Hasbro 2007 Annual Report Download - page 34

incentive compensation provisions, the impact of foreign currency, and general inflationary increases. The
decrease as a percentage of revenues reflects the fixed nature of certain of these expenses. Selling, distribution
and administration expenses were $682,214 or 21.7% of net revenues in 2006 compared to $624,560 or 20.2%
in 2005. Approximately $20,000 of this increase related to the Company’s adoption of SFAS 123R in 2006
which required that the Company measure all stock-based compensation awards using a fair value method and
record such expense in its financial statements. The remainder of the increase primarily related to increased
sales and marketing expense in 2006 associated with the higher level of sales and increased bonus and
incentive provisions due to the strong performance of the Company in 2006.
Interest Expense
Interest expense increased to $34,618 in 2007 from $27,521 in 2006. The increase in interest expense was
primarily the result of higher average borrowings in 2007. In September 2007, the Company issued $350,000
of Notes that are due in 2017. The majority of the proceeds from the issuance of these Notes were used to
repay short-term debt resulting from increased repurchases of common stock as well as the repurchase of the
Lucas warrants for $200,000.
Interest expense decreased to $27,521 in 2006 from $30,537 in 2005. The decrease in interest expense
mainly reflected the reduction in the Company’s long-term debt over that period. The Company repurchased or
repaid principal amounts of long-term debt of $32,743 in 2006 and $93,303 in 2005.
Interest Income
Interest income was $29,973 in 2007 compared to $27,609 in 2006 and $24,157 in 2005. Interest income
includes $5,200 in 2006 related to a long-term deposit that was refunded during 2006 and approximately
$4,100 in 2005 related to an IRS settlement. The increase in interest income in 2007 primarily reflects higher
average rates of return in 2007. To a lesser extent, the increase reflects higher average invested balances in
2007. During a portion of 2007 and 2006, the Company invested excess cash in auction rate securities, which
generated a higher rate of return and contributed to the increases in interest income in 2007 and 2006. The
Company had no investments in auction rate securities at December 30, 2007.
Other (Income) Expense, Net
Other (income) expense, net of $52,323 in 2007 compares to $34,977 in 2006 and $(6,772) in 2005. The
major component of other (income) expense is non-cash (income) expense related to the change in fair value
of certain warrants required to be classified as a liability. These warrants were required to be adjusted to their
fair value each quarter through earnings. For 2007, 2006 and 2005, expense (income) related to the change in
fair value of these warrants was $44,370, $31,770 and $(2,080), respectively. In May 2007, the Company
exercised the call option on these warrants and repurchased the warrants for $200,000 in cash, which
approximated fair value at that date. As these warrants have been repurchased there will be no further fair
value adjustments.
In addition to the above, other (income) expense, net in 2006 also included $2,629 representing a write-
down of the value of common stock of Infogrames, held by the Company as an available-for-sale investment.
This write-down resulted from an other-than-temporary decline in the fair value of this investment.
Income Taxes
Income tax expense totaled 28.0% of pretax earnings in 2007 compared with 32.6% in 2006 and 31.8%
in 2005. Income tax expense for 2007 is net of a benefit of $29,999 of discrete tax events, primarily relating
to the recognition of previously unrecognized tax benefits. Income tax expense for 2006 includes a charge of
approximately $7,800 of discrete tax events, primarily relating to the settlement of various tax exams in
multiple jurisdictions. Income tax expense for 2005 includes a charge of approximately $25,800 related to the
repatriation of $547,000 of foreign earnings pursuant to the special incentive provided by the American Jobs
Creation Act of 2004. Income tax expense for 2005 was also reduced by approximately $4,000, due primarily
to the settlement of an Internal Revenue Service examination of tax years ending in December 2001. Absent
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