Hasbro 2011 Annual Report Download - page 52

To manage this exposure, the Company has hedged a portion of its forecasted foreign currency transactions
using foreign exchange forward contracts. The Company estimates that a hypothetical immediate 10%
depreciation of the U.S. dollar against foreign currencies could result in an approximate $43,451 decrease in the
fair value of these instruments. A decrease in the fair value of these instruments would be substantially offset by
decreases in the related forecasted foreign currency transactions.
The Company is also exposed to foreign currency risk with respect to its net cash and cash equivalents or
short-term borrowing positions in currencies other than the U.S. dollar. The Company believes, however, that the
on-going risk on the net exposure should not be material to its financial condition. In addition, the Company’s
revenues and costs have been and will likely continue to be affected by changes in foreign currency rates. A
significant change in foreign exchange rates can materially impact the Company’s revenues and earnings due to
translation of foreign-denominated revenues and expenses. The Company does not hedge against translation
impacts of foreign exchange. From time to time, affiliates of the Company may make or receive intercompany
loans in currencies other than their functional currency. The Company manages this exposure at the time the loan
is made by using foreign exchange contracts.
The Company reflects all derivatives at their fair value as an asset or liability on the balance sheet. The
Company does not speculate in foreign currency exchange contracts. At December 25, 2011, these contracts had
unrealized gains of $7,891, of which $7,778 are recorded in prepaid expenses and other current assets, $2,021 are
recorded in other assets, $(783) are recorded in accrued liabilities, and $(1,125) are recorded in other liabilities.
Included in accumulated other comprehensive earnings at December 25, 2011 are deferred gains of $10,081, net
of tax, related to these derivatives.
At December 25, 2011, the Company had fixed rate long-term debt, excluding fair value adjustments, of
$1,384,895. The Company is party to several interest rate swap agreements, with a total notional amount of
$400,000, to adjust the amount of long-term debt subject to fixed interest rates. The interest rate swaps are matched
with specific long-term debt issues and are designated and effective as hedges of the change in the fair value of the
associated debt. Changes in fair value of these contracts are wholly offset in earnings by changes in the fair value of
the related long-term debt. At December 25, 2011, the fair value of these contracts was an asset of $15,977, which is
included in other assets, with a corresponding fair value adjustment to increase 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 $126,700 or $107,400, respectively. A hypothetical one-quarter percentage point change in
interest rates would increase or decrease 2011 pretax earnings by $885 and 2011 cash flows by $767.
The Economy and Inflation
The principal market for the Company’s products is the retail sector. Revenues from the Company’s top five
customers, all retailers, accounted for approximately 45% of its consolidated net revenues in 2011 and 50% and
54% of its consolidated net revenues in 2010 and 2009, respectively. In recent 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 2011, approximately 63% of the Company’s full year net revenues were
recognized in the second half of the year. The Company expects that this concentration will continue, particularly as
more of its business has shifted to larger customers with order patterns concentrated in the second half of the year.
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.
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