Mattel 2014 Annual Report Download - page 51

assumptions used to develop the estimate could materially affect key financial measures, including other selling
and administrative expenses, net income, and accounts receivable. In addition, the allowance requires a high
degree of judgment since it involves estimation of the impact of both current and future economic factors in
relation to its customers’ ability to pay amounts owed to Mattel.
Mattel’s products are sold throughout the world. Products within the North America segment are sold
directly to retailers, including discount and free-standing toy stores, chain stores, department stores, other retail
outlets and, to a limited extent, wholesalers, and directly to consumers. Products within the International segment
are sold directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in
Australia and New Zealand, and through agents and distributors in those countries where Mattel has no direct
presence.
In recent years, the mass-market retail channel has experienced significant shifts in market share among
competitors, causing some large retailers to experience liquidity problems. 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
seasonal nature of toy sales, which results in a substantial portion of trade receivables being collected during the
latter half of the year and the first quarter of the following year. There is a risk that customers will not pay, or
that payment may be delayed, because of bankruptcy or other factors beyond the control of Mattel. This could
increase Mattel’s exposure to losses from bad debts.
A small number of customers account for a large share of Mattel’s net sales and accounts receivable. In
2014, Mattel’s three largest customers, Wal-Mart, Toys “R” Us, and Target, in the aggregate, accounted for
approximately 35% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 45%
of net sales. As of December 31, 2014, Mattel’s three largest customers accounted for approximately 34% of net
accounts receivable, and its ten largest customers accounted for approximately 47% of net accounts receivable.
The concentration of Mattel’s business with a relatively small number of customers may expose Mattel to a
material adverse effect if one or more of Mattel’s large customers were to experience financial difficulty.
Mattel has procedures to mitigate its risk of exposure to losses from bad debts. Revenue is recognized upon
shipment or upon receipt of products by the customer, depending on the terms, provided that: there are no
uncertainties regarding customer acceptance; persuasive evidence of an agreement exists documenting the
specific terms of the transaction; the sales price is fixed or determinable; and collectibility is reasonably assured.
Value added taxes are recorded on a net basis and are excluded from revenue. Credit limits and payment terms
are established based on the underlying criteria that collectibility must be reasonably assured at the levels set for
each customer. Extensive evaluations are performed on an ongoing basis throughout the fiscal year of each
customer’s financial performance, cash generation, financing availability, and liquidity status. Customers are
reviewed at least annually, with more frequent reviews being performed, if necessary, based on the customers’
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.
Customers’ terms and credit limits are adjusted, if necessary, to reflect the results of the review. Mattel uses a
variety of financial arrangements to ensure collectibility of accounts receivable of customers deemed to be a
credit risk, including requiring letters of credit, factoring, purchasing various forms of credit insurance with
unrelated third parties, or requiring cash in advance of shipment.
The following table summarizes Mattel’s allowance for doubtful accounts at December 31:
2014 2013 2012
(In millions, except percentage
information)
Allowance for doubtful accounts .......................................... $26.3 $20.4 $33.5
As a percentage of total accounts receivable ................................. 1.7% 1.6% 2.7%
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