Business Context and Reporting Period
Company: HASBRO, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 28, 2003 (Third Quarter)
Business Overview: Hasbro is a worldwide leader in children's and family leisure time and entertainment products, including games and toys. The company operates through three principal reportable segments: U.S. Toys, Games, and International.
Key Financial Metrics
All figures in thousands of dollars, except per share data.
| Metric | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Net Revenues | $971,071 | $820,532 | $2,014,308 | $1,818,789 |
| Gross Profit | $551,202 | $477,614 | $1,191,395 | $1,113,292 |
| Gross Margin % | 56.8% | 58.2% | 59.1% | 61.2% |
| Operating Profit | $136,993 | $96,717 | $181,340 | $104,373 |
| Net Earnings | $68,464 | $55,848 | $81,070 | $(232,830) |
| Diluted EPS | $0.38 | $0.32 | $0.45 | $(1.34) |
| Cash and Equivalents | $155,357 | $43,850 | $155,357 | $43,850 |
| Short-term Borrowings | $104,576 | $63,392 | $104,576 | $63,392 |
| Long-term Debt | $856,934 | $856,257 | $856,934 | $856,257 |
| Net Borrowings | $807,372 | $1,131,047 | $807,372 | $1,131,047 |
Cash Flow (9 Months): Net cash utilized by operating activities was $(175,427) in 2003 compared to $(98,597) in 2002. This utilization is attributed to seasonal working capital requirements, specifically increases in accounts receivable and inventories.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net revenues increased 18% in Q3 2003 and 11% for the nine months ended September 28, 2003, compared to the prior year.
- Profitability: Operating profit increased significantly, driven by higher revenues and lower royalty/amortization expenses related to Star Wars products in a non-movie year. Net earnings for the nine months turned positive ($81.1M) compared to a significant loss ($232.8M) in 2002, which included a one-time goodwill impairment charge.
- Segment Performance:
- U.S. Toys: Q3 revenues up 23% due to Beypalade and Furreal Friends, offset by lower Star Wars sales.
- Games: Q3 revenues up 11% driven by Trivial Pursuit and Magic: The Gathering.
- International: Q3 revenues up 22%, aided by a weaker U.S. dollar (approx. 10% of growth) and strong Beypalade sales.
- Debt Reduction: Net borrowings decreased by approximately $324 million year-over-year, primarily due to the repayment of $252 million in 7.95% notes in early 2003.
Guidance, Outlook, and Risks
- Accounting Changes: The company adopted SFAS 150, reclassifying certain warrants from equity to liabilities. This resulted in a cumulative effect charge of $17.35 million (net of tax) in Q3 2003. Future earnings will be impacted by quarterly fair value adjustments to these warrants based on stock price volatility.
- Seasonality: The company expects the second half of the year, particularly the fourth quarter, to be the most significant for full-year results. The first half of 2003 is expected to represent a smaller proportion of full-year revenues than 2002 due to the timing of the Star Wars: Episode II release in 2002.
- Cost Initiatives: Management is evaluating the viability of a manufacturing facility in Spain and other under-performing operations, which could result in operating charges in the fourth quarter of 2003.
- Risks: Key risks include the concentration of sales in the fourth quarter, reliance on licensed properties (e.g., Star Wars, Disney), foreign currency fluctuations, and the potential for inventory obsolescence if consumer demand is misjudged.
- Liquidity: The company maintains a $380 million secured revolving credit facility and believes funds from operations and available borrowings are adequate for 2003 and 2004.
Investor Verification Checklist
- Warrant Liability Impact: Verify the sensitivity of future earnings to stock price fluctuations due to the SFAS 150 reclassification of warrants to liabilities.
- Fourth Quarter Execution: Monitor Q4 sales performance, as a significant portion of annual revenue is concentrated in the holiday season.
- Inventory Levels: Assess inventory turnover and potential obsolescence charges, particularly for licensed products with declining sales.
- Debt Covenants: Confirm continued compliance with debt covenants, especially given the seasonal nature of cash flows and the risk of retail market softness.
- Spain Facility: Watch for announcements regarding the potential closure of the Spain manufacturing facility and associated restructuring costs.