Hasbro 2009 Annual Report Download - page 48

Stock-Based Compensation
The Company has a stock-based 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. The Company measures all stock-based compensation awards using a fair value method
and records such expense in its consolidated financial statements. Total stock-based compensation expense
recognized for the years ended December 27, 2009, December 28, 2008 and December 30, 2007 was $29,912,
$35,221 and $29,402, respectively. As of December 27, 2009, total unrecognized stock-based compensation
cost was approximately $31,684.
The Company uses the Black-Scholes option pricing model to value stock options that are granted under
these plans. The Black-Scholes method includes four significant assumptions: (1) expected term of the options,
(2) risk-free interest rate, (3) expected dividend yield, and (4) expected stock price volatility. The weighted
average expected terms used were approximately 4 years for the 2009 grant and approximately 5 years for the
2008 and 2007 stock option grants. These amounts are based on a review of employees’ exercise history
relating to stock options as well as the contractual term of the option. The weighted average risk-free interest
rates used for 2009, 2008 and 2007 stock option grants were 1.87%, 2.71% and 4.79%, respectively. This
estimate was based on the interest rate available on U.S. treasury securities with durations that approximate
the expected term of the option. The weighted average expected dividend yields used for the 2009, 2008 and
2007 stock option grants were 3.52%, 2.95% and 1.97%, respectively, which is based on the Company’s
current annual dividend amount divided by the stock price on the date of the grant. The weighted average
expected stock price volatilities used were 36% for the 2009 stock option grant and 22% for the 2008 and
2007 stock option grants. These amounts were derived using a combination of historical price volatility and
current implied price volatility. Implied price volatility reflects the volatility implied in publicly traded options
on the Company’s common stock, which the Company believes represents the expected future volatility of the
Company’s stock price. The Company believes that since this is a market-based estimate, it provides a better
estimate of expected future volatility as compared to based only on historical volatility. The increase in the
stock volatility assumption in 2009 reflects the increase in stock market volatility at the time of the Company’s
2009 grant.
In 2009, 2008 and 2007, as part of its employee stock-based compensation plan, the Company issued
contingent stock performance awards, which provide the recipients with the ability to earn shares of the
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 2011, December 2010
and December 2009 for the 2009, 2008 and 2007 awards, respectively. Each award has a target number of
shares of common stock associated with such award which may be earned by the recipient if the Company
achieves the stated diluted earnings per share and net revenue targets. These awards are valued based on the
fair market value of the Company’s common stock on the date of the grant and expensed over the performance
period. The measurement of the expense related to this award is based on the Company’s current estimate of
net revenues and diluted earnings per share over the performance period. Changes in these estimates may
impact the expense recognized related to these awards.
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
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