Hasbro, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; each period comprised 13 and 26 weeks, respectively. Amounts below are in millions except per-share data. Hasbro is a global play and entertainment company operating in U.S. and Canada, International, Entertainment, Licensing and Digital, and Global Operations segments.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $984.5 | $904.5 | $1,717.0 | $1,620.8 |
| Operating profit | $128.3 | $87.6 | $164.5 | $7.2 |
| Operating margin | 13.0% | 9.7% | 9.6% | 0.4% |
| Net earnings (loss) | $13.4 | $60.3 | $40.2 | $(52.2) |
| Diluted EPS | $0.11 | $0.48 | $0.32 | $(0.42) |
Q2 revenue increased 9%; first-half revenue increased 6%. Q2 gross margin, calculated from reported cost of sales, was 65.1%, up from 62.6%; first-half gross margin was 64.8%, up from 63.4%. Q2 earnings included a non-cash $110.8 pension settlement charge ($85.9 after tax, or $0.68 per diluted share), which drove other expense to $106.2. First-half 2019 also included this charge. The 2018 first-half comparison included $87.7 of Toys“R”Us and restructuring expenses and a $47.8 tax expense related to U.S. tax reform.
Cash flow: First-half operating cash flow was $336.3, compared with $240.8 in 2018; investing cash use was $60.5 versus $223.8, including the prior-year $155.5 Power Rangers acquisition payment. Financing cash use was $306.6 versus $421.2. Cash ended at $1,151.0, down from $1,159.1 a year earlier.
Balance sheet and liquidity: At June 30, cash was $1,151.0, current assets $2,830.1 and current liabilities $1,072.7. Long-term debt was $1,695.8 carrying value; principal was $1,709.9. Short-term borrowings were $12.8. Hasbro had no commercial-paper or committed-revolver borrowings, and approximately $1,097.8 remained available under its $1,100.0 revolver. The company reported compliance with its debt covenants. It had a $192.9 transition-tax liability, payable in interest-free annual installments through 2025, and $548.7 of purchase commitments.
Dividends declared rose to $0.68 per share in Q2 from $0.63 a year earlier. First-half repurchases totaled $58.6; $369.3 remained under the authorization.
Material changes and operating drivers
- Segments: Q2 U.S. and Canada revenue rose 14% to $510.5 and operating profit increased to $106.6 from $73.1. International revenue declined 1% to $377.4, but operating profit improved to $14.6 from $0.2. Entertainment, Licensing and Digital revenue rose 28% to $96.5, while operating profit fell to $7.9 from $21.8, reflecting higher digital development, advertising, and program costs.
- First-half International revenue declined 1% to $660.1 and the segment recorded a $15.8 operating loss, improved from a $55.9 loss. Entertainment, Licensing and Digital revenue increased 26% to $188.5; operating profit was $38.0 versus $38.9.
- Q2 franchise, emerging and partner brand revenues rose 14%, 28% and 3%, respectively; Hasbro Gaming portfolio revenue declined 8%. Total gaming revenue, including MAGIC: THE GATHERING and MONOPOLY outside that portfolio, increased 26% to $393.4.
- Foreign exchange reduced Q2 revenue by $20.7 and first-half revenue by $45.0. International revenue would have increased 5% in both periods excluding currency effects.
- First-half operating profit improved substantially year over year, partly because the 2018 period included Toys“R”Us-related costs and restructuring charges. Cost-saving initiatives also reduced selling, distribution and administration expense.
Outlook, risks and unusual items
The filing gives no specific quantitative revenue or earnings guidance. Management said available cash, expected operating cash flow and access to credit facilities should be adequate for working capital needs over the next 12 months. The company expects its historically heavier second-half sales pattern to continue, particularly around the holiday season; results for the first half are not necessarily indicative of full-year performance.
Management cited exposure to foreign-exchange movements, proposed or imposed tariffs and sourcing concentration in China; Hasbro imported some products earlier than expected in response to proposed U.S. tariffs, increasing warehousing costs. Other risks include concentrated retail customers and possible retailer distress, seasonal demand and compressed shipping schedules, changing consumer and retail behavior, licensed-brand performance, and costs or delays in digital and entertainment initiatives. The company uses currency hedges but does not hedge translation effects.
The U.S. defined benefit pension plan settlement generated the $110.8 non-cash charge; excess plan assets of approximately $19.0 were to fund future U.S. 401(k) matching contributions. A 2018 restructuring program had $53.6 of remaining amounts to be paid at June 30, 2019; no additional restructuring charges were recorded in the first half. A putative securities class action related to statements concerning Toys“R”Us and economic conditions in the U.K. and Brazil remained pending; Hasbro denied liability and intended to defend the matter.
Important facts for investors to verify
- How much reported earnings and operating cash flow reflect recurring operations versus the pension settlement, tax items, and working-capital movements.
- Whether second-half holiday demand, product availability and retail orders support full-year performance, given the company’s seasonality.
- How tariffs, sourcing diversification and foreign-exchange movements affect costs, pricing and international results.
- Whether digital gaming revenue growth can translate into improved segment profitability as development, advertising and production costs rise.
- Developments in the securities litigation, transition-tax liability, purchase commitments and access to external financing.