Mattel 2006 Annual Report Download - page 16

quarters of its fiscal 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.”
Product Design and Development
Through its product design and development group, Mattel regularly refreshes, redesigns and extends
existing toy product lines and develops innovative new toy product lines for all segments. Mattel believes its
success is dependent on its ability to continue this activity effectively. See Item 1A “Risk Factors—Factors That
May Affect Future Results.” Product design and development activities are principally conducted by a group of
professional designers and engineers employed by Mattel. During 2006, 2005 and 2004, Mattel spent
$173.5 million, $182.0 million and $171.3 million, respectively, in connection with the design and development
of products, exclusive of royalty payments. See Item 8 “Financial Statements and Supplementary Data—Note 11
to the Consolidated Financial Statements.”
Additionally, independent toy designers and developers bring concepts and products to Mattel and are
generally paid a royalty on the net selling price of products licensed to Mattel. These independent toy designers
may also create different products for other toy companies.
Advertising and Marketing
Mattel supports its product lines with extensive advertising and consumer promotions. Advertising takes
place at varying levels throughout the year and peaks during the traditional holiday season. Advertising includes
television and radio commercials, and magazine and newspaper advertisements. Promotions include in-store
displays, sweepstakes, merchandising materials and major events focusing on products and tie-ins with various
consumer products companies.
During 2006, 2005 and 2004, Mattel incurred $651.0 million (11.5% of net sales), $629.1 million (12.1% of
net sales) and $643.0 million (12.6% of net sales), respectively, on advertising and promotion.
Sales
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 by Mattel Girls & Boys Brands US and Fisher-Price Brands US. Mattel also
operates several small retail outlets, generally near or at its corporate headquarters and distribution centers as a
service to its employees and as an outlet for its products. American Girl Brands products are sold directly to
consumers and its children’s publications are also sold to certain retailers. Mattel has three retail stores,
American Girl Place®in Chicago, Illinois, New York, New York, and Los Angeles, California, each of which
features children’s products from the American Girl Brands segment. In April 2006, the third American Girl
Place®retail store opened in Los Angeles, California. American Girl Brands also has a retail outlet in
Oshkosh, Wisconsin that serves as an outlet for excess product. 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. Mattel also has retail
outlets in Latin America and Europe as an outlet for its products. Additionally, Mattel sells certain of its products
online through its website.
During 2006, Mattel’s three largest customers (Wal-Mart at $1.1 billion, Toys “R” Us at $0.8 billion and
Target at $0.5 billion) accounted for approximately 43% of worldwide consolidated net sales in the aggregate.
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
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