Management Accounting

Income Statement Elmo: Mattel’s Recall

Snags in the toymaker's supply chain could reverse the good news announced in the second quarter.
Marie LeoneAugust 3, 2007

The product recall of 1.5 million toys issued by Mattel Inc. is expected to reduce the toymaker’s pre-tax operating income by about $30 million, according to a regulatory filing released on Thursday. As a result, the company’s second-quarter financial results will be adjusted to reflect the charge. Prior to the recall, Mattel had announced that operating income for the second quarter increased year-over-year from $49.9 million in 2006 to $63.5 million this year.

Mattel pulled out of circulation various Fisher-Price toys manufactured by a Chinese third-party contract manufacturer, including those featuring such popular pre-school characters as Elmo, Cookie Monster, and Dora the Explorer. The company said the toys were produced using a non-approved paint containing “excessive” amounts of lead, which is in violation of industry standards, as well as the company’s self-imposed standards.

Although officials noted that they were not aware of any additional problems related to the paint used on its toys, the company has launched an investigation and expanded its testing programs with regard to third-party contractors. “We require our manufacturing partners to use paint from approved and certified suppliers and have procedures in place to test and verify, but in this particular case our procedures were not followed,” commented Jim Walter, Mattel’s senior vice president of worldwide quality assurance.

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