Hasbro, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter ended July 2, 2017 (13 weeks); six months ended July 2, 2017 (27 weeks). Comparative 2016 periods were 13 and 26 weeks, respectively. Financial statements are unaudited. Dollar amounts below are in millions except per-share data.
Business context
Hasbro is a global play and entertainment company operating through U.S. and Canada, International, Entertainment and Licensing, and Global Operations segments. Its portfolio includes owned and licensed toy, game, digital, television, film, and consumer-products brands.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net revenue | $972.5 | $878.9 | $1,822.2 | $1,710.1 |
| Operating profit | $100.0 | $84.9 | $178.3 | $170.8 |
| Operating margin | 10.3% | 9.7% | 9.8% | 10.0% |
| Net earnings attributable to Hasbro | $67.7 | $52.1 | $136.3 | $100.9 |
| Diluted EPS | $0.53 | $0.41 | $1.07 | $0.79 |
| Operating cash flow | Not reported separately | Not reported separately | $366.1 | $305.9 |
Q2 revenue grew 11%; operating profit rose 18% and diluted EPS rose 29%. First-half revenue increased 7% and operating profit increased 4%. First-half operating cash flow rose about 20%; capital expenditures were $66.3 versus $66.4, leaving approximately $299.8 of operating cash flow after capital expenditures (derived).
At July 2, cash and cash equivalents were $1,433.5, current assets $3,094.8, and current liabilities $1,472.2. Short-term borrowings were $186.9. Long-term debt had $1,559.9 principal outstanding, including $350.0 due in September 2017; the carrying amount of long-term debt was $1,199.1 after classifying the near-term maturity as current and deducting debt costs. The company reported $1,246.6 of cash net of short-term borrowings. It had $533.5 available under its committed facility after commercial-paper borrowings and letters of credit. Debt covenants were met.
Accounts receivable were $846.5, up 20% from the prior-year comparable date; days sales outstanding increased from 72 to 78. Inventories were $557.5, down 3%. Total assets were $4,912.7 and shareholders’ equity was $1,832.5.
Material changes and drivers
- Brands: Q2 Franchise Brands revenue increased 21%, Hasbro Gaming 6%, and Partner Brands 1%; Emerging Brands fell 14%. Franchise growth included Transformers, Magic: The Gathering, Nerf, and Monopoly. Partner Brands were affected by lower Star Wars sales ahead of a planned film release. First-half Partner Brands revenue declined 9%, while Franchise Brands and Hasbro Gaming increased 12% and 19%.
- Segments: Q2 U.S. and Canada revenue rose 16% and operating profit 41%. International revenue rose 6%, but operating profit fell 43% to $16.9, reflecting closeouts, product mix, hedging results, and higher expenses. Entertainment and Licensing revenue was nearly flat and operating profit declined 18%. Global Operations recorded a $7.6 operating loss.
- Costs and margins: Q2 cost of sales increased to 37.9% of revenue from 36.6%, reflecting more closeout sales and less favorable hedging; royalties rose to 8.1% from 7.9%, partly due to the Transformers theatrical release. First-half cost of sales rose to 37.0% from 35.8%, while operating margin eased to 9.8% from 10.0%.
- Cash returns and ownership: Hasbro acquired the remaining 30% of Backflip Studios in January, making it wholly owned. The quarterly dividend increased from $0.51 to $0.57 per share. First-half repurchases were $18.6; $309.4 remained under the authorization.
Outlook, commentary, and risks
The filing provides no specific full-year revenue or earnings guidance. Management says the business is historically weighted toward the second half, particularly the holiday season, and expects that pattern to continue. It cautions that interim results are not necessarily indicative of full-year performance and believes cash generation and available borrowing facilities will cover working-capital needs for the remainder of 2017. Management expects to refinance the $350 million notes due in September, through a bond issuance or commercial paper.
Key exposures include concentrated second-half sales and retailer order patterns; the risk of excess or insufficient inventory and compressed shipping schedules; reliance on third-party manufacturing, particularly in China; customer concentration and credit risk; licensed-brand performance and royalty commitments; foreign-exchange and hedging effects; consumer demand, competition, and product acceptance; and access to financing. Most cash was held outside the United States and was largely treated as indefinitely reinvested; management said domestic cash was sufficient without repatriation. Purchase commitments were $673.7, and uncertain-tax-position liabilities were $92.8. The company reported ongoing tax examinations, including an IRS examination of amended 2012 and 2013 returns; it did not believe its disclosed legal proceedings were material.
Unusual and accounting items include adoption of share-based payment guidance: excess tax benefits contributed $15.5 to first-half income-tax benefits and approximately $0.12 to diluted EPS; the filing also reports a $0.7 after-tax forfeiture-accounting charge to retained earnings. First-half favorable discrete tax adjustments totaled $17.7. The company expects the forthcoming lease standard to add potentially material balance-sheet assets and liabilities, with no expected material impact on results or cash flows.
Most important facts to verify
- Whether second-half and holiday-season demand, shipments, and retailer orders support full-year performance; no quantified guidance is provided.
- Whether the International segment’s weaker operating profit and higher closeout activity persist, and how margins respond to product mix and hedging.
- Collection of receivables, given higher DSO and increased sales in markets with longer payment terms.
- Completion and terms of refinancing the $350 million September 2017 maturity, and continued covenant compliance and credit-market access.
- The durability of reported earnings and EPS growth after considering the 2017 extra reporting week and share-based-payment tax benefits.