Hasbro, Inc. 10-Q Summary: Quarter Ended June 28, 2009
Business Context and Reporting Period
This Form 10-Q covers the 13-week quarter and 26-week six-month period ended June 28, 2009. Hasbro, Inc. is a global leader in children's and family leisure products, including toys, games, and licensed properties. The company operates through four segments: U.S. and Canada, International, Global Operations, and Entertainment and Licensing (renamed from "Other" in Q2 2009). The reporting period was characterized by a stronger U.S. dollar, which negatively impacted foreign currency translation, and significant strategic investments, including a joint venture with Discovery Communications.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Revenues | $792.2M | $784.3M | $1,413.5M | $1,488.5M |
| Gross Profit Margin | 59.7% | 60.7% | 60.1% | 61.1% |
| Operating Profit | $73.1M | $65.5M | $114.3M | $126.8M |
| Net Earnings | $39.3M | $37.5M | $59.0M | $75.0M |
| Diluted EPS | $0.26 | $0.25 | $0.40 | $0.50 |
| Cash and Equivalents | $392.0M | $594.6M | $392.0M | $594.6M |
| Long-Term Debt | $1,134.7M | $709.7M | $1,134.7M | $709.7M |
| Operating Cash Flow (6mo) | ($179.9M) utilized | $22.8M provided | ($179.9M) utilized | $22.8M provided |
Material Changes vs. Prior Period
- Revenue Trends: Q2 2009 revenues increased 1% year-over-year, while the six-month period saw a 5% decline. The decline was primarily driven by a stronger U.S. dollar, which negatively impacted revenues by approximately $44.5M in Q2 and $84.7M for the six months.
- Profitability: Operating profit increased 12% in Q2 ($73.1M vs. $65.5M) despite revenue flatness, driven by cost controls and higher gross profit in the U.S. segment. However, six-month operating profit decreased 10% ($114.3M vs. $126.8M).
- Segment Performance:
- U.S. & Canada: Revenues up 5% in Q2; Operating profit up 29% in Q2 and 21% for six months, driven by Transformers and GI Joe sales.
- International: Revenues down 6% in Q2 and 14% for six months due to currency headwinds. Operating profit dropped 93% for the six months compared to 2008, which included a one-time pension surplus recognition.
- Entertainment & Licensing: Revenues up 13% in Q2, but operating profit fell 63% due to acquisition costs related to the Discovery joint venture.
- Debt and Liquidity: Long-term debt increased significantly to $1.13B from $710M in the prior year, primarily due to the issuance of $425M in 6.125% Notes in May 2009 to fund the Discovery joint venture investment. Operating cash flow turned negative for the six-month period ($179.9M utilized) compared to positive flow in 2008, largely due to increased royalty payments and working capital changes.
Guidance, Outlook, and Risks
- Strategic Investments: Hasbro closed a joint venture with Discovery Communications in May 2009 to create a children's television network, investing $300M upfront. The company expects to incur investment spending leading up to the network's debut in late 2010.
- Product Outlook: Management anticipates increased revenues from GI Joe products following the August 2009 theatrical release of The Rise of Cobra. The company continues to focus on core brands like Transformers, Littlest Pet Shop, and Nerf.
- Cost Management: The company is implementing cost control initiatives, including salary freezes and SKU reductions, to mitigate economic downturns and currency impacts.
- Risks and Contingencies:
- Legal/Tax: Hasbro is defending tax assessments in Mexico totaling approximately $98.4M related to transfer pricing for years 2000-2003. Bonds have been posted to secure these assessments.
- Currency: Continued strength of the U.S. dollar poses a risk to international revenues and earnings.
- Seasonality: The business is highly seasonal, with the majority of revenues occurring in the second half of the year, creating risks related to inventory management and shipping schedules.
Investor Verification Checklist
- Discovery Joint Venture Impact: Verify the long-term financial impact of the $300M investment and the $125M minimum royalty guarantee payable to the joint venture.
- Currency Sensitivity: Assess the magnitude of foreign exchange headwinds on the International segment and the effectiveness of hedging strategies.
- Debt Service: Review the company's ability to service the new $425M debt issuance and existing convertible debentures, particularly given the negative operating cash flow in the first half of the year.
- License Renewals: Monitor the financial implications of the extended Star Wars (through 2020) and Marvel (through 2017) license agreements, including minimum royalty guarantees.
- Inventory Levels: Confirm that inventory levels ($346.8M) are aligned with demand, given the risks of overproduction in a weak economic environment.