Hasbro 2012 Annual Report Download - page 16

purchase by consumers. Although the Company may receive orders from customers in advance, it is a general
industry practice that these orders are subject to amendment or cancellation by customers prior to shipment and,
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 2013 are substantially the same as those
we employed in 2012.
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 2012, we utilized cash from our operations
and borrowings under our commercial paper program and uncommitted lines of credit to meet our cash flow
requirements.
Royalties and Product Development
Our success is dependent on continuous innovation in our 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 2012,
2011 and 2010, we incurred expenses of $201,197, $197,638 and $201,358, 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 2012, 2011 and 2010, we incurred $302,066, $339,217 and $248,570, respectively, of royalty expense.
Our royalty expense in any given year may 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. 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 who 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, 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 products, for the most part, in
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