Mattel 2008 Annual Report Download - page 46

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. Certain of Mattel’s customers filed
for bankruptcy in 2008, including KB Toys in the US and Woolworth’s in the UK, and the recent global
economic crisis has adversely affected the financial position of other retailers. 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
2008, Mattel’s three largest customers, Wal-Mart, Toys “R” Us, and Target, in the aggregate, accounted for
approximately 38% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 47%
of net sales. As of December 31, 2008, Mattel’s three largest customers accounted for approximately 32% of net
accounts receivable, and its ten largest customers accounted for approximately 42% 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:
2008 2007 2006
(In millions, except percentage information)
Allowance for doubtful accounts ................................. $ 25.9 $ 21.5 $ 19.4
As a percentage of total accounts receivable ........................ 2.9% 2.1% 2.0%
Mattel’s allowance for doubtful accounts is based on management’s assessment of the business
environment, customers’ financial condition, historical collection experience, accounts receivable aging, and
customer disputes. Changes in the allowance for doubtful accounts between December 31, 2008 and 2007 reflect
management’s assessment of the factors noted above, including past due accounts, disputed balances with
customers, and the financial condition of customers. The allowance for doubtful accounts is also affected by the
time at which uncollectible accounts receivable balances are actually written off.
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