Hasbro 2014 Annual Report Download - page 21

as such, the Company does not believe that these unshipped orders, at any given date, are indicative of future
sales. The types of programs that we plan to employ to promote sales in 2015 are substantially the same as those
we employed in 2014 and in prior years.
Historically, we commit to the majority of our inventory production and advertising and marketing
expenditures for a given year prior to the peak 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 2014, we utilized cash from our operations,
borrowings under our commercial paper program and uncommitted lines of credit as well as excess proceeds
from the 2014 issuance of long-term debt to meet our cash flow requirements.
Royalties and Product Development
Our success is dependent on continuous innovation in our product and 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 and game 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 2014, 2013 and 2012, we incurred expenses of $222,556, $207,591 and $201,197, 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 2014, 2013 and 2012, we incurred $305,317, $338,919 and $302,066, respectively, of royalty expense. In
2013, royalty expense included $63,801 related to the settlement of an arbitration award for a dispute between the
Company and an inventor as well as the amendment of its license agreement with Zynga. Our royalty expense in
any given year may also 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, 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. This global marketing
group works cross-functionally with the global development function to deliver a unified product and message.
The costs of this group are allocated to the selling entities which comprise our principal operating segments. We
also maintain sales and marketing functions in our selling entities which are responsible for local market
activities and execution. Our products are sold globally to a broad spectrum of customers, including wholesalers,
distributors, chain stores, discount stores, drug 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
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