Hasbro, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 25, 2016, a 52-week year. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter data are summarized below. Hasbro is a global play and entertainment company selling toys and games and earning licensing, television, film and digital-gaming revenue.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net revenue | $5,019.8 million | $4,447.5 million | +13% reported; +14% excluding currency translation |
| Operating profit | $788.0 million | $691.9 million | +14% |
| Operating margin | 15.7% | 15.6% | +0.1 percentage point |
| Net earnings attributable to Hasbro | $551.4 million | $451.8 million | +22% |
| Diluted EPS attributable to Hasbro | $4.34 | $3.57 | +22% |
| Operating cash flow | $774.9 million | $552.4 million | +$222.4 million |
Cost of sales was 38.0% of revenue versus 37.7% in 2015, implying a 62.0% gross margin before royalties and other operating expenses. Net margin attributable to Hasbro was approximately 11.0%, up from 10.2%. Operating cash flow less capital expenditures was approximately $620.0 million, calculated from reported figures.
Revenue growth was broad-based: U.S. and Canada increased 15%, International increased 11% as reported (14% excluding currency effects), and Entertainment and Licensing increased 8%. International revenue included $58.4 million of unfavorable currency translation. By brand portfolio, Partner Brands grew 28%, Hasbro Gaming 23%, Emerging Brands 17%, and Franchise Brands 2%. Girls-category revenue rose 50%, led by the 2016 launch of Disney Princess and Frozen dolls; games grew 9%.
Fourth quarter: Revenue was $1,629.9 million versus $1,465.4 million in Q4 2015. Operating profit was $255.2 million versus $258.7 million; net earnings attributable to Hasbro were $192.7 million versus $175.8 million, and diluted EPS was $1.52 versus $1.39.
Cash, debt and liquidity
- Cash and cash equivalents were $1,282.3 million at year-end, up from $976.8 million. The filing says substantially all cash was held by international subsidiaries and was not available to fund U.S. needs without changing the reinvestment policy and potentially incurring additional tax.
- Current assets were $3,227.6 million and current liabilities $1,617.9 million (current ratio approximately 2.0). Short-term borrowings were $172.6 million.
- Long-term debt principal was $1,559.9 million, including $350.0 million due in 2017; total debt including short-term borrowings was approximately $1,732.5 million. Hasbro expected to refinance the 2017 notes. Interest expense was $97.4 million.
- The company had a $700 million committed revolver through 2020 and $163.3 million of commercial paper outstanding. Approximately $535.9 million was available under the committed line, including the commercial-paper support; Hasbro reported covenant compliance.
- Investing cash use was $138.4 million, including $154.9 million of capital expenditures and $12.4 million for Boulder Media. Financing cash use was $333.1 million, including $248.9 million of dividends and $150.1 million of share repurchases.
Material changes and unusual items
- Net earnings included a $32.9 million non-cash goodwill impairment charge related to Backflip, reducing its remaining goodwill to $86.3 million. Entertainment and Licensing operating profit fell 35% to $49.9 million, with the impairment and investment in new games and licensing capabilities weighing on results.
- Hasbro acquired Dublin animation studio Boulder Media in July 2016. In January 2017, it acquired the remaining 30% of Backflip for no additional consideration, making it wholly owned.
- Hasbro’s 2016 revenue mix shifted: Franchise Brands represented 46% of sales versus 52% in 2015, while Partner Brands rose to 28%, reflecting licensed-brand growth. The company plans to report by brand portfolio beginning in 2017 rather than by the historic product categories.
- The company repurchased approximately 1.9 million shares for $151.3 million in 2016 and had $328.0 million remaining under its authorization. Dividends declared were $2.04 per share for 2016; the quarterly rate was increased to $0.57 for 2017 from $0.51.
- The effective tax rate was 23.0%, including approximately $12 million of discrete tax benefits. In 2015, foreign-exchange translation reduced revenue by approximately $394.5 million; the 2016 currency headwind was substantially smaller.
Outlook, risks and contingencies
Management said it expected operating cash flow, commercial paper and available credit to cover 2017 working-capital needs, while noting that unexpected losses or restricted credit access could reduce liquidity. Planned 2017 capital expenditures were $130–$160 million. No specific 2017 revenue or EPS guidance is provided in the filing. Management cited planned product and entertainment releases, including Star Wars: The Last Jedi and My Little Pony: The Movie, as well as continued development of digital gaming and global licensing.
- Business is highly seasonal: approximately 66% of 2016 revenue was recognized in the second half. Retailer quick-response ordering increases forecasting, inventory and delivery-timing risks.
- Customer concentration is material: the top five customers represented approximately 41% of consolidated revenue; Walmart, Toys “R” Us and Target represented 18%, 9% and 9%, respectively.
- Most products are made by third parties in the Far East, principally China. Supply disruption, labor and freight costs, tariffs or trade restrictions could affect product availability and margins.
- Currency volatility remains a risk. Brexit-related sterling weakness and foreign-exchange volatility adversely affected 2016 results; translation impacts are not hedged.
- Hasbro depends on successful owned brands and third-party licenses, including Disney, Marvel and Star Wars. Jurassic World product rights were scheduled to end after June 2017. Future minimum guaranteed royalties under existing contracts were approximately $215.7 million, with additional theatrical-release-related commitments described separately.
- Goodwill, acquired rights and royalty advances depend on forecast sales and cash flows. Further Backflip underperformance could cause additional impairment. The filing reported $84.4 million of liabilities for uncertain tax positions and estimated approximately $25 million of U.S. pension contributions in 2017.
- Management stated that pending legal matters were not believed material. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the 2016 growth rate and brand mix are sustainable, particularly the contribution from newly launched Disney lines and licensed properties.
- Performance against Backflip’s game-release, growth and profitability assumptions and any subsequent goodwill impairment.
- Refinancing terms for the $350 million 2017 maturity, and the accessibility of overseas cash and committed credit during seasonal funding needs.
- Exposure to key retailers, China-centered manufacturing, currency movements and potential trade-policy changes.
- The economics, renewal terms and sales performance of major licenses, including guaranteed royalties and the end of Jurassic World rights.