Hasbro 2007 Annual Report Download - page 19

Our use of third-party manufacturers to produce the majority of our toy products, as well as certain other
products, presents risks to our business.
We own and operate two game and puzzle manufacturing facilities, one in East Longmeadow, Massachusetts
and the other in Waterford, Ireland. However, most of our toy products, in addition to certain other products, are
manufactured by third-party manufacturers, most of whom are located in the People’s Republic of China. Although
our external sources of manufacturing can be shifted, over a period of time, to alternative sources of supply, should
such changes be necessary, if we were prevented or delayed in obtaining products or components for a material
portion of our product line due to political, labor or other factors beyond our control, our operations would be
disrupted, potentially for a significant period of time, while alternative sources of supply were secured. This delay
could significantly reduce our sales and profitability, and harm our business.
Given that the majority of our manufacturing is conducted by third-party manufacturers located in the
People’s Republic of China, health conditions and other factors affecting social and economic activity in China
and affecting the movement of people and products into and from China to our major markets, including
North America and Europe, as well as increases in the costs of labor and other costs of doing business in
China, could have a significant negative impact on our operations, revenues and earnings. Factors that could
negatively affect our business include a potential significant revaluation of the Chinese yuan, which may result
in an increase in the cost of producing products in China, increases in labor costs and difficulties in moving
products manufactured in the Far East out of the Far East and through the ports on the western coast of
North America, whether due to port congestion, labor disputes, product regulations and/or inspections or other
factors. Also, the imposition of trade sanctions or other regulations by the United States or the European
Union against products imported by us from, or the loss of “normal trade relations” status with, the People’s
Republic of China, could significantly increase our cost of products imported into the United States or Europe
and harm our business. Additionally, the suspension of the operations of a third party manufacturer by
government inspectors in China could result in delays to us in obtaining product and may harm sales.
We require our third-party manufacturers to comply with our Global Business Ethics Principles, which
are designed to prevent products manufactured by or for us from being produced under inhumane or exploitive
conditions. The Global Business Ethics Principles address a number of issues, including working hours and
compensation, health and safety, and abuse and discrimination. In addition, Hasbro requires that our products
supplied by third-party manufacturers be produced in compliance with all applicable laws and regulations,
including consumer and product safety laws in the markets where those products are sold. Hasbro has the
right, both directly and through the use of outside monitors, to monitor compliance by our third-party
manufacturers with our Global Business Ethics Principles and other manufacturing requirements. In addition,
we do quality assurance testing on our products, including products manufactured for us by third parties.
Notwithstanding these requirements and our monitoring and testing of compliance with them, there is always a
risk that one or more of our third-party manufacturers will not comply with our requirements and that we will
not immediately discover such non-compliance. Any failure of our third-party manufacturers to comply with
labor, consumer, product safety or other applicable requirements in manufacturing products for us could result
in damage to our reputation, harm sales of our products and potentially create liability for us.
Our substantial sales and manufacturing operations outside the United States subject us to risks
associated with international operations.
We operate facilities and sell products in numerous countries outside the United States. For the year
ended December 30, 2007, our net revenues from international customers comprised approximately 42% of
our total consolidated net revenues. We expect our sales to international customers to continue to account for a
significant portion of our revenues. Additionally, as we discussed above, we utilize third-party manufacturers
located principally in the Far East, to produce the majority of our products, and we have a manufacturing
facility in Ireland. These sales and manufacturing operations are subject to the risks associated with
international operations, including:
• Currency conversion risks and currency fluctuations;
• Limitations, including taxes, on the repatriation of earnings;
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