Hasbro, Inc. — Q1 2015 Form 10-Q
Business context and period. The filing covers the unaudited 13 weeks ended March 29, 2015, compared with the 13 weeks ended March 30, 2014. Hasbro sells toys and games and earns entertainment and licensing revenue through U.S. and Canada, International, Entertainment and Licensing, and Global Operations segments. Management cautions that first-quarter results are not necessarily indicative of full-year performance.
Financial performance
- Revenue: $713.5 million, up 5% year over year; management says revenue grew 14% excluding approximately $62.6 million of unfavorable currency translation.
- Operating profit and margins: Operating profit was $54.2 million, up 25%, with operating margin of 7.6% versus 6.4%. Excluding currency effects, management reported operating profit growth of approximately 57% and an 8.8% margin.
- Net earnings and EPS: Net earnings attributable to Hasbro were $26.7 million, down from $32.1 million; diluted EPS was $0.21 versus $0.24. The prior-year quarter included a $13.5 million tax benefit from settlement of open tax years. The 2015 effective tax expense was $8.5 million, compared with a $5.5 million tax benefit in 2014.
- Cash flow: Operating cash flow was $315.3 million versus $242.0 million. Investing used $33.1 million, including $31.2 million of capital expenditure; financing used $82.5 million, including $53.5 million of dividends and $26.5 million of share repurchases. Cash ended at $1.081 billion, up from $792.2 million a year earlier.
- Liquidity and debt: Current assets were $2.405 billion and current liabilities $820.7 million. Cash less short-term borrowings was $849.5 million. Debt comprised $231.9 million of short-term borrowings and $1.560 billion of long-term debt. The $700 million revolving facility had no direct borrowings; approximately $474.1 million remained available after commercial-paper borrowings. Hasbro reported compliance with financial covenants.
- Shareholder returns: Quarterly dividends declared increased to $0.46 per share from $0.43. The company repurchased approximately 436,000 shares for $25.2 million during the quarter.
Changes versus the prior-year quarter
- Product-category revenue increased in Boys (10%), Games (7%) and Preschool (22%), but declined in Girls (16%). Stronger franchise-brand revenue and the Entertainment and Licensing mix supported operating profit and margin.
- Entertainment and Licensing revenue rose 74% to $60.6 million and operating profit rose to $16.4 million, driven by lifestyle licensing and a multi-year digital distribution agreement for Hasbro Studios programming.
- U.S. and Canada revenue increased 2%; International revenue was nearly flat as reported, but grew 20% excluding approximately $61 million of unfavorable currency translation. International operating profit declined 21% to $1.9 million, reflecting foreign exchange.
- Cost of sales fell to 34.7% of revenue from 38.1%, while royalties rose to 8.3% from 7.3%. Program production cost amortization increased to $11.1 million from $4.7 million, partly associated with the digital distribution agreement.
- Operating cash flow benefited from working-capital movements and comparison with the prior-year quarter, which included $58.0 million of payments related to an adverse arbitration award.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expects adequate funding for working capital through the remainder of 2015 from operating cash flow and available credit facilities, while noting that unexpected events or credit-market disruption could limit external funding.
- Management says sales and cash flows are seasonally weighted toward the second half, particularly the holiday period. Retailer order patterns, product acceptance, inventory decisions and compressed shipping schedules can affect results.
- Foreign exchange remains a significant exposure: the company hedges certain forecast transactions but does not hedge translation effects. A stronger U.S. dollar materially reduced reported revenue and operating profit in the quarter.
- Substantially all cash held outside the U.S. was not available for U.S. funding without changing the indefinite-reinvestment policy and potentially incurring additional taxes. Management stated U.S. cash sources were sufficient for U.S. needs.
- Other notable items include $53.1 million of purchase commitments, $40.2 million of liabilities for uncertain tax positions, and $162.8 million of letters of credit and similar instruments. The filing says $141.7 million of tax-assessment bonds were cancelled March 30, 2015, after settlement of the related Mexico assessments in 2014.
- Key risks cited include currency movements, consumer and retailer demand, product and entertainment execution, licensing and royalty exposure, dependence on third-party manufacturing, seasonality, and access to financing. The company reported no legal proceedings it believed material to its business or financial condition.
Important facts for investors to verify
- Whether reported revenue and profit growth persist after the unusually large currency headwinds and how exchange rates affect future periods.
- Whether Entertainment and Licensing growth from the digital distribution agreement and brand licensing is recurring and translates into sustained margins and cash flow.
- Whether the Girls-category decline and weak International segment profitability improve, and whether franchise and film-related demand meets expectations.
- How the prior-year $13.5 million tax benefit affects comparisons, and whether uncertain tax positions or international cash repatriation could create additional tax costs.
- Debt, commercial-paper availability, share repurchases and dividends relative to seasonal working-capital needs and the company’s second-half sales concentration.