Mattel 2005 Annual Report Download - page 24

The production and sale of private-label toys by Mattel’s retail customers may result in lower purchases of
Mattel-branded products by those retail customers.
In recent years, consumer goods companies generally, including those in the toy business, have experienced
the phenomenon of retail customers developing their own private-label products that directly compete with the
products of traditional manufacturers. Some retail chains that are customers of Mattel sell private-label toys
designed, manufactured and branded by the retailers themselves. These toys may be sold at prices lower than
comparable toys sold by Mattel, and may result in lower purchases of Mattel-branded products by these retailers.
In some cases, retailers who sell these private-label toys are larger than Mattel and may have substantially more
resources than Mattel.
Liquidity problems or bankruptcy of Mattel’s key customers could increase Mattel’s exposure to losses
from bad debts and could have a material adverse effect on Mattel’s business, financial condition and
results of operations.
Many of Mattel’s key customers are mass-market retailers. The mass-market retail channel in the US has
experienced significant shifts in market share among competitors in recent years, causing some large retailers to
experience liquidity problems. From 2001 through early 2004, four large customers of Mattel filed for
bankruptcy. In addition, Mattel’s sales to customers are typically made on credit without collateral. 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, which could increase Mattel’s exposure to losses from bad debts. In addition, if these or
other customers were to cease doing business as a result of bankruptcy, or significantly reduce the number of
stores operated, it could have a material adverse effect on Mattel’s business, financial condition and results of
operations.
A reduction or interruption in the delivery of raw materials, parts and components from its suppliers or a
significant increase in the price of supplies could negatively impact the gross profit margins realized by
Mattel on the sale of its products or result in lower sales.
Mattel’s ability to meet customer demand depends, in part, on its ability to obtain timely and adequate
delivery of materials, parts and components from its suppliers and internal manufacturing capacity. Mattel has
experienced shortages in the past, including raw materials and components. Although Mattel works closely with
suppliers to avoid these types of shortages, there can be no assurance that Mattel will not encounter these
problems in the future. A reduction or interruption in supplies or a significant increase in the price of one or more
supplies, such as fuel and resin (which is an oil-based product) expenses, could have a material adverse effect on
Mattel’s business. Cost increases, whether resulting from shortages of materials or otherwise, including but not
limited to rising costs of materials, transportation, services and labor (including but not limited to wages,
expenses related to employee health plans and insurance), could impact the profit margins realized by Mattel on
the sale of its products. Because of market conditions, timing of pricing decisions and other factors, there can be
no assurance that Mattel will be able to offset any of these increased costs by adjusting the prices of its products.
Increases in prices of Mattel’s products could result in lower sales.
Unfavorable resolution of pending and future litigation matters and disputes could have a material
adverse effect on Mattel’s financial condition.
Mattel is involved in a number of litigation matters. An unfavorable resolution of pending litigation could
have a material adverse effect on Mattel’s financial condition. Litigation may result in substantial costs and
expenses and significantly divert the attention of Mattel’s management regardless of the outcome. There can be
no assurance that Mattel will be able to achieve a favorable settlement of pending litigation or obtain a favorable
resolution of litigation if it is not settled. In addition, current and future litigation, governmental proceedings,
labor disputes or environmental matters could lead to increased costs or interruptions of the normal business
operations of Mattel.
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