Martin Trueb explains how Hasbro securitised its trade receivables and outlines their innovative approach to managing foreign exchange risk. He also describes how Hasbro complied with Sarbanes-Oxley.

How is the Hasbro treasury structured?

We are divided into four main areas:

1. Treasury operations.

   These are the traditional treasury activities of foreign exchange management, cash management, managing bank relationships, credit facilities and working capital management.

2. Capital markets.

   This is focussed on factors which will impact the group’s long-term debt. These include issuing debt, managing dividend payments and share repurchase programmes; and assessing our subsidiaries’ balance-sheet structures.

3. Insurance and risk management.

   This includes the full range of insurance policies, such as property and casualty, directors and officers’ liability; and workers’ compensation.

4. Credit and collections.

   In the United States, we use a shared service centre concept to manage credit and collections. We also oversee our foreign collections process. We are considering implementing a shared service centre concept to manage collections for our international activities.

At the moment, we employ about forty people within the treasury department. This has reduced over the last couple of years. We have outsourced some of our collections activity to focus better on managing the relationships with our core clients.

Personally, I have been concentrating on a number of long-term capital issues and the renewal of our bank facilities. I also provide guidance and support to the teams within the department.

How do you manage cash?

As a company, we are a seasonal business. For the first third of the year, from December through to March, we tend to be flush with cash. Then from the summer into the fall (autumn), we face significant cash outflows. We then start collecting cash again from the Thanksgiving period.

Within the United States, we manage cash centrally. As I mentioned, we work on a shared service centre basis. Cash is collected in lockboxes and then transmitted to the corporate level. In addition, we have securitised our trade receivables to finance our working capital.

We also have an international treasury centre in Switzerland. This has centralised cash management by operating as an inhouse bank, allowing affiliates to invest and borrow on a routine basis while minimising external activity. Our plans for adopting a pooling structure were delayed as we worked to comply with Sarbanes-Oxley. We are also moving towards a payment factory solution. Whilst this will require more legal and tax due diligence, it will offer us further opportunity to cut costs and improve automation.

We are now a powerful cash flow company. Over the last four years, we have worked hard to improve our cash management. This has allowed us to translate a net debt position of $1.3 billion at the end of 2000 into net cash of $0.1 billion at the end of 2004.

How do you arrange your funding?

We have been working to reduce our core debt-tocapitalisation ratio. We have targeted between 25% and 30%, which will give us a reasonable cost of capital. As a somewhat fashion-oriented business, we do not feel it would be prudent to be leveraged more than this level.

Our securitisation programme took about ten to twelve weeks from issuing the first approach to the first funding. We had done a lot of preparatory work before this. We needed to understand what was available in the market, particularly because my previous experience of securitisation was dated.

Once we had identified what we were going to do, we spent about half the time managing a limited RFP and the rest negotiating with lawyers. There were significant questions over accounting rules as the implications of potential changes were unclear. We debated whether to build flexibility into the structure, but we decided to make any changes if it proved necessary. Two years later, we have had to make no changes.

We executed the transaction as a true sale of assets. This transaction is off the balance sheet, but we do disclose fully what we have done in the notes to our financial statements. Unless a company is an A1/P1 commercial paper issuer, there is a significant (in our case about a half-point) funding benefit from using a securitisation programme.

As far as the rest of funding is concerned, on working capital management we are relatively plain vanilla. On the debt side, the most recent significant transaction was our convertible a couple of years ago. At the time, this was a hot concept. We used it to tender for about half of our near term maturity debt, which relieved some anxiety in the market over our ability to refinance. We have been happy with the results to date.

In general, the balance of funding has changed. We now have cash as a significant asset on the balance-sheet. While nowhere near the size, the challenge is similar to that which Microsoft faced. We have achieved our first goal — to improve our debt to capital ratio and to regain an investment grade rating. We are now in a position to focus on investments, to grow the company and reward our shareholders.

How do you measure and manage foreign exchange risk?

We have a somewhat unique approach in Hasbro. We manage risk by means of a hedge committee. As well as the treasurer, the assistant treasurer and the foreign exchange manager, the committee includes the controller and the heads of businesses in the operating divisions with foreign exchange exposures.

We update the foreign exchange exposure forecast almost monthly. This is then submitted to treasury, which is responsible for formulating our hedging strategy. This is not formula driven. Rather, we try to balance the risk of being right and wrong.

Our risk is seasonal. We have to set prices early in the year for inventory sales later. As a result, we have a greater propensity to hedge than other businesses. If we find we were wrong, we cannot go back to the customer and alter the price. At the same time, we do not want the business units to be concerned about foreign exchange fluctuations, but to concentrate on revenues instead.

Our strategy is based on the forecast. We hedge four to six months prior to the budget cycle. We have a documented policy in place. The key thing is the buy-in from the businesses. Because the CFOs of divisions are members of the hedge committee, they are part of the hedge decision. This is useful as it means everybody has the opportunity to participate.

In terms of instruments, we primarily use forwards and purchased options. We may roll some of the options into forwards where we can in order to recapture some of the premium.

We started this process in the second year I was here. It took about a year to get comfortable with the concept of managing the risk of the cash flows (rather than simply locking-in a profit and loss amount) and to determine the dynamics of the committee itself. Today, it functions well. It proved its worth during FAS133 because we had regularised the exposure forecast, focusing on the exposure rather than the hedge. We did have documentation issues, but the process did not need to be changed.

How have you been affected by the Sarbanes-Oxley requirements?

The most significant issues were the documentation and testing aspects. Pretty much all groups within the company had good policies and procedures. Some might not have been fully up to date, but that was a minor concern. Under Sarbanes-Oxley, we needed to be able to demonstrate that we do what we say we do. This is very much an auditor environment, so for non-accounting people it meant preparing results in such a way that they could pass an audit.

In general, it was a worthwhile process. We have stronger current policies for new joiners, so they can understand much more clearly what we do. However, it seems a little excessive in terms of the testing process. We need to find a way to make it less painful. Although the controls will be stronger, the determined fraudster may still find a way around them.

It was a larger challenge for our people overseas. Although they have used US financial reporting for a long time, it was probably more difficult for them to execute.

We did not outsource compliance to a second audit firm. We decided to do it ourselves with assistance when it was necessary. We have completed the task well, but that is not to say it has been easy.

What do you see as your challenges over the next few months?

Cash continues to be the major corporate challenge. As a company, we are not unique in having cash on the balance sheet. This is OK for a period of time. However, stockholders will want to earn a higher return than one or two per cent after tax. As a company, Hasbro needs to invest. If not, we have to return cash to our shareholders.

We do need to consider how we can put money in shareholders’ pockets. While we can pay higher dividends, not all shareholders are looking to realise their investments at a particular time. As an alternative, we can embark on a share repurchase programme. This lets shareholders manage their own income. It also has the advantage of allowing those shareholders who want to exit to do so and for them to be replaced by new investors who are more excited about our prospects. This is a more balanced way of managing our shareholder base.

We also need to continue to be in a position to react quickly to new market events. We have to work to take cost out of our processes. Financial markets continue to develop cost effective ways of helping companies. We have to remain in touch with those developments and be able to communicate internally what is available. When decisions are taken, we need to execute them. So for example, we implemented a captive insurance vehicle as a means to cost effectively retain risk. We adopted a securitisation structure as a way to use our assets more effectively. We continue to identify new ways to use technology.

n the end, we have to make sure that, as a business, we continue to keep moving.