Mattel 2007 Annual Report Download - page 57

the estimate could materially affect key financial measures, including other selling and administrative expenses, net
income, and accounts receivable. In addition, the allowance requires a high degree of judgment since it involves
estimation of the impact of both current and future economic factors in relation to its customers’ ability to pay amounts
owed to Mattel.
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, and directly to consumers. Products within the International segment are sold
directly to retailers and wholesalers in most European, Latin American, and Asian countries, and in Australia,
Canada, and New Zealand, and through agents and distributors in those countries where Mattel has no direct
presence.
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.
A small number of customers account for a large share of Mattel’s net sales and accounts receivable. In
2007, Mattel’s three largest customers, Wal-Mart, Toys “R” Us, and Target, in the aggregate, accounted for
approximately 41% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 50%
of net sales. As of December 31, 2007, Mattel’s three largest customers accounted for approximately 34% of net
accounts receivable, and its ten largest customers accounted for approximately 45% of net accounts receivable.
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.
Mattel has procedures to mitigate its risk of exposure to losses from bad debts. Revenue is recognized upon
shipment or upon receipt of products by the customer, depending on the terms, 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:
2007 2006 2005
(In millions, except percentage information)
Allowance for doubtful accounts .......................... $ 21.5 $ 19.4 $ 24.6
As a percentage of total accounts receivable ................. 2.1% 2.0% 3.1%
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