Hasbro, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2020; each period was 13 and 26 weeks, respectively. Dollar amounts below are in millions unless noted. Results include Entertainment One (eOne), acquired December 30, 2019, and are materially affected by COVID-19 disruptions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net revenue | $860.3 | $984.5 | $1,965.8 | $1,717.0 |
| Operating profit (loss) | $2.2 | $128.3 | $(21.1) | $164.5 |
| Operating margin | 0.3% | 13.0% | (1.1)% | 9.6% |
| Net earnings (loss) attributable to Hasbro | $(33.9) | $13.4 | $(103.6) | $40.2 |
| Diluted EPS | $(0.25) | $0.11 | $(0.75) | $0.32 |
| Operating cash flow | — | $258.3 | $336.3 |
- Q2 revenue fell 13%, including an unfavorable $15.8 foreign-exchange impact. First-half revenue rose 14%, principally reflecting eOne, which contributed $503.4 of first-half revenue; eOne reported a $39.0 segment operating loss.
- Q2 revenue declines in U.S. and Canada and International were 30% and 34%, respectively; Entertainment, Licensing and Digital declined 7%. Hasbro Gaming grew 11% in Q2 and 20% for the first half. The first-half TV/Film/Entertainment portfolio contributed $424.7.
- Q2 cost of sales was 29.4% of revenue versus 34.9% a year earlier; however, program cost amortization, royalties, acquired-asset amortization, and selling, distribution and administration costs weighed on operating results.
- Interest expense was $49.6 in Q2 and $104.3 for the first half, up from $22.0 and $44.3, respectively, primarily due to acquisition-related borrowing.
Balance sheet, debt and liquidity
- At June 28, cash and cash equivalents, including $71.9 of restricted cash, were $1,038.0; current assets were $3,185.7 and current liabilities $1,981.6.
- Long-term debt principal was approximately $5,219.4, including $378.6 classified as current. Total debt increased substantially following the eOne acquisition; the company reported compliance with its term-loan and revolving-credit covenants.
- Approximately $1,497.3 was available under the $1.5 billion revolving credit facility; no amounts were drawn under it. The company stated that cash, operating cash flows and available facilities were adequate for working-capital needs over the next 12 months.
- Operating cash flow was $258.3 for the first half. Investing cash outflow was $4,454.8, including $4.4 billion for eOne net of cash acquired; financing cash inflow was $678.5. Dividends paid were $186.2.
Material changes and unusual items
- Acquisition-related and other charges totaled $160.0 in the first half, including $99.7 of acquisition and integration costs and $60.4 of restructuring and related costs. The latter included $40.9 of asset impairments tied to a change in entertainment strategy. Q2 charges were $10.3.
- eOne added $3,171.6 of goodwill and significant content and intangible assets. The purchase-price allocation remained provisional and subject to completion.
- First-half accounts receivable increased to $911.3 from $805.3 a year earlier; days sales outstanding rose from 74 to 96, reflecting slower collections and extended payment terms amid market disruption.
- Share repurchases were suspended while Hasbro prioritizes deleveraging. Management expected to maintain the $0.68 quarterly dividend for the remaining 2020 payments.
- Q2 2019 included a $110.8 non-cash pension settlement charge, affecting prior-period comparisons.
Outlook, management commentary and risks
- No formal full-year revenue or earnings guidance is provided. Management said it expected to make up remaining product-production shortfalls in Q3 and be positioned for holiday demand, assuming no renewed factory disruptions.
- Management expected eOne’s entertainment slate to be robust in 2021, but production shutdowns and delayed theatrical releases had shifted the timing of content and related revenue. The timing and ultimate effects remained uncertain.
- COVID-19 risks included manufacturing and shipping interruptions, store closures and constrained e-commerce, weaker consumer demand, delayed entertainment production and releases, and customer payment and collectability issues. Latin America was particularly challenged.
- Hasbro cited approximately $1.0 billion of cash and $1.5 billion of revolving-credit capacity as liquidity support and said it was managing expenses. It also noted seasonal concentration of sales in the second half and foreign-exchange, acquisition-integration, leverage and content-impairment risks.
Key facts investors should verify
- Whether production recovery, inventory availability and holiday shipments met management’s Q3 expectations, and whether subsequent COVID-19 restrictions affected supply or demand.
- Collection trends and customer credit quality, given the increase in days sales outstanding and reported requests for extended payment terms.
- Debt repayment and covenant headroom, including the $300.0 million notes due in 2021 and management’s deleveraging progress.
- eOne integration, remaining purchase-price allocation adjustments, impairment exposure, and the timing and profitability of entertainment production and releases.
- The filing’s cash disclosure: the balance sheet reports $71.9 of restricted cash at June 28, while an MD&A comparison table states $86.2; reconcile the discrepancy.