Hasbro, Inc. — Q3 2011 Form 10-Q
Business context and reporting period
Hasbro sells toys, games and licensed products, and operates U.S. and Canada, International, Entertainment and Licensing, and Global Operations segments. The quarter ended September 25, 2011 covered 13 weeks; the nine-month period covered 39 weeks. Results are unaudited, and the company cautions that interim results are not necessarily indicative of the full year. Its business is seasonal, with a significant share of sales typically in the second half.
Key financial metrics
Amounts below are in millions of dollars unless noted; the filing reports financial statements in thousands.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,375.8 | $1,313.3 | $2,956.3 | $2,723.5 |
| Operating profit | $248.1 | $237.8 | $377.4 | $386.8 |
| Net earnings | $171.0 | $155.2 | $246.2 | $257.7 |
| Diluted EPS | $1.27 | $1.09 | $1.78 | $1.76 |
| Operating margin | 18.0% | 18.1% | 12.8% | 14.2% |
| Net margin | 12.4% | 11.8% | 8.3% | 9.5% |
Quarterly revenue increased 5%; nine-month revenue increased about 8.5%. Foreign-currency translation added approximately $37.1 million to quarterly revenue and $77.7 million to nine-month revenue. For the nine months, operating cash flow was $1.0 million versus $5.8 million; capital expenditures were $71.7 million. Cash and equivalents were $187.0 million at September 25, down from $497.9 million a year earlier. Long-term debt had a carrying value of $1,405.1 million (principal of $1,384.9 million); short-term borrowings were $13.2 million.
At September 25, current assets were $2,210.3 million and current liabilities were $942.4 million. The company paid $115.3 million in dividends and spent $384.8 million repurchasing shares during the first nine months. Quarterly dividends declared were $0.30 per share, up from $0.25; $263.5 million remained under the May 2011 repurchase authorization.
Material changes versus the prior comparable period
- Quarterly net earnings and diluted EPS rose, although operating margin was slightly lower. Nine-month net earnings fell despite revenue growth, and operating margin declined from 14.2% to 12.8%.
- International was a major growth driver: quarterly revenue rose 23% and operating profit 42%; nine-month revenue rose 27% and operating profit 66%. Currency translation contributed to the increases.
- U.S. and Canada revenue declined 7% in the quarter and 2% year to date; operating profit fell 19% and 18%, respectively. Management cited lower sales in several product categories and higher royalty and selling, distribution and administration costs.
- Entertainment and Licensing quarterly revenue rose 69%, including a $5.0 million one-time movie-related payment from Universal Studios. Nine-month operating profit declined 25%, reflecting investment and higher program amortization.
- Royalties increased to 7.9% of revenue for both the quarter and nine months, versus 5.8% and 6.2%, respectively, mainly due to movie-related products and BEYBLADE and Sesame Street sales. Selling, distribution and administration expense rose to 16.0% of quarterly revenue and 21.0% year to date.
Outlook, commentary, risks and unusual items
- No specific revenue or EPS guidance is provided. Management expects full-year selling, distribution and administration expense, excluding games-reorganization costs, to be below 20% of revenue. It considers available cash, operating cash flow, credit facilities and the commercial paper program adequate for working-capital needs through the remainder of 2011.
- The games-business reorganization is estimated to cost approximately $20.1 million; $15.0 million was recognized in the first nine months, with remaining costs expected through the first half of 2012. Management identified approximately $9.5 million of after-tax reorganization expense in nine-month 2011 earnings.
- Nine-month 2011 income tax expense includes a $20.5 million benefit from resolution of the 2006–2007 IRS examination. The comparable 2010 period included a $21.2 million benefit from settlement of an earlier IRS examination; reported earnings comparisons therefore include significant discrete tax items.
- Mexico tax authorities assessed approximately $171.9 million, including interest, penalties and inflation adjustments, for transfer-pricing matters covering 2000–2005. Hasbro disputes the assessments and says it expects to prevail; approximately $150.3 million of bonds secure assessments for 2000–2004.
- Other considerations include seasonal concentration of sales and compressed holiday shipping schedules; retailer ordering and inventory decisions; foreign-exchange exposure; reliance on third-party manufacturing, substantially concentrated in China; and uncertainty around entertainment, licensing and digital initiatives. Management reported compliance with credit-facility covenants and no borrowings under its $500 million committed revolving facility at period-end.
Important facts for investors to verify
- Whether fourth-quarter and holiday demand converts the year-to-date revenue growth into operating cash flow, given the very low nine-month cash generation and lower cash balance.
- Whether International growth persists after separating currency effects, and whether U.S. and Canada operating performance stabilizes.
- How much reported earnings depend on discrete tax benefits, and the timing and eventual outcome of the disputed Mexican tax assessments.
- Actual remaining games-reorganization costs, and whether management meets its full-year SD&A outlook excluding those costs.
- The cash and balance-sheet impact of continued share repurchases and dividends, alongside debt service and investment commitments.