Hasbro, Inc. — Q1 2018 Form 10-Q
Business context and period: Hasbro is a global toy, games and entertainment company. The quarter ended April 1, 2018 covered 13 weeks; the comparable quarter ended April 2, 2017 covered 14 weeks. Results may not indicate full-year performance, and prior-year comparisons are not restated for the adoption of ASC 606.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net revenue | $716.3 million | $849.7 million |
| Operating income (loss) | $(80.4) million | $78.3 million |
| Net income (loss) | $(112.5) million | $68.6 million |
| Diluted EPS | $(0.90) | $0.54 |
| Operating cash flow | $317.7 million | $411.9 million |
- Revenue fell 16%; the filing attributes the decline to Toys“R”Us liquidations and uncertainty in other operations, as well as elevated retail inventory carried into 2018. Favorable foreign exchange translation contributed $20.7 million to reported revenue.
- Operating margin was (11.2)% versus 9.2%; net margin was (15.7)% versus 8.1%. Cost of sales was 35.6% of revenue versus 36.0%, while selling, distribution and administration rose to 45.8% from 28.7%.
- Cash and cash equivalents were $1.599 billion at April 1, 2018. Balance-sheet current assets were $3.022 billion and current liabilities $852.5 million.
- Long-term debt carrying value was $1.694 billion and short-term borrowings were $21.6 million. The company reported $1.710 billion of long-term debt principal, no borrowings under its $1.0 billion revolving credit facility, and approximately $998.9 million available under that facility. It was in compliance with debt covenants.
- Operating cash flow decreased from $411.9 million, principally reflecting lower earnings. Investing used $26.2 million; financing used $275.7 million, including $70.8 million of dividends and $38.1 million of share repurchases. Cash increased $17.7 million during the quarter.
Material changes and segment results
- U.S. and Canada revenue declined 19% to $364.3 million and the segment recorded a $23.4 million operating loss, versus $64.8 million profit. The loss included $52.3 million of Toys“R”Us-related expenses.
- International revenue declined 17% to $287.9 million; operating loss was $56.1 million versus $0.5 million profit. European revenue fell 28%; reported segment revenue included a favorable $19.5 million currency-translation impact.
- Entertainment and Licensing revenue increased 21% to $64.0 million and operating profit increased to $13.9 million from $11.3 million.
- Revenue declined across brand portfolios: Franchise Brands 19%, Hasbro Gaming 22%, Partner Brands 6%, and Emerging Brands 6%. Total gaming-category revenue declined 20% to $203.5 million.
Outlook, commentary, risks and unusual items
- Management provided no specific numerical full-year revenue or earnings guidance. It said available cash, expected operating cash flow and credit facilities should meet working-capital needs for the remainder of 2018.
- Management noted that the business is seasonal, with a greater share of revenue and earnings typically in the second half, especially the holiday period. Retail inventory policies, order cancellations, product demand and shipping schedules may affect results.
- Toys“R”Us liquidations and uncertainty in other Toys“R”Us operations led to $70.4 million of pretax expenses, including $59.1 million of bad-debt expense, $7.0 million of accelerated royalty expense and $4.3 million of other charges. A commercial reorganization resulted in $17.3 million of pretax severance expense.
- A $47.8 million one-time tax expense reflected updated accounting for U.S. tax reform and a higher provisional deemed-repatriation tax liability. The company reported $24.1 million of total tax expense despite a pretax loss.
- Hasbro began terminating its U.S. defined-benefit pension plan, expecting to transfer plan assets over approximately 18 months. Remeasurement increased the projected benefit obligation by $35.2 million; pension losses may be recognized in earnings upon settlement.
- On May 1, 2018, Hasbro announced a definitive agreement to acquire Power Rangers and other entertainment brands for $522 million: $229.75 million cash and $270 million in Hasbro stock, in addition to $22.25 million previously paid under the master toy license. Closing was expected in Q2 2018, subject to conditions and approvals. Management did not expect a material impact on 2018 results.
- Other disclosed risks include concentrated retail customers, currency fluctuations, dependence on third-party manufacturing and sourcing, consumer demand and product execution, and the company’s second-half sales concentration. The filing states that pending legal proceedings were not believed material.
Important facts for investors to verify
- Progress and financial effects of Toys“R”Us liquidation proceedings, including recovery of receivables, bad-debt exposure and sales lost across regions.
- Whether inventory levels and retail demand normalize, and whether second-half and holiday sales offset the weak first quarter.
- Cash-flow sustainability, debt and credit-facility availability, and the company’s ability to meet commitments, including purchase commitments of approximately $393.9 million.
- Final tax-reform accounting and payment timing for the estimated $288.5 million deemed-repatriation tax liability.
- Regulatory approval, closing, financing and integration of the Power Rangers and related-brand acquisition.
- Effects of the shorter current-year quarter and ASC 606 timing changes on comparisons; the filing says ASC 606’s cumulative adoption effect was not material, but minimum-guarantee licensing revenue shifts among quarters.