Mattel 2003 Annual Report Download - page 53

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 materially change the terms of our current relationship at any time. Any such change could
significantly harm Mattel’s business and operating results. In addition, some large retail chains have begun to sell
private-label toys designed 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 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.
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 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 CPSC 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
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