Mattel 2014 Annual Report Download - page 52

Mattel’s allowance for doubtful accounts is based on management’s assessment of the business
environment, customers’ financial condition, historical collection experience, accounts receivable aging, and
customer disputes. Changes in the allowance for doubtful accounts reflect management’s assessment of the
factors noted above, including past due accounts, disputed balances with customers, and the financial condition
of customers. The allowance for doubtful accounts is also affected by the time at which uncollectible accounts
receivable balances are actually written off.
Mattel believes that its allowance for doubtful accounts at December 31, 2014 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
may not 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.
Inventories—Allowance for Obsolescence
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or
market. Inventory obsolescence reserves are recorded for damaged, obsolete, excess, and slow-moving inventory.
Inventory allowances are charged to cost of sales and establish a lower cost basis for the inventory. Management
believes that the accounting estimate related to the allowance for obsolescence is a “critical accounting estimate”
because changes in the assumptions used to develop the estimate could materially affect key financial measures,
including gross profit, net income, and inventories. As more fully described below, valuation of Mattel’s
inventory could be impacted by changes in public and consumer preferences, demand for product, or changes in
the buying patterns of both retailers and consumers and inventory management of customers.
In the toy industry, orders are subject to cancellation or change at any time prior to shipment since actual
shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines,
strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and
consumers, and overall economic conditions. Unexpected changes in these factors could result in excess
inventory in a particular product line, which would require management to record a valuation adjustment on such
inventory.
Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account
historical trends, results of market research, and current market information. Mattel ships products in accordance
with delivery schedules specified by its customers, who usually request delivery within three months. In
anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in
advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three
quarters of its fiscal year. These seasonal purchasing patterns and requisite production lead times create risk to
Mattel’s business associated with the underproduction of popular toys and the overproduction of toys that do not
match consumer demand. Retailers are also attempting to manage their inventories more tightly, requiring Mattel
to ship products closer to the time the retailers expect to sell the products to consumers. These factors increase
inventory valuation risk since Mattel’s inventory levels may be adversely impacted by the need to pre-build
products before orders are placed.
When current conditions in the domestic and global economies become uncertain, it is difficult to estimate
the level of growth or contraction for the economy as a whole. It is even more difficult to estimate growth or
contraction in various parts of the economy, including the economies in which Mattel participates. Because all
components of Mattel’s budgeting and forecasting are dependent upon estimates of growth or contraction in the
markets it serves and demand for its products, economic uncertainty makes estimates of future demand for
product more difficult. Such economic changes may affect the sales of Mattel’s products and its corresponding
inventory levels, which could potentially impact the valuation of its inventory.
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