Mattel 2002 Annual Report Download - page 15

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marketing strategies of retailers and overall economic conditions. Unexpected changes in these factors could
result in a lack of product availability or excess inventory in a particular product line.
The foreign countries in which most of Mattel’s products are manufactured (principally China, Indonesia,
Thailand, Malaysia and Mexico) all enjoy permanent “normal trade relations” (“NTR”) status under US tariff
laws, which provides a favorable category of US import duties. China’s NTR status became permanent on
January 1, 2002, following enactment of a bill authorizing such status upon the country’s accession to the World
Trade Organization, which occurred in December 2001. This substantially reduces the possibility of China losing
its NTR status, which would result in increased costs for Mattel and others in the toy industry.
With the implementation of the Uruguay Round agreement effective January 1, 1995, all US duties on dolls
and traditional toys were completely eliminated. Canada also eliminated its tariffs on dolls and most toy
categories in 1995, with the exception of certain toy sets and board games that will have their duties eliminated
over ten years. The European Union and Japan reduced their tariffs on dolls by 40% and 15%, respectively, as of
January 1, 1999, and are in the process of phasing out their duties on several other toy categories by January 1,
2004.
Virtually all of Mattel’s raw materials are available from numerous suppliers but may be subject to
fluctuations in price. Mattel has long-term agreements in place with major suppliers that allow the suppliers to
pass on only their actual raw material cost increases.
Competition and Industry Background
Competition in the toy industry is intense and is based primarily on price, quality and play value.
Mattel’s US Girls, US Boys-Entertainment and US Infant & Preschool segments compete with several large
toy companies, including Hasbro, Inc., Jakks Pacific, Lego, Leap Frog, Bandai, MGA Entertainment and many
smaller toy companies. Mattel’s International segment competes with global toy companies including Hasbro,
Lego, Tomy, Bandai, and other national and regional toy companies. Foreign national and regional toy markets
may include competitors who are strong in a particular toy line or geographical area, but do not compete with
Mattel and other international toy companies worldwide. Additionally, in recent years, several large retailers
have offered competing products under their own private labels.
Seasonality
Mattel’s business is highly seasonal, with consumers making a large percentage of all toy purchases around
the traditional holiday season in the fourth quarter. A significant portion of Mattel’s customers’ purchasing
occurs in the third and fourth quarters in anticipation of such holiday buying. These seasonal purchasing patterns
and requisite production lead times cause 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 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. Additionally, as retailers manage their inventories, Mattel
experiences cyclical ordering patterns for products and product lines that may cause its sales to vary significantly
from period to period.
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 the year. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in the
respective levels of inventories and accounts receivable, which result in seasonal working capital financing
requirements. See “Seasonal Financing.”
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