Hasbro, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 28, 2014 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing. Dollar amounts below are in U.S. dollars; financial figures are in millions unless noted.
Business context
Hasbro sells toys and games, licenses its brands, and produces entertainment and digital gaming content. Its principal reporting segments are U.S. and Canada, International, and Entertainment and Licensing. The business is highly seasonal: approximately 65% of 2014 revenue was generated in the second half. Seven franchise brands produced 55% of revenue, up from 44% in 2013.
Financial results and liquidity
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $4,277.2 | $4,082.2 | +4.8% |
| Operating profit | $635.4 | $467.1 | +36.1% |
| Operating margin | 14.9% | 11.4% | +3.5 percentage points |
| Net earnings attributable to Hasbro | $415.9 | $286.2 | +45.3% |
| Diluted EPS | $3.20 | $2.17 | +47.5% |
| Cash from operations | $454.4 | $401.1 | +13.3% |
- Reported net margin was 9.7%, versus 7.0% in 2013. Results include material unusual items described below.
- Revenue growth reflected a 31% increase in franchise-brand revenue; unfavorable foreign currency translation reduced reported 2014 revenue by approximately $93.4 million. Excluding currency translation, revenue grew approximately 7%.
- By product category, boys’ revenue rose 20%, girls’ rose 2%, games fell 4%, and preschool fell 4%. International revenue increased 8% reported and 13% excluding currency effects; International operating profit rose 15%.
- Cash and cash equivalents were $893.2 million; short-term borrowings were $252.5 million and long-term debt was $1,559.9 million. Cash less short-term borrowings was $640.7 million. The company reported $459.1 million available under its committed facility, including commercial-paper borrowings, and compliance with debt covenants.
- Capital expenditures were $113.4 million. Management expected 2015 capital expenditures of $120–$140 million.
Material changes and unusual items
- Operating profit improved from 2013, which included significant charges, including the NERF/SUPER SOAKER arbitration settlement and product-related and restructuring charges. The 2014 comparison also reflects higher franchise-brand sales and improved cost of sales as a percentage of revenue.
- 2014 earnings included after-tax charges of $18.1 million for restructuring the Discovery television joint venture and $5.2 million for other restructuring; gains of $23.9 million after tax from the sale of intellectual-property license rights; and a $6.6 million favorable tax benefit from tax-exam settlements.
- Foreign-exchange movements were a significant headwind: the company reported foreign-currency transaction losses of $20.9 million in 2014, versus $5.2 million in 2013, and noted sharp late-year depreciation in the euro, Russian ruble, and Brazilian real.
- Hasbro reduced its Discovery joint-venture interest from 50% to 40%, receiving $64.4 million in cash. It recorded a net expense related to the restructuring and an option agreement on its remaining interest.
- In May 2014, Hasbro issued $600 million of long-term notes, including $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 2014.
- Share repurchases totaled $459.6 million in 2014 and dividends paid were $216.9 million. In February 2015, the board authorized an additional $500 million repurchase and raised the quarterly dividend to $0.46 per share from $0.43.
Outlook, commentary, and risks
- Management said available operating cash, the commercial-paper program, and credit lines were expected to meet 2015 working-capital needs, while noting that adverse operating results or disrupted credit markets could constrain funding.
- The company targeted $100 million in annual gross cost savings by the end of 2015 under its multi-year initiative. It reported approximately $90 million of gross savings through 2014, before other costs and investments.
- Planned 2015 product support included the expected releases of AVENGERS: AGE OF ULTRON, STAR WARS: THE FORCE AWAKENS, and JURASSIC WORLD. Management cautioned that partner-controlled release schedules and consumer response could affect sales. The filing provides no quantified revenue or EPS guidance.
- Key risks include dependence on a small number of retailers (the five largest generated about 38% of 2014 revenue), holiday-season demand and shipping execution, changing consumer tastes, competition from digital entertainment, reliance on licensed brands and minimum royalty guarantees, foreign-exchange exposure, and reliance on third-party manufacturing concentrated in China.
- Contractual commitments included $295.2 million of inventory and tooling purchase commitments and $245.6 million of scheduled minimum guaranteed royalties. The filing separately describes up to $260 million in additional contingent guaranteed royalties, including expected 2015 payments of about $40 million for Marvel and $50 million for Star Wars.
- The company settled Mexican transfer-pricing assessments for approximately $65 million in cash; related bonds totaling approximately $146.4 million remained outstanding at year-end and were expected to be cancelled in early 2015. Other legal matters were not considered material by the company.
Important facts for investors to verify
- How much of the 2014 earnings and margin improvement reflects recurring operating performance versus tax benefits, asset-sale gains, restructuring, and prior-year charges.
- Whether franchise-brand growth and 2015 partner-film launches can offset currency pressure and declines in selected games, preschool, and individual brands.
- Cash availability and seasonal borrowing needs, including the location of cash held overseas, debt maturities, and committed royalty and purchase obligations.
- Progress toward the $100 million annual cost-savings target, alongside the costs of continued investment in brands, emerging markets, and digital gaming.
- Performance and valuation of Backflip and the Discovery joint venture, including potential impairment exposure and the terms of the option on Hasbro’s remaining Discovery interest.