Mattel 2007 Annual Report Download - page 39

The second goal is to improve execution in areas including manufacturing, distribution, and selling.
Mattel continues to focus on improving the efficiency of its supply chain using Lean supply chain
initiatives. The objective of the Lean program is to improve the flow of processes, do more with less, and
focus on the value chain from beginning to end.
The third goal is to further capitalize on Mattel’s scale advantage. For example, as the world’s largest toy
company, Mattel believes it can realize cost savings when making purchasing decisions based on a One Mattel
philosophy.
Product Recalls and Withdrawals
During the third quarter of 2007, Mattel recalled products with high-powered magnets that may
become dislodged and other products, some of which were produced using non-approved paint containing
lead in excess of applicable regulatory and Mattel standards (collectively, the “Third Quarter of 2007
Recalls”). Additional products were recalled, withdrawn from retail stores, or replaced at the request of
consumers in the fourth quarter of 2007 as a result of small parts separating from a product, some instances
of paint containing lead in excess of applicable regulatory standards in another product, and the presence of
lead in the substrate in excess of an Illinois regulatory standard in other products (collectively, along with
the Third Quarter of 2007 Recalls, the “2007 Product Recalls”).
As a result of the Third Quarter of 2007 Recalls, Mattel intentionally slowed down its shipments out of Asia
while it conducted extensive product testing in the third quarter of 2007. Also, export licenses at several
manufacturing facilities in China were temporarily suspended in September 2007 while safety procedures were
reviewed, but all licenses were in place at December 31, 2007. Mattel’s ability to import products into certain
countries was also temporarily impacted by product recalls as certain countries and regulatory authorities
reviewed Mattel’s safety procedures; however, these import and export issues were largely resolved early in the
fourth quarter of 2007 and did not have a significant financial impact on Mattel’s 2007 results.
The third quarter of 2007 recall of products with high-powered magnets was a recall of older toys that do
not meet Mattel’s current magnet retention system requirements. Since November 2006, when Mattel conducted
its first voluntary recall for magnetic toys, Mattel has implemented enhanced magnet retention systems across all
of its brands. At the beginning of 2007, all magnets must be “locked” into the plastic toy with sturdy material
holding in the edges around the exposed face of the magnet or completely covering or “encapsulating” the
magnet. Mattel also conducted an extensive review of technical data and consumer information on all magnetic
toys and is confident in the new requirements, based on its continued testing and consumer experience.
In July 2007, Mattel determined that certain products, manufactured by a third-party contract manufacturer
in China, were produced using non-approved paint containing lead in excess of applicable regulatory standards.
As a result, and also in July 2007, Mattel launched a thorough investigation and expanded its testing programs to
ensure that painted finished goods, at third-party contract manufacturers as well as facilities operated by Mattel,
are systematically tested prior to being shipped to customers. The expanded testing programs include a check
system to enforce compliance with all regulations and standards applicable to lead paint. Mattel has also created
a new Corporate Responsibility organization, which has an even greater level of accountability internally and
externally for adherence to the company’s safety and compliance protocols.
Although management is not aware of any additional significant issues associated with lead in paints used
on, or lead in substrate used in, its products, there can be no assurance that additional issues will not be identified
in the future. Mattel believes that it has some of the most rigorous quality and safety testing procedures in the toy
industry. Management also believes that Mattel’s history of acting responsibly and quickly will maintain the trust
of its customers and consumers. However, the 2007 Product Recalls may have a negative impact on both
customer and consumer demand for Mattel’s products in the future.
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