Hasbro, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter ended July 1, 2012; the quarter was 13 weeks. The six-month period was 27 weeks, compared with 26 weeks in 2011. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and performance
Hasbro sells toys and games and generates revenue through entertainment, licensing and digital activities. Its business is seasonal, with most revenue historically generated in the second half of the year. Management expected an even greater share of 2012 revenue in the second half than in 2011, partly due to shifting U.S. and Canada shipments closer to consumer demand.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $811.5 | $908.5 | $1,460.3 | $1,580.4 |
| Operating profit | $86.3 | $80.4 | $102.0 | $129.3 |
| Operating margin | 10.6% | 8.9% | 7.0% | 8.2% |
| Net earnings | $43.4 | $58.1 | $40.8 | $75.2 |
| Diluted EPS | $0.33 | $0.42 | $0.31 | $0.54 |
- Q2 revenue fell 11%; first-half revenue fell 8%. A stronger U.S. dollar reduced revenue by approximately $34.4 million in Q2 and $42.9 million in the first half.
- Q2 operating profit increased despite lower revenue, helped by product mix, including higher-margin MAGIC: THE GATHERING sales and fewer closeout shipments. First-half operating profit declined, reflecting lower revenue, $11.1 million of severance costs, an extra week of expenses and higher advertising as a share of revenue.
- Q2 cost of sales was 38.5% of revenue versus 41.6% a year earlier; first-half cost of sales was 39.0% versus 40.8%. First-half net margin was 2.8%, compared with 4.8%.
- By product category, Q2 revenue declined in boys (16%), games (8%) and girls (13%), while preschool increased 6%. First-half changes were boys down 8%, games down 8%, girls down 15%, and preschool up 5%.
- By segment, Q2 U.S. and Canada revenue declined 19%, International declined 4% (but rose 3% for the first half), and Entertainment and Licensing increased 59%. Entertainment and Licensing operating profit rose to $8.2 million from $0.6 million in Q2, primarily on stronger television-programming sales.
Cash flow, debt and liquidity
- First-half operating cash flow was $200.8 million, versus $128.9 million in 2011, principally due to higher receivable collections. Investing activities used $44.1 million; financing activities used $14.1 million. Cash increased by $138.2 million to $779.9 million.
- At July 1, 2012, current assets were $2,145.8 million and current liabilities were $838.7 million. Cash was $779.9 million; accounts receivable were $651.4 million and inventory was $416.9 million.
- Short-term borrowings were $220.6 million and long-term debt carrying value was $1,399.6 million, for total reported borrowings of approximately $1,620.2 million. Long-term debt principal was $1,384.9 million. Cash was substantially held outside the United States; management said U.S. cash needs could be met without repatriating it.
- Hasbro had approximately $210.5 million outstanding under its commercial paper program and approximately $498.9 million available under its $500 million revolving facility; it was in compliance with facility covenants. Management believed available cash, operating cash generation and borrowing facilities were adequate for remaining 2012 working-capital needs.
- Capital returns included $85.3 million of dividends paid and $9.9 million of share repurchases in the first half. The quarterly dividend was raised 20% to $0.36 per share. Approximately $217.3 million remained under the May 2011 repurchase authorization.
Material changes, outlook and risks
- First-half 2012 net earnings included $7.7 million after tax ($0.06 per share) of severance costs. The comparable 2011 periods included a $20.5 million tax benefit from resolution of an IRS audit and $8.4 million after-tax expenses related to the games reorganization; these items affect year-over-year earnings comparability.
- Management gave no specific full-year revenue or earnings forecast in the supplied filing text. It emphasized that interim results are not necessarily indicative of the full year and expected a higher proportion of 2012 revenue in the second half.
- Key risks include seasonal dependence on holiday-period sales and compressed shipping schedules; uncertain consumer and retailer demand; foreign-exchange movements; product acceptance and licensing economics; manufacturing and supply-chain concentration; and access to financing during market disruption.
- Mexican tax authorities assessed approximately $190.9 million, including interest, penalties and inflation updates, for transfer-pricing matters covering 2000–2005. Hasbro is contesting the assessments and said it expects to prevail. It had posted bonds of approximately $162.7 million for the 2000–2004 assessments; no bond was then required for 2005.
- Other items to monitor include $99.2 million of uncertain tax-position liabilities, $517.6 million of purchase commitments, and the company’s $332.6 million equity investment in THE HUB. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether second-half shipments and holiday demand offset first-half weakness, particularly in U.S. and Canada.
- Whether product-category trends, foreign-exchange effects and advertising or severance costs support a sustained operating-margin recovery.
- The timing and outcome of the Mexican transfer-pricing dispute, and any potential cash or tax consequences.
- Availability of commercial-paper and revolving-credit funding, covenant compliance, and the accessibility of cash held abroad.
- Whether THE HUB, entertainment distribution and licensing growth translate into sustained earnings and cash generation.