Mattel 2002 Annual Report Download - page 44

presence. In the International segment, there is also significant concentration of sales to certain large customers.
The customers and the degree of concentration vary depending upon the region or nation.
On a consolidated basis, a small number of Mattel’s customers account for a large share of net sales and
accounts receivable. For year end 2002, Mattel’s three largest customers, Wal-Mart, Toys “R” Us and Target, in
the aggregate, accounted for approximately 50% of net sales and the ten largest customers in the aggregate
accounted for approximately 62% of net sales. As of year end 2002, Mattel’s three largest customers accounted
for approximately 42% of net accounts receivable and the ten largest customers accounted for approximately
65% 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.
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 the worsening economic conditions. In 2001 and 2002, two large
customers of Mattel filed for bankruptcy and a third customer filed for bankruptcy in 2003. 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. This 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 the 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. Each customer is 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
reviewed and 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 on delivery.
Mattel’s allowance for doubtful accounts was $23.3 million, $55.9 million and $24.6 million at year end
2002, 2001 and 2000, respectively. The increase in the allowance for doubtful accounts from 2000 to 2001 was
due to an initial $22.1 million charge, and related increase to the allowance for doubtful accounts, related to the
Kmart bankruptcy filing in January 2002. Later in 2002, Mattel recorded an additional $33.5 million charge to
write down the Kmart pre-bankruptcy petition accounts receivable to liquidation value, as a direct reduction of
accounts receivable without adjusting the allowance for doubtful accounts. On a more comparable basis,
excluding the reserves attributable to Kmart, the allowance for doubtful accounts represented 4.5%, 4.8% and
3.0% of total accounts receivable at year end 2002, 2001 and 2000, respectively.
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 a significant event occurs, such as a bankruptcy filing of
a customer, the allowance is reviewed for adequacy and adjusted to reflect the change in estimated receivable
impairment. Mattel believes that its allowance for doubtful accounts at year end 2002 is adequate and proper.
However, as described above, Mattel’s business is greatly dependent on a small number of customers. Should
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