Hasbro, Inc. Q2 2015 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Hasbro, Inc., covering the 13-week period ended June 28, 2015. Hasbro is a global leader in children's and family leisure time products, operating through U.S. and Canada, International, and Entertainment and Licensing segments. The company reported results for both the quarter and the six-month period ended June 28, 2015.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | 6 Months 2015 | 6 Months 2014 |
|---|---|---|---|---|
| Net Revenues | $797.7M | $829.3M | $1,511.2M | $1,508.7M |
| Operating Profit | $75.5M | $82.6M | $129.7M | $126.0M |
| Net Earnings (Attributable to Hasbro) | $41.8M | $33.5M | $68.5M | $65.6M |
| Diluted EPS | $0.33 | $0.26 | $0.54 | $0.50 |
| Operating Margin | 9.5% | 10.0% | 8.6% | 8.4% |
| Cash from Operations (6 Mo) | $236.1M (vs. $109.3M prior year) | |||
| Cash & Equivalents | $858.5M (as of June 28, 2015) | |||
| Total Debt | $1.73B (Short-term: $167.9M; Long-term: $1.56B) |
Material Changes vs. Prior Period
- Revenue Impact of Currency: Reported net revenues decreased 4% in Q2 and were flat for the six months. However, excluding unfavorable foreign currency translation of approximately $71.5M (Q2) and $134.1M (6 months), revenues grew 5% and 9%, respectively.
- Profitability: Operating profit declined 9% in Q2 but increased 3% for the six months. Excluding currency impacts, operating profit grew 10% in Q2 and 26% for the six months.
- Brand Performance: Franchise brand revenues declined 10% in Q2 due to expected declines in Transformers and Magic: The Gathering, offsetting growth in Nerf and Play-Doh. For the six months, franchise brands grew 3%.
- Segment Results:
- U.S. & Canada: Revenues up 1% (Q2) and 1% (6 months).
- International: Revenues down 9% (Q2) and 5% (6 months) due to currency; underlying growth was 9% and 14% respectively.
- Entertainment & Licensing: Revenues flat in Q2 but up 31% for the six months, driven by digital distribution agreements.
- Cost Structure: Cost of sales as a percentage of revenue improved to 37.0% in Q2 (from 38.6%) and 35.9% for six months (from 38.4%), aided by a favorable product mix and hedging.
Outlook, Risks, and Unusual Items
- Dividends and Buybacks: The quarterly dividend was increased to $0.46 per share. The company repurchased approximately 747,000 shares in the first half of 2015 for $46.8M. Approximately $517.3M remains available under the share repurchase authorization.
- Asset Sale: On July 14, 2015, Hasbro announced the intent to sell its manufacturing operations in East Longmeadow, MA, and Waterford, Ireland, to the Cartamundi Group. The transaction is expected to close in Q3 2015. Assets held for sale were classified on the balance sheet as of June 28, 2015.
- Product Development: Increased product development expenses ($57.6M in Q2) reflect costs for Disney Princess and Frozen lines, with shipments expected in 2016.
- Risks: Key risks include foreign currency fluctuations, concentration of sales in the second half of the year (holiday season), reliance on third-party manufacturers in China, and the success of entertainment-driven product lines.
- Accounting Changes: The company is evaluating the impact of new revenue recognition standards (ASU 2014-09) effective after 2017 and debt issuance cost presentation changes (ASU 2015-03).
Investor Verification Checklist
- Currency Sensitivity: Verify the magnitude of foreign exchange headwinds, as reported revenue declines mask underlying organic growth of 5-9%.
- Franchise Lifecycle: Assess the sustainability of revenue from partner brands (Marvel, Star Wars, Jurassic World) versus owned franchises facing post-movie declines (Transformers).
- Asset Sale Closure: Monitor the closing of the manufacturing operations sale to Cartamundi and the associated cash proceeds.
- Inventory Levels: Review inventory balances ($403.8M) relative to the upcoming holiday season to ensure alignment with demand.
- Debt Covenants: Confirm continued compliance with financial covenants under the $700M revolving credit facility and commercial paper program.