Hasbro, Inc. — Q3 2014 Form 10-Q
Business context and period. Hasbro sells toys, games and licensed products and generates revenue from entertainment, digital gaming and licensing. The unaudited quarter ended September 28, 2014 was 13 weeks; the nine-month period was 39 weeks. Results are seasonal, with sales concentrated in the second half of the year.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $1,469.9m | $1,370.3m | $2,978.6m | $2,800.4m |
| Operating profit | $285.8m | $198.7m | $411.8m | $283.4m |
| Operating margin | 19.4% | 14.5% | 13.8% | 10.1% |
| Net earnings attributable to Hasbro | $180.5m | $126.6m | $246.0m | $156.4m |
| Diluted EPS | $1.40 | $0.96 | $1.88 | $1.19 |
| Operating cash flow | Not separately stated | Not separately stated | $26.8m | $47.3m |
Quarterly revenue rose 7% and nine-month revenue 6%; management said growth excluding currency effects was 8% and 7%, respectively. Franchise-brand revenue grew approximately 36% in Q3 and 31% year to date. Boys’ products rose 22% in Q3, helped by Transformers and Marvel theatrical releases; games fell 4% and preschool fell 5% year to date. Nine-month growth was led by International revenue (+11%) and Entertainment and Licensing (+18%).
Reported operating profit and EPS comparisons reflect significant prior-year items. Q3 and nine-month 2013 included a $57.2m charge for an adverse licensing arbitration award; 2013 also included restructuring charges. Excluding specified unusual items, management reported operating profit growth of 9% for both Q3 and the nine-month period. 2014 results include a $12.9m pretax net expense related to restructuring the Hub Network investment, partly offset by a $1.3m operating benefit; the after-tax impact was $7.4m, or $0.06 per diluted share.
Balance sheet, cash flow and capital
- At September 28, 2014, cash was $452.2m, short-term borrowings were $78.0m and long-term debt was $1,559.9m. Cash less short-term borrowings was $374.2m. The company reported $634m available under its committed facility after commercial-paper balances; it was in compliance with covenants.
- Cash declined from $588.7m a year earlier. Nine-month operating cash flow was $26.8m, down from $47.3m, amid increases in receivables ($274.2m cash use) and inventory ($172.5m cash use).
- Receivables were $1,314.0m and inventory $499.2m, up approximately 8% and 12% year over year. Management attributed inventory growth partly to support for higher sales and emerging markets, and said it had accelerated shipments in Q2 because of potential port labor disruptions.
- In May, Hasbro issued $600m of notes: $300m due 2021 at 3.15% and $300m due 2044 at 5.10%, primarily to repay $425m of notes that matured in 2014.
- Nine-month financing included $338.2m of share repurchases and $162.8m of dividends. The quarterly dividend increased to $0.43 per share; $183.6m remained under the share-repurchase authorization.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided. Management said available cash, operating cash generation and borrowing facilities should meet working-capital needs for the rest of 2014; interim results may not indicate full-year performance.
- Management’s strategy emphasizes owned and controlled brands, entertainment and licensing, digital gaming, and efficiency. Its cost-savings initiative targets $100m of annual underlying savings by 2015; reported 2013 gross savings were approximately $50m before restructuring charges and offsetting cost increases.
- In September, Discovery increased its Hub Network stake to 60%; Hasbro retained 40% and received $64.4m. A put/call option for Hasbro’s remaining interest is exercisable after December 31, 2021, with a recorded $25.6m liability. The filing notes potential additional Network restructuring charges in Q4 2014.
- Mexico tax authorities assessed approximately $295.5m, including interest, penalties and inflation adjustments, over transfer-pricing matters. Hasbro is contesting the assessments and discussing a possible settlement; it posted approximately $173.1m in bonds for the 2000–2004 assessments. The company recorded $105.9m of unrecognized tax-benefit liabilities and said approximately $66.4m of payments within 12 months were reasonably possible.
- Key risks include seasonal and holiday sales concentration, customer ordering and inventory decisions, foreign exchange (which reduced 2014 revenue), licensed-property performance, product acceptance and supply-chain disruptions. The company also cited reliance on third-party manufacturing, particularly in China, and potential financing-market constraints.
Important facts for investors to verify
- Whether revenue and margin momentum persists after separating 2014 performance from 2013 arbitration, restructuring and tax items.
- Whether operating cash flow improves as receivables and inventory convert to cash during the holiday season.
- The status, potential resolution cost and timing of the Mexican tax disputes and related possible cash payments.
- Hub Network’s performance, any further restructuring charges, and the value and eventual exercise terms of the option on Hasbro’s remaining 40% interest.
- How currency movements, licensed entertainment releases and seasonal retailer orders affect full-year results; management cautions that interim results are not necessarily indicative.