Hasbro, Inc. — Q1 2011 Form 10-Q Summary
Reporting period: Unaudited 13-week quarter ended March 27, 2011, compared with the 13-week quarter ended March 28, 2010. Dollar amounts below are in millions unless stated otherwise. Hasbro sells toys, games and licensed products and earns licensing and entertainment revenue; its business is seasonal, with most revenue historically generated in the second half of the year.
Financial performance and liquidity
- Revenue: $672.0, essentially flat versus $672.4. Foreign exchange added approximately $4.8, or 1%.
- Profit: Operating profit fell to $48.9 from $69.3; operating margin was 7.3%, versus 10.3%. Net earnings declined to $17.2 from $58.9. Basic and diluted EPS were both $0.12, compared with $0.43 basic and $0.40 diluted.
- Prior-period comparison: Q1 2010 net earnings included a favorable tax adjustment of approximately $21.2, or $0.14 per diluted share, following completion of a tax audit. Excluding specified discrete tax items, the reported adjusted tax rates were 28.0% for Q1 2011 and 29.0% for Q1 2010.
- Cash flow: Operating activities provided $276.5, compared with $265.1. Investing used $24.4, including $22.4 of capital additions. Financing used $57.4, compared with $382.1 provided in Q1 2010, which included proceeds from the 2010 debt issuance. Cash increased $199.6 during the quarter to $927.4.
- Balance sheet and debt: Total assets were $3,940.3 and shareholders’ equity was $1,531.0. Long-term debt was $1,396.7 and short-term borrowings were $37.9; cash was $927.4. Inventories were $401.3, up from $226.8 a year earlier. Current assets were $2,060.8 and current liabilities $626.5.
- Shareholder returns: The company repurchased approximately 1.40 million shares for about $63.7 and paid $34.3 in dividends. The board raised the quarterly dividend 20% to $0.30 per share, effective with the May 2011 payment. Approximately $86.4 remained under the repurchase authorization at quarter-end.
Material changes versus Q1 2010
- U.S. and Canada revenue decreased 8% to $391.2; operating profit fell 33% to $41.0. Lower games and puzzles, preschool and girls’ sales were partly offset by boys’ products, including BEYBLADE and TRANSFORMERS.
- International revenue increased 15% to $254.3, including approximately 1% from currency translation. The segment’s operating loss narrowed to $1.7 from $2.4, while emerging-market investment and higher selling, distribution and administration costs remained factors.
- Entertainment and Licensing revenue declined 2% to $24.6; operating profit fell to $5.4 from $9.4, reflecting lower TRANSFORMERS-related licensing revenue and higher television-operation costs, including program amortization.
- Costs rose faster than revenue: selling, distribution and administration expense increased to $186.4 from $173.7, and product development expense to $45.8 from $40.3. Cost of sales rose to $267.2 from $262.7, partly reflecting product mix and unfavorable manufacturing variances associated with lower production at the U.S. games facility.
- Interest expense increased to $21.4 from $16.8, primarily reflecting the replacement of lower-rate convertible debt with 6.35% notes due 2040 issued in 2010. Other expense was $6.1, versus other income of $0.9; Q1 2011 included a $2.0 share of THE HUB’s losses and foreign-exchange losses.
Outlook, risks and contingencies
- Management expected selling, distribution and administration expense to be below 20% of revenue for full-year 2011. It anticipated higher royalty expense beginning in Q2, with movie-related products and BEYBLADE expected to contribute to sales; significant TRANSFORMERS shipments were expected to increase in Q2 and the remainder of the year.
- Management described 2011 as the first year of a multi-year strategic plan spanning toys and games, entertainment, licensing and digital gaming. It cited strong Q1 sales from several core brands and continued investment in emerging markets, product development, television programming and Hasbro Studios.
- Hasbro stated that available cash, operating cash flow, credit lines and its commercial-paper program were expected to meet working-capital needs for the remainder of 2011. The new commercial-paper program permits up to $500.0 outstanding; the company also had a $500.0 revolving facility, with no borrowings under it and approximately $498.8 unused before considering commercial-paper borrowings. The company reported compliance with its credit covenants.
- Seasonality, retailer inventory and order patterns, product acceptance, compressed shipping schedules, foreign-exchange movements, customer concentration, manufacturing and sourcing conditions, and the performance and costs of entertainment initiatives could affect results. Management cautioned that interim results are not necessarily indicative of full-year performance.
- Mexican tax authorities assessed approximately $191.9, including interest, penalties and inflation updates, for 2000–2005 transfer-pricing matters. Hasbro is contesting the assessments and said it expected to prevail; approximately $127.4 of bonds had been posted for 2000–2003 assessments. Separately, recorded liabilities for uncertain tax positions were $105.3. The filing also cited other ongoing tax examinations.
- At quarter-end, letters of credit and similar instruments totaled approximately $169.7, including the Mexican tax bonds, and purchase commitments were $356.2. Management said it believed cash generation and borrowing facilities would allow it to meet obligations.
Important facts for investors to verify
- Whether the expected movie-related product demand and second-half seasonal sales materialized, and how retailer orders and inventory levels developed.
- Whether Hasbro achieved its full-year expense outlook and improved operating profitability after Q1 margin compression.
- Inventory growth, receivable collection trends and liquidity needs, particularly in emerging markets with longer payment terms.
- Subsequent developments in the Mexican tax disputes and other uncertain tax positions, including possible cash exposure despite management’s expectation of success.
- THE HUB and Hasbro Studios’ costs and performance, and the effect of currency movements and hedging on earnings.