Hasbro, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017, a 53-week year; comparatives for 2016 and 2015 were 52-week years. Hasbro develops and sells toys and games and generates entertainment, digital-gaming and licensing revenue. Its principal segments are U.S. and Canada, International, and Entertainment and Licensing.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Net revenue | $5,209.8 million | $5,019.8 million |
| Operating profit | $810.4 million | $788.0 million |
| Operating margin | 15.6% | 15.7% |
| Net earnings | $396.6 million | $533.2 million |
| Net earnings attributable to Hasbro | $396.6 million | $551.4 million |
| Diluted EPS attributable to Hasbro | $3.12 | $4.34 |
| Operating cash flow | $724.4 million | $817.3 million |
Revenue increased 4% as reported, including $79.2 million of favorable currency translation; excluding that impact, growth was 2%. Operating profit rose 3%, while the operating margin edged down. Cost of sales increased to 39.0% of revenue from 38.0%; advertising rose to $501.8 million from $468.9 million. Net earnings included a $296.5 million net charge related to U.S. tax reform ($2.33 per diluted share). The 2016 comparison included a $32.9 million Backflip goodwill impairment; 2016 attributable earnings also reflected noncontrolling interests in Backflip.
Fourth quarter: Revenue was $1,596.1 million versus $1,629.9 million in Q4 2016. Hasbro reported a net loss of $5.3 million, or $0.04 per diluted share, versus attributable earnings of $192.7 million, or $1.52 per diluted share, a result materially affected by the tax-reform charge. The filing says sales of products tied to Star Wars: The Last Jedi were significantly below expectations.
Segments and material changes
- U.S. and Canada: Revenue grew 5% to $2,690.5 million; operating profit fell 2% to $509.9 million. Margin declined to 19.0% from 20.4%, reflecting higher advertising and product-development costs and Toys “R” Us-related bad debt.
- International: Revenue rose 2% to $2,233.6 million, including $75.3 million of favorable currency translation; excluding translation, revenue declined 2%. Operating profit fell 22% to $228.7 million, and margin dropped to 10.2% from 13.4%.
- Entertainment and Licensing: Revenue grew 8% to $285.6 million. Operating profit increased to $96.4 million from $49.9 million, primarily because the 2016 period included the Backflip impairment.
- Brand portfolios: Franchise Brands grew 10%, Hasbro Gaming 10%, and Emerging Brands 2%; Partner Brands declined 10%. Franchise Brands generated 49% of company revenue. Hasbro attributed the Partner Brands decline chiefly to lower Star Wars, Yo-Kai Watch and Disney Frozen sales.
Cash, debt and liquidity
- Cash and cash equivalents were $1,581.2 million at year-end, substantially held by international subsidiaries. Short-term borrowings were $155.0 million; long-term debt principal was $1,709.9 million.
- Hasbro issued $500 million of 3.50% notes due 2027 and used proceeds in part to repay $350 million of 6.30% notes due 2017. Interest expense was $98.3 million.
- Operating cash flow was $724.4 million, down from $817.3 million, reflecting unfavorable working-capital changes. Capital expenditures were $134.9 million; investing cash outflow was $131.5 million. Financing cash outflow was $312.2 million.
- The company had a $1 billion committed revolving credit facility, with approximately $861.4 million available at year-end inclusive of commercial-paper borrowings; it reported compliance with covenants. It also had $137.5 million outstanding under its commercial-paper program.
- Current assets were $3,633.9 million and current liabilities $1,251.7 million. Accounts receivable rose 7%, inventories 12%, and days sales outstanding increased to 79 from 73.
Outlook, risks and unusual items
- Management said available cash, operating cash flow, commercial paper and credit lines were expected to meet 2018 working-capital needs; no specific revenue or earnings forecast is provided. Expected 2018 capital expenditures were $135–$155 million, with about $78.3 million in guaranteed royalty payments.
- Hasbro expected Toys “R” Us’ financial difficulties and store closures to hurt 2018 sales, especially in the first half; the extent of recovery through other retail and e-commerce channels was uncertain. The retailer’s U.S. and Canada bankruptcy led to incremental bad-debt expense in 2017.
- Tax reform produced a provisional $316.4 million tax expense, partly offset by other tax benefits and a $19.9 million gain, for a net earnings charge of $296.5 million. A February 2018 tax-guidance update was expected to cause an additional one-time tax expense of about $48 million in Q1 2018; the estimate could change.
- Hasbro entered a five-year Paramount agreement to develop and distribute films and television programming based on its brands, with Hasbro taking a greater financing role and associated investment risk. It spent $48.0 million on television and film projects in 2017 and anticipated comparable or higher spending in future years.
- Key risks include dependence on popular owned and licensed brands and third-party entertainment schedules; concentrated retail customers (top five generated about 42% of 2017 revenue); seasonal holiday sales; foreign-exchange exposure; reliance on third-party manufacturers, principally in China; changing consumer preferences; and product safety, privacy, regulatory and cyber risks.
- Revenue-recognition standard ASC 606 was adopted January 1, 2018. Hasbro expected no material change to product-sales recognition, but licensing minimum-guarantee revenue would shift toward earlier quarters and away from Q4. The filing reports an unqualified audit opinion and effective internal control over financial reporting.
Important facts for investors to verify
- How Toys “R” Us closures, receivable collections and displaced sales affected 2018 results and inventory.
- Whether the Star Wars and broader Partner Brands revenue weakness persisted, and whether Franchise Brands and Gaming sustained growth.
- The final tax-reform accounting, including the estimated additional $48 million charge and the $181.3 million net repatriation-tax liability payable over eight years.
- Cash conversion and working-capital trends, particularly receivables, inventory and seasonality, alongside debt levels and credit-facility availability.
- Returns and costs from Hasbro’s expanded film financing and digital-gaming investments, including Backflip’s performance.