Hasbro, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 29, 2013 (52 weeks). The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited. Unless stated otherwise, dollar amounts are in millions.
Business context and reporting period
Hasbro develops and sells toys and games and earns revenue from entertainment, digital gaming and licensing. Its principal operating segments are U.S. and Canada, International, and Entertainment and Licensing. The business is highly seasonal: approximately 65% of 2013 revenue was recorded in the second half. Hasbro acquired a 70% interest in mobile-game developer Backflip Studios in July 2013.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net revenue | $4,082.2 | $4,089.0 |
| Operating profit / margin | $467.1 / 11.4% | $551.8 / 13.5% |
| Net earnings attributable to Hasbro | $286.2 | $336.0 |
| Diluted EPS | $2.17 | $2.55 |
| Cash from operating activities | $401.1 | $534.8 |
| Cash and cash equivalents at year-end | $682.4 | $849.7 |
| Principal long-term debt | $1,384.9 | $1,396.4 |
- Cost of sales was 41.0% of revenue, implying a 59.0% margin before royalties and other operating expenses; operating margin fell from 13.5% to 11.4%, and net margin from 8.2% to 7.0%.
- Cash from operations declined about 25%. Investing used $217.7, including $112.0 of capital expenditures and $110.7 for investments and acquisitions. Financing used $341.0, including $103.5 of share repurchases and $156.1 of dividends paid.
- Current assets were $2,480.5 and current liabilities $1,363.3 at year-end. Cash was largely held by international subsidiaries and generally was not available for U.S. needs without changing the reinvestment policy.
- Of $1,384.9 principal debt, $425.0 was due in May 2014. Hasbro expected to refinance most or all of it with long-term notes. It had no commercial paper outstanding and approximately $699 of unused availability under its $700 revolving facility; it reported compliance with covenants.
Fourth quarter: Revenue was $1,281.8 versus $1,283.5 in Q4 2012; operating profit was $183.7 versus $200.2; net earnings attributable to Hasbro were $129.8 versus $130.3; diluted EPS was $0.98 versus $0.99.
Material changes versus prior comparable period
- Revenue was nearly flat year over year, but operating profit declined 15% and Hasbro-attributable earnings declined 15%. Results included a 2013 arbitration-related charge, restructuring, brand exit and licensing costs.
- By product category, boys’ revenue fell 22% to $1,237.6, games rose 10% to $1,311.2, girls’ rose 26% to $1,001.7, and preschool rose 1% to $531.6. Lower licensed-brand sales, including MARVEL and BEYBLADE, weighed on boys; MAGIC: THE GATHERING, MY LITTLE PONY, FURBY and the NERF REBELLE launch supported growth elsewhere.
- U.S. and Canada revenue declined 5% to $2,006.1; International revenue increased 5% to $1,873.0; Entertainment and Licensing revenue increased 5% to $191.0. International growth was led by emerging markets; the segment reported 25% emerging-market revenue growth.
- Revenue from Hasbro’s franchise brands increased 15% and represented 44% of consolidated revenue. The prior-year comparison included a 53-week fiscal year in 2012 versus 52 weeks in 2013; foreign-currency translation was modestly favorable in 2013, compared with an approximately $98.5 adverse effect in 2012.
Outlook, commentary, risks and unusual items
- Management set a goal of $100 million in annual gross cost savings by the end of 2015. 2013 gross savings were approximately $50 million before other costs and investments; the company recorded $43.7 million of 2013 restructuring and related pension charges.
- 2013 results included a $61.1 million pre-tax charge related to an inventor dispute over NERF and SUPER SOAKER royalties and associated legal and interest costs. A February 2014 settlement fixed payment at $58.04 million plus related costs; the filing reports a $53.1 million after-tax impact, or $0.40 per diluted share.
- Hasbro recorded $19.7 million of impairment charges after deciding to exit certain non-core brands, and $20.9 million of additional royalty expense following an amendment to its Zynga agreement. A favorable $23.6 million tax benefit arose from settlement of U.S. tax examinations.
- Management expected 2014 working-capital needs to be funded primarily by operating cash flow, with commercial paper or credit facilities available as needed. Planned 2014 capital expenditures were $125–$135 million. The filing does not provide a clear numeric 2014 revenue or earnings guidance figure. The Board raised the quarterly dividend to $0.43 per share in February 2014.
- Key risks include reliance on major retail customers (top five represented about 39% of 2013 revenue), licensed properties and minimum royalty guarantees, holiday-season concentration, changing consumer tastes, foreign exchange and economic exposure, and dependence on third-party manufacturing concentrated in China.
- Mexico tax authorities asserted assessments totaling approximately $249 million for 2000–2007, principally involving transfer pricing. Hasbro was contesting them, expected to prevail and had posted approximately $187 million in bonds for 2000–2004 assessments. Disney license amendments extended the MARVEL license through 2020 and added royalty commitments, including up to $170 million of contingent additional royalties tied to future theatrical releases.
- KPMG gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the 2014 refinancing of the $425 million notes was completed on acceptable terms and how debt-service costs evolved.
- Whether operating cash flow and margins recovered after the 2013 decline, and whether the cost-savings initiative delivered durable net savings.
- Whether growth in games, girls and emerging markets continued to offset weakness in boys’ products and developed markets.
- The realized costs and outcomes of the inventor settlement, Mexico tax assessments, contingent Disney royalties and the remaining Backflip purchase obligation.
- How much reported cash was accessible for U.S. obligations, given the concentration of cash in foreign subsidiaries and the company’s seasonal working-capital needs.