Hasbro, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended December 26, 2010; each year shown was a 52-week period. Unless noted otherwise, financial amounts below are in millions of dollars. Hasbro sells toys and games, licenses its brands, and develops entertainment, including through its 50%-owned television joint venture, THE HUB.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net revenue | $4,002.2 | $4,067.9 |
| Operating profit / margin | $587.9 / 14.7% | $588.6 / 14.5% |
| Net earnings / margin | $397.8 / 9.9% | $374.9 / 9.2% |
| Diluted EPS | $2.74 | $2.48 |
| Cash from operating activities | $368.0 | $265.6 |
| Cash used in investing activities | $104.2 | $497.5 |
| Cash used in / provided by financing activities | $(170.6) | $236.8 |
| Cash and cash equivalents | $727.8 | $636.0 |
| Long-term debt, balance-sheet carrying value | $1,397.7 | $1,132.0 |
Net revenue declined 1.6%, while net earnings rose 6.1% and diluted EPS rose 10.5%. Operating profit was nearly flat. Earnings benefited from a lower effective tax rate: 21.7%, compared with 29.2% in 2009; 2010 included approximately $22.3 million of discrete tax benefits, including benefits from tax examination resolutions. The filing identifies a $0.15-per-diluted-share favorable effect from completion of the U.S. examination for 2004–2005.
Cash from operations improved year over year, although the filing notes long-term royalty advance payments of $25 million in 2010 and $75 million in 2009. Cash used in investing fell substantially because 2009 included the $300 million investment in THE HUB and other intellectual-property payments. 2010 financing uses included $639.6 million for share repurchases and $133.0 million in dividends, partly offset by $492.5 million of note proceeds.
At year-end, cash less short-term borrowings was $713.2 million. The company had $14.6 million of short-term borrowings and $1,384.9 million of long-term debt principal outstanding. Its $500 million committed revolving facility, maturing in 2014, had approximately $498.6 million unused; Hasbro reported compliance with its covenants. A new commercial-paper program of up to $500 million was established in January 2011. The accounts-receivable securitization facility was terminated in January 2011.
Material changes and segment results
- U.S. and Canada: Revenue fell 6% to $2,299.5 million and operating profit fell 8% to $349.6 million. Lower TRANSFORMERS, G.I. JOE and STAR WARS sales, following 2009 movie releases, and weaker traditional games late in the year outweighed growth in NERF, MARVEL, BEYBLADE, preschool products and MAGIC: THE GATHERING.
- International: Revenue rose 7% to $1,559.9 million (9% in local currency) and operating profit rose 29% to $209.7 million. Growth included emerging markets such as Brazil, Russia and China; foreign exchange reduced reported revenue and profit.
- Entertainment and Licensing: Revenue declined 12% to $136.5 million and operating profit declined 34% to $43.2 million, primarily as licensing revenues tied to 2009 movie releases decreased and television-program amortization costs arose.
- Cost of sales increased to 42.8% of revenue from 41.2%, including $22.1 million of television-program amortization and an adverse product mix. Royalties fell to 6.2% of revenue from 8.1%, as sales of entertainment-based products declined. Product-development spending rose to $201.4 million from $181.2 million.
Outlook, risks and contingencies
Management provided no specific 2011 revenue or earnings guidance in the supplied filing text. It expected 2011 capital expenditures of $125–$135 million and program-production amortization of $35–$45 million. Management said cash from operations, cash on hand and available credit or commercial-paper funding were expected to meet 2011 needs, while noting access to financing and operating results could differ from expectations. The company expected releases including TRANSFORMERS: DARK OF THE MOON, THOR and CAPTAIN AMERICA, and planned continued investment in Hasbro Studios and emerging markets.
- Seasonality and concentration: Approximately 65% of 2010 revenue came in the second half. The three largest customers represented 46% of consolidated revenue and the top five approximately 50%; retailer inventory decisions, credit problems or reduced orders could materially affect results.
- Production and market risks: Most toys are made by third parties in the Far East, principally China. Supply disruption, labor and commodity cost increases, shipping delays, trade restrictions, currency movements, rapidly changing consumer preferences, and competition from digital entertainment could pressure sales and margins.
- THE HUB and brand assets: Hasbro’s investment in THE HUB was $354.6 million at year-end; underperformance could trigger impairment. Goodwill was $474.8 million, and acquired product and licensing rights were material assets also subject to impairment risk.
- Licensing commitments: Prepaid royalties were $112.9 million; future minimum guaranteed royalties and other licensing fees were approximately $286.9 million. The filing also identifies up to $140 million of additional contingent Marvel royalty guarantees not included in that total.
- Mexico tax dispute: Tax assessments for 2000–2005 totaled approximately $179 million, including interest, penalties and inflation updates. Hasbro is challenging the assessments and expects to prevail; bonds of approximately $114.9 million were posted for the 2000–2003 matters.
- Other obligations: Outstanding purchase commitments were $340.0 million. Total future contractual obligations in the filing’s schedule were $3,559.0 million, including debt principal and interest, leases, royalties, tax-sharing payments and purchase commitments. These amounts have differing timing and conditions.
The Board increased the quarterly dividend to $0.30 per share in February 2011 from $0.25. The 2010 declared dividend was $1.00 per share. The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Key facts for investors to verify
- Whether the reported earnings improvement persists excluding the $22.3 million of discrete tax benefits and other tax-resolution effects.
- Whether revenue and margins recover from lower U.S. sales and the post-movie decline in entertainment-linked product and licensing revenue.
- Whether inventory, receivables and seasonal cash generation normalize: year-end inventory rose to $364.2 million from $207.9 million, while receivables fell to $961.3 million.
- Debt maturity, interest burden, covenant headroom and the practical availability and cost of commercial-paper funding.
- THE HUB’s performance and the recoverability of its $354.6 million carrying investment, along with goodwill and acquired rights.
- Developments in the Mexico tax dispute, contingent licensing guarantees, and customer and China-based supplier concentration.