Hasbro, Inc. — 2015 Form 10-K Summary
Business context and reporting period
Hasbro is a global branded-play company that sells toys and games and earns revenue from entertainment, digital gaming and licensing. Its principal reporting segments are U.S. and Canada, International, and Entertainment and Licensing. The fiscal year ended December 27, 2015, comprised 52 weeks. The filing also reports fourth-quarter results; figures below are in U.S. dollars and millions except per-share amounts.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenue | $4,447.5 | $4,277.2 | +4% reported; +13% excluding currency translation |
| Operating profit | $691.9 | $635.4 | +9% reported; +23% excluding currency translation |
| Operating margin | 15.6% | 14.9% | +0.7 percentage points |
| Net earnings attributable to Hasbro | $451.8 | $415.9 | +9% |
| Diluted EPS | $3.57 | $3.20 | +12% |
| Operating cash flow | $552.4 | $454.4 | +$98.0 |
Fourth-quarter revenue was $1,465.4 million versus $1,298.6 million; operating profit was $258.7 million versus $223.5 million; net earnings attributable to Hasbro were $175.8 million versus $169.9 million; and diluted EPS was $1.39 versus $1.34.
- At year-end, cash and cash equivalents were $976.8 million, short-term borrowings were $164.6 million and long-term debt had $1,559.9 million principal outstanding ($1,547.1 million carrying value). Cash was substantially held by international subsidiaries and generally not available for U.S. needs without changing the reinvestment policy.
- Hasbro had $160.0 million outstanding under its commercial-paper program and $539.2 million available under its $700 million committed revolver, inclusive of commercial paper. It reported compliance with credit-facility covenants.
- Investing cash use was $103.6 million; financing cash use was $346.5 million. Capital expenditures were $142.0 million. The company paid $225.8 million in dividends and repurchased $84.9 million of shares during 2015.
- Gross margin improved as cost of sales declined to 37.7% of revenue from 39.7%; royalties rose to 8.5% from 7.1%. The effective tax rate increased to 26.0% from 23.5%.
Material changes versus the prior comparable period
- Currency translation reduced 2015 revenue by approximately $394.5 million, including $379.4 million in the International segment. International revenue fell 3% as reported but grew 16% excluding currency translation; International operating profit fell 6% reported, but grew 12% excluding currency.
- U.S. and Canada revenue increased 10% and operating profit 29%. Entertainment and Licensing revenue increased 11% and operating profit 27%, supported in part by a multi-year digital distribution agreement.
- By product category, boys grew 20%, games 1% and preschool 17%; girls declined 22%. The boys’ category benefited from NERF and movie-supported partner brands, while lower Furby and other girls’ brand sales weighed on results.
- Franchise Brands represented 52% of revenue and declined 2% reported, but grew 7% excluding currency effects. Top-line growth benefited from major partner releases including Jurassic World, Avengers: Age of Ultron and Star Wars: The Force Awakens.
- In August 2015, Hasbro sold its East Longmeadow and Waterford manufacturing operations to Cartamundi for approximately $54.4 million, recognized a $6.6 million gain, and entered a five-year manufacturing services agreement with minimum purchase commitments.
Outlook, commentary, risks and unusual items
- Management said it expected 2016 working-capital needs to be funded primarily by operating cash flow and, when needed, commercial paper or its revolving facility. It considered available liquidity adequate for 2016, subject to risks including operating shortfalls and tighter credit markets. No specific 2016 revenue or earnings guidance is provided in the filing text.
- Expected 2016 capital expenditures were $130–$160 million. The quarterly dividend rate was increased from $0.46 to $0.51 per share, effective for the dividend payable in May 2016.
- Planned product opportunities included Disney Princess and Frozen, introduced at retail in January 2016, and products tied to expected 2016 releases including Captain America: Civil War, Moana, Rogue One: A Star Wars Story and Trolls. Hasbro noted that partner-controlled schedules and consumer response could affect results.
- Key risks include dependence on a limited number of major retailers (top five were 39% of revenue), seasonality (66% of 2015 revenue was earned in the second half), foreign-exchange exposure, reliance on third-party manufacturing principally in China, licensed-brand performance and minimum guarantees, changing consumer preferences, and intense competition.
- Potentially material commitments include $518.5 million of 2016 purchase commitments and $43.6 million of scheduled 2016 minimum guaranteed royalties, plus up to $40 million of additional 2016 royalties contingent on theatrical releases. Future minimum royalties totaled approximately $426.4 million under existing contracts, with certain additional theatrical-contingent guarantees excluded from the contractual-obligations table.
- Unusual items included a $6.9 million after-tax benefit from the manufacturing sale; 2015 also included $4.0 million of net discrete tax benefits. The company reported $68.3 million of liabilities for uncertain tax positions, and $124.4 million of prepaid royalties. No material legal proceedings were reported. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether reported growth and margin gains persist after separating currency effects, revenue mix, theatrical-release timing and one-time items.
- Whether the sharp decline in the girls’ category stabilizes and the 2016 Disney Princess/Frozen launches and planned entertainment-linked products meet sales expectations.
- Whether International growth excluding currency translates into reported growth, particularly in emerging markets, and how foreign-exchange movements affect profit.
- Retailer concentration, seasonal inventory and receivables: year-end receivables rose 11% and inventory rose 13% year over year.
- Debt and liquidity needs, including the $350 million notes due in 2017, the availability of commercial-paper markets, and cash held overseas.
- Royalty guarantees, Cartamundi purchase commitments, tax exposures and the impairment sensitivity of Backflip goodwill, whose carrying value was $119.1 million.