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 31, 2006
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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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New York Stock
Exchange
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Preference Share Purchase
Rights
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New York Stock Exchange
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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 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, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one:)
Large accelerated
filer þ Accelerated
filer o Non-Accelerated
filer o
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 30, 2006 (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, was approximately $2,695,875,000.
The registrant does not have non-voting common stock outstanding.
The number of shares of common stock outstanding as of
February 8, 2007 was 160,857,841.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for our 2007 Annual
Meeting of Shareholders are incorporated by reference into
Part III of this Report.
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 and entertainment products and services, including the
design, manufacture and marketing of games and toys. Both
internationally and in the U.S., our widely recognized core
brands such as PLAYSKOOL, TONKA, SUPER SOAKER, MILTON BRADLEY,
PARKER BROTHERS, TIGER, and WIZARDS OF THE COAST provide what we
believe are the highest quality play experiences in the world.
Our offerings encompass a broad variety of games, including
traditional board, card, hand-held electronic, trading card,
roleplaying, plug and play 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, childrens consumer electronics, electronic
interactive products, creative play and toy related specialty
products. In addition, we license certain of our trademarks,
characters and other property rights to third parties for use in
connection with consumer promotions and for the sale of
noncompeting toys and games and non-toy products.
Organizationally, our principal segments are North America and
International. Both of these segments engage in the development,
marketing and selling of various toy and game products as listed
above. Our North American segment covers the United States,
Canada and Mexico while the International segment primarily
includes Europe, the Asia Pacific region and Latin and South
America. Financial information with respect to our segments and
geographic areas is included in note 15 to our financial
statements, which are included in Item 8 of this
Form 10-K.
In addition, the Hasbro Products Group outlicenses our
intellectual property to third parties on a worldwide basis and
the Global Operations segment is responsible for arranging
product manufacturing and sourcing for the North American and
International segments.
North
America
The North American segments strategy in 2006 continued to
be based on growing core brands through innovation and
reinvention, introducing new initiatives driven by consumer and
marketplace insights and leveraging opportunistic toy and game
lines and licenses. In recent years, a major source of
innovation has been the incorporation of greater technology into
our products. The use of technology has increased our ability to
develop products that appeal to older children who have been
shifting from traditional toys and games to consumer electronic
products, such as MP3 players, cell phones and other
entertainment and lifestyle products. In addition, we seek to
grow our business and maintain our brands by refreshing and
reintroducing products from our vast portfolio which have been
out of the market for extended periods of time. Recent
successful reintroductions of products include BABY ALIVE in
2006, LITTLEST PET SHOP in 2005 and MY LITTLE PONY in 2003.
Major 2006 brands and products included STAR WARS, PLAYSKOOL,
LITTLEST PET SHOP, NERF, MAGIC: THE GATHERING, PLAY-DOH,
TRANSFORMERS and MONOPOLY. In the North American segment,
our products are organized into the following categories:
(i) games and puzzles; (ii) boys toys;
(iii) girls toys; (iv) preschool toys;
(v) tween toys; and (vi) other.
Our games and puzzles category includes several well known
brands, including MILTON BRADLEY, PARKER BROTHERS, TIGER GAMES,
AVALON HILL, and WIZARDS OF THE COAST. The MILTON BRADLEY,
PARKER BROTHERS, TIGER GAMES and AVALON HILL brand portfolios
consist of a broad assortment of games for children, tweens,
families and adults. Core game brands include MONOPOLY,
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BATTLESHIP, GAME OF LIFE, SCRABBLE, CHUTES AND LADDERS, CANDY
LAND, TROUBLE, MOUSETRAP, OPERATION, HUNGRY HUNGRY HIPPOS,
CONNECT FOUR, TWISTER, YAHTZEE, JENGA, SIMON, CLUE, SORRY!,
RISK, BOGGLE, and TRIVIAL PURSUIT, as well as a line of jigsaw
puzzles for children and adults, including BIG BEN and CROXLEY,
as well as the PUZZ-3D line. WIZARDS OF THE COAST offers a
variety of successful trading card and roleplaying games,
including MAGIC: THE GATHERING and DUNGEONS & DRAGONS.
We seek to keep our core brands relevant through sustained
marketing programs as well as by offering consumers new ways to
experience them. In 2006, the Company introduced MONOPOLY
HERE & NOW, a modernized version of MONOPOLY that
reflects contemporary culture and landmarks. In 2007 we plan to
continue this reinvention of MONOPOLY through the introduction
of several new related products including MONOPOLY TROPICAL
TYCOON DVD game and the MONOPOLY HERE & NOW electronic
banking game. Other core brand extensions expected for 2007
include a new version of the GAME OF LIFE, TWISTS AND TURNS, as
well as a new version of the OPERATION game, OPERATION RESCUE
KIT. In addition to our core brands strategy, we seek to develop
new game concepts, such as the 2006 introduction of COSMIC
CATCH. In 2007, the Company plans to introduce a new line of
brain training games, which will include hand held electronics,
card games, plug and play games and pocket-sized games. In
addition to more traditional game play, in the tween category,
we plan to introduce NET JET, a digital internet game system.
Our boys toys include a wide range of core properties such
as G.I. JOE and TRANSFORMERS action figures as well as
entertainment-based licensed products based on popular movie and
television characters, such as STAR WARS and MARVEL toys and
accessories. The boys toys category is increasingly
competing with video games as boys become more sophisticated in
their evaluation of entertainment. 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 2007, the Company
expects to have significant sales of MARVEL and TRANSFORMERS
products due to the anticipated major motion picture releases of
SPIDER-MAN 3 in May of 2007 and TRANSFORMERS in July of 2007.
There are two other MARVEL motion picture releases scheduled in
2007, GHOST RIDER and FANTASTIC FOUR: THE RISE OF THE SILVER
SURFER for which the Company will be offering products in 2007.
In addition to marketing and developing action figures for
traditional play, the Company also develops and markets products
designed for collectors, which was a key component of the
success of the STAR WARS brand in 2006. In 2007, in addition to
toys designed around the MARVEL and TRANSFORMERS motion picture
releases, the Company will offer products such as the MARVEL
ORIGINS product line, designed for the collector market.
In our girls toys category, we seek to provide a
traditional and wholesome play experience. Girls toys
include the MY LITTLE PONY, LITTLEST PET SHOP, FUR REAL FRIENDS
and BABY ALIVE brands as well as the EASY BAKE oven. In 2007, we
will seek to continue the growth of the MY LITTLE PONY and
LITTLEST PET SHOP brands though innovative new lines, such as
the PONYVILLE line and the TEENIEST TINIEST PET line. The FUR
REAL FRIENDS line combines plush toys with electronic innovation
to provide an interactive play experience.
Our preschool toys category encompasses a range of products for
preschoolers in the various stages of development, from infant
to kindergarteners. 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, starting in 2007, the PLAYSKOOL line will
also include the TONKA line of trucks and interactive toys and
the PLAY-DOH brand. Through our AGES & STAGES system,
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 2007, the Company plans to
introduce the MADE FOR ME toy and gear line that will allow
parents to customize activities and features to suit a
childs developmental needs. Our preschool toys focus on
encouraging children to get active through the PLAYSKOOL KID
MOTION line of indoor and outdoor toys as well as seek to
promote the use of the childs imagination through products
such as the PLAY-DOH line of playsets and products such as
DREAMTOWN, a system of role play environments and
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accessories. In 2007, we plan to continue to increase the
visibility of our PLAYSKOOL brand through an agreement with the
CVS/pharmacy retail chain whereby PLAYSKOOL will serve as the
private label brand for CVS baby care products.
Our tweens toys category generally markets products under the
TIGER ELECTRONICS and NERF brands and seeks to target those
children who have outgrown traditional toys. The age group
targeted by this category is generally 8 to 12 years old.
In recent years, we have used our consumer insights and
electronic innovation to develop a strong line of products
focusing on this target audience. Our major tweens toys product
lines in 2006 included I-DOG and NERF. As demonstrated through
our I-DOG product, an interactive pet that acts as an accessory
to an MP3 player, we seek to draw on the popularity of
electronic trends in our tween product offerings. In 2007, we
will seek to leverage the interest of this age group in music
and musical instruments through the introduction of the POWER
TOUR GUITAR product.
International
In addition to our business in the United States, Mexico and
Canada, in 2006 we operated in more than 20 other countries,
selling a representative range of the toy and game products
marketed in North America, together with some items that are
sold only internationally. The major geographic regions included
in the International segment are Europe, Asia Pacific, South
America and Latin America, excluding Mexico. 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. Key international brands for
2006 included MONOPOLY, MY LITTLE PONY, PLAYSKOOL, STAR WARS,
and LITTLEST PET SHOP.
Other
Segments
In our Global Operations segment, we manufacture and source
production of substantially all of our toy and game products.
The Company operates manufacturing facilities in East
Longmeadow, Massachusetts and Waterford, Ireland. Sourcing of
our other production is done through unrelated manufacturers in
various Far East countries, principally China, using a Hong Kong
based subsidiary for quality control and order coordination
purposes. See Manufacturing and Importing below for
more details concerning overseas manufacturing.
Through our other segment, the Hasbro Products Group, we
generate revenue through the out-licensing worldwide of certain
of our intellectual properties to third parties for promotional
and merchandising uses in businesses which do not compete
directly with our own product offerings.
Other
Information
To further extend our range of products in the various segments
of our business, we sell our toy and game products directly to
retailers, primarily 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.
No individual line of products accounted for 10% or more of our
consolidated net revenues during our 2006 or 2004 fiscal years.
During the 2005 fiscal year, revenues generated from the sale of
STAR WARS products produced under our license with Lucas
Licensing and Lucasfilm were approximately $494,000, which was
16% of our consolidated net revenues in 2005. No other line of
products constituted 10% or more of our consolidated net
revenues in 2005.
Working
Capital Requirements
Our working capital needs are primarily financed through cash
generated from operations and, when necessary, short-term
borrowings and proceeds from our accounts receivable
securitization program. Our borrowings and the use of our
accounts receivable program generally reach peak levels during
the fourth
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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 shipping season. The strategy of retailers has 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 this trend
will continue. 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 and, within the second half of the
year, the fourth quarter is more prominent. In 2006, the second
half of the year accounted for approximately 68% of full year
revenues with the third and fourth quarters accounting for 33%
and 35% of full year revenues, respectively. In years where the
Company has products tied to a major motion picture release,
such as in 2005 with the mid-year release of STAR WARS III:
REVENGE OF THE SITH, this concentration is not as pronounced due
to the higher level of sales that occur around the time of the
motion picture theatrical release. In 2007 the Company has
products tied to two anticipated major motion picture releases,
SPIDER-MAN 3, expected to be released in May of 2007, and
TRANSFORMERS, which is expected to be released in July of 2007.
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 now being used result in fewer
orders being placed significantly in advance of shipment with
more orders being placed for immediate delivery. Unshipped
orders at January 28, 2007 and January 29, 2006 were
approximately $192,000 and $123,000, respectively. It is a
general industry practice that orders are subject to amendment
or cancellation by customers prior to shipment. The backlog 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. This method
is a general industry practice. The programs that we plan to
employ to promote sales in 2007 are substantially the same as
those we employed in 2006.
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 2006 and 2005, we
utilized cash from our operations, proceeds from our accounts
receivable securitization program, borrowing under our revolving
credit agreement as well as our uncommitted lines of credit to
meet our cash flow requirements.
Royalties,
Research and Development
Our success is dependent on innovation through the continuing
development of new products and the redesign of existing
products for continued market acceptance. In 2006, 2005, and
2004, we spent $171,358, $150,586, and $157,162, 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.
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We also produce a number of toys 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
2006, 2005, and 2004, we incurred $169,731, $247,283, and
$223,193, 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 vary depending
upon the timing of movie releases and other entertainment. In
2005, royalty expense increased due to the release of STAR WARS
EPISODE III: REVENGE OF THE SITH, and the corresponding
increase of our sales of STAR WARS licensed products. In 2007,
the Company has licensed products tied to anticipated MARVEL
major motion picture releases, including SPIDER-MAN 3 in May of
2007 as well as FANTASTIC FOUR: THE RISE OF THE SILVER SURFER
and GHOSTRIDER. We will also incur royalties on products based
on the theatrical release of TRANSFORMERS in July of 2007. As
such, we expect higher royalty expense in 2007 then was incurred
in 2006.
We have $116,792 of prepaid royalties, which are a component of
prepaid expenses and other current assets on our balance sheet.
Included in other assets is $64,769 representing the long-term
portion of royalty advances already paid. As further detailed in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, based on
contracts in effect at December 31, 2006, the Company may
be required to pay approximately $164,780 of minimum guaranteed
royalties at various times from 2007 through 2011. Amounts paid
and advances to be paid relate to anticipated revenues from
licensed properties to be sold in the years 2007 through 2018.
Marketing
and Sales
Our products are sold nationally and internationally 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
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. Although we had more than 2,500 customers in the
United States and Canada during 2006, including specialty
retailers carrying trading card games and toy-related products,
there has been significant consolidation at the retail level
over the last several years in our industry, which we expect to
continue. 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 2006, sales to our
three largest customers, Wal-Mart Stores, Inc., Target
Corporation and Toys R Us, Inc., represented 24%, 13% and
11%, respectively, of consolidated net revenues, and sales to
our top five customers accounted for approximately 53% of our
consolidated net revenues. During 2006, 90% of the net revenues
from our top 5 customers related to the North American segment.
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. 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 many of our new products at international
toy fairs held early in the fiscal year in Hong Kong, London,
Nuremberg, and New York City.
In 2006 we spent $368,996 on advertising, promotion and
marketing programs compared to $366,371 in 2005 and $387,523 in
2004.
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Manufacturing
and Importing
During 2006 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. We generally enter into agreements with
suppliers at the beginning of a fiscal year that establish
prices for that year. For this reason, we are generally
insulated, in the short-term, from increases in the prices of
raw materials. However, severe increases 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 the
Peoples Republic of China, constitute the largest
manufacturing center of toys in the world and the substantial
majority of our toy products are manufactured in China.
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 2007 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 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 trade relations status by, the
Peoples Republic of China could significantly disrupt our
operations and increase the cost of our products imported into
the United States or Europe.
We purchase dies and molds, principally from independent United
States and international sources.
Competition
We are a worldwide leader in the design, manufacture and
marketing of games and toys, 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. 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 addition to contending with competition from other toy and
game companies, in our business we must deal with the phenomena
that many children have been moving away from traditional toys
and games at a younger age. 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 create new
opportunities for existing competitors and
start-ups to
develop products which compete with our toy and game offerings.
Employees
At December 31, 2006, we employed approximately 5,800
persons worldwide, approximately 3,200 of whom were located in
the United States.
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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 (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 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 Canada, Australia and
Europe. We maintain laboratories that employ testing and other
procedures intended to maintain compliance with the CPSA, the
FHSA, the FFA, international 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 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, 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 and
Export Sales
The information required by this item is included in
note 15 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
developments, the
7
expected timing of new product introductions or our expectations
concerning the future acceptance of products by customers, the
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.
Volatility
of consumer preferences, combined with the high level of
competition and low barriers to entry in the family
entertainment industry make it difficult to maintain the success
of existing product lines or consistently introduce successful
new products. In addition, an inability to develop and introduce
planned new products and product lines in a timely and
cost-effective manner may damage our business.
The family entertainment business is a fashion industry. Our
success is critically dependent upon the consumer appeal of our
products, principally games and toys. 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
profitability.
A decline in the popularity of our existing products and product
lines, or the failure of our new products and product lines to
achieve and sustain market acceptance with retailers and
consumers, could significantly lower our sales and operating
margins, which would in turn harm our profitability, business
and financial condition. In our industry, it is important to
identify and offer what are considered to be the hot
toys and games on childrens wish lists. Our
continued success will depend on our ability to develop, market
and sell popular toys, games and childrens electronic
products which are sought after by both children and their
parents. We seek to achieve and maintain market popularity for
our products through the redesign and extension of our existing
family entertainment properties in ways we believe will capture
evolving consumer interest and imagination 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 and identifying entertainment concepts and properties
that appeal to childrens imaginations. However, consumer
preferences with respect to family entertainment are
continuously changing and are difficult to anticipate. Evolving
consumer tastes, coupled with an ever changing pipeline of
entertainment properties and products which compete for consumer
interest and acceptance, creates an environment in which
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 generally, and high technology products
in particular, 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 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 property can gain access to consumers
and become a significant source of competition for our products.
In some cases our competitors products may achieve greater
market acceptance than our products and potentially reduce
demand for our products.
The challenge of 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 losing interest in traditional toys at younger ages and, as
a result, at younger and younger ages, our products compete with
the offerings of
8
video game suppliers, consumer electronics companies and other
businesses outside of the traditional toy and game industry.
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 released theatrically for
which we have a license, such as MARVEL or STAR WARS related
products, can significantly affect our revenues. 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
ownership rights granted pursuant to any of our licensing
agreements could harm our business and competitive position.
There is no guarantee that:
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Any of our current products or product lines will 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 new products life cycle will be sufficient to permit
us to profitably recover development, manufacturing, marketing,
royalties (including royalty advances and guarantees) and other
costs of producing 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 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 and implementation work in accordance with our
currently anticipated development schedule. Unforeseen delays or
difficulties in the development process, or significant
increases in the planned cost of development, may cause the
introduction date for products to be later than anticipated or,
in some situations, may cause a product introduction to be
discontinued. Similarly, the success of our products is often
dependent on the timelines and effectiveness of related
advertising and media efforts. Television programming, movie and
DVD releases, comic book releases, and other media efforts are
often critical in generating interest in our products. 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 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.
Our
business is seasonal and therefore our annual operating results
will depend, in large part, on our sales during the relatively
brief holiday season. This seasonality is exacerbated as
retailers become more efficient in their control of inventory
levels through 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. These 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 occur in the
9
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 to meet
consumer demand. While these techniques 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.
The
continuing consolidation of our retail customer base means that
economic difficulties or changes in the purchasing 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 31, 2006, Wal-Mart Stores, Inc., Target
Corporation, and Toys R Us, Inc., accounted for
approximately 24%, 13% 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 53% of our consolidated net
revenues. These net revenues were primarily related to the North
American segment. 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 or return substantial amounts of our products,
it could harm our business, financial condition and results of
operations. 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 bad
debt expense.
We may
not realize the full benefit of our licenses if the licensed
material has less market appeal than expected or if sales
revenue from the licensed products is not sufficient to earn out
the minimum guaranteed royalties.
An important part of our business involves obtaining licenses to
produce products based on various entertainment properties and
theatrical releases, such as those based upon MARVEL or STAR
WARS characters. 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 31, 2006, we
had $181,561 of prepaid royalties, $116,792 of which are
included in prepaid expenses and other current assets and
$64,769 of which are included in other assets. Under the terms
of existing contracts as of December 31, 2006, we may be
required to pay future minimum
10
guaranteed royalties and other licensing fees totaling
approximately $164,780. 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 will 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
substantial sales and manufacturing operations outside the
United States subject us to risks associated with international
operations.
We operate facilities and sell products in numerous countries
outside the United States. For the year ended December 31,
2006, our net revenues from international customers comprised
approximately 40% of our total consolidated net revenues. We
expect our sales to international customers to continue to
account for a significant portion of our revenues. Additionally,
we utilize third-party manufacturers located principally in the
Far East, to produce the majority of our products, and we have a
manufacturing facility in Ireland. These sales and manufacturing
operations are subject to the risks associated with
international operations, including:
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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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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, which laws may dictate that certain practices
which are acceptable in some jurisdictions are not acceptable in
others, 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.
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Our reliance on external sources of manufacturing can be
shifted, over a period of time, to alternative sources of
supply, should such changes be necessary. However, if we were
prevented from obtaining products or components for a material
portion of our product line due to political, labor or other
factors beyond our control, our operations would be disrupted,
potentially for a significant period of time, while alternative
sources of products were secured. In particular, as the majority
of our toy products, in addition to certain other products, are
manufactured in the Peoples Republic of China, health
conditions and other factors affecting social and economic
activity in China and affecting the movement of people and
products into and from China to our major markets, including
North America and Europe, and the 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 revaluation
of the Chinese yuan, which may result in an increase in the cost
of producing products in China, increases in labor costs and
difficulties in moving products manufactured in the Far East
through the ports on the western coast of North America, whether
due to port congestion, labor disputes or other factors. Also,
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 trade relations status
11
with, the Peoples Republic of China, could significantly
increase our cost of products imported into the United States or
Europe and harm our business. 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.
Part
of our strategy for remaining relevant to older 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, increasing 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 become
interested in more and more sophisticated and adult products,
such as videogames and consumer electronics, at younger and
younger ages, we have needed to work even harder to keep our
products relevant for these consumers. One initiative we have
been pursuing to capture the interest of older children is to
offer innovative childrens electronic toys and games.
Examples of such products in the last few years include
VIDEONOW, CHATNOW, ZOOMBOX, our I-branded products such as I-DOG
and I-CAT, and our FURREAL FRIENDS line of products, including
BUTTERSCOTCH. 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. 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 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.
Market
conditions, including commodity and fuel prices, public health
conditions and other third party conduct could negatively impact
our revenues, margins and our other business
initiatives.
Economic and public health conditions, including factors that
impact the strength of the retail market and retail demand, or
our ability to manufacture and deliver products, can have a
significant impact on our business. The success of our family
entertainment products is dependent on consumer purchasing of
those 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. Significant increases in the costs of other products
which are required by consumers, such as gasoline and home
heating fuels, may reduce household spending on entertainment
products we offer. In addition, rising fuel and raw material
prices, for components such as resin used in plastics, or
increased transportation costs, may increase our costs for
producing and transporting our products, which in turn may
reduce our margins and harm our business.
In addition, general economic conditions and employment levels
can impact demand for our products. Economic conditions were
significantly harmed by the September 11, 2001 terrorist
attacks and could be similarly affected by any future attacks.
Economic conditions may also be negatively impacted by 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 sales and profitability.
Other conditions, such as the unavailability of electrical
components, may impede our ability to manufacture, source and
ship new and continuing products on a timely basis. Additional
factors outside of our control could delay or increase the cost
of implementing our business initiatives and product plans or
alter our
12
actions and reduce actual results. For example, work stoppages,
slowdowns or strikes, a severe public health pandemic or the
occurrence or threat of wars or other conflicts, could impact
our ability to manufacture or deliver product, resulting in
increased costs
and/or lost
sales for our products.
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
income.
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 31, 2006, we had approximately $532,257 of
acquired product and 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 income
caused by impairment charges could harm our financial results.
We may
not realize the anticipated benefits of future acquisitions or
those benefits may be delayed or reduced in their
realization.
Although we have not made any major acquisitions in the last few
years, 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. We may also target companies in markets
where we would like to increase our local presence. However, we
cannot be certain that the products of companies we may acquire
in the future will achieve or maintain popularity with consumers
or that we will be successful in a particular geographic region.
In some cases, we expect that the integration of the product
lines 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 continue to
develop popular and profitable products or services.
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.
13
We
rely on external financing, including our credit facilities and
accounts receivable securitization facility, to 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 five-year revolving credit agreement, which provides for
a $300,000 committed revolving credit facility which provides
the Company the ability to request increases in the committed
facility in additional increments of $50,000, up to a total of
$500,000. 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.
As an additional source of working capital and liquidity, we
currently have a $250,000 accounts receivable securitization
program, which is increased to $300,000 from fiscal October
through fiscal January. Under this program, we sell on an
ongoing basis, substantially all of our U.S. dollar
denominated trade accounts receivable to a bankruptcy remote
special purpose entity. Under this facility, the special purpose
entity is able to sell, on a revolving basis, undivided
ownership interests in the eligible receivables to bank
conduits. During the term of the facility, we must maintain
certain performance ratios. If we fail to maintain these ratios,
we could be prevented from accessing this cost-effective source
of working capital and short-term financing.
We believe that our cash flow from operations, together with our
cash on hand and access to existing credit facilities and our
accounts receivable securitization facility, are adequate for
current and planned needs in 2007. 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, as well as increases in inventory or
accounts receivable that are ineligible for sale under our
securitization facility, or future events that may reduce or
eliminate the availability of external financial resources.
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 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 31, 2006, we had $494,983 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 refinance such debt or face default. There is
no guarantee that we would be able to refinance debt on
favorable terms, or at all. This total indebtedness includes
$249,996 in aggregate principal amount of 2.75% senior
convertible debentures that we issued in 2001. On
December 1, 2011 and December 1, 2016, and upon the
occurrence of certain fundamental corporate changes, holders of
the 2.75% senior convertible debentures may require us to
purchase their debentures. At that time, the purchase price may
be paid in cash, shares of common stock or a combination of the
two, at our discretion, provided that we will pay accrued and
unpaid
14
interest in cash. We may not have sufficient cash at that time
to make the required repurchases and may be required to settle
in shares of common stock.
We previously issued warrants that provide the holder with an
option through January 2008 to sell all of these warrants to us
for a price to be paid, at our election, of either $100,000 in
cash or $110,000 in our common stock, such stock being valued at
the time of the exercise of the option. Should we be required to
settle these warrants under this option, we believe that we will
have adequate funds to settle in cash if necessary. However, we
may not have sufficient funds at that time to make the required
payment and may be required to settle the warrants in stock.
As a
manufacturer of consumer products and a large multinational
corporation, we are subject to various government regulations,
violation of which could subject us to sanctions. 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 under The Consumer Products
Safety Act, The Federal Hazardous Substances Act, and The
Flammable Fabrics Act. In addition, certain of our products are
subject to regulation by the Food and Drug Administration. 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 sales and results of operations.
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. While we currently maintain
product liability insurance coverage in amounts we believe
sufficient for our business risks, we may not be able to
maintain such coverage or such coverage may not be adequate to
cover all potential claims. Moreover, even if we maintain
sufficient insurance coverage, 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 and the Foreign Corrupt Practices Act. Our failure
to successfully comply with any such legal requirements could
subject us to monetary liabilities and other sanctions that
could harm our business and financial condition.
We
have a material amount of goodwill which, if it becomes
impaired, would result in a reduction in our net
income.
Goodwill is the amount by which the cost of an acquisition
accounted for using the purchase method exceeds the fair value
of the net assets we acquire. Current accounting standards
require that goodwill no longer be amortized but instead be
periodically evaluated for impairment based on the fair value of
the reporting unit. At December 31, 2006, approximately
$469,938 or 15.2%, 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 income caused by the write-down
of goodwill could harm our results of operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
Square
|
|
Type of
|
|
Expiration
|
Location
|
|
Use
|
|
Feet
|
|
Possession
|
|
Dates
|
|
Rhode Island
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pawtucket(1) (2) (3)
|
|
Administrative, Sales &
Marketing, and Product Development offices
|
|
|
343,000
|
|
|
|
Owned
|
|
|
|
|
|
Pawtucket(2)
|
|
Executive Office
|
|
|
23,000
|
|
|
|
Owned
|
|
|
|
|
|
East Providence (2) (3)
|
|
Administrative Office
|
|
|
120,000
|
|
|
|
Leased
|
|
|
|
2014
|
|
Central Falls(1) (2)
|
|
Warehouse
|
|
|
261,500
|
|
|
|
Owned
|
|
|
|
|
|
Massachusetts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Longmeadow(1) (3)
|
|
Office, Manufacturing &
Warehouse
|
|
|
1,148,000
|
|
|
|
Owned
|
|
|
|
|
|
East Longmeadow(1) (3)
|
|
Warehouse
|
|
|
500,000
|
|
|
|
Leased
|
|
|
|
2007
|
|
California
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chino(1)
|
|
Warehouse
|
|
|
1,001,000
|
|
|
|
Leased
|
|
|
|
2010
|
|
Texas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dallas(1)
|
|
Warehouse
|
|
|
147,500
|
|
|
|
Leased
|
|
|
|
2011
|
|
Washington
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renton(1)
|
|
Office
|
|
|
95,400
|
|
|
|
Leased
|
|
|
|
2016
|
|
Tukwilla(1)
|
|
Warehouse
|
|
|
5,000
|
|
|
|
Leased
|
|
|
|
2007
|
|
Australia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erskine Park(4)
|
|
Office & Warehouse
|
|
|
98,400
|
|
|
|
Leased
|
|
|
|
2015
|
|
Eastwood(4)
|
|
Office
|
|
|
16,900
|
|
|
|
Leased
|
|
|
|
2009
|
|
Belgium
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brussels(4)
|
|
Office & Showroom
|
|
|
18,800
|
|
|
|
Leased
|
|
|
|
2008
|
|
Canada
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Montreal(1)
|
|
Office, Warehouse & Showroom
|
|
|
133,900
|
|
|
|
Leased
|
|
|
|
2010
|
|
Mississauga(1)
|
|
Sales Office & Showroom
|
|
|
16,300
|
|
|
|
Leased
|
|
|
|
2010
|
|
Montreal(1)
|
|
Warehouse
|
|
|
88,100
|
|
|
|
Leased
|
|
|
|
2010
|
|
Chile
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Santiago(4)
|
|
Warehouse
|
|
|
67,600
|
|
|
|
Leased
|
|
|
|
2007
|
|
Santiago(4)
|
|
Office
|
|
|
17,300
|
|
|
|
Leased
|
|
|
|
2007
|
|
China
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shenzhen(3)
|
|
Office
|
|
|
25,700
|
|
|
|
Leased
|
|
|
|
2009
|
|
Shenzhen(3)
|
|
Office
|
|
|
26,600
|
|
|
|
Leased
|
|
|
|
2009
|
|
Denmark
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glostrup(4)
|
|
Office
|
|
|
9,200
|
|
|
|
Leased
|
|
|
|
2010
|
|
England
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uxbridge(4)
|
|
Office & Showroom
|
|
|
51,000
|
|
|
|
Leased
|
|
|
|
2013
|
|
France
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Le Bourget du Lac(4)
|
|
Office
|
|
|
33,500
|
|
|
|
Owned
|
|
|
|
|
|
Creutzwald(4)
|
|
Warehouse
|
|
|
301,300
|
|
|
|
Owned
|
|
|
|
|
|
Germany
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Soest(4)
|
|
Office & Warehouse
|
|
|
258,300
|
|
|
|
Owned
|
|
|
|
|
|
Soest(4)
|
|
Warehouse
|
|
|
79,700
|
|
|
|
Leased
|
|
|
|
2007
|
|
Dreieich(4)
|
|
Office
|
|
|
24,900
|
|
|
|
Leased
|
|
|
|
2015
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
|
|
Square
|
|
Type of
|
|
Expiration
|
Location
|
|
Use
|
|
Feet
|
|
Possession
|
|
Dates
|
|
Hong Kong
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kowloon(3)
|
|
Offices
|
|
|
64,300
|
|
|
|
Leased
|
|
|
|
2008
|
|
New Territories(3)
|
|
Warehouse
|
|
|
11,500
|
|
|
|
Leased
|
|
|
|
2008
|
|
New Territories(3)
|
|
Warehouse
|
|
|
8,100
|
|
|
|
Leased
|
|
|
|
2009
|
|
Ireland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waterford(3)
|
|
Office, Manufacturing &
Warehouse
|
|
|
244,000
|
|
|
|
Owned
|
|
|
|
|
|
Italy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Milan(4)
|
|
Office & Showroom
|
|
|
12,100
|
|
|
|
Leased
|
|
|
|
2007
|
|
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico City(1)
|
|
Office
|
|
|
21,700
|
|
|
|
Leased
|
|
|
|
2013
|
|
Carretera(1)
|
|
Warehouse
|
|
|
221,700
|
|
|
|
Leased
|
|
|
|
2011
|
|
The Netherlands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utrecht(4)
|
|
Office
|
|
|
7,200
|
|
|
|
Leased
|
|
|
|
2008
|
|
Amsterdam(2)
|
|
Office
|
|
|
2,600
|
|
|
|
Leased
|
|
|
|
2011
|
|
New Zealand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auckland(4)
|
|
Office & Warehouse
|
|
|
35,000
|
|
|
|
Leased
|
|
|
|
2010
|
|
Poland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warsaw(4)
|
|
Office
|
|
|
3,200
|
|
|
|
Leased
|
|
|
|
2007
|
|
Spain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valencia(4)
|
|
Office & Warehouse
|
|
|
251,900
|
|
|
|
Leased
|
|
|
|
2015
|
|
Switzerland
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delemont(2)
|
|
Office
|
|
|
9,200
|
|
|
|
Leased
|
|
|
|
2009
|
|
Baar(4)
|
|
Office
|
|
|
3,700
|
|
|
|
Leased
|
|
|
|
2011
|
|
Turkey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Istanbul(4)
|
|
Office
|
|
|
11,000
|
|
|
|
Leased
|
|
|
|
2007
|
|
Wales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newport(4)
|
|
Warehouse
|
|
|
94,000
|
|
|
|
Leased
|
|
|
|
2013
|
|
Newport(4)
|
|
Warehouse
|
|
|
72,000
|
|
|
|
Leased
|
|
|
|
2018
|
|
Newport(4)
|
|
Warehouse
|
|
|
198,000
|
|
|
|
Owned
|
|
|
|
|
|
|
|
|
(1) |
|
Property used in the North American segment. |
|
(2) |
|
Property used in the Corporate function. |
|
(3) |
|
Property used in the Global Operations segment. |
|
(4) |
|
Property used in the International segment. |
In addition to the above listed facilities, the Company either
owns or leases various other properties approximating an
aggregate of 123,500 square feet which are utilized by its
various segments. The Company also either owns or leases an
aggregate of approximately 533,600 square feet not
currently being utilized in its operations or previously
included in restructuring actions, which are currently subleased
or offered for sublease.
The foregoing 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
current needs.
17
|
|
Item 3.
|
Legal
Proceedings
|
We are currently party to certain legal proceedings, none of
which, individually or in the aggregate, we believe to be
material to our financial condition.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None.
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, or its
subsidiaries or divisions employing such person. 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
|
|
Alfred J. Verrecchia(1)
|
|
|
64
|
|
|
President and Chief Executive
Officer
|
|
|
Since 2003
|
|
Brian Goldner(2)
|
|
|
43
|
|
|
Chief Operating Officer
|
|
|
Since 2006
|
|
David D. R. Hargreaves(3)
|
|
|
54
|
|
|
Executive Vice President, Finance
and Global Operations and Chief Financial Officer
|
|
|
Since 2007
|
|
Frank P. Bifulco, Jr.(4)
|
|
|
57
|
|
|
President, North American Sales
|
|
|
Since 2006
|
|
Simon Gardner(5)
|
|
|
46
|
|
|
President, Hasbro Europe
|
|
|
Since 2002
|
|
Barry Nagler
|
|
|
50
|
|
|
Senior Vice President, General
Counsel and Secretary
|
|
|
Since 2001
|
|
Deborah Thomas Slater(6)
|
|
|
43
|
|
|
Senior Vice President and
Controller
|
|
|
Since 2003
|
|
Martin R. Trueb
|
|
|
54
|
|
|
Senior Vice President and Treasurer
|
|
|
Since 1997
|
|
|
|
|
(1) |
|
Prior thereto, President and Chief Operating Officer from 2001
to 2003. |
|
(2) |
|
Prior thereto, President, U.S. Toys Segment from 2003 to
2006; prior thereto, President, U.S. Toys, from 2001 to
2003. |
|
(3) |
|
Prior thereto, Senior Vice President and Chief Financial Officer
from 2001 to 2007. |
|
(4) |
|
Prior thereto, President, U.S. Games since joining the
Company in June 2003; prior thereto, Senior Vice President and
Chief Marketing Officer of The Timberland Company since 2001. |
|
(5) |
|
From 2002 to 2003 also President, Asia Pacific; prior to 2002,
President, Hasbro International. |
|
(6) |
|
Prior thereto, Vice President and Assistant Controller from 1998
to 2003. |
18
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The Companys common stock, par value $.50 per share
(the Common Stock), is traded on the New York Stock
Exchange under the symbol HAS. The following table
sets forth the high and low sales prices as reported on the
Composite Tape of the New York Stock Exchange and the cash
dividends declared per share of Common Stock for the periods
listed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales Prices
|
|
|
Cash Dividends
|
|
Period
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
21.90
|
|
|
|
19.52
|
|
|
$
|
.12
|
|
2nd Quarter
|
|
|
21.27
|
|
|
|
17.90
|
|
|
|
.12
|
|
3rd Quarter
|
|
|
22.75
|
|
|
|
17.00
|
|
|
|
.12
|
|
4th Quarter
|
|
|
27.69
|
|
|
|
22.41
|
|
|
|
.12
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
21.50
|
|
|
|
18.11
|
|
|
$
|
.09
|
|
2nd Quarter
|
|
|
21.00
|
|
|
|
18.40
|
|
|
|
.09
|
|
3rd Quarter
|
|
|
22.35
|
|
|
|
19.83
|
|
|
|
.09
|
|
4th Quarter
|
|
|
20.75
|
|
|
|
17.75
|
|
|
|
.09
|
|
The approximate number of holders of record of the
Companys Common Stock as of February 8, 2007 was
9,400.
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. Payment of
dividends is subject to restrictions contained in agreements
relating to the Companys outstanding short-term and
long-term debt.
Issuer
Repurchases of Common Stock
Repurchases Made in the Fourth Quarter (in whole numbers of
shares and dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Dollar Value
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
of Shares
|
|
|
|
(a)
|
|
|
(b)
|
|
|
as Part of
|
|
|
that May yet
|
|
|
|
Total
|
|
|
Average
|
|
|
Publicly
|
|
|
be Purchased
|
|
|
|
Number of
|
|
|
Price
|
|
|
Announced
|
|
|
Under the
|
|
|
|
Shares
|
|
|
Paid per
|
|
|
Plans or
|
|
|
Plans or
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Programs
|
|
|
Programs
|
|
|
October 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(October 2, 2006 to
October 29, 2006)
|
|
|
1,055,122
|
|
|
$
|
22.9814
|
|
|
|
1,010,000
|
|
|
$
|
212,217,280
|
|
November 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(October 30, 2006 to
December 3, 2006)
|
|
|
404,769
|
|
|
$
|
26.8426
|
|
|
|
395,000
|
|
|
$
|
201,615,992
|
|
December 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(December 4, 2006 to
December 31, 2006)
|
|
|
210,100
|
|
|
$
|
26.8221
|
|
|
|
210,100
|
|
|
$
|
195,980,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,669,991
|
|
|
$
|
24.4004
|
|
|
|
1,615,100
|
|
|
$
|
195,980,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
In 2006, the Company utilized the remaining capacity it had
under the Board of Directors May 2005 authorization to
repurchase up to $350 million in common stock. In July
2006, the Companys Board of Directors authorized the
repurchase of up to an additional $350 million in common
stock. Purchases of the Companys common stock may be made
from time to time, subject to certain 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.
In October and November 2006, the Company repurchased an
aggregate of 54,891 shares upon the exercises of stock
options, which shares were delivered by the award recipient as
payment of the exercise price and related taxes. These shares
were purchased at the market prices on the dates of the
exercises of the stock options.
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Thousands of dollars and shares except per share data and
ratios)
|
|
|
Statement of Earnings Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,151,481
|
|
|
|
3,087,627
|
|
|
|
2,997,510
|
|
|
|
3,138,657
|
|
|
|
2,816,230
|
|
Net earnings before cumulative
effect of accounting change
|
|
$
|
230,055
|
|
|
|
212,075
|
|
|
|
195,977
|
|
|
|
175,015
|
|
|
|
75,058
|
|
Per Common Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before cumulative effect
of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.38
|
|
|
|
1.19
|
|
|
|
1.11
|
|
|
|
1.01
|
|
|
|
.43
|
|
Diluted
|
|
$
|
1.29
|
|
|
|
1.09
|
|
|
|
.96
|
|
|
|
.94
|
|
|
|
.43
|
|
Cash dividends declared
|
|
$
|
.48
|
|
|
|
.36
|
|
|
|
.24
|
|
|
|
.12
|
|
|
|
.12
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,096,905
|
|
|
|
3,301,143
|
|
|
|
3,240,660
|
|
|
|
3,163,376
|
|
|
|
3,142,881
|
|
Total long-term debt
|
|
$
|
494,917
|
|
|
|
528,389
|
|
|
|
626,822
|
|
|
|
688,204
|
|
|
|
1,059,115
|
|
Ratio of Earnings to Fixed
Charges(1)
|
|
|
9.74
|
|
|
|
8.33
|
|
|
|
6.93
|
|
|
|
4.56
|
|
|
|
2.05
|
|
Weighted Average Number of Common
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
167,100
|
|
|
|
178,303
|
|
|
|
176,540
|
|
|
|
173,748
|
|
|
|
172,720
|
|
Diluted
|
|
|
181,043
|
|
|
|
197,436
|
|
|
|
196,048
|
|
|
|
190,058
|
|
|
|
185,062
|
|
|
|
|
(1) |
|
For purposes of calculating the ratio of earnings to fixed
charges, fixed charges include interest, amortization of
deferred debt 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. |
20
|
|
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.
(Thousands of Dollars and Shares Except Per Share Data)
Executive
Summary
The Company earns revenue and generates cash through the sale of
a variety of toy and game products. The Company sells these
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 and within that half, the fourth
quarter. In 2006, 68% of the Companys net revenues were
generated in the second half of the year with 35% of annual net
revenues generated in the fourth quarter. In both 2005 and 2004,
percentages were comparable at 67% and 35% for the second half
and fourth quarter. While many of the Companys products
are based on brands 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, such as MARVEL and STAR WARS properties.
In January 2006 the Company simplified its operating segment
structure in order to better focus on consumer demands, better
anticipate the needs of its retail customers, provide a more
integrated toy and game marketing plan, place a greater
company-wide focus on its core brands and thereby improve its
overall business. The Companys North American toy and
games business is managed under common leadership, providing a
combined focus on developing, marketing, and selling products in
the U.S., Canada and Mexico. The International segment consists
of the Companys European, Asia Pacific and Latin American
marketing operations, excluding Mexico. The Companys
world-wide manufacturing and product sourcing operations are
managed through its Global Operations segment. The Hasbro
Products Group continues to be responsible for the world-wide
outlicensing of the Companys intellectual properties and
works closely with the North American and International segments
on the coordinated out-licensing activities of the
Companys brands.
The Companys focus remains on growing core owned and
controlled brands, developing new and innovative products which
respond to market insights, and optimizing efficiencies within
the Company to reduce costs, increase operating profits and
strengthen its balance sheet. While the Company has sought to
achieve 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. Given the strength of
its core brands, the Company may also seek to drive
product-related revenues by increasing the visibility of its
core brands through entertainment-based theatrical venues. As an
example of this, in July of 2007, the TRANSFORMERS motion
picture is expected to be released and the Company has developed
products based on the motion picture that will be marketed in
2007.
The Companys core brands represent Company-owned or
Company-controlled brands, such as G.I. JOE, TRANSFORMERS,
MY LITTLE PONY, MONOPOLY, MAGIC: THE GATHERING, PLAYSKOOL and
TONKA, 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 build a more consistent revenue stream and
basis for future growth. In 2006, the Company had strong sales
of core brand products, namely PLAYSKOOL, LITTLEST PET SHOP,
MONOPOLY, NERF, and PLAY-DOH.
21
In addition to its focus on core brands, the Companys
strategy also involves trying to meet ever-changing consumer
preferences by identifying and offering innovative products
based on market opportunities and insights. The Company believes
its strategy of focusing on the development of its core brands
and continuing to identify innovative new products will help to
prevent the Company from being dependent on the success of any
one product line.
With the theatrical release of Lucasfilms STAR WARS
EPISODE III: REVENGE OF THE SITH in May 2005, and the
subsequent holiday season DVD release, sales of product related
to the Companys strategic STAR WARS license were a
significant contributor to 2005 revenues and have continued to
be strong in 2006. Pairing this key licensed property with the
Companys ability to design and produce action figures,
role playing toys, and games, as well as its ability to launch
an integrated marketing campaign to promote the product
globally, was the key to this lines success. While sales
of product related to this license performed well in 2006, they
were lower than 2005.
While the Companys strategy has continued to focus on
growing its core brands and developing innovative, new products,
it will continue to evaluate and enter into arrangements to
license properties when the Company believes it is economically
attractive. In 2006, the Company entered into a license with
Marvel Entertainment, Inc. and Marvel Characters, Inc.
(collectively Marvel) to produce toys and games
based on Marvels portfolio of characters. The Company will
also incur royalties on products based on the theatrical release
of TRANSFORMERS in July 2007. While gross profits of theatrical
entertainment-based products are generally higher than many of
the Companys other products, sales from these products
also incur royalty expenses payable to the licensor. Such
royalties reduce the impact of these higher gross margins. In
certain instances, such as with Lucasfilms STAR WARS, the
Company may also incur amortization expense on property
right-based assets acquired from the licensor of such
properties, further impacting profit made on these products.
The Company remains committed to reducing fixed costs and
increasing operating margins. Over the last 5 years the
Company has improved its operating margin from 7.8% in 2002 to
11.9% in 2006. In the fourth quarter of 2006, as part of its
ongoing cost reduction efforts, the Company determined that it
will reduce its manufacturing activity in Ireland and transition
the manufacture of certain products to the Companys
suppliers in China. The Company is also investing to grow its
business in emerging international markets. With a strong
balance sheet, and having achieved a debt to capitalization
ratio of between
25-30%, the
Company will also continue to evaluate strategic alliances and
acquisitions which may complement its current product offerings
or allow it entry into an area which is adjacent to and
complementary to the toy and game business. The Company expects
to leverage revenue to offset the impact of these investments
and maintain 2007 operating margin levels near 2006.
In recent years, the Company has been seeking to return excess
cash to its shareholders through share repurchase and dividends.
As part of this initiative, in July 2006, the Companys
Board of Directors (the Board) authorized the
repurchase of an additional $350,000 in common stock after a
previous authorization of $350,000 was exhausted in July 2006.
For the fiscal year ended December 31, 2006, the Company
has invested $456,744 in the repurchase of 22,767 shares of
common stock in the open market. The Company intends to
opportunistically repurchase shares in the future subject to
market conditions. In addition, in February 2007, the Company
announced an increase in its quarterly dividend to $.16 per
share. This is the fourth consecutive year that the Board of
Directors has increased the dividend rate.
22
Summary
The relationship between various components of the results of
operations, stated as a percent of net revenues, is illustrated
below for each of the three fiscal years ended December 31,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales
|
|
|
41.4
|
|
|
|
41.7
|
|
|
|
41.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
58.6
|
|
|
|
58.3
|
|
|
|
58.2
|
|
Amortization
|
|
|
2.5
|
|
|
|
3.3
|
|
|
|
2.4
|
|
Royalties
|
|
|
5.4
|
|
|
|
8.0
|
|
|
|
7.4
|
|
Research and product development
|
|
|
5.4
|
|
|
|
4.9
|
|
|
|
5.2
|
|
Advertising
|
|
|
11.7
|
|
|
|
11.8
|
|
|
|
12.9
|
|
Selling, distribution and
administration
|
|
|
21.7
|
|
|
|
20.2
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
11.9
|
|
|
|
10.1
|
|
|
|
9.8
|
|
Interest expense
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
1.1
|
|
Interest income
|
|
|
(0.9
|
)
|
|
|
(0.8
|
)
|
|
|
(0.3
|
)
|
Other (income) expense, net
|
|
|
1.1
|
|
|
|
(0.2
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
10.8
|
|
|
|
10.1
|
|
|
|
8.7
|
|
Income taxes
|
|
|
3.5
|
|
|
|
3.2
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
7.3
|
%
|
|
|
6.9
|
%
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results
of Operations
The fiscal year ended December 31, 2006 was a fifty-three
week year while the fiscal years ended December 25, 2005
and December 26, 2004 were fifty-two week years.
Net earnings for the fiscal year ended December 31, 2006
were $230,055, or $1.29 per diluted share. This compares to
net earnings for fiscal 2005 and 2004 of $212,075 and $195,977,
or $1.09 and $.96 per diluted share, respectively.
On December 26, 2005, the first day of fiscal 2006, the
Company adopted Statement of Financial Accounting Standards
No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which required that the Company
measure all stock-based compensation awards using a fair value
method and record such expense in its financial statements. The
Company adopted this statement using the modified prospective
method. Under this adoption method, the Company is recording
expense related to stock option awards that were unvested as of
the date of adoption as well as all awards made after the date
of adoption. The adoption of this statement resulted in total
expense, net of tax, of $14,285 in 2006.
Net earnings and basic and diluted earnings per share for 2005
include income tax expense of approximately $25,800 related to
the Companys repatriation of approximately $547,000 of
foreign earnings in the fourth quarter of 2005 pursuant to the
special incentive provided by the American Jobs Creation Act of
2004.
Consolidated net revenues for the year ended December 31,
2006 were $3,151,481 compared to $3,087,627 in 2005 and
$2,997,510 in 2004. Most of the Companys revenues and
operating profits were derived from its two principal segments:
North America and International, which are discussed in detail
below. Consolidated net revenues were positively impacted by
foreign currency translation in the amount of $27,800 in 2006
and $1,029 in 2005 as the result of the overall weaker
U.S. dollar in each of those years. The following table
presents net revenues and operating profit data for the
Companys two principal segments for 2006, 2005 and 2004.
Both 2005 and 2004 results have been reclassified to conform to
the Companys new operating segment structure. The
operating profit for 2005 and 2004 for each of these segments
have been adjusted to include the impact of expense related to
stock options as disclosed under SFAS 123, consistent
23
with the Companys management reporting. See notes 1
and 15 to the consolidated financial statements for further
details.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
%
|
|
|
|
|
|
|
2006
|
|
|
Change
|
|
|
2005
|
|
|
Change
|
|
|
2004
|
|
|
Net Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,130,290
|
|
|
|
4
|
%
|
|
$
|
2,038,556
|
|
|
|
4
|
%
|
|
$
|
1,956,031
|
|
International
|
|
$
|
959,319
|
|
|
|
(3
|
)%
|
|
$
|
988,591
|
|
|
|
1
|
%
|
|
$
|
977,128
|
|
Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
275,959
|
|
|
|
67
|
%
|
|
$
|
165,676
|
|
|
|
1
|
%
|
|
$
|
163,786
|
|
International
|
|
$
|
90,893
|
|
|
|
(15
|
)%
|
|
$
|
106,435
|
|
|
|
13
|
%
|
|
$
|
94,487
|
|
North
America
North American segment net revenues for the year ended
December 31, 2006 increased 4% to $2,130,290 from
$2,038,556 in 2005. The impact of foreign currency translation
on North American segment net revenues in 2006 was favorable and
increased net revenues by approximately $3,200. Anticipated
decreased revenues of STAR WARS products were more than offset
primarily by increased sales of LITTLEST PET SHOP, PLAYSKOOL,
NERF, I-DOG and MONOPOLY products, as well as revenues from the
successful reintroduction of BABY ALIVE. 2006 revenues were also
positively impacted, to a lesser extent, by increased sales of
PLAY-DOH and TRANSFORMERS products. STAR WARS revenues were
significant in 2005 due to the theatrical and DVD releases of
STAR WARS EPISODE III: REVENGE OF THE SITH and remained strong
in 2006. In 2007, the Company will introduce products related to
two anticipated major motion picture releases, SPIDER-MAN 3 in
May of 2007 and TRANSFORMERS in July of 2007.
North American operating profit increased to $275,959 in 2006
from $165,676 in 2005. The increase in operating profit is
primarily due to increased gross profit as a result of the
increased sales in 2006 as well as decreases in royalty and
amortization expense principally due to the decrease in sales of
STAR WARS products. Operating profit for the North American
segment was negatively impacted by higher research and product
development costs due to higher investments in the PLAYSKOOL
line and costs related to MARVEL products expected to be
introduced in 2007. North American operating profit was
negatively impacted in 2005 by a loss of approximately $23,000
in the electronic games category, which included charges
associated with inventory obsolescence and customer allowances
related to plug and play games.
North American segment net revenues for the year ended
December 25, 2005 increased 4% to $2,038,556 from
$1,956,031 in 2004. North American revenues were positively
impacted in 2005 by currency translation by approximately
$11,300 due to the stronger Mexican Peso and Canadian Dollar.
The increase in volume was predominantly due to increased
revenues from STAR WARS related products as the result of the
theatrical and DVD release of STAR WARS EPISODE III: REVENGE OF
THE SITH in 2005. In addition to the increase from STAR WARS
related products, North American net revenues were also
positively impacted by the reintroduction of LITTLEST PET SHOP
products as well as increased sales of NERF products. These
increases were partially offset by decreased games sales in
2005, primarily MAGIC: THE GATHERING and DUEL MASTERS trading
card games. Net revenues in 2005 were also negatively impacted
by decreased sales of VIDEONOW and FURREAL FRIENDS products as
well as the continued decline in BEYBLADE products.
North American segment operating profit increased slightly to
$165,676 in 2005 from $163,786 in 2004. Increased gross profit
primarily resulting from higher net revenues was partially
offset by higher royalty and amortization expense associated
with higher sales of STAR WARS products. 2005 operating profit
was also positively impacted by decreased advertising expense
due to the high percentage of net revenues that represented STAR
WARS products, which do not require as much advertising and
promotion to raise awareness as an internally-developed product
would. North American operating profit was negatively impacted
in 2005 by a loss of approximately $23,000 in the electronic
games category, which included charges associated with inventory
obsolescence and customer allowances related to plug and play
games. Currency
24
translation had a positive impact of approximately $1,900 on the
operating profit of the North American segment in 2005.
International
International segment net revenues for the year ended
December 31, 2006 decreased by 3% to $959,319 from $988,591
in 2005. In 2006 net revenues were positively impacted by
currency translation by approximately $24,300 as a result of a
weaker U.S. dollar. The decrease in net revenues was
primarily the result of decreased sales of STAR WARS products in
2006 as well as decreased sales of FURBY and DUEL MASTERS
products. These decreases were partially offset by increased
revenues from LITTLEST PET SHOP, PLAYSKOOL and MONOPOLY
products. To a lesser extent, 2006 net revenues were also
positively impacted by increased sales of MY LITTLE PONY,
TRANSFORMERS, and PLAY-DOH products as well as the
reintroduction of the BABY ALIVE doll.
International segment operating profit decreased 15% to $90,893
in 2006 from $106,435 in 2005. Operating profit in 2006 was
positively impacted by approximately $4,900 due to the
translation of foreign currencies to the U.S. dollar. The
decrease in operating profit is the result of decreased gross
profit primarily as the result of the decrease in net revenues,
partially offset by decreases in royalties and amortization
expense as a result of the decrease in sales of STAR WARS
products.
International segment net revenues for the year ended
December 25, 2005 increased by 1% to $988,591 from $977,128
in 2004. In 2005, net revenues were negatively impacted by
approximately $10,000 as a result of the stronger
U.S. dollar. The increase in revenues was primarily the
result of increased sales of STAR WARS products in 2005 and, to
a lesser extent, the successful reintroduction of LITTLEST PET
SHOP and FURBY products and the introduction of B-DAMAN
products. These increases were partly offset by decreased sales
of BEYBLADE and ACTION MAN products as well as decreased sales
of FURREAL FRIENDS and VIDEONOW products. Revenues for board
games grew internationally in 2005, while the Company
experienced decreased revenues in its trading card games,
primarily DUEL MASTERS and MAGIC: THE GATHERING.
International operating profit increased 13% to $106,435 in 2005
from $94,487 in 2004. Increased gross profit as a result of
increased revenues was partially offset by higher amortization
and royalty expenses as a result of the higher sales of licensed
products, primarily STAR WARS products, in 2005. International
operating profit was negatively impacted by approximately $4,500
due to the translation of foreign currencies to the
U.S. dollar.
Gross
Profit
The Companys gross profit margin increased to 58.6% for
the year ended December 31, 2006 from 58.3% in 2005. This
increase is due to increased revenues from certain core brand
products that have higher gross margins, such as LITTLEST PET
SHOP products and traditional board games, such as MONOPOLY.
Gross profit in 2006 was negatively impacted by a charge of
approximately $10,300 related to the Companys decision to
transfer certain manufacturing activities from its Ireland
manufacturing facility to its suppliers in China. Gross margin
in 2005 was also negatively impacted by inventory obsolescence
and customer allowances on plug and play games.
The Companys gross profit margin increased slightly to
58.3% for the year ended December 25, 2005 from 58.2% in
2004. This increase was primarily due to increased sales of STAR
WARS products. Gross profit margin in 2005 was also impacted by
decreased sales of VIDEONOW products that have lower gross
margins. These increases were largely offset by inventory
obsolescence and customer allowances on plug and play games as
well as lower sales of trading card games that carry a higher
gross margin.
The Company aggressively monitors its levels of inventory,
attempting to avoid unnecessary expenditures of cash and
potential charges related to obsolescence. The Companys
failure to accurately predict and respond to consumer demand
could result in overproduction of less popular items, which
could result in higher obsolescence costs, causing a reduction
in gross profit.
25
Expenses
The Companys operating expenses, stated as percentages of
net revenues, are illustrated below for the three fiscal years
ended December 31, 2006:
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2006
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2005
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2004
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Amortization
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2.5
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%
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3.3
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%
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2.4
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%
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Royalties
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5.4
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8.0
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7.4
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Research and product development
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5.4
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4.9
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5.2
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Advertising
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11.7
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11.8
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12.9
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Selling, distribution and
administration
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21.7
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20.2
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20.5
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Amortization expense decreased to $78,934 in 2006 from $102,035
in 2005. This decrease was due to decreased amortization of STAR
WARS property rights as a result of the decrease in sales of
STAR WARS products in 2006. Amortization of these property
rights is based on actual sales of products as a portion of
total expected sales of related products related to this
licensing right. Amortization is generally higher in years where
theatrical or DVD releases occur, such as in 2005. Amortization
expense increased to $102,035 in 2005 from $70,562 in 2004 as a
result of increased amortization of STAR WARS property rights
due to the theatrical and DVD releases of STAR WARS
EPISODE III: REVENGE OF THE SITH.
Royalty expense decreased to $169,731 or 5.4% of net revenues in
2006 compared to $247,283 or 8.0% of net revenues in 2005. This
decrease primarily relates to the decrease in sales of STAR WARS
products in 2006, as a higher percentage of net revenues were
from the Companys core brands. Royalty expense in 2005
increased to $247,283 or 8.0% of net revenues in 2005 from
$223,193 or 7.4% of net revenues in 2004. Increased royalty
expense in 2005 related primarily to increased sales of STAR
WARS related products. The increase from STAR WARS products was
partially offset by lower sales of BEYBLADE, SHREK and DISNEY
products. The Company expects royalty expense to increase in
both dollars and as a percentage of net revenues in 2007
compared to 2006, due to significant anticipated revenues from
MARVEL products in 2007 primarily due to the anticipated release
of SPIDER-MAN 3 in May. In addition, in 2007, the Company will
incur additional royalty expense on certain sales of
TRANSFORMERS products that are related to the major motion
picture release anticipated in July of 2007.
Research and product development expense increased in 2006 to
$171,358 or 5.4% of net revenues from $150,586 or 4.9% of net
revenues in 2005. This increase is the result of development
expenses related to the MARVEL line of products as well as
increased investment in the PLAYSKOOL line. Research and product
development decreased in 2005 to $150,586 or 4.9% of net
revenues from $157,162 or 5.2% of net revenues in 2004. The
decrease reflected increased efficiencies in the product
development of certain toy lines resulting from a realignment in
2004. This realignment streamlined the workforce of these toy
lines and moved certain product development activity outside of
the U.S. While the Company strives to incur these costs in
the most efficient manner possible, investment in research and
product development costs is an important component to the
Companys strategy to grow core brands and to create new
and innovative toy and game products.
Advertising expense in 2006 was $368,996 or 11.7% of net
revenues which was consistent with the 2005 expense of $366,371
or 11.8% of net revenues. Advertising expense in 2005 decreased
in dollars and as a percentage of net revenues from $387,523 or
12.9% of net revenues in 2004. The Company continues to focus on
marketing to raise awareness of its core brands, as well as to
introduce new products.
Selling, distribution and administration expenses were $682,214
or 21.7% of net revenues in 2006 compared to $624,560 or 20.2%
in 2005. Approximately $20,000 of this increase relates to the
Companys adoption of SFAS 123R in 2006 which required
that the Company measure all stock-based compensation awards
using a fair value method and record such expense in its
financial statements. The remainder of the increase primarily
relates to increased sales and marketing expense in 2006
associated with the higher level of sales and increased bonus
and incentive provisions due to the strong performance of the
Company in 2006. Selling, distribution and administration
expenses increased in dollars but decreased as a percentage of
net revenues to $624,560 or 20.2% of net revenues in 2005, from
$614,401 or 20.5% of net revenues in 2004. The
26
increase in administration costs in dollars in 2005 over 2004
primarily reflected increased performance incentive bonus
provisions reflecting the Companys improved performance.
Interest
Expense
Interest expense continued to decrease in 2006 to $27,521 from
$30,537 in 2005 and $31,698 in 2004. Decreases in interest
expense resulting from lower levels of debt were partially
offset by increases resulting from higher interest rates in
2006. The decrease in interest expense mainly reflects the
reduction in the Companys long-term debt. The Company
repurchased or repaid principal amounts of long-term debt of
$32,743 in 2006, $93,303 in 2005, and $56,697 in 2004. The
Company will continue to review the amount of long-term debt
outstanding as part of its strategic capital structure objective
of maintaining a debt to capitalization ratio between 25% and
30%.
Interest
Income
Interest income was $27,609 in 2006 compared to $24,157 in 2005
and $7,729 in 2004. Interest income includes $5,200 in 2006
related to a long-term deposit that was refunded during 2006 and
approximately $4,100 in 2005 related to an IRS settlement. The
increase in interest income reflects the Companys strong
financial position. During a portion of 2006, the Company
invested excess cash in auction rate securities, which generated
a higher rate of return and contributed to the increase in
interest income in 2006. In recent years the Company has reduced
its long-term debt which has reduced cash required to service
debt and allowed the Company to retain and invest excess cash.
Other
(Income) Expense, Net
Other (income) expense, net of $34,977 in 2006 compares to
$(6,772) in 2005 and $8,955 in 2004. The major component of
other (income) expense is non-cash (income) expense related to
the change in fair value of certain warrants required to be
classified as a liability. These warrants are required to be
adjusted to their fair value each quarter through earnings. For
2006, 2005 and 2004, expense (income) related to the change in
fair value of these warrants was $31,770, $(2,080) and
$(12,710), respectively. The fair value of these warrants is
primarily affected by the Companys stock price, but is
also affected by the Companys stock price volatility and
dividends, as well as risk-free interest rates. Assuming the
Companys stock volatility and dividend payments, as well
as risk-free interest rates remain constant, the fair value of
the warrants would increase and the Company would recognize a
charge to earnings as the price of the Companys stock
increases. If the price of the Companys stock decreases
and the Companys stock volatility, dividend payments, and
the risk-free interest rates remain constant, the fair value of
the warrants will decrease and the Company will recognize
income. Based on a hypothetical increase in the Companys
stock price to $30.00 per share at December 31, 2006
from its actual price of $27.25 a share on that date, the
Company would have recognized a non-cash charge of approximately
$52,190 rather than actual non-cash charge recorded of $31,770
for the year ended December 31, 2006, to reflect the change
in the fair value of the warrants from their fair value of
$123,860 at December 25, 2005.
In addition to the above, other (income) expense, net in 2006
and 2004 also include $2,629 and $8,988, respectively,
representing write-downs of the value of the common stock of
Infogrames, held by the Company as an
available-for-sale
investment. This write-down resulted from an
other-than-temporary
decline in the fair value of this investment.
Income
Taxes
Income tax expense was 32.6% of pretax earnings in 2006 compared
with 31.8% of pretax earnings in 2005 and 24.6% of pretax
earnings in 2004. Income tax expense for 2006 includes
approximately $7,800 of discrete tax events, primarily relating
to the settlement of various tax exams in multiple
jurisdictions. Income tax expense for 2005 includes
approximately $25,800 related to the repatriation of $547,000 of
foreign earnings pursuant to the special incentive provided by
the American Jobs Creation Act of 2004. Income tax expense for
2005 was also reduced by approximately $4,000, due primarily to
the settlement of an Internal
27
Revenue Service examination of tax years ending in December
2001. Absent these items and the effect of the adjustment of
certain warrants to their fair value, which has no tax effect,
the 2006 effective tax rate would have been 27.6% compared with
24.9% in 2005 and 25.9% in 2004. The increase in the adjusted
rate to 27.6% in 2006 from 24.9% in 2005 was the result of
higher earnings in jurisdictions with higher statutory tax
rates. The decrease in the adjusted rate, to 24.9% in 2005 from
25.9% in 2004, was due to the tax impact of higher operating
profits in jurisdictions with lower statutory tax rates.
Liquidity
and Capital Resources
The Company has historically generated a significant amount of
cash from operations. In 2006, the Company funded its operations
and liquidity needs primarily through cash flows from
operations, and, when needed, proceeds from its accounts
receivable securitization program and borrowings under its
unsecured credit facilities. During 2007, the Company expects to
continue to fund its working capital needs primarily through
operations and, when needed, using proceeds from the accounts
receivable securitization program and borrowings under 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 securitization
program and other available lines of credit, are adequate to
meet its needs for 2007.
During the last five fiscal years, as part of its strategy of
reducing long-term debt and its overall
debt-to-capitalization
ratio, the Company has repurchased or repaid approximately
$679,000 in aggregate principal amount of long-term debt,
primarily using cash from operations. Remaining principal
amounts of long-term debt at December 31, 2006, were
$494,983. The Company believes that the reduction in its
debt-to-capitalization
ratio has improved its liquidity situation by decreasing cash
required to service outstanding debt and increasing the ability
of the Company to obtain additional financing should the need to
do so arise in the future.
At December 31, 2006, cash and cash equivalents, net of
short-term borrowings, were $704,818 compared to $927,592 and
$707,043 at December 25, 2005 and December 26, 2004,
respectively. Hasbro generated $320,647, $496,624, and $358,506
of cash from its operating activities in 2006, 2005 and 2004,
respectively. The higher cash flows from operations in 2005
compared to 2006 and 2004 is primarily due to the mix of
products in 2005 net revenues. Net earnings in 2005
included increased non-cash expenses primarily as a result of
increased STAR WARS revenues. Increased royalty expense in 2005
related to revenues from STAR WARS products, most of which had
been paid in prior years. In 2006 and 2005, operating cash flows
were impacted by royalty advances paid of $105,000 and $35,000
related to MARVEL and STAR WARS agreements, respectively. In
addition, the Company had increased amortization expense in
2005, which did not impact the cash flows from operations.
Accounts receivable increased to $556,287 at December 31,
2006 from $523,232 at December 25, 2005. Fourth quarter
days sales outstanding increased slightly to 45 days in
2006 from 44 days in 2005. Fourth quarter days sales
outstanding in 2004 was 49. The increase in days sales
outstanding from 2005 primarily reflects increases in
international accounts receivable due to the weaker
U.S. dollar in 2006. The December 31, 2006 accounts
receivable balance includes an increase of approximately $18,800
related to the currency impact of the weaker U.S. dollar.
The Company has a revolving accounts receivable securitization
facility whereby the Company is able to sell undivided interests
in qualifying accounts receivable on an ongoing basis. At
December 31, 2006 and December 25, 2005, there was
$250,000 sold at each period-end under this program.
Inventories increased to $203,337 at December 31, 2006 from
$179,398 at December 25, 2005. The increase in inventory
represents higher levels of inventory at December 31, 2006
primarily due to anticipated sales of MARVEL products in early
2007. In addition, inventories increased approximately $6,100
due to the weaker U.S. dollar in 2006. The decrease in
inventory to $179,398 at December 25, 2005 from $194,780 at
December 26, 2004 reflects higher levels of inventory at
December 26, 2004 due to lower levels of sales in the
fourth quarter of 2004 and, to a lesser extent, lower
international inventories in U.S. dollars as a result of
the stronger U.S. dollar in 2005.
Prepaid expenses and other current assets increased to $243,291
at December 31, 2006 from $185,297 at December 25,
2005. This increase is primarily due to a royalty advance paid
to MARVEL in 2006, of which
28
approximately $87,400 is recorded in prepaid assets and $12,930
is shown in long-term assets at December 31, 2006. Prepaid
expenses and other current assets decreased to $185,297 in 2005
from $219,735 in 2004. This decrease is primarily related to
decreased prepaid royalties as a result of the increased sales
of STAR WARS products in 2005. 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 recorded. The decrease related to prepaid royalties was
partially offset by increased deferred taxes. With respect to
the MARVEL and STAR WARS licenses, the Company has prepaid
royalties recorded in both current and non-current assets.
Accounts payable and accrued expenses increased to $895,311 at
December 31, 2006 from $863,280 at December 25, 2005.
$31,770 of this increase relates to the increase in fair value
of the Lucas warrants that the Company is required to record as
liabilities under SFAS 150. As a result of SFAS 150,
the Company classifies these warrants containing a put option as
a current liability and adjusts the amount of this liability to
its fair value on a periodic basis. Increases from higher
accrued bonus and incentive payments as a result of the
Companys strong performance in 2006 were offset by
decreases in other accrued amounts, principally accrued
royalties. Accounts payable and accrued expenses increased to
$863,280 at December 25, 2005 from $806,528 at
December 26, 2004. This primarily reflected an increase in
accrued income taxes primarily as a result of improved earnings
in 2005 and, to a lesser extent, taxes payable related to
earnings repatriated under the American Jobs Creation Act (the
Act). In December 2005, the Company repatriated
approximately $547,000 under this Act. The increase from accrued
income taxes was partially offset by lower accrued royalties at
December 25, 2005 due to lower sales of BEYBLADE and SHREK
products in the fourth quarter of 2005. These contracts did not
require the Company to prepay royalties and these amounts were
paid in arrears.
Cash flows from investing activities were a net utilization of
$83,604, $120,671, and $84,967 in 2006, 2005, and 2004,
respectively. During 2005, the Company expended $65,000 to
reacquire the digital gaming rights for its owned or controlled
properties from Infogrames Entertainment SA (Infogrames). These
rights were previously held by Infogrames on an exclusive basis
as a result of a licensing agreement entered into during 2000.
In addition, the Company expended $14,179 to purchase the assets
of Wrebbit Inc., a Montreal-based creator and manufacturer of
innovative puzzles. In 2005, the Company also had proceeds from
the sales of property, plant and equipment of $33,083. These
proceeds came primarily from the sale of the Companys
former manufacturing facility in Spain. During 2006, the Company
expended approximately $82,000 on additions to its property,
plant and equipment while during 2005 and 2004 it expended
approximately $71,000 and $79,000, respectively. Of these
amounts, 63% in 2006, 61% in 2005, and 58% in 2004 were for
purchases of tools, dies and molds related to the Companys
products. In 2007, the Company expects capital expenditures to
increase and be in the range of $90,000 to $110,000, primarily
as the result of increased tooling requirements for the MARVEL
line. During the three years ended December 31, 2006,
depreciation and amortization of plant and equipment was
$67,773, $78,097, and $75,618, respectively. In 2004, the
Company acquired the remaining unowned interest in its Latin
America operations for total consideration of $9,824. This
purchase resulted in an increase in goodwill in the amount of
$9,390. The Company made no acquisitions of businesses in 2006.
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 varying amounts during the year.
During 2006, 2005 and 2004, the Company primarily utilized cash
from operations and its accounts receivable securitization
program to fund its operations.
The Company is party to an accounts receivable securitization
program, which was amended in December 2006, whereby the Company
sells, 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 is consolidated with the Company for
financial reporting purposes. The securitization program then
allows HRF to sell, on a revolving basis, an undivided interest
of up to $250,000 in the eligible receivables it holds to
29
certain bank conduits. During the period from the first day of
the October fiscal month through the last day of the following
January fiscal month, this limit is increased to $300,000. The
program provides the Company with a cost-effective source of
working capital. Based on the amount of eligible accounts
receivable as of December 31, 2006, the Company had
$300,000 available to sell under this program of which $250,000
was utilized.
In June 2006, the Company entered into a five-year revolving
credit agreement (the Agreement) which provides the
Company with a $300,000 committed borrowing facility that
replaced the prior credit facility. The Company has the ability
to request increases in the committed facility in additional
increments of at least $50,000, up to a total of committed
facility of $500,000. The Company is not required to maintain
compensating balances under the 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 fiscal year
ended December 31, 2006. The Company had no borrowings
outstanding under its committed revolving credit facility at
December 31, 2006. The Company also has other uncommitted
lines from various banks, of which approximately $37,755 was
utilized at December 31, 2006. Amounts available and unused
under the committed line at December 31, 2006 were
approximately $297,131.
Net cash utilized by financing activities was $467,279 in 2006.
Of this amount, $456,744, which includes transaction costs, was
used to repurchase shares of the Companys common stock. In
July 2006, the Companys Board of Directors authorized the
repurchase of an additional $350,000 in common stock subsequent
to the full utilization of the Board of Directors May 2005
authorization of $350,000. During 2006, the Company repurchased
22,767 shares at an average price of $20.03. In addition,
$32,743 was used to repay long-term debt. Dividends paid were
$75,282 in 2006 reflecting the increase in the Companys
quarterly dividend rate to $.12 per share in 2006 compared
to $.09 per share in 2005. These uses of cash were partially
offset by cash receipts of $86,257 from the exercise of employee
stock options.
Net cash utilized by financing activities was $158,641 in 2005.
This amount included repayments in principal amount of long-term
debt totaling $93,303. These amounts primarily related to
$71,970 of bonds that matured in November of 2005. The remaining
amount related to repayment of long-term debt associated with
the Companys former manufacturing facility in Spain.
Dividends paid increased to $58,901 as a result of the increase
of the quarterly dividend rate to $0.09 in 2005 from $0.06. In
2005, the Company repurchased 2,386 shares at an average
price of $20.10 under the Board of Directors May 2005
authorization. The total cost of these repurchases, including
transaction costs, was $48,030. The Company received $45,278 in
2005 in proceeds from the exercise of employee stock options.
Net cash utilized by financing activities was $75,824 in 2004.
This amount included repurchases in principal amount of
long-term debt totaling $56,697 in connection with the
Companys strategy of reducing its overall debt and
improving its
debt-to-capitalization
ratio. The Company received $25,836 from the exercise of stock
options during the year. Cash paid for dividends in 2004 was
$37,088.
At December 31, 2006, the Company has outstanding $249,996
in principal amount of senior convertible debentures due 2021.
The senior convertible debentures bear interest at 2.75%, which
could be subject to an upward adjustment in the rate, not to
exceed 11%, should the price of the Companys stock trade
at or below $9.72 per share for 20 of the 30 trading days
preceding the fifth day prior to an interest payment date. This
contingent interest feature represents a derivative instrument
that is recorded on the balance sheet at its fair value, with
changes in fair value recognized in the statement of operations.
If the closing price of the Companys stock exceeds $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 will be
convertible at an initial conversion price of $21.60 in the next
calendar quarter. At December 31, 2006, this conversion
feature was met and the bonds are convertible through
March 31, 2007 at which time the conversion feature will be
reassessed. In addition, if the closing price of the
Companys stock exceeds $27.00 for at least 20 trading days
in any 30 day period, the Company has the right to call the
debentures by giving notice to the holders of the debentures.
During a prescribed notice period, the holders of the debentures
have the right to convert their debentures in accordance with
the conversion terms described above. The holders of
30
these debentures may also put the notes back to Hasbro in
December 2011 and December 2016 at the original principal
amount. At that time, the purchase price may be paid in cash,
shares of common stock or a combination of the two, at the
Companys discretion. While the Companys current
intent is to settle in cash any puts exercised, there can be no
guarantee that the Company will have the funds necessary to
settle this obligation in cash. On December 1, 2005, the
holders of these debentures had the option to put these notes
back to Hasbro. On that date, the Company redeemed $4 of these
notes in cash.
The Company has remaining principal amounts of long-term debt at
December 31, 2006 of approximately $494,983. As detailed
below in Contractual Obligations and Commercial Commitments,
this debt is due at varying times from 2008 through 2028. In
addition, the Company is committed to guaranteed royalty and
other contractual payments of approximately $91,890 in 2007,
which includes $70,000 of royalty commitments related to a
contract signed in January 2006 with Marvel Entertainment, Inc.
and Marvel Characters, Inc. Also, as detailed in Contractual
Obligations and Commercial Commitments, the Company has certain
warrants, currently recorded in accrued liabilities, that may be
settleable for, at the Companys option, $100,000 in cash
or $110,000 in the Companys stock, such stock being valued
at the time of the exercise of the option. The Company believes
that cash from operations, including the securitization
facility, and, if necessary, its line of credit, will allow the
Company to meet these and other obligations listed. The Company
will continue to review the amount of long-term debt outstanding
as part of its strategic capital structure objective of
maintaining a debt to capitalization ratio between 25% and 30%.
In July 2006, the Companys Board of Directors authorized
the repurchase of up to $350,000 in common stock, replacing a
fully utilized prior authorization of $350,000 dated May 2005.
Purchases of the Companys common stock may be made in the
open market or through privately negotiated transactions. The
Company has no obligation to repurchase shares under the open
authorization, and the timing, actual number, and the 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. In 2006, the Company repurchased
22,767 shares at an average price of $20.03 under these
authorizations. The total cost of these repurchases, including
transaction costs, was $456,744.
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 the 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, inventory valuation,
recoverability of goodwill and intangible assets, recoverability
of royalty advances and commitments, pension costs and
obligations, and stock-based compensation.
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 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 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
31
against actual results and any adjustments are recorded at that
time as an increase or decrease to net revenues. During 2006,
there have been no material adjustments to the Companys
estimates.
Inventory
Valuation
Inventory is valued at the lower of cost or market. Based upon a
consideration of quantities on hand, actual and projected sales
volume, anticipated product selling prices and product lines
planned to be discontinued, slow-moving and obsolete inventory
is written down to its net realizable value. Failure to
accurately predict and respond to consumer demand could result
in the Company under producing popular items or overproducing
less popular items. Management estimates are monitored on a
quarterly basis and a further adjustment to reduce inventory to
its net realizable value is recorded, as an increase to cost of
sales, when deemed necessary under the lower of cost or market
standard. During 2006, there have been no material adjustments
to the Companys estimates.
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 impairment test was performed in the
fourth quarter of 2006 and no impairment was 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 31, 2006, the Company has goodwill and
intangible assets with indefinite lives of $545,676 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 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
$456,519 at December 31, 2006. During 2006, there were no
impairment charges related to these intangible assets.
Recoverability
of Royalty Advances and Commitments
The recoverability of 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
32
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 remaining 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 31, 2006, the Company had $181,561 of prepaid
royalties, $116,792 of which are included in prepaid expenses
and other current assets and $64,769 which are included in other
assets.
Pension
Costs and Obligations
The Company, except for certain international subsidiaries, has
pension plans covering substantially all of its full-time
employees. Pension expense is based on actuarial computations of
current and future benefits using estimates for expected return
on assets, expected compensation increases, and applicable
discount rates.
The estimates for the Companys domestic plans are
established at the Companys measurement date of
September 30 to measure the liabilities and assets of the
plans as of that date and to establish the expense for the
upcoming year. As a result of the Companys adoption of
Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans,
(SFAS No. 158) in December 2006, the
Company will be required to change the measurement date for its
pension plans to match its year-end date by 2008.
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 domestic plan assets was 8.75% in
2006, 2005 and 2004. 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 .25% in the estimate of expected return
on plan assets would have increased 2006 pension expense for
U.S. plans by approximately $550.
Expected compensation increases are estimated using a
combination of historical and expected compensation increases.
Based on this analysis, the Companys estimate of expected
long-term compensation increases for its U.S. plans was
4.0% in 2006, 2005 and 2004. Increases in estimated compensation
increases would result in higher pension expense while decreases
would lower pension expense.
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. Based on this
long-term corporate bond yield at September 30, 2006, the
Companys measurement date for its pension assets and
liabilities, the Companys discount rate for its domestic
plans used for the calculation of 2007 pension expense was 5.75%
compared to a rate of 5.50% used in the calculation of 2006
pension expense and 5.75% used in the calculation of 2005
pension expense. 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 .25% in the
Companys discount rate would have increased 2006 pension
expense and the 2006 projected benefit obligation by
approximately $756 and $9,395, respectively.
In accordance with Statement of Financial Accounting Standards
No. 87, Employers Accounting for Pensions,
actual results that differ from the actuarial assumptions are
accumulated and, if outside a certain corridor, amortized over
future periods and, therefore generally affect recognized
expense in future periods. In December 2006, the Company adopted
SFAS No. 158, which required that the funded status of
the plans be recognized on the Companys balance sheet and
any unrecognized gains or losses be recorded to accumulated
other comprehensive income. At December 31, 2006, the
Company has unrecognized actuarial losses of $48,879 included in
accumulated other comprehensive income related to its defined
benefit pension plans. Assets in the plan are valued on the
basis of their fair market value on the measurement date.
33
Stock-Based
Compensation
The Company has a stock-based compensation plan for employees
and non-employee members of the Companys Board of
Directors. Under this plan, the Company grants stock options at
or above the fair market value of the Companys stock. On
December 26, 2005, the first day of fiscal 2006, the
Company adopted SFAS 123R, which requires the Company to
measure all stock-based compensation awards using a fair value
method and record such expense in its consolidated financial
statements. The Company uses the Black-Scholes option pricing
model to value the stock options that are granted under these
plans. The Black-Scholes method includes four significant
assumptions: (1) expected term of the options,
(2) risk-free interest rate, (3) expected dividend
yield, and (4) expected stock price volatility. For the
Companys 2006 stock option grant, the weighted average
expected term was approximately 5 years. This amount is
based on a review of employees exercise history relating
to stock options as well as the contractual term of the option.
The weighted average risk-free interest rate used for 2006 stock
option grants was 4.98%. This estimate was based on the interest
rate available on U.S. treasury securities with durations
that approximate the expected term of the option. For 2006 stock
option grants, the weighted average expected dividend yield used
was 2.55% which is based on the Companys current annual
dividend amount divided by the stock price on the date of the
grant. The weighted average expected stock price volatility used
for 2006 stock option grants was 24%. This amount was derived
using a combination of historical price volatility over the most
recent period approximating the expected term of the option and
implied price volatility. Implied price volatility represents
the volatility implied in publicly traded options on the
Companys stock, which the Company believes represents the
expected future volatility of the Companys stock price.
The Company believes that since this is a market-based estimate,
it can provide a better estimate of expected future volatility.
In July 2006, as part of its employee stock-based compensation
plan, the Company issued contingent stock performance awards,
which 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 a ten quarter period
beginning July 3, 2006 and ending December 28, 2008.
Each 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 net revenue targets. The measurement of the expense related
to this award is based on the Companys current estimate of
revenues and diluted earnings per share over the performance
period. Changes in these estimates may impact the expense
recognized related to these awards.
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 $494,983 in principal
amount of long-term debt outstanding at December 31, 2006,
excluding fair value adjustments. Future payments required under
these and other obligations as of December 31, 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Fiscal Year
|
|
Certain Contractual Obligations
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt
|
|
$
|
|
|
|
|
135,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359,891
|
|
|
|
494,983
|
|
Interest payments on long-term debt
|
|
|
22,436
|
|
|
|
22,436
|
|
|
|
14,128
|
|
|
|
14,128
|
|
|
|
14,128
|
|
|
|
192,058
|
|
|
|
279,314
|
|
Operating lease commitments
|
|
|
28,149
|
|
|
|
25,529
|
|
|
|
21,733
|
|
|
|
10,979
|
|
|
|
10,487
|
|
|
|
22,914
|
|
|
|
119,791
|
|
Future minimum guaranteed
contractual payments
|
|
|
91,890
|
|
|
|
12,380
|
|
|
|
13,900
|
|
|
|
41,810
|
|
|
|
4,800
|
|
|
|
|
|
|
|
164,780
|
|
Purchase commitments
|
|
|
249,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
392,029
|
|
|
|
195,437
|
|
|
|
49,761
|
|
|
|
66,917
|
|
|
|
29,415
|
|
|
|
574,863
|
|
|
|
1,308,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys agreement with MARVEL also requires the
Company to make minimum expenditures on marketing and
promotional activities, including the spending of at least
$15,000 associated with the motion
34
picture SPIDER-MAN 3, which is included in purchase
commitments above. Certain of the future minimum guaranteed
contractual royalty payments are contingent upon the theatrical
release of the related entertainment property.
Included in the Thereafter column above is $249,996 in principal
amount of senior convertible debt due 2021. The holders of these
debentures may put the notes back to the Company in December
2011 and December 2016 at the principal amount. At that time,
the purchase price may be paid in cash, shares of common stock
or a combination of the two. In addition, at December 31,
2006, these debentures may be converted to shares at an initial
conversion price of $21.60 per share through March 31,
2007, at which time the contingent conversion feature will be
reassessed. If the Companys stock exceeds $23.76 for at
least 20 trading days, within the 30 consecutive trading day
period ending on the last trading day of a calendar quarter, or
upon other specified events, the debentures will be convertible
at the initial conversion price of $21.60.
In addition to the above, the Company has certain warrants
outstanding at December 31, 2006 that contain a put option
that would require the Company to repurchase the warrants for a
price to be paid, at the Companys election, of either
$100,000 in cash or $110,000 in shares of the Companys
common stock, such stock being valued at the time of the
exercise of the option. The Companys current intent is to
settle this put option in cash if exercised. In accordance with
SFAS 150, these warrants are recorded as a current
liability in the amount of $155,630, which represented the fair
value of these warrants at December 31, 2006.
In addition, the Company expects to make contributions totaling
approximately $7,100 to its pension plans in 2007. The Company
also has letters of credit and related instruments of
approximately $71,000 at December 31, 2006.
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.
To manage this exposure, the Company has hedged a portion of its
forecasted foreign currency transactions using forward foreign
exchange contracts. The Company estimates that a hypothetical
immediate 10% depreciation of the U.S. dollar against
foreign currencies could result in an approximate $22,000
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
transaction.
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. 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. Other than as set forth above, the
Company does not hedge foreign currency exposures. 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 31,
2006, these contracts had unrealized losses of $2,574, which are
recorded in accrued liabilities. Included in accumulated other
comprehensive income at December 31, 2006 are deferred
losses of $2,116, net of tax.
At December 31, 2006, the Company had fixed rate long-term
debt, excluding fair value adjustments, of $494,983. At
December 31, 2006, the Company had
fixed-for-floating
interest rate swaps with notional amounts of $75,000. The
interest rate swaps are designed to adjust a portion of the
Companys debt subject to a fixed interest rate. 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
35
December 31, 2006, the fair value of these contracts were a
liability of $66, which is included in long-term liabilities,
with a corresponding fair value adjustment to decrease long-term
debt. Changes in interest rates affect the fair value of fixed
rate debt not hedged by interest rate swap agreements while
affecting the earnings and cash flows of the long-term debt
hedged by the interest rate swaps. The Company estimates that a
hypothetical one percentage point decrease or increase in
interest rates would increase or decrease the fair value of this
long-term debt by approximately $15,600 or $12,800,
respectively. A hypothetical one percentage point change in
interest rates would increase or decrease 2007 pretax earnings
and cash flows by $731 and $377, respectively.
The
Economy and Inflation
The principal market for the Companys products is the
retail sector. Revenues from the Companys top
5 customers, all retailers, accounted for approximately
53%, 53%, and 50% of its consolidated net revenues in 2006, 2005
and 2004, respectively. In the past three years certain
customers in the retail sector have experienced economic
difficulty. The Company monitors the creditworthiness of its
customers and adjusts credit policies and limits as it deems
appropriate.
The 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 2006, approximately 68% 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 shifts to larger customers with order patterns
concentrated in the second half of the year, this concentration
may be less in years where the Company has products related to a
major motion picture release that occurs in the first half of
the year. In 2007, the Company will have products related to two
major motion picture releases, SPIDER-MAN 3 in May of 2007 and
TRANSFORMERS in July of 2007. The concentration of sales in the
second half of the year increases the risk of
(a) underproduction of popular items,
(b) overproduction of less popular items, and
(c) failure to achieve tight and compressed shipping
schedules. The business of the Company is characterized by
customer order patterns which vary from year to year largely
because of differences in the degree of consumer acceptance of a
product line, product availability, marketing strategies,
inventory levels, policies of retailers and differences in
overall economic conditions. The trend of larger retailers has
been to maintain lower inventories throughout the year and
purchase a greater percentage of product within or close to the
fourth quarter holiday consumer selling season, which includes
Christmas.
Quick response inventory management practices now being used
result in more orders being placed for immediate delivery and
fewer orders being placed well in advance of shipment. To the
extent that retailers do not sell as much of their year-end
inventory purchases during this holiday selling season as they
had anticipated, their demand for additional product earlier in
the following fiscal year may be curtailed, thus negatively
impacting the Companys 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
2006 was not significant and the Company will continue its
policy of monitoring costs and adjusting prices, accordingly.
Other
Information
In June 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), which applies to all tax positions
accounted for under Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes.
FIN 48 prescribes a two step process for the measurement of
uncertain tax positions that have been taken or are expected to
be taken in a tax return. The first step is a determination of
whether the tax position should be recognized in the financial
statements. The second step determines the measurement of the
tax position. FIN 48 also provides guidance on
derecognition of such tax positions, classification, interest
and penalties, accounting in interim periods and disclosure.
FIN 48 was applicable to the Company as of January 1,
2007, the first day of fiscal 2007. The adoption of FIN 48
is expected to decrease the Companys current liabilities
and increase the Companys long-term liabilities. Overall,
tax liabilities are not expected to change by a material amount.
36
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements, (SFAS No. 157) which
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands
disclosures about fair value measurements.
SFAS No. 157 is applicable for the Company as of
December 31, 2007, the first day of fiscal 2008. The
Company is currently evaluating SFAS No. 157 and the
potential effect it will have on its consolidated balance sheet
and results of operations.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159
permits 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 types of assets and liabilities.
SFAS No. 159 is effective for the Company beginning
January 1, 2008. The Company has not yet determined the
impact, if any, from the adoption of SFAS No. 159.
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.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The information required by this item is included in Item 7
of Part II of this Report and is incorporated herein by
reference.
37
|
|
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 31, 2006 and
December 25, 2005, 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 31, 2006. 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 31, 2006 and December 25, 2005, and the
results of their operations and their cash flows for each of the
fiscal years in the three-year period ended December 31,
2006, 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), the
effectiveness of Hasbro, Inc.s internal control over
financial reporting as of December 31, 2006, 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 27, 2007, expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
As discussed in note 10 to the consolidated financial
statements, during the first quarter of 2006, the Company
adopted Statement of Financial Accounting Standards
No. 123(R), Share-Based Payments. As discussed
in note 11 to the consolidated financial statements, during
the fourth quarter of 2006, the Company adopted Statement of
Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans.
/s/ KPMG LLP
Providence, Rhode Island
February 27, 2007
38
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2006 and December 25, 2005
(Thousands of dollars except share data)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
715,400
|
|
|
|
942,268
|
|
Accounts receivable, less
allowance for doubtful accounts of $27,700 in 2006 and $29,800
in 2005
|
|
|
556,287
|
|
|
|
523,232
|
|
Inventories
|
|
|
203,337
|
|
|
|
179,398
|
|
Prepaid expenses and other current
assets
|
|
|
243,291
|
|
|
|
185,297
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,718,315
|
|
|
|
1,830,195
|
|
Property, plant and equipment, net
|
|
|
181,726
|
|
|
|
164,045
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
469,938
|
|
|
|
467,061
|
|
Other intangibles, net
|
|
|
532,257
|
|
|
|
613,433
|
|
Other
|
|
|
194,669
|
|
|
|
226,409
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
1,196,864
|
|
|
|
1,306,903
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,096,905
|
|
|
|
3,301,143
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
10,582
|
|
|
|
14,676
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
32,770
|
|
Accounts payable
|
|
|
160,015
|
|
|
|
152,468
|
|
Accrued liabilities
|
|
|
735,296
|
|
|
|
710,812
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
905,893
|
|
|
|
910,726
|
|
Long-term debt, excluding current
portion
|
|
|
494,917
|
|
|
|
495,619
|
|
Other liabilities
|
|
|
158,205
|
|
|
|
171,322
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,559,015
|
|
|
|
1,577,667
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preference stock of $2.50 par
value. Authorized 5,000,000 shares; none issued
|
|
|
|
|
|
|
|
|
Common stock of $.50 par
value. Authorized 600,000,000 shares; issued
209,694,630 shares in 2006 and 2005
|
|
|
104,847
|
|
|
|
104,847
|
|
Additional paid-in capital
|
|
|
322,254
|
|
|
|
358,199
|
|
Deferred compensation
|
|
|
|
|
|
|
(24
|
)
|
Retained earnings
|
|
|
2,020,348
|
|
|
|
1,869,007
|
|
Accumulated other comprehensive
earnings
|
|
|
11,186
|
|
|
|
15,348
|
|
Treasury stock, at cost,
49,074,215 shares in 2006 and 31,744,690 shares in 2005
|
|
|
(920,745
|
)
|
|
|
(623,901
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,537,890
|
|
|
|
1,723,476
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
3,096,905
|
|
|
|
3,301,143
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
39
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended in December
(Thousands of dollars except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net revenues
|
|
$
|
3,151,481
|
|
|
|
3,087,627
|
|
|
|
2,997,510
|
|
Cost of sales
|
|
|
1,303,885
|
|
|
|
1,286,271
|
|
|
|
1,251,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,847,596
|
|
|
|
1,801,356
|
|
|
|
1,745,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
78,934
|
|
|
|
102,035
|
|
|
|
70,562
|
|
Royalties
|
|
|
169,731
|
|
|
|
247,283
|
|
|
|
223,193
|
|
Research and product development
|
|
|
171,358
|
|
|
|
150,586
|
|
|
|
157,162
|
|
Advertising
|
|
|
368,996
|
|
|
|
366,371
|
|
|
|
387,523
|
|
Selling, distribution and
administration
|
|
|
682,214
|
|
|
|
624,560
|
|
|
|
614,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,471,233
|
|
|
|
1,490,835
|
|
|
|
1,452,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
376,363
|
|
|
|
310,521
|
|
|
|
293,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonoperating (income) expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
27,521
|
|
|
|
30,537
|
|
|
|
31,698
|
|
Interest income
|
|
|
(27,609
|
)
|
|
|
(24,157
|
)
|
|
|
(7,729
|
)
|
Other (income) expense, net
|
|
|
34,977
|
|
|
|
(6,772
|
)
|
|
|
8,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonoperating (income) expense
|
|
|
34,889
|
|
|
|
(392
|
)
|
|
|
32,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
341,474
|
|
|
|
310,913
|
|
|
|
260,088
|
|
Income taxes
|
|
|
111,419
|
|
|
|
98,838
|
|
|
|
64,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
230,055
|
|
|
|
212,075
|
|
|
|
195,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.38
|
|
|
|
1.19
|
|
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.29
|
|
|
|
1.09
|
|
|
|
.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
$
|
.48
|
|
|
|
.36
|
|
|
|
.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
40
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended in December
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
230,055
|
|
|
|
212,075
|
|
|
|
195,977
|
|
Adjustments to reconcile net
earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization of
plant and equipment
|
|
|
67,773
|
|
|
|
78,097
|
|
|
|
75,618
|
|
Other amortization
|
|
|
78,934
|
|
|
|
102,035
|
|
|
|
70,562
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
1,277
|
|
Loss on impairment of investment
|
|
|
2,629
|
|
|
|
|
|
|
|
8,988
|
|
Change in fair value of liabilities
potentially settleable in common stock
|
|
|
31,770
|
|
|
|
(2,080
|
)
|
|
|
(12,710
|
)
|
Deferred income taxes
|
|
|
24,967
|
|
|
|
(24,032
|
)
|
|
|
34,624
|
|
Stock-based compensation
|
|
|
22,832
|
|
|
|
74
|
|
|
|
138
|
|
Excess tax benefits from
stock-based compensation
|
|
|
(14,959
|
)
|
|
|
|
|
|
|
|
|
Change in operating assets and
liabilities (other than cash and cash equivalents):
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts
receivable
|
|
|
(10,708
|
)
|
|
|
39,341
|
|
|
|
75,590
|
|
(Increase) decrease in inventories
|
|
|
(17,623
|
)
|
|
|
10,677
|
|
|
|
(15,838
|
)
|
(Increase) decrease in prepaid
expenses and other current assets
|
|
|
(35,174
|
)
|
|
|
74,531
|
|
|
|
29,423
|
|
Increase (decrease) in accounts
payable and accrued liabilities
|
|
|
(20,680
|
)
|
|
|
33,211
|
|
|
|
(89,735
|
)
|
Other, including long-term advances
|
|
|
(39,169
|
)
|
|
|
(27,305
|
)
|
|
|
(15,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
320,647
|
|
|
|
496,624
|
|
|
|
358,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and
equipment
|
|
|
(82,103
|
)
|
|
|
(70,584
|
)
|
|
|
(79,239
|
)
|
Investments and acquisitions, net
of cash acquired
|
|
|
|
|
|
|
(79,179
|
)
|
|
|
(9,824
|
)
|
Proceeds from sale of property,
plant and equipment
|
|
|
1,197
|
|
|
|
33,083
|
|
|
|
4,309
|
|
Puchases of short-term investments
|
|
|
(941,120
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales of short-term
investments
|
|
|
941,120
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(2,698
|
)
|
|
|
(3,991
|
)
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash utilized by investing
activities
|
|
|
(83,604
|
)
|
|
|
(120,671
|
)
|
|
|
(84,967
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases and repayments of
borrowings with original maturities of more than three months
|
|
|
(32,743
|
)
|
|
|
(93,303
|
)
|
|
|
(57,974
|
)
|
Net repayments of other short-term
borrowings
|
|
|
(3,726
|
)
|
|
|
(3,685
|
)
|
|
|
(6,598
|
)
|
Purchase of common stock
|
|
|
(456,744
|
)
|
|
|
(48,030
|
)
|
|
|
|
|
Stock option transactions
|
|
|
86,257
|
|
|
|
45,278
|
|
|
|
25,836
|
|
Excess tax benefits from
stock-based compensation
|
|
|
14,959
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(75,282
|
)
|
|
|
(58,901
|
)
|
|
|
(37,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash utilized by financing
activities
|
|
|
(467,279
|
)
|
|
|
(158,641
|
)
|
|
|
(75,824
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash
|
|
|
3,368
|
|
|
|
(46
|
)
|
|
|
6,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(226,868
|
)
|
|
|
217,266
|
|
|
|
204,255
|
|
Cash and cash equivalents at
beginning of year
|
|
|
942,268
|
|
|
|
725,002
|
|
|
|
520,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
year
|
|
$
|
715,400
|
|
|
|
942,268
|
|
|
|
725,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
26,228
|
|
|
|
33,265
|
|
|
|
35,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
84,901
|
|
|
|
32,962
|
|
|
|
40,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
41
HASBRO,
INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
(Thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Deferred
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
|
Balance, December 28, 2003
|
|
$
|
104,847
|
|
|
|
397,878
|
|
|
|
(679
|
)
|
|
|
1,567,693
|
|
|
|
30,484
|
|
|
|
(694,983
|
)
|
|
|
1,405,240
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
195,977
|
|
|
|
|
|
|
|
|
|
|
|
195,977
|
|
Other comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,904
|
|
|
|
|
|
|
|
51,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247,881
|
|
Stock option and warrant
transactions
|
|
|
|
|
|
|
(16,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,720
|
|
|
|
28,972
|
|
Restricted stock activity
|
|
|
|
|
|
|
(385
|
)
|
|
|
581
|
|
|
|
|
|
|
|
|
|
|
|
(104
|
)
|
|
|
92
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,461
|
)
|
|
|
|
|
|
|
|
|
|
|
(42,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 26, 2004
|
|
|
104,847
|
|
|
|
380,745
|
|
|
|
(98
|
)
|
|
|
1,721,209
|
|
|
|
82,388
|
|
|
|
(649,367
|
)
|
|
|
1,639,724
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,075
|
|
|
|
|
|
|
|
|
|
|
|
212,075
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,040
|
)
|
|
|
|
|
|
|
(67,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,035
|
|
Stock option and warrant
transactions
|
|
|
|
|
|
|
(22,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,496
|
|
|
|
50,950
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,030
|
)
|
|
|
(48,030
|
)
|
Restricted stock activity
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,277
|
)
|
|
|
|
|
|
|
|
|
|
|
(64,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 25, 2005
|
|
|
104,847
|
|
|
|
358,199
|
|
|
|
(24
|
)
|
|
|
1,869,007
|
|
|
|
15,348
|
|
|
|
(623,901
|
)
|
|
|
1,723,476
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230,055
|
|
|
|
|
|
|
|
|
|
|
|
230,055
|
|
Other comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,588
|
|
|
|
|
|
|
|
22,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,643
|
|
Adjustment to adopt
SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,750
|
)
|
|
|
|
|
|
|
(26,750
|
)
|
Stock option and warrant
transactions
|
|
|
|
|
|
|
(58,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,645
|
|
|
|
101,147
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(456,744
|
)
|
|
|
(456,744
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
22,553
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
255
|
|
|
|
22,832
|
|
Dividends declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,714
|
)
|
|
|
|
|
|
|
|
|
|
|
(78,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
104,847
|
|
|
|
322,254
|
|
|
|
|
|
|
|
2,020,348
|
|
|
|
11,186
|
|
|
|
(920,745
|
)
|
|
|
1,537,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
42
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 interest in other companies
are accounted for using the equity method. The Company had no
equity method investments at December 31, 2006 that were
material to the consolidated financial statements. 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 2005 and 2004 consolidated financial
statements have been reclassified to conform to the 2006
presentation.
Fiscal
Year
Hasbros fiscal year ends on the last Sunday in December.
The fiscal year ended December 31, 2006 was a fifty-three
week period while the fiscal years ended December 25, 2005
and December 26, 2004 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 are comprised of investments in
publicly-traded securities, classified as
available-for-sale,
and are recorded at market value with unrealized gains or
losses, net of tax, reported as a component of accumulated other
comprehensive earnings within shareholders equity until
realized. Unrealized losses are evaluated to determine the
nature of the losses. If the losses are determined to be other
than temporary, the basis of the security is adjusted and the
loss is recognized in earnings at that time. These securities
are included in other assets in the accompanying consolidated
balance sheets.
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 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.
43
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
The Company records an allowance for doubtful accounts at the
time revenue is recognized 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 customer, and on a
quarterly basis, the allowance is reviewed for adequacy and the
balance or accrual rate is adjusted to reflect current risk
prospects.
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 net
realizable value.
At December 31, 2006 and December 25, 2005, finished
goods comprised 92% and 89% of inventories, respectively.
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 purchase method 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, but does not
individually value, existing trademarks, copyrights, patents,
license agreements and other product-related rights. These
rights were valued at 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,
and amortization of these assets has been suspended until a
remaining useful life can be determined.
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 three to twenty-five years, primarily using the
straight-line method. Approximately 9% of other intangibles
relate to rights acquired in connection with a major motion
picture entertainment property and are being amortized over the
contract life, in proportion to projected sales of the licensed
products during the same period.
Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed using accelerated and straight-line
methods to amortize 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. Tools, dies and
molds are amortized 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.
44
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Recoverability is measured by a comparison of the carrying
amount of an asset to future undiscounted net cash flows
expected to be generated by the asset. 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 asset. Assets to be disposed of are carried at the
lower of the net book value or their fair value less disposal
costs.
Financial
Instruments
Hasbros financial instruments include cash and cash
equivalents, accounts receivable, marketable securities, short-
and long-term borrowings, accounts payable and accrued
liabilities. At December 31, 2006, the carrying cost of
these instruments approximated their fair value, with the
exception of the Companys contingent convertible
debentures due 2021. At December 31, 2006, these debentures
had a carrying value of $249,996 and an approximate fair value
of $318,700. The Companys financial instruments also
include foreign currency forwards (see note 13) as
well as interest rate swap agreements (see note 7). At
December 31, 2006, the carrying value of these instruments
approximated their fair value based on quoted or publicly
available market information.
Securitization
and Transfer of Financial Instruments
Hasbro has an agreement that allows the Company to sell, on an
ongoing basis, an undivided interest in certain of its trade
accounts receivable through a revolving securitization
arrangement. The Company retains servicing responsibilities for,
as well as a subordinate interest in the transferred
receivables. Hasbro accounts for the securitization of trade
accounts receivable as a sale in accordance with
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of
Liabilities (SFAS 140). As a result, the
related receivables are removed from the consolidated balance
sheet.
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.
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 annual
minimum guaranteed amounts. Royalty revenues are recognized as
they are reported as earned and payment becomes assured, over
the life of the agreement. Revenue from product sales less
related provisions for discounts, rebates and returns, as well
as royalty revenues comprise net revenues in the consolidated
statements of operations.
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 for 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 nonrecoverable portion of the guaranty is charged
to expense at that time.
45
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Advertising
Production costs of commercials and programming 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.
Shipping
and Handling
Hasbro expenses costs related to the shipment and handling of
goods to customers as incurred. For 2006, 2005, and 2004, these
costs were $145,729, $144,953 and $144,620, respectively, and
are included in selling, distribution and administration
expenses.
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 undistributed earnings of
international subsidiaries as substantially all of such earnings
are indefinitely reinvested by the Company.
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
Hasbro, except for certain international subsidiaries, has
pension plans covering substantially all of its full-time
employees. Pension expense is based on actuarial computations of
current and future benefits. In December 2006, the Company
adopted Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans
(SFAS 158), which amends SFAS 87, 88, 106
and 132(R). See footnotes 2 and 11 for the impact of
adoption of this statement.
The Companys policy is to fund amounts which are required
by applicable regulations and which are tax deductible. In 2007,
the Company expects to contribute approximately $7,100 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. 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.
46
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Risk
Management Contracts
Hasbro uses foreign currency forward and option contracts,
generally purchased for terms of not more than eighteen months,
to mitigate the impact of adverse 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 unit, are primarily denominated in
United States and Hong Kong dollars, Euros and United Kingdom
pound sterling and are entered into with counterparties who are
major financial institutions. The Company believes any risk
related to default by a counterparty to be remote. 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 accumulated other comprehensive earnings
(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
prospectively 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 hedge
intercompany loans denominated in foreign currencies. Due to the
short-term nature of the 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 long-term debt
obligations and are designated and effective as fair value
hedges of the change in fair value of those debt obligations.
These agreements are recorded at their fair value as an asset or
liability. Gains and losses on these contracts are included
currently 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 Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by Statement of Financial
Accounting Standards No. 138 (collectively
SFAS 133). 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
At December 31, 2006, the Company had stock-based employee
compensation plans and plans for non-employee members of the
Companys Board of Directors, which are described more
fully in note 10. Effective December 26, 2005, the
first day of fiscal 2006, the Company adopted Statement of
Financial Accounting
47
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which amends
Statement of Financial Accounting Standards No. 123, as
amended by No. 148, and Statement of Financial Accounting
Standards No. 95, Statement of Cash Flows. The
Company adopted SFAS 123R under the modified prospective
basis as defined in the statement. In 2006, the Company recorded
stock option expense based on all unvested stock options as of
the adoption date as well as all stock-based compensation awards
granted subsequent to the adoption date. See footnote 10
for further information related to the adoption of this
statement. Prior to 2006, as permitted by Statement of Financial
Accounting Standards No. 123, as amended by No. 148,
Accounting for Stock-Based Compensation,
(collectively SFAS 123), Hasbro accounted for
those plans under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
related interpretations. As required by the Companys
existing stock plans, stock options are granted at or above the
fair market value of the Companys stock and, accordingly,
no compensation expense was recognized for these grants in the
consolidated statements of operations in 2005 and 2004.
Had compensation expense been recorded under the fair value
method as set forth in the provisions of SFAS 123 for stock
options awarded, the impact on the Companys net earnings
and earnings per share for 2005 and 2004 would have been:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Reported net earnings
|
|
$
|
212,075
|
|
|
|
195,977
|
|
Add:
|
|
|
|
|
|
|
|
|
Stock-based employee compensation
expense included in reported net earnings, net of related tax
effects
|
|
|
46
|
|
|
|
103
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Total stock-based employee
compensation expense determined under fair value based method
for all awards, net of related tax effects
|
|
|
(15,124
|
)
|
|
|
(13,844
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$
|
196,997
|
|
|
|
182,236
|
|
|
|
|
|
|
|
|
|
|
Reported net earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.19
|
|
|
|
1.11
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.09
|
|
|
|
.96
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.10
|
|
|
|
1.03
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.01
|
|
|
|
.89
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share
Basic earnings per share is computed by dividing net earnings by
the weighted average number of shares outstanding for the year.
Diluted 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 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
market price exceeds exercise price, less shares which could
have been purchased by the Company with the related proceeds.
Dilutive securities may also include shares potentially issuable
to settle liabilities. Options and warrants totaling 5,148,
6,018 and 10,207 for 2006, 2005 and 2004, respectively, were
excluded from the calculation of diluted earnings per share
because to include them would have been antidilutive.
48
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
A reconciliation of net earnings and average number of shares
for the three fiscal years ended December 31, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Net earnings
|
|
$
|
230,055
|
|
|
|
230,055
|
|
|
|
212,075
|
|
|
|
212,075
|
|
|
|
195,977
|
|
|
|
195,977
|
|
Change in fair value of
liabilities potentially settleable in common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,080
|
)
|
|
|
|
|
|
|
(12,710
|
)
|
Interest expense on contingent
convertible debentures due 2021, net of tax
|
|
|
|
|
|
|
4,262
|
|
|
|
|
|
|
|
4,263
|
|
|
|
|
|
|
|
4,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
230,055
|
|
|
|
234,317
|
|
|
|
212,075
|
|
|
|
214,258
|
|
|
|
195,977
|
|
|
|
187,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
|
167,100
|
|
|
|
167,100
|
|
|
|
178,303
|
|
|
|
178,303
|
|
|
|
176,540
|
|
|
|
176,540
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities potentially settleable
in common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,339
|
|
|
|
|
|
|
|
5,629
|
|
Contingent convertible debentures
due 2021
|
|
|
|
|
|
|
11,574
|
|
|
|
|
|
|
|
11,574
|
|
|
|
|
|
|
|
11,574
|
|
Options and warrants
|
|
|
|
|
|
|
2,369
|
|
|
|
|
|
|
|
2,220
|
|
|
|
|
|
|
|
2,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent shares
|
|
|
167,100
|
|
|
|
181,043
|
|
|
|
178,303
|
|
|
|
197,436
|
|
|
|
176,540
|
|
|
|
196,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share
|
|
$
|
1.38
|
|
|
|
1.29
|
|
|
|
1.19
|
|
|
|
1.09
|
|
|
|
1.11
|
|
|
|
.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In December 2004, the Company adopted Emerging Issues Task Force
(EITF) Issue
04-8,
The Effect of Contingently Convertible Instruments on
Diluted Earnings per Share, which states that the dilutive
effect of contingent convertible debt instruments must be
included in dilutive earnings per share regardless of whether
the triggering contingency has been satisfied. The earnings per
share calculations for the three years ended December 31,
2006 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 add back to
outstanding shares the amount of shares potentially issuable as
if the contingent conversion features were met.
Pursuant to Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments
with Characteristics of Liabilities and Equity
(note 6), certain warrants containing a put feature that
may be settled in cash or common stock are required to be
accounted for as a liability at fair value. The Company is
required to assess if these warrants, classified as a liability,
have a more dilutive impact on earnings per share when treated
as an equity contract. As of December 31, 2006, the
warrants had a more dilutive impact on earnings per share
assuming they were treated as a liability and no adjustments to
net earnings or equivalent shares was required. As of
December 25, 2005 and December 26, 2004, the warrants
had a more dilutive impact on earnings per share assuming they
were treated as an equity contract. Accordingly for those years,
the numerator includes an adjustment to earnings for the income
included therein related to the fair market value adjustment and
the denominator includes an adjustment for the shares issuable
as of those dates.
49
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
|
|
(2)
|
Other
Comprehensive Earnings
|
The Companys other comprehensive earnings (loss) for the
years 2006, 2005 and 2004 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Foreign currency translation
adjustments
|
|
$
|
26,429
|
|
|
|
(68,530
|
)
|
|
|
50,391
|
|
Changes in value of
available-for-sale
securities, net of tax
|
|
|
(2,497
|
)
|
|
|
838
|
|
|
|
(9,862
|
)
|
Gains (losses) on cash flow
hedging activities, net of tax
|
|
|
(7,412
|
)
|
|
|
6,460
|
|
|
|
(3,954
|
)
|
Minimum pension liability
adjustment, net of tax
|
|
|
1,991
|
|
|
|
(7,813
|
)
|
|
|
(1,661
|
)
|
Reclassifications to earnings, net
of tax
|
|
|
4,077
|
|
|
|
2,005
|
|
|
|
16,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss)
|
|
$
|
22,588
|
|
|
|
(67,040
|
)
|
|
|
51,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments from other comprehensive earnings
to earnings in 2006, 2005 and 2004 were net of related income
taxes of $85, $89, and $1,724, respectively. The
reclassification adjustments for 2006 and 2004 includes an
impairment charge relating to other than temporary decreases in
the value of the Companys
available-for-sale
securities. In accordance with Hasbros marketable
securities accounting policy, as the result of the decline in
the fair value of the Companys investment in Infogrames
Entertainment SA common stock, the Company adjusted the basis of
this investment and recorded a pretax charge to earnings in the
amounts of $2,629 and $8,988 in 2006 and 2004, respectively. The
remainder of the reclassification adjustments in 2006 and 2004,
as well as the 2005 reclassification adjustment, include net
losses on cash flow hedging derivatives for which the related
transaction has impacted earnings and was reflected in cost of
sales.
The related tax benefit (expense) of other comprehensive
earnings items was $273, $3,960, and $(283) for the years 2006,
2005, and 2004, respectively.
At December 31, 2006, the Company adopted SFAS 158,
which required the Company to recognize the over or underfunded
status of defined benefit pension and postretirement plans as an
asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the
changes occur through comprehensive income. The adoption of this
statement resulted in an adjustment of $(26,750) to accumulated
other comprehensive income at December 31, 2006.
Components of accumulated other comprehensive earnings at
December 31, 2006 and December 25, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Foreign currency translation
adjustments
|
|
$
|
68,984
|
|
|
|
42,555
|
|
Changes in value of
available-for-sale
securities, net of tax
|
|
|
1,932
|
|
|
|
1,800
|
|
Gains (losses) on cash flow
hedging activities, net of tax
|
|
|
(2,116
|
)
|
|
|
3,848
|
|
Minimum pension liability
adjustment, net of tax
|
|
|
|
|
|
|
(32,855
|
)
|
Unrecognized pension and
postretirement amounts, net of tax
|
|
|
(57,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,186
|
|
|
|
15,348
|
|
|
|
|
|
|
|
|
|
|
50
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
|
|
(3)
|
Property,
Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Land and improvements
|
|
$
|
6,623
|
|
|
|
6,836
|
|
Buildings and improvements
|
|
|
186,519
|
|
|
|
174,183
|
|
Machinery and equipment
|
|
|
318,835
|
|
|
|
296,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
511,977
|
|
|
|
477,626
|
|
Less accumulated depreciation
|
|
|
378,979
|
|
|
|
348,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,998
|
|
|
|
128,980
|
|
Tools, dies and molds, net of
amortization
|
|
|
48,728
|
|
|
|
35,065
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
181,726
|
|
|
|
164,045
|
|
|
|
|
|
|
|
|
|
|
Expenditures for maintenance and repairs which do not materially
extend the life of the assets are charged to operations.
|
|
(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 sheet.
The Company performs an annual impairment test for 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 31,
2006, no such events occurred. The Company completed its annual
impairment tests in the fourth quarters of 2006, 2005 and 2004,
which indicated that there was no impairment.
A portion of the Companys goodwill and other intangible
assets reside in the Corporate segment of the business. For
purposes of testing pursuant to Statement of Financial
Accounting Standards No. 142, these assets are allocated to
the reporting units within the Companys operating
segments. In 2006, the Company realigned its business, which
resulted in a change in the Companys operating segments
(see note 15). The Company has adjusted its prior year
information to reflect the current reporting structure and
reallocated Corporate segment amounts. Changes in carrying
amount of goodwill, by operating segment for the years ended
December 31, 2006 and December 25, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
America
|
|
|
International
|
|
|
Total
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 25, 2005
|
|
$
|
294,378
|
|
|
|
172,683
|
|
|
$
|
467,061
|
|
Foreign exchange translation
|
|
|
|
|
|
|
2,877
|
|
|
|
2,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
294,378
|
|
|
|
175,560
|
|
|
$
|
469,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 26, 2004
|
|
$
|
294,378
|
|
|
|
175,348
|
|
|
$
|
469,726
|
|
Foreign exchange translation
|
|
|
|
|
|
|
(2,665
|
)
|
|
|
(2,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
294,378
|
|
|
|
172,683
|
|
|
$
|
467,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
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 31, 2006 and December 25, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Acquired product rights
|
|
$
|
903,182
|
|
|
|
900,891
|
|
Licensed rights of entertainment
properties
|
|
|
211,555
|
|
|
|
219,071
|
|
Accumulated amortization
|
|
|
(658,218
|
)
|
|
|
(586,022
|
)
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets
|
|
|
456,519
|
|
|
|
533,940
|
|
Product rights with indefinite
lives
|
|
|
75,738
|
|
|
|
75,738
|
|
Unrecognized pension prior service
cost
|
|
|
|
|
|
|
3,755
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
532,257
|
|
|
|
613,433
|
|
|
|
|
|
|
|
|
|
|
On September 9, 2005, the Company purchased the assets and
assumed certain liabilities of Wrebbit Inc., a Montreal-based
creator and manufacturer of innovative puzzles. The purchase
price was approximately $14,200. Based on the allocation of the
purchase price, property rights related to acquired product
lines of approximately $10,900 were recorded in connection with
this acquisition. These property rights are being amortized over
a ten year life. No goodwill was recorded as a result of this
acquisition.
During June 2005, the Company reacquired the digital gaming
rights for all its owned or controlled properties from
Infogrames Entertainment SA (Infogrames) for $65,000. These
rights were previously held by Infogrames on an exclusive basis
as a result of a license agreement entered into during 2000 with
an expiration date in 2016. The consideration paid to reacquire
these rights, which represents fair value, is included as a
component of acquired product rights and is being amortized over
a 10-year
period. In addition, the Company and Infogrames entered into a
new licensing agreement that provides Infogrames exclusive
rights to DUNGEONS & DRAGONS and rights to nine other
properties for a limited number of platforms. Under the new
license agreement, the Company will receive royalty income on
Infogrames sales.
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 for the next five years to be approximately:
|
|
|
|
|
2007
|
|
$
|
66,400
|
|
2008
|
|
|
67,400
|
|
2009
|
|
|
62,500
|
|
2010
|
|
|
36,000
|
|
2011
|
|
|
34,200
|
|
|
|
(5)
|
Financing
Arrangements
|
Short-Term
Borrowings
At December 31, 2006, Hasbro had available an unsecured
committed line and unsecured uncommitted lines of credit from
various banks approximating $300,000 and $203,600, respectively.
A significant portion of the short-term borrowings outstanding
at the end of 2006 and 2005 represents borrowings made under, or
supported by, these lines of credit. The weighted average
interest rates of the outstanding borrowings as of
December 31, 2006 and December 25, 2005 were 4.7% and
4.2%, respectively. The Company had no borrowings outstanding
under its committed line of credit at December 31, 2006.
During 2006, Hasbros working capital needs were fulfilled
by cash generated from operations, the Companys accounts
receivable
52
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
securitization program, and borrowing under lines of credit.
Borrowings under the lines of credit were on terms and at
interest rates generally extended to companies of comparable
creditworthiness.
In June 2006, the Company entered into a five-year revolving
credit agreement (the Agreement) which replaced the
prior amended and restated credit agreement. The Agreement
provides the Company with a $300,000 committed borrowing
facility. The Company has the ability to request increases in
the committed facility in additional increments of at least
$50,000, up to a total committed facility of $500,000. The
Company is not required to maintain compensating balances under
the 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 31,
2006.
The Company pays a fee (currently .10%) based on the unused
portion of the facility and interest equal to Libor or Prime
plus a spread on borrowings under the facility. The amount of
the spread to Libor or Prime varies based on the Companys
long-term debt ratings and the Companys leverage. At
December 31, 2006, the interest rate under the facility was
equal to Libor plus 0.50% or Prime.
Securitization
As of December 31, 2006, the Company is party to a
receivable securitization program whereby the Company sells, 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 will, subject
to certain conditions, sell, 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. Under the terms of the agreement, new receivables are
added to the pool as collections reduce previously held
receivables. The Company expects to service, administer, and
collect the receivables on behalf of HRF and the conduits. The
net proceeds of sale will be less than the face amount of
accounts receivable sold by an amount that approximates the
purchasers financing costs. In December 2006, this
agreement was amended. Under the amended agreement, the
expiration date is December 1, 2011, subject to an annual
renewal process. Also under the amended agreement, the maximum
aggregate outstanding purchase limit for interest in receivables
which may be sold is raised to $300,000 during the period from
fiscal October to fiscal January of each year.
The receivables facility contains certain restrictions on the
Company and HRF that are customary for facilities of this type.
The commitments under the facility are subject to termination
prior to their term upon the occurrence of certain events,
including payment defaults, breach of covenants, breach of
representations or warranties, bankruptcy, and failure of the
receivables to satisfy certain performance criteria.
As of December 31, 2006 and December 25, 2005 the
utilization of the receivables facility on both dates was
$250,000, which was the maximum available to the Company to sell
under this program at December 25, 2005. As of
December 31, 2006, the Company had an additional $50,000
available to sell under the facility. The transactions are
accounted for as sales under SFAS 140. During 2006 and
2005, the loss on the sale of the receivables totaled $2,241 and
$6,925, respectively, which is recorded in selling, distribution
and administration expenses in the accompanying consolidated
statements of operations. The discount on interests sold is
approximately equal to the interest rate paid by the conduits to
the holders of the commercial paper plus other fees. The
discount rate as of December 31, 2006 was approximately
5.73%.
Upon sale to the conduits, HRF continues to hold a subordinated
retained interest in the receivables. The subordinated interest
in receivables is recorded at fair value, which is determined
based on the present value of future expected cash flows
estimated using managements best estimates of credit
losses and discount rates commensurate with the risks involved.
Due to the short-term nature of trade receivables, the carrying
amount,
53
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
less allowances, approximates fair value. Variations in the
credit and discount assumptions would not significantly impact
fair value.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Liabilities potentially settleable
in common stock
|
|
$
|
155,630
|
|
|
|
123,860
|
|
Royalties
|
|
|
76,695
|
|
|
|
84,765
|
|
Advertising
|
|
|
74,781
|
|
|
|
75,515
|
|
Payroll and management incentives
|
|
|
76,653
|
|
|
|
64,583
|
|
Accrued income taxes
|
|
|
121,254
|
|
|
|
130,007
|
|
Other
|
|
|
230,283
|
|
|
|
232,082
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
735,296
|
|
|
|
710,812
|
|
|
|
|
|
|
|
|
|
|
The Company currently has a warrant amendment agreement with
Lucas Licensing Ltd. and Lucasfilm Ltd. that provides the
Company with a call option through October 13, 2016 to
purchase all of these warrants from Lucas for a price to be paid
at the Companys election of either $200,000 in cash or the
equivalent of $220,000 in shares of the Companys common
stock, such stock being valued at the time of the exercise of
the option. Also, the warrant amendment agreement provides Lucas
with a put option through January 2008 to sell all of these
warrants to the Company for a price to be paid at the
Companys election of either $100,000 in cash or the
equivalent of $110,000 in shares of the Companys common
stock, such stock being valued at the time of the exercise of
the option.
The Company adjusts these warrants to their fair value through
earnings at the end of each reporting period. During 2006, 2005,
and 2004, the Company recorded (income) expense of $31,770,
$(2,080), and $(12,710), respectively, to adjust the warrants to
their fair value. This (income) expense is included in other
(income) expense, net in the consolidated statement of
operations. There is no tax benefit or expense associated with
the fair value adjustments.
Should either the put or call option be required to be settled,
the Company believes that it will have adequate funds available
to settle them in cash if necessary. Had this option been
exercised at December 31, 2006 and the Company had elected
to settle this option in the Companys stock, the Company
would have been required to issue 4,078 shares. If the
share price of the Companys common stock were higher as of
December 31, 2006 the number of shares issuable would have
decreased. If the share price were lower as of December 31,
2006, the number of shares issuable would have increased.
54
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Components of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
8.50% Notes Due 2006
|
|
$
|
|
|
|
|
32,743
|
|
6.15% Notes Due 2008
|
|
|
135,092
|
|
|
|
135,092
|
|
2.75% Debentures Due 2021
|
|
|
249,996
|
|
|
|
249,996
|
|
6.60% Notes Due 2028
|
|
|
109,895
|
|
|
|
109,895
|
|
|
|
|
|
|
|
|
|
|
Total principal amount of
long-term debt
|
|
|
494,983
|
|
|
|
527,726
|
|
Fair value adjustment related to
interest rate swaps
|
|
|
(66
|
)
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
494,917
|
|
|
|
528,389
|
|
Less current portion
|
|
|
|
|
|
|
32,770
|
|
|
|
|
|
|
|
|
|
|
Long-term debt excluding current
portion
|
|
$
|
494,917
|
|
|
|
495,619
|
|
|
|
|
|
|
|
|
|
|
The schedule of contractual maturities of long-term debt for the
next five years and thereafter is as follows:
|
|
|
|
|
2007
|
|
$
|
|
|
2008
|
|
|
135,092
|
|
2009
|
|
|
|
|
2010
|
|
|
|
|
2011
|
|
|
|
|
Thereafter
|
|
|
359,891
|
|
|
|
|
|
|
|
|
$
|
494,983
|
|
|
|
|
|
|
In 2006, the Company repaid in principal amount $32,743 of
8.50% Notes due in March 2006.
During 2004, the Company repurchased an aggregate of $55,658 in
principal amount of long-term debt, comprised of $19,105 in
principal amount of 6.60% Debentures due 2028, $10,908 in
principal amount of 6.15% Notes due 2008, and $25,645 in
principal amount of 5.60% Notes due 2005. The Company
recorded a loss on repurchase of $1,277, which is included in
other (income) expense, net in the accompanying consolidated
statements of operations.
The Company is party to interest rate swap agreements in order
to adjust the amount of total debt that is subject to fixed
interest rates. The interest rate swaps are matched with
specific long-term debt obligations and accounted for as fair
value hedges of those debt obligations. At December 31,
2006, these interest rate swaps had a total notional amount of
$75,000 with maturities in 2008. In each of the contracts, the
Company receives payments based upon a fixed interest rate that
matches the interest rate of the debt 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 31,
2006, these contracts had unrealized losses of $66, which are
included in other liabilities, with a corresponding fair value
adjustment to decrease long-term debt.
The Company currently has $249,996 outstanding in principal
amount of contingent convertible debentures due 2021. These
debentures bear interest at 2.75%, which could be subject to an
upward adjustment commencing in December 2005 depending on the
price of the Companys stock. If the closing price of the
Companys stock exceeds $23.76 for at least 20 trading
days, within the 30 consecutive trading
55
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
day period ending on the last trading day of the calendar
quarter, the holders have 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. At
December 31, 2006, this contingent conversion feature was
met and the debentures are convertible through March 31,
2007, at which time the contingent conversion feature will be
reassessed. In addition, if the closing price of the
Companys stock exceeds $27.00 for at least 20 trading days
in any 30 day period, the Company has the right to call the
debentures by giving notice to the holders of the debentures.
During a prescribed notice period, the holders of the debentures
have the right to convert their debentures in accordance with
the conversion terms described above. The holders of these
debentures may also put the notes back to Hasbro in December
2011 and December 2016. At these times, the purchase price may
be paid in cash, shares of common stock or a combination of the
two, at the discretion of the Company.
Income taxes attributable to earnings before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
34,049
|
|
|
|
76,642
|
|
|
|
3,786
|
|
State and local
|
|
|
3,203
|
|
|
|
7,147
|
|
|
|
(497
|
)
|
International
|
|
|
49,200
|
|
|
|
39,081
|
|
|
|
26,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,452
|
|
|
|
122,870
|
|
|
|
29,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
24,912
|
|
|
|
(20,611
|
)
|
|
|
28,019
|
|
State and local
|
|
|
2,135
|
|
|
|
(1,767
|
)
|
|
|
2,402
|
|
International
|
|
|
(2,080
|
)
|
|
|
(1,654
|
)
|
|
|
4,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,967
|
|
|
|
(24,032
|
)
|
|
|
34,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
111,419
|
|
|
|
98,838
|
|
|
|
64,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. The Act created a
one-time incentive for U.S. corporations to repatriate
undistributed earnings from their international subsidiaries by
providing an 85% dividends-received deduction for certain
international earnings. The deduction was available to
corporations during the tax year that includes October 22,
2004 or in the immediately subsequent tax year. In the fourth
quarter of 2005, the Companys Board of Directors approved
a plan to repatriate approximately $547,000 in foreign earnings,
which was completed in December 2005. The tax expense related to
this repatriation was $25,844.
Certain tax benefits (expenses) are not reflected in income
taxes in the statements of operations. Such benefits of $27,876
in 2006, $8,426 in 2005, and $6,675 in 2004, relate primarily to
stock options. In 2006, 2005 and 2004, the deferred tax portion
of the total benefit (expense) was $12,917, $4,563, and $(283),
respectively.
56
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
A reconciliation of the statutory United States federal income
tax rate to Hasbros effective income tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local income taxes, net
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
0.5
|
|
One time dividend
|
|
|
|
|
|
|
8.3
|
|
|
|
|
|
Tax on international earnings
|
|
|
(9.7
|
)
|
|
|
(12.2
|
)
|
|
|
(12.9
|
)
|
Fair value adjustment of
liabilities potentially settleable in common stock
|
|
|
3.3
|
|
|
|
(0.2
|
)
|
|
|
(1.7
|
)
|
Change in valuation allowance
|
|
|
0.8
|
|
|
|
|
|
|
|
2.7
|
|
Settlement of tax examinations
|
|
|
1.5
|
|
|
|
(1.4
|
)
|
|
|
|
|
Other, net
|
|
|
0.5
|
|
|
|
1.5
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.6
|
%
|
|
|
31.8
|
%
|
|
|
24.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of earnings before income taxes, determined by
tax jurisdiction, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
United States
|
|
$
|
113,761
|
|
|
|
98,180
|
|
|
|
71,759
|
|
International
|
|
|
227,713
|
|
|
|
212,733
|
|
|
|
188,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
341,474
|
|
|
|
310,913
|
|
|
|
260,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of deferred income tax expense arise from various
temporary differences and relate to items included in the
statements of operations.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
at December 31, 2006 and December 25, 2005 are:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
19,287
|
|
|
|
25,477
|
|
Inventories
|
|
|
17,860
|
|
|
|
21,454
|
|
Losses and tax credit carryforwards
|
|
|
34,405
|
|
|
|
36,574
|
|
Operating expenses
|
|
|
62,392
|
|
|
|
56,667
|
|
Pension
|
|
|
27,663
|
|
|
|
35,946
|
|
Deferred compensation and stock
options
|
|
|
16,251
|
|
|
|
9,023
|
|
Postretirement benefits
|
|
|
14,128
|
|
|
|
11,197
|
|
Other
|
|
|
26,453
|
|
|
|
26,450
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
218,439
|
|
|
|
222,788
|
|
Valuation allowance
|
|
|
(27,808
|
)
|
|
|
(23,333
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
190,631
|
|
|
|
199,455
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
32,149
|
|
|
|
24,784
|
|
Depreciation and amortization of
long-lived assets
|
|
|
9,658
|
|
|
|
14,337
|
|
Other
|
|
|
655
|
|
|
|
880
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
42,462
|
|
|
|
40,001
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
148,169
|
|
|
|
159,454
|
|
|
|
|
|
|
|
|
|
|
57
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Hasbro has a valuation allowance for deferred tax assets at
December 31, 2006 of $27,808, which is an increase of
$4,475 from $23,333 at December 25, 2005. The valuation
allowance pertains to United States and International loss
carryforwards, some of which have no expiration and others that
would expire beginning in 2007. The increase in the valuation
allowance is primarily attributable to the investment in
Infogrames Entertainment S.A. If the operating loss
carryforwards are fully realized, $210 will reduce goodwill and
the balance will reduce future income tax expense.
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, it
believes that it will realize the benefit of the deferred tax
assets, net of the existing valuation allowance.
Deferred income taxes of $83,854 and $103,209 at the end of 2006
and 2005, respectively, are included as a component of prepaid
expenses and other current assets, and $66,276 and $58,075,
respectively, are included as a component of other assets. At
the same dates, deferred income taxes of $122 and $200,
respectively, are included as a component of accrued
liabilities, and $1,839 and $1,630, respectively, are included
as a component of other liabilities.
The cumulative amount of undistributed earnings of Hasbros
international subsidiaries held for reinvestment is
approximately $625,000 at December 31, 2006. In the event
that all international undistributed earnings were remitted to
the United States, the amount of incremental taxes would be
approximately $135,000.
In June of 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48), which applies to all tax
positions accounted for under Statement of Financial Accounting
Standard No. 109, Accounting for Income Taxes.
FIN 48 prescribes a two step process for the measurement of
uncertain tax positions that have been taken or are expected to
be taken in a tax return. The first step is a determination of
whether the tax position should be recognized in the financial
statements. The second step determines the measurement of the
tax position. FIN 48 also provides guidance on
derecognition of such tax positions, classification, interest
and penalties, accounting in interim periods and disclosure.
FIN 48 was applicable to the Company as of January 1,
2007, the first day of fiscal 2007. The adoption of FIN 48
is expected to decrease the Companys current liabilities
and increase the Companys long-term liabilities. Overall,
tax liabilities are not expected to change by a material amount.
Preference
Share Purchase Rights
Hasbro maintains a Preference Share Purchase Rights Plan (the
Rights Plan). Under the terms of the Rights Plan,
each share of common stock is accompanied by a Preference Share
Purchase Right (Right). Each Right is only
exercisable under certain circumstances and, until exercisable,
the Rights are not transferable apart from Hasbros common
stock. When exercisable, each Right will entitle its holder to
purchase until June 30, 2009, in certain merger or other
business combination or recapitalization transactions, at the
Rights then current exercise price, a number of the
acquiring companys or Hasbros, as the case may be,
common shares having a market value at that time of twice the
Rights exercise price. Under certain circumstances, the
Company may substitute cash, other assets, equity securities or
debt securities for the common stock. At the option of the Board
of Directors of Hasbro (the Board), the rightholder
may, under certain circumstances, receive shares of
Hasbros stock in exchange for Rights.
Prior to the acquisition by a person or group of beneficial
ownership of a certain percentage of Hasbros common stock,
the Rights are redeemable for $.01 per Right. The Rights Plan
contains certain exceptions with respect to the Hassenfeld
family and related entities.
58
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Common
Stock
In May 2005, the Companys Board of Directors authorized
the repurchase of up to $350,000 in common stock. In 2006, the
remaining portion of this authorization was fully utilized and
an additional $350,000 was authorized by the Board of Directors
in July 2006. 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. These authorizations replace all prior
authorizations. In 2006, the Company repurchased
22,767 shares at an average price of $20.03. The total cost
of these repurchases, including transaction costs, was $456,744.
|
|
(10)
|
Stock
Options, Restricted Stock and Warrants
|
Hasbro has reserved 19,291 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 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 options,
stock appreciation rights, stock awards and cash awards in
addition to 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. Additionally, the Company has
reserved 17,450 shares of its common stock for issuance
upon exercise of outstanding warrants.
The Company on occasion will issue restricted stock and grant
deferred restricted stock units to certain key employees. In
2006, the Company issued restricted stock of 20 shares. No
restricted stock or deferred restricted stock awards were
granted in 2005 or 2004. These shares or units are
nontransferable and subject to forfeiture for periods prescribed
by the Company. These awards are valued at the market value at
the date of grant and are subsequently amortized over the
periods during which the restrictions lapse, generally
3 years. Amortization of unearned compensation expense
relating to the outstanding restricted stock and deferred
restricted stock was $158, $74, and $138 in fiscal 2006, 2005,
and 2004, respectively. At December 31, 2006, the amount of
total unrecognized compensation cost related to restricted stock
is $293 and the weighted average period over which this will be
expensed is 24.5 months.
In July 2006, as part of its annual equity grant to executive
officers and certain other employees, the Companys Board
of Directors approved the issuance of contingent stock
performance awards (the Stock Performance Awards),
which 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 a ten quarter period
beginning July 3, 2006 and ending December 28, 2008.
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 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. If the Company achieves
100% of the stated targets, it would expect to issue
738 shares under these awards.
During 2006, the Company recognized $2,390 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 at the
date of grant and are being amortized over the 10 quarter period
from July 3, 2006 through December 28, 2008. The
59
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
weighted average grant-date fair value of each Stock Performance
Awards was $19.00. Forfeitures of these awards during 2006 were
24. At December 31, 2006, the amount of total unrecognized
compensation cost related to these awards is approximately
$11,317 and the weighted average period over which this will be
expensed is 24 months.
Prior to fiscal 2006, Hasbro used the intrinsic-value method of
accounting for stock options granted to employees and
non-employee members of the Board of Directors. Effective
December 26, 2005, the first day of fiscal 2006, the
Company adopted SFAS 123R under the modified prospective
transition method as defined in the statement. Under this
adoption method, the Company recorded stock option expense in
2006 based on all unvested stock options as of the adoption date
and any stock option awards made subsequent to the adoption
date. Stock-based compensation is recognized on a straight-line
basis over the requisite service period of the award. In
accordance with the modified prospective transition method, the
Companys consolidated financial statements for prior years
have not been restated to reflect, and do not include, the
impact of SFAS 123R.
Total compensation expense related to stock options and the
stock performance awards recognized under SFAS 123R for the
year ended December 31, 2006 was $21,684 and was recorded
as follows:
|
|
|
|
|
Cost of sales
|
|
$
|
306
|
|
Research and product development
|
|
|
1,436
|
|
Selling, distribution and
administration
|
|
|
19,942
|
|
|
|
|
|
|
|
|
|
21,684
|
|
Income taxes
|
|
|
7,399
|
|
|
|
|
|
|
|
|
$
|
14,285
|
|
|
|
|
|
|
Information with respect to stock options for the three years
ended December 31, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Outstanding at beginning of year
|
|
|
20,443
|
|
|
|
21,041
|
|
|
|
19,261
|
|
Granted
|
|
|
3,126
|
|
|
|
2,953
|
|
|
|
4,956
|
|
Exercised
|
|
|
(5,490
|
)
|
|
|
(3,020
|
)
|
|
|
(1,865
|
)
|
Expired or canceled
|
|
|
(770
|
)
|
|
|
(531
|
)
|
|
|
(1,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
17,309
|
|
|
|
20,443
|
|
|
|
21,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
11,016
|
|
|
|
14,015
|
|
|
|
12,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
$
|
18.83
|
|
|
|
20.55
|
|
|
|
19.35
|
|
Exercised
|
|
$
|
16.00
|
|
|
|
15.00
|
|
|
|
14.28
|
|
Expired or canceled
|
|
$
|
24.38
|
|
|
|
25.07
|
|
|
|
20.59
|
|
Outstanding at end of year
|
|
$
|
19.73
|
|
|
|
19.04
|
|
|
|
18.40
|
|
Exercisable at end of year
|
|
$
|
19.94
|
|
|
|
19.29
|
|
|
|
19.24
|
|
With respect to the 17,309 outstanding options and 11,016
options exercisable at December 31, 2006, the weighted
average remaining contractual life of these options was
5.29 years and 4.66 years, respectively. The aggregate
intrinsic value of the options outstanding and exercisable at
December 31, 2006 was $140,257 and $90,630, respectively.
60
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
The Company uses the Black-Scholes valuation model in
determining fair value of stock-based awards. The weighted
average fair value of options granted in fiscal 2006, 2005 and
2004 were $4.26, $5.41 and $6.32, 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 2006,
2005, and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Risk-free interest rate
|
|
|
4.98
|
%
|
|
|
3.84
|
%
|
|
|
3.85
|
%
|
Expected dividend yield
|
|
|
2.55
|
%
|
|
|
1.75
|
%
|
|
|
1.29
|
%
|
Expected volatility
|
|
|
24
|
%
|
|
|
29
|
%
|
|
|
40
|
%
|
Expected option life
|
|
|
5 years
|
|
|
|
5 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 2006, 2005 and
2004 were $46,684, $16,898 and $11,113, respectively.
In addition to the above, the Company currently has 17,450
warrants outstanding and exercisable at December 31, 2006,
which have a weighted average exercise price, weighted average
remaining life and intrinsic value at December 31, 2006 of
$20.11, 11.46 years, and $124,624, respectively.
At December 31, 2006, the amount of total unrecognized
compensation cost related to stock options is $20,008 and the
weighted average period over which this will be expensed is
21.9 months.
In May 2006, the Company granted 52 shares of common stock
to its non-employee members of its Board of Directors, of which
the receipt of 43 shares have been deferred to the date
upon which the respective director ceases to be a member of the
Companys Board of Directors. This award was valued at the
market value at the date of grant and vested upon grant.
Compensation cost of $990 was recorded in connection with this
grant.
|
|
(11)
|
Pension,
Postretirement and Postemployment Benefits
|
Pension
and Postretirement Benefits
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, (SFAS No. 158) which amends
Statements of Financial Accounting Standards No. 87, 88,
106 and 132R. Under SFAS No. 158, the Company is
required to recognize on its balance sheet actuarial gains and
losses and prior service costs that have not yet been included
in income as an adjustment of equity through other comprehensive
earnings with a corresponding adjustment to prepaid pension
expense or the accrued pension liability. In addition, within
two years of adoption, the measurement date for plan assets and
liabilities would be required to be the Companys fiscal
year end. SFAS No. 158 was effective for the Company
in the fourth quarter of 2006. The effect of this statement on
the Companys defined benefit pension and postretirement
plans was an increase in accrued pension liability of $36,287, a
decrease in intangible assets of $3,108, an increase in deferred
tax assets of $12,645 and a decrease in accumulated other
comprehensive earnings, net of tax, of $26,750.
Expense related to the Companys defined benefit and
defined contribution plans for 2006, 2005 and 2004 were
approximately $31,100, $28,800, and $26,300, respectively. Of
these amounts, $15,400, $13,900 and $12,100 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.
61
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
United
States Plans
Substantially all United States employees are 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, are 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. At September 30, 2006, the measurement date, all
individual plans had projected and accumulated benefit
obligations in excess of the fair value of each plans
assets. By the fiscal year ending December 28, 2008, the
Company will be required under SFAS 158 to change the
measurement dates for its pension plans to its fiscal year-end.
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.
62
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Change in Projected Benefit
Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit
obligation beginning
|
|
$
|
313,937
|
|
|
|
277,820
|
|
|
|
38,505
|
|
|
|
36,082
|
|
Service cost
|
|
|
10,188
|
|
|
|
9,383
|
|
|
|
684
|
|
|
|
573
|
|
Interest cost
|
|
|
16,809
|
|
|
|
15,526
|
|
|
|
2,047
|
|
|
|
2,003
|
|
Actuarial loss (gain)
|
|
|
(8,014
|
)
|
|
|
28,698
|
|
|
|
(2,358
|
)
|
|
|
2,342
|
|
Benefits paid
|
|
|
(23,291
|
)
|
|
|
(16,514
|
)
|
|
|
(2,560
|
)
|
|
|
(2,495
|
)
|
Expenses paid
|
|
|
(608
|
)
|
|
|
(976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit
obligation ending
|
|
$
|
309,021
|
|
|
|
313,937
|
|
|
|
36,318
|
|
|
|
38,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit
obligation ending
|
|
$
|
290,452
|
|
|
|
289,720
|
|
|
|
36,318
|
|
|
|
38,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan
assets beginning
|
|
$
|
208,625
|
|
|
|
188,054
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
14,838
|
|
|
|
28,537
|
|
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
35,918
|
|
|
|
9,524
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(23,291
|
)
|
|
|
(16,514
|
)
|
|
|
|
|
|
|
|
|
Expenses paid
|
|
|
(608
|
)
|
|
|
(976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan
assets ending
|
|
$
|
235,482
|
|
|
|
208,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Funded
Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
(309,021
|
)
|
|
|
(313,937
|
)
|
|
|
(36,318
|
)
|
|
|
(38,505
|
)
|
Fair value of plan assets
|
|
|
235,482
|
|
|
|
208,625
|
|
|
|
|
|
|
|
|
|
Contributions after measurement
date
|
|
|
25,533
|
|
|
|
|
|
|
|
579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(48,006
|
)
|
|
|
(105,312
|
)
|
|
|
(35,739
|
)
|
|
|
(38,505
|
)
|
Unrecognized net loss
|
|
|
|
|
|
|
73,996
|
|
|
|
|
|
|
|
11,552
|
|
Unrecognized prior service cost
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(48,006
|
)
|
|
|
(27,766
|
)
|
|
|
(35,739
|
)
|
|
|
(26,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(48,006
|
)
|
|
|
(81,095
|
)
|
|
|
(35,739
|
)
|
|
|
(26,953
|
)
|
Intangible asset
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
earnings
|
|
|
|
|
|
|
49,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(48,006
|
)
|
|
|
(27,766
|
)
|
|
|
(35,739
|
)
|
|
|
(26,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the pension amount recognized at December 31, 2006,
$3,065 is recognized in current liabilities and the remaining
$44,941 is recognized in non-current liabilities. Of the
postretirement amount recognized at December 31, 2006,
$2,396 is recognized in current liabilities and the remaining
$33,343 is recognized in non-current liabilities.
In connection with the adoption of SFAS 158 at
December 31, 2006 described above, the Companys
unamortized prior service costs of $2,954 and unrecognized net
loss of $66,781 were recorded as a reduction of accumulated
other comprehensive earnings. In fiscal 2007, the Company
expects amortization of $592 and $2,914, respectively, of these
amounts to be included as a component of net periodic benefit
cost.
63
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
The provisions of Statement of Financial Accounting Standards
No. 87, Employers Accounting for
Pensions, prior to the statement being amended by
SFAS 158, required the Company to record an additional
minimum pension liability for certain of the Companys
plans of $53,329 at December 25, 2005. This liability
represented the amount by which the accumulated benefit
obligation exceeds the sum of the fair market value of plan
assets and accrued amounts previously recorded. The additional
minimum pension liability was offset by an intangible asset to
the extent of previously unrecognized prior service cost. An
intangible asset in the amount of $3,550 is included in other
intangibles on the balance sheet as of December 25, 2005.
The remaining amount of $49,779 was recorded as components of
accumulated other comprehensive earnings, along with related
deferred taxes of $18,916 at December 25, 2005.
The assets of the funded plans are managed by investment
advisors and consist of the following:
|
|
|
|
|
|
|
|
|
Asset Category
|
|
2006
|
|
|
2005
|
|
|
Large Cap Equity
|
|
|
30
|
%
|
|
|
31
|
%
|
Small Cap Equity
|
|
|
14
|
|
|
|
13
|
|
International Equity
|
|
|
20
|
|
|
|
17
|
|
Domestic Core Fixed Income
|
|
|
9
|
|
|
|
10
|
|
Domestic High Yield Fixed Income
|
|
|
11
|
|
|
|
11
|
|
Total Return Fund
|
|
|
16
|
|
|
|
17
|
|
Cash
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
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 the Company. 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 shared primary investment goal is maximum total
return, consistent with prudent investment management. 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 8.75%, 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 liabilities to employees. 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.
The Plans Investment Policy restricts the use of
derivatives associated with leverage and speculation, or
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.
64
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
The Company measures its liabilities and related assets at
September 30 (the measurement date) to coincide
with the upcoming year planning cycle. The discount rates used
in the pension calculation were also used for the postretirement
calculation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Components of Net Periodic
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
10,188
|
|
|
|
9,384
|
|
|
|
8,632
|
|
Interest cost
|
|
|
16,809
|
|
|
|
15,526
|
|
|
|
14,630
|
|
Expected return on assets
|
|
|
(19,112
|
)
|
|
|
(16,275
|
)
|
|
|
(14,489
|
)
|
Amortization of prior service cost
|
|
|
596
|
|
|
|
582
|
|
|
|
609
|
|
Amortization of actuarial loss
|
|
|
3,399
|
|
|
|
2,554
|
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
11,880
|
|
|
|
11,771
|
|
|
|
11,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
684
|
|
|
|
573
|
|
|
|
605
|
|
Interest cost
|
|
|
2,047
|
|
|
|
2,003
|
|
|
|
2,285
|
|
Amortization of actuarial loss
|
|
|
459
|
|
|
|
354
|
|
|
|
529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
3,190
|
|
|
|
2,930
|
|
|
|
3,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine the year-end benefit obligation
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average discount rate
|
|
|
5.75%
|
|
|
|
5.50%
|
|
Rate of future compensation
increases
|
|
|
4.00%
|
|
|
|
4.00%
|
|
Long-term rate of return on plan
assets
|
|
|
8.75%
|
|
|
|
8.75%
|
|
Mortality table
|
|
|
RP-2000
|
|
|
|
RP-2000
|
|
Assumptions used to determine net periodic benefit cost of the
pension plans for each fiscal year follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Weighted average discount rate
|
|
|
5.50
|
%
|
|
|
5.75
|
%
|
|
|
6.00
|
%
|
Rate of future compensation
increases
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Long-term rate of return on plan
assets
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
|
|
8.75
|
%
|
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. Approximately
75% of the return assumption is based on the historical
information and 25% is based on current or forward-looking
information. All asset class assumptions are within certain
bands around the long-term historical averages. Correlations are
based primarily on historical return patterns.
65
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 expected gross benefit payments and subsidy receipts
under the postretirement benefit plan for the next five years
subsequent to 2006 and in the aggregate for the following five
years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Benefit
|
|
|
Subsidy
|
|
|
|
Pension
|
|
|
Payments
|
|
|
Receipts
|
|
|
2007
|
|
$
|
17,685
|
|
|
|
2,666
|
|
|
|
271
|
|
2008
|
|
|
19,283
|
|
|
|
2,750
|
|
|
|
282
|
|
2009
|
|
|
19,346
|
|
|
|
2,815
|
|
|
|
290
|
|
2010
|
|
|
18,977
|
|
|
|
2,887
|
|
|
|
292
|
|
2011
|
|
|
19,614
|
|
|
|
2,937
|
|
|
|
290
|
|
2012-2016
|
|
|
118,325
|
|
|
|
14,577
|
|
|
|
1,285
|
|
Assumptions used to determine the net periodic benefit cost of
the postretirement plans for the year to date period are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Health care cost trend rate
assumed for next year
|
|
|
10.00
|
%
|
|
|
9.00
|
%
|
|
|
10.00
|
%
|
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
|
|
|
2012
|
|
|
|
2011
|
|
|
|
2009
|
|
If the health care cost trend rate were increased one percentage
point in each year, the accumulated postretirement benefit
obligation at December 31, 2006 and the aggregate of the
benefits earned during the period and the interest cost would
have each increased by approximately 5% and 5%, respectively.
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 31, 2006 and December 25, 2005, the
defined benefit plans had total projected benefit obligations of
$73,333 and $58,206, respectively, accumulated benefit
obligations of $62,893 and $46,557, respectively, and fair
values of plan assets of $55,429 and $40,397, respectively.
Substantially all of the plan assets are invested in equity and
fixed income securities. The pension expense related to these
plans was $3,702 for fiscal 2006 and $3,073 for fiscal 2005. In
connection with the adoption of SFAS 158 at
December 31, 2006 described above, the Companys
unamortized prior service costs of $443, unrecognized net loss
of $9,710 and unrecognized transition obligation of $277 were
recorded as a reduction of accumulated other comprehensive
earnings. In fiscal 2007, the Company expects amortization of
$96, $231 and $45, respectively, of these amounts to be included
as a component of net periodic benefit cost. At
December 25, 2005, the Company had recorded an additional
minimum pension liability related to these international plans
of $3,100. This additional minimum pension liability was
partially offset by an intangible asset in the amount of $206 at
December 25, 2005. The remaining amount of $2,894 was
recorded as a separate component of accumulated other
comprehensive earnings, along with related deferred taxes of
$902. Assumptions used to calculate the benefit obligations and
pension expense for these plans vary depending on each plan and
are based on factors specific to each country.
66
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Expected benefit payments under the international defined
benefit pension plans for the five years subsequent to 2006 and
in the aggregate for the following five years are as follows:
|
|
|
|
|
2007
|
|
$
|
949
|
|
2008
|
|
|
1,027
|
|
2009
|
|
|
1,075
|
|
2010
|
|
|
1,294
|
|
2011
|
|
|
1,367
|
|
2012-2016
|
|
|
11,655
|
|
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 2006, 2005, and 2004 amounted to $34,603, $35,570, and
$36,576, respectively.
Minimum rentals, net of minimum sublease income, which is not
material, under long-term operating leases for the five years
subsequent to 2006 and in the aggregate are as follows:
|
|
|
|
|
2007
|
|
$
|
28,149
|
|
2008
|
|
|
25,529
|
|
2009
|
|
|
21,733
|
|
2010
|
|
|
10,979
|
|
2011
|
|
|
10,487
|
|
Later years
|
|
|
22,914
|
|
|
|
|
|
|
|
|
$
|
119,791
|
|
|
|
|
|
|
All leases expire prior to the end of 2018. 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 2006.
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
charge and are not included in the table above.
|
|
(13)
|
Derivative
Financial Instruments
|
Hasbro uses foreign currency forwards and options, generally
purchased for terms of not more than eighteen months, to reduce
the impact of currency rate fluctuations on firmly committed and
projected future foreign currency transactions.
67
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
During 2006, 2005, and 2004, the Company reclassified net
losses, net of tax, from other comprehensive income to earnings
of $1,448, $2,005, and $9,111, respectively, which included
gains (losses) of $(68), $509, and $(163), respectively, as the
result of ineffectiveness.
The remaining balance in accumulated other comprehensive
earnings at December 31, 2006 of $2,116 represents a net
unrealized loss on foreign currency contracts relating to hedges
of inventory purchased during the fourth quarter of 2006 or
forecasted to be purchased during 2007 and intercompany expenses
and royalty payments expected to be paid or received during
2007. These amounts will be transferred to the consolidated
statement of operations upon the sale of the related inventory
and receipt or payment of the related royalties and expenses.
The Company expects substantially all of the balance in
accumulated other comprehensive earnings to be reclassified to
the consolidated statement of operations within the next
12 months.
The Company also enters into derivative instruments to offset
changes in the fair value of intercompany loans due to the
impact of foreign currency changes. The Company recorded a net
loss on these instruments to other (income) expense, net of
$5,501, $60,014, and $30,882 in 2006, 2005, and 2004,
respectively, relating to the change in fair value of such
derivatives, substantially offsetting gains from the change in
fair value of intercompany loans to which the contracts relate
included in other (income) expense, net.
|
|
(14)
|
Commitments
and Contingencies
|
Hasbro had unused open letters of credit and related instruments
of approximately $71,000 and $33,600 at December 31, 2006
and December 25, 2005, respectively.
The Company enters into license agreements with inventors,
designers and others for the use of intellectual properties in
its products. Certain of these agreements contain provisions for
the payment of guaranteed or minimum royalty amounts.
Additionally, the Company has a long-term commitment related to
promotional and marketing activities at a U.S. based theme
park. Under terms of currently existing agreements as of
December 31, 2006, Hasbro may, provided the other party
meets their contractual commitment, be required to pay amounts
as follows:
|
|
|
|
|
2007
|
|
$
|
91,890
|
|
2008
|
|
|
12,380
|
|
2009
|
|
|
13,900
|
|
2010
|
|
|
41,810
|
|
2011
|
|
|
4,800
|
|
|
|
|
|
|
|
|
$
|
164,780
|
|
|
|
|
|
|
In addition to the above commitments, certain of the above
contracts impose minimum marketing commitments on the Company,
including the Companys agreement with MARVEL, which
requires the expenditure of $15,000 in connection with the
theatrical release of SPIDER-MAN 3 expected to occur in May of
2007.
In addition, the Company has $116,792 of prepaid royalties
included as a component of prepaid expenses and other current
assets in the balance sheet. The long-term portion of advances
paid of $64,769 is included in other assets. Advanced royalties
paid and guaranteed or minimum royalties to be paid relate to
anticipated revenues in the years 2007 through 2018.
At December 31, 2006, including the $15,000 marketing
commitment mentioned above, the Company had approximately
$249,554 in outstanding purchase commitments.
68
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Hasbro is party to certain legal proceedings, none of which,
individually or in the aggregate, is deemed to be material to
the financial condition of the Company.
Segment
and Geographic Information
Hasbro is a worldwide leader in childrens and family
leisure time and entertainment products, including the
development, manufacture and marketing of games and toys ranging
from traditional to high-tech. In 2006 the Company restructured
its business by combining the U.S. Toys and Games
operations, previously reported as separate segments, with the
Canadian and Mexican operations, previously managed as part of
the International segment, into one segment, the North American
segment. The International segment is now comprised of
operations in the Europe, Asia Pacific, South America and Latin
America, excluding Mexico. The Companys manufacturing
facilities in East Longmeadow, Massachusetts and Waterford,
Ireland, which were previously included in the Games and
International segments, respectively, along with the
Companys Far East sourcing operations, are now managed as
part of the Global Operations segment.
The North American segment includes the development, marketing
and selling of boys action figures, vehicles and playsets,
girls toys, electronic toys and games, plush products,
preschool toys and infant products, electronic interactive
products, tween electronic products, toy-related specialty
products, traditional board games and puzzles, DVD- based games,
fiction books, and trading card and role-playing games within
the United States, Canada and Mexico. Within the International
segment, the Company develops, markets and sells both toy and
certain game products in non-North American markets, primarily
the European, Asia Pacific, and Latin and South American
regions. The Global Operations segment is responsible for
manufacturing and sourcing finished product for the
Companys North American and International segments. The
Company has another segment that licenses out certain toy and
game properties.
Segment performance is measured at the operating profit level.
Included in Corporate and eliminations are certain corporate
expenses, the elimination of intersegment transactions and
certain assets benefiting more than one segment. Intersegment
sales and transfers are reflected in management reports at
amounts approximating cost. Certain shared costs are allocated
to segments based upon foreign exchange rates fixed at the
beginning of the year, with adjustment to actual foreign
exchange rates included in Corporate and eliminations.
The 2005 and 2004 segment data has been restated to reflect the
2006 segment structure. In 2006 the Company adopted
SFAS 123R, which requires the Company to record expense
related to stock options in its consolidated financial
statements. Consistent with managements approach in
evaluating segment results, the 2005 and 2004 segment operating
profit (loss) has been adjusted to include stock-based
compensation as disclosed under SFAS 123. The amount of
2005 and 2004 stock option expense is subtracted from the total
segment operating profit (loss) in order to reconcile to the
operating profit (loss) in the consolidated financial statements.
With the exception of the treatment of stock-based compensation
expense for 2005 and 2004 management financial statements, the
accounting policies of the segments are the same as those
referenced in Note 1.
Results shown for fiscal years 2006, 2005 and 2004 are not
necessarily those which would be achieved were each segment an
unaffiliated business enterprise.
69
HASBRO,
INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
(Thousands of Dollars and Shares Except Per Share
Data)
Information by segment and a reconciliation to reported amounts
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from
|
|
|
|
|
|
Operating
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
External
|
|
|
Affiliate
|
|
|
Profit
|
|
|
and
|
|
|
Capital
|
|
|
Total
|
|
|
|
Customers
|
|
|
Revenue
|
|
|
(Loss)
|
|
|
Amortization
|
|
|
Additions
|
|
|
Assets
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,130,290
|
|
|
|
8,266
|
|
|
|
275,959
|
|
|
|
51,926
|
|
|
|
4,278
|
|
|
|
3,193,870
|
|
International
|
|
|
959,319
|
|
|
|
23
|
|
|
|
90,893
|
|
|
|
24,681
|
|
|
|
3,004
|
|
|
|
859,690
|
|
Global Operations(a)
|
|
|
13,185
|
|
|
|
1,242,354
|
|
|
|
27,158
|
|
|
|
46,584
|
|
|
|
57,487
|
|
|
|
1,073,871
|
|
Other Segments
|
|
|
48,687
|
|
|
|
|
|
|
|
15,729
|
|
|
|
2,002
|
|
|
|
105
|
|
|
|
134,970
|
|
Corporate and eliminations(b)
|
|
|
|
|
|
|
(1,250,643
|
)
|
|
|
(33,376
|
)
|
|
|
21,514
|
|
|
|
17,229
|
|
|
|
(2,165,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total
|
|
$
|
3,151,481
|
|
|
|
|
|
|
|
376,363
|
|
|
|
146,707
|
|
|
|
82,103
|
|
|
|
3,096,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
2,038,556
|
|
|
|
11,042
|
|
|
|
165,676
|
|
|
|
78,562
|
|
|
|
7,394
|
|
|
|
2,658,821
|
|
International
|
|
|
988,591
|
|
|
|
124
|
|
|
|
106,435
|
|
|
|
33,048
|
|
|
|
3,866
|
|
|
|
811,577
|
|
Global Operations(a)
|
|
|
10,612
|
|
|
|
1,171,150
|
|
|
|
22,712
|
|
|
|
53,919
|
|
|
|
49,701
|
|
|
|
866,125
|
|
Other Segments
|
|
|
49,868
|
|
|
|
|
|
|
|
19,153
|
|
|
|
997
|
|
|
|
108
|
|
|
|
115,864
|
|
Corporate and eliminations(b)
|
|
|
|
|
|
|
(1,182,316
|
)
|
|
|
(26,499
|
)
|
|
|
13,606
|
|
|
|
9,515
|
|
|
|
(1,151,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
3,087,627
|
|
|
|
|
|
|
|
287,477
|
|
|
|
180,132
|
|
|
|
70,584
|
|
|
|
3,301,143
|
|
Stock Compensation(c)
|
|
|
|
|
|
|
|
|
|
|
23,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Total
|
|
$
|
3,087,627
|
|
|
|
|
|
|
|
310,521
|
|
|
|
180,132
|
|
|
|
70,584
|
|
|
|
3,301,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
1,956,031
|
|
|
|
11,247
|
|
|
|
163,786
|
|
|
|
53,266
|
|
|
|
3,941
|
|
|
|
2,469,719
|
|
International
|
|
|
977,128
|
|
|
|
161
|
|
|
|
94,487
|
|
|
|
27,971
|
|
|
|
4,313
|
|
|
|
1,090,605
|
|
Global Operations(a)
|
|
|
13,129
|
|
|
|
1,099,551
|
|
|
|
13,437
|
|
|
|
48,949
|
|
|
|
56,343
|
|
|
|
885,487
|
|
Other Segments
|
|
|
51,222
|
|
|
|
|
|
|
|
16,470
|
|
|
|
154
|
|
|
|
428
|
|
|
|
178,913
|
|
Corporate and eliminations(b)
|
|
|
|
|
|
|
(1,110,959
|
)
|
|
|
(17,332
|
)
|
|
|
15,840
|
|
|
|
14,214
|
|
|
|
(1,384,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
&nbs |