Hasbro, Inc. — 2019 Form 10-K Summary
Business context and reporting period
Hasbro is a global toys, games and entertainment company. This filing covers the 52-week fiscal year ended December 29, 2019; 2018 was also 52 weeks. Results exclude Entertainment One (eOne), acquired on December 30, 2019. Accordingly, the year-end balance sheet predates the acquisition closing and its associated loan funding.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $4.720 billion | $4.580 billion |
| Operating profit / margin | $652.1 million / 13.8% | $331.1 million / 7.2% |
| Net earnings | $520.5 million | $220.4 million |
| Diluted EPS | $4.05 | $1.74 |
| Operating cash flow | $653.1 million | $646.0 million |
| Cash and cash equivalents at year-end | $4.580 billion | $1.182 billion |
| Long-term debt principal at year-end | $4.085 billion | $1.710 billion |
Revenue grew 3%, despite $78.5 million of unfavorable foreign-exchange translation. Cost of sales improved to 38.3% of revenue from 40.4%; royalties rose to 8.8% from 7.7%, reflecting more licensed Partner Brand sales. Cash from investing activities was a $61.0 million outflow, including $133.6 million of capital expenditures; financing activities provided $2.811 billion, largely reflecting acquisition-related debt and equity issuance. The company declared $2.72 per share in dividends.
Year-end cash was elevated by financings completed ahead of eOne’s acquisition. On December 30, Hasbro paid approximately $4.6 billion for eOne and borrowed $1.0 billion under term loan facilities; eOne’s results are not in 2019 earnings. The filing states that 2020 working-capital needs are expected to be funded by cash flows, commercial paper, credit lines and production financing, and that available resources are expected to be adequate.
Material changes versus comparable periods
- Operating profit and earnings rebounded from 2018, when results included $60.4 million of Toys“R”Us-related costs, $89.3 million of restructuring charges and $117.6 million of goodwill and intangible impairment charges.
- 2019 net earnings included an $86.0 million after-tax pension settlement charge and an $81.8 million after-tax net benefit from eOne-related hedging gains, financing fees and transaction costs. These unusual items make reported year-over-year earnings comparisons less representative of underlying operations.
- Partner Brands revenue rose 24%, supported particularly by Frozen and Marvel releases; Franchise Brands fell 1% and Hasbro Gaming fell 10%. Total gaming revenue, including gaming products reported in other portfolios, increased 6% to $1.528 billion.
- U.S. and Canada revenue increased 3%; International revenue declined 1% as reported, but grew 4% excluding currency effects; Entertainment, Licensing and Digital revenue increased 22%. The International segment’s currency impact was a $76.5 million revenue headwind.
- Cash flow from operations was broadly stable, while receivables increased 19% and days sales outstanding rose to 90 from 78, partly due to sales mix and fourth-quarter shipment timing.
Outlook, risks and unusual items
- Management identified eOne as a strategic expansion into preschool brands and film, television and music capabilities. Expected synergies, integration benefits and adjusted-EPS accretion are forward-looking expectations, not 2019 results; the filing cautions these benefits may be delayed, reduced or not realized.
- For 2020, Hasbro expected capital expenditures of $160–$170 million and approximately $111 million of guaranteed royalty payments. No specific full-year revenue or EPS guidance is provided in the filing text.
- Following the acquisition, Hasbro suspended share repurchases while prioritizing debt reduction and its gross-debt-to-EBITDA targets. It had $366.6 million remaining under its authorization at year-end.
- Key risks include integration and increased debt-service requirements; dependence on major retailers (the top five represented about 38% of 2019 revenue); reliance on third-party manufacturing concentrated in China; tariffs and foreign-exchange movements; highly seasonal sales; licensed-brand performance; and competition for consumer attention.
- The filing warned that the coronavirus outbreak could disrupt manufacturing, shipments and consumer demand, particularly given Hasbro’s China sourcing. Its ultimate effect was uncertain as of the filing. Brexit-related commercial and currency effects were also uncertain.
- Contractual commitments included $671.0 million of purchase commitments, $277.3 million of future minimum guaranteed royalties and $1.862 billion of scheduled interest payments on long-term debt. The company reported no legal proceedings it considered material and no material environmental exposure.
Important facts for investors to verify
- Post-acquisition debt, cash, leverage and the pace of repayment, including the effect of eOne’s operations and production financing.
- Whether eOne integration, expected synergies and brand licensing opportunities produce measurable operating results; purchase-price accounting was incomplete at filing.
- Underlying earnings excluding the pension settlement and eOne-related hedge, financing and transaction items.
- Receivables collection and working-capital trends, especially given higher year-end DSO and the seasonal sales pattern.
- Effects of coronavirus-related supply disruption, tariffs, currency changes and continued diversification away from China manufacturing.
- Performance of Partner Brands and major owned brands, plus customer concentration and retail inventory conditions.