THQ 2006 Annual Report Download - page 53

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Cash Flow from Operating Activities. Our principal source of cash is from sales of interactive software
games designed for play on video game consoles, handheld devices and personal computers. Our principal
uses of cash are for product purchases of discs and cartridges along with associated manufacturer’s
royalties, payments to external developers and licensors, the costs of internal software development and
selling and marketing expenses.
Cash provided by operating activities decreased by approximately $17.7 million in fiscal 2006 as compared
to fiscal 2005. The decrease was mainly due to lower net income in fiscal 2006 as well as higher spending
for software development, higher payments of accrued expenses, partially offset by lower cash spending for
licenses. We expect to generate positive operating cash flow for the full fiscal year 2007.
Cash Flow from Investing Activities. Cash used in investing activities increased by approximately
$8.0 million in fiscal 2006 as compared to fiscal 2005, primarily due to an increase in the amount of net
disbursements from purchases and sales of short-term investments, an increase in purchases of property
and equipment, offset by a decrease in acquisition related activity.
Cash Flow from Financing Activities. Cash provided by financing activities increased by approximately
$4.0 million in fiscal 2006 as compared to fiscal 2005, primarily due to a reduction in the amount paid for
repurchases of our common stock offset by a decrease in cash provided by the exercise of stock options.
We did not repurchase any of our common stock in fiscal 2006 and had $9.1 million of stock repurchases in
fiscal 2005.
In fiscal 2007, we expect to generate more cash than we did in fiscal 2006. The increase in the generation of
cash will be primarily attributable to higher net income.
Key Balance Sheet Accounts
Accounts Receivable. Accounts receivable increased $5.2 million in fiscal 2006, from $73.7 million at
March 31, 2005 to$78.9 million at March 31, 2006. The increase in net accounts receivable is primarily due
the timing of our fourth quarter product releases. Allowances for price protection, returns and doubtful
accounts were $57.8 million as of March 31, 2006, a $0.3 million increase from March 31, 2005. Allowances
for price protection and returns as a percentage of trailingnine month net sales were 8% and 7% as of
March 31, 2006 and 2005, respectively. While the allowance as a percent of trailing nine month net sales
increased in North America due to higher than expected price protection related to the release of Full
Spectrum Warrior: Ten Hammers, this title was not released internationally and the allowance as a percent
of trailing nine month net sales actually decreased internationally. We belie ve our current reserves are
adequate based on historical experience, inventory remaining in the retail channel and the rate of
inventory sell-through in the retail channel.
Inventory. Inventory increased $4.8 million in fiscal 2006, from $23.8 million at March 31, 2005 to
$28.6 million at March 31, 2006. The increase in inventory is primarily due to the growth of our business
and to a lesser extent the timing of our product releases and the timing of product reorders.
Licenses. Licenses decreased $6.5 million in fiscal 2006, from $88.0 million at March 31, 2005 to
$81.5 million at March 31, 2006. The decrease in licenses is due to license amortization in excess of newly
acquired licenses duringfiscal 2006.
Software Development. Software development increased $43.8 million in fiscal 2006, from $65.3 million
March31, 2005 to $109.1 million March 31, 2006. The increase in software development is primarily the
result of our investmentinnext generation titles with higher development costs which are scheduled to be
released in fiscal 2007 andbeyond.
Accrued and Other Current Liabilities. Accrued and other current liabilities increased $31.9 million in
fiscal 2006, from $77.5 million at March 31, 2005 to $109.4 million at March 31, 2006. The increase in
accrued and other current liabilities is primarily due to movement of accrued royalties from long-term into