Hasbro, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Hasbro is a global play and entertainment company selling toys, games, licensed products and entertainment. The quarter ended October 1, 2017, comprised 13 weeks; the nine-month period comprised 40 weeks, compared with 39 weeks in the prior-year period. Unless noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenues | $1,791.5 | $1,679.8 | $3,613.7 | $3,389.9 |
| Operating profit | $360.9 | $362.1 | $539.3 | $532.9 |
| Operating margin | 20.1% | 21.6% | 14.9% | 15.7% |
| Net earnings attributable to Hasbro | $265.6 | $257.8 | $401.9 | $358.7 |
| Diluted earnings per share | $2.09 | $2.03 | $3.16 | $2.82 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $201.8 | $195.4 |
- Q3 revenue rose 7%, while operating profit was essentially flat. Revenue growth reflected increases in U.S. and Canada (7%), International (7%) and Entertainment and Licensing (4%). International revenue included a favorable $27.9 million foreign-exchange impact.
- For the first nine months, revenue increased 7% and operating profit increased 1%. Hasbro reported that the extra week in 2017 affected period comparisons.
- Q3 diluted EPS included a $0.04 benefit from adoption of share-based-payment accounting rules; the nine-month EPS benefit was $0.16. Lower effective taxes also contributed to earnings growth.
- Cost of sales increased to 40.8% of revenue in Q3 from 39.2%, and to 38.9% for nine months from 37.5%, reflecting product mix. Nine-month selling, distribution and administration costs rose to 22.5% of revenue from 22.3%.
- Brand-category revenue grew in Q3 for Franchise Brands (7%), Hasbro Gaming (22%) and Emerging Brands (9%); Partner Brands declined 2%. Nine-month growth was 10%, 20% and 6%, respectively, while Partner Brands declined 5%.
Cash, debt and liquidity
- At October 1, 2017, cash and cash equivalents were $1,244.8 million, short-term borrowings were $189.0 million, and long-term debt on the balance sheet was $1,693.3 million. Long-term debt principal was $1,709.9 million. Cash less short-term borrowings was $1,055.8 million.
- Most cash was held outside the United States; the company said it was not generally available for U.S. needs without changing its indefinite-reinvestment policy and potentially incurring additional U.S. tax.
- Nine-month operating cash flow was $201.8 million; capital expenditures were $102.5 million. Cash declined $37.5 million from the start of the year to $1,244.8 million.
- Hasbro issued $500 million of 3.50% notes due 2027, receiving net proceeds of $493.9 million, primarily to repay $350 million of 6.30% notes that matured in September. The remainder was used for general corporate and working-capital purposes.
- The committed revolving credit facility was increased to $1.0 billion. There were no revolver borrowings; approximately $823.7 million was available after commercial-paper balances. Commercial-paper borrowings were approximately $175.1 million. The company reported compliance with financial covenants.
- Management stated that operating cash flow and available borrowing facilities were adequate for working-capital needs through the remainder of 2017 and 2018, subject to risks including operating shortfalls and disruption in credit markets.
Management commentary, risks and unusual items
- The Toys“R”Us bankruptcy filing caused incremental bad-debt expense in Q3, reducing operating profit. The filing does not provide a clear amount for this incremental expense. Management said operating profit would have increased absent it.
- Q3 segment operating profit declined 5% in U.S. and Canada and 1% in International, while Entertainment and Licensing increased 20%. International nine-month operating profit declined 10%, reflecting product mix and higher expenses. Global Operations profit also declined materially, to $4.7 million for nine months from $25.4 million.
- Hasbro cited product-mix pressure, higher cost of sales, foreign-exchange exposure, reliance on retail customers and the concentration of sales in the second half and holiday season. It warned that retailer ordering patterns, product acceptance, supply and shipping constraints, and customer financial difficulties could affect results.
- The company reported $115.4 million of liabilities for uncertain tax positions and ongoing tax examinations, including an IRS examination of amended 2012 and 2013 federal returns. It stated that current legal proceedings were not believed material.
- Foreign-currency forwards hedge certain forecast transactions; the company does not use derivatives for speculation. Management noted that currency movements can affect reported revenue, earnings and costs, and that it does not hedge translation impacts.
- No numerical earnings or revenue guidance was provided in the filing. Hasbro said revenue recognition for most product sales was not expected to change materially under the new standard; it expected to adopt the standard in 2018. Lease accounting adoption may materially increase reported balance-sheet assets and liabilities, though the company did not expect a material impact on results of operations.
Most important facts for investors to verify
- Extent of Toys“R”Us-related bad-debt expense, sales exposure and any subsequent bankruptcy developments.
- Whether sales growth can translate into restored operating margins given higher cost of sales and weaker segment profitability.
- Cash accessibility: most cash was offshore, while the company also had commercial-paper borrowings and substantial debt.
- Receivables quality and collections: accounts receivable rose 14% year over year, and days sales outstanding increased from 78 to 83 days.
- Second-half holiday demand, retailer ordering and inventory trends, as well as foreign-exchange and licensed-product performance.
- Tax examination outcomes, uncertain-tax-position liabilities, and the effect of accounting-standard adoption on reported results and balance-sheet measures.