Hasbro, Inc. — Q2 2014 Form 10-Q
Reporting period: 13-week quarter ended June 29, 2014; six-month comparison is for the 26 weeks ended June 29, 2014. Unless noted otherwise, amounts below are in millions of U.S. dollars. Hasbro sells toys and games and earns revenue from entertainment, licensing and digital gaming; its business is seasonal, with most annual revenue historically generated in the second half.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net revenue | $829.3 | $766.3 | $1,508.7 | $1,430.0 |
| Operating profit | $82.6 | $74.1 | $126.0 | $84.7 |
| Operating margin | 10.0% | 9.7% | 8.4% | 5.9% |
| Net earnings attributable to Hasbro | $33.5 | $36.5 | $65.6 | $29.8 |
| Diluted EPS | $0.26 | $0.28 | $0.50 | $0.23 |
| Operating cash flow | Not provided separately | Not provided separately | $109.3 | $298.1 |
- Q2 revenue rose 8%; first-half revenue rose 6%. Franchise-brand revenue grew approximately 36% in Q2 and 27% in the first half.
- Operating profit improved year over year, though comparisons benefited from prior-year restructuring and pension charges: $2.5 million in Q2 and $31.4 million in the first half of 2013. Excluding those charges, first-half 2014 operating profit increased about 9% from $116.1 million.
- Q2 net earnings attributable to Hasbro fell despite higher operating profit, primarily reflecting a $13.8 million unfavorable tax adjustment related to a proposed resolution of tax matters. The first-half net tax adjustment was a net expense of $0.4 million. First-half adjusted tax rates, excluding discrete items, were 26.8% in 2014 and 27.3% in 2013.
- Product mix and film releases shaped results: boys revenue rose 32% in Q2, while games fell 12% and preschool fell 4%. In the first half, boys rose 18%, girls rose 15%, games fell 8% and preschool fell 4%.
- By segment, Q2 revenue increased 17% in International and 35% in Entertainment and Licensing, but declined 2% in U.S. and Canada. Segment operating profit rose sharply in International and Entertainment and Licensing, while U.S. and Canada profit fell 20%, reflecting weaker revenue, unfavorable mix and investment spending.
Cash, debt and liquidity
- Cash and cash equivalents were $586.2 million at June 29, 2014, down from $1,022.3 million a year earlier. Cash net of short-term borrowings was $577.0 million, versus $829.4 million a year earlier.
- First-half operating cash flow declined to $109.3 million from $298.1 million. Management attributed the decrease to a $58.0 million arbitration-award payment, higher royalty advances and increased working capital. Capital expenditures were $51.6 million; operating cash flow less capital expenditures was $57.6 million, a derived measure.
- Inventory rose 37% year over year to $492.8 million; receivables rose 15% to $738.9 million, and days sales outstanding increased to 80 from 75. The filing cites international growth, seasonal preparation and potential California port labor disruptions as factors affecting inventory.
- Long-term debt was $1,559.9 million, all classified as long-term at period-end; short-term borrowings were $9.2 million. In May, Hasbro issued $600 million of fixed-rate notes: $300 million at 3.15% due 2021 and $300 million at 5.10% due 2044. Proceeds primarily refinanced $425 million of notes that matured in May.
- Hasbro had no borrowings under its $700 million committed revolver or commercial paper program and approximately $699 million of unused revolver capacity. The company reported compliance with its debt covenants.
- First-half financing included $213.9 million of share repurchases and $108.1 million of dividends paid. The quarterly dividend was increased 8% to $0.43 per share; $308.1 million remained under the share-repurchase authorization.
Management outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management expects the business’s customary second-half revenue concentration to continue and cautions that interim results are not necessarily indicative of full-year performance.
- Management described growth in owned franchise brands and international markets as strategic priorities, alongside investment in entertainment, digital gaming and operating efficiencies. A previously announced initiative targeted $100 million in annual underlying cost savings by 2015; the company reported approximately $50 million of gross savings in 2013, before restructuring charges and offsetting cost increases.
- Film-related shipments supported boys’ growth, including products tied to Transformers: Age of Extinction, Captain America: The Winter Soldier and The Amazing Spider-Man 2. Hasbro planned products tied to Guardians of the Galaxy and Star Wars Rebels in the second half of 2014.
- Tax dispute: Mexican authorities assessed approximately $253 million, including interest, penalties and inflation adjustments, relating to transfer pricing for 2000–2007. Hasbro is contesting the assessments and discussing a possible settlement; it had posted approximately $184 million in bonds for 2000–2004 assessments. Unrecognized tax-benefit liabilities were $84.3 million. Management stated it expects to prevail if disputes proceed through the applicable processes, while acknowledging a settlement could require payment.
- Other notable items include $3.4 million of first-half income from selling an internet domain name, a $33.3 million loss paid to settle interest-rate swaps associated with the May debt issuance (deferred and amortized over the notes’ lives), and the Backflip acquisition, which contributed revenue but also operating losses and amortization. Hasbro owns 70% of Backflip and may be required to purchase the remaining interest upon specified performance conditions; the ultimate timing and price were not estimable.
- Key risks include seasonality and holiday execution, retailer ordering and cancellations, product acceptance and competition, reliance on licensed properties and guaranteed royalties, foreign exchange, sourcing and shipping disruptions, customer concentration, digital and entertainment performance, acquisition outcomes, and access to financing. Hasbro also noted that a significant portion of cash is held outside the United States and is treated as indefinitely reinvested.
Most important facts for investors to verify
- Whether second-half and holiday demand converts the first-half revenue growth into full-year growth, and how much results depend on film-linked product sales.
- Whether receivables, inventory and working-capital needs normalize after the seasonal build, and whether operating cash flow recovers from the first-half decline.
- The underlying trend in U.S. and Canada profitability and whether International and Entertainment and Licensing gains are sustainable.
- The outcome and potential cash cost of the Mexican tax dispute, including any settlement and future transfer-pricing methodology.
- Whether Hasbro achieves its cost-savings targets while funding brand investment, dividends and repurchases and servicing its higher long-term debt.