Hasbro 2008 Annual Report Download - page 38

general inflationary increases. The decrease as a percentage of revenues in 2008 and 2007 compared to 2006
reflects the fixed nature of certain of these expenses, coupled with the higher revenues in each of those years.
Interest Expense
Interest expense increased to $47,143 in 2008 from $34,618 in 2007. The increase in interest expense was
primarily the result of higher average borrowings in 2008 primarily as a result of the issuance of $350,000 of
notes in September 2007, partially offset by the repayment of $135,092 of notes in July 2008. The increase in
the average borrowing rate for 2008 from the issuance of long-term debt in 2007 was more than offset by
decreases in the average borrowing rate on short-term debt in 2008 as well as the repayment of 6.15% notes in
July 2008.
Interest expense increased to $34,618 in 2007 from $27,521 in 2006. The increase in interest expense was
due to higher average borrowings in 2007 primarily resulting from the issuance of $350,000 of notes in
September 2007. 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 Income
Interest income was $17,654 in 2008 compared to $29,973 in 2007 and $27,609 in 2006. The decrease in
interest income in 2008 from 2007 is primarily the result of lower returns on invested cash. Interest income in
2006 includes $5,200 related to a long-term deposit that was refunded during 2006. The increase in interest
income in 2007 from 2006 primarily reflected higher average rates of return in 2007 compared to 2006, and,
to a lesser extent, 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
higher level of interest income in 2007 and 2006.
Other (Income) Expense, Net
Other (income) expense, net of $23,752 in 2008 compares to $52,323 in 2007 and $34,977 in 2006. In
2007 and 2006 the major component of other (income) expense was non-cash expense related to the change in
fair value of the Lucas warrants, which were required to be classified as a liability. These warrants were
required to be adjusted to their fair value each quarter through earnings. In May 2007, the Company exercised
the call option on these warrants and repurchased them for $200,000 in cash, which approximated fair value at
that date. As these warrants were repurchased in 2007, there was no fair value adjustment in 2008. For 2007
and 2006, expense related to the change in fair value of these warrants was $44,370 and $31,770, respectively.
Absent the impact of the fair value adjustments, increased expense in 2008 primarily relates to increased
foreign exchange losses arising from the impact of the large downward movement in foreign exchange rates,
primarily in the fourth quarter of 2008, on non-U.S. denominated intercompany balances.
Income Taxes
Income tax expense totaled 30.4% of pretax earnings in 2008 compared with 28.0% in 2007 and 32.6%
in 2006. Income tax expense for 2008 is net of a tax benefit of approximately $10,200 related to discrete tax
events, primarily comprised of a benefit from the repatriation of certain foreign earnings, as well as the
settlement of various tax examinations in multiple jurisdictions. Income tax expense for 2007 was net of a
benefit of $29,999 related to 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 related to
discrete tax events, primarily relating to the settlement of various tax examinations in multiple jurisdictions.
Absent these items, potential interest and penalties recorded in 2008 and 2007 related to uncertain tax
positions, and the effect of the fair value adjustment of the Lucas warrants, which had no tax effect in 2007
and 2006, the 2008 effective tax rate would have been 32.8% compared to 30.5% in 2007 and 27.6% in 2006.
The increase in the adjusted rate to 32.8% in 2008 compared to 30.5% in 2007 primarily reflects the change
in the mix of where the Company earned its profits. The increase in the adjusted rate to 30.5% in 2007 from
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