Hasbro, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2016; each period was 13 and 26 weeks, respectively. Unaudited. Dollar amounts below are USD millions unless stated otherwise.
Business context and performance
Hasbro develops and sells toys and games, licenses brands, and produces entertainment. Its principal segments are U.S. and Canada, International, and Entertainment and Licensing; Global Operations manages product sourcing.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net revenue | $878.9 | $797.7 | $1,710.1 | $1,511.2 |
| Operating profit | $84.9 | $75.5 | $170.8 | $129.7 |
| Operating margin | 9.7% | 9.5% | 10.0% | 8.6% |
| Net earnings attributable to Hasbro | $52.1 | $41.8 | $100.9 | $68.5 |
| Diluted EPS | $0.41 | $0.33 | $0.79 | $0.54 |
| Cash dividends declared per share | $0.51 | $0.46 | $1.02 | $0.92 |
Revenue increased 10% in Q2 and 13% in the first half. Excluding unfavorable currency translation, management reported growth of 12% and 16%, respectively. Hasbro-attributable earnings rose 25% in Q2 and 47% in the first half.
Revenue drivers and material changes
- Q2 category revenue growth: Girls +35%, Games +8%, Preschool +5%, and Boys +4%. First-half growth was Girls +38%, Boys +13%, Preschool +7%, and Games +3%.
- Q2 segment revenue grew 11% in U.S. and Canada, 11% in International, and 9% in Entertainment and Licensing. First-half growth was 19% and 12% in the first two segments, while Entertainment and Licensing declined 13%.
- U.S. and Canada and International segment operating profit rose in Q2 and the first half. Entertainment and Licensing profit rose 86% in Q2 but fell 19% in the first half, reflecting lower entertainment revenue; 2015 included a multi-year streaming deal.
- Management attributed growth to products including NERF, PLAY-DOH, STAR WARS, Disney Princess/Frozen, and selected games. Results varied across established brands; management noted weaker TRANSFORMERS and other product revenues.
- Q2 operating profit benefited from revenue growth and lower intangible amortization and program costs, partly offset by higher operating and royalty expenses. First-half operating margin improved to 10.0% from 8.6%.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $268.8, versus $236.1 in 2015. Investing activities used $46.0, including $66.4 of capital expenditures; financing activities used $282.2, including $121.3 of dividends, $57.3 of share repurchases, and $159.1 of net short-term borrowing repayments.
- Cash and equivalents were $924.1 at June 26, 2016, down from $976.8 at year-end 2015. Cash less short-term borrowings was $918.7. The company stated that substantially all cash was held outside the U.S.; it said U.S. cash sources were sufficient without repatriation.
- Current assets were $2,523.4 and current liabilities $745.0. Inventory was $572.4, up 42% from $403.8 a year earlier; management said the increase supported initiatives and anticipated growth. Receivables were $703.8, and days sales outstanding declined to 72 from 80.
- Long-term debt carrying value was $1,547.8; principal amount was $1,559.9, with maturities from 2017 through 2044. Short-term borrowings were $5.4. The company had no commercial-paper or committed revolving-credit borrowings and reported $699.2 available under its $700 million revolving facility, net of letters of credit.
- Outstanding purchase commitments were $541.6; letters of credit totaled approximately $38.9. Uncertain tax position liabilities were $72.8. The company reported compliance with its credit covenants.
Outlook, risks, and unusual items
- Management said funds from operations and available credit facilities were adequate for working-capital needs for the remainder of 2016. It gave no specific revenue or earnings guidance in the supplied filing text.
- Hasbro’s sales and cash flows are seasonal, with the second half—and particularly the holiday quarter—historically more significant. Management highlighted risks of underproducing popular items, excess inventory of weaker products, and compressed shipping schedules.
- Foreign exchange reduced reported Q2 revenue by approximately $17.7 and first-half revenue by approximately $46.3. The company hedges some forecast currency exposures but does not hedge translation effects.
- International administration expense included a $13.8 bad-debt provision in the first half. Management flagged potential impairment risk for $119.1 of Backflip Studios goodwill if 2016 game releases fail to meet projections; it said a third-quarter impairment test might be required. Early results for TRANSFORMERS: EARTH WARS were positive.
- On July 13, 2016, after quarter-end, Hasbro acquired Dublin-based Boulder Media for an initial cash payment of approximately $12.8, plus potential earnout payments.
- The company reported legal proceedings that it did not believe were material and stated disclosure controls were effective. It was under tax examination in several jurisdictions; the filing also describes discrete tax adjustments.
Important facts for investors to verify
- Whether the substantial inventory build converts into sales without excess stock, discounting, or fulfillment constraints during the seasonally important second half.
- Whether reported growth and margins persist after currency effects, higher royalties, and the first-half bad-debt provision.
- Performance of Entertainment and Licensing, including the impact of the prior-year streaming deal and the Backflip game pipeline and goodwill assessment.
- Availability and practical use of overseas cash, and capacity to meet debt, purchase commitments, dividends, and repurchases through operating cash flow and credit facilities.
- Potential developments in tax examinations, uncertain tax positions, foreign-exchange exposures, and other contingencies; the filing does not quantify all possible outcomes.