling and administrative expenses		238,712			230,530			490,261			453,400
Restructuring charges		—			3,300			—			12,000

Operating Income		43,215			41,746			55,925			94,376
Interest expense		16,388			18,212			31,609			35,639
Interest (income)		(4,144	)		(5,266	)		(9,040	)		(11,666	)
Other non-operating (income), net		(1,519	)		(22	)		(11,538	)		(3,070	)

Income Before Income Taxes		32,490			28,822			44,894			73,473
Provision for income taxes		8,935			7,930			12,346			19,738

Net Income	$	23,555		$	20,892		$	32,548		$	53,735

Income Per Common Share – Basic
Net income	$	0.06		$	0.05		$	0.08		$	0.12

Weighted average number of common shares		419,177			439,700			423,673			438,986

Income Per Common Share – Diluted
Net income	$	0.06		$	0.05		$	0.08		$	0.12

Weighted average number of common and common equivalent shares		422,903			445,491			427,622			444,714

The accompanying notes are an integral part of these financial statements.

Mattel, Inc. and Subsidiaries

Consolidated Statements of Cash Flows


	For the Six Months Ended
(Unaudited; in thousands)	June 30, 2004			June 30, 2003
Cash Flows From Operating Activities:
Net income	$	32,548		$	53,735
Adjustments to reconcile net income to net cash flows used for operating activities:
Gain on sale of investments		(12,933	)		—
Net (gain) loss on sale of other property, plant and equipment		(1,055	)		91
Depreciation		87,595			86,927
Amortization		3,291			3,142
Increase (decrease) from changes in assets and liabilities:
Accounts receivable		(84,058	)		(98,114	)
Inventories		(179,716	)		(188,651	)
Prepaid expenses and other current assets		39,960			39,524
Accounts payable, accrued liabilities and income taxes payable		(402,323	)		(504,618	)
Deferred income taxes		(1,504	)		(3,854	)
Deferred compensation and other retirement plans		3,485			5,430
Other, net		(3,702	)		6,853

Net cash flows used for operating activities		(518,412	)		(599,535	)

Cash Flows From Investing Activities:
Purchases of tools, dies and molds		(43,417	)		(48,582	)
Purchases of other property, plant and equipment		(27,645	)		(38,694	)
Payment for businesses acquired		(12,955	)		(4,839	)
Proceeds from sale of investments		18,718			—
Proceeds from sale of other property, plant and equipment		2,437			1,002
Other, net		—			(552	)

Net cash flows used for investing activities		(62,862	)		(91,665	)

Cash Flows From Financing Activities:
Short-term borrowings, net		57,047			(1,913	)
Purchase of treasury stock		(255,130	)		—
Payment of long-term debt		(11,319	)		(30,000	)
Exercise of stock options		7,319			33,100
Other, net		(508	)		(608	)

Net cash flows (used for) from financing activities		(202,591	)		579

Effect of Currency Exchange Rate Changes on Cash		(5,296	)		6,404

Decrease in Cash and Short-term Investments		(789,161	)		(684,217	)
Cash and Short-term Investments at Beginning of Period		1,152,681			1,267,038

Cash and Short-term Investments at End of Period	$	363,520		$	582,821

The accompanying notes are an integral part of these financial statements.

Mattel, Inc. and Subsidiaries

Notes To Consolidated Financial Information

(Unaudited)

The accompanying unaudited consolidated financial statements and related disclosures have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments, including those of a normal recurring nature, considered necessary for a fair presentation of the financial position and interim results of Mattel, Inc. and its subsidiaries (“Mattel”) as of and for the periods presented have been included. Certain amounts in the financial statements for prior periods have been reclassified to conform to the current period’s presentation. Because Mattel’s business is seasonal, results for interim periods are not necessarily indicative of those that may be expected for a full year.

The financial information included herein should be read in conjunction with Mattel’s consolidated financial statements and related notes in its 2003 Annual Report on Form 10-K.

2.	Accounts receivable are shown net of allowances for doubtful accounts of $27.2 million (June 30, 2004), $23.4 million (June 30, 2003), and $27.5 million (December 31, 2003).

3.	Inventories include the following:


(In thousands)	June 30, 2004		June 30, 2003		Dec. 31, 2003
Raw materials and work in process	$	60,064	$	63,384	$	40,362
Finished goods		497,473		476,968		348,296

	$	557,537	$	540,352	$	388,658

Goodwill and other intangible assets are 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 for purposes of applying the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, are: Mattel Brands US Girls division, Mattel Brands US Boys division, Fisher-Price Brands US, American Girl Brands and International.

The change in the carrying amount of goodwill by reporting unit for the six months ended June 30, 2004, 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.


(In thousands)	Dec. 31, 2003		Impact of Currency Exchange Rate Changes		June 30, 2004
Mattel Brands US Girls division	$	35,141	$	625	$	35,766
Mattel Brands US Boys division		54,222		49		54,271
Fisher-Price Brands US		216,678		120		216,798
American Girl Brands		207,571		—		207,571
International		208,637		802		209,439

	$	722,249	$	1,596	$	723,845

5.	Other assets include the following:


(In thousands)	June 30, 2004		June 30, 2003		Dec. 31, 2003
Deferred income taxes	$	511,415	$	511,499	$	509,430
Identifiable intangibles		24,478		16,508		15,106
Other		234,476		254,703		243,416

	$	770,369	$	782,710	$	767,952

6.	Long-term debt consists of the following:


(In thousands)	June 30, 2004			June 30, 2003			Dec. 31, 2003
6% senior notes due 2003	$	—		$	150,000		$	—
6-1/8% senior notes due 2005		150,000			150,000			150,000
Medium-term notes due 2004 to 2013		440,000			450,000			450,000
10.15% mortgage note due 2005		39,612			40,505			40,069
Other		—			1,287			1,335

		629,612			791,792			641,404
Less: current portion		(40,988	)		(162,180	)		(52,274	)

	$	588,624		$	629,612		$	589,130

During the second quarter of 2004, Mattel repaid $10.0 million of medium-term notes upon maturity. During 2003, Mattel repaid its $150.0 million, 6% senior notes and $30.0 million of medium-term notes upon maturity.

7.	The calculation of comprehensive income (loss), net of tax, is as follows:


	For the Six Months Ended
(In thousands)	June 30, 2004			June 30, 2003
Net income	$	32,548		$	53,735
Currency translation adjustments		(23,724	)		23,741
Net unrealized gain on securities:
Unrealized holding gains		3,478			5,542
Less: reclassification adjustment for realized (gains) included in net income		(5,991	)		—

		(2,513	)		5,542

Net unrealized gain (loss) on derivative instruments:
Unrealized holding (losses)		(10,915	)		(33,030	)
Less: reclassification adjustment for realized losses included in net income		15,014			25,269

		4,099			(7,761	)

	$	10,410		$	75,257

The components of accumulated other comprehensive loss, net of tax, are as follows:


(In thousands)	June 30, 2004			June 30, 2003			Dec. 31, 2003
Currency translation adjustments	$	(259,896	)	$	(270,278	)	$	(236,172	)
Minimum pension liability adjustments		(60,042	)		(52,321	)		(60,042	)
Net unrealized gain on securities		30,288			33,851			32,801
Net unrealized (loss) on derivative instruments		(19,495	)		(30,377	)		(23,594	)

	$	(309,145	)	$	(319,125	)	$	(287,007	)

During the first quarter of 2004, Mattel sold marketable securities with a cost basis of $5.0 million for proceeds of $14.5 million. The pre-tax gain on these securities of $9.5 million, net of transaction costs, was recorded in other non-operating (income), net in the consolidated statement of operations for the six months ended June 30, 2004. As of June 30, 2004, Mattel has no marketable securities for which cost exceeds the fair market value of the securities.

Mattel’s financial position is impacted by currency exchange rate fluctuations on translation of its net investment in foreign subsidiaries. Assets and liabilities of foreign subsidiaries are translated into US dollars at fiscal period-end exchange rates. Income, expense and cash flow items are translated at weighted average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Mattel’s primary foreign currency translation exposures are on its net investment in entities having functional currencies denominated in the Euro, British pound sterling, Mexican peso and Indonesian rupiah. For the six months ended June 30, 2004, currency translation adjustments resulted in a net loss of $23.7 million, with losses from the weakening of the Euro, Indonesian rupiah, and Mexican peso against the US dollar being partially offset by strengthening of the British pound sterling against the US dollar. For the six months ended June 30, 2003, currency translation adjustments resulted in a net gain of $23.7 million from the strengthening of the Euro, British pound sterling, Indonesian rupiah, and Brazilian real against the US dollar being partially offset by losses from the weakening of the Mexican peso against the US dollar.

Mattel’s foreign 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. Gains and losses on unhedged intercompany loans and advances are recorded as a component of other non-operating (income) expense, net in the period in which the currency exchange rate changes.

Transaction gains and losses included in the consolidated statements of operations are as follows:


	For the Three Months Ended						For the Six Months Ended
(In thousands)	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Transaction (gains) losses included in:
Operating income	$	(12,348	)	$	1,076		$	(25,006	)	$	(3,179	)
Other non-operating (income), net		(1,143	)		(508	)		(1,144	)		(1,235	)

Net transaction (gain) loss	$	(13,491	)	$	568		$	(26,150	)	$	(4,414	)

During the fourth quarter of 2003, Mattel changed the way certain close out sales are classified in its consolidated statement of operations. Close out sales are sales of certain products that are no longer included in current product lines. These sales were previously classified as a reduction of cost of sales. Commencing October 1, 2003, close out sales are reported as net sales in Mattel’s consolidated statements of operations. This change in classification has no impact on gross profit, operating income, net income or any element of the consolidated balance sheets or consolidated statements of cash flows for any date or period presented. For the three- and six-months ended June 30, 2003, close out sales classified as a reduction of cost of sales were $12.0 million and $25.3 million, respectively. Mattel does not believe that this amount is material, and therefore has not revised previously reported net sales and cost of sales amounts for these periods.

10.	Selling and administrative expenses include research and development expenses of $43.2 million and $40.8 million, and $83.0 million and $79.5 million for the three- and six-months ended June 30, 2004 and 2003, respectively.

11.	Basic income per common share is computed by dividing net income by the weighted average number of common shares outstanding during each period.

Diluted income per common share is computed by dividing net income by the weighted average number of common shares and other common equivalent shares outstanding during each period. The calculation of common equivalent shares assumes the exercise of dilutive stock options, net of assumed treasury share purchases at average market prices, as applicable. Nonqualified stock options totaling 26.3 million and 28.7 million were excluded from the calculation of diluted earnings per share for the three- and six-months ended June 30, 2004, respectively, because they were anti-dilutive. For both the three- and six-months ended June 30, 2003, nonqualified stock options totaling 12.2 million were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

12.	Mattel and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees of these companies, which are more fully described in Note 4 to the Consolidated Financial Statements in Mattel’s 2003 Annual Report on Form 10-K.

The components of net periodic benefit cost for Mattel’s defined benefit pension plans are as follows:


	For the Three Months Ended						For the Six Months Ended
(In thousands)	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Service cost	$	1,800		$	1,450		$	3,689		$	2,958
Interest cost		4,971			4,268			10,414			8,536
Expected return on plan assets		(5,336	)		(4,777	)		(10,795	)		(9,553	)
Amortization of:
Unrecognized prior service costs		(129	)		(156	)		(261	)		(312	)
Unrecognized net loss		1,885			599			3,850			1,198

	$	3,191		$	1,384		$	6,897		$	2,827


The components of net periodic benefit cost for Mattel’s postretirement benefit plans are as follows:

	For the Three Months Ended						For the Six Months Ended
(In thousands)	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Service cost	$	70		$	9		$	141		$	18
Interest cost		886			866			1,772			1,732
Amortization of:
Unrecognized prior service costs		—			(79	)		—			(158	)
Unrecognized net loss		386			324			772			648

	$	1,342		$	1,120		$	2,685		$	2,240

During the three- and six-months ended June 30, 2004, Mattel made cash contributions totaling approximately $0.3 million and $0.5 million, respectively, to its defined benefit pension plans. Mattel expects to make cash contributions totaling approximately $2 million to its defined benefit pension plans for the year ending December 31, 2004, which is consistent with the estimate reported as of December 31, 2003. Mattel’s estimated cash contributions in 2004 do not reflect the provisions of the Pension Funding Equity Act of 2004. Mattel does not expect its 2004 funding requirements to decrease materially as a result of the provisions of the Pension Funding Equity Act of 2004.

On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”) was signed into law. The Act will provide plan sponsors a federal subsidy for certain qualifying prescription drug benefits covered under the sponsor’s postretirement health care plans. Under Financial Accounting Standards Board (“FASB”) Staff Position 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“FSP 106-2”) issued on May 19, 2004, Mattel has elected to defer accounting for the effects of the Act. As a result, the reported postretirement benefit plan cost for the three- and six-months ended June 30, 2004, does not reflect the effects of the Act on Mattel’s postretirement benefit plans. Mattel’s election to defer expires during the quarter ending September 30, 2004. Mattel is in the process of determining whether the prescription drug benefits provided under its postretirement benefit plans are actuarially equivalent as well as whether the enactment of the Act is a “significant event” pursuant to SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.

13.

Mattel has various stock compensation plans, which are more fully described in Note 7 to the Consolidated Financial Statements in its 2003 Annual Report on Form 10-K. Mattel applies the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized in the results of operations for nonqualified stock options granted under Mattel’s plans as such options are granted at not less than the quoted market price of Mattel’s common stock on the date of grant.

Mattel has adopted the disclosure-only provisions of SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, which amended SFAS No. 123, Accounting for Stock-Based Compensation. Had compensation cost for nonqualified stock options been determined based on their fair value at the date of grant, consistent with the method of accounting prescribed by SFAS No. 123, Mattel’s net income and earnings per share would have been adjusted as follows:


	For the Three Months Ended						For the Six Months Ended
(In millions, except per share amounts)	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net income
As reported	$	23.5		$	20.9		$	32.5		$	53.7
Stock option plans		(8.6	)		(3.6	)		(15.1	)		(7.7	)

Pro forma income	$	14.9		$	17.3		$	17.4		$	46.0

Income per share
Basic
As reported	$	0.06		$	0.05		$	0.08		$	0.12
Stock option plans		(0.02	)		(0.01	)		(0.04	)		(0.02	)

Pro forma basic income	$	0.04		$	0.04		$	0.04		$	0.10

Diluted
As reported	$	0.06		$	0.05		$	0.08		$	0.12
Stock option plans		(0.02	)		(0.01	)		(0.04	)		(0.02	)

Pro forma diluted income	$	0.04		$	0.04		$	0.04		$	0.10

The pro forma amounts shown above are not indicative of the pro forma effect in future periods since the estimated fair value of options is amortized to expense over the vesting period, and the number of options granted varies from period to period.

14.	Supplemental disclosure of cash flow information is as follows:


	For the Six Months Ended
(In thousands)	June 30, 2004		June 30, 2003
Cash paid during the period for:
Income taxes	$	48,408	$	53,271
Interest		34,478		36,532
Noncash investing and financing activities:
Liability for acquisitions	$	1,024	$	2,389

15.	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 Brands US, Fisher-Price Brands US and American Girl Brands.

Mattel’s portfolio of brands and products are grouped in the following categories:

Mattel Brands – including Barbie^® fashion dolls and accessories (“Barbie^®”), Polly Pocket!^™ and ello^™ (collectively “Other Girls Brands”), Hot Wheels^®, Matchbox^® and Tyco^® R/C vehicles and playsets (collectively “Wheels”) and Nickelodeon^®, Harry Potter^™, Yu-Gi-Oh!^™, He-Man^® and Masters of the Universe^®, Batman^™, Justice League^™, and games and puzzles (collectively “Entertainment”).

Fisher-Price Brands – including Fisher-Price^®, Little People^®, Rescue Heroes^®, See ’N Say^®, BabyGear^™, PowerTouch^™ and View-Master^® (collectively “Core Fisher-Price^®”), Sesame Street^®, Barney^™, Dora the Explorer^™, Winnie the Pooh and Disney preschool and plush (collectively “Fisher-Price^® Friends”) and Power Wheels^®.

American Girl Brands – including American Girl Today^®, The American Girls Collection^® and Bitty Baby^®. American Girl Brands products are sold directly to consumers and its children’s publications are also sold to certain retailers.

The International segment sells products in all toy categories, except American Girl Brands.

The tables below present information about revenues, income and assets by segment. Mattel does not include sales adjustments such as trade discounts and other allowances in the calculation of segment revenues (hereinafter referred to as “gross sales”). Mattel records these adjustments in its financial accounting systems at the time of sale to each customer, but the adjustments are not allocated to individual products. For this reason, Mattel’s chief operating decision maker uses gross sales by segment as one of the metrics to measure segment performance. Such sales adjustments are included in the determination of segment income (loss) from operations based on the adjustments recorded in the financial accounting systems. Segment income (loss) from operations represents operating income, while consolidated income from operations represents income before income taxes as reported in the consolidated statements of operations. The corporate and other category includes costs not allocated to individual segments, including charges related to the financial realignment plan, incentive compensation and corporate headquarters functions managed on a worldwide basis. Segment assets are comprised of accounts receivable and inventories, net of applicable reserves and allowances.


	For the Three Months Ended						For the Six Months Ended
(In thousands)	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Revenues
Domestic:
Mattel Brands US	$	224,540		$	227,662		$	487,189		$	521,421
Fisher-Price Brands US		215,874			214,751			398,693			380,599
American Girl Brands		49,142			41,587			103,269			87,992

Total Domestic		489,556			484,000			989,151			990,012
International		389,793			349,182			743,765			655,705

Gross sales		879,349			833,182			1,732,916			1,645,717
Sales adjustments		(75,347	)		(64,188	)		(147,970	)		(131,440	)

Net sales	$	804,002		$	768,994		$	1,584,946		$	1,514,277

Segment Income (Loss)
Domestic:
Mattel Brands US	$	33,227		$	36,362		$	73,599		$	106,155
Fisher-Price Brands US		2,924			13,625			3,829			14,945
American Girl Brands		(2,623	)		(2,874	)		(2,908	)		(4,537	)

Total Domestic		33,528			47,113			74,520			116,563
International		15,473			20,944			22,260			40,254

		49,001			68,057			96,780			156,817
Corporate and other expense (a)		5,786			26,311			40,855			62,441

Operating income		43,215			41,746			55,925			94,376
Interest expense		16,388			18,212			31,609			35,639
Interest (income)		(4,144	)		(5,266	)		(9,040	)		(11,666	)
Other non-operating (income), net		(1,519	)		(22	)		(11,538	)		(3,070	)

Income before income taxes	$	32,490		$	28,822		$	44,894		$	73,473

(a)

For the three- and six-months ended June 30, 2004, corporate and other includes $4.4 million and $15.2 million, respectively, of charges related to severance. For the three- and six-months ended June 30, 2003, corporate and other includes $13.1 million and $24.7 million of charges, respectively, related to the financial realignment plan.


(In thousands)	June 30, 2004		June 30, 2003		Dec. 31, 2003
Assets
Domestic:
Mattel Brands US	$	313,797	$	298,033	$	243,934
Fisher-Price Brands US		231,565		228,444		149,158
American Girl Brands		71,571		69,821		64,877

Total Domestic		616,933		596,298		457,969
International		502,614		460,958		434,286

		1,119,547		1,057,256		892,255
Corporate and other		60,652		86,785		40,291

Accounts receivable and inventories	$	1,180,199	$	1,144,041	$	932,546

Mattel sells a broad variety of toy products, which are grouped into three major categories: Mattel Brands, Fisher-Price Brands and American Girl Brands. The table below presents worldwide revenues by category:


	For the Three Months Ended						For the Six Months Ended
(In thousands)	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Worldwide Revenues
Mattel Brands	$	513,299		$	494,691		$	1,045,400		$	1,027,035
Fisher-Price Brands		314,614			295,622			578,612			528,896
American Girl Brands		49,142			41,587			103,269			87,992
Other		2,294			1,282			5,635			1,794

Gross sales		879,349			833,182			1,732,916			1,645,717
Sales adjustments		(75,347	)		(64,188	)		(147,970	)		(131,440	)

Net sales	$	804,002		$	768,994		$	1,584,946		$	1,514,277

As discussed in Note 9 to the consolidated financial information, effective October 1, 2003, Mattel changed the way certain close out sales are classified in its consolidated statement of operations. Close out sales are sales of certain products that are no longer included in current product lines. These sales were previously classified as a reduction of cost of sales. Commencing October 1, 2003, close out sales are reported as net sales in Mattel’s consolidated statements of operations. This change in classification has no impact on gross profit, operating income, net income, income per common share, or any element of the consolidated balance sheets or consolidated statements of cash flows for any date or period presented. For purposes of comparing gross sales from 2003 to 2004, the following table provides the quantification of close out sales classified as a reduction of cost of sales by segment and worldwide for the three- and six-months ended June 30, 2003:


(In thousands)	For the Three Months Ended		For the Six Months Ended
Segment
Domestic:
Mattel Brands US	$	7,169	$	11,612
Fisher-Price Brands US		2,364		8,298
American Girl Brands		—		—

Total Domestic		9,533		19,910
International		2,510		5,467

	$	12,043	$	25,377

Worldwide
Mattel Brands	$	9,075	$	15,856
Fisher-Price Brands		2,925		9,461
American Girl Brands		—		—
Other		43		60

	$	12,043	$	25,377

16.

In 2003, Mattel completed its financial realignment plan, originally announced during the third quarter of 2000, designed to improve gross profit; selling and administrative expenses; operating income; and cash flows. Since its inception, Mattel recorded a total pre-tax charge of $250.0 million, or approximately $171 million after-tax, of which approximately $123 million represented cash expenditures and $48 million represented noncash writedowns.

A summary of the components of the financial realignment plan is as follows:


	For the Year Ended
(In millions)	2000		2001		2002		2003		Total
Gross profit	$	78.6	$	28.2	$	10.4	$	4.1	$	121.3
Advertising and promotion expenses		4.8		0.3		—		—		5.1
Other selling and administrative expenses		13.4		6.0		13.3		8.6		41.3
Restructuring and other charges		22.9		15.7		24.6		12.7		75.9
Other non-operating expense, net		5.5		—		—		0.9		6.4

Pre-tax charges	$	125.2	$	50.2	$	48.3	$	26.3	$	250.0

Approximate after-tax charges	$	84	$	35	$	32	$	20	$	171

During the three-months ended June 30, 2003, Mattel recorded pre-tax charges of $14.0 million related to the financial realignment plan. The 2003 second quarter charges were largely related to termination of a licensing arrangement; restructuring of Corolle, Mattel’s French doll business; streamlining back office functions; and consolidation of two manufacturing facilities in Mexico. These charges are included in Cost of Sales ($2.4 million), Other Selling and Administrative Expenses ($7.4 million), Restructuring and Other Charges ($3.3 million) and Other Non-Operating (Income), Net ($0.9 million) in the consolidated statement of operations. For the six-months ended June 30, 2003, Mattel recorded total pre-tax charges related to the financial realignment plan of $25.6 million. The year-to-date charges relate to the actions described above and the consolidation of the US Girls and US Boys-Entertainment segments under the Mattel Brands US segment. The year-to-date charges are included in Cost of Sales ($4.1 million), Other Selling and Administrative Expenses ($8.6 million), Restructuring and Other Charges ($12.0 million) and Other Non-Operating (Income), Net ($0.9 million) in the consolidated statement of operations.

For the three- and six-months ended June 30, 2003, Mattel recorded $3.3 million and $12.0 million, respectively, of pre-tax restructuring charges in connection with the financial realignment plan, primarily related to consolidation of its US Girls and US Boys-Entertainment segments into one segment, renamed Mattel Brands US and the restructuring of its Corolle doll business in France. Since inception, included in the total pre-tax charges of $250.0 million were total pre-tax restructuring charges of $75.9 million, of which $0.7 million has not yet been paid as of June 30, 2004. The restructuring charges were largely related to the elimination of positions at its US-based headquarters locations in El Segundo, Fisher-Price and American Girl, asset writedowns and other costs associated with the closure of Mattel’s manufacturing and distribution facilities in Murray, KY (“North American Strategy”), closure of certain international offices, and consolidation of facilities.

17.

for income tax effects of share-based payment transactions. The Exposure Draft also notes that the use of a lattice model, such as the binomial model, to determine the fair value of employee stock options, is preferable. Mattel currently uses the Black-Scholes pricing model to determine the fair value of its employee stock options. Use of a lattice model to determine the fair value of employee stock options may result in compensation cost materially different from those pro forma costs disclosed in Note 13 to the consolidated financial information. Mattel is currently determining what impact the proposed statement would have on its results of operations or financial position.

In November 2003 and March 2004, the Emerging Issues Task Force (“EITF”) reached final consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The EITF requires a company to apply a three-step model to determine whether an impairment of an investment, within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, is other-than-temporary. EITF Issue No. 03-1 shall be applied prospectively to all current and future investments, in interim or annual reporting periods beginning after June 15, 2004. Mattel believes the adoption of EITF Issue No. 03-1 will not have a material impact on its results of operations or financial position.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial information and related notes that appear in Part I of this Quarterly Report. Mattel’s business is seasonal, and, therefore, results of operations are comparable only with corresponding periods.

Overview

Mattel designs, manufactures and markets a broad variety of toy products worldwide through sales to retailers and wholesalers (i.e., “customers”) and directly to consumers. Mattel’s business is dependent in great part on its ability each year to redesign, restyle and extend existing core products and product lines, to design and develop innovative new products and product lines, and to successfully market those products and product lines. Mattel plans to continue to focus on its portfolio of traditional brands that have historically had worldwide appeal, to create new brands utilizing its knowledge of children’s play patterns and to target customer and consumer preferences around the world.

Mattel’s portfolio of brands and products are grouped in the following categories:

Mattel Brands – including Barbie^® fashion dolls and accessories (“Barbie^®”), Polly Pocket!^™ and ello^™ (collectively “Other Girls Brands”), Hot Wheels^®, Matchbox^® and Tyco^® R/C vehicles and playsets (collectively “Wheels”) and Nickelodeon^®, Harry Potter^™, Yu-Gi-Oh!^™, He-Man^® and Masters of the Universe^®, Batman^™, Justice League^™, and games and puzzles (collectively “Entertainment”).

During 2003 and continuing in the first half of 2004, there were several factors that had a negative impact on Mattel’s revenue in the US, including increased competition in the doll and various boys toys categories, retail consolidation and aggressive retail pricing. In addition, management believes that its fourth quarter and full year 2003 results were negatively affected by a shift in consumer purchases to later in the holiday season and increased purchase of gift cards. This shift in the timing of consumer purchases compared to prior years changed the re-order pattern of Mattel’s products by retailers during the holiday season. When consumers purchase toys in October or November, retailers are typically inclined to re-order more toys to restock their shelves for the holiday season. However, when consumers buy products late in December or purchase gift cards that will be used after the holidays, retailers have less incentive to refill their shelves with holiday products. Mattel’s management expects that some or all of these factors may continue and may have an impact on future results of operations.

Mattel previously announced plans to increase its focus on revenue growth in 2004. These plans include strategies aimed at strengthening its core brands and expanding its presence in the interactive learning category. Mattel has initiated value enhancement strategies that include more open packaging and additional items in the package to enhance value perception with consumers. Additionally, management intends to rebuild its fashion doll category. In 2004, Mattel commenced its strategy to re-establish the Barbie^® brand into content-driven product lines pursuant to a “worlds of” strategy in which stories are told through movies, books, magazines and music. Product lines, including dolls and accessories, are being created to complement these stories. The “worlds of” Barbie^® products introduced in 2004 are geared to different age segments in an attempt to maintain the brand’s broad appeal among girls and their parents. For instance, for younger girls, there are stories and products with a fantasy theme such as princesses and fairies, while for older girls, the My Scene^™ line includes the launch of a full-length DVD accompanied by a product line that complements the targeted theme. Through the first half of 2004, approximately one-third of the Barbie^® products available at retail were developed using the “worlds of” strategy. Management believes that this will increase to approximately two-thirds by fall of 2004 with the full product line available for sale to customers in 2005. In the interactive learning category, Mattel intends to capitalize on a sizable opportunity by developing innovative platforms, such as Laugh & Learn^™ for infants, Learn Through Music for toddlers, and InteracTV^™ for preschoolers. These initiatives are management’s primary strategic actions to strengthen its product lines and promote revenue growth.

Additionally, Mattel intends to continue its emphasis on globalizing its brands. Management believes the reorganization in the first quarter of 2003, which combined the US Girls and US Boys-Entertainment segments under the Mattel Brands US segment, should allow Mattel to help achieve this goal through optimizing the strengths, and leveraging the talents of, personnel managing the brands on a global basis. The International segment continues to benefit from Mattel’s strategic focus on globalizing its brands, including improved product availability and better alignment of worldwide marketing and sales plans. Management intends to continue focusing on maintaining a high level of business performance in the eight geographies that represented approximately 75% of the gross sales of Mattel’s International segment at December 31, 2003: United Kingdom, France, Germany, Italy, Spain, Northern Europe, Canada, and Mexico. Management believes that maintaining a high level of business performance in these geographies will give Mattel a greater degree of freedom to be opportunistic in markets where its business is smaller and less developed. Management expects that this strategy should enable Mattel to seek opportunities in smaller and less developed markets, while maintaining stability in these larger markets. Mattel’s long-term goal is to generate 50% of its sales in markets outside of the US by continuing to grow its international business at a higher rate than in the US. However, while management believes that Mattel will continue to grow its International segment sales at a higher rate than in the US, primarily due to gains in market share, it will be difficult to maintain the same level of sales growth achieved over the last three years, especially if the value of the US dollar strengthens against the major foreign currencies.

Second Quarter

Consolidated Results

Net income for the second quarter of 2004 was $23.5 million, or $0.06 per diluted share, as compared to net income of $20.9 million, or $0.05 per diluted share, in the second quarter of 2003. Profitability in the second quarter of 2004 compared to the prior year was largely driven by sales growth, partially offset by a 70 basis point decline in gross profit, as a percentage of net sales, due to increased sales of lower margin products, including the impact of sales mix, change in classification of close out sales and value enhancement initiatives, and increased royalty costs. Other items that had an impact on profitability in the second quarter of 2004 were a pre-tax charge of $4.4 million, mainly related to the integration of the Matchbox^® and Tyco^® R/C business located in New Jersey into the Hot Wheels^® business in California and ongoing external cost pressures in areas such as employee-related costs and insurance, which were offset by net favorable legal settlements totaling $10.1 million. During the second quarter of 2003, Mattel’s results of operations reflected pre-tax charges totaling $14.0 million related to the financial realignment plan.

Changes in currency exchange rates also provided an overall benefit to Mattel’s results of operations in the second quarter of 2004. Net sales in the second quarter of 2004 were $804.0 million, a 5% increase compared to $769.0 million in the second quarter of 2003, including a benefit from changes in currency exchange rates of 2 percentage points. While Mattel enters into hedges to limit the effect of currency exchange rate fluctuations, management cannot predict the impact of changes in currency exchange rates, favorable or unfavorable, on future results of operations. See Item 3 – “Quantitative and Qualitative Disclosures About Market Risk.”

In the second quarter of 2004, a major thunderstorm damaged a Mattel distribution center located in Texas, which distributes and warehouses finished product for Mattel. Mattel believes it is adequately insured against all losses sustained and is in the process of determining the value of its claim. This event had no material impact on the results of operations in the second quarter and Mattel does not expect this event to have a material impact on its results of operations for the year ending December 31, 2004.

The following table provides a summary of Mattel’s consolidated results for the second quarter of 2004 and 2003:


	For the Three Months Ended June 30,
	2004					2003
(In millions, except percentage information)	Amount			% of Net Sales		Amount			% of Net Sales
Net sales	$	804.0		100.0	%	$	769.0		100.0	%

Gross profit	$	366.3		45.6	%	$	356.3		46.3	%
Advertising and promotion expenses		84.4		10.5			80.8		10.5
Other selling and administrative expenses		238.7		29.7			230.5		30.0
Restructuring charges		—		—			3.3		0.4

Operating income		43.2		5.4			41.7		5.4
Interest expense		16.4		2.0			18.2		2.4
Interest (income)		(4.1	)	(0.5	)		(5.3	)	(0.7	)
Other non-operating (income), net		(1.5	)	(0.1	)		—		—

Income before income taxes	$	32.4		4.0	%	$	28.8		3.7	%

Worldwide gross sales for the second quarter of 2004 increased 6%, which included a benefit from changes in currency exchange rates of 2 percentage points. Gross sales in the US increased 1% from the second quarter of 2003 and accounted for 56% of consolidated gross sales in 2004 compared to 58% in 2003, reflecting continued inventory management by retailers and increased competition in the doll category. In the second quarter of 2004, gross sales in international markets increased 12% compared to 2003, including a 4 percentage point benefit from changes in currency exchange rates.

During the fourth quarter of 2003, Mattel changed the way certain close out sales are classified in its consolidated statement of operations. Close out sales are sales of certain products that are no longer included in current product lines. Effective October 1, 2003, close out sales previously classified as a reduction of cost of sales are now classified as net sales in Mattel’s consolidated statements of operations. This change in classification has no impact on gross profit, operating income, net income, income per common share, or any element of the consolidated balance sheets or consolidated statements of cash flows for any date or period presented. For the second quarter of 2003, close out sales, which were classified as a reduction of cost of sales, were $12.0 million, resulting in a 1.6 percentage point benefit to net sales for the second quarter of 2004 when compared to the second quarter of 2003.

Worldwide gross sales of Mattel Brands increased 4% in the second quarter of 2004 to $513.3 million, including a 2 percentage point benefit from changes in currency exchange rates. Domestic gross sales decreased 1% and international gross sales increased 8%, including a 3 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Barbie^® declined 13% from 2003, including a benefit from changes in currency exchange rates of 1 percentage point. Domestic gross sales of Barbie^® declined 15% and international gross sales of Barbie^® declined 11%, including a benefit of 3 percentage points from changes in currency exchange rates. Worldwide gross sales of Other Girls Brands were flat compared to 2003 and included a benefit of 2 percentage points from changes in currency exchange rates. Worldwide gross sales in the Wheels category were up 22%, which included a 2 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of Hot Wheels^® were up 37%, driven by double-digit growth in both domestic and international markets due to new product introductions. Worldwide gross sales in the Entertainment category increased 31%, including a 3 percentage point benefit from changes in currency exchange rates, primarily due to increased sales of Harry Potter^™ and other Warner Bros. properties, including Batman^™ and Justice League^™, and continued strong sales of games and puzzles.

Worldwide gross sales of Fisher-Price Brands increased 6% in the second quarter of 2004 to $314.6 million, including a 1 percentage point benefit from changes in currency exchange rates. International gross sales increased 22%, including a 4 percentage point benefit from changes in currency exchange rates, while domestic gross sales increased 1%. Worldwide gross sales of Core Fisher-Price^® products were up 12%, including a benefit of 2 percentage points from changes in currency exchange rates, reflecting double-digit growth internationally as well as solid growth in the US driven by continued success in the Infant and BabyGear^™ product lines and gains in the interactive learning category.

American Girl Brands gross sales increased 18% in the second quarter of 2004 to $49.1 million, driven primarily by the opening of the American Girl Place^® store in New York City in November 2003 and increased sales of American Girl Today^®, American Girl Collection^® and Hopscotch Hill School^™ products.

Gross profit, as a percentage of net sales, was 45.6% in the second quarter of 2004, compared to 46.3% in the second quarter of 2003. The decline in gross profit, as a percentage of net sales, resulted from sales of lower margin products, including the impact of sales mix, change in the classification of close out sales and value enhancement initiatives, as well as higher royalty costs and external cost pressures. A benefit from changes in currency exchange rates, a charge taken in the second quarter of 2003 for plant consolidation and savings generated from continuous improvement programs partially mitigated the decline in gross profit resulting from the items discussed above for the second quarter of 2004. Mattel plans to continue to invest in value enhancement initiatives and expects the external cost pressures to continue in 2004 and is actively pursuing actions to offset or minimize these costs. If the current trend in sales mix continues, gross profit may be negatively impacted. In 2003, gross profit benefited from savings realized from the financial realignment plan, supply chain initiatives and favorable sales mix, partially offset by a $2.4 million financial realignment plan charge, primarily related to the consolidation of two of Mattel’s manufacturing facilities in Mexico.

Advertising and promotion expense was 10.5% of net sales in both the second quarter of 2004 and 2003. Mattel expects advertising and promotion expense, as a percentage of net sales, to remain at a level fairly consistent with 2003 to support its plan to invest in the business to drive long-term performance.

Other selling and administrative expenses were $238.7 million, or 29.7% of net sales, in the second quarter of 2004, compared to $230.5 million, or 30.0% of net sales, in the second quarter of 2003. Other selling and administrative expenses increased in the second quarter of 2004, primarily due to the following:

•

Investment in continuous improvement initiatives, including a $4.4 million charge for severance, primarily related to the relocation of the Matchbox^® and Tyco^® R/C Brands from New Jersey to California to take advantage of synergies in the Wheels business;

•

Higher insurance and employee-related costs;

•

The negative effect of changes in currency exchange rates on overhead expenses incurred in international markets, primarily Europe; and

•

Higher overhead costs associated with the new American Girl Place^® store in New York City that opened in November 2003.

The overall increase in other selling and administrative expenses was partially mitigated by net favorable legal settlements and a continued focus on controlling costs. Other selling and administrative expenses in the second quarter of 2003 included a $7.4 million financial realignment plan charge, largely related to the termination of a licensing arrangement and streamlining back office functions.

Non-Operating Items

Interest expense decreased from $18.2 million in the second quarter of 2003 to $16.4 million in the second quarter of 2004 due to lower average long-term debt in 2004 as a result of the repayment of $180.0 million in medium- and long-term debt during 2003, partially offset by higher average short-term borrowings in 2004.

Business Segment Results

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 Brands US, Fisher-Price Brands US and American Girl Brands.

Domestic Segment

Mattel Brands US gross sales decreased 1% in the second quarter of 2004 compared to the second quarter of 2003. Within this segment, Barbie^® gross sales declined 15%. The Wheels category experienced an increase in gross sales in the second quarter of 2004 driven by new product introductions in the Hot Wheels^® product line, partially offset by declines in sales of Matchbox^® and Tyco^® R/C brands. Gross sales in the Entertainment category were higher, largely due to strong sales of Harry Potter^™ and games and puzzles. Management believes that the overall decrease in the Mattel Brands US segment sales is the result of continued effort by retailers to manage their inventories and from increased competition in the doll category. Mattel Brands US segment income decreased 9% to $33.2 million in the second quarter of 2004, primarily due to lower sales and a decline in gross profit, as a percentage of net sales, caused primarily by sales of lower margin products, including the impact of value enhancement initiatives, change in classification of close out sales and sales mix.

Fisher-Price Brands US gross sales increased 1% in the second quarter of 2004 compared to the second quarter of 2003, reflecting an increase in sales of Core Fisher-Price^® products, due to strong sales of Infant and BabyGear^™ products, partially offset by a decrease in sales of Fisher-Price^® Friends. Fisher-Price Brands US segment income decreased from $13.6 million in the second quarter of 2003 to $2.9 million in the second quarter of 2004, primarily due to increased sales of lower margin products and higher royalty expense.

American Girl Brands gross sales increased 18% in the second quarter of 2004 compared to 2003, primarily as a result of the higher sales volume generated by the opening of the American Girl Place^® store in New York City in November 2003. American Girl Brands segment loss decreased from $2.9 million in the second quarter of 2003 to $2.6 million in the second quarter of 2004, driven by higher sales volume and improved gross profit, partially offset by higher overhead costs associated with its new retail store in New York City.

International Segment

The following table provides a summary of percentage changes in gross sales within the International segment for the three months ended June 30, 2004 versus the three months ended June 30, 2003:


Non-US Regions:	% Change in Gross Sales	Impact of Change in Currency (in % pts)
Europe	4	6
Latin America	18	(4)
Canada	(3)	2
Asia Pacific	53	8

Total International	12	4

International gross sales increased 12% in the second quarter of 2004 compared to the second quarter of 2003, including a benefit from changes in currency exchange rates of 4 percentage points. International gross sales of Barbie^® decreased 11%, including a benefit of 3 percentage points from changes in currency exchange rates. Strong growth in Hot Wheels^® products drove the double-digit increase in gross sales in the Wheels category. Gross sales in the Entertainment category also increased by double-digits, due to increased sales of Harry Potter^™ and other Warner Bros. properties, including Justice League^™ and Batman^™, and games and puzzles. Fisher-Price Brands gross sales increased 22%, including a 4 percentage point benefit from changes in currency exchange rates, reflecting strong sales of Core Fisher-Price^® products. International segment income decreased 26% in the second quarter of 2004, largely due to a decrease in gross profit as a result of a sales mix shift to lower margin products, pricing adjustments on certain products in Europe to remain competitive given the strength of the Euro versus the US dollar, and increased external costs and higher royalty costs.

Results of Operations - First Half

Consolidated Results

Net income for the first half of 2004 was $32.5 million, or $0.08 per diluted share, as compared to net income of $53.7 million, or $0.12 per diluted share, in the first half of 2003. A decline in gross profit, due to sales of lower margin products, including the impact of sales mix and value enhancement initiatives, external cost pressures and higher royalty costs were the primary drivers for lower profitability in the first half of 2004. Also contributing to the decline in first half profitability was a pre-tax charge of $15.2 million, primarily related to the elimination of approximately 260 positions as a result of headcount reductions at certain domestic and international locations, and integration of the Matchbox^® and Tyco^® R/C business located in New Jersey into its Hot Wheels^® business in California to take advantage of synergies in the Wheels business. These increased costs were partially offset by net favorable legal settlements totaling $10.1 million and gains on the sale of investments. For the first half of 2003, profitability was negatively impacted by pre-tax charges totaling $25.6 million related to the financial realignment plan.

For the first half of 2004, changes in currency exchange rates provided an overall benefit to Mattel’s results of operations. Net sales in the first half of 2004 were $1.6 billion, a 5% increase compared to $1.5 billion in the first half of 2003, including a benefit from changes in currency exchange rates of 3 percentage points.

The following table provides a summary of the consolidated results for the first half of 2004 and 2003:


	For the Six Months Ended
	June 30, 2004					June 30, 2003
(In millions, except percentage information)	Amounts			% of Net Sales		Amounts			% of Net Sales
Net sales	$	1,584.9		100.0	%	$	1,514.3		100.0	%

Gross profit	$	718.0		45.3	%	$	724.3		47.8	%
Advertising and promotion expenses		171.8		10.9			164.6		10.9
Other selling and administrative expenses		490.3		30.9			453.4		29.9
Restructuring charges		—		—			12.0		0.8

Operating income		55.9		3.5			94.3		6.2
Interest expense		31.6		2.0			35.6		2.4
Interest (income)		(9.0	)	(0.6	)		(11.7	)	(0.8	)
Other non-operating (income), net		(11.5	)	(0.7	)		(3.0	)	(0.2	)

Income before income taxes	$	44.8		2.8	%	$	73.4		4.8	%

Worldwide gross sales for the first half of 2004 increased 5% compared to the first half of 2003, including a 3 percentage point benefit from changes in currency exchange rates. Gross sales in the US remained essentially flat and accounted for 57% of consolidated gross sales in 2004 compared to 60% in 2003. Gross sales for the first half of 2004 in international markets increased 13% compared to 2003, including a 7 percentage point benefit from changes in currency exchange rates.

During the fourth quarter of 2003, Mattel changed the way certain close out sales are classified in its consolidated statement of operations. Close out sales are sales of certain products that are no longer included in current product lines. Effective October 1, 2003, close out sales previously classified as a reduction of cost of sales are now classified as net sales in Mattel’s consolidated statements of operations. This change in classification has no impact on gross profit, operating income, net income, income per common share, or any element of the consolidated balance sheets or consolidated statements of cash flows for any date or period presented. For the first half of 2003, close out sales, which were classified as a reduction of cost of sales, were $25.3 million, resulting in a 1.7 percentage point benefit to net sales for the first half of 2004 when compared to the first half of 2003.

Worldwide gross sales of Mattel Brands in the first half of 2004 increased 2% to $1.0 billion, including a 4 percentage point benefit from changes in currency exchange rates. Domestic gross sales decreased 7% and international gross sales increased 10%, including a benefit from changes in currency exchange rates of 7 percentage points. Worldwide gross sales of Barbie^® decreased 9% from 2003, including a benefit from changes in currency exchange rates of 4 percentage points. Domestic gross sales of Barbie^® decreased 15% and international gross sales of Barbie^® decreased 4%, including a 7 percentage point benefit from changes in currency exchange rates, as a result of competition in the doll category. Worldwide gross sales in the Wheels category increased 10% compared to 2003, including a 3 percentage point benefit from changes in currency exchange rates. Worldwide gross sales of the Hot Wheels^® product line increased by double-digits, driven by international growth resulting from new product introductions. Worldwide gross sales in the Entertainment category increased compared to 2003, mainly attributable to strong sales of Warner Bros. properties and games and puzzles.

Worldwide gross sales of Fisher-Price Brands in the first half of 2004 compared to the first half of 2003 increased 9% to $578.6 million, including a benefit of 2 percentage points from changes in currency exchange rates. Domestic gross sales increased 5%, while international sales grew 21%, including an 8 percentage point benefit from changes in currency exchange rates. The increase in the sales over 2003 was mainly attributable to new learning products introduced in the fall of 2003.

Gross sales of American Girl Brands increased 17% in the first half of 2004 over the first half of 2003 to $103.3 million, due primarily to the opening of the American Girl Place^® store in New York City in November 2003 with continued strength in American Girl Today^® and the introduction of the Hopscotch Hill School^™ brand.

Gross profit, as a percentage of net sales, was 45.3% in the first half of 2004, compared to 47.8% in the first half of 2003. The decrease in gross profit, as a percentage of net sales, resulted from sales of lower margin products, including the impact of sales mix, change in the classification of close out sales and value enhancement initiatives, external cost pressures and higher royalty costs. This decline was partially offset by the benefit from changes in currency exchange rates and savings generated from continuous improvement programs. Mattel plans to continue to invest in value enhancement initiatives and expects the external cost pressures to continue during the remainder of 2004 and is actively pursuing actions to offset or minimize these costs. In the first half of 2003, the higher gross profit, as a percentage of net sales, was due to savings realized from the financial realignment plan and supply chain initiatives, and favorable sales mix. Cost of sales in the first half of 2003 includes a charge of $4.1 million for the financial realignment plan, primarily related to the consolidation of two of Mattel’s manufacturing facilities in Mexico.

Advertising and promotion expense was 10.9% of net sales in both the first half of 2004 and 2003. Mattel expects advertising and promotion expense, as a percentage of net sales, to remain at a level fairly consistent with 2003 to support its plan to invest in the business to drive long-term performance.

Other selling and administrative expenses were $490.3 million, or 30.9% of net sales, in the first half of 2004, compared to $453.4 million, or 29.9% of net sales, in the first half of 2003. Other selling and administrative expenses increased in the first half of 2004, primarily due to the following:

•

Investment in continuous improvement activities, including a charge of $15.2 million for severance related to the elimination of approximately 260 positions as a result of headcount reductions at certain domestic and international locations and relocation of the Matchbox^® and Tyco^® R/C Brands from New Jersey to California to take advantage of synergies in the Wheels business;

•

Higher insurance and employee-related costs;

•

The negative effect of changes in currency exchange rates on overhead expenses incurred in international markets, primarily Europe; and

•

Higher overhead costs associated with the new American Girl Place^® store in New York City that opened in November 2003.

of 2003 includes an $8.6 million financial realignment plan charge, largely related to streamlining back office functions and the termination of a licensing arrangement.

Non-Operating Items

Interest expense decreased from $35.6 million in the first half of 2003 to $31.6 million in the first half of 2004 due to lower average long-term debt in the first half of 2004 as a result of the repayment of $180.0 million in long-term debt during 2003, partially offset by higher average short-term borrowings in the first half of 2004. Interest income decreased from $11.7 million in 2003 to $9.0 million in 2004, due to lower average interest rates in 2004 relative to 2003. Other non-operating (income), net was $11.5 million in 2004 compared to $3.0 million in 2003, primarily due to gains on sales of marketable securities during the first quarter of 2004.

As of June 30, 2004, the pre-tax unrealized holding gains on marketable equity securities held by Mattel were $48.1 million ($30.3 million after-tax). Prospectively, management expects to periodically sell additional marketable securities.

Business Segment Results

Domestic Segment

Mattel Brands US gross sales decreased 7% in the first half of 2004 compared to the first half of 2003. Within this segment, gross sales of Barbie^® declined 15%. Management believes that Mattel Brands US segment sales continue to be negatively impacted by the continued effort by retailers to manage their inventories and from increased competition in the doll category. Mattel Brands US segment income decreased 31% to $73.6 million in the first half of 2004, primarily due to lower sales and a decline in gross profit resulting from increased sales of lower margin products, including the impact of sales mix, change in classification of close out sales and value enhancement initiatives, external cost pressures and increased royalty costs.

Fisher-Price Brands US gross sales increased 5% in the first half of 2004 compared to 2003, reflecting an increase in sales of Core Fisher-Price^®, mainly Infant and BabyGear^™ products. Fisher-Price Brands US segment income decreased from $14.9 million in the first half of 2003 to $3.8 million in the first half of 2004, primarily due to increased sales of lower margin products and increased royalty expense.

American Girl Brands gross sales increased 17% in the first half of 2004 compared to 2003, primarily as a result of the higher sales volume generated by the opening of American Girl Place^® store in New York City in November 2003. American Girl Brands segment loss decreased from $4.5 million in the first half of 2003 to $2.9 million in the first half of 2004, driven by higher sales volume and improved gross profit, partially offset by higher overhead costs associated with its new retail store in New York City.

International Segment

The following table provides a summary of percentage changes in gross sales within the International segment for the six months ended June 30, 2004 versus the six months ended June 30, 2003:


Non-US Regions:	% Change in Gross Sales	Impact of Change in Currency (in % pts)
Europe	6	10
Latin America	30	(2)
Canada	8	7
Asia Pacific	47	11

Total International	13	7

International segment gross sales increased 13% in the first half of 2004 compared to the first half of 2003, which included a benefit from changes in currency exchange rates of 7 percentage points. Gross sales of Barbie^® decreased 4%, including a benefit from changes in currency exchange rates of 7 percentage points. Gross sales in the Wheels category were higher in the first half of 2004 compared to the first half of 2003, mainly due to double-digit growth in Hot Wheels^® products. Gross sales in the Entertainment category increased in the first half of 2004 compared to the first half of 2003, primarily due to strong sales of Warner Bros. properties, including Justice League^™, Batman^™ and Harry Potter^™, and increased sales of Yu-Gi-Oh^™ and games and puzzles. Fisher-Price Brands gross sales increased 21%, including a benefit from changes in currency exchange rates of 8 percentage points, due to strong growth in Core Fisher-Price^® products and Fisher-Price^® Friends. International segment income decreased 45% in the first half of 2004 compared to the first half of 2003 as a result of a sales mix shift to lower margin products, price adjustments on certain products in Europe to remain competitive given the strength of the Euro versus the US dollar, and increased external cost pressures.

Financial Realignment Plan

In 2003, Mattel completed its financial realignment plan, originally announced during the third quarter of 2000, designed to improve gross margin; selling and administrative expenses; operating income; and cash flows. Since its inception, Mattel recorded a total pre-tax charge of $250.0 million, or approximately $171 million after-tax, of which approximately $123 million represented cash expenditures and $48 million represented noncash writedowns.

Mattel exceeded the targeted initial cumulative pre-tax cost savings of approximately $200 million, achieving cumulative pre-tax cost savings of approximately $221 million, of which approximately $55 million, $87 million and $79 million were realized in 2001, 2002 and 2003, respectively.

A summary of the components of the financial realignment plan is as follows:


	For the Year Ended
(In millions)	2000		2001		2002		2003		Total
Gross profit	$	78.6	$	28.2	$	10.4	$	4.1	$	121.3
Advertising and promotion expenses		4.8		0.3		—		—		5.1
Other selling and administrative expenses		13.4		6.0		13.3		8.6		41.3
Restructuring and other charges		22.9		15.7		24.6		12.7		75.9
Other non-operating expense, net		5.5		—		—		0.9		6.4

Pre-tax charges	$	125.2	$	50.2	$	48.3	$	26.3	$	250.0

Approximate after-tax charges	$	84	$	35	$	32	$	20	$	171

Liquidity and Capital Resources

Mattel’s primary sources of liquidity for the first half of 2004 were cash on hand at the beginning of the year and short-term seasonal borrowings. Cash flows from operations 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 realized 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 an inability to meet its debt covenant requirements, which include maintaining consolidated debt-to-capital 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.

Operating Activities

Cash flows used for operating activities decreased by $81.1 million to $518.4 million for the first half of 2004 compared to $599.5 million in the first half of 2003, largely due to lower use of cash for working capital, partially offset by the decrease in income from operations. The working capital improvement was partially attributable to the decrease in the amount of incentive compensation payments made in the first quarter of 2004 compared to the first quarter of 2003, lower inventory build and higher accounts receivable collections. Working capital in the first quarter of 2003 was negatively impacted by payments of year end 2002 accruals for incentive compensation and the shareholder litigation settlement.

Investing Activities

During the first half of 2004 and 2003, Mattel used cash flows of $62.9 million and $91.7 million, respectively, for investing activities, primarily in tooling and other property, plant and equipment to support existing and new products and its long-term information technology strategy. In 2004, the investment in tooling and other property, plant and equipment was partially offset by proceeds from the sale of investments.

Financing Activities

Cash flows used for financing activities in the first half of 2004 increased $203.2 million to $202.6 million, primarily due to the purchase of 14.7 million shares of treasury stock and repayment of medium-term notes upon maturity, partially offset by increased short-term borrowings. During the second half of 2004, Mattel intends to repay $40.0 million in medium-term notes upon maturity.

Capital and Investment Framework

To guide future capital deployment decisions, with a goal of maximizing shareholder value, Mattel’s board of directors in 2003 established the following capital and investment framework:

•

To maintain approximately $800 million to $1 billion in year-end cash available to fund a substantial portion of seasonal working capital;

•

To maintain a year-end debt-to-capital ratio of about 25%;

•

To invest approximately $180 million to $200 million in capital expenditures annually to maintain and grow the business;

•

To make strategic acquisitions consistent with Mattel’s vision of providing “the world’s premier toy brands – today and tomorrow”; and

•

To return excess funds to shareholders through dividends and share repurchases.

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 shareholders through cash dividends and, depending on market conditions, share repurchases. However, the ability to implement successfully the capital deployment plan is directly dependent on Mattel’s ability to generate strong cash flows from operating activities. There is no assurance that Mattel will continue to generate strong cash flows from operating activities or achieve its targeted goals from investing activities.

Seasonal Financing

Mattel’s financing of seasonal working capital typically grows throughout the first half of the year and peaks in the third or fourth quarter, when inventories are at their highest levels in anticipation of expected second half sales volume and when accounts receivable are at their highest levels due to increased sales volume, consistent with the industry taken as a whole. Mattel expects to finance its seasonal working capital requirements for the next twelve months by using existing and internally generated cash, issuing commercial paper, selling certain trade receivables, and using various short-term bank lines of credit. In the first quarter of 2004, Mattel amended and restated its domestic unsecured committed revolving credit facility. The size of the facility was increased to $1.30 billion, and the expiration date of the facility was extended to March 2007. The other terms and conditions of the amended and restated facility are substantially similar to those contained in the previous facility. Interest is charged at various

rates selected by Mattel, ranging from market commercial paper rates to the bank reference rate. The unsecured committed revolving credit facility contains a variety of covenants, including financial covenants that require Mattel to maintain certain consolidated
debt-to-capital and interest coverage ratios. Specifically, Mattel is required to meet these financial covenant ratios at the end of each fiscal quarter and fiscal year, using the formulae specified in the credit agreement to calculate the ratios. Mattel was in compliance with such covenants at the end of the second quarter of 2004. As of June 30, 2004, Mattel’s consolidated debt-to-capital ratio, as calculated per the terms of the credit agreement, was 0.28 to 1 (compared to a maximum allowed of 0.60 to 1) and Mattel’s interest coverage ratio was 12.71 to 1 (compared to a minimum allowed of 3.50 to 1). The unsecured committed revolving credit facility is a material agreement and failure to comply with the financial covenant ratios may result in an event of default under the terms of the facility. If Mattel defaulted under the terms of the unsecured committed revolving credit facility, its ability to meet its seasonal financing requirements could be adversely affected.

To finance seasonal working capital requirements of certain foreign subsidiaries, Mattel avails itself of individual short-term credit lines with a number of banks. Mattel expects to extend these credit lines throughout 2004.

Mattel believes the cash on hand at the beginning of 2004, amounts available under its domestic unsecured committed revolving credit facility, its uncommitted money market facility, and its foreign credit lines will be adequate to meet its seasonal financing requirements in 2004.

Mattel sells certain domestic and foreign trade receivables as one of its means for financing its seasonal working capital requirements. Mattel has a $300.0 million domestic receivables sales facility that is a sub-facility of Mattel’s domestic unsecured committed revolving credit facility. The outstanding amount of receivables sold under the domestic receivables facility may not exceed $300.0 million at any given time, and the amount available to be borrowed under the credit facility is reduced to the extent of any such outstanding receivables sold. Under the domestic receivables facility, certain trade receivables are sold to a group of banks, which currently include, among others, Bank of America, N.A. as administrative agent, Citicorp USA, Inc. and Barclays Bank PLC, as co-syndication agents, and Societe Generale and BNP Paribas, as co-documentation agents. Pursuant to the domestic receivables facility, Mattel Sales Corp. and Fisher-Price, Inc. (which are wholly-owned subsidiaries of Mattel) can sell eligible trade receivables from Wal-Mart and Target to Mattel Factoring, Inc. (“Mattel Factoring”), a Delaware corporation and wholly-owned, consolidated subsidiary of Mattel. Mattel Factoring is a special purpose entity whose activities are limited to purchasing and selling receivables under this facility. Pursuant to the terms of the domestic receivables facility and simultaneous with each receivables purchase, Mattel Factoring sells those receivables to the bank group. Mattel records the transaction, reflecting cash proceeds and sale of accounts receivable on its consolidated balance sheet, at the time of the sale of the receivables to the bank group.

Mattel’s subsidiaries, Mattel International Holdings B.V., a Netherlands company, Mattel France S.A.S., a French company, and Mattel GmbH, a German company, have entered into a Euro 150 million European trade receivables facility, pursuant to which Mattel France S.A.S. and Mattel GmbH may sell trade receivables to a bank, Societe Generale Bank Nederland N.V. The receivables sales are accounted for as a sale. As with the domestic receivables facility, each sale of accounts receivable is recorded on Mattel’s consolidated balance sheet at the time of such sale.

No Mattel subsidiary is used as a special purpose entity in connection with these transactions. Under the European receivables facility, the outstanding amount of receivables sold may not exceed Euro 60 million from February 1 through July 31 of each year and may not exceed Euro 150 million at all other times. Pursuant to a letter agreement between Societe Generale Bank Nederland N.V. and Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH effective June 29, 2003, the commitment termination date for the European receivables facility was extended to June 24, 2005.

The outstanding amounts of accounts receivable that have been sold under these facilities and other factoring arrangements, net of collections from customers, have been excluded from Mattel’s consolidated balance sheets and are summarized as follows:


(In millions)	June 30, 2004		June 30, 2003		Dec. 31, 2003
Receivables sold pursuant to the:
Domestic receivables facility	$	58.9	$	55.6	$	279.5
European receivables facility		56.2		64.9		94.5
Other factoring arrangements		12.5		—		82.0

	$	127.6	$	120.5	$	456.0

Financial Position

Mattel’s cash and short-term investments decreased $219.3 million to $363.5 million at June 30, 2004, compared to $582.8 million at June 30, 2003, primarily due to the purchase of treasury stock, payment of dividends, repayment of long-term debt upon maturity and investment in capital, largely offset by cash flows generated from operating activities. Compared to year end 2003, cash and short-term investments decreased $789.2 million, primarily due to cash flows used for operating activities and the purchase of treasury stock. Accounts receivable, net increased $78.8 million to $622.7 million at June 30, 2004 compared to $543.9 million at year end 2003, primarily due to the seasonality of collections. Inventories increased $168.9 million to $557.5 million at June 30, 2004 compared to $388.7 million at year end 2003 caused by the seasonal inventory buildup to support sales in the second half of the year.

Current portion of long-term debt decreased $121.2 million to $41.0 million at June 30, 2004 compared to $162.2 million at June 30, 2003, primarily due to repayment of the $150.0 million of 6% senior notes and $10.0 million of medium-term notes upon maturity, partially offset by the reclassification of $40.0 million of medium-term notes from long-term debt to current portion of long-term debt based on their maturity in 2004. Accrued liabilities decreased $385.2 million since year end 2003 to $467.7 million at June 30, 2004, mainly due to lower receivables collections due to bank related to the European receivables facility, payment of incentive compensation, and lower advertising and royalty accruals.

A summary of Mattel’s capitalization is as follows:


(In millions, except percentage information)	June 30, 2004				June 30, 2003				Dec. 31, 2003
Medium-term notes	$	400.0	14	%	$	440.0	15	%	$	400.0	13	%
Senior notes		150.0	5			150.0	5			150.0	5
Other long-term debt obligations		38.6	1			39.6	1			39.1	1

Total long-term debt		588.6	20			629.6	21			589.1	19
Other long-term liabilities		241.9	9			202.6	7			237.9	8
Stockholders’ equity		1,979.6	71			2,092.9	72			2,216.2	73

	$	2,810.1	100	%	$	2,925.1	100	%	$	3,043.2	100	%

Total long-term debt decreased $41.0 million at June 30, 2004 compared to June 30, 2003 due to the aforementioned reclassification of the $40.0 million of medium-term notes maturing in the next twelve months to current portion of long-term debt. Mattel expects to satisfy its future long-term capital needs through the generation of corporate earnings and the issuance of long-term debt instruments. Stockholders’ equity decreased $113.3 million since June 30, 2003, primarily due to the purchase of treasury stock during 2003 and 2004 and payment of a dividend on common stock in the fourth quarter of 2003, partially offset by income from operations and cash received from the exercise of stock options. Since year end 2003, stockholders’ equity declined $236.6 million, largely due to the purchase of treasury stock.

Mattel’s debt-to-capital ratio, including short-term borrowings and current portion of long-term debt, improved from 28% at June 30, 2003 to 26% at June 30, 2004 due to the repayment of long-term debt. Mattel’s objective is to continue to maintain a year-end debt-to-capital ratio of approximately 25%.

New Accounting Pronouncements

In March 2004, the FASB published an Exposure Draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95. The proposed change in accounting would replace existing requirements under SFAS No. 123 and APB Opinion No. 25. The proposed statement would require public companies to recognize the cost of employee services received in exchange for equity instruments, based on the grant-date fair value of those instruments, with limited exceptions. The proposed statement would also affect the pattern in which compensation cost would be recognized, the accounting for employee share purchase plans, and the accounting for income tax effects of share-based payment transactions. The Exposure Draft also notes that the use of a lattice model, such as the binomial model, to determine the fair value of employee stock options, is preferable. Mattel currently uses the Black-Scholes pricing model to determine the fair value of its employee stock options. Use of a lattice model to determine the fair value of employee stock options may result in compensation cost materially different from those pro forma costs disclosed in Note 13 to the consolidated financial information. Mattel is currently determining what impact the proposed statement would have on its results of operations or financial position.

In November 2003 and March 2004, the EITF reached final consensus on EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The EITF requires a company to apply a three-step model to determine whether an impairment of an investment, within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, is other-than-temporary. EITF Issue No. 03-1

shall be applied prospectively to all current and future investments, in interim or annual reporting periods beginning after June 15, 2004. Mattel believes the adoption of EITF Issue No. 03-1 will not have a material impact on its results of operations or financial position.

Non-GAAP Financial Measure

In this Quarterly Report on Form 10-Q, Mattel includes a non-GAAP financial measure, gross sales, which it uses to analyze its continuing 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. Consistent with its segment reporting, Mattel presents changes in gross sales as a metric for comparing its aggregate, business unit and geographic results to highlight significant trends in Mattel’s business. Changes in gross sales are discussed because most sales adjustments are not allocated to individual brands, 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 Three Months Ended						For the Six Months Ended
(In thousands)	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Revenues
Domestic:
Mattel Brands US	$	224,540		$	227,662		$	487,189		$	521,421
Fisher-Price Brands US		215,874			214,751			398,693			380,599
American Girl Brands		49,142			41,587			103,269			87,992

Total Domestic		489,556			484,000			989,151			990,012
International		389,793			349,182			743,765			655,705

Gross sales		879,349			833,182			1,732,916			1,645,717
Sales adjustments		(75,347	)		(64,188	)		(147,970	)		(131,440	)

Net sales	$	804,002		$	768,994		$	1,584,946		$	1,514,277

Factors That May Affect Future Results

(Cautionary Statement Under the Private Securities Litigation Reform Act of 1995)

Certain written and oral statements made or incorporated by reference from time to time by Mattel or its representatives in this Quarterly Report on Form 10-Q, other filings or reports filed with the Securities and Exchange Commission (“SEC”), press releases, conferences, or otherwise, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and may include, but are not limited to, statements about: sales and inventory levels; brand and customer management programs; increased competition; initiatives to promote revenue growth; globalization initiatives; restructuring and financial realignment plans; special charges and other non-recurring charges; initiatives aimed at anticipated cost savings; operating efficiencies, including those associated with supply chain and information technology initiatives; capital and investment framework (including statements about free cash flow, seasonal working capital, debt-to-capital ratios, capital expenditures, strategic acquisitions, dividends and share repurchases); cost increases; increased advertising and promotion spending; and profitability. 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 for any such forward-looking statements. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results,

performance, or achievements. Forward-looking statements can be identified by the use of terminology such as “believe,” “anticipate,” “expect,” “estimate,” “may,” “will,” “should,” “project,” “continue,” “plans,” “aims,” “intends,” “likely,” or other similar words or phrases. Except for historical matters, the matters discussed in this Quarterly Report on Form 10-Q and other statements or filings made by Mattel from time-to-time may be forward-looking statements. Management cautions you that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. In addition to the important factors detailed herein and from time to time in other reports filed by Mattel with the SEC, including Forms 8-K, 10-Q and 10-K, the following important factors could cause actual results to differ materially from past results or those suggested by any forward-looking statements.

Competition and New Product Introductions

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. The toy industry experiences significant, sudden shifts in demand caused by “hit” toys and trends, which are often unpredictable. In recent years there have been 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, Mattel competes with many other companies, both large and small, which means that Mattel’s market position is always at risk. Mattel’s ability to maintain its current market share, and increase its market share or establish market share in new product categories, will depend on Mattel’s ability to satisfy consumer preferences, enhance existing products, develop and introduce new products, and achieve market acceptance of such products. For example, in 2004, Mattel has introduced a new “worlds of” concept for the Barbie^® product line. This concept is unproven and may not succeed. 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 results of operations may be adversely affected.

Seasonality, Managing Production and Predictability of Orders

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 seasonal, with a majority of retail sales occurring during the period of September through December. As a result, Mattel’s annual operating results will depend, in large part, on sales during the relatively brief traditional holiday season. Retailers are attempting to manage their inventories better, requiring 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 result in purchases after the holiday season) may negatively impact customer re-orders during the holiday season. Shipping disruptions limiting the availability of ships or containers in Asia during peak demand times may affect Mattel’s ability to deliver its products in time to meet retailer demand. These factors may decrease sales or 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.

Uncertain and Adverse General Economic Conditions

Current conditions in the domestic and global economies have a certain level of uncertainty. As a result, it is difficult to estimate the level of growth for the economy as a whole. It is even more difficult to estimate growth in various parts of the economy, including the markets in which Mattel participates. Because all components of Mattel’s budgeting and forecasting are dependent upon estimates of growth in the markets it serves and demand for its products, the prevailing economic uncertainties render estimates of future income and expenditures even more difficult than usual to make. Adverse changes may occur as a result of soft global economies, wavering consumer confidence caused by the threat or occurrence of terrorist attacks such as those in the US on September 11, 2001, war, or other factors affecting economic conditions generally. Such changes may negatively affect the sales of Mattel’s products, increase exposure to losses from bad debts, or increase costs associated with manufacturing and distributing these products.

Customer Concentration and Pricing

A small number of customers account for a large share of Mattel’s net sales. For 2003, Mattel’s three largest customers, Wal-Mart, Toys “R” Us and Target, in the aggregate accounted for approximately 47% of net sales, and its ten largest customers in the aggregate accounted for approximately 59% 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. 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. In 2003, several large customers engaged in price cutting of toy products during the holiday season, which, if it continues, could have a long-term impact on Mattel’s gross profit, profitability and consumers’ perception of the brand equity of Mattel’s products.

Competition from Private Label Toys

Consumer products companies generally, including those in the toy business, have experienced in recent years the phenomenon of retail customers developing their own private label goods that directly compete with the products of traditional manufacturers. Some retail chains that are customers of Mattel sell private-label toys designed, manufactured and branded by the retailers themselves. Such toys may be sold at prices lower than comparable toys sold by Mattel, and may result in lower purchases of Mattel-branded products by such retailers. In some cases, retailers who sell such private label toys are larger than Mattel and may have substantially more resources than Mattel.

Rationalization of Mass Market Retail Channel and Bankruptcy of Key Customers

Many of Mattel’s key customers are mass market retailers. The mass market retail channel in the US has experienced significant shifts in market share among competitors in recent years, causing some large retailers to experience liquidity problems. In the last three years, four large customers of Mattel filed for bankruptcy. In

addition, 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 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, it could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Adequate Supplies; Cost Increases

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 raw materials and components. Although Mattel works closely with suppliers to avoid these types of shortages, there can be no assurances that Mattel will not encounter these problems in the future. A reduction or interruption in supplies or a significant increase in the price of one or more supplies, such as fuel and resin expenses, could have a material adverse effect on Mattel’s business. Cost increases as a result of shortages of materials or rising service expenses, including expenses related to employee health plans and insurance policies, could increase the cost of Mattel’s products and result in lower sales.

Litigation and Disputes

Mattel is involved in a number of litigation matters. An unfavorable resolution of pending litigation could have a material adverse effect on Mattel’s financial condition. Litigation may result in substantial costs and expenses and significantly divert the attention of Mattel’s management regardless of the outcome. There can be no assurance that Mattel will be able to achieve a favorable settlement of pending litigation or obtain a favorable resolution of litigation if it is not settled. In addition, current and future litigation, governmental proceedings, labor disputes or environmental matters could lead to increased costs or interruptions of normal business operations of Mattel.

Recalls

Mattel is subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities, and its products could be subject to involuntary recalls and other actions by such authorities. Concerns about product safety may lead Mattel to voluntarily recall selected products. Mattel has experienced, and in the future may experience, defects or errors in products after their production and sale to customers. Such defects or errors could result in the rejection of Mattel’s products by customers, damage to its reputation, lost sales, diverted development resources and increased customer service and support costs, any of which could harm Mattel’s business. Individuals could sustain injuries from Mattel’s products, and Mattel may be subject to claims or lawsuits resulting from such injuries. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, Mattel’s insurance coverage. Moreover, Mattel may be unable to obtain adequate liability insurance in the future. Recalls, post-manufacture repairs of Mattel products, absence or cost of insurance and administrative costs associated with recalls could harm Mattel’s reputation, increase costs or reduce sales.

Protection of Intellectual Property Rights

The value of Mattel’s business depends to a large degree on its ability to protect its intellectual property, including its trademarks, trade names, copyrights, patents and trade secrets in the US and around the world. Any failure by Mattel to protect its proprietary intellectual property and information, including any successful challenge to Mattel’s ownership of its intellectual property or material infringements of such property, could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Political Developments, including Trade Relations, and the Threat or Occurrence of War or Terrorist Activities

Mattel’s business is worldwide in scope, including operations in 36 countries. 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 such activities, could materially impact Mattel, its personnel and facilities, its customers and suppliers, retail and financial markets and general economic conditions.

Manufacturing Risk; Severe Acute Respiratory Syndrome (“SARS”) and Other Diseases

Mattel owns and operates 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 plants and contractors 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 manufacturers or their suppliers contract SARS 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

Mattel has significant operations, including its headquarters, near major earthquake faults in Southern California. Southern California has experienced earthquakes, wildfires and other natural disasters in recent years. A catastrophic event 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 business negatively, harming Mattel’s operating results.

Changes in Currency Exchange Rates

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 or fully hedging such exposure using foreign currency forward exchange and option contracts. Such contracts are primarily used to hedge Mattel’s purchase and sale of inventory, 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 the government-fixed foreign currency exchange rates, including the Chinese yuan, could have a material adverse effect on Mattel’s business and results of operations.

Financing Matters

Increases in interest rates, both domestically and internationally, could negatively affect Mattel’s cost of financing both its operations and investments. Any reduction in Mattel’s credit ratings could increase the cost of obtaining financing. Additionally, Mattel’s ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as an inability to meet its debt covenant requirements, which include maintaining consolidated debt-to-capital and interest coverage ratios. Mattel’s ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity.

Advertising and Promotion

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 such programs. If Mattel does not successfully market its products or if media or other advertising or promotional costs increase, these factors could have a material adverse affect on Mattel’s business, financial condition and results of operations.

Success of New Initiatives

Mattel has announced initiatives to improve the execution of its core business, globalize and extend Mattel’s brands, create new brands, develop people, and improve productivity and simplify processes, including a supply chain initiative, a long-term information technology strategy and new initiatives designed to drive growth in sales. Such initiatives involve complex decision making as well as extensive and intensive execution, and the success of such initiatives is not assured. Failure to successfully implement any of these initiatives could have a material adverse effect on Mattel’s business, financial condition and results of operations.

Changes in Laws and Regulations

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. Such regulations may include accounting standards, taxation requirements (including changes in applicable tax rates, new tax laws and revised tax law interpretations), trade

restrictions, regulations regarding financial matters, environmental regulations, advertising directed toward children, safety and other administrative and regulatory restrictions. Changes in laws or regulations may lead to increased costs, changes in Mattel’s consolidated effective tax rate, or the interruption of normal business operations that would negatively impact its financial condition and results of operations.

Acquisitions, Dispositions and Takeover Defenses

Mattel may engage in acquisitions, mergers or dispositions, which may affect the profit, revenues, profit margins, debt-to-capital ratios, 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 that, if identified, it will be able to acquire such targets on acceptable terms. Additionally, there can 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. 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.

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 materially and adversely affected. The factors listed above are not exhaustive. Other sections of this Quarterly Report on Form 10-Q 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 such 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 Quarterly Report on Form 10-Q 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 3.

Quantitative and Qualitative Disclosures About Market Risk.

Risk Management

Foreign currency exchange rate fluctuations may impact Mattel’s results of operations and cash flows. Inventory purchase transactions denominated in the Euro, British pound sterling, Mexican peso, Hong Kong dollar and Indonesian rupiah are the primary transactions that cause foreign currency transaction exposure for Mattel. Mattel seeks to mitigate its exposure to market risk by monitoring its foreign currency transaction exposure for the year and partially or fully hedging such exposure using foreign currency forward exchange and option contracts. Such contracts are primarily used to hedge Mattel’s purchase and sale of inventory, and other intercompany transactions denominated in foreign currencies. These contracts generally have maturity dates of up to 18 months. The majority of all intercompany receivables and payables denominated in foreign currencies are hedged. For those intercompany

receivables and payables that are not hedged, 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) expense, net based on the nature of the underlying transaction. However, for unhedged intercompany inventory transactions, the transaction gains or losses 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 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 foreign subsidiaries. Assets and liabilities of foreign subsidiaries are translated into US dollars at fiscal period-end exchange rates. Income, expense and cash flow items are translated at weighted average exchange rates prevailing during the fiscal period. The resulting currency translation adjustments are recorded as a component of accumulated other comprehensive loss within stockholders’ equity. Mattel’s primary foreign currency translation exposures are on its net investment in entities having functional currencies denominated in the Euro, British pound sterling, Mexican peso and Indonesian rupiah.

Item 4.

Controls and Procedures.

As of June 30, 2004, Mattel’s disclosure controls and procedures were evaluated. Based on this evaluation, Robert A. Eckert, Mattel’s principal executive officer, and Kevin M. Farr, Mattel’s principal financial officer, concluded that these disclosure controls and procedures were effective as of June 30, 2004, in timely alerting them to material information relating to Mattel required to be included in Mattel’s periodic reports.

Beginning in the fourth quarter of 2002, Mattel began and continues to implement a planned conversion to new and upgraded financial and human resources information technology systems. Mattel has evaluated the effect on its internal control over financial reporting of this conversion and determined that this conversion has not materially affected, and is not reasonably likely to materially affect, Mattel’s internal control over financial reporting. Mattel has not made any significant changes to its internal control over financial reporting or in other factors that could significantly affect these controls subsequent to June 30, 2004.

PART II — OTHER INFORMATION

Item 2.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

During the second quarter of 2004, Mattel repurchased its common stock in the open market as follows:

ISSUER PURCHASES OF EQUITY SECURITIES


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
April 1 – April 30	5,925,000	$	17.43	5,925,000	$	142,970,614
May 1 – May 31	8,252,671		17.28	14,177,671	$	384,333
June 1 – June 30	—		—	—	$	384,333

Total	14,177,671	$	17.34	14,177,671	$	384,333

In July 2003, Mattel’s board of directors approved a share repurchase program of up to $250.0 million. During 2003, Mattel repurchased 12.7 million shares at a cost of $244.4 million pursuant to this program. In November 2003, the board of directors approved an increase to the share repurchase program of an additional $250.0 million, bringing the total authorized repurchases to $500.0 million. In the first half of 2004, Mattel repurchased 14.7 million shares at a cost of $255.1 million pursuant to this program. Mattel’s share repurchase program has no expiration date.

Item 4.

Submission of Matters to a Vote of Security Holders.

The Annual Meeting of Stockholders of Mattel was held on May 13, 2004. Proxies for the meeting were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934 and there was no solicitation in opposition to that of management. All of management’s nominees for directors as listed in the proxy statement were elected pursuant to the process described in the proxy statement, with the number of votes cast as follows:


Name of Nominee	Votes “FOR”	Votes Withheld From This Nominee	Votes Withheld From All Nominees
Eugene P. Beard	347,233,497	9,288,060	11,018,531
Michael J. Dolan	356,126,381	395,177	11,018,531
Robert A. Eckert	346,774,839	9,746,719	11,018,531
Tully M. Friedman	350,708,302	5,813,255	11,018,531
Ronald M. Loeb	347,142,486	9,379,071	11,018,531
Dr. Andrea L. Rich	352,297,482	4,224,076	11,018,531
Ronald L. Sargent	356,040,450	481,108	11,018,531
Christopher A. Sinclair	347,501,939	9,019,619	11,018,531
G. Craig Sullivan	352,378,214	4,143,343	11,018,531
John L. Vogelstein	347,888,255	8,633,302	11,018,531
Kathy Brittain White	352,243,534	4,278,024	11,018,531

The proposal to ratify the selection of PricewaterhouseCoopers LLP as independent auditors for Mattel for the year ending December 31, 2004, was approved by the following vote:

Shares Voted

“FOR”

Shares Voted

“AGAINST”

Shares

“ABSTAINING”

Broker

“NON-VOTE”

344,739,307

20,495,559

2,305,222

—

A stockholder proposal regarding management compensation was defeated by the following vote:

Shares Voted

“FOR”

Shares Voted

“AGAINST”

Shares

“ABSTAINING”

Broker

“NON-VOTE”

12,756,279

297,000,842

3,119,980

54,662,988

A stockholder proposal regarding services performed by the independent auditors was defeated by the following vote:

Shares Voted

“FOR”

Shares Voted

“AGAINST”

Shares

“ABSTAINING”

Broker

“NON-VOTE”

48,130,206

262,053,631

2,693,264

54,662,988

Item 6.

Exhibits and Reports on Form 8-K.

(a) Exhibits



11.0		Computation of Income (Loss) per Common and Common Equivalent Share

12.0		Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends

31.0		Certification of Principal Executive Officer dated August 6, 2004 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.1		Certification of Principal Financial Officer dated August 6, 2004 pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.0		Certification of Principal Executive Officer and Principal Financial Officer dated August 6, 2004 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002¹

99.0		Amendment to Master Agreement for the Transfer of Receivables dated July 12, 2004 among Societe General Bank Nederland N.V., Mattel International Holdings B.V., Mattel France S.A.S. and Mattel GmbH

(b) Reports on Form 8-K

Mattel filed the following Current Reports on Forms 8-K and 8-K/A during the quarterly period ended June 30, 2004:


Date of Report	Items Reported	Financial Statements Filed
April 20, 2004	7, 9, 12	None
April 20, 2004	7, 9, 12	None
April 30, 2004	9	None

¹	This exhibit should not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		MATTEL, INC. (Registrant)

Date: As of August 6, 2004	By:
		Douglas E. Kerner
		Senior Vice President and
		Corporate Controller (Duly authorized officer and chief accounting officer)