e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D. C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 26, 2010
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Commission file number 1-6682
Hasbro, Inc.
(Exact Name of Registrant, As
Specified in its Charter)
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Rhode Island
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05-0155090
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(State of
Incorporation)
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(I.R.S. Employer
Identification No.)
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1027 Newport Avenue,
Pawtucket, Rhode Island
(Address of Principal
Executive Offices)
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02862
(Zip Code)
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Registrants
telephone number, including area code
(401) 431-8697
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock
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The NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ or No o.
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o or No þ.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ or No o.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files.) Yes þ or No o.
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o or No þ.
The aggregate market value on June 25, 2010 (the last
business day of the Companys most recently completed
second quarter) of the voting common stock held by
non-affiliates of the registrant, computed by reference to the
closing price of the stock on that date, was approximately
$5,490,489,000. The registrant does not have non-voting common
stock outstanding.
The number of shares of common stock outstanding as of
February 7, 2011 was 137,040,353.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for our 2011 Annual
Meeting of Shareholders are incorporated by reference into
Part III of this Report.
HASBRO,
INC.
Table of
Contents
PART I
General
Development and Description of Business and Business
Segments
Except as expressly indicated or unless the context otherwise
requires, as used herein, Hasbro, the
Company, we, or us, means
Hasbro, Inc., a Rhode Island corporation organized on
January 8, 1926, and its subsidiaries. Unless otherwise
specifically indicated, all dollar or share amounts herein are
expressed in thousands of dollars or shares, except for per
share amounts.
Overview
We are a worldwide leader in childrens and family leisure
time products and services with a broad portfolio of brands and
entertainment properties. As a branded play, consumer-focused
global company, Hasbro applies its brand blueprint to all of its
operations. The brand blueprint revolves around the objective of
continuously re-imagining, re-inventing, and re-igniting our
brands through a wide range of innovative toys and games,
entertainment offerings, including television programming and
motion pictures, and licensed products, ranging from traditional
to high-tech and digital, under well-known brand names such as
TRANSFORMERS, PLAYSKOOL, NERF, LITTLEST PET SHOP, MY LITTLE
PONY, G.I. JOE, TONKA, MILTON BRADLEY, PARKER BROTHERS, CRANIUM
and WIZARDS OF THE COAST. Our offerings encompass a broad
variety of games, including traditional board, card, hand-held
electronic, trading card, role-playing and DVD games, as well as
electronic learning aids and puzzles. Toy offerings include
boys action figures, vehicles and playsets, girls
toys, electronic toys, plush products, preschool toys and infant
products, electronic interactive products, creative play and toy
related specialty products. In addition, in order to further
expand our brands, we license certain of our trademarks,
characters and other property rights to third parties for use in
connection with digital gaming, consumer promotions, and for the
sale of non-competing toys and games and non-toy products. We
also seek to expand awareness of our brands through immersive
entertainment experiences, including television and movies. We
own a 50% interest in a joint venture with Discovery
Communications, Inc. (Discovery) that operates a
television network in the United States, THE HUB, dedicated to
high-quality childrens and family entertainment and
educational programming. Hasbro Studios, our wholly-owned
production studio, produces television programming primarily
based on our brands for distribution on THE HUB in the United
States and for distribution on other networks internationally.
Product
Categories
We market our brands under the following primary product
categories: (1) boys toys; (2) games and
puzzles; (3) girls toys; and (4) preschool toys.
Descriptions of these product categories are as follows:
Our boys toys category includes a wide range of core brand
offerings such as TRANSFORMERS and G.I. JOE action figures and
accessories, NERF sports and action products, as well as
entertainment-based licensed products based on popular movie,
television and comic book characters, such as STAR WARS and
MARVEL toys and accessories. In the action figure area, a key
part of our strategy focuses on the importance of reinforcing
the storyline associated with these products through the use of
media-based entertainment. In 2010, sales in our boys toys
category also benefited from the major motion picture release of
IRON MAN 2. In addition, STAR WARS and SPIDER-MAN
products were each supported by animated television series. In
2011, the major motion pictures TRANSFORMERS: DARK OF THE
MOON, based on our TRANSFORMERS property, and THOR
and CAPTAIN AMERICA: THE FIRST AVENGER, from MARVEL,
are expected to be released. In addition to marketing and
developing action figures and accessories for traditional play,
the Company also develops and markets products designed for
collectors, which has been a key component of the success of the
STAR WARS brand. Other key boys brands include TONKA
trucks and playsets, BEYBLADE tops and accessories and
SUPERSOAKER water squirting toys.
Our games and puzzles category includes several well known
lines, including MILTON BRADLEY, PARKER BROTHERS, CRANIUM,
AVALON HILL and WIZARDS OF THE COAST. These brand portfolios
consist of a broad assortment of games for children, tweens,
families and adults. Core game brands include
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MONOPOLY, TRIVIAL PURSUIT, BATTLESHIP, GAME OF LIFE, SCRABBLE,
CHUTES AND LADDERS, CANDY LAND, TROUBLE, MOUSETRAP, OPERATION,
HUNGRY HUNGRY HIPPOS, CONNECT FOUR, TWISTER, YAHTZEE, CRANIUM,
JENGA, SIMON, CLUE, SORRY!, RISK, BOGGLE, TRIVIAL PURSUIT, GUESS
WHO? and BOP IT!, as well as a line of puzzles for children and
adults, including the BIG BEN and CROXLEY lines of puzzles.
WIZARDS OF THE COAST offers trading card and role-playing games,
including MAGIC: THE GATHERING, DUEL MASTERS and
DUNGEONS & DRAGONS. We seek to keep our game brands
relevant through sustained marketing programs, such as FAMILY
GAME NIGHT, as well as by offering consumers new ways to
experience these brands.
In our girls toys category, we seek to provide a
traditional and wholesome play experience. Girls toy
brands include LITTLEST PET SHOP, MY LITTLE PONY, FURREAL
FRIENDS, BABY ALIVE and STRAWBERRY SHORTCAKE. In 2010, the MY
LITTLE PONY brand was supported through television programming
on THE HUB beginning in the fourth quarter of 2010. This
programming will continue in 2011. In addition, the LITTLEST PET
SHOP brand will be supported by expanded digital gaming through
our partnership with Electronic Arts, Inc. (EA).
Our preschool toys category encompasses a range of products for
infants and preschoolers in the various stages of development.
Our preschool products include a portfolio of core brands
marketed primarily under the PLAYSKOOL trademark. The PLAYSKOOL
line includes such well-known products as MR. POTATO HEAD,
WEEBLES, SIT N SPIN and GLOWORM, along with a successful
line of infant toys including STEP START WALK N RIDE,
2-IN-1 TUMMY TIME GYM and BUSY BALL POPPER. In addition, 2011
will be the first year of our agreement with Sesame Workshop
that provides us with the licensed rights to produce products
based on the SESAME STREET portfolio of characters, including
ELMO, BIG BIRD, and COOKIE MONSTER, among others. Through our
preschool marketing programs, we seek to provide consumer
friendly information that assists parents in understanding the
developmental milestones their children will encounter as well
as the role each PLAYSKOOL product can play in helping children
to achieve these developmental milestones. In addition, our
preschool category also includes certain TONKA lines of trucks
and interactive toys, including the CHUCK & FRIENDS
line, and the PLAY-DOH brand. The CHUCK & FRIENDS line
was supported by television programming on THE HUB in the fourth
quarter of 2010, which will continue in 2011.
Segments
Organizationally, our three principal segments are U.S. and
Canada, International and Entertainment and Licensing. The
U.S. and Canada and International segments engage in the
marketing and selling of various toy and game products as listed
above. Our toy, game and puzzle products are developed by a
global development group. We also have a global marketing
function which establishes brand direction and assists the
segments in establishing certain local marketing programs. The
costs of these groups are allocated to the principal segments.
Our U.S. and Canada segment covers the United States and
Canada while the International segment primarily includes
Europe, the Asia Pacific region and Latin and South America. The
Entertainment and Licensing segment engages in the out-licensing
of our trademarks, characters and other brand and intellectual
property rights to third parties for non-competing products and
also conducts our movie, television and online entertainment
operations, including the operations of Hasbro Studios. In
addition, our Global Operations segment is responsible for
arranging product manufacturing and sourcing for the
U.S. and Canada and International segments. Financial
information with respect to our segments and geographic areas is
included in note 18 to our consolidated financial
statements, which are included in Item 8 of this
Form 10-K.
The Companys strategy is focused around re-imagining,
re-inventing, and re-igniting its existing brands, and
imagining, inventing, and igniting new brands, globally through
the development and marketing of innovative toy and game
products, providing immersive entertainment experiences for our
consumers, and expansion of our brands into other consumer
products through a broad licensing program. The following is a
discussion of each segment.
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U.S.
and Canada
This segment engages in the marketing and sale of our product
categories in the United States and Canada. The U.S. and
Canada segments strategy is based on promoting our brands
through innovation and reinvention of toys and games. This is
accomplished through introducing new initiatives driven by
consumer and marketplace insights and leveraging opportunistic
toy and game lines and licenses. This strategy leverages off of
efforts to increase consumer awareness of the Companys
core brands through entertainment experiences such as motion
pictures, television and publishing. Major 2010 brands and
products included NERF, MARVEL products, STAR WARS products,
LITTLEST PET SHOP, TRANSFORMERS, PLAYSKOOL, MAGIC: THE
GATHERING, PLAY-DOH, FURREAL FRIENDS, and MONOPOLY.
International
The International segment engages in the marketing and sale of
our product categories to retailers and wholesalers in most
countries in Europe, Asia Pacific and Latin and South America
and through distributors in those countries where we have no
direct presence. In addition to growing core brands and
leveraging opportunistic toy lines and licenses, we seek to grow
our international business by continuing to expand into Eastern
Europe and emerging markets in Asia and Latin and South America.
In recent years, we expanded our operations in Brazil, China,
Russia, the Czech Republic, Romania and Korea. We will continue
to expand operations in emerging markets in future years through
the establishment of subsidiaries or increased involvement with
our existing distributors. The Company began operations in Peru
in 2010 and Colombia in 2011. Key international brands for 2010
included LITTLEST PET SHOP, NERF, TRANSFORMERS, MONOPOLY,
FURREAL FRIENDS, PLAY-DOH, PLAYSKOOL, STAR WARS, and BEYBLADE.
Entertainment
and Licensing
Our Entertainment and Licensing segment includes our lifestyle
licensing, digital licensing, movie, television and online
entertainment operations. Our lifestyle licensing category seeks
to promote our brands through the out-licensing of our
intellectual properties to third parties for promotional and
merchandising uses in businesses which do not compete directly
with our own product offerings, such as apparel, publishing,
home goods and electronics.
Our digital licensing category seeks to promote our brands
through the out-licensing of our intellectual properties in the
digital area, such as for applications on mobile phones,
personal computers, and video game consoles. This is primarily
done through our long-term strategic alliance with EA, which
provides EA with the exclusive worldwide rights to create
digital games for all of these major platforms based on most of
our toy and game intellectual properties.
As noted above, we own a 50% interest in a joint venture with
Discovery that operates a television network in the United
States, THE HUB, which debuted in October 2010. THE HUB is
dedicated to providing high-quality childrens and family
entertainment and educational programming. To support our
strategic objective of further developing our brands through
television entertainment, we established a wholly-owned
television studio, Hasbro Studios, that produces programming for
distribution on THE HUB network in the U.S. and for
international distribution on other networks. The programming is
primarily based on our brands, but also includes third-party
branded content. Hasbro Studios has a coordinated development
process that aligns with THE HUB.
In addition to the above, we also seek to promote and leverage
our brands through major motion pictures. In 2009,
TRANSFORMERS: REVENGE OF THE FALLEN and G.I. JOE: THE
RISE OF COBRA were released based on our brands. In July
2011, TRANSFORMERS: DARK OF THE MOON is expected to be
released. In addition, we also have a long-term strategic
relationship with Universal Pictures to produce at least three
motion pictures based on certain of our core brands, with an
option to produce two additional movies. The first movies under
this relationship, BATTLESHIP and OUIJA, are
expected to be released in 2012.
Promotion of our brands through major motion pictures and
television programming provides our consumers with the ability
to experience our brands in a different format which we believe
can result in
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increased product sales, royalty revenues, and overall brand
awareness. To a lesser extent, we can also earn revenue from our
participation in the financial results of motion pictures and
related DVD releases and through the distribution of television
programming. Revenue from product sales is a component of the
U.S. and Canada and International segments, while royalty
revenues, including revenues earned from movies and television
programming, is included in the Entertainment and Licensing
segment.
Global
Operations
In our Global Operations segment, we manufacture and source
production of substantially all of our toy and game products.
The Company owns and operates manufacturing facilities in East
Longmeadow, Massachusetts and Waterford, Ireland which
predominantly produce games and puzzles. Sourcing of our other
production is done through unrelated third party manufacturers
in various Far East countries, principally China, using a Hong
Kong based wholly-owned subsidiary operation for quality control
and order coordination purposes. See Manufacturing and
Importing below for more details concerning overseas
manufacturing and sourcing.
Other
Information
To further extend our range of products in the various segments
of our business, we sell a portion of our toy and game products
directly to retailers, on a direct import basis from the Far
East. These sales are reflected in the revenue of the related
segment where the customer resides.
Certain of our products are licensed to other companies for sale
in selected countries where we do not otherwise have a direct
business presence.
During 2010, net revenues generated from NERF products were
approximately $414,000, which was 10.3% of our consolidated net
revenues for that year. During 2009, net revenues generated from
TRANSFORMERS products were approximately $592,000, which was
14.5% of our consolidated net revenues in that year. No other
line of products constituted 10% or more of our consolidated net
revenues in 2010 or 2009. No individual line of products
accounted for 10% or more of our consolidated net revenues
during our 2008 fiscal year.
Working
Capital Requirements
Our working capital needs are primarily financed through cash
generated from operations and, when necessary, proceeds from
short-term borrowings. Our borrowings generally reach peak
levels during the third or fourth quarter of each year. This
corresponds to the time of year when our receivables also
generally reach peak levels as part of the production and
shipment of product in preparation for the holiday season. The
strategy of retailers has generally been to make a higher
percentage of their purchases of toy and game products within or
close to the fourth quarter holiday consumer buying season,
which includes Christmas. We expect that retailers will continue
to follow this strategy. Our historical revenue pattern is one
in which the second half of the year is more significant to our
overall business than the first half. In 2010, the second half
of the year accounted for approximately 65% of full year
revenues with the third and fourth quarters accounting for 33%
and 32% of full year revenues, respectively. In years where the
Company has products tied to a major motion picture release,
such as in 2009 with the mid-year releases of TRANSFORMERS:
REVENGE OF THE FALLEN, G.I. JOE: THE RISE OF COBRA
and X-MEN ORIGINS: WOLVERINE, this concentration of
revenue late in the year may not be as pronounced due to the
higher level of sales that occur around and just prior to the
time of the motion picture theatrical release. In 2010, the
Company had products tied to only one major motion picture
release, IRON MAN 2, in May 2010.
The toy and game business is also characterized by customer
order patterns which vary from year to year largely because of
differences each year in the degree of consumer acceptance of
product lines, product availability, marketing strategies and
inventory policies of retailers, the dates of theatrical
releases of major motion pictures for which we have product
licenses, and changes in overall economic conditions. As a
result, comparisons of our unshipped orders on any date with
those at the same date in a prior year are not necessarily
indicative of our sales for that year. Moreover, quick response
inventory management practices
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result in fewer orders being placed significantly in advance of
shipment and more orders being placed for immediate delivery.
Retailers are timing their orders so that they are being filled
by suppliers, such as us, closer to the time of purchase by
consumers. Although the Company may receive orders from
customers in advance, it is a general industry practice that
these orders are subject to amendment or cancellation by
customers prior to shipment and, as such, the Company does not
believe that these unshipped orders, at any given date, are
indicative of future sales. The amount of unshipped orders at
any date in a given year can also be affected by programs that
we may employ to incent customers to place orders and accept
shipments early in the year. These programs follow general
industry practices. The types of programs that we plan to employ
to promote sales in 2011 are substantially the same as those we
employed in 2010.
Historically, we commit to the majority of our inventory
production and advertising and marketing expenditures for a
given year prior to the peak third and fourth quarter retail
selling season. Our accounts receivable increase during the
third and fourth quarter as customers increase their purchases
to meet expected consumer demand in the holiday season. Due to
the concentrated timeframe of this selling period, payments for
these accounts receivable are generally not due until later in
the fourth quarter or early in the first quarter of the
subsequent year. The timing difference between expenses paid and
revenues collected sometimes makes it necessary for us to borrow
varying amounts during the year. During 2010, we utilized cash
from our operations and borrowings under our revolving credit
agreement as well as our uncommitted lines of credit to meet our
cash flow requirements.
Royalties
and Product Development
Our success is dependent on continuous innovation in our
entertainment offerings, including both the continuing
development of new brands and products and the redesign of
existing products to drive consumer interest and market
acceptance. Our toy, game and puzzle products are developed by a
global development group and the costs of this group are
allocated to the selling entities which comprise our principal
operating segments. In 2010, 2009 and 2008, we spent $201,358,
$181,195 and $191,424, respectively, on activities relating to
the development, design and engineering of new products and
their packaging (including products brought to us by independent
designers) and on the improvement or modification of ongoing
products. Much of this work is performed by our internal staff
of designers, artists, model makers and engineers.
In addition to the design and development work performed by our
own staff, we deal with a number of independent toy and game
designers for whose designs and ideas we compete with other toy
and game manufacturers. Rights to such designs and ideas, when
acquired by us, are usually exclusive and the agreements require
us to pay the designer a royalty on our net sales of the item.
These designer royalty agreements, in some cases, also provide
for advance royalties and minimum guarantees.
We also produce a number of toys and games under trademarks and
copyrights utilizing the names or likenesses of characters from
movies, television shows and other entertainment media, for
whose rights we compete with other toy and game manufacturers.
Licensing fees for these rights are generally paid as a royalty
on our net sales of the item. Licenses for the use of characters
are generally exclusive for specific products or product lines
in specified territories. In many instances, advance royalties
and minimum guarantees are required by these license agreements.
In 2010, 2009 and 2008, we incurred $248,570, $330,651 and
$312,986, respectively, of royalty expense. A portion of this
expense relates to amounts paid in prior years as royalty
advances. Our royalty expenses in any given year may vary
depending upon the timing of movie releases and other
entertainment media.
Marketing
and Sales
As we are focused on re-imagining, re-inventing and re-igniting
our many brands on a consistent global basis, we have a global
marketing function which establishes brand direction and
messaging, as well as assists the selling entities in
establishing certain local marketing programs. The costs of this
group are allocated to the selling entities which comprise our
principal operating segments. Our products are sold globally to
a broad spectrum of customers, including wholesalers,
distributors, chain stores, discount stores, mail order houses,
catalog stores, department stores and other traditional
retailers, large and small, as well as internet-based
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e-tailers.
Our own sales forces account for the majority of sales of our
products. Remaining sales are generated by independent
distributors who sell our products, for the most part, in areas
of the world where we do not otherwise maintain a direct
presence. While we have thousands of customers, there has been
significant consolidation at the retail level over the last
several years in our industry. As a result, the majority of our
sales are to large chain stores, distributors and wholesalers.
While the consolidation of customers provides us with certain
benefits, such as potentially more efficient product
distribution and other decreased costs of sales and
distribution, this consolidation also creates additional risks
to our business associated with a major customer having
financial difficulties or reducing its business with us. In
addition, customer concentration may decrease the prices we are
able to obtain for some of our products and reduce the number of
products we would otherwise be able to bring to market. During
2010, net revenues from our three largest customers, Wal-Mart
Stores, Inc., Target Corporation and Toys R Us,
Inc., represented 23%, 12% and 11%, respectively, of
consolidated net revenues, and sales to our top five customers,
including Wal-Mart, Target and Toys R Us, Inc.,
accounted for approximately 50% of our consolidated net
revenues. In the U.S. and Canada segment, approximately 71%
of our net revenues were derived from these top three customers.
We advertise many of our toy and game products extensively on
television. Generally our advertising highlights selected items
in our various product groups in a manner designed to promote
the sale of not only the selected item, but also other items we
offer in those product groups as well. Hasbro Studios also
produces television entertainment based on our brands which
appears on THE HUB in the U.S. and on other major networks
internationally. We introduce many of our new products to major
customers during the year prior to the year of introduction of
such products for retail sale. In addition, we showcase certain
of our new products in New York City at the time of the American
International Toy Fair in February, as well as at other
international toy shows. In 2010 we spent $420,651 on
advertising, promotion and marketing programs compared to
$412,580 in 2009 and $454,612 in 2008.
Manufacturing
and Importing
During 2010 substantially all of our products were manufactured
in third party facilities in the Far East, primarily China, as
well as in our two owned facilities located in East Longmeadow,
Massachusetts and Waterford, Ireland.
Most of our products are manufactured from basic raw materials
such as plastic, paper and cardboard, although certain products
also make use of electronic components. All of these materials
are readily available but may be subject to significant
fluctuations in price. There are certain chemicals (including
phthalates and BPA) that national, state and local governments
have restricted or are seeking to restrict or limit the use of;
however, we do not believe these restrictions have or will
materially impact our business. We generally enter into
agreements with suppliers at the beginning of a fiscal year that
establish prices for that year. However, significant volatility
in the prices of any of these materials may require
renegotiation with our suppliers during the year. Our
manufacturing processes and those of our vendors include
injection molding, blow molding, spray painting, printing, box
making and assembly. We purchase most of the components and
accessories used in our toys and certain of the components used
in our games, as well as some finished items, from manufacturers
in the United States and in other countries. However, the
countries of the Far East, and particularly China, constitute
the largest manufacturing center of toys in the world and the
substantial majority of our toy products are manufactured in
China. The 1996 implementation of the General Agreement on
Tariffs and Trade reduced or eliminated customs duties on many
of the products imported by us.
We believe that the manufacturing capacity of our third party
manufacturers, together with our own facilities, as well as the
supply of components, accessories and completed products which
we purchase from unaffiliated manufacturers, are adequate to
meet the anticipated demand in 2011 for our products. Our
reliance on designated external sources of manufacturing could
be shifted, over a period of time, to alternative sources of
supply for our products, should such changes be necessary or
desirable. However, if we were to be prevented from obtaining
products from a substantial number of our current Far East
suppliers due to political, labor or other factors beyond our
control, our operations and our ability to obtain products would
be severely disrupted while alternative sources of product were
secured. The imposition of trade sanctions by the
United States or the European Union against a class of
products imported by us from, or the loss of normal
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trade relations status by, China, or other factors which
increase the cost of manufacturing in China, such as higher
Chinese labor costs or an appreciation in the Chinese Yuan,
could significantly disrupt our operations
and/or
significantly increase the cost of the products which are
manufactured in China and imported into other markets.
We purchase dies and molds from independent United States and
international sources.
Competition
We are a worldwide leader in the design, manufacture and
marketing of games and toys and other entertainment offerings,
but our business is highly competitive. We compete with several
large toy and game companies in our product categories, as well
as many smaller United States and international toy and game
designers, manufacturers and marketers. We also compete with
companies that offer branded entertainment focused on children
and their families. Competition is based primarily on meeting
consumer entertainment preferences and on the quality and play
value of our products. To a lesser extent, competition is also
based on product pricing. In the entertainment arena, Hasbro
Studios and THE HUB compete with other childrens
television networks and entertainment producers, such as
NICKELODEON and CARTOON NETWORK, for viewers, advertising
revenue and distribution
In addition to contending with competition from other toy and
game and branded play entertainment companies, in our business
we must deal with the phenomenon that many children have been
moving away from traditional toys and games at a younger age and
the array of products and entertainment offerings competing for
the attention of children has expanded. We refer to this as
children getting older younger. As a result, our
products not only compete with the offerings of other toy and
game manufacturers, but we must compete, particularly in meeting
the demands of older children, with the entertainment offerings
of many other companies, such as makers of video games and
consumer electronic products.
The volatility in consumer preferences with respect to family
entertainment and low barriers to entry continually creates new
opportunities for existing competitors and
start-ups to
develop products which compete with our toy and game offerings.
Employees
At December 26, 2010, we employed approximately
5,800 persons worldwide, approximately 3,100 of whom were
located in the United States.
Trademarks,
Copyrights and Patents
We seek to protect our products, for the most part, and in as
many countries as practical, through registered trademarks,
copyrights and patents to the extent that such protection is
available, cost effective, and meaningful. The loss of such
rights concerning any particular product is unlikely to result
in significant harm to our business, although the loss of such
protection for a number of significant items might have such an
effect.
Government
Regulation
Our toy and game products sold in the United States are subject
to the provisions of The Consumer Product Safety Act, as amended
by the Consumer Product Safety Improvement Act of 2008, (as
amended, the CPSA), The Federal Hazardous Substances
Act (the FHSA), The Flammable Fabrics Act (the
FFA), and the regulations promulgated thereunder. In
addition, certain of our products, such as the mixes for our
EASY-BAKE
ovens, are also subject to regulation by the Food and Drug
Administration.
The CPSA empowers the Consumer Product Safety Commission (the
CPSC) to take action against hazards presented by
consumer products, including the formulation and implementation
of regulations and uniform safety standards. The CPSC has the
authority to seek to declare a product a banned hazardous
substance under the CPSA and to ban it from commerce. The
CPSC can file an action to seize and condemn an imminently
hazardous consumer product under the CPSA and may also
order equitable remedies such as
7
recall, replacement, repair or refund for the product. The FHSA
provides for the repurchase by the manufacturer of articles that
are banned.
Consumer product safety laws also exist in some states and
cities within the United States and in many foreign markets
including Canada, Australia and Europe. We utilize laboratories
that employ testing and other procedures intended to maintain
compliance with the CPSA, the FHSA, the FFA, other applicable
domestic and international product standards, and our own
standards. Notwithstanding the foregoing, there can be no
assurance that our products are or will be hazard free. Any
material product recall or other safety issue impacting our
product could have an adverse effect on our results of
operations or financial condition, depending on the product and
scope of the recall, and could negatively affect sales of our
other products as well.
The Childrens Television Act of 1990 and the rules
promulgated thereunder by the United States Federal
Communications Commission, as well as the laws of certain
foreign countries, also place limitations on television
commercials during childrens programming.
We maintain programs to comply with various United States
federal, state, local and international requirements relating to
the environment, plant safety and other matters.
Financial
Information about International and United States
Operations
The information required by this item is included in
note 18 of the Notes to Consolidated Financial Statements
included in Item 8 of Part II of this report and is
incorporated herein by reference.
Availability
of Information
Our internet address is
http://www.hasbro.com.
We make our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, available free of charge on or through our website as soon
as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission.
Forward-Looking
Information and Risk Factors That May Affect Future
Results
From time to time, including in this Annual Report on
Form 10-K
and in our annual report to shareholders, we publish
forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These
forward-looking statements may relate to such
matters as our anticipated financial performance or business
prospects in future periods, expected technological and product
developments, the expected content of and timing for new product
introductions or our expectations concerning the future
acceptance of products by customers, the content and timing of
entertainment releases, marketing and promotional efforts,
research and development activities, liquidity, and similar
matters. Forward-looking statements are inherently subject to
risks and uncertainties. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking
statements. These statements may be identified by the use of
forward-looking words or phrases such as anticipate,
believe, could, expect,
intend, looking forward,
may, planned, potential,
should, will and would or
any variations of words with similar meanings. We note that a
variety of factors could cause our actual results and experience
to differ materially from the anticipated results or other
expectations expressed or anticipated in our forward-looking
statements. The factors listed below are illustrative and other
risks and uncertainties may arise as are or may be detailed from
time to time in our public announcements and our filings with
the Securities and Exchange Commission, such as on
Forms 8-K,
10-Q and
10-K. We
undertake no obligation to make any revisions to the
forward-looking statements contained in this Annual Report on
Form 10-K
or in our annual report to shareholders to reflect events or
circumstances occurring after the date of the filing of this
report. Unless otherwise specifically indicated, all dollar or
share amounts herein are expressed in thousands of dollars or
shares, except for per share amounts.
8
The
volatility of ever-evolving consumer preferences, combined with
the high level of competition and low barriers to entry in the
family entertainment industry, make it difficult to achieve,
maintain or build upon the success of our brands, products and
product lines, or introduce successful new brands and products.
In addition, an inability to develop and introduce planned new
brands, products and product lines in a timely and
cost-effective manner may damage our business.
The childrens and family entertainment business is a
trend-driven industry where consumer demands and interests
evolve quickly. We may develop products which consumers do not
find interesting enough to buy in significant quantities to be
profitable to us. Similarly, brands or products that were
successful at one time may lose consumer interest. Our ongoing
success is critically dependent upon developing and maintaining
the consumer appeal of our brands and products and in our
ongoing ability to achieve and maintain market interest in and
acceptance of our offerings to a degree that enables those
brands and products to be profitable. Our failure to
successfully anticipate, identify and react to childrens
interests and the current preferences in family entertainment
could significantly lower sales of our products and harm our
business and profitability.
A decline in the popularity of our existing brands, products and
product lines, or the failure of our new brands, products and
product lines to achieve and sustain sufficient interest from
retailers and consumers, could significantly lower our revenues
and operating margins, which would in turn harm our
profitability, business and financial condition. In our
industry, it is critical to identify and offer what are
considered to be the next hot toys, games and other
entertainment offerings on childrens wish
lists and to effectively anticipate childrens
evolving entertainment interests. Our continued success will
depend on our ability to develop, market and sell popular toys,
games and other entertainment offerings, and license our brands
for products which are sought after by both children and their
parents, in spite of rapidly evolving consumer tastes. We seek
to achieve and maintain market popularity for our brands and
products through the continued re-imagination, re-invention,
re-ignition and extension of our existing family entertainment
properties in ways we believe will capture evolving consumer
interest and imagination, offer immersive brand experiences and
remain relevant in todays world, and by developing,
introducing and gaining customer interest for new family
entertainment products. This process involves anticipating and
extending successful play patterns, offering continual product
innovation and identifying and developing entertainment concepts
and properties that appeal to childrens imaginations and
feed the human need for play. However, consumer preferences with
respect to family entertainment are continuously changing and
are difficult to anticipate and we may not successfully identify
product offerings which are sought after by consumers. Evolving
consumer tastes, coupled with an ever changing pipeline of
entertainment properties and products which compete for consumer
interest and acceptance, create an environment in which some
products can fail to achieve consumer acceptance, and other
products can be extremely popular during a certain period in
time but then rapidly be replaced in consumers minds with
other properties. As a result, individual family entertainment
products and properties often have short consumer life cycles.
Not only must we address rapidly changing consumer tastes and
interests but we face competitors who are also constantly
monitoring and attempting to anticipate consumer tastes, seeking
ideas which will appeal to consumers and introducing new
products that compete with our products for consumer purchasing.
In addition to existing competitors, the barriers to entry for
new participants in the family entertainment industry are low.
New participants with a popular product idea or entertainment
property can gain access to consumers and become a significant
source of competition for our products in a very short period of
time. In some cases our competitors products may achieve
greater market acceptance than our products and potentially
reduce demand for our products and lower our profitability.
The challenge of continuously developing and offering products
that are sought after by children is compounded by the trend of
children getting older younger. By this we mean that
children are expanding their interests beyond traditional toys
and games to a wider array of entertainment products at younger
ages and, as a result, at younger and younger ages, our products
compete with the offerings of video game suppliers, consumer
electronics companies, media and social media companies and
other businesses outside of the traditional toy and game
industry.
9
There is no guarantee that:
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Any of our brands, products or product lines will achieve
popularity or continue to be popular;
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Any property for which we have a significant license will
achieve or sustain popularity;
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Any new products or product lines we introduce will be
considered interesting to consumers and achieve an adequate
market acceptance;
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Any products life cycle or sales quantities will be
sufficient to permit us to profitably recover our development,
manufacturing, marketing, royalties (including royalty advances
and guarantees) and other costs of producing, marketing and
selling the product; or
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We will be able to manufacture, source and ship new or
continuing products in a timely and cost-effective basis to meet
constantly changing consumer demands, a risk that is heightened
by our customers compressed shipping schedules and the
seasonality of our business.
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In developing new brands, products and product lines, we have
anticipated dates for the associated product introductions. When
we state that we will introduce, or anticipate introducing, a
particular product or product line at a certain time in the
future those expectations are based on completing the associated
development, implementation, and marketing work in accordance
with our currently anticipated development schedule. Unforeseen
delays or difficulties in the development process, significant
increases in the planned cost of development, or changes in
anticipated consumer demand for products may cause the
introduction date for products to be later than anticipated or,
in some situations, may cause a product introduction to be
discontinued.
Delays
or increased costs associated with the development and offering
of entertainment media based upon or related to our brands, or
lack of sufficient consumer interest in such entertainment
media, can harm our business and profitability.
As part of our strategy of offering immersive brand experiences,
we look to offer consumers the ability to enjoy our brands in as
many different forms and formats as possible. Entertainment
media, in forms such as motion pictures and television, can
provide popular platforms for consumers to experience our brands
and the success, or lack of success, of such media efforts can
significantly impact demand for our products and our financial
success.
The success of our products is often dependent on the timelines
and effectiveness of media efforts. Television programming,
movie and DVD releases, comic book releases, and other media
efforts are often critical in generating interest in our
products and brands. Not only our efforts, but the efforts of
third parties, heavily impact the launch dates and success of
these media efforts. When we say that products or brands will be
supported by certain media releases, those statements are based
on our current plans and expectations. Unforeseen factors may
increase the cost of these releases, delay these media releases
or even lead to their cancellation. Any delay or cancellation of
planned product development work, introductions, or media
support may decrease the number of products we sell and harm our
business.
Similarly, if our and our partners media efforts fail to
garner sufficient consumer interest and acceptance, our revenues
and the financial return from such efforts will be harmed. In
2009 we entered into a joint venture with Discovery
Communications, Inc. (Discovery). Through that joint
venture, we launched a childrens and family entertainment
channel called THE HUB in October of 2010. In connection with
this joint venture effort, we also developed a wholly-owned
studio, called Hasbro Studios, which is responsible for
developing and producing television entertainment media,
primarily based on our brands. The television programming
developed by Hasbro Studios is offered in the United States on
THE HUB and will be distributed on other networks
internationally. THE HUB is competing with a number of other
childrens television networks in the United States for
viewers, advertising revenue and distribution fees. There is no
guarantee that THE HUB will be successful. Similarly, Hasbro
Studios programming distributed internationally competes
with programming by other parties. Lack of consumer interest in
and acceptance of THE HUB, programming appearing on THE HUB,
other programming developed by Hasbro Studios, and products
related to that programming could
10
significantly harm our business. Similarly, our business could
be harmed by greater than expected costs, or unexpected delays
or difficulties, associated with the development of Hasbro
Studios programming. During 2010 the Company incurred $52,047
for programming developed by Hasbro Studios and anticipates that
it will continue spending at increased levels in 2011 and future
years.
At December 26, 2010, $354,612, or 8.7%, of our total
assets represented our investment in THE HUB. If THE HUB does
not achieve success, or there are subsequent declines in the
success or profitability of the channel, then our investment may
become impaired, which could result in a write-down through net
earnings.
Economic
downturns which negatively impact the retail and credit markets,
or which otherwise damage the financial health of our retail
customers and consumers, can harm our business and financial
performance.
The success of our family entertainment products and our
financial performance is dependent on consumer purchases of our
products. Consumers may not purchase our products because the
products do not capture consumer interest and imagination, or
because competitor family entertainment offerings are deemed
more attractive. But consumer spending on our products can also
be harmed by factors that negatively impact consumers
budgets generally, and which are not due to our product
offerings.
Recessions and other economic downturns, or disruptions in
credit markets, in the markets in which we operate can result in
lower levels of economic activity, lower employment levels, less
consumer disposable income, and lower consumer confidence.
Similarly, reductions in the value of key assets held by
consumers, such as their homes or stock market investments, can
lower consumer confidence and consumer spending power. Any of
these factors can reduce the amount which consumers spend on the
purchase of our products. This in turn can reduce our revenues
and harm our financial performance and profitability.
In addition to experiencing potentially lower revenues from our
products during times of economic difficulty, in an effort to
maintain sales during such times we may need to reduce the price
of our products, increase our promotional spending, or take
other steps to encourage retailer and consumer purchase of our
products. Those steps may lower our net revenues, decrease our
operating margins, increase our costs
and/or lower
our profitability.
Other
economic and public health conditions in the markets in which we
operate, including rising commodity and fuel prices, higher
labor costs, increased transportation costs, outbreaks of public
health pandemics or other diseases, or third party conduct could
negatively impact our ability to produce and ship our products,
and lower our revenues, margins and profitability.
Various economic and public health conditions can impact our
ability to manufacture and deliver products in a timely and
cost-effective manner, or can otherwise have a significant
negative impact on our business.
Significant increases in the costs of other products which are
required by consumers, such as gasoline, home heating fuels, or
groceries, may reduce household spending on the discretionary
entertainment products we offer. As we discussed above, weakened
economic conditions, lowered employment levels or recessions in
any of our major markets may significantly reduce consumer
purchases of our products. Economic conditions may also be
negatively impacted by terrorist attacks, wars and other
conflicts, increases in critical commodity prices, or the
prospect of such events. Such a weakened economic and business
climate, as well as consumer uncertainty created by such a
climate, could harm our revenues and profitability.
Our success and profitability not only depend on consumer demand
for our products, but also on our ability to produce and sell
those products at costs which allow for us to make a profit.
Rising fuel and raw material prices, for paperboard and other
components such as resin used in plastics or electronic
components, increased transportation costs, and increased labor
costs in the markets in which our products are manufactured all
may increase the costs we incur to produce and transport our
products, which in turn may reduce our margins, reduce our
profitability and harm our business.
Other conditions, such as the unavailability of sufficient
quantities of electrical components, may impede our ability to
manufacture, source and ship new and continuing products on a
timely basis. Additional factors
11
outside of our control could further delay our products or
increase the cost we pay to produce such products. For example,
work stoppages, slowdowns or strikes, an outbreak of a severe
public health pandemic, or the occurrence or threat of wars or
other conflicts, all could impact our ability to manufacture or
deliver product. Any of these factors could result in product
delays, increased costs
and/or lost
sales for our products.
We may
not realize the full benefit of our licenses if the licensed
material has less market appeal than expected or if revenue from
the licensed products is not sufficient to earn out the minimum
guaranteed royalties.
In addition to designing and developing products based on our
own brands, we seek to fulfill consumer preferences and
interests by producing products based on popular entertainment
properties developed by other parties and licensed to us. The
success of entertainment properties for which we have a license,
such as MARVEL or STAR WARS related products, can significantly
affect our revenues and profitability. If we produce a line of
products based on a movie or television series, the success of
the movie or series has a critical impact on the level of
consumer interest in the associated products we are offering. In
addition, competition in our industry for access to
entertainment properties can lessen our ability to secure,
maintain, and renew popular licenses to entertainment products
on beneficial terms, if at all, and to attract and retain the
talented employees necessary to design, develop and market
successful products based on these properties. The loss of
rights granted pursuant to any of our licensing agreements could
harm our business and competitive position.
The license agreements we enter to obtain these rights usually
require us to pay minimum royalty guarantees that may be
substantial, and in some cases may be greater than what we are
ultimately able to recoup from actual sales, which could result
in write-offs of significant amounts which in turn would harm
our results of operations. At December 26, 2010, we had
$112,922 of prepaid royalties, $17,922 of which are included in
prepaid expenses and other current assets and $95,000 of which
are included in other assets. Under the terms of existing
contracts as of December 26, 2010, we may be required to
pay future minimum guaranteed royalties and other licensing fees
totaling approximately $287,000. Acquiring or renewing licenses
may require the payment of minimum guaranteed royalties that we
consider to be too high to be profitable, which may result in
losing licenses we currently hold when they become available for
renewal, or missing business opportunities for new licenses.
Additionally, as a licensee of entertainment based properties we
have no guaranty that a particular property or brand will
translate into successful toy or game products.
We anticipate that the shorter theatrical duration for movie
releases may make it increasingly difficult for us to profitably
sell licensed products based on entertainment properties and may
lead our customers to reduce their demand for these products in
order to minimize their inventory risk. Furthermore, there can
be no assurance that a successful brand will continue to be
successful or maintain a high level of sales in the future, as
new entertainment properties and competitive products are
continually being introduced to the market. In the event that we
are not able to acquire or maintain successful entertainment
licenses on advantageous terms, our revenues and profits may be
harmed.
Our
business is seasonal and therefore our annual operating results
will depend, in large part, on our sales during the relatively
brief holiday shopping season. This seasonality is exacerbated
by retailers quick response inventory management
techniques.
Sales of our family entertainment products at retail are
extremely seasonal, with a majority of retail sales occurring
during the period from September through December in
anticipation of the holiday season, including Christmas. This
seasonality has increased over time, as retailers become more
efficient in their control of inventory levels through quick
response inventory management techniques. Customers are timing
their orders so that they are being filled by suppliers, such as
us, closer to the time of purchase by consumers. For toys, games
and other family entertainment products which we produce, a
majority of retail sales for the entire year generally occur in
the fourth quarter, close to the holiday season. As a
consequence, the majority of our sales to our customers occur in
the period from September through December, as our customers do
not want to maintain large on-hand inventories throughout the
year ahead of consumer demand. While these techniques
12
reduce a retailers investment in inventory, they increase
pressure on suppliers like us to fill orders promptly and
thereby shift a significant portion of inventory risk and
carrying costs to the supplier.
The limited inventory carried by retailers may also reduce or
delay retail sales, resulting in lower revenues for us. If we or
our customers determine that one of our products is more popular
at retail than was originally anticipated, we may not have
sufficient time to produce and ship enough additional product to
fully capture consumer interest in the product. Additionally,
the logistics of supplying more and more product within shorter
time periods increases the risk that we will fail to achieve
tight and compressed shipping schedules, which also may reduce
our sales and harm our financial performance. This seasonal
pattern requires significant use of working capital, mainly to
manufacture or acquire inventory during the portion of the year
prior to the holiday season, and requires accurate forecasting
of demand for products during the holiday season in order to
avoid losing potential sales of popular products or producing
excess inventory of products that are less popular with
consumers. Our failure to accurately predict and respond to
consumer demand, resulting in our underproducing popular items
and/or
overproducing less popular items, would reduce our total sales
and harm our results of operations. In addition, as a result of
the seasonal nature of our business, we would be significantly
and adversely affected, in a manner disproportionate to the
impact on a company with sales spread more evenly throughout the
year, by unforeseen events, such as a terrorist attack or
economic shock, that harm the retail environment or consumer
buying patterns during our key selling season, or by events,
such as strikes or port delays, that interfere with the shipment
of goods, particularly from the Far East, during the critical
months leading up to the holiday purchasing season.
Our
substantial sales and manufacturing operations outside the
United States subject us to risks associated with international
operations. Among these risks is the fact that fluctuations in
foreign exchange rates can significantly impact our financial
performance.
We operate facilities and sell products in numerous countries
outside the United States. For the year ended December 26,
2010, our net revenues from international customers comprised
approximately 46% of our total consolidated net revenues. We
expect our sales to international customers to continue to
account for a significant portion of our revenues. In fact, over
time, we expect our international sales and operations to grow
both in absolute terms and as a percentage of our overall
business as one of our key business strategies is to increase
our presence in emerging and underserved markets. Additionally,
as we discuss below, 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, including operations
in emerging markets that we have entered, may enter, or may
increase our presence in, are subject to the risks associated
with international operations, including:
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Currency conversion risks and currency fluctuations;
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Limitations, including taxes, on the repatriation of earnings;
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Potential challenges to our transfer pricing determinations and
other aspects of our cross border transactions;
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Political instability, civil unrest and economic instability;
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Greater difficulty enforcing intellectual property rights and
weaker laws protecting such rights;
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Complications in complying with different laws in varying
jurisdictions and changes in governmental policies;
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Natural disasters and the greater difficulty and expense in
recovering therefrom;
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Difficulties in moving materials and products from one country
to another, including port congestion, strikes and other
transportation delays and interruptions;
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Changes in international labor costs and other costs of doing
business internationally; and
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The imposition of tariffs, quotas, or other protectionist
measures.
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13
Because of the importance of our international sales and
international sourcing of manufacturing to our business, our
financial condition and results of operations could be
significantly harmed if any of the risks described above were to
occur.
If the exchange rate between the United States dollar and a
local currency for an international market in which we have
significant sales or operations changes, our financial results,
reported in U.S. dollars, may be meaningfully impacted even
if our business in the local currency is not significantly
affected. As an example, if the dollar appreciates 10% relative
to a local currency for an international market in which we had
$200 million of net sales, the dollar value of those sales,
as they are translated into U.S. dollars, would decrease by
$20 million in our consolidated financial results. As such,
we would recognize a $20 million decrease in our net
revenues, even if the actual level of sales in the foreign
market had not changed. Similarly, our expenses in foreign
markets can be significantly impacted, in U.S. dollar
terms, by exchange rates, meaning the profitability of our
business in U.S. dollar terms can be significantly harmed
by exchange rate movements.
The
concentration of our retail customer base means that economic
difficulties or changes in the purchasing or promotional
policies of our major customers could have a significant impact
on us.
We depend upon a relatively small retail customer base to sell
the majority of our products. For the fiscal year ended
December 26, 2010, Wal-Mart Stores, Inc., Target
Corporation, and Toys R Us, Inc., accounted for
approximately 23%, 12% and 11%, respectively, of our
consolidated net revenues and our five largest customers,
including Wal-Mart, Target and Toys R Us, in the
aggregate accounted for approximately 50% of our consolidated
net revenues. In the U.S. and Canada segment, approximately
71% of the net revenues of the segment were derived from our top
three customers. While the consolidation of our customer base
may provide certain benefits to us, such as potentially more
efficient product distribution and other decreased costs of
sales and distribution, this consolidation also means that if
one or more of our major customers were to experience
difficulties in fulfilling their obligations to us, cease doing
business with us, significantly reduce the amount of their
purchases from us, 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. 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. In addition, the bankruptcy
or other lack of success of one or more of our significant
retail customers could negatively impact our revenues and result
in higher bad debt expense.
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 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, including natural disasters or pandemics, 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 revenues and
profitability, and harm our business.
Given that the majority of our 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 shortage and increases in labor costs in China, and
difficulties in moving
14
products manufactured in China out of Asia 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, 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. 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 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.
Our
success is critically dependent on the efforts and dedication of
our employees.
Our employees are at the heart of all of our efforts. It is
their skill, innovation and hard work which drive our success.
We compete with many other potential employers in hiring and
retaining our employees. Although we continuously seek to
develop our employees, challenge them and compensate them
fairly, there is no guarantee that we will be able to hire or
retain the employees we need to succeed. Our loss of key
employees, or our inability to hire talented employees we need,
could significantly harm our business.
Part
of our strategy for remaining relevant to children is to offer
innovative childrens toy and game electronic products. The
margins on many of these products are lower than more
traditional toys and games and such products may have a shorter
lifespan than more traditional toys and games. As a result,
sales of childrens toy and game electronic products may
lower our overall operating margins and produce more volatility
in our business.
As children have grown older younger and have
otherwise become interested in more and more sophisticated and
adult products, such as videogames, consumer electronics and
social media, at younger and younger ages, we have sought to
keep our products relevant for these consumers. One initiative
we have pursued to capture the interest of children is to offer
innovative childrens electronic toys and games. Examples
of such products in the last few years include our I-branded
products such as I-DOG and I-CAT, and our FURREAL FRIENDS line
of products, including BUTTERSCOTCH PONY and BISCUIT MY
LOVIN PUP. In 2011 we are offering games based on our
innovative LIVE platform and our most realistic member of the
FURREAL FRIENDS line to date, COOKIE, MY PLAYFUL PUP. These
products, if successful, can be an effective way for us to
connect with consumers and increase sales. However,
childrens electronics, in addition to the risks associated
with our other family entertainment products, also face certain
additional risks.
Our costs for designing, developing and producing electronic
products tend to be higher than for many of our other more
traditional products, such as board games and action figures.
The ability to recoup these higher costs through sufficient
sales quantities and to reflect higher costs in higher prices is
constrained by heavy competition in consumer electronics and
entertainment products, and can be further constrained by
difficult economic conditions. As a consequence, our margins on
the sales of electronic products tend to be lower than for more
traditional products and we can face increased risk of not
achieving sales sufficient to recover our
15
costs. In addition, the pace of change in product offerings and
consumer tastes in the electronics area is potentially even
greater than for our other products. This pace of change means
that the window in which a product can achieve and maintain
consumer interest may be even shorter than traditional toys and
games.
We
rely on external financing, including our credit facility, to
help fund our operations. If we were unable to obtain or service
such financing, or if the restrictions imposed by such financing
were too burdensome, our business would be harmed.
Due to the seasonal nature of our business, in order to meet our
working capital needs, particularly those in the third and
fourth quarters, we rely on our revolving credit facility and
our other credit facilities for working capital. We currently
have a revolving credit agreement that expires in 2014, which
provides for a $500,000 committed revolving credit facility. The
credit agreement contains certain restrictive covenants setting
forth leverage and coverage requirements, and certain other
limitations typical of an investment grade facility. These
restrictive covenants may limit our future actions, and
financial, operating and strategic flexibility. In addition, our
financial covenants were set at the time we entered into our
credit facility. Our performance and financial condition may not
meet our original expectations, causing us to fail to meet such
financial covenants. Non-compliance with our debt covenants
could result in us being unable to utilize borrowings under our
revolving credit facility and other bank lines, a circumstance
which potentially could occur when operating shortfalls would
most require supplementary borrowings to enable us to continue
to fund our operations.
In early 2011 we established a commercial paper program which,
subject to market conditions, will allow us to issue up to
$500,000 in aggregate amount of commercial paper outstanding
from time to time as a further source of working capital funding
and liquidity. We did not renew our accounts receivable
securitization facility in January 2011 as we believe issuing
commercial paper can be a more cost effective way for us to
raise short-term funding in the future. However, there is no
guarantee that we will be able to issue commercial paper on
favorable terms, or at all, at any given point in time.
We believe that our cash flow from operations, together with our
cash on hand and access to existing credit facilities or our
commercial paper program, are adequate for current and planned
needs in 2011. However, our actual experience may differ from
these expectations. Factors that may lead to a difference
include, but are not limited to, the matters discussed herein,
as well as future events that might have the effect of reducing
our available cash balance, such as unexpected material
operating losses or increased capital or other expenditures, or
other future events that may reduce or eliminate the
availability of external financial resources.
Not only may our individual financial performance impact our
ability to access sources of external financing, but significant
disruptions to credit markets in general may also harm our
ability to obtain financing. Although we believe the risk of
nonperformance by the counterparties to our financial facilities
is not significant, in times of severe economic downturn
and/or
distress in the credit markets, it is possible that one or more
sources of external financing may be unable or unwilling to
provide funding to us. In such a situation, it may be that we
would be unable to access funding under our existing credit
facilities, and it might not be possible to find alternative
sources of funding.
We also may choose to finance our capital needs, from time to
time, through the issuance of debt securities. Our ability to
issue such securities on satisfactory terms, if at all, will
depend on the state of our business and financial condition, any
ratings issued by major credit rating agencies, market interest
rates, and the overall condition of the financial and credit
markets at the time of the offering. The condition of the credit
markets and prevailing interest rates have fluctuated
significantly in the past and are likely to fluctuate in the
future. Variations in these factors could make it difficult for
us to sell debt securities or require us to offer higher
interest rates in order to sell new debt securities. The failure
to receive financing on desirable terms, or at all, could damage
our ability to support our future operations or capital needs or
engage in other business activities.
As of December 26, 2010, we had $1,384,895 of total
principal amount of indebtedness outstanding. If we are unable
to generate sufficient available cash flow to service our
outstanding debt we would need to
16
refinance such debt or face default. There is no guarantee that
we would be able to refinance debt on favorable terms, or at all.
As a
manufacturer of consumer products and a large multinational
corporation, we are subject to various government regulations
and may be subject to additional regulations in the future,
violation of which could subject us to sanctions or otherwise
harm our business. In addition, we could be the subject of
future product liability suits or product recalls, which could
harm our business.
As a manufacturer of consumer products, we are subject to
significant government regulations, including, in the United
States, under The Consumer Products Safety Act, The Federal
Hazardous Substances Act, and The Flammable Fabrics Act, as well
as under product safety and consumer protection statutes in our
international markets. In addition, certain of our products are
subject to regulation by the Food and Drug Administration or
similar international authorities. While we take all the steps
we believe are necessary to comply with these acts, there can be
no assurance that we will be in compliance in the future.
Failure to comply could result in sanctions which could have a
negative impact on our business, financial condition and results
of operations. We may also be subject to involuntary product
recalls or may voluntarily conduct a product recall. While costs
associated with product recalls have generally not been material
to our business, the costs associated with future product
recalls individually and in the aggregate in any given fiscal
year, could be significant. In addition, any product recall,
regardless of direct costs of the recall, may harm consumer
perceptions of our products and have a negative impact on our
future revenues and results of operations.
Governments and regulatory agencies in the markets where we
manufacture and sell products may enact additional regulations
relating to product safety and consumer protection in the
future, and may also increase the penalties for failure to
comply with product safety and consumer protection regulations.
In addition, one or more of our customers might require changes
in our products, such as the non-use of certain materials, in
the future. Complying with any such additional regulations or
requirements could impose increased costs on our business.
Similarly, increased penalties for non-compliance could subject
us to greater expense in the event any of our products were
found to not comply with such regulations. Such increased costs
or penalties could harm our business.
In addition to government regulation, products that have been or
may be developed by us may expose us to potential liability from
personal injury or property damage claims by the users of such
products. There can be no assurance that a claim will not be
brought against us in the future. Any successful claim could
significantly harm our business, financial condition and results
of operations.
As a large, multinational corporation, we are subject to a host
of governmental regulations throughout the world, including
antitrust, customs and tax requirements, anti-boycott
regulations, environmental regulations and the Foreign Corrupt
Practices Act. Complying with these regulations imposes costs on
us which can reduce our profitability and our failure to
successfully comply with any such legal requirements could
subject us to monetary liabilities and other sanctions that
could further harm our business and financial condition.
Our
business is dependent on intellectual property rights and we may
not be able to protect such rights successfully. In addition, we
have a material amount of acquired product rights which, if
impaired, would result in a reduction of our net
earnings.
Our intellectual property, including our license agreements and
other agreements that establish our ownership rights and
maintain the confidentiality of our intellectual property, are
of great value. We rely on a combination of trade secret,
copyright, trademark, patent and other proprietary rights laws
to protect our rights to valuable intellectual property related
to our brands. From time to time, third parties have challenged,
and may in the future try to challenge, our ownership of our
intellectual property. In addition, our business is subject to
the risk of third parties counterfeiting our products or
infringing on our intellectual property rights. We may need to
resort to litigation to protect our intellectual property
rights, which could result in substantial costs and diversion of
resources. Our failure to protect our intellectual property
rights could harm our business and competitive position. Much of
our intellectual property has been internally developed and has
no carrying value on our balance sheet. However, as of
December 26, 2010, we had $500,597 of acquired product and
17
licensing rights included in other assets on our balance sheet.
Declines in the profitability of the acquired brands or licensed
products may impact our ability to recover the carrying value of
the related assets and could result in an impairment charge.
Reduction in our net earnings caused by impairment charges could
harm our financial results.
We may
not realize the anticipated benefits of acquisitions or
investments in joint ventures, or those benefits may be delayed
or reduced in their realization.
Acquisitions have been a significant part of our historical
growth and have enabled us to further broaden and diversify our
product offerings. In making acquisitions, we target companies
that we believe offer attractive family entertainment products
or the ability for us to leverage our entertainment offerings.
In the case of our joint venture with Discovery, we looked to
partner with a company that has shown the ability to establish
and operate compelling entertainment channels. However, we
cannot be certain that the products of companies we may acquire,
or acquire an interest in, in the future will achieve or
maintain popularity with consumers or that any such acquired
companies or investments will allow us to more effectively
market our products. In some cases, we expect that the
integration of the companies that we acquire into our operations
will create production, marketing and other operating synergies
which will produce greater revenue growth and profitability and,
where applicable, cost savings, operating efficiencies and other
advantages. However, we cannot be certain that these synergies,
efficiencies and cost savings will be realized. Even if
achieved, these benefits may be delayed or reduced in their
realization. In other cases, we acquire companies that we
believe have strong and creative management, in which case we
plan to operate them more autonomously rather than fully
integrating them into our operations. We cannot be certain that
the key talented individuals at these companies will continue to
work for us after the acquisition or that they will develop
popular and profitable products or services in the future.
From
time to time, we are involved in litigation, arbitration or
regulatory matters where the outcome is uncertain and which
could entail significant expense.
As is the case with many large multinational corporations, we
are subject, from time to time, to regulatory investigations,
litigation and arbitration disputes. Because the outcome of
litigation, arbitration and regulatory investigations is
inherently difficult to predict, it is possible that the outcome
of any of these matters could entail significant expense for us
and harm our business. The fact that we operate in significant
numbers of international markets also increases the risk that we
may face legal and regulatory exposures as we attempt to comply
with a large number of varying legal and regulatory requirements.
We
have a material amount of goodwill which, if it becomes
impaired, would result in a reduction in our net
earnings.
Goodwill is the amount by which the cost of an acquisition
exceeds the fair value of the net assets we acquire. Goodwill is
not amortized and is required to be periodically evaluated for
impairment. At December 26, 2010, $474,813, or 11.6%, of
our total assets represented goodwill. Declines in our
profitability may impact the fair value of our reporting units,
which could result in a write-down of our goodwill. Reductions
in our net earnings caused by the write-down of goodwill or our
investment in the joint venture could harm our results of
operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Hasbro owns its corporate headquarters in Pawtucket, Rhode
Island consisting of approximately 343,000 square feet,
which is used by the U.S. and Canada, Global Operations and
Entertainment and Licensing segments as well as for corporate
functions. The Company also owns an adjacent building consisting
of approximately 23,000 square feet that is used in the
corporate function. In addition, the Company leases a
18
building in East Providence, Rhode Island consisting of
approximately 120,000 square feet that is used in the
corporate function as well as by the Global Operations and
Entertainment and Licensing segments. In addition to the above
facilities, the Company also leases office space consisting of
approximately 95,400 square feet in Renton, Washington as
well as warehouse space aggregating approximately
1,939,000 square feet in Georgia, California, Texas and
Quebec that are also used by the U.S. and Canada segment.
The Company also leases properties that total approximately
41,500 square feet in Dedham, Massachusetts and Burbank,
California that are used by the Entertainment and Licensing
segment.
The Company owns manufacturing plants in East Longmeadow,
Massachusetts and Waterford, Ireland. The East Longmeadow plant
consists of approximately 1,148,000 square feet and is used
by the U.S. and Canada and Global Operations segments. The
Waterford plant consists of approximately 244,000 square
feet and is used by our Global Operations segment. The Global
Operations segment also leases an aggregate of
87,900 square feet of office and warehouse space in Hong
Kong used by this segment as well as approximately
52,300 square feet of office space leased in China.
In the International segment, the Company leases or owns
property in over 25 countries. The primary locations in the
International segment are in the United Kingdom, Mexico,
Germany, France, Spain, Australia and Brazil, all of which are
comprised of both office and warehouse space.
The above properties consist, in general, of brick, cinder block
or concrete block buildings which the Company believes are in
good condition and well maintained.
The Company believes that its facilities are adequate for its
needs. The Company believes that, should it not be able to renew
any of the leases related to its leased facilities, it could
secure similar substitute properties without a material adverse
impact on its operations.
|
|
Item 3.
|
Legal
Proceedings
|
The Company has outstanding tax assessments from the Mexican tax
authorities relating to the years 2000 through 2005. These tax
assessments, which total approximately $179 million in
aggregate (including interest, penalties, and inflation
updates), are based on transfer pricing issues between the
Companys subsidiaries with respect to the Companys
operations in Mexico. The Company has filed suit in the Federal
Tribunal of Fiscal and Administrative Justice in Mexico
challenging the 2000 through 2003 assessments. The Company filed
the suit related to the 2000 and 2001 assessments in May 2009;
the 2002 assessment in June 2008; and the 2003 assessment in
March 2009. The Company is challenging the 2004 assessment
through administrative appeals and anticipates that it will
challenge the 2005 assessment in a similar manner. The Company
expects to be successful in sustaining its positions for all of
these years. However, in order to challenge the outstanding tax
assessments related to 2000 through 2003, as is usual and
customary in Mexico in these matters, the Company was required
to either make a deposit or post a bond in the full amount of
the assessments. The Company elected to post bonds and
accordingly, as of December 26, 2010, bonds totaling
approximately $115 million (at year-end 2010 exchange
rates) have been posted related to the 2000, 2001, 2002 and 2003
assessments. These bonds guarantee the full amounts of the
related outstanding tax assessments in the event the Company is
not successful in its challenge to them. The Company does not
currently expect that it will be required to make a deposit or
post a bond related to the 2004 or 2005 assessments.
We are currently party to certain other legal proceedings, none
of which we believe to be material to our business or financial
condition.
19
Executive
Officers of the Registrant
The following persons are the executive officers of the Company.
Such executive officers are elected annually. The position(s)
and office(s) listed below are the principal position(s) and
office(s) held by such persons with the Company. The persons
listed below generally also serve as officers and directors of
certain of the Companys various subsidiaries at the
request and convenience of the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
Serving in
|
|
|
|
|
|
|
Current
|
Name
|
|
Age
|
|
Position and Office Held
|
|
Position
|
|
Brian Goldner(1)
|
|
|
47
|
|
|
President and Chief Executive Officer
|
|
|
Since 2008
|
|
David D. R. Hargreaves(2)
|
|
|
58
|
|
|
Chief Operating Officer
|
|
|
Since 2008
|
|
Deborah Thomas(3)
|
|
|
47
|
|
|
Senior Vice President and Chief Financial Officer
|
|
|
Since 2009
|
|
Duncan J. Billing(4)
|
|
|
52
|
|
|
Global Chief Development Officer
|
|
|
Since 2008
|
|
Barbara Finigan(5)
|
|
|
49
|
|
|
Senior Vice President, Chief Legal Officer and Secretary
|
|
|
Since 2010
|
|
John Frascotti(6)
|
|
|
50
|
|
|
Global Chief Marketing Officer
|
|
|
Since 2008
|
|
Martin R. Trueb
|
|
|
58
|
|
|
Senior Vice President and Treasurer
|
|
|
Since 1997
|
|
|
|
|
(1) |
|
Prior thereto, Chief Operating Officer from 2006 to 2008; prior
thereto, President, U.S. Toys Segment from 2003 to 2006. |
|
(2) |
|
Prior thereto, Chief Operating Officer and Chief Financial
Officer from 2008 to 2009; prior thereto, Executive Vice
President, Finance and Global Operations and Chief Financial
Officer from 2007 to 2008; prior thereto, Senior Vice President
and Chief Financial Officer from 2001 to 2007. |
|
(3) |
|
Prior thereto, Senior Vice President, Head of Corporate Finance
from 2008 to 2009; prior thereto, Senior Vice President and
Controller from 2003 to 2008. |
|
(4) |
|
Prior thereto, Chief Marketing Officer, U.S. Toy Group since
2004; prior thereto, General Manager, Big Kids Division,
since 2002. |
|
(5) |
|
Prior thereto, Vice President, Employment, Litigation and
Compliance since 2006; prior thereto, Vice President,
Employment and Litigation since 2001. |
|
(6) |
|
Mr. Frascotti joined the Company in January 2008. Prior
thereto he was employed by Reebok International, Ltd., serving
as Senior Vice President, New Business, Acquisitions and
Licensing from 2002 to 2005, and as Senior Vice President,
Sports Division from 2005 to 2008. |
20
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The Companys common stock, par value $0.50 per share (the
Common Stock), is traded on The NASDAQ Global Select
Market under the symbol HAS. Prior to
December 21, 2010, the Common Stock was traded on the New
York Stock Exchange under the same symbol. The following table
sets forth the high and low sales prices in the applicable
quarters, as reported on either The NASDAQ Global Select Market
for the period December 21, 2010 through December 26,
2010, or the New York Stock Exchange for the period
December 29, 2008 through December 20, 2010,
respectively, as well as the cash dividends declared per share
of Common Stock for the periods listed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Prices
|
|
Cash Dividends
|
Period
|
|
High
|
|
Low
|
|
Declared
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
38.82
|
|
|
|
30.20
|
|
|
$
|
0.25
|
|
2nd Quarter
|
|
|
43.71
|
|
|
|
36.50
|
|
|
|
0.25
|
|
3rd Quarter
|
|
|
45.55
|
|
|
|
37.65
|
|
|
|
0.25
|
|
4th Quarter
|
|
|
50.17
|
|
|
|
44.22
|
|
|
|
0.25
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
29.91
|
|
|
|
21.14
|
|
|
$
|
0.20
|
|
2nd Quarter
|
|
|
29.23
|
|
|
|
22.27
|
|
|
|
0.20
|
|
3rd Quarter
|
|
|
29.36
|
|
|
|
22.79
|
|
|
|
0.20
|
|
4th Quarter
|
|
|
32.47
|
|
|
|
26.82
|
|
|
|
0.20
|
|
The approximate number of holders of record of the
Companys Common Stock as of February 7, 2011 was
9,100.
See Part III, Item 12 of this report for the
information concerning the Companys Equity
Compensation Plans.
Dividends
Declaration of dividends is at the discretion of the
Companys Board of Directors and will depend upon the
earnings and financial condition of the Company and such other
factors as the Board of Directors deems appropriate.
Issuer
Repurchases of Common Stock
Repurchases made in the fourth quarter (in whole numbers of
shares and dollars)
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate Dollar
|
|
|
|
|
|
|
|
|
|
(c) Total Number of Shares
|
|
|
Value) of Shares (or
|
|
|
|
(a) Total Number
|
|
|
(b) Average Price
|
|
|
(or Units) Purchased as
|
|
|
Units) that May Yet Be
|
|
|
|
of Shares (or
|
|
|
Paid per Share
|
|
|
Part of Publicly Announced
|
|
|
Purchased Under the
|
|
Period
|
|
Units) Purchased
|
|
|
(or Unit)
|
|
|
Plans or Programs
|
|
|
Plans or Programs
|
|
|
October 2010
9/27/10 10/24/10
|
|
|
166,572
|
|
|
$
|
44.7366
|
|
|
|
166,572
|
|
|
$
|
150,068,118
|
|
November 2010
10/25/10 11/28/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,068,118
|
|
December 2010
11/29/10 12/26/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150,068,118
|
|
Total
|
|
|
166,572
|
|
|
$
|
44.7366
|
|
|
|
166,572
|
|
|
$
|
150,068,118
|
|
21
In April 2010, the Companys Board of Directors authorized
the repurchase of up to $625 million in common stock.
Purchases of the Companys common stock may be made from
time to time, subject to market conditions. These shares may be
repurchased in the open market or through privately negotiated
transactions. The Company has no obligation to repurchase shares
under the authorization, and the timing, actual number and value
of the shares that are repurchased will depend on a number of
factors, including the price of the Companys stock. The
Company may suspend or discontinue the program at any time and
there is no expiration date.
|
|
Item 6.
|
Selected
Financial Data
|
(Thousands of dollars and shares
except per share data and ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
4,002,161
|
|
|
|
4,067,947
|
|
|
|
4,021,520
|
|
|
|
3,837,557
|
|
|
|
3,151,481
|
|
Net earnings
|
|
$
|
397,752
|
|
|
|
374,930
|
|
|
|
306,766
|
|
|
|
333,003
|
|
|
|
230,055
|
|
Per Common Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.86
|
|
|
|
2.69
|
|
|
|
2.18
|
|
|
|
2.13
|
|
|
|
1.38
|
|
Diluted
|
|
$
|
2.74
|
|
|
|
2.48
|
|
|
|
2.00
|
|
|
|
1.97
|
|
|
|
1.29
|
|
Cash dividends declared
|
|
$
|
1.00
|
|
|
|
0.80
|
|
|
|
0.80
|
|
|
|
0.64
|
|
|
|
0.48
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,093,226
|
|
|
|
3,896,892
|
|
|
|
3,168,797
|
|
|
|
3,237,063
|
|
|
|
3,096,905
|
|
Total long-term debt
|
|
$
|
1,397,681
|
|
|
|
1,131,998
|
|
|
|
709,723
|
|
|
|
845,071
|
|
|
|
494,917
|
|
Ratio of Earnings to Fixed Charges(1)
|
|
|
6.28
|
|
|
|
7.96
|
|
|
|
8.15
|
|
|
|
10.86
|
|
|
|
9.74
|
|
Weighted Average Number of Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
139,079
|
|
|
|
139,487
|
|
|
|
140,877
|
|
|
|
156,054
|
|
|
|
167,100
|
|
Diluted
|
|
|
145,670
|
|
|
|
152,780
|
|
|
|
155,230
|
|
|
|
171,205
|
|
|
|
181,043
|
|
|
|
|
(1) |
|
For purposes of calculating the ratio of earnings to fixed
charges, fixed charges include interest expense and one-third of
rentals; earnings available for fixed charges represent earnings
before fixed charges and income taxes. |
See Forward-Looking Information and Risk Factors That May
Affect Future Results contained in Item 1A of this
report for a discussion of risks and uncertainties that may
affect future results. Also see Managements
Discussion and Analysis of Financial Condition and Results of
Operations contained in Item 7 of this report for a
discussion of factors affecting the comparability of information
contained in this Item 6.
22
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with the
audited consolidated financial statements of the Company
included in Part II Item 8 of this document.
This Managements Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking
statements concerning the Companys expectations and
beliefs. See Item 1A Forward-Looking Information and
Risk Factors That May Affect Future Results for a
discussion of other uncertainties, risks and assumptions
associated with these statements.
Unless otherwise specifically indicated, all dollar or share
amounts herein are expressed in thousands of dollars or shares,
except for per share amounts.
Executive
Summary
The Company earns revenue and generates cash primarily through
the sale of a variety of toy and game products, as well as
through the out-licensing of rights for use of its properties in
connection with non-competing products, including digital games,
offered by third parties. The Company sells its products both
within the United States and in a number of international
markets. The Companys business is highly seasonal with a
significant amount of revenues occurring in the second half of
the year. In 2010 and 2009, the second half of the year
accounted for 65% of the Companys net revenues and, in
2008, the second half of the year accounted for 63% of the
Companys net revenues. While many of the Companys
products are based on brands and technology the Company owns or
controls, the Company also offers products which are licensed
from outside inventors. In addition, the Company licenses rights
to produce products based on movie, television, music and other
entertainment properties owned by third parties, such as the
MARVEL, STAR WARS and SESAME STREET properties.
The Companys business is separated into three principal
business segments, U.S. and Canada, International and
Entertainment and Licensing. The U.S. and Canada segment
develops, markets and sells both toy and game products in the
U.S. and Canada. The International segment consists of the
Companys European, Asia Pacific and Latin and South
American marketing and sales operations. The Companys
Entertainment and Licensing segment includes the Companys
lifestyle licensing, digital gaming, movie, television and
online entertainment operations. In addition to these three
primary segments, the Companys world-wide manufacturing
and product sourcing operations are managed through its Global
Operations segment.
The Company seeks to make its brands relevant in all areas
important to its consumers. Brand awareness is amplified through
immersive traditional play, digital applications, publishing and
lifestyle licensing and entertainment experiences, including
television programming and motion pictures, presented for
consumers enjoyment. The Companys focus remains on
growing core owned and controlled brands, developing new and
innovative products which respond to market insights, offering
immersive entertainment experiences which allow consumers to
experience the Companys brands across multiple forms and
formats, and optimizing efficiencies within the Companys
operations to reduce costs, increase operating profits and
maintain a strong balance sheet. The Companys core brands
represent Company-owned or Company-controlled brands, such as
TRANSFORMERS, MY LITTLE PONY, LITTLEST PET SHOP, MONOPOLY,
MAGIC: THE GATHERING, PLAYSKOOL, G.I. JOE and NERF, which have
been successful over the long term. The Company has a large
portfolio of owned and controlled brands, which can be
introduced in new formats and platforms over time. These brands
may also be further extended by pairing a licensed concept with
a core brand. By focusing on core brands, the Company is working
to maintain a more consistent revenue stream and basis for
future growth, and to leverage profitability. During 2010 the
Company had significant revenues from core brands, namely NERF,
LITTLEST PET SHOP, TRANSFORMERS, FURREAL FRIENDS, PLAYSKOOL,
PLAY-DOH, MONOPOLY and MAGIC: THE GATHERING. The Companys
strategy of re-imagining, re-inventing and re-igniting its
brands has been instrumental in achieving its overall long-term
growth objectives.
The Company also seeks to drive product-related revenues by
increasing the visibility of its core brands through
entertainment. As an example of this, in June of 2009, the
TRANSFORMERS: REVENGE OF THE FALLEN motion picture was
released by Dreamworks, LLC and Paramount Pictures Corporation
as a sequel to
23
the 2007 motion picture TRANSFORMERS. In addition, in
August 2009, the motion picture G.I. JOE: THE RISE OF COBRA
was released by Paramount Pictures Corporation. The Company
developed and marketed product lines based on these motion
pictures. In 2011, the Company expects the second TRANSFORMERS
sequel, TRANSFORMERS: DARK OF THE MOON, to be released.
As a result of pairing these core brands with motion picture
entertainment, both the movies and the product lines benefited.
In addition, the Company has entered into a strategic
relationship with Universal Pictures to produce at least three
motion pictures based on certain of Hasbros core brands,
with the potential for production of two additional pictures.
The first movie under this relationship is expected to be
released in 2012. As part of its strategy, in addition to using
theatrical entertainment, the Company continues to seek
opportunities to use other entertainment outlets and forms of
entertainment as a way to build awareness of its brands.
The Company is a partner in a joint venture with Discovery
Communications, Inc. (Discovery) which runs THE HUB,
a television network in the United States dedicated to
high-quality childrens and family entertainment and
educational programming. Programming on the network includes
content based on Hasbros brands, Discoverys library
of childrens educational programming, as well as
programming developed by third parties. THE HUB debuted in
October of 2010 and was available in approximately
60 million homes in the U.S. upon launch. In
connection with its television initiative, the Company
established Hasbro Studios, an internal wholly-owned production
studio that is responsible for the creation and development of
television programming based primarily on Hasbros brands.
Hasbro Studios creates programming for distribution in the
United States on THE HUB, and for distribution on other networks
in international markets. The Company incurred a certain level
of investment spending leading up to the debut of THE HUB in
October 2010, as well as costs in 2010, and expected in the
future, related to the production of television programming by
Hasbro Studios. The Company believes that its television
initiative of developing programming based on its brands for
distribution in the United States and in international markets
supports its strategy of growing its core brands well beyond
traditional toys and games and providing entertainment
experiences for consumers of all ages in any form or format.
While the Company believes it has built a more sustainable
revenue base by developing and maintaining its core brands and
avoiding reliance on licensed entertainment properties, it
continues to opportunistically enter into or leverage existing
strategic licenses which complement its brands and key
strengths. The Companys primary licenses include its
agreements with Marvel Characters B.V. (Marvel), for
characters in the Marvel universe, including IRON MAN and
SPIDER-MAN; Lucas Licensing, Ltd. (Lucas), related
to the STAR WARS brand; and Sesame Workshop, related to the
SESAME STREET characters. The majority of product offerings
under the Sesame Workshop license will commence in 2011. During
2010 the Company had significant sales of products related to
the movie release of IRON MAN 2 in May 2010 as well as
continued strong sales of STAR WARS products. During 2009 the
Company had a high level of revenues from products related to
television programming based on SPIDER-MAN and STAR WARS.
The Companys long-term strategy also focuses on extending
its brands further into the digital world. As part of this
strategy, the Company is party to a multi-year strategic
agreement with Electronic Arts, Inc. (EA). The
agreement gives EA the worldwide rights, subject to existing
limitations on the Companys rights and certain other
exclusions, to create digital games for all platforms, such as
mobile phones, gaming consoles and personal computers, based on
a broad spectrum of the Companys intellectual properties,
including MONOPOLY, SCRABBLE, YAHTZEE, NERF, TONKA, G.I. JOE and
LITTLEST PET SHOP.
The Company is investing to grow its business in emerging
markets. During the last two years, the Company expanded its
operations in China, Brazil, Russia, Korea, Romania and the
Czech Republic. In addition, the Company is seeking to grow its
business in entertainment and digital gaming, and will continue
to evaluate strategic alliances and acquisitions which may
complement its current product offerings, allow it entry into an
area which is adjacent to or complementary to the toy and game
business, or allow it to further develop awareness of its brands
and expand the ability of consumers to experience its brands in
different forms of media.
While the Company remains committed to investing in the growth
of its business, it also continues to be focused on reducing
fixed costs through operating efficiencies and on profit
improvement. Over the last 8 years
24
the Company has improved its full year operating margin from
7.8% in 2002 to 14.7% in 2010. The Company reviews its
operations on an ongoing basis and seeks to reduce the cost
structure of its underlying business and promote efficiency.
The Company is committed to returning excess cash to its
shareholders through share repurchases and dividends. As part of
this initiative, from 2005 to 2010, the Companys Board of
Directors (the Board) adopted five successive share
repurchase authorizations with a cumulative authorized
repurchase amount of $2,325,000. The fifth authorization was
approved in April 2010 for $625,000. At December 26, 2010,
the Company had $150,068 remaining under the April 2010
authorization. In 2010, the Company invested $636,681 in the
repurchase of 15,763 shares of common stock in the open
market. For the years ended 2009 and 2008, the Company spent
$90,994 and $357,589, respectively, to repurchase 3,172 and
11,736 shares, respectively, in the open market. The
increased level of share repurchases in 2010 compared to 2009
partially reflects the Companys repurchase of an
equivalent number of shares that were issued in 2010 in
connection with the call and related conversion of its
convertible debt. The Company intends to, at its discretion,
opportunistically repurchase shares in the future subject to
market conditions, the Companys other potential uses of
cash and the Companys levels of cash generation. In
addition to the share repurchase program, the Company also seeks
to return excess cash through the payment of quarterly
dividends. In February 2011, the Companys Board of
Directors increased the Companys quarterly dividend rate
to $0.30 per share from $0.25 per share.
Summary
The components of the results of operations, stated as a percent
of net revenues, are illustrated below for the three fiscal
years ended December 26, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
42.8
|
|
|
|
41.2
|
|
|
|
42.1
|
|
Royalties
|
|
|
6.2
|
|
|
|
8.1
|
|
|
|
7.8
|
|
Product development
|
|
|
5.0
|
|
|
|
4.5
|
|
|
|
4.8
|
|
Advertising
|
|
|
10.5
|
|
|
|
10.1
|
|
|
|
11.3
|
|
Amortization
|
|
|
1.3
|
|
|
|
2.1
|
|
|
|
1.9
|
|
Selling, distribution and administration
|
|
|
19.5
|
|
|
|
19.5
|
|
|
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
14.7
|
|
|
|
14.5
|
|
|
|
12.3
|
|
Interest expense
|
|
|
2.1
|
|
|
|
1.5
|
|
|
|
1.2
|
|
Interest income
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
Other (income) expense, net
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
12.6
|
|
|
|
13.0
|
|
|
|
11.0
|
|
Income taxes
|
|
|
2.7
|
|
|
|
3.8
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
9.9
|
%
|
|
|
9.2
|
%
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations
Each of the fiscal years in the three-year period ended
December 26, 2010 were fifty-two week periods.
Net earnings for the fiscal year ended December 26, 2010
were $397,752, or $2.74 per diluted share. This compares to net
earnings for fiscal 2009 and 2008 of $374,930 and $306,766, or
$2.48 and $2.00 per diluted share, respectively.
Net earnings for 2010 include a $0.15 per diluted share
favorable impact resulting from the completion of a
U.S. tax examination for the 2004 and 2005 tax years. Net
earnings for 2010 and 2009 include dilution from
25
the Companys television investments, including the
investment in the joint venture with Discovery and its issuance
of $425,000 of long-term debt, both of which closed in May 2009,
as well as the
start-up of
the Companys internal television studio, Hasbro Studios.
Consolidated net revenues for the year ended December 26,
2010 were $4,002,161 compared to $4,067,947 in 2009 and
$4,021,520 in 2008. Most of the Companys net revenues and
operating profits were derived from its three principal
segments: the U.S. and Canada segment, the International
segment and the Entertainment and Licensing segment, which are
discussed in detail below. Consolidated net revenues in 2010
were negatively impacted by foreign currency translation of
approximately $17,700 as a result of the stronger
U.S. dollar in 2010 as compared to 2009. Consolidated net
revenues in 2009 were also negatively impacted by foreign
currency translation of approximately $65,200 as a result of the
stronger U.S. dollar in 2009 as compared to 2008.
The following table presents net revenues and operating profit
data for the Companys three principal segments for 2010,
2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
2010
|
|
Change
|
|
2009
|
|
Change
|
|
2008
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
$
|
2,299,547
|
|
|
|
(6
|
)%
|
|
$
|
2,447,943
|
|
|
|
2
|
%
|
|
$
|
2,406,745
|
|
International
|
|
$
|
1,559,927
|
|
|
|
7
|
%
|
|
$
|
1,459,476
|
|
|
|
(3
|
)%
|
|
$
|
1,499,334
|
|
Entertainment and Licensing
|
|
$
|
136,488
|
|
|
|
(12
|
)%
|
|
$
|
155,013
|
|
|
|
44
|
%
|
|
$
|
107,929
|
|
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. and Canada
|
|
$
|
349,594
|
|
|
|
(8
|
)%
|
|
$
|
380,580
|
|
|
|
34
|
%
|
|
$
|
283,152
|
|
International
|
|
$
|
209,704
|
|
|
|
29
|
%
|
|
$
|
162,159
|
|
|
|
(2
|
)%
|
|
$
|
165,186
|
|
Entertainment and Licensing
|
|
$
|
43,234
|
|
|
|
(34
|
)%
|
|
$
|
65,572
|
|
|
|
28
|
%
|
|
$
|
51,035
|
|
U.S.
and Canada
U.S. and Canada segment net revenues for the year ended
December 26, 2010 decreased 6% to $2,299,547 from
$2,447,943 in 2009. In 2010, net revenues were positively
impacted by currency translation by approximately $10,300. The
decrease in net revenues in 2010 was primarily due to decreased
revenues in the boys toys category, primarily as a result
of decreased sales of TRANSFORMERS and G.I. JOE products. The
2009 sales of these lines benefited from the theatrical releases
of TRANSFORMERS: REVENGE OF THE FALLEN in June 2009 and
G.I. JOE: THE RISE OF COBRA in August 2009. Boys
toys sales were also negatively impacted by decreased sales of
STAR WARS products. These decreases were partially offset by
increased sales of NERF products as well as increased sales of
MARVEL products, which benefited from the theatrical release of
IRON MAN 2 in May 2010. Boys toys sales were also
positively impacted by the reintroduction of BEYBLADE products
in the second half of 2010. Net revenues in the games and
puzzles category also decreased in 2010 due to decreased sales
of traditional board games and puzzles in the U.S. late in
the year. These decreases were partially offset by increased
sales of MAGIC: THE GATHERING trading card games. Sales in the
girls category were flat in 2010. Increased sales of
FURREAL FRIENDS products and, to a lesser extent, BABY ALIVE
products were offset by decreased sales of MY LITTLE PONY and
LITTLEST PET SHOP products. Although revenues from LITTLEST PET
SHOP products decreased in 2010, sales of these products
remained a significant contributor to U.S. and Canada
segment net revenues. Net revenues in the preschool category
increased in 2010 as the result of stronger sales of PLAY-DOH,
TONKA and PLAYSKOOL products.
U.S. and Canada operating profit decreased to $349,594 in
2010 from $380,580 in 2009. Foreign currency translation did not
have a material impact on U.S. and Canada operating profit
in 2010. The decrease in U.S. and Canada operating profit
was primarily driven by the decreased revenues in 2010 discussed
above and, to a lesser extent, higher cost of sales as a
percentage of those revenues due to a change in the mix of
products sold. These decreases were partially offset by
decreased royalty and amortization expense in 2010.
26
U.S. and Canada segment net revenues for the year ended
December 27, 2009 increased 2% to $2,447,943 from
$2,406,745 in 2008. The increase in net revenues in 2009 was
primarily due to increased revenues in the boys toys
category, primarily as a result of increased sales of
TRANSFORMERS and G.I. JOE products due to the theatrical
releases of TRANSFORMERS: REVENGE OF THE FALLEN in June
2009 and G.I. JOE: THE RISE OF COBRA in August 2009, as
well as increased sales of NERF products. Increased sales in the
boys toys category were partially offset by decreased
sales of STAR WARS, MARVEL and INDIANA JONES products. The
increase in U.S. and Canada segment net revenues for 2009
was also due to increased revenues in the preschool category
primarily resulting from higher sales of TONKA and PLAY-DOH
products, partially offset by decreased sales of PLAYSKOOL
products. Revenues from sales of PLAYSKOOL products declined
primarily as a result of decreased sales of ROSE PETAL COTTAGE
products which are no longer in the Companys product line.
Revenues from the girls toys category decreased primarily
as a result of lower sales of BABY ALIVE and I-DOG products,
partially offset by sales of STRAWBERRY SHORTCAKE products which
were reintroduced to the Companys line in the second
quarter of 2009. Net revenues in the games and puzzles category
decreased slightly in 2009, primarily due to decreased sales of
traditional board games, partially offset by increased revenues
from sales of MAGIC: THE GATHERING trading card games. Net
revenues in 2009 were also negatively impacted by decreased
sales of TOOTH TUNES products, which have been discontinued from
the Companys product line.
U.S. and Canada operating profit increased to $380,580 in
2009 from $283,152 in 2008. Operating profit in 2009 was
positively impacted by approximately $3,100 due to the
translation of foreign currencies to the U.S. dollar.
U.S. and Canada operating profit increased in 2009
primarily as a result of the increased revenues discussed above
and lower cost of sales as a percentage of those revenues due to
lower obsolescence charges and a change in the mix of products
sold, primarily due to increased sales of entertainment-based
products in 2009 as compared to 2008. The increase in operating
profit for 2009 also reflects decreased selling, distribution
and administration expenses which primarily reflect lower
shipping and distribution costs as well as decreased marketing
and sales expenses. In addition, operating profit increased as a
result of decreased advertising expense.
International
International segment net revenues for the year ended
December 26, 2010 increased by 7% to $1,559,927 from
$1,459,476 in 2009. In 2010, net revenues were negatively
impacted by currency translation of approximately $27,600 as a
result of a stronger U.S. dollar. Excluding the unfavorable
impact of foreign exchange, International segment net revenues
increased 9% in local currency in 2010. The increased net
revenues in 2010 were driven by increased sales in all
categories as well as growth in emerging markets, including
Brazil, Russia and China. The increase in the boys toys
category was primarily due to higher sales of NERF products as
well as the reintroduction of BEYBLADE products in 2010.
Increased sales of MARVEL and TONKA products also contributed to
the increased sales in the boys toys category. These
increases were partially offset by decreases in the TRANSFORMERS
and G.I. JOE lines. The increase in net revenues in the
girls toys category was primarily driven by increased
sales of FURREAL FRIENDS products partially offset by lower
sales of MY LITTLE PONY and LITTLEST PET SHOP products.
Preschool category net revenues increased primarily as the
result of stronger sales of PLAY-DOH and PLAYSKOOL products
offset by decreased sales of IN THE NIGHT GARDEN products. Net
revenues in the games and puzzles category increased slightly as
a result of increased revenues from MAGIC: THE GATHERING trading
card games.
International segment operating profit increased 29% to $209,704
in 2010 from $162,159 in 2009. Operating profit for the
International segment in 2010 was negatively impacted by
approximately $11,500 due to the translation of foreign
currencies to the U.S. dollar. The increase in operating
profit was primarily driven by the increased revenues described
above. In addition, operating profit was positively impacted by
decreased royalty expense and amortization. These were offset by
increased selling, distribution and administrative expenses.
International segment net revenues for the year ended
December 27, 2009 decreased by 3% to $1,459,476 from
$1,499,334 in 2008. In 2009, net revenues were negatively
impacted by currency translation of approximately $64,500 as a
result of a stronger U.S. dollar. Excluding the unfavorable
impact of foreign
27
exchange, International segment net revenues increased 2% in
local currency in 2009. The increase in local currency net
revenues was driven by increased sales in the boys toys
category, primarily as a result of increased sales of
TRANSFORMERS and G.I. JOE products, as well as increased sales
of NERF products which were partially offset by lower revenues
from MARVEL, ACTION MAN, INDIANA JONES and STAR WARS products.
Net revenues in the girls toys category decreased
primarily as a result of decreased sales of MY LITTLE PONY and
FURREAL FRIENDS products, partially offset by increased sales of
LITTLEST PET SHOP products and sales of STRAWBERRY SHORTCAKE
products, which were reintroduced to the Companys line in
the second quarter of 2009. Net revenues in the preschool
category decreased primarily as a result of decreased revenues
from sales of IN THE NIGHT GARDEN and PLAYSKOOL products,
partially offset by increased revenues from sales of PLAY-DOH
products. Net revenues in the games and puzzles category
decreased slightly as a result of decreased sales of board
games. Net revenues in 2009 were also negatively impacted by
decreased sales of TOOTH TUNES products, which have been
discontinued in the Companys product line.
International segment operating profit decreased 2% to $162,159
in 2009 from $165,186 in 2008. Operating profit for the
International segment in 2009 was positively impacted by
approximately $9,500 due to the translation of foreign
currencies to the U.S. dollar. The increased net revenues
discussed above were more than offset by increased operating
expenses, including the impact of our investments in opening
offices in emerging international markets. In addition,
International segment operating profit in 2008 was positively
impacted by the recognition of a pension surplus in the United
Kingdom of approximately $6,000.
Entertainment
and Licensing
The Entertainment and Licensing segments net revenues for
the year ended December 26, 2010 decreased 12% to $136,488
from $155,013 for the year ended December 27, 2009. The
decrease was primarily due to decreases in both lifestyle and
digital gaming licensing revenues, primarily relating to lower
licensing revenues from TRANSFORMERS and, to a lesser extent,
G.I. JOE, products following the motion picture releases in 2009.
Entertainment and Licensing segment operating profit decreased
34% to $43,234 in 2010 from $65,572 in 2009. Operating profit
decreased as a result of the decreased revenues discussed above
and program production amortization costs associated with our
television shows. This was partially offset by lower selling,
distribution and administrative expenses. Selling, distribution
and administrative expenses in 2009 were negatively impacted by
approximately $7,200 in transaction costs related to the
Companys investment in the joint venture with Discovery.
While the Discovery joint venture is a component of our
television operations, the Companys 50% share in the
earnings from the joint venture are included in other (income)
expense and therefore are not a component of operating profit of
the segment.
The Entertainment and Licensing segments net revenues for
the year ended December 27, 2009 increased 44% to $155,013
from $107,929 for the year ended December 28, 2008. The
increase was primarily due to higher lifestyle and digital
gaming licensing revenues, primarily relating to TRANSFORMERS
and G.I. JOE licensed products.
Entertainment and Licensing segment operating profit increased
28% to $65,572 in 2009 from $51,035 in 2008. Operating profit
increased as a result of the higher revenues discussed above,
partially offset by increased selling, distribution and
administrative expenses which included approximately $7,200 in
transaction costs related to the Companys investment in
the joint venture with Discovery,
start-up
costs associated with the Companys television studio, as
well as increased intangible amortization and royalty expense.
28
Expenses
The Companys operating expenses, stated as percentages of
net revenues, are illustrated below for the three fiscal years
ended December 26, 2010:
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2010
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2009
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2008
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Cost of sales
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42.8
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%
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41.2
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%
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42.1
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%
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Royalties
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6.2
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8.1
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7.8
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Product development
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5.0
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4.5
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4.8
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Advertising
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10.5
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10.1
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11.3
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Amortization
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1.3
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2.1
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1.9
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Selling, distribution and administration
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19.5
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19.5
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19.8
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Cost of sales primarily consists of purchased materials, labor,
manufacturing overheads and other inventory-related costs such
as obsolescence. In addition, 2010 cost of sales also includes
amortization of television program production costs. Cost of
sales increased to 42.8% for the year ended December 26,
2010 from 41.2% in 2009. In 2010, cost of sales includes $22,069
of television programming amortization. The remaining increase
was partially due to a change in the mix of revenues. Increased
cost of sales as a percentage of net revenues reflects a change
in product mix primarily due to decreased sales of
entertainment-based products in 2010 as compared to 2009. While
cost of sales as a percentage of revenues of theatrical
entertainment-based products are generally lower than many of
the Companys other products, sales from these products,
including Company owned or controlled brands based on a movie
release, also incur royalty expense. Such royalties reduce the
benefit of these lower cost of sales. Cost of sales decreased to
41.2% for the year ended December 27, 2009 from 42.1% in
2008. The decrease was partially due to a change in the mix of
revenues reflecting higher licensing revenues in 2009. In
addition, the decrease reflects a change in product mix
primarily due to increased sales of entertainment-based products
in 2009 as compared to 2008. Cost of sales in 2009 were also
positively impacted by lower obsolescence charges.
Royalty expense decreased to $248,570 or 6.2% of net revenues in
2010 compared to $330,651 or 8.1% of net revenues in 2009 and
$312,986 or 7.8% of net revenues in 2008. The decrease in 2010
and the increase in 2009 primarily reflect the higher sales of
entertainment-driven products in 2009, namely TRANSFORMERS and
G.I. JOE products. The increase in royalty expense in 2009 was
partially offset by the impact of foreign exchange.
Product development expense increased in 2010 to $201,358 or
5.0% of net revenues compared to $181,195 or 4.5% of net
revenues in 2009. This increase reflects costs associated with
the development of products for introduction in 2011, including
products related to the Companys agreement with Sesame
Workshop. Product development expense decreased in 2009 to
$181,195 or 4.5% of net revenues from $191,424 or 4.8% of net
revenues in 2008. The decrease in 2009 primarily reflected an
effort to reduce the Companys overall SKU count and make
development spending more efficient as part of the
Companys ongoing cost control efforts.
Advertising expense increased to $420,651 or 10.5% of net
revenues in 2010 compared to $412,580 or 10.1% of net revenues
in 2009. This increase reflects the decrease in
entertainment-driven products in 2010, which do not require the
same level of advertising that the Company spends on
non-entertainment based products. In addition, the increase in
2010 reflects a lower revenue base due to the decline in
U.S. sales late in the year as well as increased
advertising rates in 2010. Advertising expense decreased to
$412,580 or 10.1% of net revenues in 2009 compared to $454,612
or 11.3% of net revenues in 2008. In years in which the Company
has significant sales of products related to major motion
picture releases, such as in 2009, advertising expense as a
percentage of revenue is generally lower, as such products do
not require the same level of advertising that the Company
spends on non-entertainment based products. The decrease in
advertising expense in 2009 also reflects lower advertisement
placement costs as well as the impact of foreign exchange.
Amortization expense decreased to $50,405 or 1.3% of net
revenues in 2010 compared to $85,029 or 2.1% of net revenues in
2009. The decrease is the result of the property rights related
to Wizards of the Coast becoming fully amortized in the fourth
quarter of 2009. Amortization expense increased to $85,029 or
2.1% of
29
net revenues in 2009 compared to $78,265 or 1.9% of net revenues
in 2008. The increase was primarily a result of accelerated
amortization related to a write-down of the carrying value of
certain property rights as well as the purchase of the
intellectual property rights related to TRIVIAL PURSUIT in the
second quarter of 2008. Property rights of $80,800 were recorded
as a result of the purchase of TRIVIAL PURSUIT and are being
amortized over fifteen years.
Selling, distribution and administration expenses decreased in
dollars but remained flat as a percentage of revenues in 2010.
These expenses were $781,192 or 19.5% of revenues compared to
$793,558 or 19.5% of revenues in 2009. The 2009 amount includes
approximately $7,200 of transaction costs related to the
Companys purchase of a 50% interest in THE HUB television
network. The remaining decrease relates to management incentive
and other compensation expenses in 2010 partially offset by
higher marketing and sales costs related to emerging markets and
our television initiatives. Selling, distribution and
administration expenses decreased to $793,558 or 19.5% of net
revenues in 2009, compared to $797,209 or 19.8% of net revenues
in 2008. Absent the impact of foreign exchange, selling,
distribution and administration expenses increased in 2009.
Included in selling, distribution and administration expenses in
2009 were approximately $7,200 in transaction costs discussed
above. The increase in selling, distribution and administration
expense in 2009 also reflected higher incentive compensation
expense as well as costs related to the start up of the
Companys television studio and continued investments in
emerging markets. Selling, distribution and administration
expense was also positively impacted by lower shipping and
distribution costs in 2009. In addition, selling, distribution
and administration expenses in 2008 were positively impacted by
the recognition of a pension surplus in the United Kingdom of
approximately $6,000.
Interest
Expense
Interest expense increased to $82,112 in 2010 from $61,603 in
2009. The 2009 interest expense amount includes approximately
$4,000 in costs related to a short-term borrowing facility
commitment the Company entered into in April 2009 in connection
with the Companys anticipated investment in the joint
venture with Discovery. Absent this charge, the increase was
primarily due to higher outstanding borrowings and, to a lesser
extent, higher average borrowing rates. The higher average
borrowings reflect the issuance of $425,000 in principal amount
of Notes in May 2009 and $500,000 in principal amount of Notes
in March 2010, partially offset by the conversion and redemption
of the 2.75% contingent convertible debentures during March and
April of 2010. The proceeds from the issuance of the Notes in
May 2009 were primarily used to purchase a 50% interest in THE
HUB. The increase in average borrowing rates in 2010 is due to
the issuance of Notes in March 2010, which bear interest at the
rate of 6.35%, partially offset by the conversion and redemption
of the contingent convertible debentures during March and April
2010, which bore interest at 2.75%. Interest expense increased
to $61,603 in 2009 from $47,143 in 2008. The increase in
interest expense reflects both higher outstanding borrowings and
a higher average borrowing rate as a result of the issuance of
$425,000 of notes in May 2009. As noted above, interest expense
in 2009 also includes approximately $4,000 in costs related to a
short-term borrowing facility commitment the Company entered
into in April 2009 in connection with the Companys
anticipated investment in the joint venture with Discovery. In
addition, interest expense in 2010 and 2009 include amounts
related to the Companys tax sharing agreement with
Discovery.
Interest
Income
Interest income was $5,649 in 2010 compared to $2,858 in 2009.
The increase primarily reflects higher invested cash balances in
2010. Interest income was $2,858 in 2009 compared to $17,654 in
2008. The decrease in interest income was primarily the result
of lower returns on invested cash as well as lower average
invested cash balances.
Other
(Income) Expense, Net
Other (income) expense, net of $3,676 in 2010 compares to $156
in 2009. Other (income) expense, net in 2010 and 2009 includes
$9,323 and $(3,856), respectively, relating to the
Companys 50% share in the (earnings) loss of THE HUB. The
2010 amount also includes a gain of $4,950 on the sale of a
product line.
30
Other (income) expense, net of $156 in 2009 compared to $23,752
in 2008. Other (income) expense, net in 2009 included income of
$(3,856) representing the Companys 50% share in the
earnings of THE HUB. The remainder of the change in other
(income) expense in 2009 as compared to 2008 primarily reflected
the impact of foreign exchange gains and losses.
Income
Taxes
Income tax expense totaled 21.7% of pretax earnings in 2010
compared with 29.2% in 2009 and 30.4% in 2008. Income tax
expense for 2010 is net of a benefit of approximately $22,300
from discrete tax events, primarily related to the settlement of
various tax examinations in multiple jurisdictions, including
the United States. Income tax expense for 2009 is net of a
benefit of approximately $2,300 from discrete tax events,
primarily related to the expiration of state statutes and
settlement of various tax examinations in multiple
jurisdictions. Income tax expense for 2008 is net of a benefit
of approximately $10,200 related to discrete tax events,
primarily comprised of a benefit from the repatriation of
certain foreign earnings, as well as the settlement of various
tax examinations in multiple jurisdictions. Absent these items
and potential interest and penalties related to uncertain tax
positions in 2010, 2009 and 2008, the effective tax rates would
have been 25.4%, 29.0% and 32.8%, respectively. The decrease in
the adjusted tax rate from 29.0% in 2009 compared to 25.4% in
2010 is primarily due to a change in the mix of where the
company earned its profits, due to lower earnings in the
U.S. and increased earnings in international jurisdictions
in which the tax rates are lower. The adjusted tax rate of 32.8%
in 2008 primarily reflects the decision to provide for the
repatriation of a portion of 2008 international earnings to the
U.S.
Liquidity
and Capital Resources
The Company has historically generated a significant amount of
cash from operations. In 2010, the Company funded its operations
and liquidity needs primarily through cash flows from
operations, and, when needed, using borrowings under its
available lines of credit. In addition, in January 2011, the
Company entered into an agreement with a group of banks to
establish a commercial paper program. Under the program, at the
Companys request and subject to market conditions, the
group of banks may either purchase or arrange for the sale by
the Company of unsecured commercial paper notes from time to
time up to an aggregate principal amount outstanding at any
given time of $500,000. During 2011, the Company expects to
continue to fund its working capital needs primarily through
cash flows from operations and, when needed, by issuing
commercial paper or borrowing under its new revolving credit
agreement. In the event that the Company is not able to issue
commercial paper, the Company intends to utilize its available
lines of credit. The Company believes that the funds available
to it, including cash expected to be generated from operations
and funds available through its commercial paper program or its
available lines of credit are adequate to meet its working
capital needs for 2011, however, unexpected events or
circumstances such as material operating losses or increased
capital or other expenditures, or inability to otherwise access
the commercial paper market, may reduce or eliminate the
availability of external financial resources. In addition,
significant disruptions to credit markets may also reduce or
eliminate the availability of external financial resources.
Although we believe the risk of nonperformance by the
counterparties to our financial facilities is not significant,
in times of severe economic downturn in the credit markets it is
possible that one or more sources of external financing may be
unable or unwilling to provide funding to us.
At December 26, 2010, cash and cash equivalents, net of
short-term borrowings, were $713,228 compared to $621,932 and
$622,804 at December 27, 2009 and December 28, 2008,
respectively. Hasbro generated $367,981, $265,623 and $593,185
of cash from its operating activities in 2010, 2009 and 2008,
respectively. Cash from operations in 2010 and 2009 includes
long-term royalty advance payments of $25,000 and $75,000,
respectively. There were no long-term advance royalty payments
made in 2008. Operating cash flows in 2009 were also negatively
impacted by the Companys decision to sell $250,000 of its
accounts receivable under its securitization program at
December 28, 2008. The securitization program was not
utilized at December 26, 2010 or December 27, 2009.
The Company did not renew its accounts receivable securitization
facility when that facility came up for renewal in January 2011.
31
Accounts receivable decreased to $961,252 at December 26,
2010 from $1,038,802 at December 27, 2009. The accounts
receivable balance at December 26, 2010 includes a decrease
of approximately $11,500 as a result of the translation of
foreign currency balances due to the stronger U.S. dollar
at December 26, 2010 compared to December 27, 2009.
Absent the effect of foreign exchange, the decrease in accounts
receivable reflects decreased sales in the fourth quarter of
2010 compared to the fourth quarter of 2009. There was no
utilization of the Companys securitization program at
December 26, 2010 or December 27, 2009. Accounts
receivable increased to $1,038,802 at December 27, 2009
from $611,766 at December 28, 2008. The accounts receivable
balance at December 27, 2009 includes an increase of
approximately $33,200 as a result of a weaker U.S. dollar
at December 27, 2009 as compared to December 28, 2008.
Absent the effect of foreign exchange, the increase in accounts
receivable primarily reflects the utilization of the
Companys securitization program at December 28, 2008
of $250,000. The increase in accounts receivable also reflects
higher sales, and the timing of those sales, in the fourth
quarter of 2009 as compared to 2008. Fourth quarter days sales
outstanding were 68 days in 2010 and 2009 and 45 days
in 2008. Absent the impact of securitization, days sales
outstanding would have been 63 days in 2008.
Inventories increased to $364,194 at December 26, 2010
compared to $207,895 at December 27, 2009. The increased
inventory balance at December 26, 2010 reflects the lower
sales in the fourth quarter of 2010 compared to 2009.
Inventories decreased to $207,895 at December 27, 2009
compared to $300,463 at December 28, 2008. The decrease
primarily reflects higher inventory levels at December 28,
2008 due to decreased sales in the fourth quarter of 2008 as
well as increased sales in the fourth quarter of 2009.
Prepaid expenses and other current assets increased slightly to
$167,807 at December 26, 2010 from $162,290 at
December 27, 2009. Increases in income tax receivables,
current deferred income taxes and the values of the
Companys forward currency contracts were partially offset
by decreased prepaid royalties as the result of utilization of
advance royalty payments. Generally, when the Company enters
into a licensing agreement for entertainment-based properties,
an advance royalty payment is required at the inception of the
agreement. This payment is then recognized in the consolidated
statement of operations as the related sales are made. Each
reporting period, the Company reflects as current prepaid
expense the amount of royalties it expects to reflect in the
statement of operations in the upcoming twelve months. Prepaid
expenses and other current assets decreased to $162,290 at
December 27, 2009 from $171,387 at December 28, 2008.
The decrease was primarily due to a decrease in the value of the
Companys foreign currency contracts as a result of the
stronger U.S. dollar, partially offset by purchases of
short-term investments of $18,000 in 2009, which are reflected
as an investing activity in the accompanying consolidated
statement of cash flows.
Accounts payable and accrued expenses decreased to $704,233 at
December 26, 2010 compared to $801,775 at December 27,
2009. This decrease primarily related to lower accrued payroll
and management incentives, lower accrued royalties as a result
of the decrease in entertainment-driven products, and lower
accounts payable balances due to the timing of payments in the
current year. Accounts payable and accrued expenses increased to
$801,775 at December 27, 2009 from $792,306 at
December 28, 2008. The accounts payable and accrued
expenses balance at December 27, 2009 includes an increase
of approximately $17,700 as a result of a weaker
U.S. dollar at December 27, 2009 as compared to
December 28, 2008. Absent the impact of foreign exchange,
accounts payable and accrued expenses decreased approximately
$8,300. Decreases in accounts payable and accrued expenses in
2009 primarily relate to decreased accrued pension benefits, as
well as lower accounts payable. These decreases were partially
offset by higher accrued payroll and management incentives at
December 27, 2009.
Cash flows from investing activities were a net utilization of
$104,188, $497,509, and $271,920 in 2010, 2009 and 2008,
respectively. The 2009 utilization includes the Companys
$300,000 payment to Discovery for its 50% interest in THE HUB, a
payment of $45,000 to Lucas to extend the term of the license
agreement related to the STAR WARS brand and approximately
$26,500 used to acquire certain other intellectual properties.
The 2008 utilization includes the Companys purchase of the
intellectual property rights related to the TRIVIAL PURSUIT
brand for a total cost of $80,800 as well as $65,153 in cash,
net of cash acquired, used to acquire Cranium in January 2008.
There were no investments or acquisitions in 2010. During 2010,
the Company expended approximately $113,000 on additions to its
property, plant and equipment compared to $104,000 during 2009
and $117,000 during 2008. Of these amounts, 57% in 2010, 58% in
2009 and 56% in
32
2008 were for purchases of tools, dies and molds related to the
Companys products. In 2011, the Company expects capital
expenditures to be in the range of $125,000 to $135,000. During
the three years ended December 26, 2010, depreciation of
plant and equipment was $95,925, $95,934 and $87,873,
respectively.
The Company commits to inventory production, advertising and
marketing expenditures prior to the peak third and fourth
quarter retail selling season. Accounts receivable increase
during the third and fourth quarter as customers increase their
purchases to meet expected consumer demand in the holiday
season. Due to the concentrated timeframe of this selling
period, payments for these accounts receivable are generally not
due until the fourth quarter or early in the first quarter of
the subsequent year. This timing difference between expenditures
and cash collections on accounts receivable makes it necessary
for the Company to borrow higher amounts during the latter part
of the year. During 2010, 2009 and 2008, the Company primarily
utilized cash from operations, borrowings under its available
lines of credit and its accounts receivable securitization
program to fund its operations.
During 2010, 2009 and 2008, the Company was party to an accounts
receivable securitization program whereby the Company sold, on
an ongoing basis, substantially all of its U.S. trade
accounts receivable to a bankruptcy remote special purpose
entity, Hasbro Receivables Funding, LLC (HRF). HRF
was consolidated with the Company for financial reporting
purposes. The securitization program then allowed HRF to sell,
on a revolving basis, an undivided fractional ownership interest
of up to $250,000 in the eligible receivables it held to certain
bank conduits. The program provided the Company with a source of
working capital. Based on the amount of eligible accounts
receivable as of December 26, 2010, the Company had
availability under this program to sell $250,000, of which no
amounts were utilized. In January 2011, the Company terminated
this facility.
On December 16, 2010, the Company entered into a revolving
credit agreement (the Agreement) which provides it
with a $500,000 committed borrowing facility through December of
2014. The Agreement replaced the Companys previous
revolving credit agreement. The Agreement contains certain
financial covenants setting forth leverage and coverage
requirements, and certain other limitations typical of an
investment grade facility, including with respect to liens,
mergers and incurrence of indebtedness. The Company was in
compliance with all covenants in the Agreement, as well as the
covenants in the prior revolving credit agreement for that
portion of 2010 that it was effective, as of and for the fiscal
year ended December 26, 2010. The Company had no borrowings
outstanding under its committed revolving credit facility at
December 26, 2010. However, letters of credit outstanding
under this facility as of December 26, 2010 were
approximately $1,400. Amounts available and unused under the
committed line at December 26, 2010 were approximately
$498,600. The Company also has other uncommitted lines from
various banks, of which approximately $77,700 was utilized at
December 26, 2010. Of the amount utilized under the
uncommitted lines, approximately $14,400 and $63,300 represent
outstanding short-term borrowings and letters of credit,
respectively.
In January 2011, the Company entered into an agreement with a
group of banks to establish a commercial paper program (the
Program). Under the Program, at the request of the
Company and subject to market conditions, the banks may either
purchase from the Company, or arrange for the sale by the
Company, of unsecured commercial paper notes. Under the Program,
the Company may issue notes from time to time up to an aggregate
principal amount outstanding at any given time of $500,000. The
maturities of the notes may vary but may not exceed
397 days. The notes will be sold under customary terms in
the commercial paper market and will be issued at a discount to
par, or alternatively, will be sold at par and will bear varying
interest rates based on a fixed or floating rate basis. The
interest rates will vary based on market conditions and the
ratings assigned to the notes by the credit rating agencies at
the time of issuance.
Net cash utilized by financing activities was $170,595 in 2010.
Of this amount, $639,563 reflects cash paid, including
transaction costs, to repurchase the Companys common
stock. During 2010, the Company repurchased 15,763 shares
at an average price of $40.37. At December 26, 2010,
$150,068 remained under the April 2010 authorization. Dividends
paid were $133,048 in 2010 compared to $111,458 in 2009
reflecting the increase in the Companys dividend rate in
2010 to $0.25 per quarter from $0.20 per quarter. These
utilizations
33
were partially offset by proceeds of $492,528 from the issuance
of long-term notes in March 2010. In addition, cash received
from the exercise of employee stock options in 2010 was $93,522.
Net cash provided by financing activities was $236,779 in 2009.
Of this amount, $421,309 reflected net proceeds from the
issuance of long-term notes in May 2009. In addition, cash
received from the exercise of employee stock options in 2009 was
$9,193. These sources of cash were partially offset by $88,112,
which included transaction costs, used to repurchase shares of
the Companys common stock. During 2009, the Company
repurchased 3,172 shares at an average price per share of
$28.67. Dividends paid were $111,458 in 2009 compared to
$107,065 in 2008.
Net cash utilized by financing activities was $457,391 in 2008.
Of this amount, $360,244, which includes transaction costs, was
used to repurchase shares of the Companys common stock.
During 2008, the Company repurchased 11,736 shares at an
average price per share of $30.44. Dividends paid were $107,065
in 2008. In addition, $135,092 was used to repay long-term debt.
These uses of cash were partially offset by cash receipts of
$120,895 from the exercise of employee stock options.
At December 27, 2009, the Company had outstanding $249,828
in principal amount of senior convertible debentures due 2021.
If the closing price of the Companys common stock exceeded
$23.76 for at least 20 trading days, within the 30 consecutive
trading day period ending on the last trading day of the
calendar quarter, or upon other specified events, the debentures
were convertible at an initial conversion price of $21.60 in the
next calendar quarter. At December 31, 2009, this
conversion feature was met and the debentures were convertible
during the first quarter of 2010. During the first quarter of
2010, holders of these debentures converted $111,177, in
principal amount, of these debentures which resulted in the
issuance of 5,147 shares. In addition, if the closing price
of the Companys common stock exceeded $27.00 for at least
20 trading days in any 30 day period, the Company had the
right to call the debentures by giving notice to the holders of
the debentures. During a prescribed notice period following such
a call by the Company, the holders of the debentures had the
right to convert their debentures in accordance with the
conversion terms described above. As of March 28, 2010, the
Company had the right to call the debentures. On March 29,
2010, as part of the Companys overall debt management
strategy and in furtherance of its capital structure goals, the
Company gave notice of its election to redeem in cash all of the
outstanding debentures on April 29, 2010 at a redemption
price of $1,011.31 per $1,000 principal amount, which was equal
to the par value thereof plus accrued and unpaid cash interest
through April 29, 2010. During the notice period, $138,467,
in principal amount, of the debentures were converted by the
holders, resulting in the issuance of 6,410 shares of
common stock. The remaining debentures were redeemed at a total
cost of $186, which included accrued interest through the
redemption date.
The $350,000 notes due in 2017 bear interest at a rate of 6.30%,
which may be adjusted upward in the event that the
Companys credit rating from Moodys Investor
Services, Inc., Standard & Poors Ratings
Services or Fitch Ratings is reduced to Ba1, BB+, or BB+,
respectively, or below. At December 26, 2010, the
Companys ratings from Moodys Investor Services,
Inc., Standard & Poors Ratings Services and
Fitch Ratings were Baa2, BBB and BBB+, respectively. The
interest rate adjustment is dependent on the degree of decrease
of the Companys ratings and could range from 0.25% to a
maximum of 2.00%. The Company may redeem the notes at its option
at the greater of the principal amount of the notes or the
present value of the remaining scheduled payments discounted
using the effective interest rate on applicable
U.S. Treasury bills at the time of repurchase.
The $425,000 notes due in 2014 bear interest at a rate of
6.125%, which may be adjusted upward in the event that the
Companys credit rating from Moodys Investor
Services, Inc., Standard & Poors Ratings
Services or Fitch Ratings is reduced to Ba1, BB+, or BB+,
respectively, or below. At December 26, 2010, the
Companys ratings from Moodys Investor Services,
Inc., Standard & Poors Ratings Services and
Fitch Ratings were Baa2, BBB, and BBB+, respectively. The
interest rate adjustment is dependent on the degree of decrease
of the Companys ratings and could range from 0.25% to a
maximum of 2.00%. The Company may redeem the notes at its option
at the greater of the principal amount of the notes or the
present value of the remaining scheduled payments discounted
using the effective interest rate on applicable
U.S. Treasury bills at the time of repurchase.
34
Including the debentures and notes described above, the Company
has remaining principal amounts of long-term debt at
December 26, 2010 of approximately $1,384,895 due at
varying times from 2014 through 2040. The Company also had
letters of credit and other similar instruments of approximately
$179,592 and purchase commitments of $340,007 outstanding at
December 26, 2010. Letters of credit and similar
instruments include $114,890 related to the defense of tax
assessments in Mexico. These assessments relate to transfer
pricing that the Company is defending and expects to be
successful in sustaining its position. In addition, the Company
is committed to guaranteed royalty and other contractual
payments of approximately $39,513 in 2011.
Critical
Accounting Policies and Significant Estimates
The Company prepares its consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America. As such, management is required to
make certain estimates, judgments and assumptions that it
believes are reasonable based on information available. These
estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses for the periods
presented. The significant accounting policies which management
believes are the most critical to aid in fully understanding and
evaluating the Companys reported financial results include
sales allowances, program production costs, recoverability of
goodwill and intangible assets, recoverability of royalty
advances and commitments, pension costs and obligations and
income taxes.
Sales
Allowances
Sales allowances for customer promotions, discounts and returns
are recorded as a reduction of revenue when the related revenue
is recognized. Revenue from product sales is recognized upon
passing of title to the customer, generally at the time of
shipment. Revenue from product sales, less related sales
allowances, is added to license fees and royalty revenue and
reflected as net revenues in the consolidated statements of
operations. The Company routinely commits to promotional sales
allowance programs with customers. These allowances primarily
relate to fixed programs, which the customer earns based on
purchases of Company products during the year. Discounts and
allowances are recorded as a reduction of related revenue at the
time of sale. While many of the allowances are based on fixed
amounts, certain of the allowances, such as the returns
allowance, are based on market data, historical trends and
information from customers and are therefore subject to
estimation.
For its allowance programs that are not fixed, such as returns,
the Company estimates these amounts using a combination of
historical experience and current market conditions. These
estimates are reviewed periodically against actual results and
any adjustments are recorded at that time as an increase or
decrease to net revenues. During 2010, there have been no
material adjustments to the Companys estimates made in
prior years.
Program
Production Costs
The Company incurs certain costs in connection with the
production of television programs based primarily on the
Companys toy and game brands, including animated and
live-action programs and game shows. These costs are capitalized
as they are incurred and amortized using the
individual-film-forecast method, whereby these costs are
amortized in the proportion that the current years
revenues bear to managements estimate of total ultimate
revenues as of the beginning of each fiscal year related to the
program. These capitalized costs are reported at the lower of
cost, less accumulated amortization, or fair value, and reviewed
for impairment when an event or change in circumstances occurs
that indicates that an impairment may exist. The fair value is
determined using a discounted cash flow model which is primarily
based on managements future revenue and cost estimates.
The most significant estimates are those used in the
determination of ultimate revenue in the
individual-film-forecast method. Ultimate revenue estimates
impact the timing of program production cost amortization in the
consolidated statement of operations. Ultimate revenue includes
revenue from all sources that are
35
estimated to be earned related to the television program and
include toy, game and other merchandise licensing fees; first
run program distribution fees; and other revenue sources, such
as DVD distribution. Our ultimate revenue estimates for each
television program are developed based on our estimates of
expected future results. We review and revise these estimates at
each reporting date to reflect the most current available
information. If estimates for a television program are revised,
the difference between the program production cost amortization
determined using the revised estimate and any amounts previously
expensed during that fiscal year, are included as an adjustment
to program production cost amortization in the consolidated
statement of operations in the quarter in which the estimates
are revised. Prior period amounts are not adjusted for
subsequent changes in estimates. Factors that can impact our
revenue estimates include the success and popularity of our
television programs in the U.S. which are distributed on
THE HUB, our ability to achieve broad distribution and viewer
acceptance in international markets, and success of our
program-related toy, game and other merchandise.
For the year ended December 26, 2010 we have $35,415 of
program production costs included in other assets in the
consolidated balance sheet. Program production cost amortization
of $22,069 is included in cost of sales in the consolidated
statement of operations for the year ended December 26,
2010. We currently expect that over 90% of capitalized program
production costs will be amortized over a 4 year period
including the year of the programs initial broadcast
distribution. The Company estimates program production cost
amortization in 2011 to be in the range of $35,000 to $45,000,
which includes amortization related to amounts capitalized
during 2010 as well as amortization of amounts expected to be
incurred for programs to be completed and released in 2011.
Future program production cost amortization is subject to change
based on actual costs incurred and managements then
current estimates of ultimate revenues. During 2010 the Company
did not incur any impairment charges related to its program
production costs.
Recoverability
of Goodwill and Intangible Assets
Goodwill and other intangible assets deemed to have indefinite
lives are tested for impairment at least annually. If an event
occurs or circumstances change that indicate that the carrying
value may not be recoverable, the Company will perform an
interim test at that time. The impairment test begins by
allocating goodwill and intangible assets to applicable
reporting units. Goodwill is then tested using a two step
process that begins with an estimation of the fair value of the
reporting unit using an income approach, which looks to the
present value of expected future cash flows.
The first step is a screen for potential impairment while the
second step measures the amount of impairment if there is an
indication from the first step that one exists. Intangible
assets with indefinite lives are tested for impairment by
comparing their carrying value to their estimated fair value
which is also calculated using an income approach. The
Companys annual goodwill impairment test was performed in
the fourth quarter of 2010 and the estimated fair value of the
Companys reporting units with allocated goodwill were
substantially in excess of their carrying value. No reporting
units were considered to be at risk of failing the first step of
the impairment test. Accordingly, no impairment was indicated.
The Companys annual impairment tests related to intangible
assets with indefinite lives were also performed in the fourth
quarter of 2010 and no impairments were indicated. The
estimation of future cash flows requires significant judgments
and estimates with respect to future revenues related to the
respective asset and the future cash outlays related to those
revenues. Actual revenues and related cash flows or changes in
anticipated revenues and related cash flows could result in a
change in this assessment and result in an impairment charge.
The estimation of discounted cash flows also requires the
selection of an appropriate discount rate. The use of different
assumptions would increase or decrease estimated discounted cash
flows and could increase or decrease the related impairment
charge. At December 26, 2010, the Company has goodwill and
intangible assets with indefinite lives of $550,551 recorded on
the balance sheet.
Intangible assets, other than those with indefinite lives, are
amortized over their estimated useful lives and are reviewed for
indications of impairment whenever events or changes in
circumstances indicate the carrying value may not be
recoverable. Recoverability of the value of these intangible
assets is measured by a comparison of the assets carrying
value to the estimated future undiscounted cash flows expected
to be generated by the asset. If such assets were considered to
be impaired, the impairment would be measured by
36
the amount by which the carrying value of the asset exceeds its
fair value based on estimated future discounted cash flows. The
estimation of future cash flows requires significant judgments
and estimates with respect to future revenues related to the
respective asset and the future cash outlays related to those
revenues. Actual revenues and related cash flows or changes in
anticipated revenues and related cash flows could result in a
change in this assessment and result in an impairment charge.
The estimation of discounted cash flows also requires the
selection of an appropriate discount rate. The use of different
assumptions would increase or decrease estimated discounted cash
flows and could increase or decrease the related impairment
charge. Intangible assets covered under this policy were
$424,859 at December 26, 2010. During 2010, the Company
wrote down certain intangible assets by approximately $3,900 to
reflect revised expectations of future cash flows for the
related product lines.
Recoverability
of Royalty Advances and Commitments
The Companys ability to earn-out royalty advances and
contractual obligations with respect to minimum guaranteed
royalties is assessed by comparing the remaining minimum
guaranty to the estimated future sales forecasts and related
cash flow projections to be derived from the related product. If
sales forecasts and related cash flows from the particular
product do not support the recoverability of the remaining
minimum guaranty or, if the Company decides to discontinue a
product line with royalty advances or commitments, a charge to
royalty expense to write-off the non-recoverable minimum
guaranty is required. The preparation of revenue forecasts and
related cash flows for these products requires judgments and
estimates. Actual revenues and related cash flows or changes in
the assessment of anticipated revenues and cash flows related to
these products could result in a change to the assessment of
recoverability of remaining minimum guaranteed royalties. At
December 26, 2010, the Company had $112,922 of prepaid
royalties, $17,922 of which are included in prepaid expenses and
other current assets and $95,000 of which are included in other
assets.
Pension
Costs and Obligations
Pension expense is based on actuarial computations of current
and future benefits using estimates for expected return on
assets and applicable discount rates. At the end of 2007 the
Company froze benefits under its two largest pension plans in
the U.S., with no future benefits accruing to employees. The
Company will continue to pay benefits under the plan consistent
with the provisions existing at the date of the plan benefit
freeze. The estimates for the Companys U.S. plans are
established at the Companys measurement date. The Company
uses its fiscal year-end date as its measurement date to measure
the liabilities and assets of the plans and to establish the
expense for the upcoming year.
The Company estimates expected return on assets using a weighted
average rate based on historical market data for the investment
classes of assets held by the plan, the allocation of plan
assets among those investment classes, and the current economic
environment. Based on this information, the Companys
estimate of expected return on U.S. plan assets used in the
calculation of 2010 pension expense for the U.S. plans was
8.0%. A decrease in the estimate used for expected return on
plan assets would increase pension expense, while an increase in
this estimate would decrease pension expense. A decrease of
0.25% in the estimate of expected return on plan assets would
have increased 2010 pension expense for U.S. plans by
approximately $610.
Discount rates are selected based upon rates of return at the
measurement date on high quality corporate bond investments
currently available and expected to be available during the
period to maturity of the pension benefits. The Companys
discount rate for its U.S. plans used for the calculation
of 2010 pension expense averaged 5.73%. A decrease in the
discount rate would result in greater pension expense while an
increase in the discount rate would decrease pension expense. A
decrease of 0.25% in the Companys discount rate would have
increased 2010 pension expense and the 2010 projected benefit
obligation by approximately $383 and $9,815, respectively.
Actual results that differ from the actuarial assumptions are
accumulated and, if outside a certain corridor, amortized over
future periods and, therefore affect recognized expense in
future periods. At December 26, 2010, the Companys
U.S. plans had unrecognized actuarial losses of $87,553
included in accumulated other
37
comprehensive earnings related to its defined benefit pension
plans compared to $80,201 at December 27, 2009. The
increase primarily reflects additional unrecognized actuarial
losses in 2010, primarily due to the reduction of the discount
rate used to value the liability at December 26, 2010. The
discount rate decreased to 5.20% at December 26, 2010 from
5.73% used at December 27, 2009. Pension plan assets are
valued on the basis of their fair market value on the
measurement date. These changes in the fair market value of plan
assets impact the amount of future pension expense due to
amortization of the unrecognized actuarial losses or gains.
Income
Taxes
The Companys annual income tax rate is based on its
income, statutory tax rates, changes in prior tax positions and
tax planning opportunities available in the various
jurisdictions in which it operates. Significant judgment and
estimates are required to determine the Companys annual
tax rate and in evaluating its tax positions. Despite the
Companys belief that its tax return positions are fully
supportable, these positions are subject to challenge and
estimated liabilities are established in the event that these
positions are challenged and the Company is not successful in
defending these challenges. These estimated liabilities are
adjusted, as well as the related interest, in light of changing
facts and circumstances, such as the progress of a tax audit.
An estimated effective income tax rate is applied to the
Companys quarterly operating results. In the event there
is a significant unusual or extraordinary item recognized in the
Companys quarterly operating results, the tax attributable
to that item is separately calculated and recorded at the time.
Changes in the Companys estimated effective income tax
rate during 2010 were primarily due to changes in its estimate
of earnings by tax jurisdiction. In addition, changes in
judgment regarding likely outcomes related to tax positions
taken in a prior fiscal year, or tax costs or benefits from a
resolution of such positions would be recorded entirely in the
interim period the judgment changes or resolution occurs. During
2010, the Company recorded a total benefit of approximately
$22,300 related to discrete tax events primarily related to the
completion of a U.S. tax examination.
In certain cases, tax law requires items to be included in the
Companys income tax returns at a different time than when
these items are recognized on the financial statements or at a
different amount than that which is recognized on the financial
statements. Some of these differences are permanent, such as
expenses that are not deductible on the Companys tax
returns, while other differences are temporary and will reverse
over time, such as depreciation expense. These differences that
will reverse over time are recorded as deferred tax assets and
liabilities on the consolidated balance sheet. Deferred tax
assets represent credits or deductions that have been reflected
in the financial statements but have not yet been reflected in
the Companys income tax returns. Valuation allowances are
established against deferred tax assets to the extent that it is
determined that the Company will have insufficient future
taxable income, including capital gains, to fully realize the
future credits, deductions or capital losses. Deferred tax
liabilities represent expenses recognized on the Companys
income tax return that have not yet been recognized in the
Companys financial statements or income recognized in the
financial statements that has not yet been recognized in the
Companys income tax return. In 2007, the Mexican
government instituted a tax structure which results in companies
paying the higher of an income-based tax or an alternative flat
tax commencing in 2008. Should the Company be subject to the
alternative flat tax, it would be required to review whether its
net deferred tax assets would be realized. As the Company
believes that it will continue to be subject to the income-based
tax in 2011, it believes that the net deferred tax assets
related to the Mexican tax jurisdiction will be realizable.
Should the facts and circumstances change, the Company may be
required to reevaluate deferred tax assets related to its
Mexican operations, which may result in additional tax expense.
38
Contractual
Obligations and Commercial Commitments
In the normal course of its business, the Company enters into
contracts related to obtaining rights to produce product under
license, which may require the payment of minimum guarantees, as
well as contracts related to the leasing of facilities and
equipment. In addition, the Company has $1,384,895 in principal
amount of long-term debt outstanding at December 26, 2010.
Future payments required under these and other obligations as of
December 26, 2010 are as follows:
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|
|
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|
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Payments due by Fiscal Year
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Certain Contractual Obligations
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2011
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2012
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2013
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2014
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2015
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Thereafter
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Total
|
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Long-term debt
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$
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|
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425,000
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959,895
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1,384,895
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Interest payments on long-term debt
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87,084
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|
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87,084
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|
|
87,084
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|
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74,069
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61,053
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916,265
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1,312,639
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Operating lease commitments
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28,200
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|
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24,261
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20,966
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10,040
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6,911
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8,549
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98,927
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Future minimum guaranteed contractual payments
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39,513
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46,353
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85,675
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14,775
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14,375
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86,250
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286,941
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Tax sharing agreement
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6,000
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6,400
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6,800
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7,100
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7,400
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|
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101,900
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135,600
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Purchase commitments
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340,007
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|
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|
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340,007
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$
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500,804
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|
|
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164,098
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200,525
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530,984
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89,739
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|
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2,072,859
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|
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3,559,009
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The Company has a liability at December 26, 2010, including
potential interest and penalties, of $105,575 for uncertain tax
positions that have been taken or are expected to be taken in
various income tax returns. The Company does not know the
ultimate resolution of these uncertain tax positions and as
such, does not know the ultimate timing of payments related to
this liability. Accordingly, these amounts are not included in
the table above.
In connection with the Companys agreement to form a joint
venture with Discovery, the Company is obligated to make future
payments to Discovery under a tax sharing agreement. These
payments are contingent upon the Company having sufficient
taxable income to realize the expected tax deductions of certain
amounts related to the joint venture. Accordingly, estimates of
these amounts are included in the table above.
The Companys agreement with Marvel provides for minimum
guaranteed royalty payments and requires the Company to make
minimum expenditures on marketing and promotional activities.
The future minimum contractual payments in the table above
include future guaranteed contractual royalty payments of
approximately $19,000 payable to Marvel that are contingent upon
the theatrical release of SPIDER-MAN 4 which the Company
currently expects to be paid in 2012 and may be reduced by
payments occurring prior to the theatrical release of
SPIDER-MAN 4. In addition, in connection with the
extension of the Marvel license in 2009, the Company may be
subject to additional royalty guarantees totaling $140,000 that
are not included in the table above and that may be payable
during the next five to six years contingent upon the quantity
and types of theatrical movie releases.
In addition to the amounts included in the table above, the
Company expects to make contributions totaling approximately
$5,400 related to its unfunded U.S. and other International
pension plans in 2011. The Company also has letters of credit
and related instruments of approximately $179,592 at
December 26, 2010.
The Company believes that cash from operations and funds
available through its commercial paper program or lines of
credit will allow the Company to meet these and other
obligations described above.
Financial
Risk Management
The Company is exposed to market risks attributable to
fluctuations in foreign currency exchange rates primarily as the
result of sourcing products priced in U.S. dollars, Hong
Kong dollars and Euros while marketing those products in more
than twenty currencies. Results of operations may be affected
primarily by changes in the value of the U.S. dollar, Hong
Kong dollar, Euro, British pound, Canadian dollar and Mexican
peso and, to a lesser extent, currencies in Latin American and
Asia Pacific countries.
39
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 $68,455
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 Companys 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 Companys
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 26, 2010, these contracts had unrealized gains of
$16,151, of which $14,681 are recorded in prepaid expenses and
other current assets and $1,470 are recorded in other assets.
Included in accumulated other comprehensive earnings at
December 26, 2010 are deferred gains of $15,432, net of
tax, related to these derivatives.
At December 26, 2010, 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 26, 2010,
the fair value of these contracts was an asset of $12,786, 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
$122,000 or $104,800, respectively. A hypothetical one-quarter
percentage point change in interest rates would increase or
decrease 2011 pretax earnings by $882 and 2011 cash flows by
$764.
The
Economy and Inflation
The principal market for the Companys products is the
retail sector. Revenues from the Companys top five
customers, all retailers, accounted for approximately 50% of its
consolidated net revenues in 2010 and 54% and 52% of its
consolidated net revenues in 2009 and 2008, 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 Companys revenue pattern continues to show the second
half of the year to be more significant to its overall business
for the full year. In 2010, approximately 65% of the
Companys 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 has shifted 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 2010, the Company had products related to the
mid-year major motion picture release of IRON MAN 2,
while in 2009 the Company had products related to the mid-year
major motion picture releases of TRANSFORMERS: REVENGE OF THE
FALLEN, G.I. JOE: THE RISE OF COBRA and X-MEN
ORIGINS: WOLVERINE. 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
40
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 being used by
retailers result in more orders being placed for immediate
delivery and fewer orders being placed well in advance of
shipment. Retailers are timing their orders so that they are
being filled by suppliers closer to the time of purchase by
consumers. 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 Companys future revenues. In
addition, the bankruptcy or other lack of success of one of the
Companys significant retailers could negatively impact the
Companys future revenues.
The effect of inflation on the Companys operations during
2010 was not significant and the Company will continue its
policy of monitoring costs and adjusting prices, accordingly.
Other
Information
The Company is not aware of any material amounts of potential
exposure relating to environmental matters and does not believe
its environmental compliance costs or liabilities to be material
to its operating results or financial position.
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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The information required by this item is included in Item 7
of Part II of this Report and is incorporated herein by
reference.
41
|
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Item 8.
|
Financial
Statements and Supplementary Data
|
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Hasbro, Inc.:
We have audited the accompanying consolidated balance sheets of
Hasbro, Inc. and subsidiaries as of December 26, 2010 and
December 27, 2009, and the related consolidated statements
of operations, shareholders equity, and cash flows for
each of the fiscal years in the three-year period ended
December 26, 2010. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Hasbro, Inc. and subsidiaries as of
December 26, 2010 and December 27, 2009, and the
results of their operations and their cash flows for each of the
fiscal years in the three-year period ended December 26,
2010, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Hasbro, Inc.s internal control over financial reporting as
of December 26, 2010, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 23, 2011 expressed an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
Providence, Rhode Island
February 23, 2011
42
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 26, 2010 and December 27, 2009
(Thousands of Dollars Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
727,796
|
|
|
|
636,045
|
|
Accounts receivable, less allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
of $31,200 in 2010 and $32,800 in 2009
|
|
|
961,252
|
|
|
|
1,038,802
|
|
Inventories
|
|
|
364,194
|
|
|
|
207,895
|
|
Prepaid expenses and other current assets
|
|
|
167,807
|
|
|
|
162,290
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,221,049
|
|
|
|
2,045,032
|
|
Property, plant and equipment, net
|
|
|
233,580
|
|
|
|
220,706
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
474,813
|
|
|
|
475,931
|
|
Other intangibles, net
|
|
|
500,597
|
|
|
|
554,567
|
|
Other
|
|
|
663,187
|
|
|
|
600,656
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,638,597
|
|
|
|
1,631,154
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,093,226
|
|
|
|
3,896,892
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
14,568
|
|
|
|
14,113
|
|
Accounts payable
|
|
|
132,517
|
|
|
|
173,388
|
|
Accrued liabilities
|
|
|
571,716
|
|
|
|
628,387
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
718,801
|
|
|
|
815,888
|
|
Long-term debt
|
|
|
1,397,681
|
|
|
|
1,131,998
|
|
Other liabilities
|
|
|
361,324
|
|
|
|
354,234
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,477,806
|
|
|
|
2,302,120
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preference stock of $2.50 par value. Authorized
5,000,000 shares; none issued
|
|
|
|
|
|
|
|
|
Common stock of $0.50 par value. Authorized
600,000,000 shares; issued 209,694,630 shares in 2010
and 2009
|
|
|
104,847
|
|
|
|
104,847
|
|
Additional paid-in capital
|
|
|
625,961
|
|
|
|
467,183
|
|
Retained earnings
|
|
|
2,978,317
|
|
|
|
2,720,549
|
|
Accumulated other comprehensive earnings
|
|
|
8,149
|
|
|
|
58,631
|
|
Treasury stock, at cost, 72,278,515 shares in 2010 and
72,597,140 shares in 2009
|
|
|
(2,101,854
|
)
|
|
|
(1,756,438
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,615,420
|
|
|
|
1,594,772
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,093,226
|
|
|
|
3,896,892
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
43
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended in December
(Thousands of Dollars Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net revenues
|
|
$
|
4,002,161
|
|
|
|
4,067,947
|
|
|
|
4,021,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
1,712,126
|
|
|
|
1,676,336
|
|
|
|
1,692,728
|
|
Royalties
|
|
|
248,570
|
|
|
|
330,651
|
|
|
|
312,986
|
|
Product development
|
|
|
201,358
|
|
|
|
181,195
|
|
|
|
191,424
|
|
Advertising
|
|
|
420,651
|
|
|
|
412,580
|
|
|
|
454,612
|
|
Amortization
|
|
|
50,405
|
|
|
|
85,029
|
|
|
|
78,265
|
|
Selling, distribution and administration
|
|
|
781,192
|
|
|
|
793,558
|
|
|
|
797,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,414,302
|
|
|
|
3,479,349
|
|
|
|
3,527,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
587,859
|
|
|
|
588,598
|
|
|
|
494,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
82,112
|
|
|
|
61,603
|
|
|
|
47,143
|
|
Interest income
|
|
|
(5,649
|
)
|
|
|
(2,858
|
)
|
|
|
(17,654
|
)
|
Other (income) expense, net
|
|
|
3,676
|
|
|
|
156
|
|
|
|
23,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating expense, net
|
|
|
80,139
|
|
|
|
58,901
|
|
|
|
53,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
507,720
|
|
|
|
529,697
|
|
|
|
441,055
|
|
Income taxes
|
|
|
109,968
|
|
|
|
154,767
|
|
|
|
134,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
397,752
|
|
|
|
374,930
|
|
|
|
306,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.86
|
|
|
|
2.69
|
|
|
|
2.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.74
|
|
|
|
2.48
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
$
|
1.00
|
|
|
|
0.80
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended in December
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
397,752
|
|
|
|
374,930
|
|
|
|
306,766
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of plant and equipment
|
|
|
95,925
|
|
|
|
95,934
|
|
|
|
87,873
|
|
Amortization
|
|
|
50,405
|
|
|
|
85,029
|
|
|
|
78,265
|
|
Program production cost amortization
|
|
|
22,069
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
25,172
|
|
|
|
19,136
|
|
|
|
24,994
|
|
Stock-based compensation
|
|
|
33,392
|
|
|
|
29,912
|
|
|
|
35,221
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
71,173
|
|
|
|
(422,560
|
)
|
|
|
(14,220
|
)
|
(Increase) decrease in inventories
|
|
|
(151,634
|
)
|
|
|
105,329
|
|
|
|
(69,871
|
)
|
Decrease in prepaid expenses and other current assets
|
|
|
15,904
|
|
|
|
35,702
|
|
|
|
74,734
|
|
Program production costs
|
|
|
(52,047
|
)
|
|
|
(1,837
|
)
|
|
|
|
|
(Decrease) increase in accounts payable and accrued liabilities
|
|
|
(129,531
|
)
|
|
|
5,966
|
|
|
|
56,143
|
|
Other, including long-term advances
|
|
|
(10,599
|
)
|
|
|
(61,918
|
)
|
|
|
13,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
367,981
|
|
|
|
265,623
|
|
|
|
593,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(112,597
|
)
|
|
|
(104,129
|
)
|
|
|
(117,143
|
)
|
Investments and acquisitions, net of cash acquired
|
|
|
|
|
|
|
(371,482
|
)
|
|
|
(154,757
|
)
|
Purchases of short-term investments
|
|
|
|
|
|
|
(18,000
|
)
|
|
|
(42,000
|
)
|
Proceeds from sales of short-term investments
|
|
|
|
|
|
|
|
|
|
|
42,000
|
|
Other investing activities
|
|
|
8,409
|
|
|
|
(3,898
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash utilized by investing activities
|
|
|
(104,188
|
)
|
|
|
(497,509
|
)
|
|
|
(271,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from borrowings with original maturities of more
than three months
|
|
|
492,528
|
|
|
|
421,309
|
|
|
|
|
|
Repayments of borrowings with original maturities of more than
three months
|
|
|
(186
|
)
|
|
|
|
|
|
|
(135,092
|
)
|
Net (repayments) proceeds of other short-term borrowings
|
|
|
(381
|
)
|
|
|
4,114
|
|
|
|
(645
|
)
|
Purchases of common stock
|
|
|
(639,563
|
)
|
|
|
(88,112
|
)
|
|
|
(360,244
|
)
|
Stock option transactions
|
|
|
93,522
|
|
|
|
9,193
|
|
|
|
120,895
|
|
Excess tax benefits from stock-based compensation
|
|
|
22,517
|
|
|
|
1,733
|
|
|
|
24,760
|
|
Dividends paid
|
|
|
(133,048
|
)
|
|
|
(111,458
|
)
|
|
|
(107,065
|
)
|
Other financing activities
|
|
|
(5,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (utilized) provided by financing activities
|
|
|
(170,595
|
)
|
|
|
236,779
|
|
|
|
(457,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(1,447
|
)
|
|
|
762
|
|
|
|
(7,942
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
91,751
|
|
|
|
5,655
|
|
|
|
(144,068
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
636,045
|
|
|
|
630,390
|
|
|
|
774,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
727,796
|
|
|
|
636,045
|
|
|
|
630,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
72,927
|
|
|
|
54,578
|
|
|
|
50,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
93,995
|
|
|
|
107,948
|
|
|
|
49,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
(Thousands of Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance, December 30, 2007
|
|
$
|
104,847
|
|
|
|
369,092
|
|
|
|
2,261,561
|
|
|
|
74,938
|
|
|
|
(1,425,346
|
)
|
|
|
1,385,092
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
306,766
|
|
|
|
|
|
|
|
|
|
|
|
306,766
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,682
|
)
|
|
|
|
|
|
|
(12,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,084
|
|
Stock-based compensation transactions
|
|
|
|
|
|
|
45,947
|
|
|
|
|
|
|
|
|
|
|
|
99,708
|
|
|
|
145,655
|
|
Purchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(357,589
|
)
|
|
|
(357,589
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
35,116
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
35,221
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(111,677
|
)
|
|
|
|
|
|
|
|
|
|
|
(111,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 28, 2008
|
|
|
104,847
|
|
|
|
450,155
|
|
|
|
2,456,650
|
|
|
|
62,256
|
|
|
|
(1,683,122
|
)
|
|
|
1,390,786
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
374,930
|
|
|
|
|
|
|
|
|
|
|
|
374,930
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,625
|
)
|
|
|
|
|
|
|
(3,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
371,305
|
|
Stock-based compensation transactions
|
|
|
|
|
|
|
(12,724
|
)
|
|
|
|
|
|
|
|
|
|
|
17,518
|
|
|
|
4,794
|
|
Purchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90,994
|
)
|
|
|
(90,994
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
29,752
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
29,912
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(111,031
|
)
|
|
|
|
|
|
|
|
|
|
|
(111,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 27, 2009
|
|
|
104,847
|
|
|
|
467,183
|
|
|
|
2,720,549
|
|
|
|
58,631
|
|
|
|
(1,756,438
|
)
|
|
|
1,594,772
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
397,752
|
|
|
|
|
|
|
|
|
|
|
|
397,752
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,482
|
)
|
|
|
|
|
|
|
(50,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,270
|
|
Stock-based compensation transactions
|
|
|
|
|
|
|
22,971
|
|
|
|
|
|
|
|
|
|
|
|
86,253
|
|
|
|
109,224
|
|
Conversion of debentures
|
|
|
|
|
|
|
102,792
|
|
|
|
|
|
|
|
|
|
|
|
204,635
|
|
|
|
307,427
|
|
Purchases of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(636,681
|
)
|
|
|
(636,681
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
33,015
|
|
|
|
|
|
|
|
|
|
|
|
377
|
|
|
|
33,392
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
(139,984
|
)
|
|
|
|
|
|
|
|
|
|
|
(139,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 26, 2010
|
|
$
|
104,847
|
|
|
|
625,961
|
|
|
|
2,978,317
|
|
|
|
8,149
|
|
|
|
(2,101,854
|
)
|
|
|
1,615,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements
(Thousands
of Dollars and Shares Except Per Share Data)
|
|
(1)
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
Hasbro, Inc. and all majority-owned subsidiaries
(Hasbro or the Company). Investments
representing 20% to 50% ownership interests in other companies
are accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated.
Preparation
of Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
notes thereto. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the 2009 and 2008 consolidated financial
statements have been reclassified to conform to the 2010
presentation.
Fiscal
Year
Hasbros fiscal year ends on the last Sunday in December.
Each of the fiscal years in the three-year period ended
December 26, 2010 were fifty-two week periods.
Cash
and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments purchased with a maturity to the Company of
three months or less.
Marketable
Securities
Marketable securities consist of investments in private
investment funds. For these investments, which are included in
prepaid and other current assets on the accompanying
consolidated balance sheets, the Company has selected the fair
value option which requires the Company to record the unrealized
gains and losses on these investments in the consolidated
statements of operations at the time they occur.
Accounts
Receivable and Allowance for Doubtful Accounts
Credit is granted to customers predominantly on an unsecured
basis. Credit limits and payment terms are established based on
extensive evaluations made on an ongoing basis throughout the
fiscal year with regard to the financial performance, cash
generation, financing availability and liquidity status of each
customer. The majority of customers are formally reviewed at
least annually; more frequent reviews are performed based on the
customers financial condition and the level of credit
being extended. For customers on credit who are experiencing
financial difficulties, management performs additional financial
analyses before shipping orders. The Company uses a variety of
financial transactions, based on availability and cost, to
increase the collectibility of certain of its accounts,
including letters of credit, credit insurance, factoring with
unrelated third parties, and requiring cash in advance of
shipping.
The Company records an allowance for doubtful accounts based on
managements assessment of the business environment,
customers financial condition, historical collection
experience, accounts receivable aging and customer disputes.
When a significant event occurs, such as a bankruptcy filing by
a specific
47
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
customer, and on a quarterly basis, the allowance is reviewed
for adequacy and the balance is adjusted to reflect current risk
assessments.
Inventories
Inventories are valued at the lower of cost
(first-in,
first-out) or market. Based upon a consideration of quantities
on hand, actual and projected sales volume, anticipated product
selling price and product lines planned to be discontinued,
slow-moving and obsolete inventory is written down to its
estimated net realizable value.
At December 26, 2010 and December 27, 2009, finished
goods comprised 96% and 93% of inventories, respectively.
Equity
Method Investments
For the Companys equity method investments, only the
Companys investment in and amounts due to and from the
equity method investments are included on the consolidated
balance sheet and only the Companys share of the equity
method investments earnings (losses) is included on the
consolidated statement of operations. Dividends, cash
distributions, loans or other cash received from the equity
method investments, additional cash investments, loan repayments
or other cash paid to the investee are included in the
consolidated statement of cash flows.
The Company reviews its investments in equity method investments
for impairment on a periodic basis. If it has been determined
that the equity investment is less than its related fair value
and that this decline is
other-than-temporary,
the carrying value of the investment is adjusted downward to
reflect these declines in value. The Company has one significant
equity method investment, its 50% interest in a joint venture
with Discovery Communications, Inc. See note 5 for
additional information.
Long-Lived
Assets
The Companys long-lived assets consist of property, plant
and equipment, goodwill and intangible assets with indefinite
lives as well as other intangible assets the Company considers
to have a defined life.
Goodwill results from acquisitions the Company has made over
time. Substantially all of the other intangibles consist of the
cost of acquired product rights. In establishing the value of
such rights, the Company considers existing trademarks,
copyrights, patents, license agreements and other
product-related rights. These rights were valued on their
acquisition date based on the anticipated future cash flows from
the underlying product line. The Company has certain intangible
assets related to the Tonka and Milton Bradley acquisitions that
have an indefinite life.
Goodwill and intangible assets deemed to have indefinite lives
are not amortized and are tested for impairment at least
annually. The annual test begins with goodwill and all
intangible assets being allocated to applicable reporting units.
Goodwill is then tested using a two-step process that begins
with an estimation of fair value of the reporting unit using an
income approach, which looks to the present value of expected
future cash flows. The first step is a screen for potential
impairment while the second step measures the amount of
impairment if there is an indication from the first step that
one exists. Intangible assets with indefinite lives are tested
annually for impairment by comparing their carrying value to
their estimated fair value, also calculated using the present
value of expected future cash flows.
The remaining intangibles having defined lives are being
amortized over periods ranging from five to twenty-five years,
primarily using the straight-line method. At December 26,
2010, approximately 15% of
48
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
other intangibles relate to rights acquired in connection with a
major entertainment property and are being amortized in
proportion to projected sales of the licensed products over the
contract life.
Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using
accelerated and straight-line methods to depreciate the cost of
property, plant and equipment over their estimated useful lives.
The principal lives, in years, used in determining depreciation
rates of various assets are: land improvements 15 to 19,
buildings and improvements 15 to 25 and machinery and equipment
3 to 12. Depreciation expense is classified in the statement of
operations based on the nature of the property and equipment
being depreciated. Tools, dies and molds are depreciated over a
three-year period or their useful lives, whichever is less,
using an accelerated method. The Company generally owns all
tools, dies and molds related to its products.
The Company reviews property, plant and equipment and other
intangibles with defined lives for impairment whenever events or
changes in circumstances indicate the carrying value may not be
recoverable. Recoverability is measured by a comparison of the
carrying amount of an asset or asset group to future
undiscounted cash flows expected to be generated by the asset or
asset group. If such assets were considered to be impaired, the
impairment to be recognized would be measured by the amount by
which the carrying value of the assets exceeds their fair value.
Fair value is determined based on discounted cash flows or
appraised values, depending on the nature of the assets. Assets
to be disposed of are carried at the lower of the net book value
or their estimated fair value less disposal costs.
Financial
Instruments
Hasbros financial instruments include cash and cash
equivalents, accounts receivable, short-term borrowings,
accounts payable and accrued liabilities. At December 26,
2010, the carrying cost of these instruments approximated their
fair value. The Companys financial instruments at
December 26, 2010 also include long-term borrowings (see
note 9 for carrying cost and related fair values) as well
as certain assets and liabilities measured at fair value (see
notes 9, 12 and 16).
Securitization
and Transfer of Financial Instruments
During the three years ended 2010, Hasbro had an agreement that
allowed the Company to sell, on an ongoing basis, an undivided
fractional ownership interest in certain of its trade accounts
receivable through a revolving securitization arrangement. The
Company retained servicing responsibilities for, as well as a
subordinate interest in, the transferred receivables. In 2009
and prior, Hasbro accounted for the securitization of trade
accounts receivable as a sale in accordance with then current
accounting standards. As a result, the related receivables were
removed from the consolidated balance sheet.
In 2010, the Company adopted the revised accounting standards
related to the transfer of financial assets. As a result of the
adoption of these standards, the Company was required to account
for the sale of the receivables under the securitization
facility as a secured borrowing. The receivables sold are
included in accounts receivable until collection. The proceeds
from utilization of the facility are recorded as short-term
debt. The Company did not utilize this facility in 2010. The
facility was terminated effective January 28, 2011.
Revenue
Recognition
Revenue from product sales is recognized upon the passing of
title to the customer, generally at the time of shipment.
Provisions for discounts, rebates and returns are made when the
related revenues are recognized. The Company bases its estimates
for discounts, rebates and returns on agreed customer terms and
historical experience.
49
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
The Company enters into arrangements licensing its brand names
on specifically approved products. The licensees pay the Company
royalties as products are sold, in some cases subject to minimum
guaranteed amounts. Royalty revenues are recognized as they are
reported as earned and payment becomes assured, over the life of
the agreement.
The Company produces television programming for license to third
parties. Revenues from the licensing of television programming
are recorded when the content is available for telecast by the
licensee and when certain other conditions are met.
Revenue from product sales less related provisions for
discounts, rebates and returns, as well as royalty revenues and
television programming revenues comprise net revenues in the
consolidated statements of operations.
Costs
of Sales
Cost of sales primarily consists of purchased materials, labor,
manufacturing overheads and other inventory-related costs such
as obsolescence. In addition, cost of sales during 2010 also
includes amortization of program production costs.
Royalties
The Company enters into license agreements with inventors,
designers and others for the use of intellectual properties in
its products. These agreements may call for payment in advance
or future payment of minimum guaranteed amounts. Amounts paid in
advance are recorded as an asset and charged to expense as
revenue from the related products is recognized. If all or a
portion of the minimum guaranteed amounts appear not to be
recoverable through future use of the rights obtained under
license, the non-recoverable portion of the guaranty is charged
to expense at that time.
Advertising
Production costs of commercials are charged to operations in the
fiscal year during which the production is first aired. The
costs of other advertising, promotion and marketing programs are
charged to operations in the fiscal year incurred.
Program
Production Costs
The Company incurs certain costs in connection with the
production of television programming. These costs are
capitalized by the Company as they are incurred and amortized
using the individual-film-forecast method, whereby these costs
are amortized in the proportion that the current years
revenues bear to managements estimate of total ultimate
revenues as of the beginning of such period related to the
program. These capitalized costs are reported at the lower of
cost, less accumulated amortization, or fair value, and reviewed
for impairment when an event or change in circumstances occurs
that indicates that impairment may exist. The fair value is
determined using a discounted cash flow model which is primarily
based on managements future revenue and cost estimates.
Shipping
and Handling
Hasbro expenses costs related to the shipment and handling of
goods to customers as incurred. For 2010, 2009 and 2008, these
costs were $154,604, $155,496 and $178,738, respectively, and
are included in selling, distribution and administration
expenses.
50
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Operating
Leases
Hasbro records lease expense in such a manner as to recognize
this expense on a straight-line basis inclusive of rent
concessions and rent increases. Reimbursements from lessors for
leasehold improvements are deferred and recognized as a
reduction to lease expense over the lease term.
Income
Taxes
Hasbro uses the asset and liability approach for financial
accounting and reporting of income taxes. Deferred income taxes
have not been provided on the majority of undistributed earnings
of international subsidiaries as the majority of such earnings
are indefinitely reinvested by the Company.
The Company uses 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. The Company records potential interest and
penalties on uncertain tax positions as a component of income
tax expense.
Foreign
Currency Translation
Foreign currency assets and liabilities are translated into
U.S. dollars at period-end rates, and revenues, costs and
expenses are translated at weighted average rates during each
reporting period. Earnings include gains or losses resulting
from foreign currency transactions and, when required,
translation gains and losses resulting from the use of the
U.S. dollar as the functional currency in highly
inflationary economies. Other gains and losses resulting from
translation of financial statements are a component of other
comprehensive earnings.
Pension
Plans, Postretirement and Postemployment
Benefits
Pension expense and related amounts in the consolidated balance
sheet are based on actuarial computations of current and future
benefits. The Companys policy is to fund amounts which are
required by applicable regulations and which are tax deductible.
In 2011, the Company expects to contribute approximately $5,400
to its pension plans. The estimated amounts of future payments
to be made under other retirement programs are being accrued
currently over the period of active employment and are also
included in pension expense. Hasbro has a contributory
postretirement health and life insurance plan covering
substantially all employees who retire under any of its United
States defined benefit pension plans and meet certain age and
length of service requirements. The cost of providing these
benefits on behalf of employees who retired prior to 1993 is and
will continue to be substantially borne by the Company. The cost
of providing benefits on behalf of substantially all employees
who retire after 1992 is borne by the employee. It also has
several plans covering certain groups of employees, which may
provide benefits to such employees following their period of
employment but prior to their retirement. The Company measures
the costs of these obligations based on actuarial computations.
Risk
Management Contracts
Hasbro uses foreign currency forward contracts to mitigate the
impact of currency rate fluctuations on firmly committed and
projected future foreign currency transactions. These
over-the-counter
contracts, which hedge future purchases of inventory and other
cross-border currency requirements not denominated in the
functional currency of the business unit, are primarily
denominated in United States and Hong Kong dollars, Euros and
British pound sterling and are entered into with a number of
counterparties, all of which are major financial institutions.
The Company believes that a default by a counterparty would not
have a
51
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
material adverse effect on the financial condition of the
Company. Hasbro does not enter into derivative financial
instruments for speculative purposes.
At the inception of the contracts, Hasbro designates its
derivatives as either cash flow or fair value hedges. The
Company formally documents all relationships between hedging
instruments and hedged items as well as its risk management
objectives and strategies for undertaking various hedge
transactions. All hedges designated as cash flow hedges are
linked to forecasted transactions and the Company assesses, both
at the inception of the hedge and on an on-going basis, the
effectiveness of the derivatives used in hedging transactions in
offsetting changes in the cash flows of the forecasted
transaction. The ineffective portion of a hedging derivative, if
any, is immediately recognized in the consolidated statements of
operations.
The Company records all derivatives, such as foreign currency
exchange contracts, on the balance sheet at fair value. Changes
in the derivative fair values that are designated effective and
qualify as cash flow hedges are deferred and recorded as a
component of AOCE until the hedged transactions occur and are
then recognized in the consolidated statements of operations.
The Companys foreign currency contracts hedging
anticipated cash flows are designated as cash flow hedges. When
it is determined that a derivative is not highly effective as a
hedge, the Company discontinues hedge accounting prospectively.
Any gain or loss deferred through that date remains in AOCE
until the forecasted transaction occurs, at which time it is
reclassified to the consolidated statements of operations. To
the extent the transaction is no longer deemed probable of
occurring, hedge accounting treatment is discontinued and
amounts deferred would be reclassified to the consolidated
statements of operations. In the event hedge accounting
requirements are not met, gains and losses on such instruments
are included currently in the consolidated statements of
operations. The Company uses derivatives to economically hedge
intercompany loans denominated in foreign currencies. Due to the
short-term nature of the derivative contracts involved, the
Company does not use hedge accounting for these contracts.
The Company also uses interest rate swap agreements to adjust
the amount of long-term debt subject to fixed interest rates.
The interest rate swaps are matched with specific fixed rate
long-term debt obligations and are designated as fair value
hedges of the change in fair value of the related debt
obligations. These agreements are recorded at their fair value
as an asset or liability. Gains and losses on these contracts
are included in the consolidated statements of operations and
are wholly offset by changes in the fair value of the related
long-term debt. These hedges are considered to be perfectly
effective under current accounting guidance. The interest rate
swap contracts are with a number of major financial institutions
in order to minimize counterparty credit risk. The Company
believes that it is unlikely that any of its counterparties will
be unable to perform under the terms of the contracts.
Accounting
for Stock-Based Compensation
The Company has a stock-based employee compensation plan for
employees and non-employee members of the Companys Board
of Directors. Under this plan the Company may grant stock
options at or above the fair market value of the Companys
stock, as well as restricted stock, restricted stock units and
contingent stock performance awards. All awards are measured at
fair value at the date of the grant and amortized as expense on
a straight-line basis over the requisite service period of the
award. For awards contingent upon Company performance, the
measurement of the expense for these awards is based on the
Companys current estimate of its performance over the
performance period. See note 13 for further discussion.
Net
Earnings Per Common Share
Basic net earnings per share is computed by dividing net
earnings by the weighted average number of shares outstanding
for the year. Diluted net earnings per share is similar except
that the weighted average number of shares outstanding is
increased by dilutive securities, and net earnings are adjusted
for certain
52
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
amounts related to dilutive securities. Dilutive securities
include shares issuable under convertible debt, as well as
shares issuable upon exercise of stock options and warrants for
which the market price exceeds the exercise price, less shares
which could have been purchased by the Company with the related
proceeds. Options totaling 94, 5,784 and 3,491 for 2010, 2009
and 2008, respectively, were excluded from the calculation of
diluted earnings per share because to include them would have
been antidilutive.
A reconciliation of net earnings and average number of shares
for each of the three fiscal years ended December 26, 2010
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Net earnings
|
|
$
|
397,752
|
|
|
|
397,752
|
|
|
|
374,930
|
|
|
|
374,930
|
|
|
|
306,766
|
|
|
|
306,766
|
|
Interest expense on contingent convertible debentures due 2021,
net of tax
|
|
|
|
|
|
|
1,124
|
|
|
|
|
|
|
|
4,328
|
|
|
|
|
|
|
|
4,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings
|
|
$
|
397,752
|
|
|
|
398,876
|
|
|
|
374,930
|
|
|
|
379,258
|
|
|
|
306,766
|
|
|
|
311,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
|
139,079
|
|
|
|
139,079
|
|
|
|
139,487
|
|
|
|
139,487
|
|
|
|
140,877
|
|
|
|
140,877
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent convertible debentures due 2021
|
|
|
|
|
|
|
3,024
|
|
|
|
|
|
|
|
11,566
|
|
|
|
|
|
|
|
11,566
|
|
Options, warrants, and other share-based awards
|
|
|
|
|
|
|
3,567
|
|
|
|
|
|
|
|
1,727
|
|
|
|
|
|
|
|
2,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent shares
|
|
|
139,079
|
|
|
|
145,670
|
|
|
|
139,487
|
|
|
|
152,780
|
|
|
|
140,877
|
|
|
|
155,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
2.86
|
|
|
|
2.74
|
|
|
|
2.69
|
|
|
|
2.48
|
|
|
|
2.18
|
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net earnings per share calculations for each of the three
years ended December 26, 2010 include adjustments to add
back to earnings the interest expense, net of tax, incurred on
the Companys senior convertible debentures due 2021, as
well as to add back to outstanding shares the amount of shares
potentially issuable under the contingent conversion feature of
these debentures. During the first and second quarter of 2010,
substantially all of these debentures were converted into shares
of common stock. See note 9 for further information.
53
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
|
|
(2)
|
Other
Comprehensive Earnings (Loss)
|
The Companys other comprehensive earnings (loss) for the
years 2010, 2009 and 2008 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Foreign currency translation adjustments
|
|
$
|
(32,457
|
)
|
|
|
23,782
|
|
|
|
(33,555
|
)
|
Changes in value of
available-for-sale
securities, net of tax
|
|
|
|
|
|
|
504
|
|
|
|
(3,037
|
)
|
Gain (loss) on cash flow hedging activities, net of tax
|
|
|
10,444
|
|
|
|
(24,446
|
)
|
|
|
73,184
|
|
Changes in unrecognized pension and postretirement amounts, net
of tax
|
|
|
(1,812
|
)
|
|
|
8,356
|
|
|
|
(52,582
|
)
|
Reclassifications to earnings, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (gains) losses on cash flow hedging activities
|
|
|
(15,422
|
)
|
|
|
(18,657
|
)
|
|
|
1,409
|
|
Loss on
available-for-sale
securities
|
|
|
|
|
|
|
147
|
|
|
|
897
|
|
Amortization of unrecognized pension and postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
amounts
|
|
|
(11,235
|
)
|
|
|
6,689
|
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
$
|
(50,482
|
)
|
|
|
(3,625
|
)
|
|
|
(12,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2010, 2009 and 2008, net gains (losses) on cash flow hedging
activities reclassified to earnings, net of tax, included gains
(losses) of $(109), $(679), and $1,292, respectively, as a
result of hedge ineffectiveness.
The related tax benefit (expense) of other comprehensive
earnings items was $5,327, $1,322 and $16,022 for the years
2010, 2009 and 2008, respectively. Income tax expense (benefit)
related to reclassification adjustments from other comprehensive
earnings of $8,767, $(331) and $763 in 2010, 2009 and 2008,
respectively, were included in these amounts.
At December 26, 2010, the Company had remaining deferred
gains on hedging instruments, net of tax, of $15,432 in AOCE.
These instruments hedge inventory purchased during the fourth
quarter of 2010 or forecasted to be purchased during 2011 and
2012 and intercompany expenses and royalty payments expected to
be paid or received during 2011 and 2012. These amounts will be
reclassified into the consolidated statement of operations upon
the sale of the related inventory or receipt or payment of the
related royalties and expenses. Of the amount included in AOCE
at December 26, 2010, the Company expects approximately
$11,822 to be reclassified to the consolidated statement of
operations within the next 12 months. However, the amount
ultimately realized in earnings is dependent on the fair value
of the contracts on the settlement dates.
Components of accumulated other comprehensive earnings at
December 26, 2010 and December 27, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Foreign currency translation adjustments
|
|
$
|
62,642
|
|
|
|
95,099
|
|
Gain on cash flow hedging activities, net of tax
|
|
|
15,432
|
|
|
|
20,410
|
|
Unrecognized pension and postretirement amounts, net of tax
|
|
|
(69,925
|
)
|
|
|
(56,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,149
|
|
|
|
58,631
|
|
|
|
|
|
|
|
|
|
|
54
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
|
|
(3)
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Land and improvements
|
|
$
|
6,726
|
|
|
|
6,766
|
|
Buildings and improvements
|
|
|
197,494
|
|
|
|
199,595
|
|
Machinery, equipment and software
|
|
|
398,896
|
|
|
|
393,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
603,116
|
|
|
|
600,039
|
|
Less accumulated depreciation
|
|
|
430,193
|
|
|
|
431,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,923
|
|
|
|
168,475
|
|
Tools, dies and molds, net of accumulated depreciation
|
|
|
60,657
|
|
|
|
52,231
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
233,580
|
|
|
|
220,706
|
|
|
|
|
|
|
|
|
|
|
Expenditures for maintenance and repairs which do not materially
extend the life of the assets are charged to operations as
incurred.
|
|
(4)
|
Goodwill
and Intangibles
|
Goodwill and certain intangible assets relating to rights
obtained in the Companys acquisition of Milton Bradley in
1984 and Tonka in 1991 are not amortized. These rights were
determined to have indefinite lives and total approximately
$75,700. The Companys other intangible assets are
amortized over their remaining useful lives, and accumulated
amortization of these other intangibles is reflected in other
intangibles, net in the accompanying consolidated balance sheets.
The Company performs an annual impairment test on goodwill and
intangible assets with indefinite lives. This annual impairment
test is performed in the fourth quarter of the Companys
fiscal year. In addition, if an event occurs or circumstances
change that indicate that the carrying value may not be
recoverable, the Company will perform an interim impairment test
at that time. For the three fiscal years ended December 26,
2010, no such events occurred. The Company completed its annual
impairment tests in the fourth quarters of 2010, 2009 and 2008
and had no impairment charges.
A portion of the Companys goodwill and other intangible
assets reside in the Corporate segment of the business. For
purposes of impairment testing, these assets are allocated to
the reporting units within the Companys operating
segments. Changes in the carrying amount of goodwill, by
operating segment, for the years ended December 26, 2010
and December 27, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment and
|
|
|
|
|
|
|
U.S. and Canada
|
|
|
International
|
|
|
Licensing
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 27, 2009
|
|
$
|
296,978
|
|
|
|
172,457
|
|
|
|
6,496
|
|
|
|
475,931
|
|
Foreign exchange translation
|
|
|
|
|
|
|
(1,118
|
)
|
|
|
|
|
|
|
(1,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 26, 2010
|
|
$
|
296,978
|
|
|
|
171,339
|
|
|
|
6,496
|
|
|
|
474,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 28, 2008
|
|
$
|
300,496
|
|
|
|
174,001
|
|
|
|
|
|
|
|
474,497
|
|
Foreign exchange translation
|
|
|
|
|
|
|
1,593
|
|
|
|
|
|
|
|
1,593
|
|
Disposal
|
|
|
|
|
|
|
(159
|
)
|
|
|
|
|
|
|
(159
|
)
|
Reallocation
|
|
|
(3,518
|
)
|
|
|
(2,978
|
)
|
|
|
6,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 27, 2009
|
|
$
|
296,978
|
|
|
|
172,457
|
|
|
|
6,496
|
|
|
|
475,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
A summary of the Companys other intangibles, net at
December 26, 2010 and December 27, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Acquired product rights
|
|
$
|
755,214
|
|
|
|
1,099,541
|
|
|
|
|
|
|
|
|
|
Licensed rights of entertainment properties
|
|
|
256,555
|
|
|
|
256,555
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
(586,910
|
)
|
|
|
(877,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets
|
|
|
424,859
|
|
|
|
478,829
|
|
|
|
|
|
|
|
|
|
Product rights with indefinite lives
|
|
|
75,738
|
|
|
|
75,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
500,597
|
|
|
|
554,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In May 2009 the Company amended its license agreement with Lucas
Licensing, Ltd. (Lucas) related to the STAR WARS
brand. The amendment included the extension of the term of the
license for an additional two years, from the end of 2018 to the
end of 2020. In connection with the extension of the license
rights, $45,000 was recorded as an intangible asset during 2009
and will be amortized over the term of the extension. The
amendment also provided for the settlement of certain royalty
audit issues, primarily related to contractual interpretations
associated with the computation of royalties dating back to
1999, and the clarification of certain terms and interpretations
of the agreement on a prospective basis through the end of the
term, including the scope of licensed rights to future developed
properties by Lucas.
The Company will continue to incur amortization expense related
to the use of acquired and licensed rights to produce various
products. The amortization of these product rights will
fluctuate depending on related projected revenues during an
annual period, as well as rights reaching the end of their
useful lives. The Company currently estimates continuing
amortization expense related to the above intangible assets for
the next five years to be approximately:
|
|
|
|
|
2011
|
|
$
|
45,000
|
|
2012
|
|
|
50,000
|
|
2013
|
|
|
51,000
|
|
2014
|
|
|
50,000
|
|
2015
|
|
|
47,000
|
|
|
|
(5)
|
Equity
Method Investment
|
In the second quarter of 2009, the Company acquired a 50%
interest in a joint venture, Hub Television Networks, LLC
(THE HUB, formerly known as DHJV Company LLC), with
Discovery Communications, Inc. (Discovery). THE HUB,
formerly known as the Discovery Kids Network, was established to
create a television network in the United States dedicated to
high-quality childrens and family entertainment and
educational programming. The Company purchased its 50% share in
THE HUB for a payment of $300,000 and certain future payments
based on the value of certain tax benefits expected to be
received by the Company. The present value of the expected
future payments at the acquisition date totaled approximately
$67,900 and was recorded as a component of the Companys
investment in the joint venture. The balance of the associated
liability, including imputed interest, was $72,665 and $71,234
at December 26, 2010 and December 27, 2009,
respectively, and is included as a component of other
liabilities in the accompanying balance sheet.
Voting control of the joint venture is shared
50/50
between the Company and Discovery. The Company has determined
that it does not meet the control requirements to consolidate
the joint venture, and accounts for the investment using the
equity method of accounting. The Companys share in the
earnings (loss) of the joint
56
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
venture for the years ended December 26, 2010 and
December 27, 2009 totaled $(9,323) of loss and $3,856 of
earnings, respectively, and is included as a component of other
(income) expense in the accompanying consolidated statements of
operations.
The Company has entered into a license agreement with the joint
venture that will require the payment of royalties by the
Company to the joint venture based on a percentage of revenue
derived from products related to television shows broadcast by
the joint venture. The license agreement includes a minimum
royalty guarantee of $125,000, payable in 5 annual installments
of $25,000 per year, commencing in 2009, which can be earned out
over approximately a
10-year
period. During 2010 and 2009, the Company paid the first two
annual installments of $25,000 each. The Company and the joint
venture are also parties to an agreement under which the Company
will provide the joint venture with an exclusive first look in
the U.S. to license certain types of programming developed
by the Company based on its intellectual property. In the event
the joint venture licenses the programming from the Company to
air on the network, the joint venture is required to pay the
Company a license fee.
As of December 26, 2010, the Companys interest in the
joint venture totaled $354,612 and is a component of other
assets. The Company enters into certain transactions with the
joint venture including the licensing of television programming
and the purchase of advertising. During 2010 and 2009, these
transactions were not material.
|
|
(6)
|
Program
Production Costs
|
Program production costs consist of the following at
December 26, 2010:
|
|
|
|
|
|
|
2010
|
|
|
Released, less amortization
|
|
$
|
12,852
|
|
In production
|
|
|
19,319
|
|
Development and pre-production
|
|
|
1,417
|
|
Acquired libraries
|
|
|
1,827
|
|
|
|
|
|
|
Total program production costs
|
|
$
|
35,415
|
|
|
|
|
|
|
Based on managements total revenue estimates at
December 26, 2010, approximately 95% of unamortized
television programming costs relating to released productions is
expected to be amortized during the next three years. The
Company expects to amortize, based on current estimates,
approximately $4,600 of the $12,852 of released programs during
fiscal 2011.
At December 26, 2010, acquired program libraries are being
amortized based on estimates of future expected revenues over a
remaining period of approximately 2 years.
|
|
(7)
|
Financing
Arrangements
|
Short-Term
Borrowings
At December 26, 2010, Hasbro had available an unsecured
committed line and unsecured uncommitted lines of credit from
various banks approximating $500,000 and $206,400, respectively.
A significant portion of the short-term borrowings outstanding
at the end of 2010 and 2009 represent borrowings made under, or
supported by, these lines of credit. Borrowings under the lines
of credit were made by certain international affiliates of the
Company on terms and at interest rates generally extended to
companies of comparable creditworthiness in those markets. The
weighted average interest rates of the outstanding borrowings as
of December 26, 2010 and December 27, 2009 were 5.79%
and 1.23%, respectively. The Company had no
57
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
borrowings outstanding under its committed line of credit at
December 26, 2010. During 2010, Hasbros working
capital needs were fulfilled by cash generated from operations
and borrowings under lines of credit.
The unsecured committed line (the Agreement)
provides the Company with a $500,000 committed borrowing
facility through December 2014. The Agreement was entered into
on December 16, 2010 replacing the previous Revolving
Credit Agreement. The Agreement contains certain financial
covenants setting forth leverage and coverage requirements, and
certain other limitations typical of an investment grade
facility, including with respect to liens, mergers and
incurrence of indebtedness. The Company was in compliance with
all covenants as of and for the year ended December 26,
2010.
The Company pays a commitment fee (0.225% as of
December 26, 2010) based on the unused portion of the
facility and interest equal to a Base Rate or Eurocurrency Rate
plus a spread on borrowings under the facility. The Base Rate is
determined based on either the Federal Funds Rate plus a spread,
Prime Rate or Eurocurrency Rate plus a spread. The commitment
fee and the amount of the spread to the Base Rate or
Eurocurrency rate both vary based on the Companys
long-term debt ratings and the Companys leverage. At
December 26, 2010, the interest rate under the facility was
equal to Eurocurrency Rate plus 1.50%.
In January 2011, the Company entered into an agreement with a
group of banks to establish a commercial paper program (the
Program). Under the Program, at the Companys
request the banks may either purchase from the Company, or
arrange for the sale by the Company, of unsecured commercial
paper notes. Under the Program, the Company may issue notes from
time to time up to an aggregate principal amount outstanding at
any given time of $500,000. The maturities of the notes may vary
but may not exceed 397 days. Subject to market conditions,
the notes will be sold under customary terms in the commercial
paper market and will be issued at a discount to par, or
alternatively, will be sold at par and will bear varying
interest rates based on a fixed or floating rate basis. The
interest rates will vary based on market conditions and the
ratings assigned to the notes by the credit rating agencies at
the time of issuance.
Securitization
During the three years ended 2010, the Company was party to an
accounts receivable securitization program whereby the Company
sold, on an ongoing basis, substantially all of its
U.S. trade accounts receivable to a bankruptcy-remote,
special purpose subsidiary, Hasbro Receivables Funding, LLC
(HRF), which is wholly-owned and consolidated by the Company.
HRF, subject to certain conditions, sold, from time to time on a
revolving basis, an undivided fractional ownership interest in
up to $250,000 of eligible domestic receivables to various
multi-party commercial paper conduits supported by a committed
liquidity facility. During the period from the first day of the
October fiscal month through the last day of the following
January fiscal month, this limit increased to $300,000.
Subsequent to December 27, 2009, in January 2010, the
agreement was amended on a prospective basis to eliminate the
additional $50,000 available from the first day of the October
fiscal month through the last day of the following January
fiscal month. Under the terms of the agreement, new receivables
are added to the pool as collections reduce previously held
receivables. The Company serviced, administered, and collected
the receivables on behalf of HRF and the conduits. The net
proceeds of sale were less than the face amount of accounts
receivable sold by an amount that approximates a financing cost.
Effective January 28, 2011, this program was terminated.
As of December 26, 2010 and December 27, 2009, there
were no amounts utilized under the receivables facility. The
Company did not utilize the facility in 2010. As of
December 26, 2010 the Company had $250,000 available to
sell under the facility. During 2009 and 2008, the transactions
were accounted for as sales under then current accounting
guidance. During 2009 and 2008, the loss on the sale of
receivables totaled $2,514 and $5,302, respectively, which is
recorded in selling, distribution and administration expenses in
the accompanying consolidated statements of operations. The
discount on interests sold was approximately equal to the
interest rate paid by the conduits to the holders of the
commercial paper plus other fees.
58
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Components of accrued liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Royalties
|
|
$
|
121,037
|
|
|
|
141,143
|
|
Advertising
|
|
|
86,257
|
|
|
|
92,614
|
|
Payroll and management incentives
|
|
|
70,064
|
|
|
|
91,298
|
|
Non-income based taxes
|
|
|
42,644
|
|
|
|
33,069
|
|
Other
|
|
|
251,714
|
|
|
|
270,263
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
571,716
|
|
|
|
628,387
|
|
|
|
|
|
|
|
|
|
|
Components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
6.35% Notes Due 2040
|
|
$
|
500,000
|
|
|
|
499,900
|
|
|
|
|
|
|
|
|
|
6.125% Notes Due 2014
|
|
|
437,786
|
|
|
|
462,698
|
|
|
|
422,275
|
|
|
|
465,545
|
|
6.30% Notes Due 2017
|
|
|
350,000
|
|
|
|
382,830
|
|
|
|
350,000
|
|
|
|
375,585
|
|
2.75% Convertible Debentures Due 2021
|
|
|
|
|
|
|
|
|
|
|
249,828
|
|
|
|
373,515
|
|
6.60% Debentures Due 2028
|
|
|
109,895
|
|
|
|
110,038
|
|
|
|
109,895
|
|
|
|
110,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
1,397,681
|
|
|
|
1,455,466
|
|
|
|
1,131,998
|
|
|
|
1,325,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The carrying cost of the 6.125% Notes Due 2014 includes
principal amounts of $425,000 as well as fair value adjustments
of $12,786 and $(2,725) at December 26, 2010 and
December 27, 2009, respectively, related to interest rate
swaps. All other carrying costs represent principal amounts.
Total principal amounts of long-term debt at December 26,
2010 and December 27, 2009 were $1,384,895 and $1,134,723,
respectively.
The fair value of the convertible debt is based on an average of
the prices of trades occurring around the balance sheet date.
The fair values of the Companys other long-term borrowings
are measured using a combination of broker quotations when
available and discounted future cash flows. The fair value of
the interest rate swaps are measured based on the present value
of future cash flows using the swap curve as of the date of
valuation.
In March 2010 the Company issued $500,000 of Notes that are due
in 2040 (the Notes). The Notes bear interest at a
rate of 6.35%. The Company may redeem the Notes at its option at
the greater of the principal amount of the Notes or the present
value of the remaining scheduled payments discounted using the
effective interest rate on applicable U.S. Treasury bills
at the time of repurchase.
In May 2009 the Company issued $425,000 of Notes that are due in
2014 (the Notes). The Notes bear interest at a rate
of 6.125%, which may be adjusted upward in the event that the
Companys credit rating from Moodys Investor
Services, Inc., Standard & Poors Ratings
Services or Fitch Ratings is reduced to Ba1, BB+, or BB+,
respectively, or below. At December 26, 2010, the
Companys ratings from Moodys Investor Services,
Inc., Standard & Poors Rating Services and Fitch
ratings were Baa2, BBB, and BBB+, respectively. The interest
rate adjustment is dependent on the degree of decrease of the
Companys ratings and could range from 0.25% to a maximum
of 2.00%. The Company may redeem the Notes at its option at the
greater of the
59
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
principal amount of the Notes or the present value of the
remaining scheduled payments discounted using the effective
interest rate on applicable U.S. Treasury bills at the time
of repurchase.
The Company is party to a series of interest rate swap
agreements to adjust the amount of debt that is subject to fixed
interest rates. The interest rate swaps are matched with the
6.125% Notes Due 2014 and accounted for as fair value
hedges of those notes. The interest rate swaps have a total
notional amount of $400,000 with maturities in 2014. In each of
the contracts, the Company receives payments based upon a fixed
interest rate of 6.125%, which matches the interest rate of the
notes being hedged, and makes payments based upon a floating
rate based on Libor. These contracts are designated and
effective as hedges of the change in the fair value of the
associated debt. At December 26, 2010 and December 27,
2009, the fair value of these contracts was an asset (liability)
of $12,786 and $(2,725), respectively, which is recorded in
other assets and other liabilities with a corresponding fair
value adjustment to increase (decrease) long-term debt. The
Company recorded a gain (loss) of $15,511 and $(2,725) on these
instruments in other (income) expense, net for the years ended
December 26, 2010 and December 27, 2009, respectively,
relating to the change in fair value of such derivatives, wholly
offsetting gains and losses from the change in fair value of the
associated long-term debt.
In 2008 the Company repaid $135,092 of 6.15% notes due in
July 2008.
At December 27, 2009, the Company had $249,828 outstanding
in principal amount of contingent convertible debentures due
2021. If the closing price of the Companys common stock
exceeded $23.76 for at least 20 trading days, within the 30
consecutive trading day period ending on the last trading day of
the calendar quarter, the holders had the right to convert the
notes to shares of the Companys common stock at the
initial conversion price of $21.60 in the next calendar quarter.
During the first quarter of 2010, holders of these debentures
converted $111,177 of these debentures which resulted in the
issuance of 5,147 shares of common stock. In addition, if
the closing price of the Companys common stock exceeded
$27.00 for at least 20 trading days in any thirty day period,
the Company had the right to call the debentures by giving
notice to the holders of the debentures. During a prescribed
notice period following a call by the Company, the holders of
the debentures had the right to convert their debentures in
accordance with the conversion terms described above. On
March 29, 2010, the Company gave notice of its election to
redeem all of the outstanding debentures on April 29, 2010
at a redemption price to be paid in cash of $1,011.31 per $1,000
principal amount, which was equal to the par value thereof plus
accrued and unpaid cash interest through April 29, 2010.
During the notice period, $138,467 of the debentures were
converted by the holders, resulting in the issuance of
6,410 shares of common stock. The remaining debentures were
redeemed at a total cost of $186, which included accrued
interest through the redemption date.
At December 26, 2010, as detailed above, the Companys
6.125% Notes mature in 2014. All of the Companys
other long-term borrowings have contractual maturities that
occur subsequent to 2015.
60
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Income taxes attributable to earnings before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
35,232
|
|
|
|
87,053
|
|
|
|
68,514
|
|
State and local
|
|
|
1,931
|
|
|
|
4,142
|
|
|
|
251
|
|
International
|
|
|
47,633
|
|
|
|
44,436
|
|
|
|
40,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,796
|
|
|
|
135,631
|
|
|
|
109,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
26,269
|
|
|
|
17,387
|
|
|
|
22,917
|
|
State and local
|
|
|
901
|
|
|
|
993
|
|
|
|
1,964
|
|
International
|
|
|
(1,998
|
)
|
|
|
756
|
|
|
|
113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,172
|
|
|
|
19,136
|
|
|
|
24,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
109,968
|
|
|
|
154,767
|
|
|
|
134,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain income tax (benefits) expenses, not reflected in income
taxes in the consolidated statements of operations totaled
$(87,367) in 2010, $(2,905) in 2009, and $(29,287) in 2008.
These income tax (benefits) expenses relate primarily to the
reversal through additional paid in capital of deferred tax
liabilities relating to the Companys contingent
convertible debentures upon the conversion of these debentures
in 2010. These amounts also include derivative and pension
amounts recorded in AOCE and stock options. In 2010, 2009, and
2008, the deferred tax portion of the total (benefit) expense
was $(64,700), $(1,041), and $(26,555), respectively.
A reconciliation of the statutory United States federal income
tax rate to Hasbros effective income tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes, net
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
1.0
|
|
Investment of foreign earnings in U.S.
|
|
|
|
|
|
|
|
|
|
|
3.5
|
|
Tax on international earnings
|
|
|
(11.2
|
)
|
|
|
(7.5
|
)
|
|
|
(7.9
|
)
|
Exam settlements and statute expirations
|
|
|
(4.4
|
)
|
|
|
(0.5
|
)
|
|
|
(0.8
|
)
|
Other, net
|
|
|
1.9
|
|
|
|
1.5
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.7
|
%
|
|
|
29.2
|
%
|
|
|
30.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2010 and 2009, the Company indefinitely reinvested all
current year international net earnings outside the U.S. In
2008, the Company designated $60,000 of the international net
earnings during that year that will not be indefinitely
reinvested outside of the U.S. The incremental income tax
on these amounts, representing the difference between the
U.S. federal income tax rate and the income tax rates in
the applicable international jurisdictions, is a component of
deferred income tax expense.
61
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
The components of earnings before income taxes, determined by
tax jurisdiction, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
168,436
|
|
|
|
248,654
|
|
|
|
208,125
|
|
International
|
|
|
339,284
|
|
|
|
281,043
|
|
|
|
232,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
507,720
|
|
|
|
529,697
|
|
|
|
441,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred income tax expense (benefit) arise
from various temporary differences and relate to items included
in the statements of operations as well as items recognized in
other comprehensive earnings. The tax effects of temporary
differences that give rise to significant portions of the
deferred tax assets and liabilities at December 26, 2010
and December 27, 2009 are:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
21,095
|
|
|
|
17,314
|
|
Inventories
|
|
|
18,723
|
|
|
|
15,937
|
|
Losses and tax credit carryforwards
|
|
|
22,395
|
|
|
|
29,623
|
|
Operating expenses
|
|
|
40,835
|
|
|
|
40,419
|
|
Pension
|
|
|
29,823
|
|
|
|
26,566
|
|
Other compensation
|
|
|
45,175
|
|
|
|
45,383
|
|
Postretirement benefits
|
|
|
15,435
|
|
|
|
14,463
|
|
Tax sharing agreement
|
|
|
26,276
|
|
|
|
26,352
|
|
Other
|
|
|
25,477
|
|
|
|
31,683
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
245,234
|
|
|
|
247,740
|
|
Valuation allowance
|
|
|
(10,776
|
)
|
|
|
(11,641
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
234,458
|
|
|
|
236,099
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
|
|
|
|
56,787
|
|
International earnings not indefinitely reinvested
|
|
|
25,903
|
|
|
|
25,903
|
|
Depreciation and amortization of long-lived assets
|
|
|
61,274
|
|
|
|
40,144
|
|
Equity method investment
|
|
|
23,617
|
|
|
|
26,941
|
|
Other
|
|
|
4,715
|
|
|
|
7,227
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
115,509
|
|
|
|
157,002
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
118,949
|
|
|
|
79,097
|
|
|
|
|
|
|
|
|
|
|
Hasbro has a valuation allowance for certain deferred tax assets
at December 26, 2010 of $10,776, which is a decrease of
$865 from $11,641 at December 27, 2009. The valuation
allowance pertains to certain International loss carryforwards,
some of which have no expiration and others that would expire
beginning in 2013.
Based on Hasbros history of taxable income and the
anticipation of sufficient taxable income in years when the
temporary differences are expected to become tax deductions, the
Company believes that it will realize the benefit of the
deferred tax assets, net of the existing valuation allowance.
62
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Deferred income taxes of $64,536 and $54,321 at the end of 2010
and 2009, respectively, are included as a component of prepaid
expenses and other current assets, and $57,613 and $31,537,
respectively, are included as a component of other assets. At
the same dates, deferred income taxes of $2,135 and $1,456,
respectively, are included as a component of accrued
liabilities, and $1,065 and $5,305, respectively, are included
as a component of other liabilities.
A reconciliation of unrecognized tax benefits, excluding
potential interest and penalties, for the fiscal years ended
December 26, 2010, December 27, 2009, and
December 28, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of year
|
|
$
|
97,857
|
|
|
|
79,456
|
|
|
|
58,855
|
|
Gross increases in prior period tax positions
|
|
|
706
|
|
|
|
1,430
|
|
|
|
803
|
|
Gross decreases in prior period tax positions
|
|
|
(36,010
|
)
|
|
|
(14,250
|
)
|
|
|
(2,612
|
)
|
Gross increases in current period tax positions
|
|
|
34,598
|
|
|
|
34,189
|
|
|
|
25,101
|
|
Decreases related to settlements with tax authorities
|
|
|
(5,550
|
)
|
|
|
(269
|
)
|
|
|
(1,229
|
)
|
Decreases from the expiration of statute of limitations
|
|
|
(492
|
)
|
|
|
(2,699
|
)
|
|
|
(1,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
91,109
|
|
|
|
97,857
|
|
|
|
79,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the $91,109 balance as of December 26, 2010 is
recognized, approximately $77,000 would decrease the effective
tax rate in the period in which each of the benefits is
recognized. The remaining amount would be offset by the reversal
of related deferred tax assets.
During 2010, 2009, and 2008 the Company recognized $3,171,
$3,405, and $3,357, respectively, of potential interest and
penalties, which are included as a component of income taxes in
the accompanying consolidated statements of operations. At
December 26, 2010, December 27, 2009, and
December 28, 2008, the Company had accrued potential
interest and penalties of $14,466, $17,938, and $13,660,
respectively.
The Company and its subsidiaries file income tax returns in the
United States and various state and international jurisdictions.
In the normal course of business, the Company is regularly
audited by U.S. federal, state and local and international
tax authorities in various tax jurisdictions. The Company is no
longer subject to U.S. federal income tax examinations for
years before 2006. With few exceptions, the Company is no longer
subject to U.S. state or local and
non-U.S. income
tax examinations by tax authorities in its major jurisdictions
for years before 2006.
The U.S. Internal Revenue Service commenced an examination
related to the 2006 and 2007 U.S. federal income tax
returns. The Company is also under income tax examination in
several U.S. state and local and
non-U.S. jurisdictions.
The U.S. Internal Revenue Service recently completed an
examination related to 2004 and 2005, including review by the
Joint Committee on Taxation. During 2010, as the result of the
completion of this examination, the Company recognized $24,167
of previously accrued unrecognized tax benefits, including the
reversal of related accrued interest, primarily related to the
deductibility of certain expenses, as well as the tax treatment
of certain subsidiary and other transactions. Of this amount,
$7,032 was recorded as a reduction of deferred tax assets and
the remainder as a reduction of income tax expense. The total
income tax benefit resulting from the completion of the
examination, including other adjustments, totaled approximately
$21,000 during 2010.
In connection with tax examinations in Mexico for the years 2000
to 2005, the Company has received tax assessments totaling
approximately $178,970, which include interest, penalties and
inflation updates, related to transfer pricing which the Company
is vigorously defending. In order to continue the process of
defending its position, the Company was required to guarantee
the amount of the assessments for the years 2000 to 2003, as is
usual and customary in Mexico with respect to these matters.
Accordingly, as of December 26, 2010, bonds
63
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
totaling approximately $114,890 (at year-end 2010 exchange
rates) have been provided to the Mexican government related to
the 2000 to 2003 assessments, allowing the Company to defend its
positions. The Company currently does not expect to be required
to guarantee the amount of the 2004 or 2005 assessments. The
Company expects to be successful in sustaining its position with
respect to these assessments as well as similar positions that
may be taken by the Mexican tax authorities for periods
subsequent to 2005.
The Company believes it is reasonably possible that certain tax
examinations and statutes of limitations may be concluded and
will expire within the next 12 months, and that
unrecognized tax benefits, excluding potential interest and
penalties, may decrease by up to approximately $2,200,
substantially all of which would be recorded as a tax benefit in
the statement of operations. In addition, approximately $300 of
potential interest and penalties related to these amounts would
also be recorded as a tax benefit in the statement of
operations. These unrecognized tax benefits primarily relate to
both the timing and the nature of the deductibility of certain
expenses, as well as the tax treatment of certain subsidiary and
other transactions.
The cumulative amount of undistributed earnings of Hasbros
international subsidiaries held for indefinite reinvestment is
approximately $1,130,000 at December 26, 2010. In the event
that all international undistributed earnings were remitted to
the United States, the amount of incremental taxes would be
approximately $268,000.
In April 2010 the Companys Board of Directors authorized
the repurchase of up to $625,000 in common stock after four
previous authorizations dated May 2005, July 2006, August 2007
and February 2008 with a cumulative authorized repurchase amount
of $1,700,000 were fully utilized. Purchases of the
Companys common stock may be made from time to time,
subject to market conditions, and may be made in the open market
or through privately negotiated transactions. The Company has no
obligation to repurchase shares under the authorization and the
timing, actual number, and the value of the shares which are
repurchased will depend on a number of factors, including the
price of the Companys common stock. In 2010, the Company
repurchased 15,763 shares at an average price of $40.37.
The total cost of these repurchases, including transaction
costs, was $636,681. At December 26, 2010, $150,068
remained under this authorization.
|
|
(12)
|
Fair
Value of Financial Instruments
|
The Company measures certain assets at fair value in accordance
with current accounting standards. The fair value hierarchy
consists of three levels: Level 1 fair values are
valuations based on quoted market prices in active markets for
identical assets or liabilities that the entity has the ability
to access; Level 2 fair values are those valuations based
on quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable data for
substantially the full term of the assets or liabilities; and
Level 3 fair values are valuations based on inputs that are
supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
Current accounting standards permit entities to choose to
measure many financial instruments and certain other items at
fair value and establishes presentation and disclosure
requirements designed to facilitate comparisons between entities
that choose different measurement attributes for similar assets
and liabilities. The Company has elected the fair value option
for certain investments. At December 26, 2010 and
December 27, 2009, these investments totaled $21,767 and
$21,108, respectively, and are included in prepaid expenses and
other current assets in the consolidated balance sheet. The
Company recorded net gains of $1,218 and $1,019 on these
investments in other (income) expense, net for the years ended
December 26, 2010 and December 27, 2009, respectively,
relating to the change in fair value of such investments.
64
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
At December 26, 2010 and December 27, 2009, the Company had
the following assets measured at fair value in its consolidated
balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Fair
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
December 26, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
21,791
|
|
|
|
24
|
|
|
|
21,767
|
|
|
|
|
|
Derivatives
|
|
|
38,092
|
|
|
|
|
|
|
|
28,937
|
|
|
|
9,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
59,883
|
|
|
|
24
|
|
|
|
50,704
|
|
|
|
9,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities
|
|
$
|
21,151
|
|
|
|
43
|
|
|
|
21,108
|
|
|
|
|
|
Derivatives
|
|
|
26,631
|
|
|
|
|
|
|
|
19,823
|
|
|
|
6,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,782
|
|
|
|
43
|
|
|
|
40,931
|
|
|
|
6,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a portion of the Companys
available-for-sale
securities, the Company is able to obtain quoted prices from
stock exchanges to measure the fair value of these securities.
Certain other
available-for-sale
securities held by the Company are valued at the net asset value
which is quoted on a private market that is not active; however,
the unit price is predominantly based on underlying investments
which are traded on an active market. The Companys
derivatives consist primarily of foreign currency forward
contracts. The Company uses current forward rates of the
respective foreign currencies to measure the fair value of these
contracts. The Companys derivatives also include interest
rate swaps used to adjust the amount of long-term debt subject
to fixed interest rates. The fair values of the interest rate
swaps are measured based on the present value of future cash
flows using the swap curve as of the valuation date. The
remaining derivative securities consist of warrants to purchase
common stock. The Company uses the Black-Scholes model to value
these warrants. One of the inputs used in the Black-Scholes
model, historical volatility, is considered an unobservable
input in that it reflects the Companys own assumptions
about the inputs that market participants would use in pricing
the asset or liability. The Company believes that this is the
best information available for use in the fair value
measurement. There were no changes in these valuation techniques
during 2010.
The following is a reconciliation of the beginning and ending
balances of the fair value measurements of the Companys
warrants to purchase common stock that use significant
unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance at beginning of year
|
|
$
|
6,808
|
|
|
|
4,591
|
|
Gain (loss) from change in fair value
|
|
|
2,347
|
|
|
|
(776
|
)
|
Warrant modification
|
|
|
|
|
|
|
2,993
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
9,155
|
|
|
|
6,808
|
|
|
|
|
|
|
|
|
|
|
In the second quarter of 2009, certain warrants held by the
Company were modified in connection with the amendment of an
existing license agreement. The fair value of the modification
was recorded as deferred revenue and is being amortized to
revenue over the term of the amended license agreement.
65
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
|
|
(13)
|
Stock
Options, Other Stock Awards and Warrants
|
Hasbro has reserved 20,364 shares of its common stock for
issuance upon exercise of options and the grant of other awards
granted or to be granted under stock incentive plans for
employees and for non-employee members of the Board of Directors
(collectively, the plans). These options and other
awards generally vest in equal annual amounts over three to five
years. The plans provide that options be granted at exercise
prices not less than fair market value on the date the option is
granted and options are adjusted for such changes as stock
splits and stock dividends. Generally, options are exercisable
for periods of no more than ten years after date of grant.
Certain of the plans permit the granting of awards in the form
of stock, stock appreciation rights, stock awards and cash
awards in addition to stock options. Upon exercise in the case
of stock options, grant in the case of restricted stock or
vesting in the case of performance based contingent stock
grants, shares are issued out of available treasury shares.
The Company on occasion will issue restricted stock or grant
restricted stock units to certain key employees. In 2010 and
2008, the Company granted restricted stock units of 138 and 60,
respectively. The 2010 and 2008 grants had weighted average
grant date fair values of $41.93 and $34.61. In 2009 the Company
did not issue any restricted stock or restricted stock units.
These shares or units are nontransferable and subject to
forfeiture for periods prescribed by the Company. These awards
are valued at the market value of the underlying common stock at
the date of grant and are subsequently amortized over the
periods during which the restrictions lapse, generally between
three and five years. There were no forfeitures in 2010 or 2008.
In 2009, the Company had forfeitures of 2 units granted in
2008. During 2010, 2009 and 2008, the Company recognized
compensation expense, net of forfeitures, on these awards of
$1,209, $768 and $661, respectively. At December 26, 2010,
the amount of total unrecognized compensation cost related to
restricted stock units is $5,583 and the weighted average period
over which this will be expensed is 53 months. In 2010, the
Company issued 12 shares related to restricted stock
granted in 2007. At December 26, 2010, the Company has
unvested and unissued awards outstanding of 196 shares with
a weighted average grant date fair value of $39.77.
In 2010, 2009 and 2008, as part of its annual equity grant to
executive officers and certain other employees, the Compensation
Committee of the Companys Board of Directors approved the
issuance of contingent stock performance awards (the Stock
Performance Awards). These awards provide the recipients
with the ability to earn shares of the Companys common
stock based on the Companys achievement of stated
cumulative diluted earnings per share and cumulative net revenue
targets over the three fiscal years ended December 2012,
December 2011, and December 2010 for the 2010, 2009 and 2008
awards, respectively. Each Stock Performance Award has a target
number of shares of common stock associated with such award
which may be earned by the recipient if the Company achieves the
stated diluted earnings per share and revenue targets. The
ultimate amount of the award may vary, depending on actual
results. Awards prior to 2010 may vary from 0% to 125% of
the target number of shares. Awards for 2010 may vary from
0% to 200% of the target number of shares. The Compensation
Committee of the Companys Board of Directors has
discretionary power to reduce the amount of the award regardless
of whether the stated targets are met.
66
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Information with respect to Stock Performance Awards for 2010,
2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Outstanding at beginning of year
|
|
|
1,639
|
|
|
|
1,830
|
|
|
|
1,194
|
|
Granted
|
|
|
883
|
|
|
|
631
|
|
|
|
696
|
|
Forfeited
|
|
|
(64
|
)
|
|
|
(52
|
)
|
|
|
(60
|
)
|
Vested
|
|
|
(580
|
)
|
|
|
(770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1,878
|
|
|
|
1,639
|
|
|
|
1,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant-date fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
$
|
33.44
|
|
|
|
22.31
|
|
|
|
27.10
|
|
Forfeited
|
|
$
|
26.75
|
|
|
|
26.53
|
|
|
|
24.31
|
|
Vested
|
|
$
|
28.74
|
|
|
|
19.06
|
|
|
|
|
|
Outstanding at end of year
|
|
$
|
28.61
|
|
|
|
26.22
|
|
|
|
24.15
|
|
Stock Performance Awards granted during 2010, 2009 and 2008
include 80, 116 and 100 shares related to the 2008, 2007
and 2006 awards, respectively, reflecting an increase in the
ultimate amount of the awards issued or expected to be issued
based on the Companys actual results during the
performance period. These shares are excluded from the
calculation of the weighted average grant-date fair value of
Stock Performance Awards granted during 2010, 2009 and 2008.
During 2010, 2009 and 2008, the Company recognized $17,144,
$15,361 and $17,422, respectively, of expense relating to these
awards. If minimum targets, as detailed under the award, are not
met, no additional compensation cost will be recognized and any
previously recognized compensation cost will be reversed. These
awards were valued at the market value of the underlying common
stock at the dates of grant and are being expensed over the
three fiscal years ended December 2012, December 2011, and
December 2010 for the 2010, 2009 and 2008 awards, respectively.
At December 26, 2010, the amount of total unrecognized
compensation cost related to these awards is approximately
$22,901 and the weighted average period over which this will be
expensed is 27 months.
In 2010, the Company granted awards to certain employees
consisting of cash settled restricted stock units. Under these
awards, the recipients are granted restricted stock units that
vest over three years. At the end of the vesting period, the
fair value of those shares will be paid in cash to the
recipient. Under no circumstances will shares be issued. The
Company accounts for these awards as a liability and marks the
vested portion of the award to market through the statement of
operations. In 2010, the Company recognized expense of $1,004
related to these awards.
Total compensation expense related to stock options, restricted
stock units and Stock Performance Awards for the years ended
December 26, 2010, December 27, 2009 and
December 28, 2008 was $31,952, $28,547, and $33,961,
respectively, and was recorded as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cost of sales
|
|
$
|
349
|
|
|
|
462
|
|
|
|
471
|
|
Product development
|
|
|
2,576
|
|
|
|
2,205
|
|
|
|
2,551
|
|
Selling, distribution and administration
|
|
|
29,027
|
|
|
|
25,880
|
|
|
|
30,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,952
|
|
|
|
28,547
|
|
|
|
33,961
|
|
Income tax benefit
|
|
|
10,658
|
|
|
|
9,293
|
|
|
|
12,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,294
|
|
|
|
19,254
|
|
|
|
21,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Information with respect to stock options for the three years
ended December 26, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Outstanding at beginning of year
|
|
|
13,347
|
|
|
|
11,651
|
|
|
|
14,495
|
|
Granted
|
|
|
2,420
|
|
|
|
2,955
|
|
|
|
3,177
|
|
Exercised
|
|
|
(4,107
|
)
|
|
|
(476
|
)
|
|
|
(5,753
|
)
|
Expired or forfeited
|
|
|
(268
|
)
|
|
|
(783
|
)
|
|
|
(268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
11,392
|
|
|
|
13,347
|
|
|
|
11,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
6,256
|
|
|
|
7,839
|
|
|
|
6,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
$
|
33.96
|
|
|
|
22.73
|
|
|
|
27.10
|
|
Exercised
|
|
$
|
22.78
|
|
|
|
19.35
|
|
|
|
21.02
|
|
Expired or forfeited
|
|
$
|
25.92
|
|
|
|
31.53
|
|
|
|
27.49
|
|
Outstanding at end of year
|
|
$
|
25.61
|
|
|
|
23.23
|
|
|
|
23.76
|
|
Exercisable at end of year
|
|
$
|
23.03
|
|
|
|
21.70
|
|
|
|
21.01
|
|
With respect to the 11,392 outstanding options and 6,256 options
exercisable at December 26, 2010, the weighted average
remaining contractual life of these options was 4.24 years
and 3.17 years, respectively. The aggregate intrinsic value
of the options outstanding and exercisable at December 26,
2010 was $260,960 and $159,503, respectively.
The Company uses the Black-Scholes valuation model in
determining the fair value of stock options. The weighted
average fair value of options granted in fiscal 2010, 2009 and
2008 was $7.24, $5.16 and $4.46, respectively. The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants in the fiscal years 2010,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
|
2.17
|
%
|
|
|
1.87
|
%
|
|
|
2.71
|
%
|
Expected dividend yield
|
|
|
2.97
|
%
|
|
|
3.52
|
%
|
|
|
2.95
|
%
|
Expected volatility
|
|
|
30
|
%
|
|
|
36
|
%
|
|
|
22
|
%
|
Expected option life
|
|
|
5 years
|
|
|
|
4 years
|
|
|
|
5 years
|
|
The intrinsic values, which represent the difference between the
fair market value on the date of exercise and the exercise price
of the option, of the options exercised in fiscal 2010, 2009 and
2008 were $80,783, $4,044 and $83,747, respectively.
At December 26, 2010, the amount of total unrecognized
compensation cost related to stock options was $20,012 and the
weighted average period over which this will be expensed is
23 months.
In 2010, 2009 and 2008, the Company granted 36, 60 and
36 shares of common stock, respectively, to its
non-employee members of its Board of Directors. Of these shares,
the receipt of 30 shares from the 2010 grant,
51 shares from the 2009 grant and 30 shares from the
2008 grant has been deferred to the date upon which the
respective director ceases to be a member of the Companys
Board of Directors. These awards were valued at the market value
of the underlying common stock at the date of grant and vested
upon grant. In connection with these grants, compensation cost
of $1,440, $1,365 and $1,260 was recorded in selling,
distribution and administration expense in 2010, 2009 and 2008,
respectively.
68
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
|
|
(14)
|
Pension,
Postretirement and Postemployment Benefits
|
Pension
and Postretirement Benefits
The Company recognizes an asset or liability for each of its
defined benefit pension plans equal to the difference between
the projected benefit obligation of the plan and the fair value
of the plans assets. Actuarial gains and losses and prior
service costs that have not yet been included in income are
recognized in the balance sheet in AOCE.
Expenses related to the Companys defined benefit and
defined contribution plans for 2010, 2009 and 2008 were
approximately $34,900, $41,100 and $33,400, respectively. Of
these amounts, $29,000, $27,600 and $32,400, respectively,
related to defined contribution plans in the United States and
certain international affiliates. The remainder of the expense
relates to defined benefit plans discussed below.
United
States Plans
Prior to 2008, substantially all United States employees were
covered under at least one of several non-contributory defined
benefit pension plans maintained by the Company. Benefits under
the two major plans which principally cover non-union employees,
were based primarily on salary and years of service. One of
these major plans is funded. Benefits under the remaining plans
are based primarily on fixed amounts for specified years of
service. Of these remaining plans, the plan covering union
employees is also funded. In 2007, for the two major plans
covering its non-union employees, the Company froze benefits
being accrued effective at the end of December 2007.
At December 26, 2010, the measurement date, the projected
benefit obligations of the funded plans were in excess of the
fair value of the plans assets in the amount of $25,086
while the unfunded plans of the Company had an aggregate
accumulated and projected benefit obligation of $38,281. At
December 27, 2009, the projected benefit obligations of the
funded plans were in excess of the fair value of the plans
assets in the amount of $19,395 while the unfunded plans of the
Company had an aggregate accumulated and projected benefit
obligation of $36,448.
Hasbro also provides certain postretirement health care and life
insurance benefits to eligible employees who retire and have
either attained age 65 with 5 years of service or
age 55 with 10 years of service. The cost of providing
these benefits on behalf of employees who retired prior to 1993
is and will continue to be substantially borne by the Company.
The cost of providing benefits on behalf of substantially all
employees who retire after 1992 is borne by the employee. The
plan is not funded.
69
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Reconciliations of the beginning and ending balances for the
years ended December 26, 2010 and December 27, 2009
for the projected benefit obligation and the fair value of plan
assets are included below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change in Projected Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation beginning
|
|
$
|
306,220
|
|
|
|
300,334
|
|
|
|
30,873
|
|
|
|
32,583
|
|
Service cost
|
|
|
2,018
|
|
|
|
1,642
|
|
|
|
609
|
|
|
|
627
|
|
Interest cost
|
|
|
17,014
|
|
|
|
17,358
|
|
|
|
1,795
|
|
|
|
1,903
|
|
Actuarial loss (gain)
|
|
|
28,197
|
|
|
|
20,972
|
|
|
|
2,903
|
|
|
|
(2,291
|
)
|
Plan amendment
|
|
|
|
|
|
|
|
|
|
|
273
|
|
|
|
|
|
Benefits paid
|
|
|
(18,647
|
)
|
|
|
(20,531
|
)
|
|
|
(1,961
|
)
|
|
|
(1,949
|
)
|
Settlements
|
|
|
|
|
|
|
(12,272
|
)
|
|
|
|
|
|
|
|
|
Expenses paid
|
|
|
(1,290
|
)
|
|
|
(1,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation ending
|
|
$
|
333,512
|
|
|
|
306,220
|
|
|
|
34,492
|
|
|
|
30,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation ending
|
|
$
|
333,512
|
|
|
|
306,220
|
|
|
|
34,492
|
|
|
|
30,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets beginning
|
|
$
|
250,378
|
|
|
|
231,742
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
36,321
|
|
|
|
37,818
|
|
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
3,383
|
|
|
|
14,904
|
|
|
|
|
|
|
|
|
|
Benefits and settlements paid
|
|
|
(18,647
|
)
|
|
|
(32,803
|
)
|
|
|
|
|
|
|
|
|
Expenses paid
|
|
|
(1,290
|
)
|
|
|
(1,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets ending
|
|
$
|
270,145
|
|
|
|
250,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
(333,512
|
)
|
|
|
(306,220
|
)
|
|
|
(34,492
|
)
|
|
|
(30,873
|
)
|
Fair value of plan assets
|
|
|
270,145
|
|
|
|
250,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(63,367
|
)
|
|
|
(55,842
|
)
|
|
|
(34,492
|
)
|
|
|
(30,873
|
)
|
Unrecognized net loss
|
|
|
87,553
|
|
|
|
80,201
|
|
|
|
4,045
|
|
|
|
1,142
|
|
Unrecognized prior service cost
|
|
|
923
|
|
|
|
1,122
|
|
|
|
273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
25,109
|
|
|
|
25,481
|
|
|
|
(30,174
|
)
|
|
|
(29,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
(2,940
|
)
|
|
|
(2,811
|
)
|
|
|
(2,400
|
)
|
|
|
(2,400
|
)
|
Other liabilities
|
|
|
(60,427
|
)
|
|
|
(53,031
|
)
|
|
|
(32,092
|
)
|
|
|
(28,473
|
)
|
Accumulated other comprehensive earnings
|
|
|
88,476
|
|
|
|
81,323
|
|
|
|
4,318
|
|
|
|
1,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
25,109
|
|
|
|
25,481
|
|
|
|
(30,174
|
)
|
|
|
(29,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal 2011, the Company expects amortization of unrecognized
net losses and unrecognized prior service cost related to its
defined benefit pension plans of $4,623 and $198, respectively,
to be included as a component of net periodic benefit cost. The
Company expects amortization of unrecognized net losses and
unrecognized prior service cost in 2011 related to its
postretirement plan of $38 and $29, respectively.
70
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Assumptions used to determine the year-end pension and
postretirement benefit obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Pension
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
5.20
|
%
|
|
|
5.73
|
%
|
Mortality table
|
|
|
RP-2000
|
|
|
|
RP-2000
|
|
Postretirement
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.27
|
%
|
|
|
5.75
|
%
|
Health care cost trend rate assumed for next year
|
|
|
7.50
|
%
|
|
|
8.00
|
%
|
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend
|
|
|
2020
|
|
|
|
2018
|
|
The assets of the funded plans are managed by investment
advisors. The fair values of the plan assets by asset class and
fair value hierarchy level (as described in
note 12) as of December 26, 2010 and
December 27, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large Cap
|
|
$
|
17,200
|
|
|
|
17,200
|
|
|
|
|
|
|
|
|
|
Small Cap
|
|
|
28,800
|
|
|
|
28,800
|
|
|
|
|
|
|
|
|
|
International
|
|
|
34,800
|
|
|
|
|
|
|
|
34,800
|
|
|
|
|
|
Other
|
|
|
47,900
|
|
|
|
|
|
|
|
|
|
|
|
47,900
|
|
Fixed Income
|
|
|
102,400
|
|
|
|
|
|
|
|
97,100
|
|
|
|
5,300
|
|
Total Return Fund
|
|
|
33,500
|
|
|
|
|
|
|
|
33,500
|
|
|
|
|
|
Cash Equivalents
|
|
|
5,500
|
|
|
|
|
|
|
|
5,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
270,100
|
|
|
|
46,000
|
|
|
|
170,900
|
|
|
|
53,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large Cap
|
|
$
|
18,400
|
|
|
|
18,400
|
|
|
|
|
|
|
|
|
|
Small Cap
|
|
|
26,500
|
|
|
|
26,500
|
|
|
|
|
|
|
|
|
|
International
|
|
|
24,800
|
|
|
|
|
|
|
|
24,800
|
|
|
|
|
|
Other
|
|
|
39,900
|
|
|
|
|
|
|
|
|
|
|
|
39,900
|
|
Fixed Income
|
|
|
93,400
|
|
|
|
|
|
|
|
93,400
|
|
|
|
|
|
Total Return Fund
|
|
|
42,200
|
|
|
|
|
|
|
|
42,200
|
|
|
|
|
|
Cash Equivalents
|
|
|
5,200
|
|
|
|
|
|
|
|
5,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
250,400
|
|
|
|
44,900
|
|
|
|
165,600
|
|
|
|
39,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 assets primarily consist of investments traded on
active markets that are valued using published closing prices.
The Plans Level 2 assets primarily consist of
investments in common and collective trusts as
71
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
well as other private investment funds that are valued using the
net asset values provided by the trust or fund. Although these
trusts and funds are not traded in an active market with quoted
prices, the investments underlying the net asset value are based
on quoted prices. The Company believes that these investments
could be sold at amounts approximating the net asset values
provided by the trust or fund. The Plans Level 3
assets consist of an investment in a hedge fund which is valued
using the net asset value provided by the investment manager as
well as an investment in a public-private investment fund which
is also valued using the net asset value provided by the
investment manager. The hedge fund contains investments in
financial instruments that are valued using certain estimates
which are considered unobservable in that they reflect the
investment managers own assumptions about the inputs that
market participants would use in pricing the asset or liability.
The public-private investment fund, which is included in fixed
income investments above, invests in commercial mortgage-backed
securities and non-agency residential mortgage-backed
securities. These securities are valued using certain estimates
which are considered unobservable in that they reflect the
investment managers own assumptions about the inputs that
market participants would use in pricing the asset. The Company
believes that the net asset value is the best information
available for use in the fair value measurement of this fund. Of
the activity in Level 3 assets for 2010 $7,126 relates to
purchases of investments, $2,102 relates to capital
distributions and $8,276 relates to the return on plan assets
still held at December 26, 2010.
Hasbros two major funded plans (the Plans) are
defined benefit pension plans intended to provide retirement
benefits to participants in accordance with the benefit
structure established by Hasbro, Inc. The Plans investment
managers, who exercise full investment discretion within
guidelines outlined in the Plans Investment Policy, are
charged with managing the assets with the care, skill, prudence
and diligence that a prudent investment professional in similar
circumstance would exercise. Investment practices, at a minimum,
must comply with the Employee Retirement Income Security Act
(ERISA) and any other applicable laws and regulations.
The Plans asset allocations are structured to meet a
long-term targeted total return consistent with the ongoing
nature of the Plans liabilities. The shared long-term
total return goal, presently 8.00%, includes income plus
realized and unrealized gains
and/or
losses on the Plans assets. Utilizing generally accepted
diversification techniques, the Plans assets, in aggregate
and at the individual portfolio level, are invested so that the
total portfolio risk exposure and risk-adjusted returns best
meet the Plans long-term obligations to employees. The
Companys asset allocation includes alternative investment
strategies designed to achieve a modest absolute return in
addition to the return on an underlying asset class such as bond
or equity indices. These alternative investment strategies may
use derivatives to gain market returns in an efficient and
timely manner; however, derivatives are not used to leverage the
portfolio beyond the market value of the underlying assets.
These alternative investment strategies are included in other
equity and fixed income asset categories at December 26,
2010 and December 27, 2009. Plan asset allocations are
reviewed at least quarterly and rebalanced to achieve target
allocation among the asset categories when necessary.
The Plans investment managers are provided specific
guidelines under which they are to invest the assets assigned to
them. In general, investment managers are expected to remain
fully invested in their asset class with further limitations of
risk as related to investments in a single security, portfolio
turnover and credit quality.
With the exception of the alternative investment strategies
mentioned above, the Plans Investment Policy restricts the
use of derivatives associated with leverage or speculation. In
addition, the Investment Policy also restricts investments in
securities issued by Hasbro, Inc. except through index-related
strategies (e.g. an S&P 500 Index Fund)
and/or
commingled funds. In addition, unless specifically approved by
the Investment Committee (which is comprised of members of
management, established by the Board to manage and control
pension plan assets), certain securities, strategies, and
investments are ineligible for inclusion within the Plans.
72
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
For 2010, 2009 and 2008, the Company measured the assets and
obligations of the Plans as of the fiscal year-end. The
following is a detail of the components of the net periodic
benefit cost (benefit) for the three years ended
December 26, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Components of Net Periodic Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
2,018
|
|
|
|
1,642
|
|
|
|
1,597
|
|
Interest cost
|
|
|
17,014
|
|
|
|
17,358
|
|
|
|
17,714
|
|
Expected return on assets
|
|
|
(19,503
|
)
|
|
|
(18,982
|
)
|
|
|
(23,961
|
)
|
Amortization of prior service cost
|
|
|
198
|
|
|
|
266
|
|
|
|
282
|
|
Amortization of actuarial loss
|
|
|
4,026
|
|
|
|
4,495
|
|
|
|
993
|
|
Curtailment/settlement losses
|
|
|
|
|
|
|
3,957
|
|
|
|
1,213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (benefit)
|
|
$
|
3,753
|
|
|
$
|
8,736
|
|
|
|
(2,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
609
|
|
|
|
627
|
|
|
|
570
|
|
Interest cost
|
|
|
1,795
|
|
|
|
1,903
|
|
|
|
2,065
|
|
Amortization of actuarial loss
|
|
|
|
|
|
|
12
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
2,404
|
|
|
|
2,542
|
|
|
|
2,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine net periodic benefit cost of the
pension plan and postretirement plan for each fiscal year follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate
|
|
|
5.73
|
%
|
|
|
6.20
|
%
|
|
|
6.34
|
%
|
Long-term rate of return on plan assets
|
|
|
8.00
|
%
|
|
|
8.50
|
%
|
|
|
8.75
|
%
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
6.02
|
%
|
|
|
6.32
|
%
|
Health care cost trend rate assumed for next year
|
|
|
8.00
|
%
|
|
|
8.50
|
%
|
|
|
9.00
|
%
|
Rate to which the cost trend rate is assumed to
|
|
|
|
|
|
|
|
|
|
|
|
|
decline (ultimate trend rate)
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2016
|
|
|
|
2016
|
|
|
|
2016
|
|
If the health care cost trend rate were increased one percentage
point in each year, the accumulated postretirement benefit
obligation at December 26, 2010 and the aggregate of the
benefits earned during the period and the interest cost would
have both increased by approximately 4%.
Hasbro works with external benefit investment specialists to
assist in the development of the long-term rate of return
assumptions used to model and determine the overall asset
allocation. Forecast returns are based on the combination of
historical returns, current market conditions and a forecast for
the capital markets for the next 5-7 years. All asset class
assumptions are within certain bands around the long-term
historical averages. Correlations are based primarily on
historical return patterns.
73
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
Expected benefit payments under the defined benefit pension
plans and the postretirement benefit plan for the next five
years subsequent to 2010 and in the aggregate for the following
five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
Postretirement
|
|
2011
|
|
$
|
18,760
|
|
|
|
2,296
|
|
2012
|
|
|
19,800
|
|
|
|
2,122
|
|
2013
|
|
|
19,685
|
|
|
|
2,168
|
|
2014
|
|
|
20,326
|
|
|
|
2,215
|
|
2015
|
|
|
21,000
|
|
|
|
2,227
|
|
2016-2020
|
|
|
110,036
|
|
|
|
11,051
|
|
International
Plans
Pension coverage for employees of Hasbros international
subsidiaries is provided, to the extent deemed appropriate,
through separate defined benefit and defined contribution plans.
At December 26, 2010 and December 27, 2009, the
defined benefit plans had total projected benefit obligations of
$76,900 and $70,328, respectively, and fair values of plan
assets of $68,762 and $69,724, respectively. Substantially all
of the plan assets are invested in equity and fixed income
securities. The pension expense related to these plans was
$2,333, $4,903, and $3,226 in 2010, 2009 and 2008, respectively.
In fiscal 2011, the Company expects amortization of $65 of prior
service costs, $349 of unrecognized net losses and $(2) of
unrecognized transition obligation to be included as a component
of net periodic benefit cost.
Expected benefit payments under the international defined
benefit pension plans for the five years subsequent to 2010 and
in the aggregate for the five years thereafter are as follows:
2011: $1,528; 2012: $1,740; 2013: $1,906; 2014: $2,138; 2015:
$2,423; and 2016 through 2020: $16,095.
Postemployment
Benefits
Hasbro has several plans covering certain groups of employees,
which may provide benefits to such employees following their
period of active employment but prior to their retirement. These
plans include certain severance plans which provide benefits to
employees involuntarily terminated and certain plans which
continue the Companys health and life insurance
contributions for employees who have left Hasbros employ
under terms of its long-term disability plan.
Hasbro occupies certain offices and uses certain equipment under
various operating lease arrangements. The rent expense under
such arrangements, net of sublease income which is not material,
for 2010, 2009 and 2008 amounted to $41,911, $43,562 and
$43,634, respectively.
Minimum rentals, net of minimum sublease income, which is not
material, under long-term operating leases for the five years
subsequent to 2010 and in the aggregate thereafter are as
follows: 2011: $28,200; 2012: $24,261; 2013: $20,966; 2014:
$10,040; 2015: $6,911; and thereafter: $8,549.
All leases expire prior to the end of 2020. Real estate taxes,
insurance and maintenance expenses are generally obligations of
the Company. It is expected that, in the normal course of
business, leases that expire will be renewed or replaced by
leases on other properties; thus, it is anticipated that future
minimum lease commitments will not be less than the amounts
shown for 2010.
74
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
In addition, Hasbro leases certain facilities which, as a result
of restructurings, are no longer in use. Future costs relating
to such facilities were accrued as a component of the original
restructuring charge and are not included in minimum rental
amounts above.
|
|
(16)
|
Derivative
Financial Instruments
|
Hasbro uses foreign currency forward contracts to mitigate the
impact of currency rate fluctuations on firmly committed and
projected future foreign currency transactions. These
over-the-counter
contracts, which hedge future currency requirements related to
purchases of inventory and other cross-border transactions not
denominated in the functional currency of the business unit, are
primarily denominated in United States and Hong Kong dollars,
Euros and British pound sterling and are entered into with a
number of counterparties, all of which are major financial
institutions. The Company believes that a default by a single
counterparty would not have a material adverse effect on the
financial condition of the Company. Hasbro does not enter into
derivative financial instruments for speculative purposes.
The Company also has warrants to purchase common stock that
qualify as derivatives. For additional information related to
these warrants see note 12. In addition, the Company is
also party to several interest rate swap agreements to adjust
the amount of long-term debt subject to fixed interest rates.
For additional information related to these interest rate swaps
see note 9.
Cash
Flow Hedges
Hasbro uses foreign currency forward contracts to reduce the
impact of currency rate fluctuations on firmly committed and
projected future foreign currency transactions. All of the
Companys designated foreign currency forward contracts are
considered to be cash flow hedges. These instruments hedge a
portion of the Companys currency requirements associated
with anticipated inventory purchases and other cross-border
transactions in 2011 and 2012.
At December 26, 2010 and December 27, 2009, the
notional amounts and fair values of the Companys foreign
currency forward contracts designated as cash flow hedging
instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Notional
|
|
|
Fair
|
|
|
Notional
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Hedged transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory purchases
|
|
$
|
593,953
|
|
|
|
11,074
|
|
|
|
380,661
|
|
|
|
16,715
|
|
Intercompany royalty transactions
|
|
|
179,308
|
|
|
|
5,344
|
|
|
|
135,921
|
|
|
|
7,007
|
|
Other
|
|
|
17,047
|
|
|
|
533
|
|
|
|
30,268
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
790,308
|
|
|
|
16,951
|
|
|
|
546,850
|
|
|
|
23,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands
of Dollars and Shares Except Per Share Data)
The Company has a master agreement with each of its
counterparties that allows for the netting of outstanding
forward contracts. The fair values of the Companys foreign
currency forward contracts designated as cash flow hedges are
recorded in the consolidated balance sheet at December 26,
2010 and December 27, 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
Unrealized gains
|
|
$
|
24,710
|
|
|
|
12,142
|
|