Latest Hasbro Investor confrence call

[MonkeyKing]

For give me if this has already been posted I dont have search

Anyhooo....

I was reading a transcipt of the latest Hasbro investors confrence call and came across this....

For example, we have been amortizing intangibles associated with our Wizards of the Coast and laddering the acquisitions at the rate of $29 million annually. By the end of 2009 these assets will be fully amortized giving a 7/10 of a percentage point improvement in operating margin.

Hasbro, Inc. Fall 2008 Analyst Event Transcript - Seeking Alpha

Does anyone know what the hell this means ( I dont speak Wall Street)?

Is it good, bad or neutral?

 

[the Jester]

Sounds to me like they are paying down the principle on the loans they took to purchase WotC. This both reduces the interest that accrues and reduces the duration that the loans are outstanding for.

If I understand correctly.

 

[Retreater]

I found some definitions online. Everyone can figure out his/her own conclusions.

from thefreedictionary.com

Amortizing

1. To liquidate (a debt, such as a mortgage) by installment payments or payment into a sinking fund.
2. To write off an expenditure for (office equipment, for example) by prorating over a certain period.

from West Encyclopedia of American Law

Intangibles

Property that is a "right" such as a patent, Copyright, or trademark, or one that is lacking physical existence, such as good will. A nonphysical, noncurrent asset that exists only in connection with something else, such as the good will of a business.

Retreater

 

[Mokona]

It's accounting jargon, if you will.

Hasbro reports profit numbers each year. Those profits are revenues minus expenses. On the day that cash went from Hasbro's coffers to Wizards of the Coast shareholders Hasbro did not reduce their profit by that cost.

Instead Hasbro capitalized the purchase of Wizards of the Coast which is to say that each year they "pretend" to have an expense out of revenues and before profit equal to a fraction of the cost of the Wizards of the Coast acquisition. If they amortized the acquisition over 10 years then each year they expense 1/10th (10%) of the purchase. After 10 years are over then they've completely expensed the capitalized expenditure.

It doesn't matter how Hasbro paid for Wizards of the Coast. They could have used cash on hand or debt or issued new equity. Any which way they financed the transaction, they chose in their income statement of profit and loss to show the cost of Wizards of the Coast spread out over 10 years.

 

[Kzach]

So basically in three more years it'll be paid off entirely?

That means Hasbro will stop seeing it as a loss-leader and may invest some capital into it!

 

[Chainsaw]

So basically in three more years it'll be paid off entirely?

That means Hasbro will stop seeing it as a loss-leader and may invest some capital into it!

Not necessarily.

Opportunity cost analysis rules economic decision making. Very generally speaking, a company will only invest new capital in a given option (WotC product line, say) if there are no other more profitable ways to invest those dollars (other product lines, share repurchases, debt repayment). Needless to say, it's also not "all or nothing" - diversity has its merits - and Hasbro probably has a sliding scale of required returns to investment size (as measured by absolute dollars or proportion of available funds, etc).

Having said all that, it's not a science. There is some guesswork in setting the assumptions that drive the expected return comparison. Ultimately though, companies want to invest high-growth or high-margin prospects. If WotC is either of those, then it's probably got a fighting chance at the Hasbro dinner table.

 

[Derulbaskul]

I'm not fully familiar with US accounting standards, but because the quote specifically mentions intangibles, the amortisation referred to would be the writing down of the goodwill on the acquisition not the full purchase price.

Goodwill is the difference between the price paid and the net tangible assets acquired. The goodwill is expensed over a 10-year period in many jurisdictions. In this case, that expense is USD29 million per annum suggesting that Hasbro paid USD290 million in goodwill for WotC. If you can work out the tangible net assets then you have the purchase price.

Where this becomes interesting is that WotC effectively costs Hasbro USD29 million per annum before anything happens. That's USD29 million in costs before you start paying salaries, rent or any other overhead. You have to sell a lot of Magic card or Pokemon (things?) to make a dent in that. I don't mention PHBs as D&D is a joke as a real business (I suspect that D&D would be lucky to make the company USD1-2 million pa and the bulk of that is probably due to the novels).

Amortisation of a large amount of goodwill isn't unusual. US companies are notorious for overpaying... which is why the rest of us are always looking for a US company as a buyer.

 

[Chainsaw]

Amortisation of a large amount of goodwill isn't unusual.

This. AND - How to handle goodwill is always being debated by the Accounting Powers That Be.

Also, my experience is that companies are less concerned with writing off goodwill than they are with the future prospects of the acquisition. Maybe it was worth X when they bought it, now it's only worth X-5 (so they have to write off some goodwill), but if they THINK it's going to be worth X+5 (for whatever reason) they may continue to invest new capital.

Edit: Added second paragraph.

 

[Fifth Element]

This. AND - How to handle goodwill is always being debated by the Accounting Powers That Be.

Indeed. We stopped amortizing goodwill in Canada some years ago. Now it's just subject to an annual impairment test - if it's worth less now than last year, you write it down.

 

[CharlesRyan]

I don't mention PHBs as D&D is a joke as a real business (I suspect that D&D would be lucky to make the company USD1-2 million pa and the bulk of that is probably due to the novels).

I won't argue with the technical aspects of your analysis, but this is way off base.