Mattel 2013 Annual Report Download - page 15

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fourth quarters of Mattel’s fiscal year in anticipation of holiday buying. 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 less popular toys that do not match consumer demand. Retailers have also been
attempting to manage their inventories more tightly in recent years, requiring Mattel to ship products closer to the
time the retailers expect to sell the products to consumers. These factors increase the risk that Mattel may not be
able to meet demand for certain products at peak demand times or that Mattel’s own inventory levels may be
adversely impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage
their inventories, Mattel experiences cyclical ordering patterns for products and product lines that may cause its
sales to vary significantly from period to period.
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. Seasonal shipping patterns result in significant peaks in the third and fourth quarters in
the respective levels of inventories and accounts receivable, which result in seasonal working capital financing
requirements. See Part II, Item 8 “Financial Statements and Supplementary Data—Note 5 to the Consolidated
Financial Statements—Seasonal Financing and Debt.”
Product Design and Development
Through its product design and development group, Mattel regularly refreshes, redesigns, and extends
existing toy product lines and develops innovative new toy product lines for all segments. Mattel believes its
success is dependent on its ability to continue these activities effectively. See Item 1A “Risk Factors.” Product
design and development activities are principally conducted by a group of professional designers and engineers
employed by Mattel. During 2013, 2012, and 2011, Mattel incurred expenses of $201.9 million, $195.1 million,
and $179.0 million, respectively, in connection with the design and development of products, exclusive of royalty
payments. See Part II, Item 8 “Financial Statements and Supplementary Data—Note 13 to the Consolidated
Financial Statements—Supplemental Financial Information.”
Additionally, independent toy designers and developers bring concepts and products to Mattel and are
generally paid a royalty on the net selling price of products licensed to Mattel. These independent toy designers
may also create different products for other toy companies.
Advertising and Marketing
Mattel supports its product lines with extensive advertising and consumer promotions. Advertising takes
place at varying levels throughout the year and peaks during the traditional holiday season. Advertising includes
television and radio commercials, magazine, newspaper, and internet advertisements, and social media.
Promotions include in-store displays, sweepstakes, merchandising materials, and major events focusing on
products and tie-ins with various consumer products companies.
During 2013, 2012, and 2011, Mattel incurred expenses of $750.2 million (11.6% of net sales), $717.8
million (11.2% of net sales), and $699.2 million (11.2% of net sales), respectively, for advertising and
promotion.
Sales
Mattel’s products are sold throughout the world. Products within the North America 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. Mattel also operates several small retail outlets, generally near or at
its corporate headquarters and distribution centers as a service to its employees and as an outlet for its products.
Products within the International segment are sold directly to retailers and wholesalers in most European, Latin
American, and Asian countries, and in Australia and New Zealand, and through agents and distributors in those
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