Earnings Quality Analysis of Mattel

Earnings Quality Analysis: Mattel, Inc. (NasdaqGS:MAT) I) Accounting Analysis Revenue:

2008 Revenue A/R Allow ance Bad Debt Gross A/R Allow ance % Gross AR/Rev 5,918.0 873.5 25.9 899.4 2.9% 15.2% 2009 5,430.8 749.3 24.5 773.8 3.2% 14.2% 2010 5,856.2 1,146.1 21.8 1,167.9 1.9% 19.9% 2011 6,266.0 1,246.7 26.3 1,273.0 2.1% 20.3% 2012 6,420.9 1,226.8 33.5 1,260.3 2.7% 19.6%

Analyzing Mattel’s revenue over the last 5 years, revenue was clearly affected by the decline in discretionary spending due to the financial crisis as 4yr revenue CAGR was a meager 2%. However between 2009 and 2010 there is a noticeable jump in the ratio of Gross A/R/Revenue. Dramatic changes in this ratio could indicate a potential red flag for potential revenue overstatement. Although slightly volatile the allowance for bad debt fluctuation does not fully explain the increase in gross A/R The company highlighted in their 2010 10-K that the increase in receivables was due to decision to not factor $300m of domestic receivables and increased sales volume. Therefore if anything, the increase in the ratio is attributable to a positive management decision not to factor receivables. Furthermore we also see a similar increase of 10% in the same ratio at competitor Hasbro from 2008-2009. Overall from the analysis we can conclude that although there is a significant increase in AR/Revenues, that there are no signs of earnings management to temporarily inflate revenues at Mattel. Expenses and Margins:

Revenue COGS Gross Profit Gross Margin SG&A Advert/Promo Exp Operating Profit OP Margin COGS/Rev SGA/Rev Promo/Rev 2008 5,918.0 3,233.6 2,684.4 45.4% 1,373.7 719.2 591.5 10.0% 54.6% 23.2% 12.2% 2009 5,430.8 2,716.1 2,714.7 50.0% 1,310.9 609.8 794.1 14.6% 50.0% 24.1% 11.2% 2010 5,856.2 2,901.2 2,955.0 50.5% 1,403.3 647.3 904.4 15.4% 49.5% 24.0% 11.1% 2011 6,266.0 3,120.2 3,145.8 50.2% 1,398.0 699.2 1,048.6 16.7% 49.8% 22.3% 11.2% 2012 6,420.9 3,011.7 3,409.2 53.1% 1,508.6 717.8 1,182.8 18.4% 46.9% 23.5%...