Hasbro, Inc. — Q1 2012 Form 10-Q
Business context and period. Hasbro sells toys and games and earns licensing and entertainment revenue. This unaudited quarter ended April 1, 2012 and covered 14 weeks, versus 13 weeks in the prior-year quarter ended March 27, 2011. Results are seasonal and management cautions that first-quarter performance is not indicative of full-year results. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2012 | Prior-year quarter |
|---|---|---|
| Net revenue | $648.9 | $672.0 |
| Operating profit | $15.7 | $48.9 |
| Operating margin | 2.4% | 7.3% |
| Pretax earnings (loss) | $(4.9) | $22.8 |
| Net earnings (loss) | $(2.6) | $17.2 |
| Diluted EPS | $(0.02) | $0.12 |
| Operating cash flow | $284.7 | $276.5 |
Revenue declined about 3% despite the extra week; foreign currency translation reduced Q1 2012 revenue by approximately $8.5 million. Cost of sales was 39.6% of revenue, compared with 39.8%; royalties rose to 8.1% from 6.4%, and selling, distribution and administration rose to 30.8% from 27.7%. Cash flow benefited substantially from collections and a $595.0 million decrease in accounts receivable, partly offset by working-capital outflows.
Segments and product categories: U.S. and Canada revenue fell 16% to $329.0 million, with operating profit down to $14.4 million from $41.0 million. International revenue increased 14% to $289.7 million, but its operating loss widened to $5.1 million from $1.7 million. Entertainment and Licensing revenue grew 19% to $29.3 million and operating profit rose to $7.7 million from $5.4 million. By product category, boys grew 4% and preschool 2%; games fell 9% and girls fell 18%.
Balance sheet, debt and liquidity
At April 1, 2012, cash and cash equivalents were $883.8 million; current assets were $2,018.9 million and current liabilities $725.9 million. Short-term borrowings were $171.2 million and long-term debt carrying value was $1,400.9 million (principal amount $1,384.9 million). Cash increased $242.1 million from year-end 2011. Capital spending was $23.0 million; dividends paid were $38.6 million.
Management said cash from operations and available borrowing facilities should meet working-capital needs for the remainder of 2012. The $500 million revolving facility had no borrowings and approximately $498.9 million unused, but effective availability after considering commercial-paper borrowings was approximately $338.8 million. Hasbro reported compliance with its credit covenants. Substantially all cash was held outside the U.S.; management said U.S. needs could be met without repatriation.
Changes, outlook and risks
- Management attributed lower operating profit primarily to lower revenue, approximately $11.1 million of severance costs, and expenses associated with the extra week. Severance reduced net earnings by $7.7 million, or $0.06 per share.
- Management expects second-half revenue to represent a greater share of 2012 revenue than the 63% recorded in 2011, citing shipment timing changes in U.S. and Canada and increased significance of International. No specific full-year revenue or earnings forecast is provided.
- The quarterly dividend was increased 20% to $0.36 per share, effective with the May 2012 payment. Approximately $222.3 million remained under the May 2011 share-repurchase authorization.
- Key operating risks include pronounced holiday-season and second-half sales concentration, retailer ordering and inventory decisions, product acceptance and supply/shipping constraints, foreign-exchange movements, customer concentration, and reliance on third-party manufacturing. Management noted that FX translation is not hedged.
- Hasbro faced Mexican transfer-pricing tax assessments of approximately $196.9 million, including interest and penalties, for 2000–2005. It is contesting the assessments and expects to prevail; approximately $166.2 million of bonds secure the 2000–2004 assessments. Separately, $96.9 million of liabilities for uncertain tax positions was recorded; ultimate resolution and payment timing are uncertain.
Investor verification priorities
- Assess the severity and persistence of operating-profit and margin contraction, adjusting for the extra week and the $11.1 million severance charge.
- Verify whether the expected second-half shipment concentration and planned product/movie launches translate into sales and profit, particularly after U.S. and Canada weakness.
- Monitor International segment profitability, expense growth in emerging markets, and currency effects.
- Review the location and accessibility of cash, commercial-paper and revolver availability, debt maturities, and covenant headroom.
- Track the Mexican tax dispute, related bonds, and uncertain-tax-position liabilities; the filing does not resolve their ultimate exposure or timing.