Hasbro, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018 (13 weeks); nine months ended September 30, 2018 (39 weeks), compared with a 40-week prior-year period. Financial amounts below are in millions of dollars except per-share data. Interim results are unaudited.
Business context and performance
Hasbro sells toys and games and earns revenue from entertainment and licensing. The quarter’s revenue decline reflected Toys“R”Us liquidations, weaker international sales and retail inventory clearance. Revenue from Entertainment and Licensing grew, but did not offset declines in the product businesses.
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Net revenue | $1,569.7 | $1,791.5 | $3,190.5 | $3,613.7 |
| Operating profit | $313.3 | $360.9 | $320.5 | $539.3 |
| Operating margin | 20.0% | 20.1% | 10.0% | 14.9% |
| Net earnings | $263.9 | $265.6 | $211.7 | $401.9 |
| Diluted EPS | $2.06 | $2.09 | $1.67 | $3.16 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $174.7 | $201.8 |
Financial position, cash flow and liquidity
- At September 30, cash and cash equivalents were $907.1, down 27% from $1,244.8 a year earlier. Current assets were $3,192.5 and current liabilities $1,321.9.
- Long-term debt carrying value was $1,694.7; principal was $1,709.9. Short-term borrowings were $20.3. Cash therefore exceeded reported borrowings by approximately $823.1.
- Nine-month investing cash outflow was $250.9, including $155.5 for the Power Rangers acquisition; capital expenditures were $104.0. Financing cash outflow was $578.6, including $229.6 of dividends and $187.9 of share repurchases. Cash fell by $674.1 from year-end 2017.
- Hasbro reported no commercial-paper or revolving-credit borrowings at quarter-end and approximately $998.5 available under its $1 billion committed revolver, net of letters of credit. It said available funds and expected operating cash flow were adequate for working capital through 2019; it was in compliance with credit covenants.
- Accounts receivable was $1,391.2, including a $77.0 allowance related to Toys“R”Us; days sales outstanding improved to 81 from 84 a year earlier. Inventory was $610.9, down 3% year over year.
Material changes and operating drivers
- Q3 revenue fell 12%; U.S. and Canada revenue declined 7%, International declined 24%, and Entertainment and Licensing grew 45%. International revenue included a $30.3 adverse foreign-currency translation impact.
- For the first nine months, revenue declined 12%; U.S. and Canada declined 10%, International declined 19%, and Entertainment and Licensing grew 31%. The International segment’s operating profit fell to $10.4 from $149.4.
- Partner Brands revenue declined 37% in Q3 and 23% year to date, reflecting lower sales of entertainment-related licensed products. Hasbro’s total gaming category grew 5% in Q3 and was up modestly year to date.
- Q3 operating margin was broadly stable. Lower royalties, advertising and administrative costs partly offset lower sales and higher program-production and intangible amortization. Year-to-date operating profit and margin were materially lower, reflecting Toys“R”Us-related charges, commercial reorganization costs, lower sales and mix, and higher freight and obsolescence costs.
Outlook, unusual items and risks
- Guidance and seasonality: The filing provides no specific full-year revenue or earnings guidance. Management noted that sales and earnings are typically weighted toward the second half, particularly the holiday season, and cautioned that interim results are not necessarily indicative of full-year results.
- Toys“R”Us and reorganization: Nine-month results included $70.4 of pre-tax Toys“R”Us-related charges, including $59.1 bad debt, and $17.3 of commercial reorganization severance. The filing also reported a $17.3 Q3 tax benefit; the net one-time tax expense related to 2018 tax guidance was $30.5 for the nine months.
- Power Rangers: Hasbro acquired Power Rangers and other entertainment assets in June for an allocated purchase price of $535.9, primarily recorded as a $534.4 intangible asset. A further $75.0 payment was due in January 2019; $25.0 was held in escrow.
- Subsequent restructuring: Announced October 22, 2018, the company expected $50–$60 of pre-tax restructuring charges in Q4 2018, primarily severance, with cash payments expected from October 2018 through December 2019.
- Pension: Hasbro began terminating its U.S. defined-benefit pension plan. It reported $143.0 of unrecognized plan losses at September 30, which it expected to recognize upon termination, subject to remeasurement and settlement outcomes.
- Legal and business risks: 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 denied liability and said it would defend the case. Other disclosed risks include retail concentration and inventory overhang, foreign-exchange movements, tariffs and China sourcing, licensed-property and entertainment performance, and holiday-season execution.
- Accounting and tax: ASC 606 adoption had no material cumulative effect but changed the timing of minimum-guarantee licensing revenue. Management expected the upcoming lease standard to add potentially material right-of-use assets and liabilities to the balance sheet, with no material operating-results or cash-flow impact expected.
Important facts for investors to verify
- Whether Hasbro recaptures lost Toys“R”Us sales through other retailers and channels, and whether international inventory clearance and retail conditions improve.
- Whether the sharp year-to-date International segment profit decline and elevated operating costs persist into the holiday season.
- Cash generation and liquidity after the remaining Power Rangers payment, announced restructuring costs, dividends and repurchases.
- The final cost and timing of the U.S. pension-plan termination, and the resolution or potential cost of the securities litigation.
- Future tax-reform adjustments, including the estimated $299.9 repatriation tax liability, and the effect of foreign exchange and potential tariffs on margins.