Hasbro, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 27, 2010 (13-week and 26-week periods). Unaudited results; amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $737.8 | $792.2 | $1,410.2 | $1,413.5 |
| Operating profit | $79.7 | $73.1 | $149.1 | $114.3 |
| Net earnings | $43.6 | $39.3 | $102.6 | $59.0 |
| Diluted EPS | $0.29 | $0.26 | $0.69 | $0.40 |
| Operating margin | 10.8% | 9.2% | 10.6% | 8.1% |
Q2 revenue fell 7%, while six-month revenue was nearly flat. Operating profit rose in both periods. Six-month net earnings included a $21.2 million tax benefit, approximately $0.14 per diluted share, from resolution of the 2004–2005 IRS examination; excluding specified discrete tax items, management reported a six-month effective tax rate of 28.5%.
Royalties declined to $50.1 million in Q2 and $93.8 million year to date, mainly reflecting fewer entertainment-driven product sales; 2009 six-month royalties included a $10 million audit expense. Amortization also fell as certain acquired property rights became fully amortized. These savings supported margin improvement, partly offset by higher product-development spending and, in Q2, a less favorable product mix that lifted cost of sales as a share of revenue.
Cash flow and balance sheet: First-half operating cash flow was $173.0 million, versus a $179.9 million use in 2009. Capital expenditures were $49.7 million. Cash ended at $872.3 million, up from $392.0 million a year earlier. At June 27, 2010, long-term debt was $1,397.0 million on the balance sheet and short-term borrowings were $10.6 million; long-term debt principal was $1,384.9 million. The company issued $500 million of 6.35% notes due 2040 in March and converted or redeemed its remaining convertible debentures. Total liabilities were $2,384.8 million.
Hasbro repurchased $352.1 million of stock in the cash-flow statement during the first half and paid $64.1 million in dividends. The filing’s MD&A reports $369.1 million spent to repurchase 9.462 million shares; investors should reconcile the difference in reported repurchase cash figures. The April 2010 authorization had approximately $417.5 million remaining at quarter-end.
Liquidity: Hasbro reported no borrowings under its $300 million committed revolving facility, with approximately $298.6 million available after letters of credit. It also had approximately $106.2 million available under its receivables securitization program, with no utilization at quarter-end. Management said available cash, expected operating cash flow, credit lines and securitization capacity should meet working-capital needs for the remainder of 2010; it cautioned that operating shortfalls or credit-market disruption could constrain external funding.
Material changes and business drivers
- U.S. and Canada revenue declined 9% in Q2 and 3% for six months; operating profit increased 4% and 22%, respectively. Lower boys’ sales, following 2009 movie-related demand, were partly offset by games, preschool and girls’ products.
- International revenue fell 5% in Q2 but rose 4% for six months, with foreign exchange contributing about $15.5 million to the six-month increase. Operating profit declined 30% in Q2 but improved to $9.2 million for the half from $2.0 million.
- Entertainment and Licensing revenue increased 26% in Q2 and 8% for six months; operating profit rose to $13.0 million and $22.4 million, respectively. Growth reflected movie-related revenue and lower comparison-period costs, including $7.2 million of 2009 Discovery joint-venture acquisition costs.
- By product category, first-half games and puzzles revenue increased to $489.3 million from $427.2 million, while boys’ revenue declined to $475.7 million from $592.8 million. Q2 boys’ revenue was also lower year over year, partly reflecting the prior-year Transformers and G.I. Joe movie cycle; Iron Man 2 supported Marvel-related sales in 2010.
Outlook, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management emphasized that the business is seasonal: historically, 63%–66% of annual revenue occurred in the second half. It cautioned that interim results are not necessarily indicative of full-year results.
- Unshipped orders were approximately $921.3 million, versus $712.6 million a year earlier, but customer orders may be amended or cancelled and backlog is not necessarily indicative of future sales.
- Hasbro expected its Discovery joint venture’s rebranded children’s network, THE HUB, to launch in fall 2010 and reach approximately 60 million U.S. homes. Management anticipated investment in the launch and programming; consumer acceptance and costs are risks.
- Mexican tax authorities assessed approximately $136.1 million, including interest, penalties and inflation updates, in transfer-pricing matters for 2000–2004. Hasbro said it was contesting the assessments and expected to prevail; approximately $113.9 million of bonds had been posted for the 2000–2003 matters.
- Other key risks include holiday-season concentration, retailer ordering and inventory behavior, product acceptance and supply-chain execution, licensing economics, foreign exchange, customer concentration, product safety and liability, and access to financing. Management said it was in compliance with credit covenants.
Investor facts to verify
- How much of first-half earnings growth remains after excluding the $21.2 million tax benefit and other discrete tax items.
- Whether improved operating margins persist as product mix, royalties, development spending and seasonal sales evolve.
- The cash-flow timing and accounting reconciliation between the $352.1 million cash-flow-statement repurchase figure and the $369.1 million MD&A figure.
- Progress and spending on THE HUB and Hasbro Studios, and the network’s launch, reach and commercial performance.
- Developments in the Mexican tax dispute, potential exposure beyond posted bonds, and the outcome of ongoing tax examinations.
- Second-half retailer orders, cancellations, inventory levels and fulfillment, given seasonality and the cancellable order backlog.