Hasbro 2006 Annual Report Download - page 39

Revenue Service examination of tax years ending in December 2001. Absent these items and the effect of the
adjustment of certain warrants to their fair value, which has no tax effect, the 2006 effective tax rate would
have been 27.6% compared with 24.9% in 2005 and 25.9% in 2004. The increase in the adjusted rate to
27.6% in 2006 from 24.9% in 2005 was the result of higher earnings in jurisdictions with higher statutory tax
rates. The decrease in the adjusted rate, to 24.9% in 2005 from 25.9% in 2004, was due to the tax impact of
higher operating profits in jurisdictions with lower statutory tax rates.
Liquidity and Capital Resources
The Company has historically generated a significant amount of cash from operations. In 2006, the
Company funded its operations and liquidity needs primarily through cash flows from operations, and, when
needed, proceeds from its accounts receivable securitization program and borrowings under its unsecured
credit facilities. During 2007, the Company expects to continue to fund its working capital needs primarily
through operations and, when needed, using proceeds from the accounts receivable securitization program and
borrowings under its available lines of credit. The Company believes that the funds available to it, including
cash expected to be generated from operations and funds available through its securitization program and other
available lines of credit, are adequate to meet its needs for 2007.
During the last five fiscal years, as part of its strategy of reducing long-term debt and its overall
debt-to-capitalization ratio, the Company has repurchased or repaid approximately $679,000 in aggregate
principal amount of long-term debt, primarily using cash from operations. Remaining principal amounts of
long-term debt at December 31, 2006, were $494,983. The Company believes that the reduction in its
debt-to-capitalization ratio has improved its liquidity situation by decreasing cash required to service
outstanding debt and increasing the ability of the Company to obtain additional financing should the need to
do so arise in the future.
At December 31, 2006, cash and cash equivalents, net of short-term borrowings, were $704,818 compared
to $927,592 and $707,043 at December 25, 2005 and December 26, 2004, respectively. Hasbro generated
$320,647, $496,624, and $358,506 of cash from its operating activities in 2006, 2005 and 2004, respectively.
The higher cash flows from operations in 2005 compared to 2006 and 2004 is primarily due to the mix of
products in 2005 net revenues. Net earnings in 2005 included increased non-cash expenses primarily as a
result of increased STAR WARS revenues. Increased royalty expense in 2005 related to revenues from STAR
WARS products, most of which had been paid in prior years. In 2006 and 2005, operating cash flows were
impacted by royalty advances paid of $105,000 and $35,000 related to MARVEL and STAR WARS
agreements, respectively. In addition, the Company had increased amortization expense in 2005, which did not
impact the cash flows from operations.
Accounts receivable increased to $556,287 at December 31, 2006 from $523,232 at December 25, 2005.
Fourth quarter days sales outstanding increased slightly to 45 days in 2006 from 44 days in 2005. Fourth
quarter days sales outstanding in 2004 was 49. The increase in days sales outstanding from 2005 primarily
reflects increases in international accounts receivable due to the weaker U.S. dollar in 2006. The December 31,
2006 accounts receivable balance includes an increase of approximately $18,800 related to the currency impact
of the weaker U.S. dollar. The Company has a revolving accounts receivable securitization facility whereby
the Company is able to sell undivided interests in qualifying accounts receivable on an ongoing basis. At
December 31, 2006 and December 25, 2005, there was $250,000 sold at each period-end under this program.
Inventories increased to $203,337 at December 31, 2006 from $179,398 at December 25, 2005. The
increase in inventory represents higher levels of inventory at December 31, 2006 primarily due to anticipated
sales of MARVEL products in early 2007. In addition, inventories increased approximately $6,100 due to the
weaker U.S. dollar in 2006. The decrease in inventory to $179,398 at December 25, 2005 from $194,780 at
December 26, 2004 reflects higher levels of inventory at December 26, 2004 due to lower levels of sales in
the fourth quarter of 2004 and, to a lesser extent, lower international inventories in U.S. dollars as a result of
the stronger U.S. dollar in 2005.
Prepaid expenses and other current assets increased to $243,291 at December 31, 2006 from $185,297 at
December 25, 2005. This increase is primarily due to a royalty advance paid to MARVEL in 2006, of which
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