Hasbro, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 27, 2015 (13 weeks); year-to-date period was 39 weeks. Comparative periods ended September 28, 2014. Unaudited interim results are not necessarily indicative of the full year.
Business context and results
Hasbro sells toys, games, licensed products and entertainment through U.S. and Canada, International, and Entertainment and Licensing segments, with Global Operations supporting sourcing. Reported Q3 revenue was essentially flat despite substantial currency headwinds; management said revenue grew 9% excluding unfavorable foreign currency translation. The company cited strength in partner brands, including Jurassic World and Star Wars, as well as NERF and Play-Doh.
Key financial metrics
Amounts below are in millions of dollars except per-share data. Margins are calculated from reported figures.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,471.0 | $1,469.9 | $2,982.2 | $2,978.6 |
| Operating profit | $303.5 | $285.8 | $433.2 | $411.8 |
| Operating margin | 20.6% | 19.4% | 14.5% | 13.8% |
| Net earnings attributable to Hasbro | $207.6 | $180.5 | $276.1 | $246.0 |
| Diluted EPS | $1.64 | $1.40 | $2.18 | $1.88 |
| Cash dividends declared per share | $0.46 | $0.43 | $1.38 | $1.29 |
- Margins and costs: Q3 cost of sales declined to 39.4% of revenue from 41.0%, which management attributed mainly to favorable product mix. Royalties rose to 7.7% from 6.4%; product development rose to 4.4% from 4.0%. Year-to-date selling, distribution and administration expense increased to 22.4% of revenue from 21.6%.
- Cash flow: Nine-month operating cash flow was $69.6 million versus $26.8 million; the prior-year comparison included a $58.0 million arbitration settlement payment. Investing activities used $58.8 million, including $97.9 million of capital expenditures. Financing activities used $335.9 million, including $168.4 million of dividends, $74.1 million of share purchases and $138.1 million of net short-term borrowing repayments. Cash declined $341.9 million to $551.3 million.
- Liquidity and debt: Cash less short-term borrowings was $437.3 million. Short-term borrowings were $114.0 million and long-term debt was $1,559.9 million. The $700 million revolving facility had no borrowings and approximately $593.1 million available; the company reported covenant compliance. Management said available cash, operating cash flow and borrowing facilities were adequate for working-capital needs for the remainder of 2015.
- Balance sheet: Current assets were $2,778.1 million and current liabilities $1,050.5 million at September 27, 2015. Accounts receivable was $1,390.3 million, with days sales outstanding rising to 85 from 80 a year earlier. Inventories were $447.1 million, down 10% reported year over year.
Material changes and segment performance
- Q3 reported revenue was up less than 1%; excluding approximately $132.4 million of unfavorable foreign exchange translation, management reported 9% growth. Nine-month reported revenue was also nearly flat; excluding approximately $266.4 million of currency impact, management reported 9% growth.
- Q3 revenue by product category: Boys increased 24%, Preschool 17%, Games declined 8%, and Girls declined 28%. Year to date, Boys and Preschool each grew 14% and 17%, respectively, while Games fell 4% and Girls fell 24%.
- Q3 U.S. and Canada revenue increased 5% and operating profit increased 10%. International revenue declined 6% as reported, but increased approximately 14% excluding currency; operating profit declined 2% as reported and increased approximately 14% excluding currency. Entertainment and Licensing revenue declined 2%, while operating profit rose to $16.2 million from $0.5 million, mainly on lower amortization.
- For the first nine months, U.S. and Canada revenue and operating profit increased 3% and 9%; International revenue and operating profit declined 5% and 4% as reported, with currency-adjusted revenue growth of 14%; Entertainment and Licensing revenue and operating profit increased 18% and 90%.
- Franchise Brand revenue declined 4% in Q3, with growth in Monopoly, NERF and Play-Doh more than offset by declines including Magic: The Gathering, My Little Pony and Transformers. Management noted that Transformers faced a tough comparison with the prior-year film release.
Outlook, commentary, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the filing. Management emphasized that the business is seasonal, with sales concentrated in the second half and holiday quarter; interim results should not be treated as a full-year forecast.
- Management identified risks from currency movements, retailer concentration and ordering/inventory decisions, holiday-season execution, product acceptance, licensed-property performance, sourcing and shipping disruptions, and reliance on third-party manufacturing. Most products are manufactured by third-party vendors in China. Foreign-exchange translation is not hedged, although forecast transactions are partly hedged.
- On August 30, 2015, Hasbro sold its remaining manufacturing operations to Cartamundi for approximately $54.4 million, with approximately $18.6 million received at closing and the remainder payable in five annual installments. The company recorded a $6.8 million gain and a total pretax benefit of $9.9 million including related items. The deal includes five-year manufacturing services and minimum purchase commitments; Global Operations will thereafter source products from third parties.
- Q3 and year-to-date 2015 earnings included a favorable after-tax $7.1 million, or $0.06 per diluted share, related to the manufacturing sale. The comparable 2014 periods included an unfavorable after-tax $7.4 million, or $0.06 per diluted share, related to restructuring the Discovery Family Channel investment.
- Outstanding purchase commitments were approximately $918.7 million over the next five years; letters of credit and similar instruments were approximately $29.5 million. Uncertain-tax-position liabilities were $57.2 million. The company reported no legal proceedings it believed material to its business or financial condition.
- Cash of $551.3 million was substantially held outside the U.S.; management said current U.S. cash sources were sufficient without repatriation. A change in the indefinite-reinvestment policy could result in additional U.S. taxes. The company also noted that adoption of the new revenue-recognition standard was under evaluation.
Most important facts for investors to verify
- Whether currency-adjusted growth translates into reported growth as exchange rates and hedges affect results.
- Whether weak Girls and Games categories, and declines in key franchises, stabilize; and whether entertainment-driven brands sustain demand after major releases.
- Whether higher receivables and 85-day DSO convert to cash, given seasonal working-capital needs and concentrated second-half sales.
- How the Cartamundi transaction’s installment proceeds, minimum purchase commitments and outsourced-sourcing transition affect cash flow, costs and execution risk.
- Whether cash generation supports dividends, repurchases and debt obligations; and how the overseas cash position and outstanding purchase commitments affect flexibility.