Hasbro, Inc. — Q1 2013 Form 10-Q
Reporting period: 13 weeks ended March 31, 2013; comparative quarter ended April 1, 2012 covered 14 weeks. Financial amounts below are in millions of dollars unless otherwise noted. Hasbro operates in toys, games, entertainment and licensing, with U.S. and Canada, International, Entertainment and Licensing, and Global Operations segments.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net revenue | $663.7 | $648.9 |
| Operating profit | $10.6 | $15.7 |
| Operating margin | 1.6% | 2.4% |
| Net loss | $6.7 | $2.6 |
| Loss per diluted share | $0.05 | $0.02 |
| Cash from operations | $297.5 | $284.7 |
| Capital expenditures | $24.2 | $23.0 |
| Cash and cash equivalents at period end | $1,067.0 | $883.8 |
- Revenue rose 2% as reported; the filing notes the shorter current quarter and approximately $3.3 million of adverse currency translation. Cost of sales was 40.3% of revenue versus 39.6%; royalties declined to 7.5% from 8.1%. Operating profit included restructuring charges of $28.9 million versus $11.1 million in Q1 2012. Excluding those charges, operating profit was $39.6 million versus $26.9 million.
- Operating cash flow increased about 4%, supported substantially by a $515.9 million decrease in accounts receivable. Cash less short- and long-term debt was approximately $489 million at March 31, 2013. Current assets were $2,250.4 million and current liabilities $741.7 million.
- Short-term borrowings were $162.0 million and long-term debt $1,394.4 million; long-term debt principal was $1,384.9 million. The company had $549 million available under its committed facility after commercial-paper borrowings, and reported covenant compliance.
Material changes and operating trends
- By product category, Games grew 26% to $230.9 million, Girls grew 23% to $114.8 million, and Preschool grew 8% to $75.2 million; Boys declined 20% to $242.8 million. Growth included MAGIC: THE GATHERING, FURBY and MY LITTLE PONY; declines included BEYBLADE and STAR WARS.
- U.S. and Canada revenue increased 4% to $342.1 million; International revenue was essentially flat at $289.8 million, with currency headwinds and reported growth in Latin America and Asia Pacific offset by lower Europe revenue. Entertainment and Licensing revenue rose 5% to $30.8 million, while operating profit fell 32% to $5.3 million, reflecting revenue mix and higher program amortization.
- International operating loss narrowed to $4.5 million from $5.1 million. U.S. and Canada operating profit increased to $37.7 million from $14.4 million. Results are not directly like-for-like because of the extra week in the 2012 quarter.
- Cash increased from $849.7 million at year-end 2012. Inventories were $323.8 million, down 18% from the year-earlier quarter; receivables were $509.3 million, up 12%, and days sales outstanding increased to 69 from 63.
Outlook, commentary and risks
- Management targets $100 million of annual cost savings by 2015 from workforce reductions, facility consolidation and process improvements. For 2013, it estimated gross savings of $45–48 million and savings net of restructuring charges of $13–15 million. Additional 2013 restructuring charges of up to $6 million were possible, before any potential pension charges.
- Management stated available cash, operating cash flow and borrowing facilities were adequate for working-capital needs through the remainder of 2013. The business is seasonal: historically about 63%–65% of annual revenue was generated in the second half.
- Cash of $1,067 million was substantially held outside the U.S.; management said these funds were generally unavailable for U.S. needs without changing its indefinite-reinvestment policy and potentially incurring additional U.S. tax.
- Mexico transfer-pricing assessments for 2000–2005 and 2007 totaled approximately $219.9 million, including interest and penalties. Hasbro said it was vigorously contesting the assessments and expected to sustain its position; bonds of approximately $188.1 million had been posted for 2000–2004 assessments. Separately, uncertain-tax-position liabilities were $119.2 million.
- Hasbro expected $80 million of aggregate Marvel royalty advances, including $30 million contingent on the theatrical release of Iron Man 3. Principal risks include product and license demand, retailer ordering and concentration, holiday-season execution, foreign exchange, sourcing and shipping, cost-savings execution, competition, and access to financing.
- The quarterly dividend was increased to $0.40 per share, effective with the May 2013 payment. The company repurchased approximately 520,000 shares for about $20.2 million during the quarter. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether revenue and operating-profit trends persist after accounting for the shorter quarter and the seasonal concentration of sales in the second half.
- Progress toward the $100 million savings target, including actual savings, restructuring costs and any pension-related charges.
- Cash conversion and working-capital trends, particularly receivables, collections and days sales outstanding.
- Developments in the Mexican tax disputes, related guarantees and uncertain-tax-position liabilities.
- Debt maturities, commercial-paper and credit-facility availability, and the implications of cash held outside the U.S.
- Sales and royalty performance for major owned and licensed brands, including exposure to entertainment-release timing and minimum royalty commitments.