HAS

Business Context and Reporting Period

Company: Hasbro, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 29, 2002
Business Overview: Hasbro is a worldwide leader in children's and family leisure time entertainment products, including games and toys. Principal reportable segments are U.S. Toys, Games, and International. The company operates retail stores (Wizards of the Coast/Game Keeper) and licenses intellectual property.

Key Financial Metrics

Note: All figures in thousands of dollars except per share data and percentages.

Material Changes vs. Prior Period

• Net Loss Driver: The 2002 net loss of $170.7 million was primarily driven by a one-time, non-cash cumulative effect of accounting change of $245.7 million (net of tax) due to the adoption of SFAS No. 142 (Goodwill and Other Intangible Assets). This standard eliminated goodwill amortization but required an impairment test, resulting in a $296.2 million charge to the U.S. Toys reporting unit.
• Revenue Stability: Consolidated net revenues decreased slightly by 1.4% to $2.82 billion, compared to a significant decline in 2001. The U.S. Toys segment grew 7% due to Star Wars Episode II and core brands, while the Games segment declined 8% due to lower trading card sales (Pokémon).
• Margin Expansion: Gross profit margin improved to 61.0% from 57.2% in 2001, attributed to a favorable product mix (higher sales of Star Wars and Disney products) and reduced inventory obsolescence charges.
• Debt Reduction: Long-term debt decreased by approximately $308 million as the company repurchased $124.6 million of 7.95% Notes due in 2003 and utilized proceeds from 2001 convertible debentures to retire higher-interest debt.
• Investment Write-down: A non-cash charge of $31.7 million (net of tax) was recorded for the write-down of the company's investment in Infogrames Entertainment S.A. common stock.

Guidance, Outlook, and Risks

• 2003 Outlook: Management expects royalty and amortization expenses to decrease in 2003 as there are no major theatrical Star Wars releases scheduled. Advertising expense is expected to increase in dollars and as a percentage of revenue to promote core brands. Capital expenditures are expected to increase from 2002 levels.
• Seasonality: The business is highly seasonal, with the majority of retail sales occurring between September and December. Working capital needs peak during this period.
• Key Risks:
  • Customer Concentration: The top five customers accounted for 52% of consolidated net revenues in 2002 (Wal-Mart 19%, Toys "R" Us 16%).
  • Licensing Dependence: Success depends on licensed properties (e.g., Disney, Star Wars). Minimum guaranteed royalty commitments total $309 million through 2018.
  • International Exposure: 35% of revenues are international. Risks include currency fluctuations, trade sanctions, and political instability.
  • Legal Proceedings: The company settled a U.K. Office of Fair Trading (OFT) investigation regarding anti-competitive pricing. A fine of approximately $7.9 million was accrued in 2002; the appeal was withdrawn in March 2003.

Investor Verification Checklist

• Goodwill Impairment: Verify the sustainability of the U.S. Toys segment's fair value following the $296 million goodwill impairment charge under SFAS 142.
• Licensed Product Mix: Assess the impact of the absence of a major Star Wars theatrical release in 2003 on revenue and royalty expenses.
• Customer Concentration: Monitor the financial health and purchasing policies of Wal-Mart and Toys "R" Us, which represent 35% of total revenue.
• Debt Covenants: Confirm continued compliance with the $380 million revolving credit facility covenants, particularly given the seasonal nature of cash flows.
• Infogrames Investment: Review the remaining value and potential for further write-downs of the Infogrames common stock held as an available-for-sale investment.