Hasbro, Inc. 10-Q Summary: Quarter Ended September 27, 2009
Business Context and Reporting Period
This report covers the 13-week quarter and 39-week nine-month period ended September 27, 2009. Hasbro, Inc. is a global leader in children's and family leisure products, including toys, games, and licensed entertainment. The company operates through four segments: U.S. and Canada, International, Global Operations, and Entertainment and Licensing. The reporting period reflects a strategic shift toward core owned brands (e.g., Transformers, G.I. Joe, Littlest Pet Shop) and significant investments in entertainment, including a joint venture with Discovery Communications.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net Revenues | $1,279,221 | $1,301,961 | $2,692,763 | $2,790,467 |
| Gross Profit | $729,195 | $728,126 | $1,578,532 | $1,637,249 |
| Operating Profit | $230,709 | $215,925 | $344,999 | $342,687 |
| Net Earnings | $150,362 | $138,229 | $209,367 | $213,185 |
| Diluted EPS | $0.99 | $0.89 | $1.39 | $1.39 |
| Cash & Equivalents (End of Period) | $297,358 | $356,512 | $297,358 | $356,512 |
| Long-Term Debt | $1,134,723 | $709,723 | $1,134,723 | $709,723 |
| Operating Cash Flow (9M) | ($210,531) | $24,274 | ($210,531) | $24,274 |
Margins (9M 2009 vs 9M 2008): Gross margin decreased slightly to 58.6% from 58.7%. Operating margin improved to 12.8% from 12.3%. Net margin increased to 7.8% from 7.6%.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net revenues decreased 2% in Q3 and 4% for the nine months ended September 27, 2009, compared to 2008. This was primarily driven by a stronger U.S. dollar (negative currency impact of ~$36M in Q3 and ~$121M for 9M) and decreased sales in games/puzzles and girls' toys categories.
- Profitability Growth: Despite revenue declines, operating profit increased 7% in Q3 and 1% for the nine months. This was achieved through cost control initiatives, lower advertising spend (due to movie tie-ins requiring less marketing), and reduced shipping costs.
- Segment Performance:
- U.S. & Canada: Revenues down 4% (Q3) and 2% (9M); Operating profit down 2% (Q3) but up 7% (9M).
- International: Revenues down 4% (Q3) and 9% (9M); Operating profit down 3% (Q3) and 29% (9M), heavily impacted by currency translation and a one-time pension surplus recognized in 2008.
- Entertainment & Licensing: Revenues up 127% (Q3) and 41% (9M); Operating profit up 217% (Q3) and 36% (9M), driven by Transformers and G.I. Joe licensing.
- Debt Increase: Long-term debt increased by approximately $425 million in May 2009 to fund the Discovery joint venture investment.
- Cash Flow: Operating cash flow turned negative ($210.5M utilized) for the nine months ended September 27, 2009, compared to positive cash flow in 2008. This was largely due to a decision not to utilize the accounts receivable securitization program and increased royalty payments.
Guidance, Outlook, and Risks
- Strategic Investments: The company closed a joint venture with Discovery Communications in May 2009 to create a children's television network, investing $300 million upfront. The company also extended its Star Wars license through 2020 and acquired Trivial Pursuit rights.
- Cost Management: Management continues to focus on reducing fixed costs through salary freezes, hiring limitations, and SKU reduction to improve operating margins.
- Liquidity: The company maintains a $300 million revolving credit facility with approximately $278.6 million available. Management believes existing cash, operating cash flow, and credit facilities are adequate for 2009 and 2010 working capital needs.
- Risks:
- Currency: Continued strength of the U.S. dollar negatively impacts international revenues and earnings.
- Seasonality: A significant portion of revenue is concentrated in the second half of the year, creating risks related to inventory management and shipping schedules.
- Legal/Tax: The company is defending tax assessments in Mexico totaling approximately $95.9 million, for which bonds have been posted.
- Convertible Debt: $249.8 million in senior convertible debentures are currently convertible; the company has the right to call them but has chosen not to exercise this right to maintain a lower cost of capital.
Key Facts for Investor Verification
- Discovery Joint Venture: Verify the financial impact and accounting treatment (equity method vs. consolidation) of the $300 million investment in the Discovery joint venture, including future royalty obligations ($125 million minimum guarantee).
- Accounts Receivable: Confirm the impact of the decision not to utilize the securitization program on the $1.1 billion accounts receivable balance and days sales outstanding (79 days vs. 65 days prior year).
- Debt Structure: Review the terms of the new $425 million 6.125% Notes due 2014 and the potential for interest rate adjustments based on credit rating downgrades.
- Core Brand Performance: Assess the sustainability of revenue growth from core brands (Transformers, G.I. Joe) versus licensed properties (Marvel, Star Wars) as movie tie-ins fluctuate.
- Operating Cash Flow: Monitor the reversal of negative operating cash flow in the second half of the year, given the seasonal nature of the business and the impact of royalty payments.