Hasbro, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 25, 2016; each comprised 13 and 39 weeks, respectively. Amounts below are in millions of dollars except per-share data. Hasbro sells toys and games and earns licensing, digital gaming, film and television revenue. Its reporting segments are U.S. and Canada, International, Entertainment and Licensing, and Global Operations.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $1,679.8 | $1,471.0 | $3,389.9 | $2,982.2 |
| Operating profit | $362.1 | $303.5 | $532.9 | $433.2 |
| Operating margin | 21.6% | 20.6% | 15.7% | 14.5% |
| Net earnings attributable to Hasbro | $257.8 | $207.6 | $358.7 | $276.1 |
| Diluted EPS | $2.03 | $1.64 | $2.82 | $2.18 |
- Q3 revenue increased 14%; operating profit grew 19% and Hasbro-attributable earnings rose 24%. Nine-month revenue increased 14%, operating profit 23%, and attributable earnings 30%.
- Q3 diluted EPS comparison includes a $0.06-per-share favorable 2015 adjustment related to the sale of manufacturing operations. Q3 2015 operating profit also included a $3.1 million gain from that sale.
- For the first nine months, foreign currency translation reduced reported revenue by approximately $49.1 million; excluding this effect, revenue grew 15%. Q3 translation reduced revenue by approximately $2.8 million. Nine-month operating profit had no significant currency translation impact.
- Q3 revenue grew in U.S. and Canada (+16%), International (+13%) and Entertainment and Licensing (+8%). Girls grew 57%, Games 13% and Boys 2%; Preschool declined 8%. For nine months, Entertainment and Licensing revenue fell 6%, while U.S. and Canada and International grew 17% and 12%.
- Growth reflected, among other products, Disney Princess/Frozen, Trolls, NERF, Transformers, Play-Doh and Magic: The Gathering. Franchise Brand revenue rose 2% in both periods; Partner Brand revenue grew 19% in Q3 and 28% for nine months.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $153.8 million, versus $69.6 million in 2015. Working-capital outflows included $224.2 million from higher receivables and $214.7 million from higher inventory. Capital expenditures were $103.6 million; investing cash outflow was $90.5 million.
- Financing cash outflow was $217.4 million, including $104.3 million for share repurchases and $185.3 million in dividends. Cash declined $146.4 million during the nine months to $830.4 million at September 25, 2016.
- Cash less short-term borrowings was $651.7 million, compared with $437.3 million a year earlier. Receivables were $1,452.9 million, up 5%; days sales outstanding improved to 78 from 85. Inventory rose 36% to $607.7 million, mainly to support new and high-growth products and fourth-quarter releases.
- Debt principal totaled $1,559.9 million: $350 million of 6.30% notes is due September 2017 and is classified as current; remaining notes mature from 2021 through 2044. Balance-sheet short-term borrowings were $178.7 million. The revolving credit facility provides $700 million; no revolver borrowings were outstanding, and approximately $533.4 million was available net of commercial paper and other stated balances. Hasbro reported covenant compliance.
- Management said available cash, expected operating cash flow, credit lines and commercial paper were adequate for working capital needs through the remainder of 2016. Most cash was held outside the U.S. and was not available for U.S. needs without changing the indefinite-reinvestment policy and potentially incurring additional taxes.
- Quarterly dividend increased from $0.46 to $0.51 per share effective with the May 2016 payment. Hasbro repurchased 0.6 million shares for $48.4 million in Q3 and 1.3 million shares for $106.2 million in the first nine months; $373.1 million remained under the authorization.
Management commentary, risks and unusual items
- Management attributed improved operating margins primarily to higher revenue, operating expense leverage, and lower intangible amortization and program production costs; higher royalties and selling, distribution and administration costs partly offset the gains.
- International nine-month results included a $13.8 million bad-debt provision. Total bad-debt expense in administration was $19.1 million for the nine months, versus $1.5 million a year earlier; the increase primarily related to a potentially uncollectible International-segment account.
- Hasbro acquired Dublin-based animation studio Boulder Media in July for an initial cash payment of approximately $13.2 million, with possible earnout payments. Preliminary goodwill recorded was $11.8 million.
- Management highlighted seasonality: the second half, particularly the holiday period, contributes a substantial share of revenue and earnings. Retailer order changes, product acceptance, supply and shipping constraints can lead to underproduction or excess inventory. The filing does not provide a clear numerical full-year revenue or earnings forecast.
- Backflip Studios had $119.1 million of goodwill. Management warned that disappointing game results or release delays could trigger an impairment charge; an annual goodwill impairment review was planned for Q4 2016.
- Other key risks include foreign exchange exposure, concentrated retail customers, licensed-product demand and minimum royalties, dependence on third-party manufacturing (particularly in China), competition, product safety, and access to financing. The company does not hedge foreign-currency translation effects.
- Uncertain tax positions totaled $92.7 million at quarter-end; tax examinations were ongoing in several jurisdictions. The filing states that existing legal proceedings were not believed material. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Cash-flow presentation and related accounting standards were under evaluation, including revenue recognition, leases and share-based payment accounting; management did not then expect adoption of the revenue standard to have a material impact.
Important facts for investors to verify
- Whether fourth-quarter sales, holiday demand and retailer orders support the company’s seasonal revenue expectations, and whether elevated inventory converts to sales without markdowns.
- Recoverability and collection of the International-segment receivable underlying the bad-debt provision, and any further credit losses.
- Cash generation and access to U.S.-available liquidity, given overseas cash balances and the $350 million debt maturity in September 2017.
- Backflip game performance and the outcome of the Q4 goodwill impairment review, as well as any Boulder earnout obligations.
- Revenue and margin sustainability by segment and product category, including the effects of partner-brand royalties, licensing demand, and foreign exchange.