Hasbro, Inc. — Q1 2014 Form 10-Q
Business context and period. Hasbro designs, sells and licenses toys, games and entertainment based on owned and licensed brands. This unaudited report covers the 13 weeks ended March 30, 2014; comparable figures are for the 13 weeks ended March 31, 2013. The company cautions that first-quarter results are not necessarily indicative of full-year results.
Financial performance
- Revenue: $679.5 million, up 2% year over year. Franchise-brand revenue grew approximately 15%; foreign-exchange translation reduced revenue by about $6 million.
- Profit and margins: Operating profit was $43.4 million, or 6.4% of revenue, versus $10.6 million, or 1.6%. The prior-year quarter included $28.9 million of restructuring and related pension charges; excluding those charges, prior-year operating profit was $39.6 million, or 6.0%. Net earnings attributable to Hasbro were $32.1 million, or $0.24 per diluted share, versus a net loss of $6.7 million, or $0.05 per share.
- Unusual tax impact: Q1 2014 earnings included a $13.5 million tax benefit, approximately $0.10 per diluted share, related primarily to the favorable resolution of certain U.S. tax years. The reported earnings comparison is therefore affected by differing unusual items.
- Cash flow: Operating cash flow was $242.0 million, down from $297.5 million. Investing activities used $27.1 million and financing activities used $103.4 million. Cash increased $109.8 million from year-end to $792.2 million.
- Liquidity and working capital: Current assets were $2.14 billion and current liabilities were $1.09 billion. Cash less short-term borrowings was $779.4 million, compared with $905.1 million a year earlier. Receivables were $552.5 million; inventory was $390.8 million, up 21% year over year. Days sales outstanding rose to 73 from 69.
- Debt: Debt carrying value totaled $1.386 billion, including $426.4 million classified as current and due May 15, 2014. Hasbro expected to issue long-term notes to repay the maturing debt. It had no borrowings under its $700 million revolving credit facility or commercial paper program and reported compliance with credit covenants.
- Shareholder returns: The company repurchased approximately 1.48 million shares for about $80.5 million during the quarter. The board raised the quarterly dividend to $0.43 per share, effective with the May 2014 payment.
Changes versus the prior-year quarter
- Girls-category revenue rose 21%, boys rose 2%, games declined 4%, and preschool declined 4%.
- International revenue increased 5% (approximately 7% excluding currency effects); U.S. and Canada revenue declined 1%; Entertainment and Licensing revenue increased 13%, partly reflecting the inclusion of Backflip Studios, acquired in 2013.
- International segment operating profit improved to $2.4 million from a $4.5 million loss. U.S. and Canada operating profit decreased 5% to $35.8 million; Entertainment and Licensing operating profit was $6.0 million, up from $5.3 million reported, but lower excluding prior-year restructuring charges.
- Improved product mix, franchise-brand growth, cost savings and the absence of prior-year restructuring charges supported reported operating-profit growth. Increased investment in Magic: The Gathering and Backflip, among other costs, partly offset these benefits.
Outlook, risks and notable items
- No specific full-year revenue or earnings guidance is provided in the filing. Management said available cash, operating cash generation and borrowing facilities should be adequate for working-capital needs through the remainder of 2014.
- Management continued to target $100 million of aggregate annual underlying cost reductions by 2015; gross savings from the program were approximately $50 million in 2013. The company noted that other costs and investments may offset some savings.
- The business is seasonal: the second half accounted for 65% of 2013 revenue. Retailer order changes, compressed holiday shipping schedules and misjudging demand for popular or less popular products may affect results.
- Foreign exchange remains a risk; the company hedges some forecast transactions but does not hedge translation effects. It reported $825.5 million of notional designated foreign-currency cash-flow hedges and a $21.5 million fair-value loss on forward-starting interest-rate swaps associated with anticipated debt issuance.
- Mexican tax authorities assessed approximately $252 million, including interest, penalties and updates, for transfer-pricing matters covering 2000–2007. Hasbro is contesting the assessments and expects to prevail; approximately $190.7 million of bonds secure assessments for 2000–2004. The company was also discussing a possible settlement with Mexican authorities.
- Hasbro agreed to pay $58.04 million to settle NERF and SUPER SOAKER licensing disputes. The filing describes the settlement terms but does not clearly state the timing of payment or the full financial-statement impact.
- Other risks include reliance on third-party manufacturing, concentrated retail customers, licensed-property performance and minimum royalties, acquisition execution, and possible impairment of goodwill or the Hub Network investment. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Separate recurring operating performance from the $13.5 million tax benefit and the prior-year restructuring charges when comparing earnings.
- Verify the refinancing and repayment of the $425 million notes due May 15, 2014, including the eventual borrowing terms and interest cost.
- Track operating cash flow, receivable collection days and inventory growth against the company’s seasonal shipment and demand expectations.
- Monitor the outcome and potential cash exposure of the Mexican tax disputes and confirm the recorded treatment and payment status of the $58.04 million licensing settlement.
- Assess whether franchise-brand growth, cost savings and Backflip’s performance can offset currency pressure, investment spending and declines in certain product categories.