Hasbro, Inc. — Q3 2012 Form 10-Q
Business context and reporting period
Hasbro sells toys and games and earns revenue from entertainment, licensing and digital properties. This unaudited report covers the 13 weeks ended September 30, 2012 and the first 40 weeks of fiscal 2012; comparable 2011 periods were 13 and 39 weeks, respectively. Results are seasonal, with sales concentrated in the second half.
Financial performance
Amounts below are in millions of dollars except per-share data. Q3 comparisons are year over year; nine-month comparisons are year over year and affected by the extra week in 2012.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,345.1 | $1,375.8 | $2,805.5 | $2,956.3 |
| Operating profit | $249.6 | $248.1 | $351.6 | $377.4 |
| Operating margin | 18.6% | 18.0% | 12.5% | 12.8% |
| Net earnings | $164.9 | $171.0 | $205.7 | $246.2 |
| Diluted EPS | $1.24 | $1.27 | $1.56 | $1.78 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $143.6 | $1.0 |
- Q3 revenue fell 2%; nine-month revenue fell 5%. Stronger U.S. dollar reduced revenue by about $47.4 million in Q3 and $90.3 million over nine months.
- Q3 operating profit was nearly flat, while nine-month operating profit declined 7%. Nine-month net earnings included $11.1 million in restructuring severance costs, or $0.06 per diluted share after tax.
- Q3 product-category revenue: Boys down 12%, Games flat, Girls up 17%, Preschool down 5%. Boys’ weakness reflected lower Transformers and Beyblade sales; Girls benefited from Furby and One Direction launches and stronger My Little Pony and Easy-Bake sales.
- By segment, Q3 U.S. and Canada revenue rose 1% and operating profit rose 20%; International revenue fell 7% and operating profit fell 15%; Entertainment and Licensing revenue fell 7% and operating profit fell 30%. Nine-month Entertainment and Licensing revenue rose 18% and operating profit rose 25%.
- Nine-month cash flow improved from $1.0 million to $143.6 million, though working-capital increases absorbed cash, including $141.3 million from receivables and $125.5 million from inventory. Investing cash use was $72.3 million; financing cash use was $14.7 million.
Financial position and liquidity
- At September 30, cash and equivalents were $696.7 million, current assets $2,619.0 million and current liabilities $1,126.6 million; the current ratio was approximately 2.3.
- Short-term borrowings were $264.7 million and long-term debt was $1,398.9 million, for total reported debt of $1,663.7 million. Cash less reported debt was approximately $967.0 million. Long-term debt principal was $1,384.9 million.
- Cash increased from $642 million at fiscal year-end and was substantially held outside the U.S.; management said U.S. liquidity was sufficient without repatriation. The company reported $143.6 million of operating cash flow for the nine months.
- Cash dividends paid were $132.2 million in the nine months. The quarterly dividend was raised 20% to $0.36 per share in 2012. Share repurchases were $15.1 million, with $212.2 million remaining under the authorization.
Changes, outlook, risks and unusual items
- Management expected a greater share of full-year revenue in the second half of 2012 than in 2011, reflecting shipment timing and the International segment’s seasonal pattern. It stated available cash, operating cash generation and borrowing facilities should meet remaining-2012 working-capital needs; no specific earnings or revenue guidance was provided.
- On October 25, 2012, Hasbro amended its revolving credit agreement, increasing the commitment from $500 million to $700 million and extending it to October 2017. Pricing and unused commitment fees were reduced; financial covenants were unchanged.
- Mexico tax authorities assessed approximately $195.8 million, including interest, penalties and inflation updates, for transfer-pricing matters covering 2000–2005. Hasbro is contesting the assessments and expects to prevail; bonds of about $166 million secure the 2000–2004 assessments. The filing also reports $108.2 million of liabilities for uncertain tax benefits.
- Foreign exchange translation weighed on revenue and segment results. Hasbro hedges some forecast transactions but does not hedge translation impacts. Other risks include seasonal holiday concentration, retailer ordering and inventory decisions, product acceptance, licensed-property performance, sourcing and shipping disruptions, and access to financing.
- The 2011 comparison included a $20.5 million favorable tax adjustment for settlement of an IRS audit; this contributed to the year-over-year decline in nine-month 2012 net earnings. The 2012 nine-month period also included an extra week.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess whether second-half shipments and seasonal demand support management’s expectations, especially given the holiday sales concentration and customer order flexibility.
- Track the trajectory of International revenue and margins, foreign-exchange effects, and performance of key product launches and brands.
- Reconcile cash generation with seasonal working-capital needs, debt and borrowing availability; consider that most cash is held outside the U.S.
- Review the status and potential financial consequences of the Mexico tax assessments and other uncertain tax positions.
- Separate recurring performance from restructuring costs, the prior-year IRS tax benefit, and the extra-week comparison when evaluating earnings trends.