Mattel 2006 Annual Report Download - page 55

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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
inventory valuation risk since Mattel may not be able to meet demand for certain products at peak demand times,
or Mattel’s own inventory levels may be adversely impacted by the need to pre-build products before orders are
placed.
Additionally, current conditions in the domestic and global economies are uncertain. As a result, it is
difficult to estimate the level of growth or contraction for the economy as a whole. It is even more difficult to
estimate growth or contraction in various parts of the economy, including the markets in which Mattel
participates. Because all components of Mattel’s budgeting and forecasting are dependent upon estimates of
growth or contraction in the markets it serves and demand for its products, the prevailing economic uncertainties
render estimates of future demand for product more difficult. Such economic changes may affect the sales of
Mattel’s products and its corresponding inventory levels, which would potentially impact the valuation of its
inventory.
At the end of each quarter, management within each business segment, Mattel Girls & Boys Brands US,
Fisher-Price Brands US, American Girl Brands and International, performs a detailed review of its inventory on
an item by item basis and identifies which products are believed to be obsolete or slow-moving. Management
assesses the need for, and the amount of, an obsolescence reserve based on the following factors:
• Customer and/or consumer demand for the item;
• Overall inventory positions of Mattel’s customers;
• Strength of competing products in the market;
• Quantity on hand of the item;
• Standard retail price of the item;
• Mattel’s cost for the item; and
• Length of time the item has been in inventory.
The time frame between when an estimate is made and the time of disposal depends on the above factors
and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.
The following table summarizes Mattel’s obsolescence reserve at December 31 (in millions, except
percentage information):
2006 2005 2004
Allowance for obsolescence .............................. $ 43.3 $ 60.5 $ 65.2
As a percentage of total inventory ......................... 10.1% 13.8% 13.5%
The decrease in the allowance for obsolescence from 2005 to 2006 was mainly due to 2006 efforts to
liquidate excess inventory. The decrease from 2004 to 2005 in the allowance for obsolescence was mainly due to
the utilization of reserves created for specifically-identified inventory in 2004. Management believes that its
allowance for obsolescence at December 31, 2006 is adequate and proper. However, the impact resulting from
the aforementioned factors could cause actual results to vary. Any incremental obsolescence charges would
negatively affect the results of operations of one or more of Mattel’s business segments.
Valuation of Goodwill
Effective on January 1, 2002, Mattel adopted SFAS No. 142, which superseded Accounting Principles
Board Opinion (“APB”) No. 17, Intangible Assets. This statement addresses the accounting and reporting of
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