Hasbro, Inc. — 2018 Form 10-K
Business context and reporting period. Hasbro is a global toys, games, entertainment and licensing company, with U.S. and Canada, International, and Entertainment and Licensing as its principal operating segments. The fiscal year ended December 30, 2018 and comprised 52 weeks; 2017 comprised 53 weeks. The filing is an annual report, not a standalone fourth-quarter filing.
The business is seasonal: approximately 65% of 2018 revenue was earned in the second half. Hasbro acquired POWER RANGERS and related entertainment assets in June 2018 for a stated purchase price of approximately $535.9 million, funded with cash, stock and deferred consideration.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $4,579.6 million | $5,209.8 million |
| Operating profit | $331.1 million; 7.2% margin | $810.4 million; 15.6% margin |
| Net earnings attributable to Hasbro | $220.4 million | $396.6 million |
| Diluted EPS | $1.74 | $3.12 |
| Operating cash flow | $646.0 million | $724.4 million |
| Cash and cash equivalents at year-end | $1,182.4 million | $1,581.2 million |
| Long-term debt principal | $1,709.9 million | $1,709.9 million |
Revenue fell 12% year over year, including $43.0 million of unfavorable foreign currency translation. Cost of sales was 40.4% of revenue, versus 39.0% in 2017. The effective income tax rate was 18.5%, compared with 49.6% in 2017; both years included material Tax Act-related items.
Operating cash flow declined $78.4 million. Investing activities used $286.5 million, including $140.4 million of capital expenditures and $155.5 million of acquisition spending, primarily for POWER RANGERS. Financing activities used $737.1 million, including $250.1 million for share repurchases and $309.3 million of dividends. Hasbro paid $2.52 per share in declared dividends for 2018.
Year-end current assets were $3,082.5 million and current liabilities $1,274.3 million. The company had no borrowings under its $1.1 billion committed revolving facility or commercial paper program at year-end; approximately $1,098.5 million was available under the revolver, net of letters of credit. It reported $9.7 million of short-term borrowings under other lines.
Material changes versus the prior comparable period
- Revenue declined in U.S. and Canada by 10% and International by 17%; Entertainment and Licensing revenue increased 5%. International revenue was also pressured by currency translation and weaker regional performance.
- By portfolio, Franchise Brands revenue declined 9%, Partner Brands 22%, and Hasbro Gaming 12%; Emerging Brands increased 1%. Declines included several major licensed and entertainment-supported lines. MONOPOLY and MAGIC: THE GATHERING grew.
- Operating profit fell sharply across segments: U.S. and Canada to $382.0 million from $509.9 million; International to $39.5 million from $228.7 million; and Entertainment and Licensing to $17.3 million from $96.4 million. The latter included the Backflip goodwill impairment.
- Fourth-quarter revenue was $1,389.2 million versus $1,596.1 million in 2017. Fourth-quarter operating profit was $10.5 million versus $271.1 million; net earnings were $8.8 million versus a net loss of $5.3 million. Full-year comparisons are affected by the extra week in 2017.
- Cash declined by $398.9 million during 2018. Receivables fell 15% to $1,188.1 million, while inventories increased 2% to $443.4 million.
Outlook, management commentary and risks
- Restructuring: Hasbro recorded $89.3 million in 2018 severance charges. It expects gross annualized savings of $70–$80 million by 2020, including approximately $65 million in 2019; after $10–$15 million of planned 2019 reinvestment, anticipated net 2019 savings are $50–$55 million. These are estimates, not guaranteed results.
- Investment and spending: Management expected 2019 capital expenditures of $155–$165 million and television and film spending of approximately $65–$85 million. No specific 2019 revenue or earnings guidance is provided in the supplied filing text.
- Impairments and unusual items: The company recorded $86.3 million of Backflip goodwill impairment and $31.3 million of other intangible-asset impairment in 2018, totaling $117.6 million. The Backflip charge followed changes to its mobile-game plans and projections. Toys“R”Us-related costs were $60.4 million, and restructuring charges were $89.3 million. The 2018 Tax Act adjustment was a $40.7 million net charge.
- Liquidity and commitments: Hasbro expects to fund 2019 working capital primarily from cash and operations, with commercial paper or the revolver available if needed. Year-end contractual commitments included $536.7 million of inventory and tooling purchases and $337.8 million of future minimum guaranteed royalties; the filing separately notes a potential $50 million STAR WARS royalty contingent on a 2019 theatrical release.
- Key risks: Toys“R”Us liquidation, excess European retail inventory and automated replenishment practices hurt 2018 sales and profitability. Revenue concentration is significant: the five largest customers represented about 38% of revenue, with Walmart at 20% and Target at 9%. Other key exposures include changing consumer tastes, dependence on partner brands and entertainment releases, foreign exchange, economic weakness in markets including the U.K. and Brazil, China-focused sourcing and potential tariffs, holiday-season execution, and product safety, privacy and cybersecurity.
- Legal and governance: A putative securities class action filed in September 2018 alleges misleading statements concerning Toys“R”Us and economic conditions in the U.K. and Brazil; Hasbro denies liability and intends to defend the case. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether sales, margins and cash generation recover after the 2018 declines, particularly in International and the U.S. and Canada segments.
- How much of the reported profit decline reflects recurring operating pressure versus Toys“R”Us costs, impairments, restructuring and tax items.
- Whether the announced restructuring savings are achieved while funding planned reinvestment and digital, gaming and entertainment initiatives.
- Progress on POWER RANGERS integration and returns, and whether Backflip’s revised game plans support future value after the full goodwill impairment.
- Customer concentration, retail inventory and ordering trends, foreign exchange exposure, sourcing diversification and potential tariff effects.
- Liquidity and capital allocation, including debt maturities, royalty and purchase commitments, dividends and remaining share repurchase authorization.
- Developments in the securities litigation and the outcome and cash cost of the U.S. defined-benefit pension plan termination, expected to proceed in 2019.