Mattel 2010 Annual Report Download - page 48

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
2010, 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 51%
of net sales. As of December 31, 2010, Mattel’s three largest customers accounted for approximately 50% of net
accounts receivable, and its ten largest customers accounted for approximately 60% 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:
2010 2009 2008
(In millions, except percentage information)
Allowance for doubtful accounts ............................... $ 21.8 $ 24.5 $ 25.9
As a percentage of total accounts receivable ...................... 1.9% 3.2% 2.9%
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 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.
Mattel believes that its allowance for doubtful accounts at December 31, 2010 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
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
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