Hasbro, Inc.
HASBRO INC (Form: 10-K, Received: 02/22/2012 16:34:40)
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

Form 10-K

  x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 25, 2011

Commission file number 1-6682

 

LOGO

Hasbro, Inc.

(Exact Name of Registrant, As Specified in its Charter)

 

Rhode Island   05-0155090
(State of Incorporation)   (I.R.S. Employer
  Identification No.)

 

1027 Newport Avenue,

Pawtucket, Rhode Island

 

02862

(Zip Code)

(Address of Principal Executive Offices)  

Registrant’s telephone number, including area code (401) 431-8697

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock

  The NASDAQ Global Select Market

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   x     or     No   ¨ .

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   ¨     or    No   x .

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   x     or    No   ¨ .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     or    No   ¨ .

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 registrant’s 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.     x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one:)

 

Large accelerated filer   

 

x

    Accelerated filer        ¨        Non-Accelerated filer   ¨     Smaller reporting company        ¨     
        (Do not check if a smaller reporting company)    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     or    No   x .

The aggregate market value on June 24, 2011 (the last business day of the Company’s most recently completed second quarter) of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing price of the stock on that date, was approximately $5,231,438,000. The registrant does not have non-voting common stock outstanding.

The number of shares of common stock outstanding as of February 6, 2012 was 128,642,089.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive proxy statement for our 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

 

 

 


Table of Contents

HASBRO, INC.

Table of Contents

 

          Page  
   PART I   

Item 1.

   Business      1   

Item 1A.

   Risk Factors      10   

Item 1B.

   Unresolved Staff Comments      22   

Item 2.

   Properties      22   

Item 3.

   Legal Proceedings      22   

Item 4.

   Mine Safety Disclosures      23   
   PART II     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      24   

Item 6.

   Selected Financial Data      25   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      26   

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk      44   

Item 8.

   Financial Statements and Supplementary Data      45   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      86   

Item 9A.

   Controls and Procedures      86   

Item 9B.

   Other Information      88   
   PART III     

Item 10.

   Directors, Executive Officers and Corporate Governance      88   

Item 11.

   Executive Compensation      88   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      89   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      89   

Item 14.

   Principal Accountant Fees and Services      89   
   PART IV     

Item 15.

   Exhibits, Financial Statement Schedules      89   
   Signatures      98   


Table of Contents

From time to time, including in this Annual Report on Form 10-K and in our annual report to shareholders, we publish “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” may relate to such matters as our anticipated financial performance or business prospects in future periods, expected technological and product developments, the expected content of and timing for new product introductions or our expectations concerning the future acceptance of products by customers, the content and timing of planned entertainment releases including motion pictures and television; and 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.

PART I

 

Item 1. Business.

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 children’s and family leisure time products with a broad portfolio of brands and entertainment properties. As a branded play, consumer-focused global company, Hasbro applies its brand blueprint to all of its operations. At the center of its brand blueprint, Hasbro re-imagines, re-invents, and re-ignites its owned and controlled brands through toy and game innovation, entertainment offerings, including television programming and motion pictures, and licensed products, ranging from traditional to high-tech and digital, under well-known brand names such as TRANSFORMERS, PLAYSKOOL, NERF, LITTLEST PET SHOP, MY LITTLE PONY, G.I. JOE, TONKA, MILTON BRADLEY, PARKER BROTHERS, CRANIUM and WIZARDS OF THE COAST. Hasbro also seeks to imagine, invent and ignite new properties offering engaging branded play experiences. In addition to product offerings under Hasbro-owned brands or brands which if not entirely owned are broadly controlled by the Company, offerings may include products branded and developed under licensing arrangements with third parties, such as BEYBLADE, MARVEL, SESAME STREET and STAR WARS product offerings. The Company’s innovative product offerings encompass a broad variety of toys including boys’ action figures, vehicles and playsets, girls’ toys, electronic toys, plush products, preschool toys and infant products, electronic interactive products, creative play and toy-related specialty products. Games offerings include board, card, electronic, trading card, role-playing and DVD games. In addition, in order to further expand our brands, we license certain of our trademarks, characters and other property rights to third parties for use in connection with digital gaming, consumer promotions, and for the sale of non-competing toys and games and non-toy products. We also seek to expand awareness of our brands through entertainment, including television and movies. Hasbro Studios, our wholly-owned production studio, produces television programming primarily based on our brands and distributes such programming globally. Hasbro Studios

 

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distributes television programming to Hub Television Networks, LLC (“THE HUB”), a joint venture with Discovery Communications, Inc. (“Discovery”) which operates a television network in the United States dedicated to high-quality children’s and family entertainment and educational programming. Internationally, Hasbro Studios distributes television programming to broadcasters throughout the world.

Product Categories

A key part of our strategy focuses on the importance of reinforcing the storyline associated with our brands through the use of media-based entertainment, including television, motion pictures and digital media. While certain media-based entertainment benefit only one particular product category, others, specifically major motion pictures, can impact more than one product category. In 2011, our net revenues were positively impacted by the major motion picture releases of TRANSFORMERS: DARK OF THE MOON , based on our TRANSFORMERS property, and THOR and CAPTAIN AMERICA: THE FIRST AVENGER , from MARVEL. In 2012, the major motion pictures G.I. JOE: RETALIATION , based on our G.I. JOE property and BATTLESHIP , based on our BATTLESHIP property as well as THE AVENGERS and THE AMAZING SPIDER-MAN from MARVEL are expected to be released. Also, STAR WARS: EPISODE I — THE PHANTOM MENACE from Lucasfilm is expected to be re-released in 3D.

We market our brands under the following primary product categories: (1) boys’ toys; (2) games and puzzles; (3) girls’ toys; and (4) preschool toys. Descriptions of these product categories are as follows:

Our boys’ toys category includes a wide range of core brand offerings such as TRANSFORMERS and G.I. JOE action figures and accessories, NERF sports and action products, SUPER SOAKER water blasters, KRE-O construction sets and TONKA trucks and playsets, as well as entertainment-based licensed products based on popular movie, television and comic book characters, such as BEYBLADE tops and accessories and MARVEL and STAR WARS toys and accessories. BEYBLADE, STAR WARS and SPIDER-MAN products were each supported by animated television series produced and distributed by third parties in 2011, while TRANSFORMERS was supported by an animated television series produced by Hasbro Studios. During 2012, MARVEL products, particularly SPIDER-MAN and AVENGERS products, will be supported by the major motion picture releases of THE AMAZING SPIDER-MAN and THE AVENGERS; STAR WARS toys and accessories will be supported by the theatrical re-release of STAR WARS: EPISODE 1 — THE PHANTOM MENACE in 3D; and G.I. JOE products will be supported by the major motion picture release of G.I. JOE: RETALIATION. In addition to marketing and developing action figures and accessories for traditional play, the Company also develops and markets products designed for collectors, which has been a key component of the success of the STAR WARS brand.

Our games and puzzles category includes several well known lines, including MILTON BRADLEY, PARKER BROTHERS and WIZARDS OF THE COAST. These brand portfolios consist of a broad assortment of games for children, tweens, families and adults. Core game brands include MONOPOLY, BATTLESHIP, SCRABBLE, OPERATION, CONNECT FOUR, TWISTER, YAHTZEE, JENGA, BOGGLE, ELEFUN & FRIENDS and BOP IT!. Other game brands include but are not limited to TRIVIAL PURSUIT, GAME OF LIFE, CRANIUM, CANDYLAND, CLUE, SIMON, SORRY! and RISK. WIZARDS OF THE COAST offers trading card and role-playing games, including MAGIC: THE GATHERING, DUEL MASTERS and DUNGEONS & DRAGONS. In 2012, we plan to extend the DUEL MASTERS brand through the introduction of KAIJUDO: RISE OF THE DUEL MASTERS which is expected to be supported by television programming developed by Hasbro Studios. We seek to keep our game brands relevant through sustained marketing programs, such as FAMILY GAME NIGHT, as well as by offering consumers new ways to experience these brands. We also seek to extend awareness of our brands through social and mobile platforms. In 2011, in order to reinvigorate our games and puzzles category, we created the Hasbro’s Gaming Center of Excellence in Rhode Island to centralize games marketing and development while building on Hasbro’s strategy of re-imagining, re-inventing and re-igniting core brands as well as inventing new brands. In February 2012 we announced a global partnership with Zynga, Inc. (“Zynga”) which provides Hasbro with the rights to develop a wide range of game and toy products based on Zynga’s social network gaming brands, which currently include FARMVILLE, CITYVILLE and WORDS WITH FRIENDS. We expect to introduce products under this agreement in fall of 2012.

 

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In our girls’ toys category, we seek to provide a traditional and wholesome play experience. Girls’ toy brands include LITTLEST PET SHOP, MY LITTLE PONY, FURREAL FRIENDS and BABY ALIVE. In 2011, the MY LITTLE PONY brand was supported through television programming produced by Hasbro Studios. LITTLEST PET SHOP was refreshed during the fourth quarter of 2011 with the introduction of WALKABLES, TEENSIES and SPARKLE PETS. LITTLEST PET SHOP will also be supported by television programming developed by Hasbro Studios and is expected to be distributed to THE HUB and internationally during the second half of 2012. The LITTLEST PET SHOP brand is further supported by digital gaming through our strategic partnership with Electronic Arts, Inc. (“EA”).

Our preschool toys category encompasses a range of products for infants and preschoolers in the various stages of development. Preschool products include PLAY-DOH modeling compound and playsets as well as a portfolio of core brands marketed primarily under the PLAYSKOOL brand, including but not limited to 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 ELEFUN BUSY BALL POPPER. Our preschool category also includes certain TONKA lines of trucks and interactive toys, including the CHUCK & FRIENDS line. In addition, we introduced PLAYSKOOL HEROES under the PLAYSKOOL brand which introduces characters from MARVEL, STAR WARS and TRANSFORMERS to boys at a preschool age. The CHUCK & FRIENDS line was and will continue to be supported by television programming, while the preschool TRANSFORMERS line will be supported by television programming on THE HUB beginning in the first quarter of 2012. In 2011, sales in our preschool category also benefited from the introduction of several educational and interactive products under our licensing agreement with Sesame Workshop that provides us with the licensed rights to produce products based on the SESAME STREET portfolio of characters, including ELMO, GROVER and COOKIE MONSTER, among others. Through our preschool marketing programs, we seek to provide consumer-friendly information that assists parents in understanding the developmental milestones that their children will encounter as well as the role each PLAYSKOOL product can play in helping children to achieve these developmental milestones.

Segments

Organizationally, our three principal segments are U.S. and Canada, International and Entertainment and Licensing. The U.S. and Canada and International segments engage in the marketing and selling of various toy and game products described above. Our toy, game and puzzle products are primarily developed by a global development group while our global marketing function establishes brand direction and assists the segments in establishing certain local marketing programs. The costs of these groups are allocated to the principal segments. Our U.S. and Canada segment covers the United States and Canada while the International segment primarily includes Europe, the Asia Pacific region and Latin and South America. The Entertainment and Licensing segment engages in the out-licensing of our trademarks, characters and other brand and intellectual property rights to third parties for non-competing products and also conducts our movie, television and online entertainment operations, including the operations of Hasbro Studios. Our Global Operations segment is responsible for arranging product manufacturing and sourcing for the U.S. and Canada and International segments. Financial information with respect to our segments and geographic areas is included in note 18 to our consolidated financial statements, which are included in Item 8 of this Form 10-K.

The Company’s strategy is focused around re-imagining, re-inventing, and re-igniting its existing brands, and imagining, inventing, and igniting new brands, globally through the development and marketing of innovative toy and game products, providing immersive entertainment experiences for our consumers, and expansion of our brands into other consumer products through broad licensing programs, including digital media and lifestyle products. The following is a discussion of each segment.

U.S. and Canada

This segment engages in the marketing and sale of our product categories in the United States and Canada. The U.S. and Canada segment’s strategy is based on promoting our brands through innovation and reinvention of toys and games. This is accomplished through introducing new products and initiatives driven by consumer and

 

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marketplace insights and leveraging opportunistic toy and game lines and licenses. This strategy leverages off of efforts to increase consumer awareness of the Company’s core brands through entertainment experiences such as motion pictures, television, publishing and digital gaming. Major 2011 brands and products included BEYBLADE products, TRANSFORMERS, NERF, MAGIC: THE GATHERING, MARVEL products, STAR WARS products, FURREAL FRIENDS, SESAME STREET products, LITTLEST PET SHOP and PLAYSKOOL.

International

The International segment engages in the marketing and sale of our product categories to retailers and wholesalers in most countries in Europe, Asia Pacific and Latin and South America and through distributors in those countries where we have no direct presence. In addition to growing core brands and leveraging opportunistic toy lines and licenses, we seek to grow our international business by continuing to expand into Eastern Europe and emerging markets in Asia and Latin and South America. We have offices in more than 35 countries contributing to sales in more than 120 countries. In recent years, we expanded our operations by opening offices in Brazil, Peru, Colombia, China, Russia, the Czech Republic, Romania and Korea. We plan to continue to expand operations in emerging markets in future years through continued investment. Key international brands for 2011 included BEYBLADE products, TRANSFORMERS, NERF, LITTLEST PET SHOP, PLAY-DOH, FURREAL FRIENDS, PLAYSKOOL, MONOPOLY, STAR WARS products and MAGIC: THE GATHERING.

Entertainment and Licensing

Our Entertainment and Licensing segment includes our lifestyle licensing, digital gaming, movie, television and online entertainment operations. Our lifestyle licensing category seeks to promote our brands through the out-licensing of our intellectual properties to third parties for promotional and merchandising uses in businesses which do not compete directly with our own product offerings, such as apparel, publishing, home goods and electronics.

Our digital gaming category seeks to promote our brands through the out-licensing of our intellectual properties in the digital area, such as for applications on mobile phones, personal computers, and video game consoles. This is primarily done through our long-term strategic partnership with EA, which provides EA with the exclusive worldwide rights to create digital games for all of these major platforms based on most of our toy and game intellectual properties. In digital gaming, we also have strategic partnerships with Activision, Majesco, Net Dragon, Jagex and Perfect World to develop digital games and applications for 2012 and beyond.

To support our strategic objective of further developing our brands through television entertainment, we established a wholly-owned television studio, Hasbro Studios, which produces television programming primarily based on our brands as well as third-party branded content, which is distributed on a global basis. In addition, Hasbro Studios has a coordinated development process which aligns with our 50% interest in a joint venture with Discovery that operates a television network in the United States, THE HUB, which debuted in October 2010. THE HUB is dedicated to providing high-quality children’s and family entertainment and educational programming.

In addition to the above, we also seek to promote and leverage our brands through major motion pictures. In 2009, TRANSFORMERS: REVENGE OF THE FALLEN and G.I. JOE: THE RISE OF COBRA were released based on our brands. In July 2011, TRANSFORMERS: DARK OF THE MOON, the third major motion picture based on the TRANSFORMERS brand, was released. The next motion pictures based on the Company’s properties include BATTLESHIP, which is scheduled to be released in 2012 by Universal Pictures, and G.I. JOE: RETALIATION, which is scheduled to be released in 2012 by Paramount Pictures. The Company has motion picture projects based on other brands in development for potential release in future years.

Major motion pictures and television programming based on our own and controlled brands provide our consumers with the ability to experience these properties in a different format, which we believe can result in

 

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increased product sales, royalty revenues, and overall brand awareness. To a lesser extent, we can also earn revenue from our participation in the financial results of motion pictures and related DVD releases and through the distribution of television programming. Revenue from toy and game product sales is a component of the U.S. and Canada and International segments, while royalty revenues, including revenues earned from movies and television programming, is included in the Entertainment and Licensing segment.

Global Operations

In our Global Operations segment, we manufacture and source production of substantially all of our toy and game products. The Company owns and operates manufacturing facilities in East Longmeadow, Massachusetts and Waterford, Ireland which predominantly produce games and puzzles. Sourcing of our other production is done through unrelated third party manufacturers in various Far East countries, principally China, using a Hong Kong based wholly-owned subsidiary operation for quality control and order coordination purposes. See “Manufacturing and Importing” below for more details concerning overseas manufacturing and sourcing.

Other Information

To further extend our range of products in the various segments of our business, we sell a portion of our toy and game products directly to retailers on a direct import basis from the Far East. These sales are reflected in the revenue of the related segment where the customer resides.

Certain of our products are licensed to other companies for sale in selected countries where we do not otherwise have a direct business presence.

During 2011, net revenues generated from TRANSFORMERS and BEYBLADE products were approximately $483,000 and $477,000, respectively, which were 11.3% and 11.1%, respectively, of our consolidated net revenues for that year. During 2010, net revenues generated from NERF products were approximately $414,000, which was 10.3% of our consolidated net revenues for that year. During 2009, net revenues generated from TRANSFORMERS products were approximately $592,000, which was 14.5% of our consolidated net revenues in that year. No other line of products constituted 10% or more of our consolidated net revenues in 2011, 2010 or 2009.

Working Capital Requirements

Our working capital needs are primarily financed through cash generated from operations and, when necessary, proceeds from short-term borrowings. Our borrowings generally reach peak levels during the third or fourth quarter of each year. This corresponds to the time of year when our receivables also generally reach peak levels as part of the production and shipment of product in preparation for the holiday season. The strategy of retailers has generally been to make a higher percentage of their purchases of toy and game products within or close to the fourth quarter holiday consumer buying season, which includes Christmas. We expect that retailers will continue to follow this strategy. Our historical revenue pattern is one in which the second half of the year is more significant to our overall business than the first half. In 2011, the second half of the year accounted for approximately 63% of full year revenues with the third and fourth quarters accounting for 32% and 31% of full year revenues, respectively.

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 offer products, 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 result in fewer orders being placed significantly in advance of shipment and more orders being placed for immediate delivery. Recent trends have shown that retailers are timing their orders so that they are being filled by suppliers, such as us, closer to the time of purchase by consumers. Although the Company may receive orders from customers in advance, it is a general industry practice that these orders are subject to amendment or cancellation by customers

 

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prior to shipment and, as such, the Company does not believe that these unshipped orders, at any given date, are indicative of future sales. The amount of unshipped orders at any date in a given year can also be affected by programs that we may employ to incent customers to place orders and accept shipments early in the year. These programs follow general industry practices. The types of programs that we plan to employ to promote sales in 2012 are substantially the same as those we employed in 2011.

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 2011, we utilized cash from our operations and borrowings under our commercial paper program and uncommitted lines of credit to meet our cash flow requirements.

Royalties and Product Development

Our success is dependent on continuous innovation in our entertainment offerings, including both the continuing development of new brands and products and the redesign of existing products to drive consumer interest and market acceptance. Our toy, game and puzzle products are developed by a global development group and the costs of this group are allocated to the selling entities which comprise our principal operating segments. In 2011, 2010 and 2009, we incurred expenses of $197,638, $201,358 and $181,195, respectively, on activities relating to the development, design and engineering of new products and their packaging (including products brought to us by independent designers) and on the improvement or modification of ongoing products. Much of this work is performed by our internal staff of designers, artists, model makers and engineers.

In addition to the design and development work performed by our own staff, we deal with a number of independent toy and game designers for whose designs and ideas we compete with other toy and game manufacturers. Rights to such designs and ideas, when acquired by us, are usually exclusive and the agreements require us to pay the designer a royalty on our net sales of the item. These designer royalty agreements, in some cases, also provide for advance royalties and minimum guarantees.

We also produce a number of toys and games under trademarks and copyrights utilizing the names or likenesses of characters from movies, television shows and other entertainment media, for whose rights we compete with other toy and game manufacturers. Licensing fees for these rights are generally paid as a royalty on our net sales of the item. Licenses for the use of characters are generally exclusive for specific products or product lines in specified territories. In many instances, advance royalties and minimum guarantees are required by these license agreements.

In 2011, 2010 and 2009, we incurred $339,217, $248,570 and $330,651, respectively, of royalty expense. Our royalty expense in any given year may vary depending upon the timing of movie releases and other entertainment media.

Marketing and Sales

As we are focused on re-imagining, re-inventing and re-igniting our many brands and imagining, inventing and igniting new brands, on a consistent global basis, we have a global marketing function which establishes brand direction and messaging, as well as assists the selling entities in establishing certain local marketing programs. The costs of this group are allocated to the selling entities which comprise our principal operating segments. Our products are sold globally to a broad spectrum of customers, including wholesalers, distributors, chain stores, discount stores, mail order houses, catalog stores, department stores and other traditional retailers, large and small, as well as internet-based “e-tailers.” Our own sales forces account for the majority of sales of our products. Remaining sales are generated by independent distributors who sell our products, for the most part, in areas of the world where we do not otherwise maintain a direct presence. While we have thousands of

 

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customers, there has been significant consolidation at the retail level over the last several years in our industry. As a result, the majority of our sales are to large chain stores, distributors and wholesalers. While the consolidation of customers provides us with certain benefits, such as potentially more efficient product distribution and other decreased costs of sales and distribution, this consolidation also creates additional risks to our business associated with a major customer having financial difficulties or reducing its business with us. In addition, customer concentration may decrease the prices we are able to obtain for some of our products and reduce the number of products we would otherwise be able to bring to market. During 2011, net revenues from our three largest customers, Wal-Mart Stores, Inc., Toys “R” Us, Inc. and Target Corporation represented 20%, 11% and 10%, respectively, of consolidated net revenues, and sales to our top five customers, including Wal-Mart, Target and Toys “R” Us, Inc., accounted for approximately 45% of our consolidated net revenues. In the U.S. and Canada segment, approximately 68% of our net revenues were derived from these top three customers.

We advertise many of our toy and game products extensively on television. Generally our advertising highlights selected items in our various product groups in a manner designed to promote the sale of not only the selected item, but also other items we offer in those product groups as well. In addition, Hasbro Studios produces television entertainment based primarily on our brands which appears on THE HUB in the U.S. and on other major networks internationally. We introduce many of our new products to major customers during the year prior to the year of introduction of such products for retail sale. In addition, we showcase certain of our new products in New York City at the time of the American International Toy Fair in February, as well as at other international toy shows. In 2011 we incurred $413,951 in expense related to advertising and promotion programs compared to $420,651 in 2010 and $412,580 in 2009. Certain entertainment-based products, such as products based on major motion pictures, do not require the same level of advertising that we spend on other products.

Manufacturing and Importing

During 2011 substantially all of our products were manufactured in third party facilities in the Far East, primarily China, as well as in our two owned facilities located in East Longmeadow, Massachusetts and Waterford, Ireland.

Most of our products are manufactured from basic raw materials such as plastic, paper and cardboard, although certain products also make use of electronic components. All of these materials are readily available but may be subject to significant fluctuations in price. There are certain chemicals (including phthalates and BPA) that national, state and local governments have restricted or are seeking to restrict or limit the use of; however, we do not believe these restrictions have or will materially impact our business. We generally enter into agreements with suppliers at the beginning of a fiscal year that establish prices for that year. However, significant volatility in the prices of any of these materials may require renegotiation with our suppliers during the year. Our manufacturing processes and those of our vendors include injection molding, blow molding, spray painting, printing, box making and assembly. The countries of the Far East, and particularly China, constitute the largest manufacturing center of toys in the world and the substantial majority of our toy products are manufactured in China. The 1996 implementation of the General Agreement on Tariffs and Trade reduced or eliminated customs duties on many of the products imported by us. We purchase most of our raw materials and component parts used in our owned manufacturing facilities from manufacturers in the United States and other certain countries.

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 2012 for our products. Our reliance on designated external sources of manufacturing could be shifted, over a period of time, to alternative sources of supply for our products, should such changes be necessary or desirable. However, if we were to be prevented from obtaining products from a substantial number of our current Far East suppliers due to political, labor or other factors beyond our control, our operations and our ability to obtain products would be severely disrupted while alternative sources of product were secured and production shifted to those new sources. 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 with, China, or other factors which increase the cost of manufacturing

 

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in China, such as higher Chinese labor costs or an appreciation in the Chinese Yuan, could significantly disrupt our operations and/or significantly increase the cost of the products which are manufactured in China and imported into other markets.

Competition

We are a worldwide leader in the design, manufacture and marketing of toys and games and other entertainment offerings, but our business is highly competitive. We compete with several large toy and game companies in our product categories, as well as many smaller United States and international toy and game designers, manufacturers and marketers. We also compete with companies that offer branded entertainment focused on children and their families. Competition is based primarily on meeting consumer entertainment preferences and on the quality and play value of our products. To a lesser extent, competition is also based on product pricing. In entertainment, Hasbro Studios and THE HUB compete with other children’s television networks and entertainment producers, such as NICKELODEON and CARTOON NETWORK, for viewers, advertising revenue and distribution.

In addition to contending with competition from other toy and game and branded play entertainment companies, in our business we must deal with the phenomenon that children are increasingly sophisticated and many children have been moving away from traditional toys and games at a younger age and the array of products and entertainment offerings competing for the attention of children has greatly expanded. We refer to this as “children getting older younger.” As a result, our products not only compete with the offerings of other toy and game manufacturers, but we must compete, particularly in meeting the demands of older children, with the entertainment offerings of many other companies, such as makers of video games and consumer electronic products.

The volatility in consumer preferences with respect to family entertainment and low barriers to entry continually creates new opportunities for existing competitors and start-ups to develop products that compete with our toy and game offerings.

Employees

At December 25, 2011, we employed approximately 5,900 persons worldwide, approximately 3,200 of whom were located in the United States.

Trademarks, Copyrights and Patents

We seek to protect our products, for the most part, and in as many countries as practical, through registered trademarks, copyrights and patents to the extent that such protection is available, cost effective, and meaningful. The loss of such rights concerning any particular product is unlikely to result in significant harm to our business, although the loss of such protection for a number of significant items might have such an effect.

Government Regulation

Our toy and game products sold in the United States are subject to the provisions of The Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008, (as amended, the “CPSA”), The Federal Hazardous Substances Act (the “FHSA”), The Flammable Fabrics Act (the “FFA”), and the regulations promulgated thereunder. In addition, certain of our products, such as the mixes for our EASY-BAKE ovens, are also subject to regulation by the Food and Drug Administration.

The CPSA empowers the Consumer Product Safety Commission (the “CPSC”) to take action against hazards presented by consumer products, including the formulation and implementation of regulations and uniform safety standards. The CPSC has the authority to seek to declare a product “a banned hazardous substance” under the CPSA and to ban it from commerce. The CPSC can file an action to seize and condemn an “imminently hazardous consumer product” under the CPSA and may also order equitable remedies such as recall, replacement, repair or refund for the product. The FHSA provides for the repurchase by the manufacturer of articles that are banned.

 

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Consumer product safety laws also exist in some states and cities within the United States and in many international markets including Canada, Australia and Europe. We utilize laboratories that employ testing and other procedures intended to maintain compliance with the CPSA, the FHSA, the FFA, other applicable domestic and international product standards, and our own standards. Notwithstanding the foregoing, there can be no assurance that our products are or will be hazard free. Any material product recall or other safety issue impacting our product could have an adverse effect on our results of operations or financial condition, depending on the product and scope of the recall, and could negatively affect sales of our other products as well.

The Children’s Television Act of 1990 and the rules promulgated thereunder by the United States Federal Communications Commission, the rules and regulations of the Federal Trade Commission, as well as the laws of certain other countries, also place limitations on television commercials during children’s programming and on advertising in other forms to children.

We maintain programs to comply with various United States federal, state, local and international requirements relating to the environment, plant safety and other matters.

Financial Information about International and United States Operations

The information required by this item is included in note 18 of the Notes to Consolidated Financial Statements included in Item 8 of Part II of this report and is incorporated herein by reference.

Executive Officers of the Registrant

The following persons are the executive officers of the Company. Such executive officers are elected annually. The position(s) and office(s) listed below are the principal position(s) and office(s) held by such persons with the Company. The persons listed below generally also serve as officers and directors of certain of the Company’s various subsidiaries at the request and convenience of the Company.

 

Name

   Age     

Position and Office Held

   Period
Serving in
Current
Position
 

Brian D. Goldner(1)

     48       President and Chief Executive Officer      Since 2008   

David D. R. Hargreaves(2)

     59       Chief Operating Officer      Since 2008   

Deborah M. Thomas(3)

     48       Senior Vice President and Chief Financial Officer      Since 2009   

Duncan J. Billing(4)

     53       Global Chief Development Officer      Since 2008   

Barbara Finigan(5)

     50       Senior Vice President, Chief Legal Officer and Secretary      Since 2010   

John A. Frascotti(6)

     51       Global Chief Marketing Officer      Since 2008   

Martin R. Trueb

     59       Senior Vice President and Treasurer      Since 1997   

 

 

(1) Prior thereto, Chief Operating Officer from 2006 to 2008; prior thereto, President, U.S. Toys Segment from 2003 to 2006.

 

(2) Prior thereto, Chief Operating Officer and Chief Financial Officer from 2008 to 2009; prior thereto, Executive Vice President, Finance and Global Operations and Chief Financial Officer from 2007 to 2008; prior thereto, Senior Vice President and Chief Financial Officer from 2001 to 2007.

 

(3) Prior thereto, Senior Vice President, Head of Corporate Finance from 2008 to 2009; prior thereto, Senior Vice President and Controller from 2003 to 2008.

 

(4) Prior thereto, Chief Marketing Officer, U.S. Toy Group since 2004; prior thereto, General Manager, Big Kids Division, since 2002.

 

(5) Prior thereto, Vice President, Employment, Litigation and Compliance since 2006; prior thereto, Vice President, Employment and Litigation since 2001.

 

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(6) Mr. Frascotti joined the Company in January 2008. Prior thereto he was employed by Reebok International, Ltd., serving as Senior Vice President, New Business, Acquisitions and Licensing from 2002 to 2005, and as Senior Vice President, Sports Division from 2005 to 2008.

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.

 

Item 1A. Risk Factors.

Forward-Looking Information and Risk Factors That May Affect Future Results

From time to time, including in this Annual Report on Form 10-K and in our annual report to shareholders, we publish “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” may relate to such matters as our anticipated financial performance or business prospects in future periods, expected technological and product developments, the expected content of and timing for new product introductions or our expectations concerning the future acceptance of products by customers, the content and timing of planned entertainment releases including motion pictures and television; and 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.

The volatility of changing consumer interests makes it difficult to design and develop products which will be popular with children and families.

The children’s and family entertainment business is one in which consumer interests evolve extremely quickly and can change dramatically from year to year. To be successful requires properly anticipating what content, properties and products will capture children’s and families’ interests and imagination, and then quickly developing and marketing products to meet those interests. Critical to this process is understanding market insights that drive product popularity and providing innovative product offerings which can compete successfully against many other products for consumers’ limited time, attention and spending.

Our performance depends on our successful ability to develop, market and sell innovative toys, games and other entertainment offerings, and license our brands for products which are sought after by consumers, including both children and their parents. We need to do this in an environment of rapidly evolving consumer tastes and increasing utilization of technology and digital media in product offerings. Consumer preferences with respect to family entertainment are continuously changing and are difficult to anticipate. We may not successfully identify, design and market product offerings which are sought after by consumers. Evolving consumer tastes, coupled with an ever changing pipeline of entertainment and consumer properties and products which compete for

 

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children’s and families’ interest and acceptance, create an environment in which some products can fail to achieve consumer acceptance, and other products can be extremely popular during a certain period in time but then rapidly be replaced in consumers’ minds with other properties. As a result, individual family entertainment products and properties often have short consumer life cycles.

If we devote time and resources to developing entertainment and consumer products that consumers do not find interesting enough to buy in significant quantities to be profitable to us, our sales and profits will decline and our business performance will be damaged. Similarly, brands or products that were successful at one time may lose consumer interest over time as tastes change and product innovation continues. Our success is critically dependent upon developing and maintaining the consumer appeal of our brands and products and in our ongoing ability to achieve and maintain market interest in and acceptance of our offerings to a degree that enables those brands and products to be profitable.

Additionally, our business is increasingly global and depends on interest in and acceptance of our entertainment and consumer product offerings by consumers in diverse markets outside of the United States. As such, our success depends on our ability to successfully predict and adapt to changing consumer tastes and preferences in different markets and geographies and to design product offerings that can achieve popularity globally over a broad and diverse consumer audience.

A decline in the popularity of our existing brands, products and product lines, or the failure of our new brands, products and product lines to achieve and sustain sufficient interest from retailers and consumers, could significantly lower our revenues and operating margins, which would in turn harm our profitability, business and financial condition. The challenge of continuously developing and offering products that are sought after by children is compounded by the sophistication of today’s children and the incredible array of entertainment offerings available to them. Children are expanding their interests beyond traditional toys and games to a wider array of innovative, technology driven entertainment products at younger and younger ages and, as a result, at younger and younger ages, our products compete with the offerings of video game suppliers, consumer electronics companies, digital media and social media companies, and other businesses outside of the traditional toy and game industry.

There is no guarantee that:

 

   

Any of our brands, products or product lines will achieve popularity or continue to be popular;

 

   

Any property for which we have a significant license will achieve or sustain popularity;

 

   

Any new products or product lines we introduce will be considered interesting to consumers and achieve an adequate market acceptance; or

 

   

Any product’s life cycle or sales quantities will be sufficient to permit us to profitably recover our development, manufacturing, marketing, royalties (including royalty advances and guarantees) and other costs of producing, marketing and selling the product.

An inability to develop and introduce planned new brands, products and product lines in a timely and cost-effective manner may damage our business.

In developing new brands, products and product lines, we have anticipated dates for the associated product introductions. When we state that we will introduce, or anticipate introducing, a particular product or product line at a certain time in the future those expectations are based on completing the associated development, implementation, and marketing work in accordance with our currently anticipated development schedule. There is no guarantee that we will be able to manufacture, source and ship new or continuing products in a timely manner and on a cost-effective basis to meet constantly changing consumer demands. This risk is heightened by our customers’ compressed shipping schedules and the seasonality of our business. The risk is also exacerbated by the increasing sophistication of many of the products we are designing, in terms of combining digital and analog technologies, utilizing digital media to a greater degree, and providing greater innovation and product differentiation. Unforeseen delays or difficulties in the development process, significant increases in the planned cost of development, or changes in anticipated consumer demand for our products may cause the introduction date for products to be later than anticipated or, in some situations, may cause a product introduction to be discontinued.

 

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The children’s and family entertainment industry is highly competitive and there are low barriers to entry. If we are unable to compete effectively with existing or new competitors our sales, market share and profitability could decline.

The children’s and family entertainment industry is, and will continue to be, highly competitive. We compete domestically and internationally with a wide array of large and small manufacturers, marketers, and sellers of toys, games, video games, digital media and other entertainment and consumer products, as well as with retailers. We face competitors who are constantly monitoring and attempting to anticipate consumer tastes and trends, 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 children’s and family entertainment industry are low, and the increasing importance of digital media, and the heightened connection between digital media and consumer interest, has further increased the ability for new participants to enter our markets. New participants with a popular product idea or entertainment property can gain access to consumers and become a significant source of competition for our products in a very short period of time. These existing and new competitors may be able to respond more rapidly than us to changes in consumer preferences. In some cases our competitors’ products may achieve greater market acceptance than our products and potentially reduce demand for our products, lower our sales and lower our profitability.

Delays or increased costs associated with the development and offering of entertainment media based upon or related to our brands, or lack of sufficient consumer interest in such entertainment media, can harm our business and profitability.

As part of our strategy of offering immersive branded play experiences, we look to offer consumers the ability to enjoy our brands in as many different forms and formats as possible. Entertainment media, in forms such as motion pictures and television, can provide popular platforms for consumers to experience our brands and the success, or lack of success, of such media efforts can significantly impact the demand for our products and our financial success.

The success of our products is often dependent on the timelines and effectiveness of media efforts by us and our partners. Television programming, motion picture and DVD releases, comic book releases, and other media efforts are often critical in generating interest in our products and brands and we spend considerable amounts of time and sums of money in designing and developing products in conjunction with planned media releases. Not only our efforts, but the efforts of third parties, heavily impact the timing of media development, release dates and the ultimate consumer interest in and success of these media efforts.

For example, development and release of motion pictures based on our brands involves working extremely closely with our studio partners in indentifying projects, developing them, and scheduling them for release. The ultimate timing and success of such projects is critically dependent on the efforts and schedules of our studio partners. We do not fully control when or if any particular motion picture projects will be greenlit or released. This can make it difficult for us to plan our future movie slates and to successfully develop and market products in conjunction with future motion picture releases, given the lengthy lead times involved in product development and successful marketing efforts.

When we say that products or brands will be supported by certain media releases, those statements are based on our current plans and expectations. Unforeseen factors may increase the cost of these releases, delay these media releases or even lead to their cancellation. Any delay or cancellation of planned product development work, introductions, or media support may decrease the number of products we sell and harm our business.

Even when motion pictures, television or other media is developed and released, consumers may not be as interested in that media, and in any associated products, as we had anticipated. While it is difficult to anticipate what products may be sought after by consumers, it can be even more difficult to properly predict the popularity of media efforts, given the broad array of competing offerings. If our and our partners’ media efforts fail to garner sufficient consumer interest and acceptance, our revenues and the financial return from such efforts will be harmed.

 

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In 2009 we entered into a joint venture with Discovery Communications, Inc. Through that joint venture, we launched a children’s and family entertainment channel called THE HUB in October of 2010. In connection with this joint venture effort, we also developed a wholly-owned studio, called Hasbro Studios, which is responsible for developing and producing television entertainment media, based on our owned and licensed brands. The television programming developed by Hasbro Studios is offered in the United States on THE HUB and is distributed on other networks internationally.

THE HUB is competing with a number of other children’s television networks in the United States for viewers, advertising revenue and distribution fees. There is no guarantee that THE HUB will be successful. Similarly, Hasbro Studios’ programming distributed internationally competes with programming from many other parties. Lack of consumer interest in and acceptance of programming developed by Hasbro Studios or other programming appearing on THE HUB, and products related to that programming, could significantly harm our business, particularly given that we are investing significant sums of money developing that programming. Similarly, our business could be harmed by greater than expected costs, or unexpected delays or difficulties, associated with our investment in THE HUB, such as difficulties in increasing subscribers to the network or in building advertising revenues for THE HUB. During 2011 the Company incurred $80,983 for programming developed by Hasbro Studios and anticipates that it will continue spending at comparable levels in 2012 and future years.

At December 25, 2011, $343,835, or 8.3%, of our total assets represented our investment in THE HUB. If THE HUB does not achieve success, or there are subsequent declines in the success or profitability of the channel, then our investment may become impaired, which could result in a write-down through net earnings.

U.S., global and regional economic downturns that negatively impact the retail and credit markets, or that otherwise damage the financial health of our retail customers and consumers, can harm our business and financial performance.

We design, manufacture and market a wide variety of entertainment and consumer products worldwide through sales to our retail customers and directly to consumers. Our financial performance is impacted by the level of discretionary consumer spending. Recessions and other economic downturns, or disruptions in credit markets, in the U.S. and in other markets in which our products are marketed and sold can result in lower levels of economic activity, lower employment levels, less consumer disposable income, and lower consumer confidence. Similarly, reductions in the value of key assets held by consumers, such as their homes or stock market investments, can lower consumer confidence and consumer spending power. Any of these factors can reduce the amount which consumers spend on the purchase of our products. This in turn can reduce our revenues and harm our financial performance and profitability.

In addition to experiencing potentially lower revenues from our products during times of economic difficulty, in an effort to maintain sales during such times we may need to reduce the price of our products, increase our promotional spending and/or sales allowances, or take other steps to encourage retailer and consumer purchase of our products. Those steps may lower our net revenues or increase our costs, thereby decreasing our operating margins and lowering our profitability.

Given the difficult economic conditions in the United States over the past few years, we have been challenged in our efforts to grow our U.S. business and improve its profitability. As long as economic conditions in the U.S. remain difficult, this will be an additional challenge we must face and overcome if we are to succeed in our efforts at growing this business. Similarly, while our European business has grown significantly in recent years, our future success in Europe is dependent upon economic conditions in Europe. A European sovereign debt crisis or other significant negative shock to European markets could lead to a recession in Europe, which would negatively impact consumers and in turn, sales of our products in the European markets.

 

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Other economic and public health conditions in the markets in which we operate, including rising commodity and fuel prices, higher labor costs, increased transportation costs, outbreaks of public health pandemics or other diseases, or third party conduct could negatively impact our ability to produce and ship our products, and lower our revenues, margins and profitability.

Various economic and public health conditions can impact our ability to manufacture and deliver products in a timely and cost-effective manner, or can otherwise have a significant negative impact on our sales, profitability and our business.

Significant increases in the costs of other products which are required by consumers, such as gasoline, home heating fuels, or groceries, may reduce household spending on the discretionary branded play entertainment products we offer. As we discussed above, weakened economic conditions, lowered employment levels or recessions in any of our major markets may significantly reduce consumer purchases of our products. Economic conditions may also be negatively impacted by terrorist attacks, wars and other conflicts, increases in critical commodity prices or labor costs, or the prospect of such events. Such a weakened economic and business climate, as well as consumer uncertainty created by such a climate, could harm our revenues and profitability.

Our success and profitability not only depend on consumer demand for our products, but also on our ability to produce and sell those products at costs which allow for us to make a profit. Rising fuel and raw material prices, for paperboard and other components such as resin used in plastics or electronic components, increased transportation costs, and increased labor costs in the markets in which our products are manufactured all may increase the costs we incur to produce and transport our products, which in turn may reduce our margins, reduce our profitability and harm our business.

Other conditions, such as the unavailability of sufficient quantities of electrical components, may impede our ability to manufacture, source and ship new and continuing products on a timely basis. Additional factors outside of our control could further delay our products or increase the cost we pay to produce such products. For example, work stoppages, slowdowns or strikes, an outbreak of a severe public health pandemic, or the occurrence or threat of wars or other conflicts, all could impact our ability to manufacture or deliver product. Any of these factors could result in product delays, increased costs and/or lost sales for our products.

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 25, 2011, our net revenues from international customers comprised approximately 50% of our total consolidated net revenues. We expect our sales to international customers to continue to account for a significant portion of our revenues. In fact, over time, we expect our international sales and operations to continue to grow both in absolute terms and as a percentage of our overall business as one of our key business strategies is to increase our presence in emerging and underserved markets. Additionally, as we discuss below, we utilize third-party manufacturers located principally in the Far East, to produce the majority of our products, and we have a manufacturing facility in Ireland. These sales and manufacturing operations, including operations in emerging markets that we have entered, may enter, or may increase our presence in, are subject to the risks associated with international operations, including:

 

   

Currency conversion risks and currency fluctuations;

 

   

Limitations, including taxes, on the repatriation of earnings;

 

   

Potential challenges to our transfer pricing determinations and other aspects of our cross border transactions;

 

   

Political instability, civil unrest and economic instability;

 

   

Greater difficulty enforcing intellectual property rights and weaker laws protecting such rights;

 

   

Complications in complying with different laws in varying jurisdictions and in dealing with changes in governmental policies;

 

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Difficulties understanding the retail climate, consumer trends, local customs and competitive conditions in foreign markets which may be quite different from the United States;

 

   

Natural disasters and the greater difficulty and expense in recovering therefrom;

 

   

Difficulties in moving materials and products from one country to another, including port congestion, strikes and other transportation delays and interruptions;

 

   

Changes in international labor costs and other costs of doing business internationally; and

 

   

The imposition of tariffs, quotas, or other protectionist measures.

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 or if we are otherwise unsuccessful in managing our increasing global business.

Changes in foreign currency exchange rates can significantly impact our reported financial performance.

Our global operations mean we produce and buy products, and sell products, in many different jurisdictions with many different foreign currencies. As a result, if the exchange rate between the United States dollar and a local currency for an international market in which we have significant sales or operations changes, our financial results, reported in U.S. dollars, may be meaningfully impacted even if our business in the local currency is not significantly affected. As an example, if the dollar appreciates 10% relative to a local currency for an international market in which we had $200 million of net sales, the dollar value of those sales, as they are translated into U.S. dollars, would decrease by $20 million in our consolidated financial results. As such, we would recognize a $20 million decrease in our net revenues, even if the actual level of sales in the foreign market had not changed. Similarly, our expenses in foreign markets can be significantly impacted, in U.S. dollar terms, by exchange rates, meaning the profitability of our business in U.S. dollar terms can be negatively impacted by exchange rate movements which we do not control.

We may not realize the full benefit of our licenses if the licensed material has less market appeal than expected or if revenue from the licensed products is not sufficient to earn out the minimum guaranteed royalties.

In addition to designing and developing products based on our own brands, we seek to fulfill consumer preferences and interests by producing products based on popular entertainment properties developed by third parties and licensed to us. The success of entertainment properties for which we have a license, such as BEYBLADE, MARVEL, SESAME STREET or STAR WARS related products, can significantly affect our revenues and profitability. If we produce a line of products based on a movie or television series, the success of the movie or series has a critical impact on the level of consumer interest in the associated products we are offering. In addition, competition in our industry for access to entertainment properties can lessen our ability to secure, maintain, and renew popular licenses to entertainment products on beneficial terms, if at all, and to attract and retain the talented employees necessary to design, develop and market successful products based on these properties. The loss of rights granted pursuant to any of our licensing agreements could harm our business and competitive position.

The license agreements we enter to obtain these rights usually require us to pay minimum royalty guarantees that may be substantial, and in some cases may be greater than what we are ultimately able to recoup from actual sales, which could result in write-offs of significant amounts which in turn would harm our results of operations. At December 25, 2011, we had $134,730 of prepaid royalties, $16,788 of which are included in prepaid expenses and other current assets and $117,942 of which are included in other assets. Under the terms of existing contracts as of December 25, 2011, we may be required to pay future minimum guaranteed royalties and other licensing fees totaling approximately $235,000. Acquiring or renewing licenses may require the payment of minimum guaranteed royalties that we consider to be too high to be profitable, which may result in losing licenses that 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, game or other family entertainment products, and underperformance of any such products may result in reduced revenues and operating profit for us.

 

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We anticipate that the shorter theatrical duration for movie releases may make it increasingly difficult for us to profitably sell licensed products based on entertainment properties and may lead our customers to reduce their demand for these products in order to minimize their inventory risk. Furthermore, there can be no assurance that a successful brand will continue to be successful or maintain a high level of sales in the future, as new entertainment properties and competitive products are continually being introduced to the market. In the event that we are not able to acquire or maintain successful entertainment licenses on advantageous terms, our revenues and profits may be harmed.

Our business is seasonal and therefore our annual operating results will depend, in large part, on our sales during the relatively brief holiday shopping season. This seasonality is exacerbated by retailers’ quick response inventory management techniques.

Sales of our toys, games and other family entertainment products at retail are extremely seasonal, with a majority of retail sales occurring during the period from September through December in anticipation of the holiday season, including Christmas. This seasonality has increased over time, as retailers become more efficient in their control of inventory levels through quick response inventory management techniques. Customers are timing their orders so that they are being filled by suppliers, such as us, closer to the time of purchase by consumers. For toys, games and other family entertainment products which we produce, a majority of retail sales for the entire year generally occur in the fourth quarter, close to the holiday season. As a consequence, the majority of our sales to our customers occur in the period from September through December, as our customers do not want to maintain large on-hand inventories throughout the year ahead of consumer demand. While these techniques reduce a retailer’s 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 concentration of our retail customer base means that economic difficulties or changes in the purchasing or promotional policies or patterns 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 25, 2011, Wal-Mart Stores, Inc., Toys “R” Us, Inc. and Target Corporation, accounted for approximately 20%, 11% and 10%, respectively, of our consolidated net revenues and our five largest customers, including Wal-Mart, Toys “R” Us and Target, in the aggregate accounted for approximately 45% of our consolidated net revenues. In the U.S. and Canada segment, approximately 68% of the net revenues of the segment were derived from our top three customers. 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, favor competitors or new entrants, increase their direct competition with us by expanding their private-label business, change their purchasing patterns, alter the manner in which they promote

 

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our products or the resources they devote to promoting and selling our products, or return substantial amounts of our products, it could significantly harm our sales, profitability and financial condition. Customers make no binding long-term commitments to us regarding purchase volumes and make all purchases by delivering purchase orders. Any customer could reduce its overall purchase of our products, and reduce the number and variety of our products that it carries and the shelf space allotted for our products. In addition, increased concentration among our customers could also negatively impact our ability to negotiate higher sales prices for our products and could result in lower gross margins than would otherwise be obtained if there were less consolidation among our customers. Furthermore, the bankruptcy or other lack of success of one or more of our significant retail customers could negatively impact our revenues and result in higher bad debt expense.

Our use of third-party manufacturers to produce the majority of our toy products, as well as certain other products, presents risks to our business.

We own and operate two game and puzzle manufacturing facilities, one in East Longmeadow, Massachusetts and the other in Waterford, Ireland. However, most of our toy products, in addition to certain other products, are manufactured by third-party manufacturers, most of whom are located in the People’s Republic of China. Although our external sources of manufacturing can be shifted, over a significant period of time, to alternative sources of supply, should such changes be necessary, if we were prevented or delayed in obtaining products or components for a material portion of our product line due to political, civil, labor or other factors beyond our control, including natural disasters or pandemics, our operations would be substantially disrupted, potentially for a significant period of time, while alternative sources of supply were secured. This delay could significantly reduce our revenues and profitability, and harm our business.

Given that the majority of our toy manufacturing is conducted by third-party manufacturers located in China, health conditions and other factors affecting social and economic activity in China and affecting the movement of people and products into and from China to our major markets, including North America and Europe, as well as increases in the costs of labor and other costs of doing business in China, could have a significant negative impact on our operations, revenues and earnings. Factors that could negatively affect our business include a potential significant revaluation of the Chinese Yuan, which may result in an increase in the cost of producing products in China, labor shortages and increases in labor costs in China, and difficulties in moving products manufactured in China out of Asia and through the ports in North America and Europe, whether due to port congestion, labor disputes, product regulations and/or inspections or other factors, and natural disasters or health pandemics impacting China. Also, the imposition of trade sanctions or other regulations by the United States or the European Union against products imported by us from, or the loss of “normal trade relations” status with, China, could significantly increase our cost of products imported into the United States or Europe and harm our business. Additionally, the suspension of the operations of a third-party manufacturer by government inspectors in China could result in delays to us in obtaining product and may harm sales.

We require our third-party manufacturers to comply with our Global Business Ethics Principles, which are designed to prevent products manufactured by or for us from being produced under inhumane or exploitive conditions. Our Global Business Ethics Principles address a number of issues, including working hours and compensation, health and safety, and abuse and discrimination. In addition, Hasbro requires that our products supplied by third-party manufacturers be produced in compliance with all applicable laws and regulations, including consumer and product safety laws in the markets where those products are sold. Hasbro has the right and exercises such right, both directly and through the use of outside monitors, to monitor compliance by our third-party manufacturers with our Global Business Ethics Principles and other manufacturing requirements. In addition, we do quality assurance testing on our products, including products manufactured for us by third parties. Notwithstanding these requirements and our monitoring and testing of compliance with them, there is always a risk that one or more of our third-party manufacturers will not comply with our requirements and that we will not immediately discover such non-compliance. Any failure of our third-party manufacturers to comply with labor, consumer, product safety or other applicable requirements in manufacturing products for us could result in damage to our reputation, harm sales of our products and potentially create liability for us.

 

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Greater than expected costs or difficulties associated with the implementation of our plan to reinvent our gaming business may harm our revenues and profitability.

Recognizing the critical need for increased innovation and a change in the way we go to market with gaming products in order to remain successful in the gaming business in the future, in 2011 we began implementing a ten point strategy to reinvent our gaming business. The objective of this plan is to stabilize our gaming business in 2012, and to position it to grow in 2013 and beyond. As part of executing this strategy, in the second quarter of 2011 we announced our creation of a Gaming Center of Excellence in Rhode Island. Our strategy to drive our gaming business in the future involves substantial changes in how we market our gaming products to consumers and how we position them at retail, a focus on delivering industry leading innovation in gaming, a change in our allocation of focus across gaming brands, greater penetration of our brands into digital gaming and the successful combination of analog and digital gaming. We also are designing our gaming products to recognize the need to provide immersive game-play in shorter periods of time, and to offer innovative face to face and off the board gaming opportunities. Our failure to successfully implement our strategy to reinvent our gaming business and to otherwise stabilize and grow our gaming business in the future could substantially harm our business, resulting in lost revenues and lost profits. There can be no assurance that we will successfully implement our global gaming strategy.

Our success is critically dependent on the efforts and dedication of our officers and other employees.

Our officers and employees are at the heart of all of our branded play efforts. It is their skill, innovation and hard work that drive our success. We compete with many other potential employers in recruiting, hiring and retaining our senior management team and our many other skilled officers and other employees. There is no guarantee that we will be able to recruit, hire or retain the senior management, officers and other employees we need to succeed. Our loss of key management or other employees, or our inability to hire talented people we need in the future, could significantly harm our business.

Part of our strategy for remaining relevant to children is to offer innovative children’s toy and game electronic products incorporating greater technology. The margins on many of these products are lower than more traditional toys and games and such products may have a shorter lifespan than more traditional toys and games. As a result, sales of children’s toy and game electronic products may lower our overall operating margins and produce more volatility in our business.

As children have grown “older younger” and have otherwise become interested in more and more sophisticated and adult products, such as videogames, consumer electronics and social and digital media, at younger and younger ages, we have sought to keep our products relevant for these consumers. One initiative we have pursued to capture the interest of children is to offer innovative children’s electronic toy and game products. Examples of such products in the last few years include our FURREAL FRIENDS line of products, including COOKIE-MY PLAYFUL PUP, BUTTERSCOTCH PONY and BISCUIT-MY LOVIN’ PUP. Increasing the marriage between digital and analog gaming and increasing the technology in our gaming products is another key for our future strategy. These electronic and digital products, if successful, can be an effective way for us to connect with consumers and increase our sales. However, children’s 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 and digital products tend to be higher than for many of our other more traditional products, such as board games and action figures. The ability to recoup these higher costs through sufficient sales quantities and to reflect higher costs in higher prices is constrained by heavy competition in consumer electronics and entertainment products, and can be further constrained by difficult economic conditions. As a consequence, our margins on the sales of electronic products tend to be lower than for more traditional products and we can face increased risk of not achieving sales sufficient to recover our costs. In addition, the pace of change in product offerings and consumer tastes in the electronics area is potentially even greater than for our other products. This pace of change means that the window in which a product can achieve and maintain consumer interest may be even shorter than traditional toys and games.

 

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We rely on external financing, including our credit facility, to help fund our operations. If we were unable to obtain or service such financing, or if the restrictions imposed by such financing were too burdensome, our business would be harmed.

Due to the seasonal nature of our business, in order to meet our working capital needs, particularly those in the third and fourth quarters, we rely on our revolving credit facility and our other credit facilities for working capital. We currently have a revolving credit agreement that expires in 2014, which provides for a $500,000 committed revolving credit facility. The credit agreement contains certain restrictive covenants setting forth leverage and coverage requirements, and certain other limitations typical of an investment grade facility. These restrictive covenants may limit our future actions, and financial, operating and strategic flexibility. In addition, our financial covenants were set at the time we entered into our credit facility. Our performance and financial condition may not meet our original expectations, causing us to fail to meet such financial covenants. Non-compliance with our debt covenants could result in us being unable to utilize borrowings under our revolving credit facility and other bank lines, a circumstance which potentially could occur when operating shortfalls would most require supplementary borrowings to enable us to continue to fund our operations.

In early 2011 we established a commercial paper program which, subject to market conditions, will allow us to issue up to $500,000 in aggregate amount of commercial paper outstanding from time to time as a further source of working capital funding and liquidity. There is no guarantee that we will be able to issue commercial paper on favorable terms, or at all, at any given point in time.

Not only may our individual financial performance impact our ability to access sources of external financing, but significant disruptions to credit markets in general may also harm our ability to obtain financing. In times of severe economic downturn and/or distress in the credit markets, it is possible that one or more sources of external financing may be unable or unwilling to provide funding to us. In such a situation, it may be that we would be unable to access funding under our existing credit facilities, and it might not be possible to find alternative sources of funding.

We also may choose to finance our capital needs, from time to time, through the issuance of debt securities. Our ability to issue such securities on satisfactory terms, if at all, will depend on the state of our business and financial condition, any ratings issued by major credit rating agencies, market interest rates, and the overall condition of the financial and credit markets at the time of the offering. The condition of the credit markets and prevailing interest rates have fluctuated significantly in the past and are likely to fluctuate in the future. Variations in these factors could make it difficult for us to sell debt securities or require us to offer higher interest rates in order to sell new debt securities. The failure to receive financing on desirable terms, or at all, could damage our ability to support our future operations or capital needs or engage in other business activities.

As of December 25, 2011, we had $1,384,895 of total principal amount of indebtedness outstanding. If we are unable to generate sufficient available cash flow to service our outstanding debt we would need to refinance such debt or face default. There is no guarantee that we would be able to refinance debt on favorable terms, or at all.

As a manufacturer of consumer products and a large multinational corporation, we are subject to various government regulations and may be subject to additional regulations in the future, violation of which could subject us to sanctions or otherwise harm our business. In addition, we could be the subject of future product liability suits or product recalls, which could harm our business.

As a manufacturer of consumer products, we are subject to significant government regulations, including, in the United States, under The Consumer Products Safety Act, The Federal Hazardous Substances Act, and The Flammable Fabrics Act, as well as under product safety and consumer protection statutes in our international markets. In addition, certain of our products are subject to regulation by the Food and Drug Administration or similar international authorities. In addition, advertising to children is subject to regulation by the Federal Trade Commission, the Federal Communications Commission and a host of other agencies globally. 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, and failure to comply with these acts 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

 

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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 or in the aggregate in any given fiscal year, could be significant. In addition, any product recall, regardless of direct costs of the recall, may harm consumer perceptions of our products and have a negative impact on our future revenues and results of operations.

Governments and regulatory agencies in the markets where we manufacture and sell products may enact additional regulations relating to product safety and consumer protection in the future, and may also increase the penalties for failure to comply with product safety and consumer protection regulations. In addition, one or more of our customers might require changes in our products, such as the non-use of certain materials, in the future. Complying with any such additional regulations or requirements could impose increased costs on our business. Similarly, increased penalties for non-compliance could subject us to greater expense in the event any of our products were found to not comply with such regulations. Such increased costs or penalties could harm our business.

As a large, multinational corporation, we are subject to a host of governmental regulations throughout the world, including antitrust, customs and tax requirements, anti-boycott regulations, environmental regulations and the Foreign Corrupt Practices Act. Complying with these regulations imposes costs on us which can reduce our profitability and our failure to successfully comply with any such legal requirements could subject us to monetary liabilities and other sanctions that could further harm our business and financial condition.

Our business is dependent on intellectual property rights and we may not be able to protect such rights successfully. In addition, we have a material amount of acquired product rights which, if impaired, would result in a reduction of our net earnings.

Our intellectual property, including our license agreements and other agreements that establish our ownership rights and maintain the confidentiality of our intellectual property, is 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 in the U.S. and around the world. From time to time, third parties have challenged, and may in the future try to challenge, our ownership of our intellectual property in the U.S. and around the world. 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 25, 2011, we had $467,293 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 earnings caused by impairment charges could harm our financial results.

We may not realize the anticipated benefits of acquisitions or investments in joint ventures, or those benefits may be delayed or reduced in their realization.

Acquisitions have been a significant part of our historical growth and have enabled us to further broaden and diversify our product offerings. In making acquisitions, we target companies that we believe offer attractive family entertainment products or the ability for us to leverage our entertainment offerings. In the case of our joint venture with Discovery, we looked to partner with a company that has shown the ability to establish and operate compelling entertainment channels. However, we cannot be certain that the products of companies we may acquire, or acquire an interest in, in the future will achieve or maintain popularity with consumers or that any such acquired companies or investments will allow us to more effectively market our products. In some cases, we expect that the integration of the companies that we acquire into our operations will create production, marketing and other operating synergies which will produce greater revenue growth and profitability and, where applicable, cost savings, operating efficiencies and other advantages. However, we cannot be certain that these synergies, efficiencies and cost savings will be realized. Even if achieved, these benefits may be delayed or reduced in their

 

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realization. In other cases, we acquire companies that we believe have strong and creative management, in which case we plan to operate them more autonomously rather than fully integrating them into our operations. We cannot be certain that the key talented individuals at these companies will continue to work for us after the acquisition or that they will develop popular and profitable products or services in the future.

Failure to operate our information systems and implement new technology effectively could disrupt our business or reduce our sales or profitability.

We rely extensively on various information technology systems and software applications, to manage many aspects of our business, including management of our supply chain, sale and delivery of our products and various other process transactions. We are dependent on the integrity, security and consistent operations of these systems and related back-up systems. These systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events such as hurricanes, fires, floods, earthquakes, tornadoes, acts of war or terrorism and usage errors by our employees. The efficient operation and successful growth of our business depends on these information systems, including our ability to operate them effectively and to select and implement appropriate upgrades or new technologies and systems and adequate disaster recovery systems successfully. The failure of our information systems to perform as designed or our failure to implement and operate them effectively could disrupt our business, require significant capital investments to remediate a problem or subject us to liability.

If our electronic data is compromised our business could be significantly harmed.

We maintain significant amounts of data electronically in locations around the world. This data relates to all aspects of our business and also contains certain customer and consumer data. We maintain systems and processes designed to protect this data, but notwithstanding such protective measures, there is a risk of intrusion or tampering that could compromise the integrity and privacy of this data. In addition, we provide confidential and proprietary information to our third party business partners in certain cases where doing so is necessary to conduct our business. While we obtain assurances from those parties that they have systems and processes in place to protect such data, and where applicable, that they will take steps to assure the protections of such data by third parties, nonetheless those partners may also be subject to data intrusion or otherwise compromise the protection of such data. Any compromise of the confidential data of our customers, our consumers, or ourselves could have a negative effect on our business.

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, including potential liability from personal injury or property damage claims by the users of products that have been or may be developed by us. 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. Any successful claim could significantly harm our business, financial condition and results of operations.

We have a material amount of goodwill which, if it becomes impaired, would result in a reduction in our net earnings.

Goodwill is the amount by which the cost of an acquisition exceeds the fair value of the net assets we acquire. Goodwill is not amortized and is required to be periodically evaluated for impairment. At December 25, 2011, $474,792, or 11.5%, of our total assets represented goodwill. Declines in our profitability may impact the fair value of our reporting units, which could result in a write-down of our goodwill. Reductions in our net earnings caused by the write-down of goodwill could harm our results of operations.

 

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Item 1B. Unresolved Staff Comments .

None.

 

Item 2. Properties.

Hasbro owns its corporate headquarters in Pawtucket, Rhode Island consisting of approximately 343,000 square feet, which is used by the U.S. and Canada, Global Operations and Entertainment and Licensing segments as well as for corporate functions. The Company also owns an adjacent building consisting of approximately 23,000 square feet that is used in the corporate function. In addition, the Company leases a building in East Providence, Rhode Island consisting of approximately 120,000 square feet used by the Global Operations and Entertainment and Licensing segments as well as corporate functions and temporary space in Providence, Rhode Island consisting of approximately 25,000 square feet, that is used by the U.S. and Canada, Global Operations and Entertainment and Licensing segments. In addition to the above facilities, the Company also leases office space consisting of approximately 95,400 square feet in Renton, Washington as well as warehouse space aggregating approximately 2,388,000 square feet in Georgia, California, Texas and Quebec that are also used by the U.S. and Canada segment. The Company also leases, in aggregate, approximately 42,000 square feet in Dedham, Massachusetts and Burbank, California that is used by the Entertainment and Licensing segment.

The Company owns manufacturing plants in East Longmeadow, Massachusetts and Waterford, Ireland. The East Longmeadow plant consists of approximately 1,148,000 square feet and is used by the Global Operations segment. The Waterford plant consists of approximately 244,000 square feet and is used by our Global Operations segment. The Global Operations segment also leases an aggregate of 90,000 square feet of office and warehouse space in Hong Kong used by this segment as well as approximately 76,000 square feet of office space leased in China.

In the International segment, the Company leases or owns property in over 35 countries. The primary locations in the International segment are in the United Kingdom, Mexico, Germany, France, Spain, Australia and Brazil, all of which are comprised of both office and warehouse space. The Company also leases offices in Switzerland and the Netherlands which are primarily used in corporate functions.

The above properties consist, in general, of brick, cinder block or concrete block buildings which the Company believes are in good condition and well maintained.

The Company believes that its facilities are adequate for its needs. The Company believes that, should it not be able to renew any of the leases related to its leased facilities, it could secure similar substitute properties without a material adverse impact on its operations.

 

Item 3. Legal Proceedings.

The Company has outstanding tax assessments from the Mexican tax authorities relating to the years 2000 through 2005. These tax assessments, which total approximately $177 million (at year-end 2011 exchange rates) in aggregate (including interest, penalties, and inflation updates), are based on transfer pricing issues between the Company’s subsidiaries with respect to the Company’s operations in Mexico. The Company has filed suit in the Federal Tribunal of Fiscal and Administrative Justice in Mexico challenging the 2000 through 2004 assessments. The Company filed the suit related to the 2000 and 2001 assessments in May 2009; the 2002 assessment in June 2008; the 2003 assessment in March 2009; and the 2004 assessment in July 2011. The Company is challenging the 2005 assessment through administrative appeals. The Company expects to be successful in sustaining its positions for all of these years. However, in order to challenge the outstanding tax assessments related to 2000 through 2004 in court, as is usual and customary in Mexico in these matters, the Company was required to either make a deposit or post a bond in the full amount of the assessments. The Company elected to post bonds and accordingly, as of December 25, 2011, bonds totaling approximately $151 million (at year-end 2011 exchange rates) have been posted related to the 2000, 2001, 2002, 2003 and 2004 assessments. These bonds guarantee the full amounts of the related outstanding tax assessments in the event the Company is not successful in its challenge to them. The Company does not currently expect that it will be required to make a deposit or post a bond related to the 2005 assessment as the Company is challenging it through administrative appeals.

 

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We are currently party to certain other legal proceedings, none of which we believe to be material to our business or financial condition.

 

Item 4. Mine Safety Disclosures.

None.

 

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PART II

 

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock, par value $0.50 per share (the “Common Stock”), is traded on The NASDAQ Global Select Market under the symbol “HAS”. Prior to December 21, 2010, the Common Stock was traded on the New York Stock Exchange under the same symbol. The following table sets forth the high and low sales prices in the applicable quarters, as reported on either the Composite Tape of The NASDAQ Global Select Market for the period December 21, 2010 through December 25, 2011, or the New York Stock Exchange for the period December 28, 2009 through December 20, 2010, respectively, as well as the cash dividends declared per share of Common Stock for the periods listed.

 

     Sales Prices      Cash  Dividends
Declared
 

Period

   High      Low     

2011

        

1st Quarter

   $ 48.70         42.54       $ 0.30   

2nd Quarter

     48.43         42.63         0.30   

3rd Quarter

     46.01         33.21         0.30   

4th Quarter

     39.20         31.36         0.30   

2010

        

1st Quarter

   $ 38.82         30.20       $ 0.25   

2nd Quarter

     43.71         36.50         0.25   

3rd Quarter

     45.55         37.65         0.25   

4th Quarter

     50.17         44.22         0.25   

The approximate number of holders of record of the Company’s Common Stock as of February 6, 2012 was 9,100.

See Part III, Item 12 of this report for the information concerning the Company’s “Equity Compensation Plans”.

Dividends

Declaration of dividends is at the discretion of the Company’s Board of Directors and will depend upon the earnings and financial condition of the Company and such other factors as the Board of Directors deems appropriate.

Issuer Repurchases of Common Stock

Repurchases made in the fourth quarter (in whole numbers of shares and dollars)

 

Period

   (a) Total Number
of Shares (or
Units) Purchased
     (b) Average Price
Paid per Share
(or Unit)
     (c) Total Number of Shares
(or Units) Purchased as

Part of Publicly Announced
Plans or Programs
     (d) Maximum Number
(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
 

October 2011
9/26/11 — 10/23/11

     560,000       $ 34.1226         560,000       $ 244,441,019   

November 2011
10/24/11 — 11/27/11

     407,500       $ 36.9452         407,500       $ 229,385,846   

December 2011
11/28/11 — 12/25/11

     60,000       $ 35.2793         60,000       $ 227,269,086   

Total

     1,027,500       $ 35.3096         1,027,500       $ 227,269,086   

 

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On April 19, 2010, the Company announced that its Board of Directors authorized the repurchase of up to $625 million in common stock. This authorization was fully utilized during the second quarter of 2011.

On May 19, 2011, the Company announced that its Board of Directors authorized the repurchase of an additional $500 million in common stock. Purchases of the Company’s common stock may be made from time to time, subject to market conditions. These shares may be repurchased in the open market or through privately negotiated transactions. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number, and value of the shares that are repurchased, if any, will depend on a number of factors, including the price of the Company’s stock. The Company may suspend or discontinue the program at any time and there is no expiration date.

 

Item 6. Selected Financial Data.

(Thousands of dollars and shares except per share data and ratios)

 

     Fiscal Year  
     2011      2010      2009      2008      2007  

Statement of Operations Data:

              

Net revenues

   $ 4,285,589         4,002,161         4,067,947         4,021,520         3,837,557   

Net earnings

   $ 385,367         397,752         374,930         306,766         333,003   

Per Common Share Data:

              

Net Earnings

              

Basic

   $ 2.88         2.86         2.69         2.18         2.13   

Diluted

   $ 2.82         2.74         2.48         2.00         1.97   

Cash dividends declared

   $ 1.20         1.00         0.80         0.80         0.64   

Balance Sheet Data:

              

Total assets

   $ 4,130,774         4,093,226         3,896,892         3,168,797         3,237,063   

Total long-term debt

   $ 1,400,872         1,397,681         1,131,998         709,723         845,071   

Ratio of Earnings to Fixed Charges(1)

     5.64         6.28         7.96         8.15         10.86   

Weighted Average Number of Common Shares:

              

Basic

     133,823         139,079         139,487         140,877         156,054   

Diluted

     136,697         145,670         152,780         155,230         171,205   

 

(1) For purposes of calculating the ratio of earnings to fixed charges, fixed charges include interest expense and one-third of rentals; earnings available for fixed charges represent earnings before fixed charges and income taxes.

See “Forward-Looking Information and Risk Factors That May Affect Future Results” contained in Item 1A of this report for a discussion of risks and uncertainties that may affect future results. Also see “Management’s 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.

 

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Item 7. Management’s 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning the Company’s expectations and beliefs. See Item 1A “Forward-Looking Information and Risk Factors That May Affect Future Results” for a discussion of other uncertainties, risks and assumptions associated with these statements.

Unless otherwise specifically indicated, all dollar or share amounts herein are expressed in thousands of dollars or shares, except for per share amounts.

EXECUTIVE SUMMARY

Hasbro, Inc. (“Hasbro” or the “Company”) is a worldwide leader in branded entertainment and play for children and families. With a consumer focus, Hasbro applies its brand blueprint to its broad portfolio of properties. The brand blueprint revolves around the objectives of continuously re-imagining, re-inventing, and re-igniting the Company’s existing brands, imagining, inventing and igniting new brands, and offering consumers the ability to experience the Company’s brands in all areas of their lives.

To accomplish these objectives, the Company offers consumers the ability to experience its branded play through innovative toys and games, digital media, lifestyle licensing and publishing and entertainment, including television programming and motion pictures. The Company’s focus remains on growing core owned and controlled brands, developing new and innovative products which respond to market insights, offering entertainment experiences which allow consumers to experience the Company’s brands across multiple forms and formats, and optimizing efficiencies within the Company to increase operating margins and maintain a strong balance sheet.

The Company earns revenue and generates cash primarily through the sale of a broad variety of toy and game products and distribution of television programming based on the Company’s properties, as well as through the out-licensing of rights for use of its properties in connection with complementary products, including digital media and games and lifestyle products, offered by third-parties. The Company’s core brands represent Company-owned brands or brands which if not entirely owned, are broadly controlled by the Company, and which have been successful over the long term. The Company’s core brands include TRANSFORMERS, NERF, MY LITTLE PONY, LITTLEST PET SHOP, MONOPOLY, FURREAL FRIENDS, MAGIC: THE GATHERING, PLAY-DOH, PLAYSKOOL, MILTON BRADLEY, PARKER BROTHERS and G.I. JOE. The Company has a large portfolio of owned and controlled brands, which can be introduced in new forms and formats 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, and to leverage profitability. During 2011 the Company had strong revenues from core brands such as TRANSFORMERS, NERF, FURREAL FRIENDS, MAGIC: THE GATHERING, LITTLEST PET SHOP, PLAY-DOH, and PLAYSKOOL.

The Company’s innovative product offerings encompass a broad variety of toys including boys’ action figures, vehicles and playsets, girls’ toys, electronic toys, plush products, preschool toys and infant products, electronic interactive products, creative play and toy-related specialty products. Games offerings include board, card, electronic, trading card, role-playing and DVD games.

While the Company believes it has built a more sustainable revenue base by developing and maintaining its core brands and avoiding reliance on licensed entertainment properties, it continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and key strengths and allow the Company to offer innovative products based on movie, television, music and other entertainment properties owned by third parties. The Company’s primary licenses include its agreements with Marvel Characters B.V. (“Marvel”) for characters in the Marvel universe, including IRON MAN and SPIDER-MAN; Lucas Licensing, Ltd. (“Lucas”), related to the STAR WARS brand; and Sesame Workshop, related to the SESAME STREET

 

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characters. The third quarter of 2011 commenced the first period of significant sales under the Company’s license with Sesame Workshop. In 2011, the Company had sales of MARVEL products, including sales of products related to the Marvel movie releases of THOR and CAPTAIN AMERICA: THE FIRST AVENGER . In 2010, the Company had significant sales of products related to the Marvel movie release of IRON MAN 2 . During 2012 the Company will market products related to two expected theatrical motion picture releases based on MARVEL properties, THE AMAZING SPIDER-MAN and THE AVENGERS. In addition, in the second half of 2010 the Company re-introduced BEYBLADE products, another licensed entertainment property. The Company has had significant sales of BEYBLADE products in 2011 as well as the second half of 2010. In addition to offering products based on licensed entertainment properties, the Company also offers products which are licensed from outside inventors.

The Company also seeks to build immersive brand experiences and drive product-related revenues by increasing the visibility of its core brands through entertainment such as motion pictures and television programming. Since 2007, the Company has had three motion pictures based on its TRANSFORMERS brand and one motion picture based on its G.I JOE brand released by major motion picture studios. This includes the release of the third TRANSFORMERS motion picture, TRANSFORMERS: DARK OF THE MOON , in 2011. The Company developed and marketed product lines based on these motion pictures. The next motion pictures based on the Company’s properties are BATTLESHIP, which is scheduled to be released in 2012 by Universal Pictures, and G.I. JOE: RETALIATION, which is scheduled to be released in 2012 by Paramount Pictures. The Company has motion picture projects based on other brands in development for potential release in future years.

In addition to using motion pictures to provide entertainment experiences for its brands, the Company established Hasbro Studios, an internal wholly-owned production studio, in 2009. Hasbro Studios is responsible for the creation and development of television programming based primarily on Hasbro’s brands. This programming is currently aired throughout the world. The Company is a 50% partner in a joint venture with Discovery Communications, Inc. (“Discovery”) which runs THE HUB, a cable television network in the United States dedicated to high-quality children’s and family entertainment and educational programming. Programming on THE HUB includes content based on Hasbro’s brands, Discovery’s library of children’s educational programming, as well as programming developed by third parties. Hasbro Studios programming is distributed in the U.S. exclusively to THE HUB while programming internationally is distributed to leading children’s networks around the world. The Company’s television initiatives support its strategy of growing its core brands well beyond traditional toys and games and providing entertainment experiences for consumers of all ages in any form or format.

The Company’s strategic blueprint also focuses on extending its brands further into digital media and gaming, including through the licensing of the Company’s properties to a number of partners who develop and offer digital games based on those brands. An example of these digital gaming relationships is the Company’s agreement with Electronic Arts Inc. (“EA”), which provides EA the exclusive worldwide rights, subject to existing limitations on the Company’s rights and certain other exclusions, to create digital games for all platforms, such as mobile phones, gaming consoles and personal computers, based on a number of the Company’s intellectual properties, including MONOPOLY, SCRABBLE, YAHTZEE, NERF, TONKA and LITTLEST PET SHOP. Similarly, the Company has an agreement with Activision under which Activision offers digital games based on the TRANSFORMERS brand. The Company continues to seek and develop additional outlets for its brands in digital gaming, including casual, mobile and online gaming.

In recent years the Company has expanded its lifestyle licensing business, and this remains a key area of focus for future development and growth. Under its lifestyle licensing programs, the Company enters into relationships with a broad spectrum of apparel, food, bedding and other lifestyle products companies for the global marketing and distribution of licensed products based on the Company’s brands. These relationships further broaden and amplify the consumer’s ability to experience the Company’s brands.

As the Company seeks to grow its business in entertainment, licensing and digital gaming, the Company will continue to evaluate strategic alliances and acquisitions which may complement its current product offerings, allow it entry into an area which is adjacent to or complementary to the toy and game business, or allow it to further develop awareness of its brands and expand the ability of consumers to experience its brands in different forms and formats.

 

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During 2011, the Company established Hasbro’s Gaming Center for Excellence in Rhode Island to centralize games marketing and development while building on Hasbro’s strategy of re-imagining, re-inventing and re-igniting core brands as well as inventing new brands.

The Company’s business is highly seasonal with a significant amount of revenues occurring in the second half of the year. In 2011, 2010 and 2009, the second half of the year accounted for 63%, 65% and 65% of the Company’s net revenues, respectively.

The Company sells its products both within the United States and in a number of international markets. In recent years, the Company’s international net revenues have experienced growth as the Company has sought to increase its international presence. One of the ways the Company has driven international growth is by opportunistically opening offices in certain markets to develop a greater presence. Since 2006, the Company has opened up operations in eight new markets around the world including China, Brazil, Russia, Korea, Romania, Czech Republic, Peru and Colombia. These represent emerging markets where the Company believes that it can achieve higher revenue growth than it could achieve in more mature markets. Net revenues of the Company’s International segment represented 43%, 39% and 36% of total net revenues in 2011, 2010 and 2009, respectively.

The Company’s business is separated into three principal business segments, U.S. and Canada, International and Entertainment and Licensing. The U.S. and Canada segment develops, markets and sells both toy and game products in the U.S. and Canada. The International segment consists of the Company’s European, Asia Pacific and Latin and South American toy and game marketing and sales operations. The Company’s Entertainment and Licensing segment includes the Company’s lifestyle licensing, digital gaming, movie, television and online entertainment operations. In addition to these three primary segments, the Company’s world-wide manufacturing and product sourcing operations are managed through its Global Operations segment.

The Company is committed to returning excess cash to its shareholders through share repurchases and dividends. As part of this initiative, from 2005 through 2011, the Company’s Board of Directors (the “Board”) adopted six successive share repurchase authorizations with a cumulative authorized repurchase amount of $2,825,000. The sixth authorization was approved in May 2011 for $500,000. At December 25, 2011, the Company had $227,269 remaining available under this authorization. During the three years ended 2011, the Company spent a total of $1,150,683, to repurchase 29,395 shares in the open market. The Company intends to, at its discretion, opportunistically repurchase shares in the future subject to market conditions, the Company’s other potential uses of cash and the Company’s levels of cash generation. In addition to the share repurchase program, the Company also seeks to return excess cash through the payment of quarterly dividends. In February 2012 the Company’s Board increased the Company’s quarterly dividend rate, effective for the dividend payment in May 2012, to $0.36 per share, a 20% increase from the prior quarterly dividend of $0.30 per share. This was the sixth dividend increase since 2005. Since then the Company has increased its quarterly cash dividend 300%, from $0.09 to $0.36 per share.

 

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Summary

The components of the results of operations, stated as a percent of net revenues, are illustrated below for the three fiscal years ended December 25, 2011. Program production cost amortization for 2010 was previously included in cost of sales and has been reclassified to conform with current year presentation.

 

     2011     2010     2009  

Net revenues

     100.0     100.0     100.0

Costs and expenses:

      

Cost of sales

     42.8       42.2       41.2  

Royalties

     7.9       6.2       8.1  

Product development

     4.6       5.0       4.5  

Advertising

     9.7       10.5       10.1  

Amortization of intangibles

     1.1       1.3       2.1  

Program production cost amortization

     0.8       0.6         

Selling, distribution and administration

     19.2       19.5       19.5  
  

 

 

   

 

 

   

 

 

 

Operating profit

     13.9       14.7       14.5  

Interest expense

     2.1       2.1       1.5  

Interest income

     (0.2 )     (0.1 )     (0.1 )

Other (income) expense, net

     0.6       0.1       0.1  
  

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     11.4       12.6       13.0  

Income taxes

     2.4       2.7       3.8  
  

 

 

   

 

 

   

 

 

 

Net earnings

     9.0     9.9     9.2
  

 

 

   

 

 

   

 

 

 

Results of Operations

Each of the fiscal years in the three-year period ended December 25, 2011 were fifty-two week periods.

Net earnings for the fiscal year ended December 25, 2011 were $385,367, or $2.82 per diluted share. This compares to net earnings for fiscal 2010 and 2009 of $397,752 and $374,930, or $2.74 and $2.48 per diluted share, respectively.

Net earnings for both 2011 and 2010 include a $0.15 per diluted share favorable tax benefit resulting from the settlement of tax examinations. Net earnings for 2011 also include a $0.07 per diluted share unfavorable impact resulting from costs associated with a reorganization of its games business announced during the second quarter of 2011 related to the establishment of the Gaming Center of Excellence.

Consolidated net revenues for the year ended December 25, 2011 were $4,285,589 compared to $4,002,161 in 2010 and $4,067,947 in 2009. Most of the Company’s net revenues and operating profits were derived from its three principal segments: the U.S. and Canada segment, the International segment and the Entertainment and Licensing segment, which are discussed in detail below. Consolidated net revenues in 2011 were positively impacted by foreign currency translation of approximately $64,300 as a result of the weaker U.S. dollar in 2011 as compared to 2010. In 2010 consolidated net revenues were negatively impacted by foreign currency translation of approximately $17,700 as a result of the stronger U.S. dollar in 2010 as compared to 2009.

 

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The following table presents net revenues and operating profit data for the Company’s three principal segments for 2011, 2010 and 2009.

 

     2011      %
Change
    2010      %
Change
    2009  

Net Revenues

            

U.S. and Canada

   $ 2,253,458         (2 )%    $ 2,299,547         (6 )%    $ 2,447,943   

International

   $ 1,861,901         19   $ 1,559,927         7   $ 1,459,476   

Entertainment and Licensing

   $ 162,233         19   $ 136,488         (12 )%    $ 155,013   

Operating Profit

            

U.S. and Canada

   $ 278,356         (20 )%    $ 349,594         (8 )%    $ 380,580   

International

   $ 270,578         29   $ 209,704         29   $ 162,159   

Entertainment and Licensing

   $ 42,784         (1 )%    $ 43,234         (34 )%    $ 65,572   

U.S. and Canada

U.S. and Canada segment net revenues for the year ended December 25, 2011 decreased 2% to $2,253,458 from $2,299,547 in 2010. In 2011, net revenues were positively impacted by currency translation of approximately $4,700. The decrease in net revenues in 2011 was due to decreased revenues in the girls’ toys and games and puzzles categories. The decrease in the girls’ category was primarily the result of decreased sales of LITTLEST PET SHOP and FURREAL FRIENDS partially offset by increased sales of BABY ALIVE and MY LITTLE PONY. The decrease in the games and puzzles category was due to decreased sales of traditional board games and puzzles partially offset by increased sales of MAGIC: THE GATHERING products. Decreases in the girls’ toys and games and puzzles categories were partially offset by increased sales in the boys’ toys and preschool categories. Increases in boys’ toys sales were significantly impacted by the first full year of sales of BEYBLADE products after its reintroduction in the second half of 2010. Higher sales of TRANSFORMERS, which benefited from the theatrical release of TRANSFORMERS: DARK OF THE MOON , as well as sales of KRE-O products, which were introduced during the second half of 2011, also contributed to increased sales in the boys’ toys category. These increases were partially offset by decreased sales of NERF products, and to a lesser extent, STAR WARS and TONKA product lines. The preschool category benefited from the introduction of several new products under the Company’s license with Sesame Workshop as well as increased sales of TRANSFORMERS and STAR WARS products specifically designed for younger consumers. Increased net revenues in the preschool category were partially offset by decreased sales of PLAYSKOOL, TONKA, and PLAY-DOH products, which had stronger sales during 2010.

U.S. and Canada operating profit decreased to $278,356, or 12.4% of net revenues, in 2011 from $349,594, or 15.2% of net revenues in 2010. Foreign currency translation did not have a material impact on U.S. and Canada operating profit in 2011. Operating profit was negatively impacted by the decline in net revenues. In addition, higher sales of licensed properties, such as BEYBLADE and movie-related TRANSFORMERS products, resulted in higher royalty expense in 2011. The decline in operating margin was largely due to the lower revenue base in 2011; product mix, including lower revenues from board games and higher revenues from entertainment-based products; and the impact of closeout sales.

U.S. and Canada segment net revenues for the year ended December 26, 2010 decreased 6% to $2,299,547 from $2,447,943 in 2009. The decrease in net revenues in 2010 was primarily due to decreased revenues in the boys’ toys category, primarily as a result of decreased sales of TRANSFORMERS and G.I. JOE products. The 2009 sales of these lines benefited from the theatrical releases of TRANSFORMERS: REVENGE OF THE FALLEN in June 2009 and G.I. JOE: THE RISE OF COBRA in August 2009. Boys’ toys sales were also negatively impacted by decreased sales of STAR WARS products. These decreases were partially offset by increased sales of NERF products as well as increased sales of MARVEL products, which benefited from the theatrical release of IRON MAN 2 in May 2010. Boys’ toys sales were also positively impacted by the reintroduction of BEYBLADE products in the second half of 2010. Net revenues in the games and puzzles

 

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category also decreased in 2010 due to decreased sales of traditional board games and puzzles in the U.S. late in the year. These decreases were partially offset by increased sales of MAGIC: THE GATHERING trading card games. Sales in the girls’ category were flat in 2010. Increased sales of FURREAL FRIENDS products and, to a lesser extent, BABY ALIVE products were offset by decreased sales of MY LITTLE PONY and LITTLEST PET SHOP products. Although revenues from LITTLEST PET SHOP products decreased in 2010, sales of these products remained a significant contributor to U.S. and Canada segment net revenues. Net revenues in the preschool category increased in 2010 as the result of stronger sales of PLAY-DOH, TONKA and PLAYSKOOL products.

U.S. and Canada operating profit decreased to $349,594 in 2010 from $380,580 in 2009. Foreign currency translation did not have a material impact on U.S. and Canada operating profit in 2010. The decrease in U.S. and Canada operating profit was primarily driven by the decreased revenues in 2010 discussed above and, to a lesser extent, higher cost of sales as a percentage of those revenues due to a change in the mix of products sold. These decreases were partially offset by decreased royalty and amortization expense in 2010.

International

International segment net revenues for the year ended December 25, 2011 increased by 19% to $1,861,901 from $1,559,927 in 2010. In 2011, net revenues were positively impacted by currency translation of approximately $59,300 as a result of a weaker U.S. dollar. Excluding the favorable impact of foreign exchange, International segment net revenues increased 16% in local currency in 2011. Revenues increased in 2011 in all major geographic regions as part of our ongoing strategy to achieve growth in the International segment. Net revenues in both Europe and Latin America / Mexico each increased 19% in 2011 compared to 2010, while Asia Pacific net revenues increased 24% in 2011 compared to 2010. The increased International segment net revenues were driven by increased sales in the boys’ toys category. The increase in the boys’ toys category was primarily due to the first full year of sales related to BEYBLADE products, which were reintroduced in 2010 as well as higher sales of TRANSFORMERS, NERF, KRE-O and SUPER SOAKER products. Sales of TRANSFORMERS and KRE-O products benefited from the theatrical release of TRANSFORMERS: DARK OF THE MOON during 2011. Increased sales in the boys’ toys category were slightly offset by decreased sales in the preschool, girls’ toys, and games and puzzles categories. Decreased sales of PLAYSKOOL and TONKA products in the preschool category were partially offset by sales of SESAME STREET products. The decrease in net revenues in the girls’ toys category is primarily due to decreased sales of LITTLEST PET SHOP products, which were partially offset by increased sales of FURREAL FRIENDS and BABY ALIVE products. Net revenues in the games and puzzles category decreased slightly as a result of lower sales of board games, partially offset by increased sales of MAGIC: THE GATHERING products.

International segment operating profit increased 29% to $270,578, or 14.5% of net revenues, in 2011 from $209,704, or 13.4% of net revenues, in 2010. Operating profit for the International segment in 2011 was positively impacted by approximately $4,400 due to the translation of foreign currencies to the U.S. dollar. The increase in operating profit was primarily driven by the increased net revenues described above. This was partially offset by higher royalty expense as a result of increased revenues from higher royalty-bearing products, particularly BEYBLADE and movie-related TRANSFORMERS products. The increase in operating profit margin was largely due to the impact of the increased net revenues.

International segment net revenues for the year ended December 26, 2010 increased by 7% to $1,559,927 from $1,459,476 in 2009. In 2010, net revenues were negatively impacted by currency translation of approximately $27,600 as a result of a stronger U.S. dollar. Excluding the unfavorable impact of foreign exchange, International segment net revenues increased 9% in local currency in 2010. The increased net revenues in 2010 were driven by increased sales in all categories as well as growth in emerging markets, including Brazil, Russia and China. The increase in the boys’ toys category was primarily due to higher sales of NERF products as well as the reintroduction of BEYBLADE products in 2010. Increased sales of MARVEL and TONKA products also contributed to the increased sales in the boys’ toys category. These increases were partially offset by decreases in the TRANSFORMERS and G.I. JOE lines. The increase in net revenues in the girls’ toys category was primarily driven by increased sales of FURREAL FRIENDS products partially offset by lower sales of MY

 

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LITTLE PONY and LITTLEST PET SHOP products. Preschool category net revenues increased primarily as the result of stronger sales of PLAY-DOH and PLAYSKOOL products offset by decreased sales of IN THE NIGHT GARDEN products. Net revenues in the games and puzzles category increased slightly as a result of increased revenues from MAGIC: THE GATHERING trading card games.

International segment operating profit increased 29% to $209,704 in 2010 from $162,159 in 2009. Operating profit for the International segment in 2010 was negatively impacted by approximately $11,500 due to the translation of foreign currencies to the U.S. dollar. The increase in operating profit was primarily driven by the increased revenues described above. In addition, operating profit was positively impacted by decreased royalty expense and amortization. These were offset by increased selling, distribution and administration expenses.

Entertainment and Licensing

The Entertainment and Licensing segment’s net revenues for the year ended December 25, 2011 increased 19% to $162,233 from $136,488 for the year ended December 26, 2010. The increase was primarily due to growth in television programming and lifestyle licensing revenues. The increased television programming revenues reflect a full year of U.S. and international program distribution in 2011 compared to a partial period in 2010, as program distribution primarily commenced during the third quarter of 2010. Higher lifestyle licensing revenues primarily related to TRANSFORMERS, as a result of licensing programs based on the motion picture release in 2011.

Entertainment and Licensing segment operating profit decreased 1% to $42,784 in 2011 from $43,234 in 2010. The impact of higher net revenues was offset by investments made by the Company to grow its global licensing organization and increased program production cost amortization.

The Entertainment and Licensing segment’s net revenues for the year ended December 26, 2010 decreased 12% to $136,488 from $155,013 for the year ended December 27, 2009. The decrease was primarily due to decreases in both lifestyle and digital gaming licensing revenues, primarily relating to lower licensing revenues from TRANSFORMERS and, to a lesser extent, G.I. JOE, products following the motion picture releases in 2009.

Entertainment and Licensing segment operating profit decreased 34% to $43,234 in 2010 from $65,572 in 2009. Operating profit decreased as a result of the decreased revenues discussed above and program production amortization costs associated with our television shows. This was partially offset by lower selling, distribution and administration expenses. Selling, distribution and administration expenses in 2009 included approximately $7,200 in transaction costs related to the Company’s investment in THE HUB.

While THE HUB is a component of our television operations, the Company’s 50% share in the earnings from the joint venture is included in other (income) expense and therefore is not a component of operating profit of the segment.

Expenses

The Company’s operating expenses, stated as percentages of net revenues, are illustrated below for the three fiscal years ended December 25, 2011:

 

     2011     2010     2009  

Cost of sales

     42.8     42.2     41.2

Royalties

     7.9       6.2       8.1  

Product development

     4.6       5.0       4.5  

Advertising

     9.7       10.5       10.1  

Amortization of intangibles

     1.1       1.3       2.1  

Program production cost amortization

     0.8       0.6         

Selling, distribution and administration

     19.2       19.5       19.5  

 

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Cost of sales primarily consists of purchased materials, labor, manufacturing overheads and other inventory-related costs such as obsolescence. Cost of sales increased to 42.8% of net revenues for the year ended December 25, 2011 from 42.2% in 2010. The negative impacts of lower sales of traditional board games as well as increased close-out inventory shipments in 2011 were only partially offset by the positive impact of increased sales of entertainment-based properties, such as TRANSFORMERS and BEYBLADE products, and sales of MAGIC: THE GATHERING products. In addition, cost of sales was negatively impacted by unfavorable manufacturing variances as a result of reduced games production in 2011. While cost of sales as a percentage of revenues of entertainment-based products are generally lower than many of the Company’s other products, sales from these products, including Company owned or controlled brands based on a movie release, also incur royalty expense. Such royalties reduce the benefit of these lower cost of sales. Additionally, costs of sales as a percentage of net revenues of traditional board games and puzzles are generally lower. Cost of sales increased to 42.2% of net revenues for the year ended December 26, 2010 from 41.2% in 2009. The increase was partially due to a change in the mix of revenues. Increased cost of sales as a percentage of revenues reflects a change in product mix primarily due to decreased sales of entertainment-based products in 2010 compared to 2009.

Royalty expense increased to $339,217 or 7.9% of net revenues in 2011 compared to $248,570, or 6.2% of net revenues, in 2010 and $330,651, or 8.1% of net revenues, in 2009. The increase in 2011 and the decrease in 2010 primarily reflect the higher sales of entertainment-driven products in 2011, primarily BEYBLADE and TRANSFORMERS products, and 2009, namely TRANSFORMERS and G.I. JOE products.

Product development expense in 2011 totaled $197,638, or 4.6% of net revenues, compared to $201,358, or 5.0% of net revenues, in 2010 and $181,195, or 4.5% of net revenues, in 2009. Product development expense for 2011 includes approximately $6,800 related to the reorganization of the games business. Excluding the impact of the games reorganization, the lower 2011 expense reflects the Company’s focus on leveraging its development efforts on larger, global brands. The increased expense in 2010 reflects higher costs associated with the development of products introduced in 2011, including products related to the Company’s agreement with Sesame Workshop.

Advertising expense in 2011 totaled $413,951, or 9.7% of net revenues, compared to $420,651, or 10.5% of net revenues, in 2010 and $412,580, or 10.1% of net revenues, in 2009. Lower advertising expense in 2011 and 2009 reflects the increased volume in sales of entertainment-based properties, primarily TRANSFORMERS and BEYBLADE products in 2011 and TRANSFORMERS and G.I. JOE products in 2009, which do not require the same level of advertising that the Company spends on non-entertainment based products. In addition, the increase in 2010 reflects a lower revenue base due to the decline in U.S. sales late in the year as well as increased advertising rates in 2010.

Amortization of intangibles decreased to $46,647, or 1.1% of net revenues, in 2011 compared to $50,405, or 1.3% of net revenues, in 2010. The decrease in 2011 is the result of certain properties becoming fully amortized during 2010. Amortization expense decreased to $50,405 or 1.3% of net revenues in 2010 compared to $85,029 or 2.1% of net revenues in 2009. The decrease in 2010 is the result of property rights related to Wizards of the Coast becoming fully amortized in the fourth quarter of 2009.

Program production cost amortization increased to $35,798 or 0.8% of net revenues in 2011 compared to $22,069 or 0.6% of net revenues in 2010. Program production costs are capitalized as incurred and amortized using the individual-film-forecast method. The Company did not begin amortizing program production costs until the third quarter of 2010, upon the initial distribution of its television programming. Accordingly, the increase in 2011 primarily reflects four quarters of activity whereas the comparable period of 2010 includes two quarters of activity.

Selling, distribution and administration expenses increased in dollars, however decreased as a percentage of revenues in 2011 compared to 2010. These expenses were $822,094, or 19.2% of net revenues, compared to $781,192, or 19.5% of net revenues, in 2010. The 2011 amount includes approximately $7,600 of costs related to the reorganization of Company’s games business. The remaining increase primarily reflects increased shipping costs related to higher revenues as well as increased expenses from the Company’s investments in emerging markets, on-line operations, licensing, entertainment and its internal systems. These increases were partially

 

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offset by lower stock compensation and bonus provisions in 2011 due to the Company’s underperformance in relation to its financial targets. Selling, distribution and administration expenses decreased to $781,192 or 19.5% of net revenues in 2010, compared $793,558 or 19.5% of net revenues in 2009. The 2009 amount includes approximately $7,200 of transaction costs related to the Company’s purchase of a 50% interest in THE HUB. The remaining decrease relates to lower management incentive and other compensation expenses in 2010 partially offset by higher marketing and sales costs related to emerging markets and television initiatives.

Interest Expense

Interest expense increased to $89,022 in 2011 from $82,112 in 2010 and $61,603 in 2009. The increases in both 2011 and 2010 are primarily due to the issuance of long-term debt during 2010 and 2009, respectively. In March 2010, the Company issued $500,000 of long-term debt which bears interest at a rate of 6.35%. The impact on interest expense of this issuance was partially offset by the conversion and redemption of the contingent convertible debentures during March and April 2010, which bore interest at the rate of 2.75%. In May 2009, the Company issued $425,000 of long-term debt which bears interest at a rate of 6.125%. A portion of these proceeds were used to purchase a 50% interest in THE HUB. The 2009 interest expense amount includes approximately $4,000 in costs related to a short-term borrowing facility commitment the Company entered into in April 2009 in connection with the Company’s anticipated investment in THE HUB.

Interest Income

Interest income was $6,834 in 2011 compared to $5,649 in 2010. The increase primarily reflects interest received from the U.S. Internal Revenue Service related to prior years. Interest income was $5,649 in 2010 compared to $2,858 in 2009. The increase primarily reflects higher invested cash balances during 2010.

Other (Income) Expense, Net

Other (income) expense, net of $25,400 in 2011 compares to $3,676 in 2010 and $156 in 2009. The increase in other (income) expense, net in 2011 is primarily due to losses on foreign currency transactions and investment losses in 2011 compared to gains in 2010. Further, the 2010 amount includes a gain of $(4,950) on the sale of a product line.

Foreign currency exchange losses of $8,343 in 2011 compared to foreign currency exchange gains of $(725) in 2010. The loss in 2011 includes $3,700 related to derivative instruments which no longer qualified for hedge accounting. Investment losses of $4,617 in 2011 compared to investment gains of $(3,822) in 2010, primarily reflecting the decrease in value of warrants to purchase common stock of an unrelated company. Other (income) expense, net in 2011, 2010 and 2009 includes $7,290, $9,323 and $(3,856) respectively, relating to the Company’s 50% share in the loss (earnings) of THE HUB.

Income Taxes

Income tax expense totaled 20.8% of pretax earnings in 2011 compared with 21.7% in 2010 and 29.2% in 2009. Income tax expense for 2011 is net of a benefit of approximately $29,600 from discrete tax events, primarily related to the settlement of various tax examinations or expirations of statutes in multiple jurisdictions, including the United States. Income tax expense for 2010 is net of a benefit of approximately $22,300 from discrete tax events, primarily related to the settlement of various tax examinations in multiple jurisdictions, including the United States. Income tax expense for 2009 is net of a benefit of approximately $2,300 related to discrete tax events, primarily related to the expiration of state statutes and settlement of various tax examinations in multiple jurisdictions. Absent these items and potential interest and penalties related to uncertain tax positions in 2011, 2010 and 2009, the effective tax rates would have been 26.2%, 25.4% and 29.0%, respectively. The decrease in the adjusted tax rate in 2011 and 2010 compared to 2009 is primarily due to higher earnings from international operations in jurisdictions that have lower income tax rates than the U.S.

 

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Liquidity and Capital Resources

The Company has historically generated a significant amount of cash from operations. In 2011, the Company funded its operations and liquidity needs primarily through cash flows from operations, and, when needed, using borrowings under its available lines of credit and its commercial paper program. During 2012, the Company expects to continue to fund its working capital needs primarily through cash flows from operations and, when needed, by issuing commercial paper or borrowing under its revolving credit agreement. In the event that the Company is not able to issue commercial paper, the Company intends to utilize its available lines of credit. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its commercial paper program or its available lines of credit are adequate to meet its working capital needs for 2012, however, unexpected events or circumstances such as material operating losses or increased capital or other expenditures, or inability to otherwise access the commercial paper market, may reduce or eliminate the availability of external financial resources. In addition, significant disruptions to credit markets may also reduce or eliminate the availability of external financial resources. Although the Company believes the risk of nonperformance by the counterparties to its financial facilities is not significant, in times of severe economic downturn in the credit markets it is possible that one or more sources of external financing may be unable or unwilling to provide funding to the Company.

As of December 25, 2011 the Company’s cash and cash equivalents totaled $641,688, substantially all of which is held outside of the U.S. Deferred income taxes have not been provided on the majority of undistributed earnings of international subsidiaries as the majority of such earnings are indefinitely reinvested by the Company. Such international cash balances are not available to fund U.S. cash requirements unless the Company decided to repatriate such funds. The Company has sufficient sources of cash in the U.S. to fund U.S. cash requirements without the need to repatriate any funds. If the Company’s assessment of indefinite reinvestment of international earnings changes, it would be required to accrue for any additional income taxes representing the difference between the tax rates in the U.S. and the applicable tax jurisdiction of the international subsidiaries. If the Company repatriated the funds from its’ international subsidiaries, it would then be required to pay the additional U.S. income tax. The majority of the Company’s cash and cash equivalents held outside of the U.S. as of December 25, 2011 is denominated in the U.S. dollar.

At December 25, 2011, cash and cash equivalents, net of short-term borrowings, were $461,258 compared to $713,228 and $621,932 at December 26, 2010 and December 27, 2009, respectively. Hasbro generated $396,069, $367,981 and $265,623 of cash from its operating activities in 2011, 2010 and 2009, respectively. Operating cash flows in 2011, 2010 and 2009 included $80,983, $52,047 and $1,837, respectively, of cash used for television program production. In 2012, the Company expects cash expenditures related to television program production to be in the range of $70,000 to $80,000. Cash from operations in 2011, 2010 and 2009 also includes long-term royalty advance payments of $25,000 made to THE HUB in each of the three years. Operating cash flows in 2009 were also negatively impacted by the Company’s decision to sell $250,000 of its accounts receivable under its securitization program at December 28, 2008. The securitization program was not utilized at year end 2009 or in 2010, and was terminated in January 2011.

Accounts receivable, net increased to $1,034,580 at December 25, 2011 from $961,252 at December 26, 2010. The accounts receivable balance at December 25, 2011 includes a decrease of approximately $24,900 as a result of the translation of foreign currency. Absent the effect of foreign exchange, the increase in accounts receivable reflects increased sales and timing of such sales in the fourth quarter of 2011 compared to the fourth quarter of 2010. Days sales outstanding increased to 70 days at December 25, 2011 from 68 days at December 26, 2010. Accounts receivable decreased to $961,252 at December 26, 2010 from $1,038,802 at December 27, 2009. The accounts receivable balance at December 26, 2010 includes a decrease of approximately $11,500 as a result of the translation of foreign currency balances. Absent the effect of foreign exchange, the decrease in accounts receivable reflects decreased sales in the fourth quarter of 2010 compared to the fourth quarter of 2009.

Inventories decreased to $333,993 at December 25, 2011 compared to $364,194 at December 26, 2010. The decreased inventory balance at December 25, 2011 reflects higher sales in the fourth quarter of 2011 compared to 2010 as well as the Company’s efforts to lower its overall levels from year-end 2010. Inventories increased to

 

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$364,194 at December 26, 2010 compared to $207,895 at December 27, 2009. The increased inventory balance at December 26, 2010 reflects the lower sales in the fourth quarter of 2010 compared to 2009.

Prepaid expenses and other current assets increased to $243,431 at December 25, 2011 from $167,807 at December 26, 2010 primarily due to higher non-income based tax receivables. These tax receivables are primarily related to value added taxes in Europe that are due to the Company, primarily from France, Spain and Germany, which are expected to be collected in 2012. The increase is primarily due to changes in the legal structure of the Company’s European business, which have resulted in larger outstanding balances at year-end 2011. This increase was partially offset by decreases in foreign exchange contracts and income tax receivables. Prepaid expenses and other current assets increased slightly to $167,807 at December 26, 2010 from $162,290 at December 27, 2009. Increases in income tax receivables, current deferred income taxes and the values of the Company’s forward currency contracts were partially offset by decreased prepaid royalties as the result of utilization of advance royalty payments.

Accounts payable and accrued expenses increased to $761,914 at December 25, 2011 compared $704,233 at December 26, 2010. The 2011 balance includes a decrease of approximately $15,100 as a result of the translation of foreign currency balances. Increases in accrued expenses relate to higher accrued royalties as a result of increased sales of royalty-bearing BEYBLADE and TRANSFORMERS products in 2011. The remainder of the increase relates to higher accrued costs associated with cancelled purchase commitments and accrued income and other taxes. These increases were partially offset by lower accrued payroll and management incentives. Accounts payable and accrued expenses decreased to $704,233 at December 26, 2010 compared to $801,775 at December 27, 2009. The decrease primarily related to lower accrued payroll and management incentives, lower accrued royalties as a result of the decrease in entertainment-driven products, and lower accounts payable balances due to the timing of payments in 2010.

Cash flows from investing activities were a net utilization of $107,615, $104,188, and $497,509 in 2011, 2010 and 2009, respectively. Additions to property, plant and equipment were approximately $99,400, $113,000 and $104,000 in 2011, 2010 and 2009, respectively. Of these amounts, 66% in 2011, 57% in 2010 and 58% in 2009 were for purchases of tools, dies and molds related to the Company’s products. In 2012, the Company expects capital expenditures to be in the range of $125,000 to $135,000. During the three years ended December 25, 2011, the depreciation of plant and equipment was $113,821, $95,925 and $95,934, respectively. Cash utilized for investments and acquisitions were $11,585 in 2011, $0 in 2010, and $371,482 in 2009. The 2011 utilization includes the Company’s purchase of intellectual property. The 2009 utilization includes the Company’s $300,000 payment to Discovery for its 50% interest in THE HUB, a payment of $45,000 to Lucas to extend the term of the license agreement related to the STAR WARS brand and approximately $26,500 used to acquire certain other intellectual properties. There were no investments or acquisitions in 2010.

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 their holiday selling season. Due to the concentrated timeframe of this selling period, payments for these accounts receivable are generally not due until the fourth quarter or early in the first quarter of the subsequent year. This timing difference between expenditures and cash collections on accounts receivable makes it necessary for the Company to borrow higher amounts during the latter part of the year. During 2011, the Company primarily used cash from operations and borrowings under its commercial paper program and available lines of credit. In 2010 and 2009, the Company primarily utilized cash from operations, borrowings under its available lines of credit and, during a portion of 2009, its accounts receivable securitization program to fund its operations.

During 2010 and 2009, the Company was party to an accounts receivable securitization program whereby the Company sold, on an ongoing basis, substantially all of its U.S. trade accounts receivable to a bankruptcy remote special purpose entity, Hasbro Receivables Funding, LLC (“HRF”). HRF was consolidated with the Company for financial reporting purposes. The securitization program then allowed HRF to sell, on a revolving basis, an undivided fractional ownership interest of up to $250,000 in the eligible receivables it held to certain bank conduits. The program provided the Company with a source of working capital. In January 2011, the Company terminated this program.

 

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In January 2011, the Company entered into an agreement with a group of banks to establish a commercial paper program (the “Program”). Under the Program, at the request of the Company and subject to market conditions, the banks may either purchase from the Company, or arrange for the sale by the Company, of unsecured commercial paper notes. The Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of $500,000. The maturities of the notes may vary but may not exceed 397 days. The notes are sold under customary terms in the commercial paper market and are issued at a discount to par, or alternatively, sold at par and bear varying interest rates based on a fixed or floating rate basis. The interest rates vary based on market conditions and the ratings assigned to the notes by the credit rating agencies at the time of issuance. Borrowings under the Program are supported by the Company’s $500,000 revolving credit agreement. At December 25, 2011, the Company had notes outstanding with par value of approximately $166,500 related to the Program.

The Company has a revolving credit agreement (the “Agreement”) which provides it with a $500,000 committed borrowing facility through December of 2014. The Agreement contains certain financial covenants setting forth leverage and coverage requirements, and certain other limitations typical of an investment grade facility, including with respect to liens, mergers and incurrence of indebtedness. The Company was in compliance with all covenants in the Agreement as of and for the fiscal year ended December 25, 2011. The Company had no borrowings outstanding under its committed revolving credit facility at December 25, 2011. However, letters of credit outstanding under this facility as of December 25, 2011 were approximately $1,200 and borrowings under the Company’s commercial paper program were approximately $166,500. Amounts available and unused under the committed line at December 25, 2011 were approximately $332,300. The Company also has other uncommitted lines from various banks, of which approximately $36,000 was utilized at December 25, 2011. Of the amount utilized under, or supported by, the uncommitted lines, approximately $14,000 and $22,100 represent outstanding short-term borrowings and letters of credit, respectively.

Net cash utilized by financing activities was $375,685 in 2011. Of this amount, $423,008 reflects cash paid, including transaction costs, to repurchase the Company’s common stock. During 2011, the Company repurchased 10,461 shares at an average price of $40.42. At December 25, 2011, $227,269 remained under the May 2011 Board authorization. Dividends paid were $154,028 in 2011 compared to $133,048 in 2010 reflecting the increase in the Company’s dividend rate in 2011 to $0.30 per quarter from $0.25 per quarter. These utilizations were partially offset by proceeds of $167,339 from short-term borrowings in 2011. In addition, cash received from the exercise of employee stock options in 2011 was $29,798.

Net cash utilized by financing activities was $170,595 in 2010. Of this amount, $639,563 reflects cash paid, including transaction costs, to repurchase the Company’s common stock. During 2010, the Company repurchased 15,763 shares at an average price of $40.37. Dividends paid were $133,048 in 2010 compared to $111,458 in 2009 reflecting the increase in the Company’s dividend rate in 2010 to $0.25 per quarter from $0.20 per quarter. These utilizations were partially offset by proceeds of $492,528 from the issuance of long-term notes in March 2010. In addition, cash received from the exercise of employee stock options in 2010 was $93,522.

Net cash provided by financing activities was $236,779 in 2009. Of this amount, $421,309 reflected net proceeds from the issuance of long-term notes in May 2009. Cash received from the exercise of employee stock options in 2009 was $9,193. These sources of cash were partially offset by $88,112, which included transaction costs, used to repurchase shares of the Company’s common stock. During 2009, the Company repurchased 3,172 shares at an average price per share of $28.67. Dividends paid were $111,458 in 2009.

For the $425,000 in notes due in 2014 and the $350,000 in notes due in 2017 which bear interest at 6.125% and 6.30%, respectively, interest rates may be adjusted upward in the event that the Company’s credit rating from Moody’s Investor Services, Inc., Standard & Poor’s Ratings Services or Fitch Ratings is reduced to Ba1, BB+, or BB+, respectively, or below. At December 25, 2011, the Company’s ratings from Moody’s Investor Services, Inc., Standard & Poor’s Ratings Services and Fitch Ratings were Baa2, BBB+ and BBB+, respectively. The interest rate adjustment is dependent on the degree of decrease of the Company’s ratings and could range from 0.25% to a maximum of 2.00%. The Company may redeem the notes at its option at the greater of the principal amount of the notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase.

 

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Including the notes described above, the Company has remaining principal amounts of long-term debt at December 25, 2011 of approximately $1,384,895 due at varying times from 2014 through 2040. The Company also had letters of credit and other similar instruments of approximately $174,082 and purchase commitments of $344,370 outstanding at December 25, 2011. Letters of credit and similar instruments include $150,840 related to the defense of tax assessments in Mexico. These assessments relate to transfer pricing that the Company is defending and expects to be successful in sustaining its position. In addition, the Company is committed to guaranteed royalty and other contractual payments of approximately $40,314 in 2012.

Critical Accounting Policies and Significant Estimates

The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company’s reported financial results include sales allowances, program production costs, recoverability of goodwill and intangible assets, recoverability of royalty advances and commitments, pension costs and obligations and income taxes.

Sales Allowances

Sales allowances for customer promotions, discounts and returns are recorded as a reduction of revenue when the related revenue is recognized. Revenue from product sales is recognized upon passing of title to the customer, generally at the time of shipment. Revenue from product sales, less related sales allowances, is added to license fees and royalty revenue and reflected as net revenues in the consolidated statements of operations. The Company routinely commits to promotional sales allowance programs with customers. These allowances primarily relate to fixed programs, which the customer earns based on purchases of Company products during the year. Discounts and allowances are recorded as a reduction of related revenue at the time of sale. While many of the allowances are based on fixed amounts, certain of the allowances, such as the returns allowance, are based on market data, historical trends and information from customers and are therefore subject to estimation.

For its allowance programs that are not fixed, such as returns, the Company estimates these amounts using a combination of historical experience and current market conditions. These estimates are reviewed periodically against actual results and any adjustments are recorded at that time as an increase or decrease to net revenues. During 2011, there have been no material adjustments to the Company’s estimates made in prior years.

Program Production Costs

The Company incurs certain costs in connection with the production of television programs based primarily on the Company’s toy and game brands, including animated and live-action programs and game shows. These costs are capitalized as they are incurred and amortized using the individual-film-forecast method, whereby these costs are amortized in the proportion that the current year’s revenues bear to management’s estimate of total ultimate revenues as of the beginning of each fiscal year related to the program. These capitalized costs are reported at the lower of cost, less accumulated amortization, or fair value, and reviewed for impairment when an event or change in circumstances occurs that indicates that an impairment may exist. The fair value is determined using a discounted cash flow model which is primarily based on management’s future revenue and cost estimates.

The most significant estimates are those used in the determination of ultimate revenue in the individual-film-forecast method. Ultimate revenue estimates impact the timing of program production cost amortization in the consolidated statement of operations. Ultimate revenue includes revenue from all sources that are estimated to be earned related to the television program and include toy, game and other merchandise licensing fees; first run program distribution fees; and other revenue sources, such as DVD distribution. Our ultimate revenue estimates for each television program are developed based on our estimates of expected future results. We review

 

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and revise these estimates at each reporting date to reflect the most current available information. If estimates for a television program are revised, the difference between the program production cost amortization determined using the revised estimate and any amounts previously expensed during that fiscal year, are included as an adjustment to program production cost amortization in the consolidated statement of operations in the quarter in which the estimates are revised. Prior period amounts are not adjusted for subsequent changes in estimates. Factors that can impact our revenue estimates include the success and popularity of our television programs in the U.S. which are distributed on THE HUB, our ability to achieve broad distribution and viewer acceptance in international markets, and success of our program-related toy, game and other merchandise.

For the year ended December 25, 2011 we have $80,600 of program production costs included in other assets in the consolidated balance sheet. We currently expect that substantially all capitalized program production costs will be amortized over the 3-year period 2012 through 2014. The Company estimates program production cost amortization in 2012 to be in the range of $60,000 to $70,000, which includes amortization related to amounts capitalized during 2011 as well as amortization of amounts expected to be incurred for programs to be completed and released in 2012. Future program production cost amortization is subject to change based on actual costs incurred and management’s then current estimates of ultimate revenues. During 2011 the Company did not incur any impairment charges related to its program production costs.

Recoverability of Goodwill and Intangible Assets

Goodwill and other intangible assets deemed to have indefinite lives are tested for impairment at least annually. If an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim test at that time. The impairment test begins by allocating goodwill and intangible assets to applicable reporting units. Goodwill is then tested using a two step process that begins with an estimation of the fair value of the reporting unit using an income approach, which looks to the present value of expected future cash flows.

The first step is a screen for potential impairment while the second step measures the amount of impairment if there is an indication from the first step that one exists. Intangible assets with indefinite lives are tested for impairment by comparing their carrying value to their estimated fair value which is also calculated using an income approach. The Company’s annual goodwill impairment test was performed in the fourth quarter of 2011 and the estimated fair value of the Company’s reporting units with allocated goodwill were substantially in excess of their carrying value. No reporting units were considered to be at risk of failing the first step of the impairment test. Accordingly, no impairment was indicated. The Company’s annual impairment tests related to intangible assets with indefinite lives were also performed in the fourth quarter of 2011 and no impairments were indicated as the estimated fair values were substantially in excess of the carrying value of the related assets. 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 25, 2011, the Company has goodwill and intangible assets with indefinite lives of $550,530 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

 

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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 $391,555 at December 25, 2011. During 2011, there were no impairment charges related to these intangible assets.

Recoverability of Royalty Advances and Commitments

The Company’s ability to earn-out royalty advances and contractual obligations with respect to minimum guaranteed royalties is assessed by comparing the remaining minimum guaranty to the estimated future sales forecasts and related cash flow projections to be derived from the related product. If sales forecasts and related cash flows from the particular product do not support the recoverability of the remaining minimum guaranty or, if the Company decides to discontinue a product line with royalty advances or commitments, a charge to royalty expense to write-off the non-recoverable minimum guaranty is required. The preparation of revenue forecasts and related cash flows for these products requires judgments and estimates. Actual revenues and related cash flows or changes in the assessment of anticipated revenues and cash flows related to these products could result in a change to the assessment of recoverability of remaining minimum guaranteed royalties. At December 25, 2011, the Company had $134,730 of prepaid royalties, $16,788 of which are included in prepaid expenses and other current assets and $117,942 of which are included in other assets.

Pension Costs and Obligations

Pension expense is based on actuarial computations of current and future benefits using estimates for expected return on assets and applicable discount rates. At the end of 2007 the Company froze benefits under its two largest pension plans in the U.S., with no future benefits accruing to employees. The Company will continue to pay benefits under the plan consistent with the provisions existing at the date of the plan benefit freeze. The estimates for the Company’s U.S. plans are established at the Company’s measurement date. The Company uses its fiscal year-end date as its measurement date to measure the liabilities and assets of the plans and to establish the expense for the upcoming year.

The Company estimates expected return on assets using a weighted average rate based on historical market data for the investment classes of assets held by the plan, the allocation of plan assets among those investment classes, and the current economic environment. Based on this information, the Company’s estimate of expected return on plan assets used in the calculation of 2011 pension expense for the U.S. plans was 7.25%. A decrease in the estimate used for expected return on plan assets would increase pension expense, while an increase in this estimate would decrease pension expense. A decrease of 0.25% in the estimate of expected return on plan assets would have increased 2011 pension expense for U.S. plans by approximately $655.

Discount rates are selected based upon rates of return at the measurement date on high quality corporate bond investments currently available and expected to be available during the period to maturity of the pension benefits. The Company’s discount rate for its U.S. plans used for the calculation of 2011 pension expense averaged 5.20%. A decrease in the discount rate would result in greater pension expense while an increase in the discount rate would decrease pension expense. A decrease of 0.25% in the Company’s discount rate would have increased 2011 pension expense and the 2011 projected benefit obligation by approximately $465 and $11,554, respectively.

Actual results that differ from the actuarial assumptions are accumulated and, if outside a certain corridor, amortized over future periods and, therefore affect recognized expense in future periods. At December 25, 2011, the Company’s U.S. plans had unrecognized actuarial losses of $104,872 included in accumulated other comprehensive earnings related to its defined benefit pension plans compared to $87,553 at December 26, 2010. The increase primarily reflects additional unrecognized actuarial losses in 2011, primarily due to the reduction of the discount rate used to value the liability at December 25, 2011 as well as differences between the Company’s actual return on plan assets and the expected return assumed in the calculation of the 2011 expense. The discount rate used to calculate the projected benefit obligation at December 25, 2011 decreased to 4.96% at December 25, 2011 from 5.20% used at December 26, 2010. Pension plan assets are valued on the basis of their fair market value on the measurement date. These changes in the fair market value of plan assets impact the amount of future pension expense due to amortization of the unrecognized actuarial losses or gains.

 

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Income Taxes

The Company’s annual income tax rate is based on its income, statutory tax rates, changes in prior tax positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant judgment and estimates are required to determine the Company’s annual tax rate and in evaluating its tax positions. Despite the Company’s belief that its tax return positions are fully supportable, these positions are subject to challenge and estimated liabilities are established in the event that these positions are challenged and the Company is not successful in defending these challenges. These estimated liabilities are adjusted, as well as the related interest, in light of changing facts and circumstances, such as the progress of a tax audit.

An estimated effective income tax rate is applied to the Company’s quarterly operating results. In the event there is a significant unusual or extraordinary item recognized in the Company’s quarterly operating results, the tax attributable to that item is separately calculated and recorded at the time. Changes in the Company’s estimated effective income tax rate during 2011 were primarily due to changes in its estimate of earnings by tax jurisdiction. In addition, changes in judgment regarding likely outcomes related to tax positions taken in a prior fiscal year, or tax costs or benefits from a resolution of such positions would be recorded entirely in the interim period the judgment changes or resolution occurs. During 2011, the Company recorded a total benefit of approximately $29,600 related to discrete tax events, primarily related to the completion of a U.S. tax examination.

In certain cases, tax law requires items to be included in the Company’s income tax returns at a different time than when these items are recognized on the financial statements or at a different amount than that which is recognized on the financial statements. Some of these differences are permanent, such as expenses that are not deductible on the Company’s tax returns, while other differences are temporary and will reverse over time, such as depreciation expense. These differences that will reverse over time are recorded as deferred tax assets and liabilities on the consolidated balance sheet. Deferred tax assets represent deductions that have been reflected in the financial statements but have not yet been reflected in the Company’s income tax returns. Valuation allowances are established against deferred tax assets to the extent that it is determined that the Company will have insufficient future taxable income, including capital gains, to fully realize the future deductions or capital losses. Deferred tax liabilities represent expenses recognized on the Company’s income tax return that have not yet been recognized in the Company’s financial statements or income recognized in the financial statements that has not yet been recognized in the Company’s income tax return. The Mexican government has a tax structure which results in companies paying the higher of an income-based tax or an alternative flat tax. Should the Company be subject to the alternative flat tax, it would be required to review whether its net deferred tax assets would be realized. As the Company believes that it will continue to be subject to the income-based tax in 2012, it believes that the net deferred tax assets related to the Mexican tax jurisdiction will be realizable. Should the facts and circumstances change, the Company may be required to reevaluate deferred tax assets related to its Mexican operations, which may result in additional tax expense.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income , which will require companies to present the components of net income and other comprehensive earnings either in a single continuous statement or in two separate but consecutive statements. It eliminates the option to present components of other comprehensive earnings as part of the statement of changes in shareholders’ equity. The pronouncement does not change the current option for presenting components of other comprehensive earnings, gross or net of the effect of income taxes, provided that such effects are presented in the statement in which other comprehensive earnings are presented or disclosed in the notes to the financial statements. Additionally, the pronouncement does not affect the calculation or reporting of earnings per share. The pronouncement also does not change the items which must be reported in other comprehensive earnings, how such items are measured or when they must be reclassified to net earnings. This standard is effective for reporting periods beginning after December 15, 2011. Early application is permitted. Hasbro expects its adoption will have no effect on its financial position or results of operations but it will impact the way Hasbro presents comprehensive earnings.

 

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Contractual Obligations and Commercial Commitments

In the normal course of its business, the Company enters into contracts related to obtaining rights to produce product under license, which may require the payment of minimum guarantees, as well as contracts related to the leasing of facilities and equipment. In addition, the Company has $1,384,895 in principal amount of long-term debt outstanding at December 25, 2011. Future payments required under these and other obligations as of December 25, 2011 are as follows:

 

     Payments due by Fiscal Year  

Certain Contractual Obligations

   2012      2013      2014      2015      2016      Thereafter      Total  

Long-term debt

   $                 425,000                         959,895         1,384,895   

Interest payments on long-term debt

     87,084         87,084         74,069         61,053         61,053         855,212         1,225,555   

Operating lease commitments

     39,868         37,461         30,803         16,047         9,131         22,353         155,663   

Future minimum guaranteed contractual payments

     40,314         93,173         14,775         14,775         14,375         57,500         234,912   

Tax sharing agreement

     6,400         6,800         7,100         7,400         7,700         94,400         129,800   

Purchase commitments

     344,370                                                 344,370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 518,036         224,518         551,747         99,275         92,259         1,989,360         3,475,195   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company has a liability at December 25, 2011, including potential interest and penalties, of $97,661 for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. The Company does not know the ultimate resolution of these uncertain tax positions and as such, does not know the ultimate timing of payments related to this liability. Accordingly, these amounts are not included in the table above.

In connection with the Company’s agreement to form a joint venture with Discovery, the Company is obligated to make future payments to Discovery under a tax sharing agreement. These payments are contingent upon the Company having sufficient taxable income to realize the expected tax deductions of certain amounts related to the joint venture. Accordingly, estimates of these amounts are included in the table above.

The Company’s agreement with Marvel provides for minimum guaranteed royalty payments and requires the Company to make minimum expenditures on marketing and promotional activities. In connection with the extension of the Marvel license in 2009, the Company may be subject to additional royalty guarantees totaling $140,000 that are not included in the table above and that may be payable during the next seven years contingent upon the quantity and types of theatrical movie releases.

Purchase commitments represent agreements (including open purchase orders) to purchase inventory and tooling in the ordinary course of business. The reported amounts exclude inventory and tooling purchase liabilities included in accounts payable or accrued liabilities on the consolidated balance sheet as of December 25, 2011.

In addition to the amounts included in the table above, the Company expects to make contributions totaling approximately $5,800 related to its unfunded U.S. and other International pension plans in 2012. The Company also has letters of credit and related instruments of approximately $174,082 at December 25, 2011.

The Company believes that cash from operations and funds available through its commercial paper program or lines of credit will allow the Company to meet these and other obligations described above.

Financial Risk Management

The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates primarily as the result of sourcing products priced in U.S. dollars, Hong Kong dollars and Euros while marketing those products in more than twenty currencies. Results of operations may be affected primarily by changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British Pound sterling, Canadian dollar and Mexican peso and, to a lesser extent, currencies in Latin American and Asia Pacific countries.

 

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To manage this exposure, the Company has hedged a portion of its forecasted foreign currency transactions using foreign exchange forward contracts. The Company estimates that a hypothetical immediate 10% depreciation of the U.S. dollar against foreign currencies could result in an approximate $43,451 decrease in the fair value of these instruments. A decrease in the fair value of these instruments would be substantially offset by decreases in the related forecasted foreign currency transactions.

The Company is also exposed to foreign currency risk with respect to its net cash and cash equivalents or short-term borrowing positions in currencies other than the U.S. dollar. The Company believes, however, that the on-going risk on the net exposure should not be material to its financial condition. In addition, the Company’s revenues and costs have been and will likely continue to be affected by changes in foreign currency rates. A significant change in foreign exchange rates can materially impact the Company’s revenues and earnings due to translation of foreign-denominated revenues and expenses. The Company does not hedge against translation impacts of foreign exchange. From time to time, affiliates of the Company may make or receive intercompany loans in currencies other than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts.

The Company reflects all derivatives at their fair value as an asset or liability on the balance sheet. The Company does not speculate in foreign currency exchange contracts. At December 25, 2011, these contracts had unrealized gains of $7,891, of which $7,778 are recorded in prepaid expenses and other current assets, $2,021 are recorded in other assets, $(783) are recorded in accrued liabilities, and $(1,125) are recorded in other liabilities. Included in accumulated other comprehensive earnings at December 25, 2011 are deferred gains of $10,081, net of tax, related to these derivatives.

At December 25, 2011, the Company had fixed rate long-term debt, excluding fair value adjustments, of $1,384,895. The Company is party to several interest rate swap agreements, with a total notional amount of $400,000, to adjust the amount of long-term debt subject to fixed interest rates. The interest rate swaps are matched with specific long-term debt issues and are designated and effective as hedges of the change in the fair value of the associated debt. Changes in fair value of these contracts are wholly offset in earnings by changes in the fair value of the related long-term debt. At December 25, 2011, the fair value of these contracts was an asset of $15,977, which is included in other assets, with a corresponding fair value adjustment to increase long-term debt. Changes in interest rates affect the fair value of fixed rate debt not hedged by interest rate swap agreements while affecting the earnings and cash flows of the long-term debt hedged by the interest rate swaps. The Company estimates that a hypothetical one percentage point decrease or increase in interest rates would increase or decrease the fair value of this long-term debt by approximately $126,700 or $107,400, respectively. A hypothetical one-quarter percentage point change in interest rates would increase or decrease 2011 pretax earnings by $885 and 2011 cash flows by $767.

The Economy and Inflation

The principal market for the Company’s products is the retail sector. Revenues from the Company’s top five customers, all retailers, accounted for approximately 45% of its consolidated net revenues in 2011 and 50% and 54% of its consolidated net revenues in 2010 and 2009, respectively. In recent years certain customers in the retail sector have experienced economic difficulty. The Company monitors the creditworthiness of its customers and adjusts credit policies and limits as it deems appropriate.

The Company’s revenue pattern continues to show the second half of the year to be more significant to its overall business for the full year. In 2011, approximately 63% of the Company’s full year net revenues were recognized in the second half of the year. The Company expects that this concentration will continue, particularly as more of its business has shifted to larger customers with order patterns concentrated in the second half of the year. The concentration of sales in the second half of the year increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items, and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by customer order patterns which vary from year to year largely because of differences in the degree of consumer acceptance of a product line, product availability, marketing strategies, inventory levels, policies of retailers and differences in overall economic conditions. The trend of larger retailers has been to maintain lower inventories throughout the year and purchase a greater percentage of product within or close to the fourth quarter holiday consumer selling season, which includes Christmas.

 

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Quick response inventory management practices being used by retailers result in more orders being placed for immediate delivery and fewer orders being placed well in advance of shipment. Retailers are timing their orders so that they are being filled by suppliers closer to the time of purchase by consumers. To the extent that retailers do not sell as much of their year-end inventory purchases during this holiday selling season as they had anticipated, their demand for additional product earlier in the following fiscal year may be curtailed, thus negatively impacting the Company’s future revenues. In addition, the bankruptcy or other lack of success of one of the Company’s significant retailers could negatively impact the Company’s future revenues.

The effect of inflation on the Company’s operations during 2011 was not significant and the Company will continue its practice of monitoring costs and adjusting prices, accordingly.

Other Information

The Company is not aware of any material amounts of potential exposure relating to environmental matters and does not believe its environmental compliance costs or liabilities to be material to its operating results or financial position.

 

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.

 

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Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Hasbro, Inc.:

We have audited the accompanying consolidated balance sheets of Hasbro, Inc. and subsidiaries as of December 25, 2011 and December 26, 2010, 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 25, 2011. These consolidated financial statements are the responsibility of the Company’s 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 25, 2011 and December 26, 2010, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 25, 2011, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hasbro, Inc.’s internal control over financial reporting as of December 25, 2011, 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 22, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/    KPMG LLP

Providence, Rhode Island

February 22, 2012

 

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HASBRO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

December 25, 2011 and December 26, 2010

(Thousands of Dollars Except Share Data)

 

     2011     2010  
ASSETS   

Current assets

    

Cash and cash equivalents

   $ 641,688        727,796  

Accounts receivable, less allowance for doubtful accounts
of $23,700 in 2011 and $31,200 in 2010

     1,034,580        961,252  

Inventories

     333,993        364,194  

Prepaid expenses and other current assets

     243,431        167,807  
  

 

 

   

 

 

 

Total current assets

     2,253,692        2,221,049  

Property, plant and equipment, net

     218,021        233,580  
  

 

 

   

 

 

 

Other assets

    

Goodwill

     474,792        474,813  

Other intangibles, net

     467,293        500,597  

Other

     716,976        663,187  
  

 

 

   

 

 

 

Total other assets

     1,659,061        1,638,597  
  

 

 

   

 

 

 

Total assets

   $ 4,130,774        4,093,226  
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY   

Current liabilities

    

Short-term borrowings

   $ 180,430       14,568  

Accounts payable

     134,864       132,517  

Accrued liabilities

     627,050       571,716  
  

 

 

   

 

 

 

Total current liabilities

     942,344       718,801  

Long-term debt

     1,400,872       1,397,681  

Other liabilities

     370,043       361,324  
  

 

 

   

 

 

 

Total liabilities

     2,713,259       2,477,806  
  

 

 

   

 

 

 

Shareholders’ equity

    

Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued

              

Common stock of $0.50 par value. Authorized 600,000,000 shares; issued 209,694,630 shares in 2011 and 2010

     104,847       104,847  

Additional paid-in capital

     630,044       625,961  

Retained earnings

     3,205,420       2,978,317  

Accumulated other comprehensive (loss) earnings

     (35,943     8,149  

Treasury stock, at cost, 81,061,373 shares in 2011 and 72,278,515 shares in 2010

     (2,486,853     (2,101,854
  

 

 

   

 

 

 

Total shareholders’ equity

     1,417,515       1,615,420  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 4,130,774       4,093,226  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Fiscal Years Ended in December

(Thousands of Dollars Except Per Share Data)

 

     2011     2010     2009  

Net revenues

   $ 4,285,589       4,002,161       4,067,947  
  

 

 

   

 

 

   

 

 

 

Costs and expenses

      

Cost of sales

     1,836,263       1,690,057       1,676,336  

Royalties

     339,217       248,570       330,651  

Product development

     197,638       201,358       181,195  

Advertising

     413,951       420,651       412,580  

Amortization of intangibles

     46,647       50,405       85,029  

Program production cost amortization

     35,798       22,069         

Selling, distribution and administration

     822,094       781,192       793,558  
  

 

 

   

 

 

   

 

 

 

Total expenses

     3,691,608       3,414,302       3,479,349  
  

 

 

   

 

 

   

 

 

 

Operating profit

     593,981       587,859       588,598  
  

 

 

   

 

 

   

 

 

 

Non-operating (income) expense

      

Interest expense

     89,022       82,112       61,603  

Interest income

     (6,834     (5,649     (2,858

Other (income) expense, net

     25,400       3,676       156  
  

 

 

   

 

 

   

 

 

 

Total non-operating expense, net

     107,588       80,139       58,901  
  

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     486,393       507,720       529,697  

Income taxes

     101,026       109,968       154,767  
  

 

 

   

 

 

   

 

 

 

Net earnings

   $ 385,367       397,752       374,930  
  

 

 

   

 

 

   

 

 

 

Per common share

      

Net earnings

      

Basic

   $ 2.88       2.86       2.69  
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 2.82       2.74       2.48  
  

 

 

   

 

 

   

 

 

 

Cash dividends declared

   $ 1.20       1.00       0.80  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Fiscal Years Ended in December

(Thousands of Dollars)

 

     2011     2010     2009  

Cash flows from operating activities

      

Net earnings

   $ 385,367       397,752       374,930  

Adjustments to reconcile net earnings to net cash provided by operating activities:

      

Depreciation of plant and equipment

     113,821       95,925       95,934  

Amortization of intangibles

     46,647       50,405       85,029  

Program production cost amortization

     35,798       22,069         

Deferred income taxes

     (2,921     25,172       19,136  

Stock-based compensation

     12,463       33,392       29,912  

Changes in operating assets and liabilities:

      

(Increase) decrease in accounts receivable

     (108,845     71,173       (422,560

Decrease (increase) in inventories

     17,463       (151,634     105,329  

(Increase) decrease in prepaid expenses and other current assets

     (85,076     15,904       35,702  

Program production costs

     (80,983     (52,047     (1,837

Increase (decrease) in accounts payable and accrued liabilities

     75,589       (129,531     5,966  

Other, including long-term advances

     (13,254     (10,599     (61,918
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     396,069       367,981       265,623  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Additions to property, plant and equipment

     (99,402     (112,597     (104,129

Investments and acquisitions, net of cash acquired

     (11,585            (371,482

Purchases of short-term investments

                   (18,000

Other investing activities

     3,372       8,409       (3,898
  

 

 

   

 

 

   

 

 

 

Net cash utilized by investing activities

     (107,615     (104,188     (497,509
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Net proceeds from borrowings with original maturities of more than three months

            492,528       421,309  

Repayments of borrowings with original maturities of more than three months

            (186       

Net proceeds (repayments) of other short-term borrowings

     167,339       (381     4,114  

Purchases of common stock

     (423,008     (639,563     (88,112

Stock option transactions

     29,798       93,522       9,193  

Excess tax benefits from stock-based compensation

     9,657       22,517       1,733  

Dividends paid

     (154,028     (133,048     (111,458

Other financing activities

     (5,443     (5,984       
  

 

 

   

 

 

   

 

 

 

Net cash (utilized) provided by financing activities

     (375,685     (170,595     236,779  
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     1,123       (1,447     762   
  

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (86,108     91,751       5,655  

Cash and cash equivalents at beginning of year

     727,796       636,045       630,390  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 641,688       727,796       636,045  
  

 

 

   

 

 

   

 

 

 

Supplemental information

      

Interest paid

   $ 91,045       72,927       54,578  
  

 

 

   

 

 

   

 

 

 

Income taxes paid

   $ 78,104       93,995       107,948  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

(Thousands of Dollars)

 

     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
(Loss)
Earnings
    Treasury
Stock
    Total
Shareholders’
Equity
 

Balance, December 28, 2008

   $ 104,847         450,155       2,456,650       62,256       (1,683,122     1,390,786  

Net earnings

                    374,930                     374,930  

Other comprehensive loss

                           (3,625            (3,625
             

 

 

 

Comprehensive earnings

                371,305  

Stock-based compensation transactions

             (12,724                   17,518       4,794  

Purchases of common stock

                                  (90,994     (90,994

Stock-based compensation expense

             29,752                     160       29,912  

Dividends declared

                    (111,031                   (111,031
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 27, 2009

     104,847         467,183       2,720,549       58,631       (1,756,438     1,594,772  

Net earnings

                    397,752                     397,752  

Other comprehensive loss

                           (50,482            (50,482
             

 

 

 

Comprehensive earnings

                347,270  

Stock-based compensation transactions

             22,971                     86,253       109,224  

Conversion of debentures

             102,792                     204,635       307,427  

Purchases of common stock

                                  (636,681     (636,681

Stock-based compensation expense

             33,015                     377       33,392  

Dividends declared

                    (139,984                   (139,984
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 26, 2010

     104,847         625,961       2,978,317       8,149       (2,101,854     1,615,420  

Net earnings

                    385,367                     385,367  

Other comprehensive loss

                           (44,092            (44,092
             

 

 

 

Comprehensive earnings

                341,275  

Stock-based compensation transactions

             (8,266                   37,895       29,629  

Purchases of common stock

                                  (423,008     (423,008

Stock-based compensation expense

             12,349                     114       12,463  

Dividends declared

                    (158,264                   (158,264
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 25, 2011

   $ 104,847         630,044       3,205,420       (35,943     (2,486,853     1,417,515  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Thousands of Dollars and Shares Except Per Share Data)

(1)     Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Hasbro, Inc. and all majority-owned subsidiaries (“Hasbro” or the “Company”). Investments representing 20% to 50% ownership interests in other companies are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated.

Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ from those estimates.

Reclassifications

Certain amounts in the 2010 and 2009 consolidated financial statements have been reclassified to conform to the 2011 presentation.

Fiscal Year

Hasbro’s fiscal year ends on the last Sunday in December. Each of the fiscal years in the three-year period ended December 25, 2011 were fifty-two week periods.

Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and highly liquid investments purchased with a maturity to the Company of three months or less.

Marketable Securities

Marketable securities consist of investments in private investment funds. For these investments, which are included in prepaid and other current assets in the accompanying consolidated balance sheets, the Company has selected the fair value option which requires the Company to record the unrealized gains and losses on these investments in the consolidated statements of operations at the time they occur.

Accounts Receivable and Allowance for Doubtful Accounts

Credit is granted to customers predominantly on an unsecured basis. Credit limits and payment terms are established based on extensive evaluations made on an ongoing basis throughout the fiscal year with regard to the financial performance, cash generation, financing availability and liquidity status of each customer. The majority of customers are formally reviewed at least annually; more frequent reviews are performed based on the customer’s 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, and requiring cash in advance of shipping.

The Company records an allowance for doubtful accounts based on management’s 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 is adjusted to reflect current risk assessments.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or market. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling price and product lines planned to be discontinued, slow-moving and obsolete inventory is written down to its estimated net realizable value. At December 25, 2011 and December 26, 2010, finished goods comprised 94% and 96% of inventories, respectively.

Equity Method Investments

For the Company’s equity method investments, only the Company’s investment in and amounts due to and from the equity method investments are included in the consolidated balance sheet and only the Company’s share of the equity method investments’ earnings (losses) is included in the consolidated statement of operations. Dividends, cash distributions, loans or other cash received from the equity method investments, additional cash investments, loan repayments or other cash paid to the investee are included in the consolidated statement of cash flows.

The Company reviews its equity method investments for impairment on a periodic basis. If it has been determined that the fair value of the equity investment is less than its related carrying value and that this decline is other-than-temporary, the carrying value of the investment is adjusted downward to reflect these declines in value. The Company has one significant equity method investment, its 50% interest in a joint venture with Discovery Communications, Inc. See note 5 for additional information.

Long-Lived Assets

The Company’s long-lived assets consist of property, plant and equipment, goodwill and intangible assets with indefinite lives as well as other intangible assets the Company considers to have a defined life.

Goodwill results from acquisitions the Company has made over time. Substantially all of the other intangibles consist of the cost of acquired product rights. In establishing the value of such rights, the Company considers existing trademarks, copyrights, patents, license agreements and other product-related rights. These rights were valued on their acquisition date based on the anticipated future cash flows from the underlying product line. The Company has certain intangible assets related to the Tonka and Milton Bradley acquisitions that have an indefinite life.

Goodwill and intangible assets deemed to have indefinite lives are not amortized and are tested for impairment at least annually. The annual test begins with goodwill and all intangible assets being allocated to applicable reporting units. Goodwill is then tested using a two-step process that begins with an estimation of fair value of the reporting unit using an income approach, which looks to the present value of expected future cash flows. The first step is a screen for potential impairment while the second step measures the amount of impairment if there is an indication from the first step that one exists. Intangible assets with indefinite lives are tested annually for impairment by comparing their carrying value to their estimated fair value, also calculated using the present value of expected future cash flows.

The remaining intangibles having defined lives are being amortized over periods ranging from five to twenty-five years, primarily using the straight-line method. At December 25, 2011, approximately 10% of other intangibles related to digital gaming rights which are being amortized in proportion to projected revenues.

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using accelerated and straight-line methods to depreciate the cost of property, plant and equipment over their estimated useful lives. The principal lives, in years, used in determining depreciation rates of various assets are: land improvements 15 to 19, buildings and improvements 15 to 25 and machinery and equipment 3 to 12.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

Depreciation expense is classified in the statement of operations based on the nature of the property and equipment being depreciated. Tools, dies and molds are depreciated over a three-year period or their useful lives, whichever is less, using an accelerated method. The Company generally owns all tools, dies and molds related to its products.

The Company reviews property, plant and equipment and other intangibles with defined lives for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to future undiscounted cash flows expected to be generated by the asset or asset group. If such assets were considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying value of the assets exceeds their fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. Assets to be disposed of are carried at the lower of the net book value or their estimated fair value less disposal costs.

Financial Instruments

Hasbro’s financial instruments include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and certain accrued liabilities. At December 25, 2011, the carrying cost of these instruments approximated their fair value. The Company’s financial instruments at December 25, 2011 also include long-term borrowings (see note 9 for carrying cost and related fair values) as well as certain assets and liabilities measured at fair value (see notes 9, 12 and 16).

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 brands on specifically approved products. The licensees pay the Company royalties as products are sold, in some cases subject to minimum guaranteed amounts. Royalty revenues are recognized as they are reported as earned and payment becomes assured, over the life of the agreement.

The Company produces television programming for license to third parties. Revenues from the licensing of television programming are recorded when the content is available for telecast by the licensee and when certain other conditions are met.

Revenue from product sales less related provisions for discounts, rebates and returns, as well as royalty revenues and television programming revenues comprise net revenues in the consolidated statements of operations.

Costs of Sales

Cost of sales primarily consists of purchased materials, labor, manufacturing overheads and other inventory-related costs such as obsolescence.

Royalties

The Company enters into license agreements with inventors, designers and others for the use of intellectual properties in its products. These agreements may call for payment in advance or future payment of minimum

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

guaranteed amounts. Amounts paid in advance are recorded as an asset and charged to expense as revenue from the related products is recognized. If all or a portion of the minimum guaranteed amounts appear not to be recoverable through future use of the rights obtained under license, the non-recoverable portion of the guaranty is charged to expense at that time.

Advertising

Production costs of commercials are expensed in the fiscal year during which the production is first aired. The costs of other advertising and promotion programs are expensed in the fiscal year incurred.

Program Production Costs

The Company incurs costs in connection with the production of television programming. These costs are capitalized by the Company as they are incurred and amortized using the individual-film-forecast method, whereby these costs are amortized in the proportion that the current year’s revenues bear to management’s estimate of total ultimate revenues as of the beginning of such period related to the program. These capitalized costs are reported at the lower of cost, less accumulated amortization, or fair value, and reviewed for impairment when an event or change in circumstances occurs that indicates that impairment may exist. The fair value is determined using a discounted cash flow model which is primarily based on management’s future revenue and cost estimates.

Shipping and Handling

Hasbro expenses costs related to the shipment and handling of goods to customers as incurred. For 2011, 2010 and 2009, these costs were $173,028, $154,604 and $155,496, 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 reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. A valuation allowance is provided for deferred tax assets if it is more likely than not such assets will be unrealized. Deferred income taxes have not been provided on the majority of undistributed earnings of international subsidiaries as the majority of such earnings are indefinitely reinvested by the Company.

The Company uses a two step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

Foreign Currency Translation

Foreign currency assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues, costs and expenses are translated at weighted average exchange rates during each reporting period. Earnings include gains or losses resulting from foreign currency transactions and, when required, translation gains and losses resulting from the use of the U.S. dollar as the functional currency in highly inflationary economies. Other gains and losses resulting from translation of financial statements are a component of other comprehensive earnings.

Pension Plans, Postretirement and Postemployment Benefits

Pension expense and related amounts in the consolidated balance sheet are based on actuarial computations of current and future benefits. The Company’s policy is to fund amounts which are required by applicable regulations and which are tax deductible. In 2012, the Company expects to contribute approximately $5,800 to its pension plans. The estimated amounts of future payments to be made under other retirement programs are being accrued currently over the period of active employment and are also included in pension expense. Hasbro has a contributory postretirement health and life insurance plan covering substantially all employees who retire under any of its United States defined benefit pension plans and meet certain age and length of service requirements. The cost of providing these benefits on behalf of employees who retired prior to 1993 is and will continue to be substantially borne by the Company. The cost of providing benefits on behalf of substantially all employees who retire after 1992 is borne by the employee. It also has several plans covering certain groups of employees, which may provide benefits to such employees following their period of employment but prior to their retirement. The Company measures the costs of these obligations based on actuarial computations.

Accounting for Stock-Based Compensation

The Company has a stock-based employee compensation plan for employees and non-employee members of the Company’s Board of Directors. Under this plan the Company may grant stock options at or above the fair market value of the Company’s stock, as well as restricted stock, restricted stock units and contingent stock performance awards. All awards are measured at fair value at the date of the grant and amortized as expense on a straight-line basis over the requisite service period of the award. For awards contingent upon Company performance, the measurement of the expense for these awards is based on the Company’s current estimate of its performance over the performance period. See note 13 for further discussion.

Risk Management Contracts

Hasbro uses foreign currency forward contracts to mitigate the impact of currency rate fluctuations on firmly committed and projected future foreign currency transactions. These over-the-counter contracts, which hedge future purchases of inventory and other cross-border currency requirements not denominated in the functional currency of the business unit, are primarily denominated in United States and Hong Kong dollars, and Euros and are entered into with a number of counterparties, all of which are major financial institutions. The Company believes that a default by a counterparty would not have a material adverse effect on the financial condition of the Company. Hasbro does not enter into derivative financial instruments for speculative purposes.

At the inception of the contracts, Hasbro designates its derivatives as either cash flow or fair value hedges. The Company formally documents all relationships between hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking various hedge transactions. All hedges designated as cash flow hedges are linked to forecasted transactions and the Company assesses, both at the inception of the hedge and on an on-going basis, the effectiveness of the derivatives used in hedging transactions in offsetting changes in the cash flows of the forecasted transaction. The ineffective portion of a hedging derivative, if any, is immediately recognized in the consolidated statements of operations.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

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 as cash flow hedges and are effective are deferred and recorded as a component of Accumulated Other Comprehensive (Loss) Earnings (“AOCE”) until the hedged transactions occur and are then recognized in the consolidated statements of operations. The Company’s foreign currency contracts hedging anticipated cash flows are designated as cash flow hedges. When it is determined that a derivative is not highly effective as a hedge, the Company discontinues hedge accounting prospectively. Any gain or loss deferred through that date remains in AOCE until the forecasted transaction occurs, at which time it is reclassified to the consolidated statements of operations. To the extent the transaction is no longer deemed probable of occurring, hedge accounting treatment is discontinued and amounts deferred would be reclassified to the consolidated statements of operations. In the event hedge accounting requirements are not met, gains and losses on such instruments are included currently in the consolidated statements of operations. The Company uses derivatives to economically hedge intercompany loans denominated in foreign currencies. The Company does not use hedge accounting for these contracts as changes in the fair value of these contracts are substantially offset by changes in the fair value of the intercompany loans.

The Company also uses interest rate swap agreements to adjust the amount of long-term debt subject to fixed interest rates. The interest rate swaps are matched with specific fixed rate long-term debt obligations and are designated as fair value hedges of the change in fair value of the related debt obligations. These agreements are recorded at their fair value as an asset or liability. Gains and losses on these contracts are included in the consolidated statements of operations and are wholly offset by changes in the fair value of the related long-term debt. These hedges are considered to be perfectly effective under current accounting guidance. The interest rate swap contracts are with a number of major financial institutions in order to minimize counterparty credit risk. The Company believes that it is unlikely that any of its counterparties will be unable to perform under the terms of the contracts.

Net Earnings Per Common Share

Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding for the year. Diluted net earnings per share is similar except that the weighted average number of shares outstanding is increased by dilutive securities, and net earnings are adjusted for certain amounts related to dilutive securities. Dilutive securities include shares issuable upon exercise of stock options for which the market price exceeds the exercise price, less shares which could have been purchased by the Company with the related proceeds. In addition, for the period that the Company’s convertible debt was outstanding, dilutive securities included shares issuable under such debt. Options totaling 1,851, 94 and 5,784 for 2011, 2010 and 2009, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive.

 

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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 each of the three fiscal years ended December 25, 2011 is as follows:

 

     2011      2010      2009  
     Basic      Diluted      Basic      Diluted      Basic      Diluted  

Net earnings

   $ 385,367         385,367         397,752         397,752         374,930         374,930   

Interest expense on contingent convertible debentures due 2021, net of tax

                             1,124                 4,328   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net earnings

   $ 385,367         385,367         397,752         398,876         374,930         379,258   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average shares outstanding

     133,823         133,823         139,079         139,079         139,487         139,487   

Effect of dilutive securities:

                 

Contingent convertible debentures due 2021

                             3,024                 11,566   

Options and other share-based awards

             2,874                 3,567                 1,727   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equivalent shares

     133,823         136,697         139,079         145,670         139,487         152,780   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings per share

   $ 2.88         2.82         2.86         2.74         2.69         2.48   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The net earnings per share calculations for each of the two fiscal years ended December 26, 2010 include adjustments to add back to earnings the interest expense, net of tax, incurred on the Company’s senior convertible debentures due 2021, as well as to add back to outstanding shares the amount of shares potentially issuable under the contingent conversion feature of these debentures. During the first and second quarter of 2010, substantially all of these debentures were converted into shares of common stock with the remainder redeemed for cash. See note 9 for further information.

(2)     Other Comprehensive Loss

The Company’s other comprehensive loss for the years 2011, 2010 and 2009 consist of the following:

 

    2011     2010     2009  

Foreign currency translation adjustments

  $ (21,844     (32,457     23,782  

Changes in value of available-for-sale securities, net of tax

                  504  

Gain (loss) on cash flow hedging activities, net of tax

    (8,689     10,444       (24,446

Changes in unrecognized pension and postretirement amounts, net of tax

    (20,237     (1,812     8,356  

Reclassifications to earnings, net of tax:

     

Net (gains) losses on cash flow hedging activities

    3,338       (15,422     (18,657

Loss on available-for-sale securities

                  147  

Amortization of unrecognized pension and postretirement amounts

    3,340       (11,235     6,689  
 

 

 

   

 

 

   

 

 

 

Other comprehensive loss

  $ (44,092     (50,482     (3,625
 

 

 

   

 

 

   

 

 

 

In 2011, 2010 and 2009, net losses on cash flow hedging activities reclassified to earnings, net of tax, included losses of $100, $109 and $679, respectively, as a result of hedge ineffectiveness.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

The related tax benefit of other comprehensive earnings items was $8,581, $5,327 and $1,322 for the years 2011, 2010 and 2009, respectively. Income tax expense (benefit) related to reclassification adjustments from other comprehensive earnings of $(1,571), $8,767 and $(331) in 2011, 2010 and 2009, respectively, were included in these amounts.

At December 25, 2011, the Company had remaining deferred gains on hedging instruments, net of tax, of $10,081 in AOCE. These instruments hedge inventory purchased during the fourth quarter of 2011 or forecasted to be purchased during 2012 and 2013 and intercompany expenses and royalty payments expected to be paid or received during 2012 and 2013. These amounts will be reclassified into the consolidated statement of operations upon the sale of the related inventory or receipt or payment of the related royalties or expenses. Of the amount included in AOCE at December 25, 2011, the Company expects approximately $8,307 to be reclassified to the consolidated statement of operations within the next 12 months. However, the amount ultimately realized in earnings is dependent on the fair value of the hedging instruments on the settlement dates.

Components of AOCE at December 25, 2011 and December 26, 2010 are as follows:

 

     2011     2010  

Foreign currency translation adjustments

   $ 40,798       62,642  

Gain on cash flow hedging activities, net of tax

     10,081       15,432  

Unrecognized pension and postretirement amounts, net of tax

     (86,822     (69,925
  

 

 

   

 

 

 

Total AOCE

   $ (35,943     8,149  
  

 

 

   

 

 

 

(3)     Property, Plant and Equipment

 

     2011      2010  

Land and improvements

   $ 7,038         6,726   

Buildings and improvements

     202,258         197,494   

Machinery, equipment and software

     405,912         398,896   
  

 

 

    

 

 

 
     615,208         603,116   

Less accumulated depreciation

     453,676         430,193   
  

 

 

    

 

 

 
     161,532         172,923   

Tools, dies and molds, net of accumulated depreciation

     56,489         60,657   
  

 

 

    

 

 

 

Total property, plant and equipment, net

   $ 218,021         233,580   
  

 

 

    

 

 

 

Expenditures for maintenance and repairs which do not materially extend the life of the assets are charged to operations as incurred.

(4)     Goodwill and Intangibles

Goodwill and certain intangible assets relating to rights obtained in the Company’s 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 Company’s other intangible assets are amortized over their remaining useful lives, and accumulated amortization of these other intangibles is reflected in other intangibles, net in the accompanying consolidated balance sheets.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

The Company performs an annual impairment test on goodwill and intangible assets with indefinite lives. This annual impairment test is performed in the fourth quarter of the Company’s 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 25, 2011, no such events occurred. The Company completed its annual impairment tests in the fourth quarters of 2011, 2010 and 2009 and had no impairment charges.

A portion of the Company’s goodwill and other intangible assets reside in the Corporate segment of the business. For purposes of impairment testing, these assets are allocated to the reporting units within the Company’s operating segments. Changes in the carrying amount of goodwill, by operating segment, for the years ended December 25, 2011 and December 26, 2010 are as follows:

 

     U.S. and
Canada
     International     Entertainment
and Licensing
     Total  

2011

          

Balance at December 26, 2010

   $ 296,978        171,339       6,496        474,813  

Foreign exchange translation

             (21             (21
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at December 25, 2011

   $ 296,978        171,318       6,496        474,792  
  

 

 

    

 

 

   

 

 

    

 

 

 

2010

          

Balance at December 27, 2009

   $ 296,978        172,457       6,496        475,931  

Foreign exchange translation

             (1,118             (1,118
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at December 26, 2010

   $ 296,978        171,339       6,496        474,813  
  

 

 

    

 

 

   

 

 

    

 

 

 

A summary of the Company’s other intangibles, net at December 25, 2011 and December 26, 2010 is as follows:

 

     2011     2010  

Acquired product rights

   $ 757,531       755,214  

Licensed rights of entertainment properties

     256,555       256,555  

Accumulated amortization

     (622,531     (586,910
  

 

 

   

 

 

 

Amortizable intangible assets

     391,555       424,859  

Product rights with indefinite lives

     75,738       75,738  
  

 

 

   

 

 

 

Total other intangibles, net

   $ 467,293       500,597  
  

 

 

   

 

 

 

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 revenues during an annual period, as well as rights reaching the end of their useful lives. The Company currently estimates amortization expense related to the above intangible assets for the next five years to be approximately:

 

2012

   $  48,000   

2013

     50,000   

2014

     54,000   

2015

     52,000   

2016

     36,000   

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

(5)     Equity Method Investment

In 2009, the Company acquired a 50% interest in a joint venture, Hub Television Networks, LLC (“THE HUB”), with Discovery Communications, Inc. (“Discovery”). THE HUB, formerly known as the Discovery Kids Network, was established to create a television network in the United States dedicated to high-quality children’s and family entertainment and educational programming. The Company purchased its 50% share in THE HUB for a payment of $300,000 and certain future payments based on the value of certain tax benefits expected to be received by the Company. The present value of the expected future payments at the acquisition date totaled approximately $67,900 and was recorded as a component of the Company’s investment in the joint venture. The balance of the associated liability, including imputed interest, was $71,999 and $72,665 at December 25, 2011 and December 26, 2010, respectively, and is included as a component of other liabilities in the accompanying balance sheets.

Voting control of THE HUB is shared 50/50 between the Company and Discovery. The Company has determined that it does not meet the control requirements to consolidate THE HUB, and accounts for the investment using the equity method of accounting. The Company’s share in the loss (earnings) of THE HUB for the years ended December 25, 2011, December 26, 2010 and December 27, 2009 totaled $7,290, $9,323 and $(3,856), respectively, and is included as a component of other (income) expense, net in the accompanying consolidated statements of operations.

The Company has entered into a license agreement with THE HUB that requires the payment of royalties by the Company to THE HUB based on a percentage of revenue derived from products related to television shows broadcast by the joint venture. The license agreement includes a minimum royalty guarantee of $125,000, payable in 5 annual installments of $25,000 per year, commencing in 2009, which can be earned out over approximately a 10-year period. During 2011, 2010 and 2009, the Company paid the first three annual installments of $25,000 each which are included in other, including long-term advances in the consolidated statements of cash flows. As of December 25, 2011, the Company had $72,916 of prepaid royalties related to this agreement, $4,974 of which are included in prepaid expenses and other current assets and $67,942 of which are included in other assets. The Company and THE HUB are also parties to an agreement under which the Company will provide THE HUB with an exclusive first look in the U.S. to license certain types of programming developed by the Company based on its intellectual property. In the event THE HUB licenses the programming from the Company to air on the network, it is required to pay the Company a license fee.

As of December 25, 2011 and December 26, 2010, the Company’s interest in THE HUB totaled $343,835 and $354,612, respectively, and is a component of other assets. The Company also enters into certain other transactions with THE HUB including the licensing of television programming and the purchase of advertising. During 2011, 2010 and 2009, these transactions were not material.

(6)     Program Production Costs

Program production costs are included in other assets and consist of the following at December 25, 2011 and December 26, 2010:

 

     2011      2010  

Released, less amortization

   $ 44,091         12,852   

In production

     33,583         19,319   

Pre-production

     2,161         1,417   

Acquired libraries

     765         1,827   
  

 

 

    

 

 

 

Total program production costs

   $ 80,600         35,415   
  

 

 

    

 

 

 

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

Based on management’s total revenue estimates at December 25, 2011, all of the unamortized television programming costs relating to released productions are expected to be amortized during the next three years. The Company expects to amortize, based on current estimates, approximately $31,000 of the $44,091 of released programs during fiscal 2012 based on current estimates.

At December 25, 2011, acquired program libraries are being amortized based on estimates of future expected revenues over a remaining period of approximately one year.

(7)     Financing Arrangements

At December 25, 2011, Hasbro had available an unsecured committed line and unsecured uncommitted lines of credit from various banks approximating $500,000 and $133,200, respectively. A portion of the short-term borrowings outstanding at the end of 2011 and 2010 represent borrowings made under, or supported by, these lines of credit. Borrowings under the lines of credit were made by certain international affiliates of the Company on terms and at interest rates generally extended to companies of comparable creditworthiness in those markets. The weighted average interest rates of the outstanding borrowings under the uncommitted lines of credit as of December 25, 2011 and December 26, 2010 were 4.84% and 5.79%, respectively. The Company had no borrowings outstanding under its committed line of credit at December 25, 2011; however, it did have notes outstanding under its commercial paper program which are supported by its unsecured committed line of credit. During 2011, Hasbro’s working capital needs were fulfilled by cash generated from operations, borrowings under lines of credit and utilization of its commercial paper program discussed below.

The unsecured committed line of credit (the “Agreement”) provides the Company with a $500,000 committed borrowing facility through December 2014. The Agreement was entered into on December 16, 2010 replacing the previous Revolving Credit Agreement. The Agreement contains certain financial covenants setting forth leverage and coverage requirements, and certain other limitations typical of an investment grade facility, including with respect to liens, mergers and incurrence of indebtedness. The Company was in compliance with all covenants as of and for the year ended December 25, 2011.

The Company pays a commitment fee (0.225% as of December 25, 2011) based on the unused portion of the facility and interest equal to a Base Rate or Eurocurrency Rate plus a spread on borrowings under the facility. The Base Rate is determined based on either the Federal Funds Rate plus a spread, Prime Rate or Eurocurrency Rate plus a spread. The commitment fee and the amount of the spread to the Base Rate or Eurocurrency rate both vary based on the Company’s long-term debt ratings and the Company’s leverage. At December 25, 2011, the interest rate under the facility was equal to Eurocurrency Rate plus 1.50%.

In January 2011, the Company entered into an agreement with a group of banks to establish a commercial paper program (the “Program”). Under the Program, at the Company’s request the banks may either purchase from the Company, or arrange for the sale by the Company of, unsecured commercial paper notes. Under the Program, the Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of $500,000. The maturities of the notes may vary but may not exceed 397 days. Subject to market conditions, the notes will be sold under customary terms in the commercial paper market and will be issued at a discount to par, or alternatively, will be sold at par and will bear varying interest rates based on a fixed or floating rate basis. The interest rates will vary based on market conditions and the ratings assigned to the notes by the credit rating agencies at the time of issuance. At December 25, 2011, the Company had notes outstanding under the Program of $166,459 with a weighted average interest rate of 1.79%.

During 2009, the Company utilized an accounts receivable securitization program. Under the program, the Company recorded a loss on the sale of receivables which totaled $2,514 which was recorded in selling, distribution and administration expenses. The program was terminated on January 28, 2011 and was not utilized in 2011 or 2010.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

(8)     Accrued Liabilities

Components of accrued liabilities are as follows:

 

     2011      2010  

Royalties

   $ 156,955         121,037   

Advertising

     83,080         86,257   

Payroll and management incentives

     59,070         70,064   

Non-income based taxes

     52,590         42,644   

Other

     275,355         251,714   
  

 

 

    

 

 

 

Total accrued liabilities

   $ 627,050         571,716   
  

 

 

    

 

 

 

(9)     Long-Term Debt

Components of long-term debt are as follows:

 

     2011      2010  
     Carrying
Cost
     Fair
Value
     Carrying
Cost
     Fair
Value
 

6.35% Notes Due 2040

   $ 500,000         540,850         500,000         499,900   

6.125% Notes Due 2014

     440,977         462,868         437,786         462,698   

6.30% Notes Due 2017

     350,000         400,400         350,000         382,830   

6.60% Debentures Due 2028

     109,895         120,148         109,895         110,038   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total long-term debt

   $ 1,400,872         1,524,266         1,397,681         1,455,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying cost of the 6.125% Notes Due 2014 include principal amounts of $425,000 as well as fair value adjustments of $15,977 and $12,786 at December 25, 2011 and December 26, 2010, respectively, related to interest rate swaps. All other carrying costs represent principal amounts. Total principal amounts of long-term debt at December 25, 2011 and December 26, 2010 were $1,384,895.

The fair values of the Company’s long-term borrowings are measured using a combination of broker quotations when available and discounted future cash flows. The fair value of the interest rate swaps are measured based on the present value of future cash flows using the swap curve as of the date of valuation.

In March 2010 the Company issued $500,000 of Notes that are due in 2040 (the “Notes”). The Notes bear interest at a rate of 6.35%. The Company may redeem the Notes at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase.

Interest rates for the 6.125% Notes Due 2014 and the 6.30% Notes Due 2017 may be adjusted upward in the event that the Company’s credit rating from Moody’s Investor Services, Inc., Standard & Poor’s Ratings Services or Fitch Ratings is reduced to Ba1, BB+, or BB+, respectively, or below. At December 25, 2011, the Company’s ratings from Moody’s Investor Services, Inc., Standard & Poor’s Rating Services and Fitch ratings were Baa2, BBB+, and BBB+, respectively. The interest rate adjustment is dependent on the degree of decrease of the Company’s ratings and could range from 0.25% to a maximum of 2.00%. The Company may redeem these notes at its option at the greater of the principal amount of these notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

The Company is party to a series of interest rate swap agreements to adjust the amount of debt that is subject to fixed interest rates. The interest rate swaps are matched with the 6.125% Notes Due 2014 and accounted for as fair value hedges of those notes. The interest rate swaps have a total notional amount of $400,000 with maturities in 2014. In each of the contracts, the Company receives payments based upon a fixed interest rate of 6.125%, which matches the interest rate of the notes being hedged, and makes payments based upon a floating rate based on Libor. These contracts are designated and effective as hedges of the change in the fair value of the associated debt. At December 25, 2011 and December 26, 2010, the fair value of these contracts was an asset of $15,977 and $12,786, respectively, which is recorded in other assets with a corresponding fair value adjustment to increase long-term debt. The Company recorded a (gain) loss of $(3,191), $(15,511) and $2,725 on these instruments in other (income) expense, net for the years ended December 25, 2011, December 26, 2010 and December 27, 2009, respectively, relating to the change in fair value of the interest rate swaps, wholly offsetting gains and losses from the change in fair value of the associated long-term debt.

At December 25, 2011, as detailed above, the Company’s 6.125% Notes mature in 2014. All of the Company’s other long-term borrowings have contractual maturities that occur subsequent to 2016.

(10)     Income Taxes

Income taxes attributable to earnings before income taxes are:

 

     2011     2010     2009  

Current

      

United States

   $ 49,233       35,232       87,053  

State and local

     2,538       1,931       4,142  

International

     52,176       47,633       44,436  
  

 

 

   

 

 

   

 

 

 
     103,947       84,796       135,631  
  

 

 

   

 

 

   

 

 

 

Deferred

      

United States

     (1,973     26,269       17,387  

State and local

     (68     901       993  

International

     (880     (1,998     756  
  

 

 

   

 

 

   

 

 

 
     (2,921     25,172       19,136  
  

 

 

   

 

 

   

 

 

 

Total incomes taxes

   $ 101,026       109,968       154,767  
  

 

 

   

 

 

   

 

 

 

Certain income tax benefits, not reflected in income taxes in the consolidated statements of operations totaled $18,266 in 2011, $87,367 in 2010 and $2,905 in 2009. In 2011 and 2009 these income tax benefits relate primarily to pension amounts recorded in AOCE and stock options. In 2010 these income tax benefits relate primarily to the reversal through additional paid in capital of deferred tax liabilities relating to the Company’s contingent convertible debentures upon the conversion of these debentures. In 2011, 2010 and 2009, the deferred tax portion of the total benefit was $8,579, $64,700 and $1,041, respectively.

 

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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 Hasbro’s effective income tax rate is as follows:

 

     2011     2010     2009  

Statutory income tax rate

     35.0     35.0     35.0

State and local income taxes, net

     0.3       0.4       0.7  

Tax on international earnings

     (11.4 )     (11.2 )     (7.5 )

Exam settlements and statute expirations

     (4.6 )     (4.4 )     (0.5 )

Other, net

     1.5       1.9       1.5  
  

 

 

   

 

 

   

 

 

 
     20.8     21.7     29.2
  

 

 

   

 

 

   

 

 

 

The components of earnings before income taxes, determined by tax jurisdiction, are as follows:

 

     2011      2010      2009  

United States

   $ 132,255         168,436         248,654   

International

     354,138         339,284         281,043   
  

 

 

    

 

 

    

 

 

 

Total earnings before income taxes

   $ 486,393         507,720         529,697   
  

 

 

    

 

 

    

 

 

 

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

The components of deferred income tax expense (benefit) arise from various temporary differences and relate to items included in the consolidated statements of operations as well as items recognized in other comprehensive earnings. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 25, 2011 and December 26, 2010 are:

 

     2011     2010  

Deferred tax assets:

    

Accounts receivable

   $ 22,007       21,095  

Inventories

     18,398       18,723  

Loss carryforwards

     27,943       29,348  

Operating expenses

     39,623       40,835  

Pension

     35,969       29,823  

Other compensation

     49,780       50,619  

Postretirement benefits

     15,723       15,435  

Tax sharing agreement

     25,991       26,276  

Other

     17,749       20,033  
  

 

 

   

 

 

 

Gross deferred tax assets

     253,183       252,187  

Valuation allowance

     (18,145     (17,729
  

 

 

   

 

 

 

Net deferred tax assets

     235,038       234,458  
  

 

 

   

 

 

 

Deferred tax liabilities:

    

International earnings not indefinitely reinvested

     7,846       25,903  

Depreciation and amortization of long-lived assets

     73,301       61,274  

Equity method investment

     21,396       23,617  

Other

     3,075       4,715  
  

 

 

   

 

 

 

Deferred tax liabilities

     105,618       115,509  
  

 

 

   

 

 

 

Net deferred income taxes

   $ 129,420       118,949  
  

 

 

   

 

 

 

Hasbro has a valuation allowance for certain deferred tax assets at December 25, 2011 of $18,145, which is an increase of $416 from $17,729 at December 26, 2010. The valuation allowance pertains to certain U.S. state and international loss carryforwards, some of which have no expiration and others that would expire beginning in 2014.

Based on Hasbro’s history of taxable income and the anticipation of sufficient taxable income in years when the temporary differences are expected to become tax deductions, the Company believes that it will realize the benefit of the deferred tax assets, net of the existing valuation allowance.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

At December 25, 2011 and December 26, 2010, the Company’s net deferred income taxes are recorded in the consolidated balance sheets as follows:

 

     2011     2010  

Prepaid expenses and other current assets

   $ 68,774       64,536  

Other assets

     62,574       57,613  

Accrued liabilities

     (731     (2,135

Other liabilities

     (1,197     (1,065
  

 

 

   

 

 

 

Net deferred income taxes

   $ 129,420       118,949  
  

 

 

   

 

 

 

A reconciliation of unrecognized tax benefits, excluding potential interest and penalties, for the fiscal years ended December 25, 2011, December 26, 2010, and December 27, 2009 is as follows:

 

     2011     2010     2009  

Balance at beginning of year

   $ 91,109       97,857       79,456  

Gross increases in prior period tax positions

     811       706       1,430  

Gross decreases in prior period tax positions

     (33,501     (36,010     (14,250

Gross increases in current period tax positions

     27,910       34,598       34,189  

Decreases related to settlements with tax authorities

     (792     (5,550     (269

Decreases from the expiration of statute of limitations

     (1,723     (492     (2,699
  

 

 

   

 

 

   

 

 

 

Balance at end of year

   $ 83,814       91,109       97,857  
  

 

 

   

 

 

   

 

 

 

If the $83,814 balance as of December 25, 2011 is recognized, approximately $72,000 would decrease the effective tax rate in the period in which each of the benefits is recognized. The remaining amount would be offset by the reversal of related deferred tax assets.

During 2011, 2010, and 2009 the Company recognized $3,100, $3,171 and $3,405, respectively, of potential interest and penalties, which are included as a component of income taxes in the accompanying consolidated statements of operations. At December 25, 2011, December 26, 2010 and December 27, 2009, the Company had accrued potential interest and penalties of $13,847, $14,466 and $17,938, respectively.

The Company and its subsidiaries file income tax returns in the United States and various state and international jurisdictions. In the normal course of business, the Company is regularly audited by U.S. federal, state and local and international tax authorities in various tax jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2008. With few exceptions, the Company is no longer subject to U.S. state or local and non-U.S. income tax examinations by tax authorities in its major jurisdictions for years before 2006.

The U.S. Internal Revenue Service commenced an examination related to the 2008 and 2009 U.S. federal income tax returns. The Company is also under income tax examination in several U.S. state and local and non-U.S. jurisdictions. The U.S. Internal Revenue Service recently completed an examination related to 2006 and 2007. During 2011, as the result of the completion of this examination, the Company recognized $22,101 of previously accrued unrecognized tax benefits, including the reversal of related accrued interest, primarily related to the deductibility of certain expenses, as well as the tax treatment of certain subsidiary and other transactions. Of this amount, $1,482 was recorded as a reduction of deferred tax assets and the remainder as a reduction of income tax expense. The total income tax benefit resulting from the completion of the examination, including other adjustments, totaled $20,477 during 2011.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

During 2010, as a result of the completion of an examination related to the 2004 and 2005 U.S. federal income tax returns by the U.S. Internal Revenue Service, the Company recognized approximately $24,200 of previously accrued unrecognized tax benefits, including the reversal of related accrued interest, primarily related to the deductibility of certain expenses, as well as the tax treatment of certain subsidiary and other transactions. Of this amount, $7,032 was recorded as a reduction of deferred tax assets and the remainder as a reduction of income tax expense. The total income tax benefit resulting from the completion of the examination, including other adjustments, totaled approximately $21,000 during 2010.

In connection with tax examinations in Mexico for the years 2000 to 2005, the Company has received tax assessments totaling approximately $177,430, which includes interest, penalties and inflation updates, related to transfer pricing which the Company is vigorously defending. In order to continue the process of defending its position, the Company was required to guarantee the amount of the assessments for the years 2000 to 2004, as is usual and customary in Mexico with respect to these matters. Accordingly, as of December 25, 2011, bonds totaling approximately $150,840 (at year-end 2011 exchange rates) have been provided to the Mexican government related to the 2000 through 2004 assessments, allowing the Company to defend its positions. The Company is not currently required to guarantee the amount of the 2005 assessment. The Company expects to be successful in sustaining its position with respect to these assessments as well as similar positions that may be taken by the Mexican tax authorities for periods subsequent to 2005.

The Company believes it is reasonably possible that certain tax examinations and statutes of limitations may be concluded and will expire within the next 12 months, and that unrecognized tax benefits, excluding potential interest and penalties, may decrease by up to approximately $3,100, substantially all of which would be recorded as a tax benefit in the statement of operations. In addition, approximately $600 of potential interest and penalties related to these amounts would also be recorded as a tax benefit in the consolidated statement of operations.

The cumulative amount of undistributed earnings of Hasbro’s international subsidiaries held for indefinite reinvestment is approximately $1,391,000 at December 25, 2011. In the event that all international undistributed earnings were remitted to the United States, the amount of incremental taxes would be approximately $337,000.

(11)     Capital Stock

In May 2011 the Company’s Board of Directors authorized the repurchase of up to $500,000 in common stock after five previous authorizations dated May 2005, July 2006, August 2007, February 2008 and April 2010 with a cumulative authorized repurchase amount of $2,325,000 were fully utilized. Purchases of the Company’s 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 time, actual number, and the value of the shares which are repurchased will depend on a number of factors, including the price of the Company’s common stock. In 2011, the Company repurchased 10,461 shares at an average price of $40.42. The total cost of these repurchases, including transaction costs, was $423,008. At December 25, 2011, $227,269 remained under the current authorization.

(12)     Fair Value of Financial Instruments

The Company measures certain assets at fair value in accordance with current accounting standards. The fair value hierarchy consists of three levels: Level 1 fair values are valuations based on quoted market prices in active markets for identical assets or liabilities that the entity has the ability to access; Level 2 fair values are those valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities; and Level 3 fair values are valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

Current accounting standards permit entities to choose to measure many financial instruments and certain other items at fair value and establish presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities. The Company has elected the fair value option for certain investments. At December 25, 2011 and December 26, 2010, these investments totaled $19,657 and $21,767, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The Company recorded net gains of $61, $1,218 and $1,019 on these investments in other (income) expense, net for the years ended December 25, 2011, December 26, 2010 and December 27, 2009, respectively, relating to the change in fair value of such investments.

At December 25, 2011 and December 26, 2010, the Company had the following assets and liabilities measured at fair value in its consolidated balance sheets:

 

            Fair Value Measurements Using  
     Fair
Value
     Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

December 25, 2011

           

Assets:

           

Available-for-sale securities

   $ 19,669         12         19,657          

Derivatives

     29,500                 25,776        3,724   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 49,169         12         45,433        3,724   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives

   $ 1,908                 1,908          
  

 

 

    

 

 

    

 

 

    

 

 

 

December 26, 2010

           

Assets:

           

Available-for-sale securities

   $ 21,791         24         21,767          

Derivatives

     38,092                 28,937        9,155   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 59,883         24         50,704        9,155   
  

 

 

    

 

 

    

 

 

    

 

 

 

For a portion of the Company’s available-for-sale securities, the Company is able to obtain quoted prices from stock exchanges to measure the fair value of these securities. Certain other available-for-sale securities held by the Company are valued at the net asset value which is quoted on a private market that is not active; however, the unit price is predominantly based on underlying investments which are traded on an active market. The Company’s derivatives consist primarily of foreign currency forward contracts. The Company uses current forward rates of the respective foreign currencies to measure the fair value of these contracts. The Company’s derivatives also include interest rate swaps used to adjust the amount of long-term debt subject to fixed interest rates. The fair values of the interest rate swaps are measured based on the present value of future cash flows using the swap curve as of the valuation date. The remaining derivative securities consist of warrants to purchase common stock of an unrelated company. The Company uses the Black-Scholes model to value these warrants. One of the inputs used in the Black-Scholes model, historical volatility, is considered an unobservable input in that it reflects the Company’s own assumptions about the inputs that market participants would use in pricing the

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

asset or liability. The Company believes that this is the best information available for use in the fair value measurement. There were no changes in these valuation techniques during 2011.

The following is a reconciliation of the beginning and ending balances of the fair value measurements of the Company’s warrants to purchase common stock that use significant unobservable inputs (Level 3):

 

     2011     2010  

Balance at beginning of year

   $ 9,155       6,808  

(Loss) gain from change in fair value

     (5,431     2,347  
  

 

 

   

 

 

 

Balance at end of year

   $ 3,724       9,155  
  

 

 

   

 

 

 

(13)     Stock Options, Other Stock Awards and Warrants

Hasbro has reserved 18,471 shares of its common stock for issuance upon exercise of options and the grant of other awards granted or to be granted under stock incentive plans for employees and for non-employee members of the Board of Directors (collectively, the “plans”). These options and other awards generally vest in equal annual amounts over three to five years. The plans provide that options be granted at exercise prices not less than the market value of the underlying common stock 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. Upon exercise in the case of stock options, grant in the case of restricted stock or vesting in the case of performance based contingent stock grants, shares are issued out of available treasury shares. The Company’s current plan permits the granting of awards in the form of stock, stock appreciation rights, stock awards and cash awards in addition to stock options.

The Company on occasion will issue restricted stock or grant restricted stock units to certain key employees. These shares or units are nontransferable and subject to forfeiture for periods prescribed by the Company. These awards are valued at the market value of the underlying common stock at the date of grant and are subsequently amortized over the periods during which the restrictions lapse, generally between three and five years. During 2011, 2010 and 2009, the Company recognized compensation expense, net of forfeitures, on these awards of $1,761, $1,209 and $768, respectively. At December 26, 2011, the amount of total unrecognized compensation cost related to restricted stock units is $7,574 and the weighted average period over which this will be expensed is 48 months. Of the shares vested in 2011, the receipt of 58 shares has been deferred to the date upon which the recipient is no longer employed by the Company.

 

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HASBRO, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

Information with respect to Restricted Stock Awards and Restricted Stock Units for 2011, 2010 and 2009 is as follows:

 

     2011     2010     2009  

Outstanding at beginning of year

     196       70       92  

Granted

     97       138         

Forfeited

     (3            (2

Vested

     (58     (12     (20
  

 

 

   

 

 

   

 

 

 

Outstanding at end of year

     232       196       70  
  

 

 

   

 

 

   

 

 

 

Weighted average grant-date fair value:

      

Granted

   $ 39.81       41.93         

Forfeited

   $ 40.98              34.61  

Vested

   $ 34.61       27.96       21.36  

Outstanding at end of year

   $ 41.06       39.77       33.51  

In 2011, 2010 and 2009, as part of its annual equity grant to executive officers and certain other employees, the Compensation Committee of the Company’s Board of Directors approved the issuance of contingent stock performance awards (the “Stock Performance Awards”). These awards provide the recipients with the ability to earn shares of the Company’s common stock based on the Company’s achievement of stated cumulative diluted earnings per share and cumulative net revenue targets over the three fiscal years ended December 2013, December 2012, and December 2011 for the 2011, 2010 and 2009 awards, respectively. Each Stock Performance Award has a target number of shares of common stock associated with such award which may be earned by the recipient if the Company achieves the stated diluted earnings per share and revenue targets. The ultimate amount of the award may vary, depending on actual results. Awards prior to 2010 may vary from 0% to 125% of the target number of shares. Awards for 2010 and 2011 may vary from 0% to 200% of the target number of shares. The Compensation Committee of the Company’s Board of Directors has discretionary power to reduce the amount of the award regardless of whether the stated targets are met.

Information with respect to Stock Performance Awards for 2011, 2010 and 2009 is as follows:

 

     2011     2010     2009  

Outstanding at beginning of year

     1,878       1,639       1,830  

Granted

     456       883       631  

Forfeited

     (86     (64     (52

Vested

     (621     (580     (770
  

 

 

   

 

 

   

 

 

 

Outstanding at end of year

     1,627       1,878       1,639  
  

 

 

   

 

 

   

 

 

 

Weighted average grant-date fair value:

      

Granted

   $ 45.66       33.44       22.31  

Forfeited

   $ 32.53       26.75       26.53  

Vested

   $ 27.10       28.74       19.06  

Outstanding at end of year

   $ 33.52       28.61       26.22  

Stock Performance Awards granted during 2011, 2010 and 2009 include 23, 80 and 116 shares related to the 2009, 2008 and 2007 awards, respectively, reflecting an increase in the ultimate amount of the awards issued or

 

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Notes to Consolidated Financial Statements — (Continued)

(Thousands of Dollars and Shares Except Per Share Data)

 

expected to be issued based on the Company’s actual results during the performance period. These shares are excluded from the calculation of the weighted average grant-date fair value of Stock Performance Awards granted during 2011, 2010 and 2009.

During 2011, 2010 and 2009, the Company recognized $(3,558), $17,144 and $15,361, respectively, of (income) expense relating to these awards. Awards are valued at the market value of the underlying common stock at the dates of grant and are expensed over the performance period. On a periodic basis the Company reviews the actual and forecasted performance of the Company against the stated targets for each award. The total expense is adjusted upward or downward based on the expected amount of shares to be issued as defined in the agreement. If minimum targets as detailed under the award are not met, no additional compensation expense will be recognized and any previously recognized compensation expense will be reversed. In the fourth quarter of 2011, it was determined that it is no longer probable that the minimum targets will be met for certain Stock Performance Awards granted. As a result, all previously recognized expense totaling $16,332 related to these awards was reversed and there is no remaining unrecognized compensation cost related to these outstanding awards.

Total compensation expense related to stock options, restricted stock units and Stock Performance Awards for the years ended December 25, 2011, December 26, 2010 and December 27, 2009 was $10,903, $31,952, and $28,547, respectively, and was recorded as follows:

 

     2011      2010      2009  

Cost of sales

   $ 51         349         462   

Product development

     556         2,576         2,205   

Selling, distribution and administration

     10,296         29,027         25,880   
  

 

 

    

 

 

    

 

 

 
     10,903         31,952         28,547   

Income tax benefit

     3,637         10,658 <