Mattel 2007 Annual Report Download - page 90

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.
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 an 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.
During 2007, Mattel reversed sales associated with the 2007 Product Recalls, recorded impairment charges
for affected inventory, and accrued other recall-related costs. These recall charges resulted in a total reduction to
operating income of $68.4 million for 2007, and were based on estimates associated with the expected levels of
affected product at retail and historical consumer return rates.
The following table summarizes Mattel’s reserves and reserve activity for the 2007 Product Recalls:
2007 Reserve
Charges
Reserves
Used
Reserves at
December 31,
2007
(In thousands)
Impairment of inventory on hand ................................. $ 3,849 $ (3,849) $ —
Product returns / redemptions ................................... 60,887 (48,275) 12,612
Other ....................................................... 3,712 (1,352) 2,360
Total ....................................................... $68,448 $(53,476) $14,972
Mattel estimates that it has also incurred incremental period costs for legal fees, recall advertisements, and
recall administration around the world of approximately $42 million during 2007.
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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