Hasbro, Inc. — 2011 Form 10-K
Business context and reporting period
Hasbro designs, markets and licenses toys, games and entertainment properties, including Transformers, Nerf, My Little Pony, Monopoly and Magic: The Gathering. Its principal reporting segments are U.S. and Canada, International, and Entertainment and Licensing; Global Operations manages manufacturing and sourcing. The fiscal year ended December 25, 2011 and comprised 52 weeks. The filing reports full-year results and fourth-quarter data; amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net revenue | $4,285.6 million | $4,002.2 million |
| Operating profit / margin | $594.0 million / 13.9% | $587.9 million / 14.7% |
| Net earnings / net margin | $385.4 million / 9.0% | $397.8 million / 9.9% |
| Diluted EPS | $2.82 | $2.74 |
| Cash from operating activities | $396.1 million | $368.0 million |
| Capital expenditures | $99.4 million | $112.6 million |
| Cash and cash equivalents at year-end | $641.7 million | $727.8 million |
Cost of sales rose to 42.8% of revenue from 42.2%, implying gross margin of 57.2% versus 57.8%. Interest expense was $89.0 million, up from $82.1 million; other expense, net, increased to $25.4 million from $3.7 million. The effective tax rate was 20.8%, compared with 21.7%.
Fourth-quarter 2011 revenue was $1,329.3 million, operating profit $216.6 million and net earnings $139.1 million, compared with $1,278.7 million, $201.0 million and $140.0 million, respectively, in fourth-quarter 2010. Fourth-quarter diluted EPS was $1.06 versus $0.99.
At year-end, total assets were $4,130.8 million and total liabilities $2,713.3 million. Principal long-term debt was $1,384.9 million; the balance-sheet carrying amount was $1,400.9 million. Short-term borrowings were $180.4 million, including approximately $166.5 million outstanding under the commercial paper program. Cash less short-term borrowings was $461.3 million. The company had a $500 million revolving facility, with approximately $332.3 million available and unused, and reported compliance with its covenants.
Material changes versus prior comparable period
- Full-year revenue grew 7.1%, while net earnings declined 3.1%; diluted EPS increased from $2.74 to $2.82, aided in part by a lower average share count.
- International revenue increased 19% to $1,861.9 million (16% in local currency); operating profit rose 29% to $270.6 million. Favorable currency translation added approximately $59.3 million to segment revenue.
- U.S. and Canada revenue declined 2% to $2,253.5 million, and operating profit fell 20% to $278.4 million. Entertainment and Licensing revenue grew 19% to $162.2 million, while operating profit edged down 1% to $42.8 million.
- Boys’ products increased to $1,821.5 million from $1,344.9 million, driven principally by Beyblade and Transformers. Games and puzzles declined to $1,167.0 million from $1,293.8 million; girls’ products fell to $741.4 million from $830.4 million. Preschool revenue rose to $553.0 million from $532.5 million.
- Royalty expense increased to $339.2 million from $248.6 million, largely reflecting higher sales of royalty-bearing Beyblade and Transformers products. Advertising declined to $414.0 million from $420.7 million.
Outlook, management commentary, risks and unusual items
Management emphasized building owned and controlled brands, developing digital and entertainment extensions, expanding internationally and improving operating efficiency. It began a gaming-business reorganization in 2011, including a Gaming Center of Excellence; its stated objective was to stabilize gaming in 2012 and position it for growth in 2013 and beyond. The filing provides no consolidated revenue or earnings guidance for 2012.
For 2012, Hasbro expected capital expenditures of $125–$135 million, television-program production cash spending of $70–$80 million, and program production cost amortization of $60–$70 million. Management said it expected to fund working-capital needs primarily through operating cash flow, supplemented as needed by commercial paper or credit lines. The company announced a quarterly dividend increase to $0.36 per share, effective with the May 2012 payment. Planned 2012 movie releases included G.I. Joe: Retaliation, Battleship, The Avengers and The Amazing Spider-Man.
- 2011 net earnings included approximately $29.6 million of discrete tax benefits; both 2011 and 2010 diluted EPS included a $0.15 favorable tax-examination benefit. Games reorganization costs had an unfavorable diluted-EPS impact of $0.07 in 2011.
- Operating cash flow included $81.0 million of television-program production spending in 2011. The 50%-owned THE HUB joint venture generated a $7.3 million share of losses for Hasbro in 2011; Hasbro’s recorded investment was $343.8 million.
- Sales are seasonal: approximately 63% of 2011 revenue occurred in the second half. The five largest customers represented about 45% of revenue; Wal-Mart alone represented 20%. Retailer inventory decisions and holiday-season shipping execution can materially affect results.
- Substantially all toy products were manufactured by third parties in the Far East, principally China. The filing highlights exposure to supply disruption, labor and input-cost increases, trade restrictions, port delays and foreign-exchange movements.
- Mexican tax authorities assessed approximately $177.4 million, including interest and penalties, for transfer-pricing matters covering 2000–2005. Hasbro said it expected to sustain its position; approximately $150.8 million of bonds had been posted for the 2000–2004 assessments.
- Existing minimum guaranteed royalties and other licensing payments totaled approximately $234.9 million. A further $140 million of potential Marvel royalty guarantees was contingent on future theatrical releases and excluded from that total. Other notable risks include brand and licensed-property popularity, competition, product safety and impairment of goodwill, acquired rights or royalty advances.
Important facts for investors to verify
- Whether international growth and the 2012 entertainment slate offset weakness in U.S. games and other categories, and whether operating margins recover.
- The quality and repeatability of earnings, especially the effect of discrete tax benefits, foreign-exchange translation, closeout sales and gaming reorganization costs.
- Cash conversion and seasonal working-capital needs, including collection of year-end receivables and planned program-production and capital spending.
- Debt maturities, commercial-paper access and liquidity availability; confirm the distinction between debt principal, balance-sheet carrying value and short-term borrowings.
- Progress and financial performance of THE HUB, including its investment value, programming costs and royalty arrangements.
- Developments in the Mexican tax dispute and any exposure under royalty guarantees, customer concentration or China-dependent sourcing.