Mattel 2011 Annual Report Download - page 55

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 create 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.
When current conditions in the domestic and global economies become uncertain, 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, economic uncertainty makes 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;
• Quantity on hand of the item;
• Standard retail price of the item;
• Mattel’s cost for the item; and
• Length of time the item has been in inventory.
The time frame between when an estimate is made and the time of disposal depends on the above factors
and may vary significantly. Generally, slow-moving inventory is liquidated during the next annual selling cycle.
The following table summarizes Mattel’s obsolescence reserve at December 31:
2011 2010 2009
(In millions, except percentage
information)
Allowance for obsolescence ............................................ $ 39.2 $ 46.9 $ 40.8
As a percentage of total inventory ....................................... 7.5% 9.2% 10.3%
Management believes that its allowance for obsolescence at December 31, 2011 is adequate and proper.
However, the impact resulting from the aforementioned factors could cause actual results to vary. Any
incremental obsolescence charges would negatively affect the results of operations of one or more of Mattel’s
business segments.
Recoverability of Goodwill and Nonamortizable Intangible Assets
Mattel tests goodwill and nonamortizable intangible assets for impairment annually, or more often if an
event or circumstance indicates that an impairment may have occurred. Management believes that the accounting
43