Hasbro, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Hasbro is a global play and entertainment company operating through U.S. and Canada, International, Entertainment, Licensing and Digital, and Global Operations segments. The quarter ended March 31, 2019 comprised 13 weeks; the comparable 2018 quarter also comprised 13 weeks. Results are unaudited, and management cautions that first-quarter results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net revenues | $732.5 million | $716.3 million |
| Operating profit (loss) | $36.1 million | $(80.4) million |
| Operating margin | 4.9% | (11.2)% |
| Net earnings (loss) | $26.7 million | $(112.5) million |
| Diluted earnings (loss) per share | $0.21 | $(0.90) |
| Cash from operating activities | $264.5 million | $317.7 million |
- Cost of sales was 35.5% of revenue, versus 35.6% a year earlier. Royalties fell to 8.2% of revenue from 9.7%; advertising rose to 10.5% from 9.5%.
- Cash and cash equivalents were $1.197 billion at March 31, down 25% from April 1, 2018. Current assets were $2.632 billion and current liabilities $948.7 million.
- Long-term debt carrying value was $1.695 billion; principal outstanding was $1.710 billion. Short-term borrowings were $13.4 million. Hasbro reported $1.099 billion available under its committed revolving facility and compliance with its covenants.
- Investing activities used $27.0 million, including $25.2 million in capital expenditures. Financing activities used $220.4 million, including $79.3 million in dividends, $47.5 million in share purchases, and an $87.5 million deferred payment related to the Power Rangers acquisition.
- The quarterly dividend increased from $0.63 to $0.68 per share, effective for the May 2019 payment. The company repurchased approximately 579,000 shares for $49.2 million; $378.8 million remained under the authorization.
Material changes versus the prior comparable period
- Revenue increased 2%. U.S. and Canada revenue rose 1%, International declined 2% as reported, and Entertainment, Licensing and Digital grew 24%. International revenue would have increased 6% excluding unfavorable currency translation of $23.4 million.
- Franchise Brands revenue grew 9%, Hasbro Gaming 2%, and Emerging Brands 22%; Partner Brands declined 14%. Total gaming revenue increased 20% to $243.4 million.
- Operating profit turned positive from a loss. The 2018 quarter included $70.4 million of Toys“R”Us-related costs and $17.3 million of restructuring severance costs. Q1 2018 also included a $47.8 million tax-reform charge. These unusual prior-year items materially affect the year-over-year comparison.
- Operating cash flow declined $53.2 million, primarily because collections of accounts receivable were higher in Q1 2018. Ending cash was also lower than a year earlier.
Outlook, commentary, risks and unusual items
- Management said cash from operations and available credit facilities were expected to be adequate for working-capital needs for the remainder of 2019 and obligations over the next 12 months. The filing provides no specific full-year revenue or earnings guidance.
- Hasbro’s sales are seasonally weighted toward the second half, especially the holiday period. Management highlighted risks from shifting consumer and retail behavior, customer inventory policies, product acceptance and execution, and compressed shipping schedules.
- Foreign exchange reduced Q1 revenue by $24.3 million overall and operating profit by $2.9 million. The company hedges certain forecast currency exposures but does not hedge translation impacts.
- The 2018 restructuring program had $61.6 million of remaining amounts payable at March 31, 2019; no new restructuring charges were recorded in Q1. The U.S. defined benefit pension plan termination was expected to settle in Q2 2019, with asset transfer to a third-party administrator expected in Q3. Unrecognized plan losses were $141.6 million; the ultimate settlement charge depends on participant elections and market conditions.
- The Tax Act transition-tax liability was $273.2 million, payable in interest-free annual installments through 2025. Q1 2019 tax expense was $2.9 million; the reported tax rate was affected by discrete items and profit mix.
- At March 31, the company had $496.1 million of purchase commitments. Operating lease liabilities totaled $158.9 million following adoption of the new lease standard; adoption did not affect reported results or cash flows.
- A putative securities class action alleges misleading statements regarding Toys“R”Us and economic conditions in the U.K. and Brazil. Hasbro denies liability and intends to defend the case; it considers other reported legal proceedings not material.
Important facts for investors to verify
- Whether revenue and segment momentum persisted beyond Q1, especially the growth in digital gaming and the decline in Partner Brands.
- How much of the profit improvement reflects ongoing cost savings versus the prior-year Toys“R”Us, restructuring and tax-reform charges.
- Cash conversion and working-capital trends, including receivables, inventory, and the seasonal cash needs of the second half.
- The final timing and financial impact of the pension-plan termination and settlement.
- Foreign-exchange, retail-customer concentration, sourcing and tariff exposure, and developments in the securities litigation.
- Debt, available credit, transition-tax installments, purchase commitments, and continued shareholder distributions relative to cash generation.