Hasbro 2006 Annual Report Download - page 47

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December 31, 2006, the fair value of these contracts were a liability of $66, which is included in long-term
liabilities, with a corresponding fair value adjustment to decrease long-term debt. Changes in interest rates
affect the fair value of fixed rate debt not hedged by interest rate swap agreements while affecting the earnings
and cash flows of the long-term debt hedged by the interest rate swaps. The Company estimates that a
hypothetical one percentage point decrease or increase in interest rates would increase or decrease the fair
value of this long-term debt by approximately $15,600 or $12,800, respectively. A hypothetical one percentage
point change in interest rates would increase or decrease 2007 pretax earnings and cash flows by $731 and
$377, respectively.
The Economy and Inflation
The principal market for the Company’s products is the retail sector. Revenues from the Company’s top
5 customers, all retailers, accounted for approximately 53%, 53%, and 50% of its consolidated net revenues in
2006, 2005 and 2004, respectively. In the past three years certain customers in the retail sector have
experienced economic difficulty. The Company monitors the creditworthiness of its customers and adjusts
credit policies and limits as it deems appropriate.
The Company’s revenue pattern continues to show the second half of the year to be more significant to
its overall business for the full year. In 2006, approximately 68% of the Company’s full year net revenues
were recognized in the second half of the year. Although the Company expects that this concentration will
continue, particularly as more of its business shifts to larger customers with order patterns concentrated in the
second half of the year, this concentration may be less in years where the Company has products related to a
major motion picture release that occurs in the first half of the year. In 2007, the Company will have products
related to two major motion picture releases, SPIDER-MAN 3 in May of 2007 and TRANSFORMERS in July
of 2007. The concentration of sales in the second half of the year increases the risk of (a) underproduction of
popular items, (b) overproduction of less popular items, and (c) failure to achieve tight and compressed
shipping schedules. The business of the Company is characterized by customer order patterns which vary from
year to year largely because of differences in the degree of consumer acceptance of a product line, product
availability, marketing strategies, inventory levels, policies of retailers and differences in overall economic
conditions. The trend of larger retailers has been to maintain lower inventories throughout the year and
purchase a greater percentage of product within or close to the fourth quarter holiday consumer selling season,
which includes Christmas.
Quick response inventory management practices now being used result in more orders being placed for
immediate delivery and fewer orders being placed well in advance of shipment. To the extent that retailers do
not sell as much of their year-end inventory purchases during this holiday selling season as they had
anticipated, their demand for additional product earlier in the following fiscal year may be curtailed, thus
negatively impacting the Company’s revenues. In addition, the bankruptcy or other lack of success of one of
the Company’s significant retailers could negatively impact the Company’s future revenues.
The effect of inflation on the Company’s operations during 2006 was not significant and the Company
will continue its policy of monitoring costs and adjusting prices, accordingly.
Other Information
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”), which applies to all tax positions accounted for
under Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. FIN 48
prescribes a two step process for the measurement of uncertain tax positions that have been taken or are
expected to be taken in a tax return. The first step is a determination of whether the tax position should be
recognized in the financial statements. The second step determines the measurement of the tax position. FIN 48
also provides guidance on derecognition of such tax positions, classification, interest and penalties, accounting
in interim periods and disclosure. FIN 48 was applicable to the Company as of January 1, 2007, the first day
of fiscal 2007. The adoption of FIN 48 is expected to decrease the Company’s current liabilities and increase
the Company’s long-term liabilities. Overall, tax liabilities are not expected to change by a material amount.
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