Business Context and Reporting Period
Company: HASBRO, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2001 (39-week period)
Comparison Period: Nine months ended October 1, 2000 (40-week period)
Business Overview: Hasbro is a worldwide leader in children's and family leisure time entertainment products, including games and toys. The company operates through reportable segments: U.S. Toys, Games, International, and Operations. In 2001, the company realigned segments to consolidate toy-related lines into the U.S. Toys segment.
Key Financial Metrics
| Metric (in thousands) | Q3 2001 | Q3 2000 | 9 Months 2001 | 9 Months 2000 |
|---|---|---|---|---|
| Net Revenues | $893,353 | $1,072,617 | $1,867,610 | $2,624,471 |
| Gross Profit | $491,198 | $613,082 | $1,071,642 | $1,566,592 |
| Gross Margin % | 55.0% | 57.2% | 57.4% | 59.7% |
| Operating Profit | $103,774 | $56,935 | $89,626 | $133,671 |
| Net Earnings | $50,602 | $13,832 | $7,247 | $35,459 |
| Diluted EPS | $0.29 | $0.08 | $0.04 | $0.20 |
| Cash and Equivalents | $37,080 | $164,307 | $37,080 | $164,307 |
| Short-term Borrowings | $298,698 | $538,653 | $298,698 | $538,653 |
| Long-term Debt | $1,166,360 | $1,168,764 | $1,166,360 | $1,168,764 |
| Net Cash Used in Operating Activities | N/A | N/A | $(121,120) | $(70,470) |
Material Changes vs. Prior Period
- Revenue Decline: Worldwide net revenues decreased 17% in Q3 2001 and 29% for the nine-month period compared to 2000. The decline was driven primarily by decreased sales of POKEMON-related products, the sale of Hasbro Interactive in January 2001, and reduced shipments of FURBY.
- Segment Performance:
- U.S. Toys: Revenues increased 21% in Q3 2001, driven by BOB THE BUILDER, E-KARA, and MONSTERS, INC. products. The segment returned to profitability in Q3 and the first nine months of 2001, reversing losses in the comparable 2000 periods.
- Games: Revenues decreased 32% in Q3 2001 due to the loss of Hasbro Interactive and POKEMON/FURBY declines. Operating profit decreased significantly year-over-year.
- International: Revenues decreased 21% in Q3 2001, impacted by POKEMON/FURBY declines and a stronger U.S. dollar (approx. $5.4 million negative impact).
- Margin Compression: Gross profit margins declined to 55.0% in Q3 2001 from 57.2% in 2000, attributed to initiatives to reduce slow-moving inventory and lower sales of high-margin products like POKEMON trading cards.
- Expense Reduction: Amortization, royalties, R&D, and advertising expenses decreased significantly, largely due to the sale of Hasbro Interactive and Games.com. Selling, distribution, and administration expenses also decreased due to the 2000 consolidation program.
- Accounting Change: The nine-month net earnings include a $1,066 charge (cumulative effect of adopting SFAS 133 regarding derivative instruments).
Guidance, Outlook, Risks, and Contingencies
- Seasonality: The company expects the second half of the year, particularly the fourth quarter, to be more significant to overall business results. This concentration increases risks related to underproduction of popular items and overproduction of less popular items.
- Restructuring: The company is executing a consolidation plan initiated in late 2000 to reduce overhead and focus on core brands. Actions are progressing as anticipated, with expected full-year pre-tax savings of approximately $49 million in 2001 and $53 million in 2002.
- Legal Contingency (U.K.): The Office of Fair Trading (OFT) in the U.K. is investigating allegedly anti-competitive pricing practices. The company estimates a potential fine ranging from $236,000 to $38.3 million. A charge equal to the low end of this range has been accrued. Any fine exceeding this amount would adversely affect future results.
- Arbitration (Infogrames): The sale of Hasbro Interactive to Infogrames is subject to binding arbitration regarding purchase price adjustments. Infogrames claims the company should return substantially all shares of Infogrames stock received as proceeds. The company believes no adjustment is required but acknowledges the potential for an additional loss if the arbitration is resolved unfavorably.
- Market Risks: The company is exposed to foreign currency fluctuations, particularly the strength of the U.S. dollar, which negatively impacted revenues. The company uses hedging strategies to manage this risk.
- Future Accounting Standards: The company must adopt SFAS 141 and 142 (Goodwill and Intangibles) effective January 1, 2002. This will require testing goodwill for impairment rather than amortization, though the specific financial impact is not yet estimable.
Investor Verification Checklist
- Q4 Revenue Concentration: Verify the company's ability to meet demand for key holiday releases (e.g., HARRY POTTER, MONSTERS, INC.) given the high reliance on the fourth quarter.
- U.K. OFT Inquiry Outcome: Monitor the resolution of the U.K. pricing investigation to determine if the accrued liability is sufficient or if a larger fine will be imposed.
- Infogrames Arbitration: Track the status of the binding arbitration regarding the Hasbro Interactive sale to assess potential additional losses or asset write-downs.
- Inventory Management: Review inventory levels and turnover rates to ensure the company is not overproducing less popular items, which could lead to future margin compression.
- Debt Reduction Strategy: Confirm the company's ability to service its debt ($1.46 billion total borrowings) given the cash flow utilization in the first nine months and the seasonal nature of cash collections.