Hasbro, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2011 (13 and 26 weeks, respectively). Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise. Hasbro sells toys, games and licensed products and reports significant seasonality, with most annual revenue historically generated in the second half.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $908.5 | $737.8 | $1,580.4 | $1,410.2 |
| Operating profit | $80.4 | $79.7 | $129.3 | $149.1 |
| Net earnings | $58.1 | $43.6 | $75.2 | $102.6 |
| Diluted EPS | $0.42 | $0.29 | $0.54 | $0.69 |
| Operating margin | 8.9% | 10.8% | 8.2% | 10.6% |
| Operating cash flow | — | $128.9 | $173.0 |
- Q2 revenue rose 23%; six-month revenue increased 12%. The weaker U.S. dollar contributed approximately $35.8 million and $40.6 million to revenue growth for the quarter and six-month period, respectively.
- Profitability lagged revenue growth: operating profit was nearly flat in Q2 and declined 13% for the half. Cost of sales was 41.6% of revenue in Q2 and 40.8% for the half, versus 40.7% and 39.9% in 2010.
- Q2 net earnings included an approximately $20.5 million tax benefit from the resolution of an IRS examination and $8.4 million of after-tax games-reorganization costs. The six-month 2010 comparison also included a $21.2 million tax benefit.
Segments and material changes
- U.S. and Canada: Q2 external revenue increased 14% to $505.0 million; six-month revenue rose 3% to $896.1 million. Operating profit declined 2% in Q2 and 18% for the half, reflecting low-margin closeout inventory and higher selling, distribution and administration costs.
- International: Q2 revenue increased 43% to $374.5 million and six-month revenue rose 30% to $628.8 million. Operating profit improved substantially in both periods, aided by higher sales and favorable currency translation. Currency accounted for about 13% of Q2 and 8% of six-month revenue growth in this segment.
- Entertainment and Licensing: Q2 revenue fell 11% to $27.2 million and operating profit fell to $0.6 million from $13.0 million. Six-month revenue declined 7% and operating profit declined 73%, reflecting lower movie-related revenue and continued investment in online, licensing and television operations.
- By product category, Q2 Boys revenue rose to $460.4 million, while Games and puzzles, Girls and Preschool revenue declined. Transformers and Beyblade helped drive Boys growth; movie-related and licensed products also raised royalty expense.
Cash, debt and liquidity
- Cash and cash equivalents were $584.8 million at June 26, 2011, down from $872.3 million a year earlier and $727.8 million at year-end 2010. Six-month operating cash flow was $128.9 million, versus $173.0 million in 2010.
- Six-month investing cash use was $57.8 million, including $51.1 million of capital spending and approximately $10.0 million for intellectual property. Financing cash use was $221.0 million, including $172.2 million of share repurchases and $75.1 million of dividends paid.
- Long-term debt carrying value was $1,403.0 million; principal was $1,384.9 million. Short-term borrowings were $12.4 million. The company reported $498.8 million available under its $500 million revolving facility, no outstanding commercial paper, and a $500 million commercial-paper program. It was in compliance with credit covenants.
- Current assets were $2,046.1 million and current liabilities $706.5 million. Accounts receivable was $838.0 million; inventory was $426.9 million, up from $342.1 million a year earlier.
- The board approved a further $500 million share-repurchase authorization in May 2011; $474.5 million remained available at quarter-end. The quarterly dividend increased 20%, from $0.25 to $0.30 per share.
Outlook, risks and unusual items
- Management expected full-year 2011 selling, distribution and administration expense to be below 20% of revenue. No full-year revenue or earnings forecast was provided in the filing.
- Management expected significant 2011 product sales tied to Transformers: Dark of the Moon, Thor, Captain America: The First Avenger, Beyblade and the Sesame Street product line. It also expected higher licensing revenue later in 2011 following the Transformers movie release.
- The games-business reorganization was estimated to cost $20.1 million in total; $13.1 million was recorded in Q2, with remaining costs expected as incurred in the second half of 2011 and first half of 2012.
- Hasbro cited holiday-season and second-half sales concentration, retailer ordering and inventory practices, product acceptance and shipping execution, foreign-exchange movements, manufacturing and transportation costs, competition and investment returns in entertainment and digital initiatives as material risks. Management noted that first-half results are not necessarily indicative of full-year results.
- Mexican tax authorities assessed approximately $195.9 million, including interest, penalties and inflation updates, in transfer-pricing disputes for 2000–2005. Hasbro said it was contesting the assessments and expected to prevail. Bonds of about $131.7 million had been posted by quarter-end for 2000–2003; an additional approximately $39.5 million bond was posted after quarter-end for 2004.
- The IRS examination of tax years 2006–2007 concluded during Q2, resulting in the tax benefit noted above. Hasbro reported $85.4 million of liabilities for uncertain tax positions, with ultimate payment timing unclear.
Important facts for investors to verify
- How much reported earnings growth depended on the IRS tax benefit, and how restructuring charges affect comparable operating results.
- Whether revenue growth—particularly internationally and in movie- and license-linked products—translates into sustainable margins after royalties, closeout inventory and currency effects.
- Inventory quality, receivables collection and cash conversion as the business enters its seasonally important second half.
- Progress and costs of the games reorganization, Hasbro Studios and THE HUB, and whether these investments generate expected returns.
- Developments in the Mexican tax disputes, the related bonds and other uncertain tax positions, as well as access to financing under market stress.