Hasbro, Inc. — Q1 2020 Form 10-Q
Reporting period: Unaudited 13-week quarter ended March 29, 2020; comparisons are with the 13 weeks ended March 31, 2019. Amounts below are in U.S. dollars.
Business context
Hasbro is a global toys, games and entertainment company. Results include Entertainment One (eOne) from its acquisition date, December 30, 2019, making the year-over-year revenue comparison non-comparable without adjustment. Hasbro paid approximately $4.6 billion in total consideration. The preliminary purchase-price allocation included $3.08 billion of goodwill.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenue | $1,105.6 million | $732.5 million |
| Operating profit (loss) | $(23.3) million | $36.1 million |
| Operating margin | (2.1)% | 4.9% |
| Net earnings (loss) attributable to Hasbro | $(69.6) million | $26.7 million |
| Diluted earnings (loss) per share | $(0.51) | $0.21 |
| Operating cash flow | $291.6 million | $264.5 million |
- Revenue rose 51%, primarily reflecting eOne, which contributed $342.5 million, or 31% of consolidated revenue. Foreign currency translation reduced revenue by $11.7 million.
- U.S. and Canada revenue increased 20% to $428.6 million; International revenue fell 11% to $250.4 million; Entertainment, Licensing and Digital revenue fell 9% to $84.0 million. eOne recorded a $33.1 million segment operating loss.
- Total gaming-category revenue increased 40% to $340.5 million. International weakness was concentrated in Latin America and Asia Pacific.
- Operating results included $149.8 million of eOne acquisition-related costs and $25.0 million of acquired-intangible amortization. The filing estimates their after-tax impacts at $127.5 million and $19.9 million, respectively. It attributes $0.93 and $0.14 per diluted share of loss to these items.
- Net interest expense was $54.7 million, versus $22.3 million, reflecting acquisition-related borrowing. Income tax benefit was $4.1 million; the quarter included a $20.1 million discrete tax benefit, mainly related to eOne acquisition costs.
Cash, debt and liquidity
- Cash and cash equivalents, including $86.2 million of restricted production-financing cash, were $1.24 billion at March 29, 2020.
- Long-term debt principal was approximately $5.3 billion, including $1.0 billion of term loans and $175.6 million of production financing. The company reported $64.4 million of current long-term debt on its balance sheet. Debt increased substantially following the eOne acquisition.
- Operating cash flow was $291.6 million. Investing activities used $4.43 billion, chiefly for the acquisition; financing activities provided $819.5 million.
- Approximately $1.50 billion was available under the $1.5 billion revolving credit facility; there were no revolver borrowings. Hasbro said it was compliant with its debt covenants and believed available cash, operating cash flow and credit facilities were adequate for the next 12 months.
- The quarterly dividend remained $0.68 per share. Share repurchases were suspended as Hasbro prioritized reducing debt and meeting leverage targets.
Outlook, risks and unusual items
- COVID-19 had disrupted product manufacturing, retail demand and entertainment production and releases. Hasbro expected a greater sales impact in Q2 than Q1, while noting that the ultimate effects on revenue, earnings and liquidity were uncertain.
- At filing, Hasbro expected its China manufacturing facilities to operate at planned capacity and anticipated making up lost production in Q2 and Q3 for holiday demand. This depended on facilities reopening and no significant resurgence or further shutdowns.
- eOne television and film production and release delays were expected to push some deliveries later in 2020; some film releases moved into 2021 or to video-on-demand. Management provided no specific full-year financial guidance in the supplied filing text.
- Key risks include prolonged pandemic effects, retail closures and constrained e-commerce, customer credit and collections, supply-chain concentration, foreign-exchange movements, entertainment delays, acquisition integration and substantial debt. Management said it was monitoring expenses, bad-debt exposure and cash.
- Hasbro recorded $40.9 million of impairments to certain definite-lived intangible and production assets following a change in entertainment strategy, along with $54.1 million of restructuring and related costs. The eOne purchase-price allocation remained preliminary and subject to adjustment.
Investor verification points
- Separate eOne’s acquired contribution from underlying legacy Hasbro performance; reported revenue growth is not like-for-like.
- Track COVID-19 effects on retail demand, manufacturing recovery, e-commerce capacity and the timing of entertainment deliveries.
- Monitor debt reduction, interest costs, covenant headroom and the sustainability of dividends amid acquisition leverage.
- Verify the final eOne purchase-price allocation, goodwill and content-asset recoverability, including any further impairments.
- Assess cash conversion: operating cash flow improved, but acquisition spending drove substantial investing outflows; restricted cash is not freely available.