Hasbro 2012 Annual Report Download - page 28

their purchases from us, favor competitors or new entrants, increase their direct competition with us by
expanding their private-label business, change their purchasing patterns, alter the manner in which they promote
our products or the resources they devote to promoting and selling our products, or return substantial amounts of
our products, it could significantly harm our sales, profitability and financial condition. Customers make no
binding long-term commitments to us regarding purchase volumes and make all purchases by delivering
purchase orders. Any customer could reduce its overall purchase of our products, and reduce the number and
variety of our products that it carries and the shelf space allotted for our products. In addition, increased
concentration among our customers could also negatively impact our ability to negotiate higher sales prices for
our products and could result in lower gross margins than would otherwise be obtained if there were less
consolidation among our customers. Furthermore, the bankruptcy or other lack of success of one or more of our
significant retail customers could negatively impact our revenues and profitability.
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 manufacturing facilities, one in East Longmeadow, Massachusetts and the other in
Waterford, Ireland. However, most of our products are manufactured by third-party manufacturers, most of
whom are located in the People’s Republic of China (“China”). Although, our external sources of manufacturing
can be shifted, over a significant 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, civil, labor or other factors beyond our control, including natural disasters or
pandemics, our operations may be substantially disrupted, potentially for a significant period of time. This delay
could significantly reduce our revenues and profitability and harm our business while alternative sources of
supply are secured.
Given that the majority of our toy manufacturing is conducted by third-party manufacturers located in
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, labor shortages and increases in labor costs in China as well as difficulties
in moving products manufactured in China out of Asia and through the ports in North America and Europe,
whether due to port congestion, labor disputes, product regulations and/or inspections or other factors, and
natural disasters or health pandemics impacting China. 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, 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. Our Global Business Ethics Principles address a number of issues, including working hours and
compensation, health and safety, and abuse and discrimination. In addition, we require 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 and
exercises such 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.
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