Hasbro, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 29, 2019. The quarter comprised 13 weeks and the nine-month period 39 weeks; statements are unaudited. Unless noted, amounts below are USD millions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,575.2 | $1,569.7 | $3,292.2 | $3,190.5 |
| Operating profit | $297.2 | $313.3 | $461.7 | $320.5 |
| Operating margin | 18.9% | 20.0% | 14.0% | 10.0% |
| Net earnings | $212.9 | $263.9 | $253.1 | $211.7 |
| Diluted EPS | $1.67 | $2.06 | $1.99 | $1.67 |
- Q3 revenue was nearly flat year over year; excluding $20.5 million of unfavorable currency translation, it increased 2%. Nine-month revenue rose 3%, or 5% excluding $65.5 million of unfavorable currency translation.
- Q3 operating profit declined 5% as higher partner-brand royalties, tariffs-related shipping and warehousing costs, and digital investment outweighed lower cost of sales. Nine-month operating profit rose substantially, partly reflecting the absence of 2018 Toys“R”Us and restructuring charges.
- Q3 net earnings included a $25.5 million pretax ($20.9 million after-tax) unrealized loss on currency contracts hedging the eOne purchase price. Nine-month results also included a $110.8 million noncash pension settlement charge ($85.9 million after-tax). The 2018 comparatives included a $17.3 million Q3 tax benefit; nine-month 2018 included Toys“R”Us and restructuring costs and tax-reform-related expense.
- Q3 revenue by segment: U.S. and Canada $898.3 million, down 2%; International $561.1 million, flat reported and up 4% excluding currency; Entertainment, Licensing and Digital $115.8 million, up 20%. Nine-month segment revenue changed +3%, -1% and +23%, respectively.
- Q3 brand portfolio revenue: Partner Brands +40%; Franchise Brands -8%; Hasbro Gaming -17%; Emerging Brands +1%. Nine-month changes were +14%, +2%, -11% and +11%, respectively. Total gaming revenue, including gaming reported in other portfolios, grew to $449.4 million in Q3 and $1,086.2 million for nine months.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $389.6 million, versus $174.7 million in 2018. Capital expenditure was $90.8 million. Investing cash outflow was $86.5 million; financing cash outflow was $417.2 million.
- Cash was $1,060.4 million at September 29, 2019, compared with $907.1 million a year earlier. Current assets were $3,413.1 million and current liabilities $1,466.7 million.
- Long-term debt was $1,696.2 million on the balance sheet; principal outstanding was $1,709.9 million. Short-term borrowings were $7.9 million. Hasbro had no borrowings under its committed revolving facility or commercial paper program at quarter-end.
- The amended revolver provides up to $1.5 billion in commitments, including $400 million conditional on the eOne acquisition closing; approximately $1,497.3 million was unused at quarter-end. The company also had a committed $1.0 billion term loan, conditional on acquisition completion, and a sterling bridge commitment of up to £3.6 billion.
- Dividends paid in the first nine months were $250.8 million. Hasbro repurchased $60.1 million of shares and said it planned to suspend repurchases temporarily in connection with eOne financing. The quarterly dividend rate had increased to $0.68 per share.
Developments, outlook and risks
- Hasbro agreed to acquire Entertainment One for approximately £3.3 billion (about $4.0 billion at the agreement-date exchange rate), or £5.60 per share, in cash. Management described the deal as supporting its brand strategy, adding properties including Peppa Pig and PJ Masks. The company expected the transaction to close in Q4 2019, subject to remaining regulatory approvals and customary closing conditions. Planned financing included issuing $1.0–$1.25 billion of Hasbro common stock and debt financing.
- The proposed acquisition adds financing, integration, foreign-exchange and execution risks. The sterling hedge generated the reported unrealized loss; the contracts do not qualify for hedge accounting.
- Tariffs and trade restrictions affected U.S. business costs and order patterns. Hasbro cited higher domestic shipping and warehousing costs from shifting orders away from direct imports, and identified China sourcing concentration and supplier diversification as risks.
- Management noted that sales are seasonally weighted toward the second half and holiday period. Retailer order changes, product acceptance, supply and shipping schedules can make interim results an unreliable guide to the full year. The filing provides no quantified full-year revenue or earnings guidance.
- Other key exposures include currency movements, partner-brand dependence and entertainment-release timing, retail/customer concentration, and the possibility that the eOne transaction may be delayed or not completed. Hasbro said it had adequate resources for working capital needs over the next 12 months, while noting that market disruption or reduced access to financing could affect liquidity.
- A putative securities class action related to prior disclosures concerning Toys“R”Us and certain markets was voluntarily dismissed without prejudice on October 18, 2019. The company said other legal proceedings were not believed material.
Most important facts for investors to verify
- Whether eOne closed as expected, final purchase consideration, equity issued, debt raised, and resulting leverage and financing costs.
- Whether the Q3 operating-margin decline and nine-month earnings improvement persist after adjusting for the pension settlement, hedge losses, 2018 comparison items and currency effects.
- Actual tariff-related costs, sourcing changes, and effects on U.S. sales, fulfillment and margins.
- Holiday-quarter demand, retailer orders and inventory levels, given Hasbro’s seasonality and compressed shipping window.
- Performance and profitability of digital gaming investments and the Entertainment, Licensing and Digital segment.