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HAS > SEC Filings for HAS > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for HASBRO INC

Form 10-Q for HASBRO INC


31-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.

This Quarterly Report on Form 10-Q, including the following section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements expressing management's current expectations, goals, objectives and similar matters. These forward-looking statements may include statements concerning the Company's product and entertainment plans, anticipated product and entertainment performance, business opportunities, plans and strategies, financial goals, cost savings and efficiency enhancing initiatives and expectations for achieving the Company's financial goals and other objectives. See Item 1A, in Part II of this report and Item 1A, in Part I of the Annual Report on Form 10-K for the year ended December 29, 2013, for a discussion of factors which may cause the Company's actual results or experience to differ materially from that anticipated in these forward-looking statements. The Company undertakes no obligation to revise the forward-looking statements in this report after the date of the filing.

EXECUTIVE SUMMARY

Hasbro, Inc. ("Hasbro" or the "Company") is a branded-play company dedicated to fulfilling the fundamental need for play for children and families through creative expression of the Company's world class brand portfolio. From toys and games, to television programming, motion pictures, digital gaming and a comprehensive licensing program, Hasbro executes its brand blueprint in all of its operations. At the center of this blueprint, Hasbro re-imagines, re-invents and re-ignites its owned and controlled brands and imagines, invents and ignites new brands, through toy and game innovation, immersive entertainment offerings, including television programming and motion pictures, and a broad range of licensed products, ranging from traditional to high-tech and digital, under well-known brand names structured within the Company's brand architecture and offering consumers the ability to experience these brands in all areas of their lives.

To accomplish these objectives, Hasbro offers consumers the ability to experience its branded play through innovative toys and games, digital media, lifestyle licensing, publishing and entertainment, including television programming and motion pictures. The Company's focus remains on growing its owned and controlled brands, developing new and innovative products which respond to market insights, offering entertainment experiences which allow consumers to experience the Company's brands across multiple forms and formats and optimizing efficiencies within the Company to increase operating margins and maintain a strong balance sheet.

Hasbro earns revenues and generates cash primarily through the sale of a broad variety of toy and game products and distribution of television programming based on the Company's properties, as well as through the out-licensing of rights for use of its properties in connection with complementary products, including digital media and games and lifestyle products, offered by third parties, or in certain situations, toy products where Hasbro considers the out-licensing of brands to be more effective. The Company's brand architecture includes franchise brands, key partner brands, challenger brands, gaming mega brands and new brands. The Company's franchise and challenger brands represent Company-owned brands or brands which if not entirely owned, are broadly controlled by the Company, and have been successful over the long term. Franchise brands are the Company's most significant owned or controlled brands which it believes have the ability to deliver significant revenue over the long-term. Challenger brands are brands which have not yet achieved franchise brand status, but have the potential to do so with investment and time. The Company's franchise brands are LITTLEST PET SHOP, MAGIC: THE GATHERING, MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and TRANSFORMERS, while challenger brands include BABY ALIVE, FURBY, FURREAL FRIENDS and PLAYSKOOL. Hasbro has a large portfolio of owned and controlled brands, which can be introduced in new forms and formats over time. These brands may also be further extended by pairing a licensed concept with an owned or controlled brand. By focusing on these brands, Hasbro is working to build a more consistent revenue stream and basis for future growth, and to leverage profitability. During 2013, net revenues from the Company's franchise brands increased by 15% and totaled 44% of total consolidated net revenues. This trend continued in the second quarter and first six months of 2014 as the Company's franchise brands grew approximately 36% and 27%, respectively, compared to the second quarter and first six months of 2013.

The Company's innovative product offerings encompass a broad variety of toys including boys' action figures, vehicles and play sets, girls' toys, electronic toys, plush products, preschool toys and infant products, electronic interactive products, creative play and toy-related specialty products. Games offerings include action battling, board, off-the-board, digital, card, electronic, trading card and role-playing games.

While Hasbro believes it has built a more sustainable revenue base by developing and maintaining its owned or controlled brands and avoiding reliance on licensed entertainment properties, it continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and key strengths and allow the Company to offer innovative products based on movie, television, music and other entertainment properties owned by third parties. The Company's primary licenses include agreements with Marvel Characters B.V. ("Marvel") for characters in the Marvel Universe, including SPIDER-MAN and the AVENGERS; Lucas Licensing Ltd. ("Lucas"), related to the STAR WARS brand; Sesame Workshop, related to the SESAME STREET characters; and Rovio Entertainment Ltd. related to the ANGRY BIRDS brand. Both Marvel and Lucas are owned by The Walt Disney Company ("Disney").

In 2013, Hasbro and Disney amended both the Marvel and Lucas agreements which extended the term of the license for Marvel characters through 2020 and provides additional guaranteed royalty payments with respect to both MARVEL and STAR WARS products in anticipation of expected future motion pictures and other related entertainment through 2020. Sales of MARVEL and STAR WARS products can vary based on the popularity of theatrical and television entertainment in any given year. In 2013 the Company's offerings included products related to several MARVEL properties backed by entertainment, including products based on the theatrical motion picture releases of IRON MAN 3 in May 2013 and THOR: THE DARK WORLD in November 2013. During the first two quarters of 2014, the Company released products related to two theatrical releases based on MARVEL properties, CAPTAIN AMERICA: THE WINTER SOLDIER in April 2014 and THE AMAZING SPIDER-MAN 2 in May 2014 and will market products related to a third planned theatrical release, GUARDIANS OF THE GALAXY, in August 2014. Hasbro also expects to have sales related to the introduction of all new television entertainment based on the STAR WARS brand, STAR WARS REBELS, in the second half of 2014. In addition to offering products based on licensed entertainment properties, the Company offers products which are licensed from outside inventors.

The Company seeks to build all-encompassing brand experiences and drive product-related revenues by increasing the visibility of its brands through entertainment such as motion pictures and television programming. Since 2007, the Company has had a number of motion pictures based on its brands released by major motion picture studios, including four motion pictures based on its TRANSFORMERS brand, one of which, TRANSFORMERS: AGE OF EXTINCTION, was released in June 2014 by Paramount Pictures, two motion pictures based on its G.I. JOE brand, including G.I. JOE: RETALIATION released in March 2013, and a major motion picture based on its gaming mega brand, BATTLESHIP. In October 2014, Universal Pictures is scheduled to release a motion picture based on the OUIJA brand. The Company has motion picture projects based on other brands in development for potential release in future years.

In addition to using motion pictures to provide entertainment experiences for its brands, the Company has an internal wholly-owned production studio, Hasbro Studios, which is responsible for the creation and development of television programming based primarily on Hasbro's brands. This programming is currently aired in markets throughout the world. The Company is also a 50% partner in a joint venture with Discovery Communications, Inc. ("Discovery") which runs Hub Television Network, LLC ("Hub Network"), a cable television network in the United States dedicated to high-quality children's and family entertainment and educational programming. Programming on Hub Network includes content based on Hasbro's brands as well as programming developed by third parties. Hasbro Studios programming is distributed domestically to Hub Network, internationally to broadcasters and cable networks, and on various digital platforms including Netflix and iTunes. The Company's television initiatives support its strategy of growing its brands well beyond traditional toys and games and providing entertainment experiences for consumers of all ages in many forms or formats.

Hasbro's strategic blueprint and brand architecture also focus on extending its brands further into digital media and gaming, including through the licensing of the Company's properties to a number of partners who develop and offer digital games and other gaming experiences based on those brands. One example of these digital gaming relationships is the Company's agreement with Electronic Arts Inc. ("EA") under which EA has the rights to develop eight of Hasbro's best-selling gaming brands for mobile platforms globally. Similarly, Hasbro has an agreement with Activision under which Activision offers digital games based on the TRANSFORMERS brand, as well as agreements with other third-party digital gaming companies, including DeNA and GameLoft.

In 2013, Hasbro acquired a 70% majority stake in Backflip Studios, LLC ("Backflip"), a mobile game developer based in Boulder, Colorado. Backflip's product offerings include games for tablets and mobile devices including DRAGONVALE, NINJUMP and PAPER TOSS. In 2014 and beyond, Backflip intends to focus on its existing product lines and launch new games, including those based on Hasbro brands. New game brands released during the second quarter of 2014 include DWARVEN DEN and PLUNDERNAUTS.

The Company also seeks to express its brands through its lifestyle licensing business. Under its lifestyle licensing programs, Hasbro enters into relationships with a broad spectrum of apparel, food, bedding, publishing and other lifestyle products companies for the global marketing and distribution of licensed products based on the Company's brands. These relationships further broaden and amplify the consumer's ability to experience the Company's brands.

As Hasbro seeks to grow its business in entertainment, licensing and digital gaming, the Company will continue to evaluate strategic alliances and acquisitions, like Backflip, which may complement its current product offerings, allow it entry into an area which is adjacent or complementary to the toy and game business, or allow it to further develop awareness of its brands and expand the ability of consumers to experience its brands in different forms and formats.

During the fourth quarter of 2012 the Company announced a multi-year cost savings initiative in which it targeted achieving aggregate annual cost reductions in its underlying business of $100,000 by 2015. This plan included an approximate 10% workforce reduction, facility consolidations and process improvements which reduce redundancy and increase efficiencies. During 2012 and 2013, the Company incurred aggregate restructuring and related pension charges of $79,748 as well as product-related charges of $19,736 associated with this plan. For the full year 2013, the Company recognized gross cost savings, before restructuring charges, from these actions of approximately $50,000. These savings are prior to other costs which have or are anticipated to increase in 2014 and future years, such as compensation costs and other investments in certain components of the business.

The Company's business is highly seasonal with a significant amount of revenues occurring in the second half of the year. In 2013, 2012 and 2011, the second half of the year accounted for 65%, 64% and 63% of the Company's annual net revenues, respectively. The Company expects this trend to continue with variation depending on the number, timing and popularity of theatrical movie releases in any given year.

Hasbro sells its products both within the United States and throughout international markets. In recent years, the Company's International segment net revenues have experienced growth as the Company has sought to increase its global presence. Net revenues from the Company's International segment represented 46%, 44% and 43% of total net revenues in 2013, 2012 and 2011, respectively. The Company has driven international growth by opportunistically opening offices in certain markets, primarily emerging markets, to develop this greater global presence. The Company believes emerging markets offer greater opportunity for revenue growth than developed economies which have faced challenging economic environments in recent years. In 2013 and 2012, net revenues from emerging markets increased by 25% and 16%, respectively, representing more than 10% of consolidated net revenues in these years. During the second quarter and first six months of 2014, net revenues from emerging markets increased approximately 30% and 23%, respectively, compared to the same periods in 2013.

The Company's business is separated into three principal business segments: U.S. and Canada, International and Entertainment and Licensing. The U.S. and Canada segment markets and sells both toy and game products primarily in the United States and Canada. The International segment consists of the Company's European, Asia Pacific and Latin American toy and game marketing and sales operations. The Company's Entertainment and Licensing segment includes the Company's lifestyle licensing, digital licensing and gaming, movie and television entertainment operations. In addition to these three primary segments, the Company's world-wide manufacturing and product sourcing operations are managed through its Global Operations segment.

The Company is committed to returning excess cash to its shareholders through share repurchases and dividends. As part of this initiative, from 2005 to 2013, the Company's Board of Directors (the "Board") adopted seven successive share repurchase authorizations with a cumulative authorized repurchase amount of $3,325,000. The seventh authorization was approved in August 2013 for $500,000. At June 29, 2014, the Company had $308,108 remaining under this authorization. During the quarter and six-month periods ended June 29, 2014, the Company spent $136,280 and $216,793 to repurchase approximately 2,520 and 4,001 shares of common stock in the open market, respectively. During the three years ended 2013, the Company spent $625,554 to repurchase 15,424 shares in the open market. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number, and value of the shares that are repurchased will depend on a number of factors, including the price of the Company's stock. The Company may suspend or discontinue the program at any time. The Company intends to, at its discretion, opportunistically repurchase shares in the future subject to market conditions, the Company's other potential uses of cash and the Company's levels of cash generation. In addition to the share repurchase program, the Company also seeks to return cash to its shareholders through the payment of quarterly dividends. In February 2014 the Board increased the Company's quarterly dividend rate, effective for the dividend paid in May 2014, to $0.43 per share, an 8% increase from the prior quarterly dividend rate of $0.40 per share. This was the tenth dividend increase in the previous eleven years. During that period, the Company has increased its quarterly cash dividend from $0.03 to $0.43 per share.

SUMMARY OF FINANCIAL PERFORMANCE

The components of the results of operations, stated as a percent of net
revenues, are illustrated below for the quarter and six-month periods ended June
29, 2014 and June 30, 2013.

                                                      Quarter Ended                         Six Months Ended
                                            June 29, 2014       June 30, 2013       June 29, 2014       June 30, 2013
Net revenues                                         100.0 %             100.0 %             100.0 %             100.0 %
Costs and expenses:
Cost of sales                                         38.6                39.2                38.4                39.7
Royalties                                              8.5                 6.6                 8.0                 7.0
Product development                                    6.2                 6.2                 6.6                 6.6
Advertising                                            9.9                 9.6                 9.9                 9.9
Amortization of intangibles                            1.4                 1.6                 1.7                 1.7
Program production cost amortization                   0.8                 1.3                 0.8                 1.1
Selling, distribution and administration              24.6                25.8                26.5                28.1
Operating profit                                      10.0                 9.7                 8.4                 5.9
Interest expense                                       2.7                 2.9                 3.0                 3.2
Interest income                                       (0.2 )              (0.2 )              (0.2 )              (0.2 )
Other (income) expense, net                           (0.4 )               0.3                (0.4 )               0.5
Earnings before income taxes                           7.8                 6.7                 6.0                 2.4
Income tax expense                                     3.8                 1.9                 1.7                 0.3
Net earnings                                           4.0                 4.8                 4.3                 2.1
Net loss attributable to noncontrolling
interests                                             (0.1 )               0.0                (0.1 )               0.0
Net earnings attributable to Hasbro,
Inc.                                                   4.0 %               4.8 %               4.3 %               2.1 %

RESULTS OF OPERATIONS

The quarter and six-month periods ended June 29, 2014 and June 30, 2013 were each 13-week and 26-week periods, respectively. Net earnings, including the impact of noncontrolling interests in Backflip, were $32,820 and $64,334 for the quarter and six months ended June 29, 2014. Net earnings attributable to Hasbro, Inc. for the quarter and six months ended June 29, 2014 were $33,475 and $65,562, respectively, compared to $36,480 and $29,809 for the respective periods of 2013. Diluted earnings per share attributable to Hasbro, Inc. for the quarter and six months ended June 29, 2014 were $0.26 and $0.50, respectively, compared to $0.28 and $0.23 for the respective periods of 2013.

Net earnings for the second quarter and first six months of 2014 include net unfavorable tax adjustments of $13,846, or $0.10 per diluted share, and $366, respectively. Year-to-date, an unfavorable tax adjustment related to a proposed resolution of outstanding tax matters during the second quarter of 2014 more than offset a favorable settlement of certain open tax years during the first quarter of 2014. Net earnings for the quarter and six months ended June 30, 2013 includes unfavorable impacts, net of tax, of $1,790, or $0.01 per share, and $20,567, or $0.16 per share, respectively, related to the multi-year cost savings initiative announced during the fourth quarter of 2012.

During the third quarter of 2013, the Company acquired a 70% majority interest in Backflip Studios, LLC ("Backflip"). The Company is consolidating the financial results of Backflip in its consolidated financial statements and, accordingly, reported revenues, costs and expenses, assets and liabilities, and cash flows include 100% of Backflip, with the 30% noncontrolling interests share reported as net loss attributable to noncontrolling interests in the consolidated statements of operations and redeemable noncontrolling interests on the consolidated balance sheets. The results of operations for the quarter and six-month periods ended June 29, 2014 include the operations of Backflip whereas the respective periods of 2013 do not. The operations of Backflip are reported in the Entertainment and Licensing segment.

Consolidated net revenues for the quarter ended June 29, 2014 increased approximately 8% to $829,262 from $766,342 for the quarter ended June 30, 2013 and were negatively impacted by foreign currency translation of approximately $1,200 for the quarter ended June 29, 2014 as a result of the stronger U.S. dollar in 2014 compared to 2013. For the six months ended June 29, 2014, consolidated net revenues increased 6% to $1,508,715 from $1,430,036 for the six months ended June 30, 2013 and were negatively impacted by foreign currency translation of approximately $7,200 as a result of the stronger U.S. dollar in 2014 compared to 2013. The Company's focus on franchise brands contributed to the overall growth of consolidated net revenues, with franchise brands growing approximately 36% and 27% in the second quarter and first six months of 2014 compared to 2013. Five of the seven franchise brands experienced growth in the quarter and six-month periods, including MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and TRANSFORMERS.

The following table presents net revenues by product category for the quarter and six-month periods ended June 29, 2014 and June 30, 2013.

                                          Quarter Ended                                         Six Months Ended
                                                                    %                                                      %
                         June 29, 2014       June 30, 2013        Change        June 29, 2014       June 30, 2013        Change
Boys                    $       335,798             253,684             32 %           583,573             496,480             18 %
Games                           225,702             255,409            -12 %           446,228             486,324             -8 %
Girls                           163,817             149,419             10 %           302,517             264,193             15 %
Preschool                       103,945             107,830             -4 %           176,397             183,039             -4 %
Net revenues            $       829,262             766,342                          1,508,715           1,430,036

BOYS: Net revenues in the boys' category increased 32% and 18% in the second quarter and first six months of 2014, respectively compared to 2013. Both the second quarter and first six months of 2014 benefited from shipments related to three theatrical releases whereas the second quarter and first six months of 2013 only benefited from shipments related to one theatrical release. Growth in 2014 resulted from higher net revenues from TRANSFORMERS products related to the June 2014 theatrical release of TRANSFORMERS: AGE OF EXTINCTION as well as higher net revenues from MARVEL products related to two theatrical releases, CAPTAIN AMERICA: THE WINTER SOLIDER in April 2014 and THE AMAZING SPIDER-MAN 2 in May 2014. The second quarter and first six months of 2013 included shipments of MARVEL products related to one theatrical release, IRON MAN 3, in May 2013. Shipments of MARVEL products also increased in the second quarter and first half of 2014 due to the introduction of MARVEL SUPER HERO MASHERS products. These higher net revenues were slightly offset by expected lower sales of BEYBLADE and STAR WARS products in the second quarter and first six months of 2014. Lastly, net revenues from NERF products were up year-to-date in 2014, however, decreased slightly in the second quarter of 2014.

GAMES: Net revenues from the games category decreased 12% and 8% in the second quarter and first six months of 2014, respectively, compared to 2013. For the quarter and six months, higher net revenues from MONOPOLY products were more than offset by lower net revenues from other games, particularly TWISTER and DUEL MASTERS products. Net revenues from MAGIC: THE GATHERING products were flat in 2014 year-to-date, however, decreased slightly in the second quarter primarily due to the timing and type of releases in 2014 compared to 2013. Games category net revenues in the second quarter and first six months of 2014 also includes mobile gaming revenue from Backflip digital gaming properties as a result of its third quarter 2013 acquisition.

GIRLS: Net revenues in the girls' category increased 10% and 15% in the second quarter and first six months of 2014, respectively, compared to 2013. Higher net revenues from franchise brands, specifically MY LITTLE PONY and NERF, contributed to the category's growth in both the quarter and six months. Net revenues from MY LITTLE PONY products have continued momentum with support from the successful television program, MY LITTLE PONY: FRIENDSHIP IS MAGIC, as well as the third quarter 2013 introduction of MY LITTLE PONY EQUESTRIA GIRLS products. The Company also successfully launched NERF REBELLE, a line of action performance products, during the second half of 2013 and the product line's success continued into the second quarter and first six months of 2014. The girls' category also benefited slightly from the launch of PLAY-DOH DOH VINCI products late in the second quarter of 2014. These higher net revenues were partially offset by lower net revenues from LITTLEST PET SHOP and FURBY products in both the quarter and six months ended June 29, 2014.

PRESCHOOL: Net revenues from the preschool category declined 4% in both the quarter and six months ended June 29, 2014 compared to the quarter and six months ended June 30, 2013. Growth in net revenues from PLAY-DOH and TRANSFORMERS products was more than offset by lower net revenues from various other preschool brands, including PLAYSKOOL and TONKA.

Operating profit for the quarter ended June 29, 2014 increased 11% to $82,564, or 10.0% of net revenues, from $74,088, or 9.7% of net revenues, for the quarter ended June 30, 2013. Absent the impact of restructuring and related pension charges of $2,462, operating profit for the quarter ended June 30, 2013 was $76,550, or 10.0% of net revenues. Foreign currency translation did not have a material impact on consolidated operating profit in the second quarter of 2014. The impact of higher net revenues, partially offset by higher costs and expenses, contributed to growth in operating profit in the second quarter of 2014. Excluding the impact of 2013 restructuring and related pension charges, the operating margin was flat in 2014 compared to 2013, and included an unfavorable revenue mix which was offset by lower expense levels as a percentage of net revenues.

Operating profit for the six months ended June 29, 2014 increased 49% to $126,012, or 8.4% of net revenues, compared to $84,715, or 5.9% of net revenues, for the six months ended June 30, 2013. Operating profit in 2013 included restructuring and related pension charges of $31,388. Absent these charges, operating profit increased 9% in 2014 from $116,103, or 8.1% of net revenues, for the six months ended June 30, 2013. Foreign currency translation did not have a material impact on consolidated operating profit in the first six months of 2014. Excluding the 2013 restructuring and related pension charges, the increase in operating profit and operating profit margin was primarily due to the impact of higher net revenues, partially offset by increased expense levels.

Most of the Company's revenues and operating profit are derived from its three principal business segments: the U.S. and Canada segment, the International . . .

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