Business Context and Reporting Period
Company: HASBRO, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 29, 2009 (13-week period)
Business Overview: Hasbro is a worldwide leader in children's and family leisure time products, including toys, games, and licensed products. The business is highly seasonal, with a significant portion of revenues occurring in the second half of the year. The company operates through U.S. and Canada, International, Global Operations, and Other segments.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Revenues | $621,340 | $704,220 |
| Gross Profit | $376,587 | $433,059 |
| Operating Profit | $41,217 | $61,253 |
| Net Earnings | $19,730 | $37,470 |
| Diluted EPS | $0.14 | $0.25 |
| Cash and Cash Equivalents | $590,388 | $832,180 |
| Short-term Borrowings | $45,716 | $171,249 |
| Long-term Debt | $709,723 | $709,723 |
| Net Cash from Operating Activities | ($22,657) | $153,852 |
Margins: Gross margin decreased to 60.6% from 61.5%. Operating margin decreased to 6.6% from 8.7%. Net earnings margin decreased to 3.2% from 5.3%.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 12% to $621.3 million. This was driven by a 6% decline in the U.S. and Canada segment and a 24% decline in the International segment. The International decline was significantly impacted by a stronger U.S. dollar (approx. $36.1 million negative impact) and decreased sales of key brands like TRANSFORMERS and MONOPOLY.
- Profitability: Operating profit fell 33% to $41.2 million. While the U.S. and Canada segment operating profit increased 11% due to cost controls, the International segment swung from a $13.0 million profit to a $14.5 million loss.
- Cash Flow: Operating cash flow turned negative, utilizing $22.7 million compared to providing $153.9 million in the prior year. This was due to lower net earnings, decreased collections of receivables, and increased royalty payments (including a $50 million guaranteed payment to Marvel).
- Balance Sheet: Cash and cash equivalents decreased by approximately $242 million year-over-year. Accounts receivable decreased, while inventories remained relatively stable.
Guidance, Outlook, and Risks
Management Commentary & Strategy:
- Cost Controls: Management instituted salary freezes, hiring limitations, and SKU reductions to mitigate economic weakness and currency headwinds.
- Brand Focus: Continued focus on core owned brands (TRANSFORMERS, LITTLEST PET SHOP, NERF, MONOPOLY) and entertainment partnerships (Universal Pictures, Discovery Communications).
- Discovery Joint Venture: Announced a joint venture with Discovery Communications to create a children's TV network. Hasbro will invest $300 million upfront for a 50% interest, expected to close in Q2 2009. The venture will be consolidated.
- Licensing Updates: Extended the STAR WARS license through 2020 (incurring a $45 million intangible asset cost) and settled royalty audit issues with Lucas Licensing ($30 million accrual). Extended the Marvel agreement through 2017 with increased minimum guarantees.
Risks and Contingencies:
- Foreign Exchange: Significant exposure to currency fluctuations, particularly the strengthening U.S. dollar and weakening Mexican peso, which negatively impacted international results.
- Tax Litigation: Ongoing tax assessments in Mexico regarding transfer pricing (years 2000-2003). Hasbro has posted bonds totaling $87.5 million to defend these assessments.
- Seasonality: Heavy reliance on second-half sales, particularly the holiday season, creates risks regarding inventory management and retailer order patterns.
- Liquidity: While management believes current resources are adequate, they noted that severe economic downturns or credit market disruptions could impact access to external financing.
Investor Verification Checklist
- Discovery JV Funding: Verify the timing and funding sources for the $300 million upfront payment for the Discovery Communications joint venture.
- International Currency Impact: Monitor the trajectory of the U.S. dollar against the Euro, Mexican Peso, and other key currencies, as this significantly impacts reported revenue and margins.
- Marvel & Lucas Agreements: Track the impact of the new minimum royalty guarantees ($100 million additional for Marvel; $125 million for Discovery JV) on future cash flows and operating expenses.
- Inventory Levels: Assess inventory turnover and potential markdown risks given the economic environment and the company's focus on reducing SKU counts.
- Debt Covenants: Confirm continued compliance with financial covenants (leverage and coverage) under the revolving credit agreement, especially given the recent operating cash flow utilization.