Mattel 2013 Annual Report Download - page 52

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
2013, Mattel’s three largest customers, Wal-Mart, Toys “R” Us, and Target, in the aggregate, accounted for
approximately 36% of net sales, and its ten largest customers, in the aggregate, accounted for approximately 46%
of net sales. As of December 31, 2013, Mattel’s three largest customers accounted for approximately 38% of net
accounts receivable, and its ten largest customers accounted for approximately 52% 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.
Value added taxes are recorded on a net basis, and are excluded from revenue. 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 customers’
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.
Customers’ 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, 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:
2013 2012 2011
(In millions, except percentage
information)
Allowance for doubtful accounts ............................................. $20.4 $33.5 $26.3
As a percentage of total accounts receivable .................................... 1.6% 2.7% 2.1%
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, 2013 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.
Inventory allowances are charged to cost of sales and establish a lower cost basis for the inventory. Management
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