Hasbro, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter ended July 1, 2018 (13 weeks); six months ended July 1, 2018 (26 weeks). Comparative first-half 2017 covered 27 weeks, so six-month comparisons are not period-length equivalent. Dollar amounts below are in millions unless stated otherwise.
Business context
Hasbro is a global play and entertainment company operating through U.S. and Canada, International, Entertainment and Licensing, and Global Operations segments. The filing highlights the Toys“R”Us liquidations in the U.S. and U.K., retail inventory pressure—especially in Europe—and the June acquisition of Power Rangers and related entertainment assets.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net revenue | $904.5 | $972.5 | $1,620.8 | $1,822.2 |
| Operating profit | $87.6 | $100.0 | $7.2 | $178.3 |
| Net earnings (loss) | $60.3 | $67.7 | $(52.2) | $136.3 |
| Diluted EPS | $0.48 | $0.53 | $(0.42) | $1.07 |
| Operating margin | 9.7% | 10.3% | 0.4% | 9.8% |
- Quarter: Revenue fell 7%; operating profit fell 12% and net earnings fell 11%. Lower sales and higher distribution and warehousing costs weighed on operating profit. Lower cost of sales as a share of revenue and reduced royalty, advertising and marketing costs partly offset the pressure.
- First half: Revenue fell 11% and operating profit dropped to $7.2. The $52.2 net loss included $61.4 after-tax of Toys“R”Us-related charges and $15.7 after-tax of commercial reorganization costs, plus $47.8 of additional tax expense related to U.S. tax reform.
- Segment revenue, Q2: U.S. and Canada $459.3 (down 7%); International $380.4 (down 11%); Entertainment and Licensing $64.7 (up 26%). International operating profit was $0.2, versus $16.9 a year earlier; Entertainment and Licensing operating profit rose to $18.6 from $11.3.
- Segment revenue, first half: U.S. and Canada $823.6 (down 13%); International $668.4 (down 13%); Entertainment and Licensing $128.7 (up 23%). International recorded an operating loss of $55.9 versus profit of $17.4 a year earlier.
- Q2 total gaming revenue, including MAGIC: THE GATHERING and MONOPOLY, increased 14% to $312.8. First-half total gaming revenue declined 2% to $516.3.
Cash flow, debt and liquidity
- First-half operating cash flow was $240.8, down from $366.1. Investing cash outflow was $223.8, including $155.5 for the Power Rangers acquisition and $71.8 of capital expenditures. Financing cash outflow was $421.2, including $149.5 of dividends, $103.5 of common-stock purchases, and $133.6 of net short-term borrowing repayments.
- Cash and cash equivalents were $1,159.1 at July 1, 2018, down from $1,433.5 a year earlier and $1,581.2 at year-end 2017. Management said available cash, operating cash flow and credit facilities should cover working-capital needs for the remainder of 2018.
- Long-term debt was $1,694.4 on the balance sheet; principal long-term debt was $1,709.9, and short-term borrowings were $20.1. The company had no borrowings under its $1.0 billion revolving facility and approximately $999.3 available under the facility after letters of credit. It reported compliance with all covenants.
- Receivables were $739.3, including a $77.0 allowance related to Toys“R”Us; inventory was $610.2, up 10% year over year. Management attributed higher inventory partly to year-end levels and first-half sales declines.
- Hasbro raised its quarterly dividend from $0.57 to $0.63 per share. It repurchased approximately 1.2 million shares for $112.9 in the first half and had $565.1 remaining under repurchase authorizations.
Material developments, outlook and risks
- Hasbro acquired Power Rangers and other entertainment assets for a total purchase price of $535.9, funded with cash, stock and deferred consideration. It recorded $534.4 as a Power Rangers intangible asset, amortized over 25 years. A further $75.0 is due in January 2019; $25.0 was placed in escrow, with release scheduled by June 2019 subject to claims.
- Toys“R”Us liquidation-related expenses totaled $70.4 before tax, including $59.1 bad-debt expense, $7.0 accelerated royalty expense and $4.3 of other charges. Commercial reorganization added $17.3 of pre-tax severance expense.
- ASC 606 adoption had no material cumulative effect, but changes the timing of minimum-guarantee licensing revenue: more is recognized in the first three quarters and less in Q4. Hasbro said the full-year impact would not be material.
- Management emphasized the business’s historical second-half and holiday-season concentration. No specific full-year revenue or earnings guidance is provided in the filing. Management cited Toys“R”Us-related lost sales, retail inventory, freight and warehousing costs, foreign exchange, product acceptance, customer concentration, and holiday execution as risks. Hasbro also noted tariff and trade-restriction exposure and that it does not hedge foreign-exchange translation effects.
- The company expects to adopt the new lease standard in a future period; it expects balance-sheet assets and liabilities to increase, potentially materially, but does not expect a material operating-results impact. It reported no legal proceedings it believed material to its business or financial condition.
Most important facts for investors to verify
- Whether sales and profitability recover as Hasbro adjusts to Toys“R”Us liquidations and elevated retail inventory, particularly in Europe.
- Whether International segment results improve after its first-half operating loss and near break-even Q2.
- How effectively Hasbro converts its increased inventory and receivables into cash, and whether bad-debt exposure or customer-related charges rise further.
- Power Rangers’ contribution to revenue and earnings, along with the remaining $75.0 payment, escrow terms and long-term amortization burden.
- The effect of foreign exchange, freight and warehousing costs, tariffs, and the company’s concentrated second-half selling season on margins and liquidity.