Business Context and Reporting Period
Company: Hasbro, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 27, 2009
Business Overview: Hasbro is a global leader in children's and family leisure time products, including toys, games, and licensed products. Key brands include TRANSFORMERS, PLAYSKOOL, NERF, LITTLEST PET SHOP, MY LITTLE PONY, G.I. JOE, MONOPOLY, and MAGIC: THE GATHERING. The company operates through three principal segments: U.S. and Canada, International, and Entertainment and Licensing, supported by a Global Operations segment for manufacturing and sourcing.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Revenues | $4,067,947 | $4,021,520 |
| Net Earnings | $374,930 | $306,766 |
| Diluted EPS | $2.48 | $2.00 |
| Gross Profit Margin | 58.8% | 57.9% |
| Operating Profit | $588,598 | $494,296 |
| Operating Margin | 14.5% | 12.3% |
| Cash from Operations | $265,623 | $593,185 |
| Total Assets | $3,896,892 | $3,168,797 |
| Total Long-Term Debt | $1,131,998 | $709,723 |
| Cash and Cash Equivalents | $636,045 | $630,390 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net revenues increased 1.2% to $4.07 billion, driven by strong sales in the U.S. and Canada segment (+2%) and the Entertainment and Licensing segment (+44%). The International segment declined 3% due to a stronger U.S. dollar, though local currency revenue increased 2%.
- Profitability: Net earnings rose 22% to $375 million. Operating profit increased 19% to $589 million, reflecting improved gross margins (58.8% vs. 57.9%) and reduced operating expenses.
- Segment Performance:
- U.S. and Canada: Operating profit surged 34% to $381 million, fueled by TRANSFORMERS and G.I. JOE movie releases and lower advertising costs.
- International: Operating profit dipped 2% to $162 million due to increased operating expenses in emerging markets, despite higher local currency sales.
- Entertainment and Licensing: Operating profit grew 28% to $66 million, driven by higher lifestyle and digital gaming licensing revenues.
- Debt Increase: Long-term debt increased significantly to $1.13 billion (from $710 million) primarily due to the issuance of $425 million in notes in May 2009 to fund the 50% acquisition of the Discovery Communications joint venture (THE HUB).
- Cash Flow: Operating cash flow decreased 55% to $266 million, largely due to an increase in accounts receivable (as the company did not utilize its securitization program at year-end) and increased royalty payments.
Guidance, Outlook, and Risks
- Strategic Initiatives: The company is focused on re-imagining core brands and expanding into entertainment. Key upcoming events include the fall 2010 launch of THE HUB television network and the 2011 commencement of the Sesame Street license.
- Capital Allocation: In February 2010, the company announced an increase in its quarterly dividend to $0.25 per share. It maintains a $500 million share repurchase authorization, with $161 million remaining as of year-end 2009.
- Outlook for 2010: Management expects capital expenditures to range between $120 million and $140 million. Amortization expense is expected to decrease to approximately $49 million as certain property rights become fully amortized.
- Key Risks:
- Seasonality: Approximately 65% of annual revenue is recognized in the second half of the year, creating working capital pressures.
- Customer Concentration: The top five customers (including Wal-Mart, Target, and Toys "R" Us) accounted for 54% of consolidated net revenues.
- Supply Chain: Substantial reliance on third-party manufacturers in China exposes the company to labor, political, and trade sanction risks.
- Joint Venture Investment: The $372 million investment in the Discovery joint venture represents 9.5% of total assets; failure of the network could lead to impairment charges.
- Legal Contingencies: The company is defending Mexican tax assessments totaling approximately $130 million, for which it has posted bonds of $105 million.
Investor Verification Checklist
- Joint Venture Viability: Monitor the launch and subscriber growth of THE HUB network in late 2010 to assess the $372 million investment.
- Debt Servicing: Verify the company's ability to service the increased debt load ($1.13 billion) and meet covenants, particularly given the seasonal cash flow nature of the business.
- Customer Concentration: Track the financial health of major retailers (Wal-Mart, Target, Toys "R" Us) which represent over half of total revenue.
- Product Lifecycle: Assess the sustainability of revenue from TRANSFORMERS and G.I. JOE following the 2009 movie releases, as these drove significant year-over-year growth.
- Foreign Exchange Impact: Monitor the strength of the U.S. dollar, as a stronger dollar negatively impacted 2009 international revenues by approximately $65 million.
- Accounting Changes: Note the 2010 adoption of new accounting standards requiring the accounts receivable securitization facility to be treated as a secured borrowing, which will impact the balance sheet presentation.