Mattel 2008 Annual Report Download - page 47

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Mattel believes that its allowance for doubtful accounts at December 31, 2008 is adequate and proper.
However, as described above, Mattel’s business is greatly dependent on a small number of customers. Should
one or more of Mattel’s major customers experience liquidity problems, then the allowance for doubtful accounts
of $25.9 million, or 2.9% of accounts receivable, at December 31, 2008 may not be sufficient to cover such
losses. Any incremental bad debt charges would negatively affect the results of operations of one or more of
Mattel’s business segments.
Inventories—Allowance for Obsolescence
Inventories, net of an allowance for excess quantities and obsolescence, are stated at the lower of cost or
market. Inventory obsolescence reserves are recorded for damaged, obsolete, excess and slow-moving inventory.
Management believes that the accounting estimate related to the allowance for obsolescence is a “critical
accounting estimate” because changes in the assumptions used to develop the estimate could materially affect
key financial measures, including gross profit, net income, and inventories. As more fully described below,
valuation of Mattel’s inventory could be impacted by changes in public and consumer preferences, demand for
product, or changes in the buying patterns of both retailers and consumers and inventory management of
customers.
In the toy industry, orders are subject to cancellation or change at any time prior to shipment since actual
shipments of products ordered and order cancellation rates are affected by consumer acceptance of product lines,
strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and
consumers and overall economic conditions. Unexpected changes in these factors could result in excess inventory
in a particular product line, which would require management to record a valuation allowance on such inventory.
Mattel bases its production schedules for toy products on customer orders and forecasts, taking into account
historical trends, results of market research and current market information. Mattel ships products in accordance
with delivery schedules specified by its customers, who usually request delivery within three months. In
anticipation of retail sales in the traditional holiday season, Mattel significantly increases its production in
advance of the peak selling period, resulting in a corresponding build-up of inventory levels in the first three
quarters of its fiscal year. These seasonal purchasing patterns and requisite production lead times cause risk to
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’s 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 economies 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
make 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 could 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 products that are believed to be impaired. 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;
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