Mattel 2004 Annual Report Download - page 47

Mattel’s products are sold throughout the world. Products within the Domestic 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. Products within the International segment are sold directly to retailers and
wholesalers in Canada and most European, Asian and Latin American countries, and through agents and
distributors in those countries where Mattel has no direct presence.
On a consolidated basis, a small number of customers account for a large share of Mattel’s net sales and
accounts receivable. For 2004, Mattel’s three largest customers, Wal-Mart, Toys “R” Us and Target, in the
aggregate, accounted for approximately 46% of net sales, and its ten largest customers, in the aggregate,
accounted for approximately 56% of net sales. As of year end 2004, Mattel’s three largest customers accounted
for approximately 35% of net accounts receivable, and its ten largest customers accounted for approximately
47% of net accounts receivable. Within countries in the International segment, there is also a concentration of
sales to certain large customers that do not operate in the US. The customers and the degree of concentration vary
depending upon the region or nation. 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 worsening economic conditions. From 2001 through early 2004,
four large customers of Mattel filed for bankruptcy. 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, 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.
Mattel has procedures to mitigate its 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 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 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 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 or 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 (in millions,
except percentage information):
2004 2003 2002
Allowance for doubtful accounts ................................ $ 32.8 $ 27.5 $ 23.3
As a percentage of total accounts receivable ....................... 4.1% 4.8% 4.5%
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. When circumstances arise or a significant event occurs that comes to the attention of
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