Hasbro, Inc. — 2012 Form 10-K Summary
Business context and reporting period
Hasbro designs and sells toys and games and earns revenue from entertainment, digital gaming and brand licensing. Its principal businesses are U.S. and Canada, International, and Entertainment and Licensing; Global Operations manages manufacturing and sourcing. The fiscal year ended December 30, 2012 and comprised 53 weeks, versus 52 weeks in 2011. Figures below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net revenue | $4,089 million | $4,286 million | Down 4.6% |
| Operating profit | $552 million | $594 million | Down 7.1% |
| Operating margin | 13.5% | 13.9% | Down 0.4 percentage points |
| Net earnings | $336 million | $385 million | Down 12.8% |
| Diluted EPS | $2.55 | $2.82 | Down 9.6% |
| Cash from operations | $535 million | $396 million | Up $139 million |
| Capital expenditures | $112 million | $99 million | Up $13 million |
Cost of sales fell to 40.9% of revenue from 42.8%, benefiting from product mix, fewer closeout sales and lower inventory obsolescence. These gains were offset by higher selling, distribution and administration costs (20.7% of revenue versus 19.2%), advertising (10.3% versus 9.7%) and program amortization. The effective tax rate rose to 25.9% from 20.8%; 2011 included larger discrete tax benefits.
Year-end cash and cash equivalents were $850 million, substantially held by international subsidiaries and generally unavailable for U.S. needs without a change in reinvestment policy. Current assets were $2,508 million and current liabilities $960 million. Long-term debt had a carrying value of $1,396 million ($1,385 million principal); short-term borrowings were $224 million, including $209 million of commercial paper. The company had a $700 million revolving credit facility, no borrowings under it at year-end, and reported compliance with its covenants. Operating cash flow included $59 million spent on television production.
Material changes versus the prior year
- U.S. and Canada revenue declined 6% to $2,116 million; operating profit rose 15% to $319 million, with margin improving to 15.1% from 12.4%, chiefly on mix and improved inventory management.
- International revenue fell 4% to $1,782 million as reported, but increased 1% excluding currency translation. Currency translation reduced revenue by about $98 million. Operating profit fell 20% to $215 million and margin declined to 12.1% from 14.5%, reflecting lower revenue, higher selling costs and geographic mix.
- Entertainment and Licensing revenue increased 12% to $181 million and operating profit increased 24% to $53 million, principally from television-program distribution.
- By product category, boys’ revenue fell 13% (lower TRANSFORMERS and BEYBLADE sales), games grew 2%, girls’ grew 7%, and preschool declined 5%.
- The fourth quarter generated $1,284 million of revenue and $130 million of net earnings, compared with $1,329 million and $139 million, respectively, in fourth-quarter 2011.
Outlook, management commentary, risks and unusual items
- Management planned 2013 product activity around expected entertainment releases, including G.I. JOE: RETALIATION and several Marvel films, and a broader FURBY rollout. These plans depend on consumer response and release timing.
- A multi-year cost-savings initiative targets approximately $100 million of annual savings by 2015 through workforce reductions, facility consolidation and process improvements. Hasbro recorded $36 million of related charges in fourth-quarter 2012, in addition to $11 million of first-quarter severance costs; further charges were expected. The plan included an approximately 10% workforce reduction, with about 560 positions identified in the announced phase.
- Management expected 2013 capital expenditures of $115–$125 million and said operating cash, commercial paper and credit lines should cover working-capital needs. In February 2013, the quarterly dividend was raised to $0.40 per share from $0.36.
- The business is highly seasonal: 64% of 2012 revenue occurred in the second half. Major risks include volatile consumer demand, concentrated retail customers (top five represented about 42% of revenue), reliance on licensed properties, foreign exchange, and dependence on third-party manufacturing, principally in China.
- Hasbro disclosed Mexican transfer-pricing tax assessments of approximately $206 million, including interest, penalties and inflation updates. It had posted bonds of approximately $175 million for assessments covering 2000–2004 and said it expected to prevail; the outcome remains unresolved. Other legal proceedings were not considered material by the company.
- The company’s 50% investment in THE HUB was $331 million at year-end; Hasbro recorded a $6 million share of the venture’s 2012 loss. Goodwill was $475 million and acquired product and licensing rights were $417 million. Annual impairment tests found no impairment in 2012.
Important facts for investors to verify
- Whether the 2013–2015 cost savings are achieved, and the total restructuring and pension-related charges required.
- Whether revenue and margins recover after 2012 declines, especially in boys’ products and the International segment; distinguish reported results from currency effects.
- Cash accessibility and funding needs: most cash was offshore, while commercial paper and seasonal borrowing supported working capital.
- Debt maturities, refinancing conditions and covenant headroom, particularly the $425 million principal due in 2014.
- Developments in the Mexican tax disputes, major license renewals and minimum royalty commitments, including contingent Marvel guarantees.
- Consumer and retail performance in the holiday season, customer concentration, and exposure to China-based sourcing.