Mattel 2003 Annual Report Download - page 46

In recent years, the mass-market retail channel has experienced significant shifts in market share among
competitors, causing some large retailers to experience liquidity problems. In addition, many of Mattel’s
customers have been negatively impacted by worsening economic conditions. From 2001 through early 2004,
four large customers of Mattel have filed for bankruptcy. Mattel’s sales to customers are typically made on credit
without collateral and are highly concentrated in the third and fourth quarters due to the cyclical nature of toy
sales, which results in a substantial portion of trade receivables being collected during the latter half of the year.
There is a risk that customers will not pay, or that payment may be delayed, because of bankruptcy or other
factors beyond the control of Mattel. This could increase Mattel’s exposure to losses from bad debts.
Mattel has procedures to mitigate its risk of exposure to losses from bad debts. Revenue is recognized
provided that: there are no uncertainties regarding customer acceptance; persuasive evidence of an agreement
exists documenting the specific terms of the transaction; the sales price is fixed or determinable; and
collectibility is reasonably assured. Credit limits and payment terms are established based on the underlying
criteria that collectibility must be reasonably assured at the levels set for each customer. Extensive evaluations
are performed on an on-going basis throughout the fiscal year of the financial performance, cash generation,
financing availability and liquidity status of each customer. Customers are reviewed at least annually, with more
frequent reviews being performed if necessary, based on the customer’s financial condition and the level of credit
being extended. For customers who are experiencing financial difficulties, management performs additional
financial analyses prior to shipping to those customers on credit. Customer terms and credit limits are adjusted, if
necessary, to reflect the results of the review. Mattel uses a variety of financial transactions to ensure
collectibility of accounts receivable of customers deemed to be a credit risk, including requiring letters of credit,
factoring or purchasing various forms of credit insurance with unrelated third parties and requiring cash in
advance of shipment.
The following table summarizes Mattel’s allowance for doubtful accounts at December 31 (in millions,
except percentage information):
2003 2002 2001
Allowance for doubtful accounts ..................................... $27.5 $23.3 $55.9
As a percentage of total accounts receivable ............................ 4.8% 4.5% 7.7%
As a percentage of total accounts receivable, excluding reserves attributable to
Kmart ........................................................ 4.8% 4.5% 4.8%
The increase from 2002 to 2003 in the allowance for doubtful accounts was due to a charge of $10.7 million
in 2003, including a charge related to the KB Toys bankruptcy filing in January 2004. The decrease in the
allowance for doubtful accounts from 2001 to 2002 was due to an initial $22.1 million charge that was recorded
in 2001, related to the Kmart bankruptcy filing in January 2002. Later in 2002, Mattel recorded an additional
$33.5 million charge and wrote down the Kmart pre-bankruptcy petition accounts receivable to liquidation value,
reducing the accounts receivable balance by the reserve.
Mattel records an allowance for doubtful accounts at the time revenue is recognized based on management’s
assessment of the business environment, customers’ financial condition, historical collection experience,
accounts receivable aging and customer disputes. When circumstances arise or a significant event occurs that
comes to the attention of management, such as a bankruptcy filing of a customer, the allowance for doubtful
accounts is reviewed for adequacy and adjusted to reflect the change in the estimated amount to be received from
the customer. Mattel believes that its allowance for doubtful accounts at year end 2003 is adequate and proper.
However, as described above, Mattel’s business is greatly dependent on a small number of customers. Should
one or more of Mattel’s major customers experience liquidity problems, then the allowance for doubtful accounts
of $27.5 million, or 4.8% of trade accounts receivable, at year end 2003 may not prove to be sufficient to cover
such losses. Any incremental bad debt charges would negatively affect the results of operations of one or more of
Mattel’s business segments.
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