Hasbro, Inc. — Q1 2017 Form 10-Q
Business context and period. Hasbro is a global play and entertainment company spanning toys, games, licensing, digital gaming, film and television. The quarter ended April 2, 2017 was 14 weeks, versus 13 weeks in the prior-year quarter ended March 27, 2016; comparisons are therefore affected by the extra week. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net revenue | $849.7 | $831.2 |
| Operating profit / margin | $78.3 / 9.2% | $85.9 / 10.3% |
| Net earnings attributable to Hasbro | $68.6 | $48.8 |
| Diluted EPS | $0.54 | $0.38 |
| Operating cash flow | $411.9 | $313.3 |
| Capital expenditures | $30.2 | $31.2 |
Revenue rose 2%, while operating profit declined 9%. Cost of sales increased to 36.0% of revenue from 34.9%; selling, distribution and administration rose to 28.7% from 28.1%. Net earnings included a $14.0 million excess-tax-benefit from adopting share-based payment accounting changes, described by management as a $0.11 per diluted share benefit. The reported tax expense was $2.2 million, versus $12.2 million; management cited favorable discrete tax adjustments of $15.4 million in 2017 versus $3.4 million in 2016.
- Cash and liquidity: Cash and equivalents were $1,463.1 million at April 2, 2017; short-term borrowings were $65.3 million. Operating cash flow benefited substantially from collections, including a $660.3 million decrease in receivables, partly offset by reductions in accounts payable and accrued liabilities.
- Debt: Long-term debt principal was $1,559.9 million, including $350 million due September 2017. The company expected to refinance the notes at maturity through a bond issuance or commercial paper. It had $640.0 million of committed credit capacity available after commercial paper balances, and reported compliance with credit covenants.
- Shareholder returns: Dividends paid were $63.4 million; 218,000 shares were repurchased for $18.1 million. The quarterly dividend rate increased from $0.51 to $0.57 per share, with the higher payment scheduled for May 15, 2017.
Material changes and operating drivers
- U.S. and Canada revenue increased 2% to $451.6 million; segment operating profit fell 17% to $64.8 million. Management cited closeout adjustments, less favorable mix, higher advertising and compensation, and extra-week overhead.
- International revenue was essentially flat at $345.3 million, including a $3.0 million foreign-exchange benefit. Segment operating profit fell to $0.5 million from $2.9 million, primarily on mix, closeouts and higher expenses; the prior-year period included a $13.8 million bad-debt provision.
- Entertainment and Licensing revenue rose 24% to $52.7 million and operating profit more than doubled to $11.3 million, supported by digital gaming and Backflip Studios and lower program production costs.
- By brand portfolio, Hasbro Gaming revenue increased 43%, Emerging Brands increased 25%, Franchise Brands increased 2%, and Partner Brands declined 18%. Partner Brand declines included STAR WARS and MARVEL ahead of planned later-year theatrical releases.
- In January 2017, Hasbro acquired the remaining 30% of Backflip Studios for no additional consideration, making it wholly owned.
Outlook, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management said available cash, expected operating cash generation and borrowing facilities should be adequate for working capital needs through the remainder of 2017. It emphasized that the business is seasonal, with a greater share of revenue typically generated in the second half, particularly the holiday period. Cash held outside the U.S. was substantially all international and generally unavailable for U.S. needs without a change in reinvestment policy and potentially additional taxes.
- Key risks include reliance on successful brands and licensed properties, concentrated retail customers, consumer and retailer demand, second-half shipping and inventory execution, foreign currency movements, and sourcing concentration among third-party manufacturers in China.
- Foreign-exchange exposure is partly hedged with forward contracts; the company does not hedge translation impacts. The filing reports $434.7 million of purchase commitments and $41.6 million of letters of credit outstanding.
- Uncertain tax position liabilities were $87.1 million. The company was undergoing tax examinations in several jurisdictions. It said current legal proceedings were not believed material.
- Adoption of the share-based payment standard affected tax expense and cash-flow classification; a $0.7 million after-tax forfeiture-policy adjustment was recorded directly to retained earnings. The company expected lease accounting adoption to add potentially material assets and liabilities, but not materially affect results or cash flows.
Important facts for investors to verify
- How much of earnings and EPS growth reflects the $14.0 million share-based tax benefit, and how results compare after adjusting for the extra week.
- Whether the operating-profit and margin declines in U.S. and Canada and International reverse as closeout activity, product mix and seasonal sales develop.
- Progress and terms of refinancing the $350 million notes due September 2017, along with cash availability given the concentration of cash outside the U.S.
- Whether Partner Brand demand, especially STAR WARS and MARVEL, and second-half retail orders meet management’s expectations.
- Potential effects of foreign exchange, customer concentration, China sourcing, and the company’s purchase commitments on cash flow and margins.