Hasbro, Inc. — Q1 2016 Form 10-Q Summary
Reporting period: 13 weeks ended March 27, 2016; comparable period was the 13 weeks ended March 29, 2015. Dollar amounts below are in millions unless noted. The interim statements are unaudited.
Business context and results
Hasbro develops, markets and sells toys and games and earns revenue from entertainment, digital gaming and licensing. Its reported segments are U.S. and Canada, International, Entertainment and Licensing, and Global Operations.
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $831.2 | $713.5 | +16%; +20% excluding unfavorable FX |
| Operating profit | $85.9 | $54.2 | +59% |
| Operating margin | 10.3% | 7.6% | +2.7 percentage points |
| Net earnings attributable to Hasbro | $48.8 | $26.7 | +83% |
| Diluted EPS | $0.38 | $0.21 | Up $0.17 |
| Operating cash flow | $293.6 | $315.3 | Down $21.7 |
Revenue and segment trends
- Revenue growth reflected stronger U.S. and Canada (+28%) and International (+13%) sales; International growth was approximately 22% excluding unfavorable FX. Consolidated revenue faced an estimated $28.6 million FX headwind.
- By product category, Boys revenue rose 24%, Girls 41% and Preschool 11%; Games declined 2%. Management cited strength in NERF, PLAY-DOH, STAR WARS, Disney Princess/Frozen and Baby Alive, offset in part by declines in Transformers, Magic: The Gathering and other brands.
- U.S. and Canada operating profit was $78.3 million versus $41.4 million. International operating profit was $2.9 million versus $1.9 million, despite a $13.8 million provision for a potentially uncollectible customer receivable. Entertainment and Licensing revenue fell 30% and operating profit fell 67%, partly because the 2015 period included revenue from a multi-year streaming deal. Global Operations returned to a $3.4 million operating profit from a $3.8 million loss.
Financial position, cash flow and capital
- At March 27, 2016, cash and cash equivalents were $1,095.9 million; short-term borrowings were $89.0 million; and long-term debt carrying value was $1,547.4 million. Cash less short-term borrowings was $1,006.9 million.
- Total assets were $4,364.7 million and shareholders’ equity was $1,607.4 million. Current assets were $2,524.1 million and current liabilities $768.4 million.
- Operating cash flow was $293.6 million, investing cash outflow $27.6 million and financing cash outflow $151.7 million. Cash increased $119.1 million to $1,095.9 million. The operating cash flow comparison benefited from a $547.2 million decrease in receivables, partly offset by higher inventory and lower payables/accruals.
- Receivables were $670.7 million, up 19% year over year; days sales outstanding rose to 73 from 71. Inventory was $461.7 million, up 36% (41% excluding FX), reflecting growth, business initiatives and entertainment timing.
- The company had $610.2 million available under its committed revolving facility after commercial paper and letters of credit; $89.0 million of commercial paper was outstanding. It reported compliance with facility covenants and no revolver borrowings. Long-term debt principal was $1,559.9 million, with maturities from 2017 through 2044.
- Cash was substantially held outside the U.S. and, under the company’s stated indefinite-reinvestment policy, generally was not available for U.S. needs without a policy change and potential additional U.S. tax. Management said U.S. cash sources were sufficient without repatriation.
- Cash dividends paid were $57.4 million. The quarterly dividend rate increased from $0.46 to $0.51 per share, effective for the May 16, 2016 dividend. The company repurchased 475,000 shares during the quarter at an average $75.41 per share; $443.5 million remained under its authorization.
Management commentary, outlook and risks
- Operating profit improvement reflected revenue growth and lower amortization of intangibles and program production costs, partly offset by higher operating expenses. The $13.8 million International bad-debt provision was included in administration costs.
- Management stated that the second half is historically more significant to annual results and that this pattern is expected to continue. Retailer order timing, quick-response inventory practices and compressed holiday shipping schedules create risks of underproduction, excess inventory and missed shipments. The filing provides no specific full-year revenue or earnings guidance.
- Unfavorable currency translation affected reported revenue; the company hedges certain forecast transactions but does not hedge translation exposure. It reported $1,630.3 million of notional cash-flow hedge contracts and expected approximately $44.5 million of accumulated hedge amounts to be reclassified to earnings within 12 months, subject to market values.
- Other risks highlighted include concentrated retail customers, licensed-product demand and royalty commitments, product and entertainment execution, competition, sourcing concentration in China, consumer demand, foreign exchange, financing access and covenant compliance. Purchase commitments were approximately $366.5 million; uncertain tax-position liabilities were $67.5 million. Management described pending legal proceedings as not material to the business or financial condition.
- Income taxes were $12.2 million on $59.2 million of pretax earnings; favorable discrete tax adjustments were a net $3.4 million. The adjusted tax rate, excluding discrete items, was 26.5%. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Collectability and subsequent receipts for the customer receivable behind the $13.8 million bad-debt provision; monitor receivables, DSO and customer concentration.
- Whether the 36% reported inventory increase converts into sales without excess inventory, markdowns or fulfillment constraints during the seasonally important second half.
- Performance and sustainability of growth in key brands and licensed products, alongside continued weakness in selected franchises and the Games category.
- Effects of currency movements and hedge settlements on revenue, margins and earnings, including the timing of expected hedge reclassifications.
- Availability and practical use of overseas cash, debt maturities and covenant headroom, and the company’s ability to fund obligations and shareholder returns through seasonal cash-flow fluctuations.