Hasbro, Inc. 10-Q Summary: Quarter Ended September 26, 2010
Business Context and Reporting Period
This filing covers the quarterly period ended September 26, 2010 (13 weeks) and the nine-month period ended September 26, 2010 (39 weeks). Hasbro, Inc. is a worldwide leader in children's and family leisure time products, including toys, games, and licensed products. The company operates through four segments: U.S. and Canada, International, Entertainment and Licensing, and Global Operations. The business is highly seasonal, with a significant portion of revenues typically occurring in the second half of the year.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net Revenues | $1,313.3M | $1,279.2M | $2,723.5M | $2,692.8M |
| Operating Profit | $237.8M | $230.7M | $386.8M | $345.0M |
| Net Earnings | $155.2M | $150.4M | $257.7M | $209.4M |
| Diluted EPS | $1.09 | $0.99 | $1.76 | $1.39 |
| Operating Margin | 18.1% | 18.0% | 14.2% | 12.8% |
| Cash & Equivalents | $497.9M | $297.4M | N/A (Balance Sheet Item) | |
| Long-Term Debt | $1,404.6M | $1,134.7M | N/A (Balance Sheet Item) | |
| Short-Term Borrowings | $103.6M | $33.1M | N/A (Balance Sheet Item) | |
| Operating Cash Flow (9M) | N/A | $5.8M | ($210.5M) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net revenues increased 3% in Q3 and 1% in the nine-month period compared to 2009. The U.S. and Canada segment saw a 4% revenue increase in Q3, while the International segment grew 3%. Conversely, the Entertainment and Licensing segment declined 34% in Q3 due to lower movie-related revenues (Transformers, G.I. Joe).
- Profitability: Operating profit increased 3% in Q3 and 12% for the nine-month period. This was driven by lower royalty expenses (due to decreased sales of entertainment-driven products) and reduced amortization expenses as certain acquisition-related intangibles became fully amortized.
- Cost Structure: Cost of sales increased as a percentage of revenue (45.4% in Q3 2010 vs. 43.0% in Q3 2009), reflecting revenue mix changes and foreign currency impacts. Royalty expense decreased significantly to 5.8% of revenue in Q3 2010 from 7.8% in 2009.
- Debt and Liquidity: Long-term debt increased to $1.4 billion, primarily due to the issuance of $500 million in 6.35% Notes in March 2010. Short-term borrowings increased to $103.6 million. Cash and cash equivalents rose to $497.9 million.
- Shareholder Returns: The company repurchased $631.0 million of common stock in the first nine months of 2010, compared to $27.1 million in the same period in 2009. Dividends declared per share increased to $0.25 in Q3 2010 from $0.20 in Q3 2009.
Guidance, Outlook, and Risks
- Outlook: Management expects the second half of the year to remain the most significant period for revenue. The company is focusing on growing core owned brands (e.g., Nerf, Littlest Pet Shop, Transformers) and expanding into digital gaming and entertainment (e.g., The HUB network, Hasbro Studios).
- Unusual Items: Net earnings for the nine months ended September 26, 2010, included a favorable tax adjustment of approximately $21.2 million ($0.14 per diluted share) resulting from the completion of an IRS examination for tax years 2004 and 2005.
- Risks and Contingencies:
- Legal Proceedings: The company faces tax assessments from Mexican authorities totaling approximately $142 million (including interest and penalties) related to transfer pricing for years 2000-2004. The company has posted bonds totaling approximately $115 million to defend these assessments and expects to be successful.
- Seasonality: A significant concentration of sales in the fourth quarter increases risks related to underproduction, overproduction, and shipping schedules.
- Foreign Currency: Fluctuations in exchange rates negatively impacted International segment revenues by approximately $17.8 million in Q3 2010.
- Joint Venture: The company's 50% interest in The HUB (joint venture with Discovery) reported a loss of $0.9 million for the quarter and $0.5 million for the nine months.
Key Facts for Investor Verification
- Tax Benefit Impact: Verify the sustainability of earnings given the $21.2 million one-time tax benefit included in the nine-month results.
- Debt Servicing: Monitor the impact of increased interest expense ($60.4M for 9M 2010 vs. $44.8M for 9M 2009) resulting from new debt issuances and higher rates.
- Inventory Levels: Inventories increased to $468.0 million (up from $400.0 million in 2009) due to early shipments to mitigate potential container shortages; verify if this leads to future markdowns.
- Entertainment Segment Decline: Assess the long-term strategy for the Entertainment and Licensing segment, which saw a 34% revenue drop in Q3 due to the lack of major movie releases compared to 2009.
- Mexican Tax Dispute: Track the resolution of the $142 million Mexican tax assessment, as the outcome could materially impact future cash flows.