Hasbro, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter ended September 29, 2013 (13 weeks); nine months ended the same date (39 weeks), compared with 40 weeks in the prior-year nine-month period. Unaudited; amounts below are in millions unless stated otherwise.
Business context and results
Hasbro sells toys and games and earns revenue from entertainment, digital gaming and licensing. Its business is seasonal, with most revenue typically generated in the second half of the year. The quarter’s sales were mixed across product lines: growth in Girls and Games partly offset lower Boys sales.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,370.3 | $1,345.1 | $2,800.4 | $2,805.5 |
| Operating profit | $198.7 | $249.6 | $283.4 | $351.6 |
| Operating margin | 14.5% | 18.6% | 10.1% | 12.5% |
| Net earnings attributable to Hasbro | $126.6 | $164.9 | $156.4 | $205.7 |
| Diluted EPS | $0.96 | $1.24 | $1.19 | $1.56 |
Q3 revenue rose 2%; nine-month revenue was approximately flat. Reported Q3 operating profit included $57.2 of royalty expense and $18.4 of interest expense related to an arbitration ruling, plus $4.1 of restructuring and pension-settlement charges. Excluding the arbitration and restructuring charges, management reported Q3 operating profit of $260.0, up approximately 4% year over year, with a 19.0% margin. Nine-month adjusted operating profit, excluding arbitration and restructuring charges, was $376.1 versus $362.8.
- Product categories: Q3 Boys revenue fell 17%, Games rose 6%, Girls rose 29% and Preschool fell 2%. For nine months, Boys fell 24%, Games rose 14%, Girls rose 31% and Preschool rose 2%.
- Segments: Q3 U.S. and Canada revenue declined 5% and operating profit declined 5%; International revenue increased 11% and operating profit increased 24%; Entertainment and Licensing revenue increased 13% while operating profit declined 29%.
- Management attributed category movements partly to lower Marvel and Beyblade sales versus 2012’s movie-related comparisons, and strength in My Little Pony, Furby and games. International emerging-market revenue increased 22% in Q3 and 25% year to date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $47.3, down from $143.6. The 2013 period included $165.0 of Marvel and Star Wars royalty advances; working-capital demands also included increases in receivables and inventory.
- Investing cash outflow was $185.1, including $110.0 for the Backflip acquisition and $78.2 of capital spending. Financing cash outflow was $115.2, including $87.0 of share repurchases and $104.2 of dividends, partly offset by stock-option proceeds.
- Cash was $588.7 at September 29, 2013, down from $696.7 a year earlier and $849.7 at year-end 2012. The filing says substantially all cash was held outside the U.S. and was not available for U.S. needs without changing the reinvestment policy.
- Debt included $212.9 of short-term borrowings, $430.4 of current long-term debt and $959.9 of long-term debt. The $425.0 principal amount of notes due in 2014 was classified as current; management intended and believed it could refinance all or part of that debt.
- Hasbro had a $700.0 committed revolving facility, no revolver borrowings, approximately $202.3 of commercial paper outstanding, and approximately $496.7 available under the facility after commercial paper. The company reported compliance with its debt covenants.
- Current assets were $2,597.3 and current liabilities were $1,648.9. Accounts receivable were $1,215.3; inventory was $447.1. The filing reports purchase commitments of $334.6 and letters of credit and similar instruments of approximately $206.0.
Material changes, outlook and risks
- Arbitration: On October 29, 2013, after the quarter-end, an arbitrator awarded the licensor $72.9 in the NERF dispute. Hasbro recorded total related charges of $75.5 in Q3, reducing previously released Q3 and nine-month net earnings by $66.4, or $0.50 per diluted share, after tax. Hasbro disagrees and is considering appeals or challenges. A separate Super Soaker lawsuit remains pending; the company says it has defenses and does not expect a material loss.
- Tax matters: Completion of a U.S. tax examination generated a $23.6 tax benefit in Q3. Mexican transfer-pricing assessments totaled approximately $241.8, including interest and penalties; Hasbro is contesting them and had posted approximately $183.5 in bonds for the 2000–2004 assessments.
- Acquisition and licensing commitments: Hasbro paid $112.0 for a 70% interest in mobile-game developer Backflip in July; purchase of the remaining interest is contingent on performance metrics. A preliminary allocation included $119.0 of goodwill. Amendments to Disney’s Marvel and Star Wars licenses added $305.0 of minimum guaranteed payments through 2020; $75.0 was paid in Q3.
- Cost savings: The multi-year initiative targets $100.0 of annual savings by 2015. For 2013, management estimated gross savings of $45–$48 and net savings of $13–$15, before pension charges and other anticipated cost increases. The company expected up to $3.0 of additional restructuring charges during the remainder of 2013, before potential pension charges.
- No specific revenue or earnings forecast was provided. Management said available cash, operating cash generation and borrowing facilities should meet working-capital needs for the remainder of 2013. Results remain exposed to holiday-season execution, retailer ordering and inventory decisions, licensed-product demand and minimum guarantees, foreign exchange, product acceptance, sourcing and shipping, and the ability to realize planned savings.
Important facts for investors to verify
- Whether the NERF arbitration award is appealed, challenged or paid, and any further effect on earnings or cash flow.
- How Hasbro refinances or repays the $425.0 of principal due in 2014 and manages commercial paper and seasonal liquidity.
- Actual performance and purchase terms for Backflip, and the final acquisition valuation and goodwill allocation.
- Sales and profitability trends in Boys versus Girls and Games, including dependence on licensed entertainment and the Disney minimum guarantees.
- Progress toward cost-saving targets, remaining restructuring and pension costs, and the resolution of the Mexican tax assessments.