Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This Quarterly Report on Form 10-Q, including the following section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements expressing management's current expectations, goals, objectives and similar matters. These forward-looking statements may include statements concerning: the impact of, and actions and initiatives taken and planned to be taken to try and manage the negative impact of, the global coronavirus outbreak on our business; the ability to achieve our financial and business goals and objectives; the Company's product and entertainment plans, including the timing of planned product and entertainment releases; changes in the methods of content distribution, including increased reliance on streaming outlets; the adequacy and delivery of product supply; the operation of our third party manufacturing facilities; marketing and promotional efforts; anticipated expenses; working capital and liquidity; and anticipated impact of acquisitions and dispositions. See Item 1A, in Part II of this report and Item 1A, in Part I of the Annual Report on Form 10-K for the year ended December 27, 2020 (“2020 Form 10-K”), for a discussion of factors which may cause the Company's actual results or experience to differ materially from that anticipated in these forward-looking statements. The Company undertakes no obligation to revise the forward-looking statements in this report after the date of the filing.
EXECUTIVE SUMMARY
Hasbro, Inc. (“Hasbro”) is a global play and entertainment company committed to Creating the World’s Best Play and Entertainment Experiences. From toys, games and consumer products to television, movies, digital gaming, and other entertainment experiences, we connect to global audiences by bringing to life great innovations, stories and brands across established and inventive platforms. Our iconic brands include NERF, MAGIC: THE GATHERING, MY LITTLE PONY, TRANSFORMERS, PLAY-DOH, MONOPOLY, BABY ALIVE, POWER RANGERS, PEPPA PIG and PJ MASKS, as well as premier partner brands. Through our entertainment studio, Entertainment One (“eOne”), we are building our brands globally through great storytelling and content on all screens, including content based on our children’s and family entertainment brands as well as offering the production and distribution of a broad spectrum of live-action scripted and unscripted entertainment content geared toward all audiences. At Hasbro, we are committed to making the world a better place for all children, fans and families. We believe that doing well includes doing good in the world and for all our constituents. This is demonstrated in all we do, including through our corporate social responsibility and philanthropy initiatives.
2021 Developments
Segment Realignment
In the first quarter of 2020, we completed our acquisition of eOne, our global independent studio. Throughout 2020, we successfully integrated parts of our business and began recognizing synergies as a combined company. Effective for the first quarter of 2021, we realigned our reportable segment structure to correspond with the evolution of our company, including the integration of eOne, to reflect changes in our reporting structure and allocation of decision-making responsibility and for assessing the Company’s performance. Our new reportable segments are: Consumer Products, Wizards of the Coast & Digital Gaming, Entertainment and Corporate and Other.
•Consumer Products Our Consumer Products business engages in the sourcing, marketing and sales of toy and game products around the world. Our Consumer Products business also promotes our brands through the out-licensing of our trademarks, characters and other brand and intellectual property rights to third parties, through the sale of branded consumer products such as toys and apparel. Additionally, through license agreements with third parties, we develop and sell products based on popular third-party partner brands.
Our toy and game products are supported by cross-functional teams including members of our global development and marketing groups. Our global development teams develop, design and engineer new products alongside the redesign of existing products, driven by our understanding of consumers and using marketplace insights while leveraging opportunistic toy and game lines and licenses. Our global marketing function establishes a cohesive brand direction and assists our selling entities in establishing local marketing programs. This strategy leverages efforts to increase consumer awareness of our brands through the Company's entertainment experiences, including film and television programming and digital gaming.
•Wizards of the Coast and Digital Gaming Our Wizards of the Coast and Digital Gaming business engages in the promotion of our brands through the development of trading card, role-playing and digital game experiences based on Hasbro and Wizards of the Coast properties.
Wizards of the Coast offerings include popular games such as the collectable card game MAGIC: THE GATHERING and the fantasy tabletop role-playing game DUNGEONS & DRAGONS, as well as other digital games developed for
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
mobile devices, personal computers and video gaming consoles including MAGIC: THE GATHERING ARENA. Additionally, we out-license certain of our brands to other third-party digital game developers who transform Hasbro brand-based characters and other intellectual properties, into digital gaming experiences.
•Entertainment Our Entertainment business engages in in the development, acquisition, production, financing, distribution and sale of world-class entertainment content including film, scripted and unscripted television, family programming, digital content, live entertainment and music production and sales.
Film and TV operations produce film and television content which is sold worldwide to distributors, broadcasters, television networks and streaming platforms. While maintaining ownership of the content rights, we sell content for specific time periods to generate broadcast license fees from television content and to collect minimum guarantees and overage participations from films. The Entertainment business also actively acquires third-party film and television content. In television, the Entertainment segment engages in the sale of acquired third-party content internationally. For acquired films, the Entertainment segment obtains territorial rights from independent producers to distribute in those territories and acquires global rights which are sold internationally. Feature length film and television programming based on our owned and controlled brands provide both immersive storytelling and the ability for our consumers to enjoy these properties in different formats, which also drives product sales, results in increased licensing revenues, and expands overall brand awareness.
•Corporate and Other Our Corporate and Other segment provides management and administrative services to the Company's principal reporting segments described above. The segment consists of unallocated corporate expenses and administrative costs and activities not considered when evaluating segment performance such as the Company's legal, human resources, finance, facilities and information technology departments as well as certain assets benefiting more than one segment. In addition, intersegment transactions are eliminated within the Corporate and Other segment.
eOne Music Business
On June 29, 2021, the Company completed the sale of its Entertainment One Music business (“eOne Music”) for an aggregate sales price of $385.0 million, subject to certain closing adjustments related to working capital and net debt. Based on the value allocated to the music assets as part of the eOne Acquisition, the Company recorded a pre-tax non-cash goodwill impairment charge of $101.8 million within Loss on Assets Held for Sale, as well as transaction expenses of $9.5 million ($7.3 million after-tax) within Selling, Distribution and Administration costs, within the Consolidated Statements of Operations for the quarter ended June 27, 2021. The impairment charge was recorded with the Entertainment segment and the transaction costs were recorded with in the Corporate and Other segment. The financial results of eOne Music are included in the consolidated financial statements included in this Form 10-Q, as the sale of eOne Music was completed in the Company's fiscal third quarter. In anticipation of the closing proceeds, the Company repaid $250 million of variable rate notes at the end of the second quarter of 2021. Subsequent to the end of the second quarter of 2021, in July 2021, the Company repaid an additional $100 million of variable rate notes with proceeds from the sale.
Coronavirus Pandemic
Throughout 2020 and continuing through the first half of 2021, the world has been significantly impacted by the novel coronavirus (COVID-19) pandemic. During this period, we experienced accelerated ecommerce growth and increased interest in offerings from our Wizards of the Coast, Gaming and Entertainment businesses, as consumers have been seeking recreational and entertainment options during the pandemic. In 2020, and continuing into 2021, the pandemic did, however, have a substantial adverse impact on our business, as well as our employees, consumers, customers, partners, licensees, suppliers and manufacturers, due in part to the preventative measures taken to reduce the spread of the virus worldwide.
We experienced and in some cases, continue to experience:
•disruptions in supply of products, due to closures or reductions in operations at third-party manufacturing facilities across several geographies including, but not limited to, China, India, the United States and Ireland, as well as difficulties in shipping and distributing products as a result of port capacity shortages, higher rates for ocean freight and higher costs due to air freight increases. These and other disruptions may continue through the remainder of 2021;
•adverse sales impact due to changes in consumer purchasing behavior and availability of products to consumers, resulting from retail store closures, limited reopening of retail stores and limitations on the capacity of ecommerce channels to supply additional products;
•fluctuations in our performance based on the progress of different countries in controlling the coronavirus and the maturity of e-commerce platforms in those markets.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
•limited production of live-action scripted and unscripted entertainment content due to the shutdown and gradual reopening of production studios;
•delays or postponements of entertainment productions and releases of entertainment content both internally and by our partners; and
•challenges of working remotely.
In response to these challenges, we developed and continue to develop and execute plans to mitigate the negative impact of COVID-19 to the business. Our responses included:
•utilizing our global supply chain and existing inventory to work to meet demand, while managing freight cost increases across all markets, as our manufacturing facilities returned to varying levels of operation;
•accelerating our business online and expanding omni-channel to get products to customers and consumers;
•developing innovative ways to enable players to continue to play MAGIC: THE GATHERING and DUNGEONS & DRAGONS games remotely; and
•continuing to develop new entertainment, including working on animation productions and post-production work, which were able to be worked on remotely as live TV and film productions have returned gradually, with health and safety protocols in place.
We have maintained sufficient liquidity and access to capital resources. We also continue to closely manage expenses to further preserve liquidity and we continually monitor customer health and collectability of receivables. The COVID-19 outbreak continues to be fluid and it is difficult to forecast the impact it could have on our future operations. Please see Part I, Item 1A. Risk Factors, in the Company's Form 10-K for the fiscal year ended December 27, 2020 for further information.
Brand Blueprint Strategy
Hasbro's strategic plan is centered around the Hasbro Brand Blueprint, a framework for bringing compelling and expansive brand experiences to consumers and audiences around the world. Our brands are story-led consumer franchises brought to life through a wide array of consumer products, compelling content offered across a multitude of platforms and media. Hasbro's purpose of making the world a better place for all children, fans and families sits at the center of the Hasbro Brand Blueprint and is a key driver of Hasbro brands and content. The development and execution of our brands and content are informed by our proprietary consumer insights, which help us understand the behavior of our consumers, from a consumption of content and play standpoint. We have learned that consumers will travel with a brand that they love across multiple forms and formats, including our core historical strength of toys and games and licensed consumer products, as well as digital gaming and story-led entertainment, including short-form content online and long-form content in television and film. As the global consumer landscape, shopping behaviors and the retail and entertainment environments continue to evolve, we continue to adapt and refine our business strategy. This process includes reexamining the ways we organize across the Hasbro Brand Blueprint, re-shaping our business into a more adaptive and digitally-driven organization, expanding our ecommerce capabilities and attracting and developing a high-performing and diverse workforce through human capital investments.
Second quarter 2021 highlights:
•Second quarter net revenues were $1,322.2 million compared to $860.3 million in the second quarter of 2020 and included a favorable foreign currency translation of $35.1 million. Absent the favorable impact of foreign currency exchange, second quarter net revenues increased 50%.
•Net revenues in the Consumer Products segment increased 33% to $689.2 million; Wizards of the Coast and Digital Gaming segment net revenues increased 118% to $406.3 million; and Entertainment segment net revenues increased 47% to $226.7 million.
•Net revenues from Franchise Brands increased 72%; Partner Brands net revenues increased 53%; Emerging Brands net revenues increased 54%; Entertainment portfolio net revenues increased 48%; and net revenues from Hasbro Gaming increased 7% in the second quarter of 2021.
•Operating profit was $76.6 million, or 6% of net revenue, in the second quarter of 2021 compared to operating profit of $2.2 million, or 0.3% of net revenue, in the second quarter of 2020.
•Second quarter 2021 operating profit was negatively impacted by a pre-tax non-cash impairment charge of $101.8 million and pre-tax cash transaction expenses of $9.5 million ($7.3 million after-tax) associated with the sale of eOne Music; $21.8 million ($18.2 million after-tax) of eOne acquired intangible asset amortization; and $1.9 million ($1.6 million after-tax) of expense associated with retention awards granted in connection with the eOne acquisition.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
•Second quarter 2020 operating profit was negatively impacted by acquisition and related expenses of $10.3 million ($8.5 million after-tax); $22.6 million ($17.9 million after-tax) of eOne acquired intangible asset amortization; and $11.6 million ($10.1 million after-tax) of restructuring charges associated with cost savings initiatives.
•The net loss attributable to Hasbro, Inc. of $22.9 million, or $0.17 per diluted share, in the second quarter of 2021 compared to a net loss of $33.9 million, or $0.25 per diluted share, in the second quarter of 2020.
•In addition to the negative impacts to operating profit described above, net earnings in the second quarter of 2021 were impacted by incremental income tax expense of $39.4 million related to a change in the UK tax code.
First six months 2021 highlights:
•Net revenues increased 24% to $2,437.0 million in first six months of 2021 compared to $1,965.9 million in the first six months of 2020. The increase in net revenues included $53.4 million of favorable foreign currency translation. Absent the impact of foreign currency exchange, net revenues increased 21%.
•Net revenues in the Consumer Products segment increased 23% to $1,343.1 million; Wizards of the Coast and Digital Gaming segment net revenues increased 63% to $648.5 million; and Entertainment segment net revenues decreased 7% to $445.4 million.
•Net revenues from Franchise Brands increased 48%; Emerging brands net revenues increased 30%; Partner Brands net revenues increased 25%; Hasbro Gaming net revenues increased 2%; and Entertainment segment net revenues decreased 8% during the first six months of 2021.
•Operating profit was $223.9 million, or 9% of net revenues, in the first six months of 2021 compared to operating losses of $21.1 million, or 1% of net revenues, in the first six months of 2020.
•Operating profit in the first half of 2021 was negatively impacted by a pre-tax non-cash impairment charge of $101.8 million and pre-tax cash transaction expenses of $9.5 million ($7.3 million after-tax) associated with the sale of eOne Music; $46.7 million ($38.7 million after-tax) of eOne acquired intangible asset amortization; and $3.8 million ($3.3 million after-tax) of expense associated with retention awards granted in connection with the eOne acquisition.
•Operating profit in the first half of 2020 was negatively impacted by acquisition and related expenses of $160.1 million ($136.0 million after-tax); $47.6 million ($37.8 million after-tax) of eOne acquired intangible asset amortization; and $11.6 million ($10.1 million after-tax) of restructuring charges associated with cost savings initiatives.
•Net earnings attributable to Hasbro, Inc. was $93.3 million, or $0.68 per diluted share, in the first six months of 2021 compared to a net loss attributable to Hasbro, Inc. of $103.6 million, or $0.75 per diluted share, in the first six months of 2020.
•In addition to the negative impacts to operating profit described above, net earnings in the first six months of 2021 were impacted by incremental income tax expense of $39.4 million related to a change in the UK tax code.
The impact of changes in foreign currency exchange rates used to translate the consolidated statements of operations is quantified by translating the current period revenues at the prior period exchange rates and comparing this amount to the prior period reported revenues. The Company believes that the presentation of the impact of changes in exchange rates, which are beyond the Company’s control, is helpful to an investor’s understanding of the performance of the underlying business.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
SUMMARY OF FINANCIAL PERFORMANCE
A summary of the results of operations is illustrated below for the quarters and six-month periods ended June 27, 2021 and June 28, 2020.
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Quarter Ended
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Six Months Ended
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June 27, 2021
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June 28, 2020
|
|
June 27, 2021
|
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June 28, 2020
|
Net revenues
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$
|
1,322.2
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|
|
$
|
860.3
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$
|
2,437.0
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|
|
$
|
1,965.9
|
|
Operating profit (loss)
|
76.6
|
|
|
2.2
|
|
|
223.9
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|
|
(21.1)
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Earnings (loss) before income taxes
|
41.1
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|
|
(43.7)
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|
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170.6
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|
|
(115.7)
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Net earnings (loss)
|
(21.9)
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|
|
(32.9)
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|
|
95.6
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|
|
(100.8)
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Net earnings attributable to noncontrolling interests
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1.0
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1.0
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|
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2.3
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|
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2.8
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Net earnings (loss) attributable to Hasbro, Inc.
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(22.9)
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|
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(33.9)
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|
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93.3
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|
|
(103.6)
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Diluted earnings (loss) per share
|
(0.17)
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|
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(0.25)
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|
|
0.68
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(0.75)
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RESULTS OF OPERATIONS – CONSOLIDATED
Second Quarter 2021
The quarters ended June 27, 2021 and June 28, 2020 were each 13-week periods.
Consolidated net revenues for the second quarter of 2021 increased $461.9 million, or 54%, compared to the second quarter of 2020, including a favorable $35.1 million impact from foreign currency translation as a result of strengthening currencies, primarily in the Company's European and to a lesser extent, Asia Pacific and Latin American regions, during the second quarter of 2021 compared to 2020.
Operating profit for the second quarter of 2021 was $76.6 million, or 6% of net revenues, compared to operating profit of $2.2 million, or 0.3% of net revenues, for the second quarter of 2020. The operating profit increase was driven primarily by higher revenues and a favorable product mix, partially offset by higher product development costs, higher royalty expenses and higher advertising costs. In addition to these expense increases were higher freight costs due to shipping cost increases and the use of air freight to manage supply chain disruptions. Operating profit during the second quarter of 2021 reflects a pre-tax non-cash impairment charge of $101.8 million included within Loss on Assets Held for Sale and transaction costs of $9.5 million ($7.3 million after-tax) included within Selling, Distribution and Administration, associated with the sale of eOne Music, $21.8 million ($18.2 million after-tax) of eOne acquired intangible asset amortization and $1.9 million ($1.6 million after-tax) of expense associated with retention awards granted in connection with the eOne acquisition. Operating profit during the second quarter of 2020 was negatively impacted by acquisition and related costs of $10.3 million ($8.5 million after-tax); $22.6 million ($17.9 million after-tax) of expenses related to eOne acquired intangible asset amortization; and restructuring charges associated with cost savings initiatives of $11.6 million ($10.1 million after-tax).
Net losses attributable to Hasbro, Inc. were $22.9 million for the second quarter of 2021 compared to net losses of $33.9 million for the second quarter of 2020. In addition to the negative impacts to operating profit described above, net losses attributable to Hasbro, Inc. included the impact of incremental income tax expense of $39.4 million, related to a change in the UK tax code. The diluted loss per share attributable to Hasbro, Inc. for the second quarter of 2021 was $0.17, compared to a diluted loss per share of $0.25 in the second quarter of 2020. The loss in the second quarter of 2021 reflects the negative impact of a non-cash impairment loss related to assets held for sale and transaction expenses, totaling $0.79 per diluted share associated with the disposition of eOne Music and incremental income tax expense related to a change in the UK tax code of $0.29 per diluted share. In addition, the diluted earnings per share in the second quarter of 2021 reflects the negative impact of $0.13 per diluted share and $0.01 per diluted share from eOne acquired intangible asset amortization and costs associated with retention awards, respectively. The diluted loss per share in 2020 reflects the negative impact of eOne acquired intangible asset amortization, acquisition and related costs and restructuring charges associated with cost savings initiatives of $0.13 per diluted share, $0.06 per diluted share and $0.07 per diluted share, respectively.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
The following table presents net revenues by brand and entertainment portfolio for the quarters ended June 27, 2021 and June 28, 2020.
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Quarter Ended
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June 27, 2021
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June 28, 2020
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%
Change
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Franchise Brands
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$
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649.9
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$
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376.9
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|
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72
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%
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Partner Brands
|
212.0
|
|
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138.3
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|
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53
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Hasbro Gaming
|
147.1
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|
|
137.0
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|
|
7
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Emerging Brands
|
117.0
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|
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75.9
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|
|
54
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Entertainment
|
196.2
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132.2
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|
|
48
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Total
|
$
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1,322.2
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|
|
$
|
860.3
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|
|
54
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%
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FRANCHISE BRANDS: Net revenues in the Franchise Brands portfolio increased 72% in the second quarter of 2021 compared to the second quarter of 2020. Higher net revenues from MAGIC: THE GATHERING products as a result of the record set releases, Strixhaven and Modern Horizons 2, and higher net revenues from NERF products, most notably in the US, drove the majority of the increase, and to a lesser extent, higher net revenues from PLAY-DOH and TRANSFORMERS products contributed to the increase.
PARTNER BRANDS: Net revenues from the Partner Brands portfolio increased 53% in the second quarter of 2021 compared to the second quarter of 2020. Within the Partner Brands portfolio, there are a number of brands which are reliant on related entertainment, including television and movie releases. As such, net revenues by partner brand, fluctuate depending on entertainment popularity, release dates and related product line offerings and success. Historically these entertainment-based brands experience higher revenues during years in which new content is released in theaters, for broadcast, and on streaming platforms. During the second quarter of 2021, the drivers of the net revenue increase included Hasbro products for MARVEL and STAR WARS and to a lesser extent, DISNEY PRINCESS and BEYBLADE products. The Company's STAR WARS and DISNEY PRINCESS products were supported by recent entertainment releases including the Disney+ streaming series, STAR WARS: THE MANDALORIAN, season two, released during the fourth quarter of 2020 and RAYA and THE LAST DRAGON which premiered in theaters and on Disney+ with Premier Access in March 2021. The Company's MARVEL products benefited from fan support across multiple properties, primarily in the U.S., as well as from shipments ahead of the release of SHANG-CHI and the LEGEND of the TEN RINGS, a feature-length film expected in theaters in September 2021. These increases were partially offset by net revenue declines from DISNEY FROZEN products as a result of the entertainment support in the prior year from the November 2019 theatrical release of DISNEY’S FROZEN 2.
HASBRO GAMING: Net revenues in the Hasbro Gaming portfolio increased 7% in the second quarter of 2021 compared to the second quarter of 2020, which benefited from growth during the onset of the COVID-19 pandemic as people looked for entertainment alternatives at home. Higher net revenues from DUNGEONS & DRAGONS products and to a lesser extent, higher net revenues from DUEL MASTERS products, were partially offset by net revenue decreases from classic games, including JENGA and CONNECT 4 during the second quarter of 2021.
Net revenues for Hasbro’s total gaming category, including the Hasbro Gaming portfolio as reported above and all other gaming revenue, most notably revenues from MAGIC: THE GATHERING and MONOPOLY products, which are included in the Franchise Brands portfolio, totaled $519.4 million for the second quarter of 2021, an increase of 63%, as compared to $319.0 million in the second quarter of 2020.
EMERGING BRANDS: Net revenues from the Emerging Brands portfolio increased 54% during the second quarter of 2021 compared to the second quarter of 2020. Net revenue increases were driven by PJ MASKS, GI JOE and FURREAL FRIENDS products, and to a lesser extent, PEPPA PIG products. During the second half of 2021, the Company expects to launch its first PEPPA PIG and PJ MASKS products.
ENTERTAINMENT: During the second quarter of 2021, net revenues from the Entertainment portfolio increased 48% compared to the second quarter of 2020. In the second quarter of 2021, results from the Company's Entertainment portfolio improved compared to the same period in 2020, as the entertainment industry continued its gradual recovery from the impact of COVID-19 pandemic. Net revenue increases during the second quarter of 2021 were driven by scripted deliveries that include CRUEL SUMMER and THE ROOKIE as well as from certain other scripted and unscripted programs. These increases were partially offset by lower transactional revenues due to the lack of theatrical releases in the first half of 2021 as a result of the production shutdowns experienced during 2020.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
First Six Months 2021
The six-month periods ended June 27, 2021 and June 28, 2020 were each 26-week periods.
For the first six months of 2021, consolidated net revenues increased 24% to $2,437.0 million including a favorable variance of $53.4 million as a result of foreign currency translation due to strengthening currencies primarily across the Company's European and to a lesser extent, Asia Pacific markets, when compared to the first six months of 2020.
Operating profit for the first six months of 2021 was $223.9 million, or 9% of net revenues, compared to an operating loss of $21.1 million, or 1% of net revenues, for the first six months of 2020. The increase in operating profit was driven by higher revenues, partially offset by higher costs to drive the business including, higher product development costs, higher marketing and advertising costs and higher freight costs due to shipping cost increases. Operating profit during the first six months of 2021 reflects a pre-tax non-cash impairment charge of $101.8 million included within Loss on Assets Held for Sale and transaction costs of $9.5 million ($7.3 million after-tax) included within Selling, Distribution and Administration, associated with the sale of eOne Music, as well as $46.7 million ($38.7 million after-tax) of expenses related to eOne acquired intangible asset amortization and $3.8 million ($3.3 million after-tax) of expense for retention awards granted in connection with the eOne acquisition. The operating loss during the first six months of 2020 was negatively impacted by acquisition and related costs of $160.1 million ($136.0 million after-tax); $47.6 million ($37.8 million after-tax) of expenses related to eOne acquired intangible asset amortization; and restructuring charges associated with cost savings initiatives of $11.6 million ($10.1 million after-tax).
Net earnings attributable to Hasbro, Inc. were $93.3 million for the first six months of 2021 compared to a net loss of $103.6 million for the first six months of 2020. In addition to the negative impacts to operating profit described above, net earnings in the first six months of 2021 were impacted by incremental income tax expense of $39.4 million related to a change in the UK tax code. Diluted earnings per share attributable to Hasbro, Inc. were $0.68 in the first six months of 2021, compared to a diluted net loss per share of $0.75 in the first six months of 2020. Net earnings attributable to Hasbro, Inc. for the first six months of 2021 reflect the negative impact of a non-cash impairment loss related to assets held for sale and transaction expenses, totaling $0.79 per diluted share, associated with the disposition of eOne Music, incremental income tax expense related to a change in the UK tax code of $0.29 per diluted share, as well as the impact of eOne acquired intangible asset amortization of $0.28 per diluted share and costs associated with retention awards of $0.02 per diluted share. Net earnings for the first six months of 2020 reflect the negative impact of acquisition related costs and eOne acquired intangible asset amortization of $1.02 per diluted share and $0.42 per diluted share, respectively, as well as restructuring charges associated with cost savings initiatives of $0.07 per diluted share.
The following table presents net revenues by product category for the first six months of 2021 and 2020.
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Six Months Ended
|
|
June 27, 2021
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|
June 28, 2020
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|
%
Change
|
Franchise Brands
|
$
|
1,141.4
|
|
|
$
|
773.4
|
|
|
48
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%
|
Partner Brands
|
400.0
|
|
|
320.6
|
|
|
25
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|
Hasbro Gaming
|
283.4
|
|
|
277.1
|
|
|
2
|
|
Emerging Brands
|
221.7
|
|
|
170.1
|
|
|
30
|
|
Entertainment
|
390.5
|
|
|
424.7
|
|
|
-8
|
|
Total
|
$
|
2,437.0
|
|
|
$
|
1,965.9
|
|
|
24
|
%
|
FRANCHISE BRANDS: Net revenues in the Franchise Brands portfolio increased 48% in the first six months of 2021 compared to 2020. Higher net revenues from MAGIC: THE GATHERING products, as a result of successful card set releases, drove the majority of the increase during the first six months of 2021. To a lesser extent, higher net revenues from NERF products, most notably in the US, as well as higher net revenues from PLAY-DOH and TRANSFORMERS products contributed to the increase.
PARTNER BRANDS: Net revenues from the Partner Brands portfolio increased 25% during the first six months of 2021 compared to 2020. During the first six months of 2021, net revenue increases from Hasbro products for STAR WARS and MARVEL drove growth in the Partner Brands portfolio and to a lesser extent, DISNEY PRINCESS products contributed to segment net revenue growth. The Company's STAR WARS and DISNEY PRINCESS products benefited from recent entertainment releases including the Disney+ streaming series, STAR WARS: THE MANDALORIAN, season two, released during the fourth quarter of 2020 and RAYA and THE LAST DRAGON which premiered in theaters and on Disney+ with Premier Access in March 2021. The Company's MARVEL products benefited from fan support, primarily in the U.S., as well
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
as from shipments ahead of the release of SHANG-CHI and the LEGEND of the TEN RINGS a feature-length film expected in theaters in September 2021. These increases were partially offset by net revenue declines from TROLLS and DISNEY FROZEN products as a result of the entertainment support in the prior year from the TROLLS WORLD TOUR film, released in April 2020 and the November 2019 theatrical release of DISNEY’S FROZEN 2.
HASBRO GAMING: Net revenues in the Hasbro Gaming portfolio increased 2% in the first six months of 2021 compared to the first six months of 2020 driven by increased net revenues from DUNGEONS & DRAGONS products, partially offset by net revenue decreases from JENGA, CONNECT 4 and certain other Hasbro Gaming products. In the first half of 2020, the Hasbro Gaming portfolio benefited overall from growth during the onset of the COVID-19 pandemic as people looked for entertainment alternatives at home.
Net revenues for Hasbro’s total gaming category, including the Hasbro Gaming portfolio as reported above and all other gaming revenue, most notably from MAGIC: THE GATHERING and MONOPOLY products, which are included in the Franchise Brands portfolio, were $884.7 million, an increase of 34%, in the first six months of 2021 versus $659.5 million in the first six months of 2020.
EMERGING BRANDS: Net revenues from the Emerging Brands portfolio grew 30% for the first six months of 2021 compared to the first six months of 2020. Net revenue increases were driven by GI JOE products, ahead of the July 2021 theatrical release of SNAKE EYES: G.I. JOE ORIGINS, and higher net revenues from FURREAL FRIENDS products and to a lesser extent, PJ MASKS and PEPPA PIG products. During the second half of 2021, the Company expects to launch its first PEPPA PIG and PJ MASKS products.
ENTERTAINMENT: During the first six months of 2021 net revenues from the Entertainment portfolio decreased 8% compared to the first six months of 2020. In 2020, the shutdown of live action TV and film productions and theatrical releases beginning late in the first quarter of 2020 as a result of the COVID-19 pandemic, had a significant impact on entertainment deliveries during the first half of 2021. The driver of the net revenue decrease during the first half of 2021 relates primarily to the gap in available entertainment deliveries, due to the conditions described above, resulting in lower theatrical, transactional and licensing revenues during the first six months of 2021. These decreases were partially offset by television production deliveries in the second quarter of 2021, most notably from CRUEL SUMMER and THE ROOKIE scripted television productions.
SEGMENT RESULTS
Effective for the first quarter of fiscal 2021, we realigned our reportable segments to reflect how the Company manages its businesses, evaluates performance and allocates resources. Consistent with these changes, the Company's three principal reportable segments are: Consumer Products, Wizards of the Coast and Digital Gaming and Entertainment.
Reclassifications of certain prior year segment results have been made to conform to the current-year presentation. None of the segment changes impact the Company's previously reported consolidated net revenue, operating profits, net earnings or net earnings per share.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
Second Quarter 2021
The following table presents net external revenues and operating profit data for the Company's principal segments for the quarters ended June 27, 2021 and June 28, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
June 27, 2021
|
|
June 28, 2020
|
|
%
Change
|
Net Revenues
|
|
|
|
|
|
Consumer Products segment
|
$
|
689.2
|
|
|
$
|
519.5
|
|
|
33
|
%
|
Wizards of the Coast and Digital Gaming segment
|
406.3
|
|
|
186.7
|
|
|
>100%
|
Entertainment segment
|
226.7
|
|
|
154.1
|
|
|
47
|
%
|
|
|
|
|
|
|
Operating Profit (Loss)
|
|
|
|
|
|
Consumer Products segment
|
$
|
17.8
|
|
|
$
|
(45.3)
|
|
|
>100%
|
Wizards of the Coast and Digital Gaming segment
|
192.9
|
|
|
74.1
|
|
|
>100%
|
Entertainment segment
|
(113.7)
|
|
|
(13.5)
|
|
|
>100%
|
Consumer Products Segment
The Consumer Products segment net revenues increased 33% to $689.2 million for the second quarter of 2021 compared to $519.5 million for the second quarter of 2020 and included the impact of a favorable $19.1 million currency translation. The drivers of the net revenue increase include higher sales of MARVEL, NERF and STAR WARS products as well as higher sales of TRANSFORMERS and PLAY-DOH products. Revenue grew across all geographic regions, most notably in the U.S. and Europe. In addition, licensing revenues from arrangements related to the Company's PEPPA PIG brand grew during the second quarter of 2021. Partially offsetting these net revenue increases were lower sales of Hasbro Gaming products in the US during the second quarter of 2021, compared to the second quarter of 2020, which benefited from sales growth during the early stages of the COVID-19 pandemic in the US.
Consumer Products segment operating profit for the second quarter of 2021 was $17.8 million or 3% of segment net revenues, compared to segment operating losses of $45.3 million or 9% of segment net revenues, for the second quarter of 2020. The operating profit increase in the second quarter of 2021 was driven by higher segment net revenues as described above, partially offset by higher royalty expenses as a result of higher sales of the Company's Partner Brand products, higher inventory costs due primarily to higher ocean freight rates and increases in air freight costs as well as higher advertising costs.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
The following table presents the Consumer Products segment net revenues by major geographic region for the quarters ended June 27, 2021 and June 28, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
June 27, 2021
|
|
June 28, 2020
|
|
|
|
|
North America
|
$
|
391.4
|
|
|
$
|
283.0
|
|
|
|
|
|
Europe
|
176.5
|
|
|
141.9
|
|
|
|
|
|
Asia Pacific
|
68.4
|
|
|
60.7
|
|
|
|
|
|
Latin America
|
52.9
|
|
|
33.9
|
|
|
|
|
|
Net Revenues
|
$
|
689.2
|
|
|
$
|
519.5
|
|
|
|
|
|
Wizards of the Coast & Digital Gaming Segment
Wizards of the Coast & Digital Gaming segment net revenues increased 118% in the second quarter of 2021 to $406.3 million from $186.7 million in the second quarter of 2020 and included the impact of a favorable $7.2 million foreign currency translation.
The net revenue increase in the Wizards of the Coast & Digital Gaming segment during the second quarter of 2021 was attributable to net revenue increases from Wizards of the Coast table-top and digital gaming products, most notably, MAGIC THE GATHERING, driven by the Strixhaven and Modern Horizons 2 set releases, as well as net revenue contributions associated with the launch of DUNGEONS & DRAGONS: DARK ALLIANCE, and higher sales from Magic: The Gathering Arena mobile.
Wizards of the Coast & Digital Gaming segment operating profit was $192.9 million, or 47% of segment net revenues for the second quarter of 2021, compared to operating profit of $74.1 million, or 40% of segment net revenues, for the second quarter of 2020. The operating profit increase during the second quarter of 2021 was the result of increased sales and product launches described above, partially offset by higher development costs, advertising costs and administrative costs, primarily related to costs to support the Company's digital gaming initiatives.
Entertainment Segment
Entertainment segment net revenues increased 47% to $226.7 million for the second quarter of 2021, compared to $154.1 million for the second quarter of 2020 and included the impact of a favorable $8.8 million foreign currency translation. The net revenue increase during the second quarter was driven by higher deliveries of scripted and unscripted programming following the return of live-action entertainment content production in late 2020 through 2021 and higher net revenues from streaming content deals related to programs featuring the Company's brands. These increases were partially offset by lower transactional and film licensing revenues in 2021, as a result of the limited production of live-action feature length films in 2020.
The Entertainment segment operating losses were $113.7 million, or 50% of segment net revenues for the second quarter of 2021 compared to operating losses of $13.5 million, or 9% of segment net revenues for the second quarter of 2020.
The operating loss in the second quarter of 2021 included a non-cash impairment charge of $101.8 million associated with the sale of eOne Music. Absent the impact of the 2021 impairment charge, second quarter 2021 operating losses decreased $1.6 million as a result of the net revenue increase described above, partially offset by higher program cost amortization, administrative costs and higher royalty expenses. The operating loss for the second quarter of 2021 and 2020 included $21.8 million and $22.6 million, respectively, of incremental intangible amortization costs related to the intangible assets acquired in the eOne Acquisition.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
The following table presents Entertainment segment net revenues by category for the quarters ended June 27, 2021 and June 28, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
June 27, 2021
|
|
June 28, 2020
|
|
|
|
|
Film and TV
|
$
|
164.3
|
|
|
$
|
108.9
|
|
|
|
|
|
Family Brands
|
26.1
|
|
|
18.8
|
|
|
|
|
|
Music and Other
|
36.3
|
|
|
26.4
|
|
|
|
|
|
Net revenues
|
$
|
226.7
|
|
|
$
|
154.1
|
|
|
|
|
|
Corporate and Other Segment
The Corporate and Other segment operating losses were $20.4 million for the second quarter of 2021 compared to operating losses of $13.1 million for the second quarter of 2020. Operating losses in 2021 were driven by higher administrative expenses including $9.5 million of transaction costs associated with the sale of eOne Music and higher compensation expense including retention costs related to the eOne acquisition. Operating losses in 2020 were driven by $11.6 million of charges associated with cost-savings initiatives as well as charges related to the eOne Acquisition; including acquisition and integration costs of $4.0 million and restructuring and related costs of $6.3 million, comprised of severance and retention costs.
First Six Months 2021
The following table presents net revenues and operating profit (loss) for the Company's principal segments for each of the six-month periods ended June 27, 2021 and June 28, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 27, 2021
|
|
June 28, 2020
|
|
%
Change
|
Net Revenues
|
|
|
|
|
|
Consumer Products segment
|
$
|
1,343.1
|
|
|
$
|
1,092.0
|
|
|
23
|
%
|
Wizards of the Coast and Digital Gaming segment
|
648.5
|
|
|
397.3
|
|
|
63
|
%
|
Entertainment segment
|
445.4
|
|
|
476.6
|
|
|
-7
|
%
|
|
|
|
|
|
|
Operating Profit (Loss)
|
|
|
|
|
|
Consumer Products segment
|
$
|
50.1
|
|
|
$
|
(55.0)
|
|
|
>100%
|
Wizards of the Coast and Digital Gaming segment
|
302.9
|
|
|
169.9
|
|
|
78
|
%
|
Entertainment segment
|
(96.7)
|
|
|
(77.8)
|
|
|
-24
|
%
|
Consumer Products Segment
The Consumer Products segment net revenues increased 23% to $1,343.1 million for the first six months of 2021 compared to $1,092.0 million for the first six months of 2020 and included the impact of a favorable $28.1 million currency translation. The drivers of the net revenue increase include higher sales of NERF, PLAY-DOH and TRANSFORMERS products as well as higher sales of STAR WARS, MARVEL and DISNEY PRINCESS products. Revenue grew across all geographic regions, most notably in the U.S. and Europe, and to a lesser extent, in the Company's Latin American and Asia Pacific markets. In addition, licensing revenues from arrangements related to the Company's NERF and PEPPA PIG brands, grew during the first half of 2021. Partially offsetting these net revenue increases were lower sales of Hasbro Gaming products, primarily within the US, during the first half of 2021, compared to the first half of 2020, which benefited from sales growth during the early stages of the COVID-19 pandemic.
Consumer Products segment operating profit for the first six months of 2021 was $50.1 million or 4% of segment net revenues, compared to segment operating losses of $55.0 million or 5% of segment net revenues, for the first half of 2020. The operating profit increase in the first half of 2021 was driven by higher segment net revenues as described above, partially offset by higher royalty expenses from higher sales of the Company's Partner Brand products, higher advertising costs as a result of the overall sales increases within the segment as well as higher rates for ocean freight and increases in air freight costs during the first six months of 2021.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
The following table presents the Consumer Products segment net revenues by major geographic region for the six month periods ended June 27, 2021 and June 28, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 27, 2021
|
|
June 28, 2020
|
|
|
|
|
North America
|
$
|
754.1
|
|
|
$
|
604.8
|
|
|
|
|
|
Europe
|
365.0
|
|
|
298.6
|
|
|
|
|
|
Asia Pacific
|
133.2
|
|
|
118.9
|
|
|
|
|
|
Latin America
|
90.8
|
|
|
69.7
|
|
|
|
|
|
Net Revenues
|
$
|
1,343.1
|
|
|
$
|
1,092.0
|
|
|
|
|
|
Wizards of the Coast and Digital Gaming Segment
Wizards of the Coast and Digital Gaming segment net revenues increased 63% in the first six months of 2021 to $648.5 million from $397.3 million in the first six months of 2020 and included the impact of a favorable $11.6 million foreign currency translation.
The net revenue increase in the Wizards of the Coast & Digital Gaming segment during the first six months of 2021 was attributable to net revenue increases from Wizards of the Coast table-top and digital gaming products, most notably, MAGIC THE GATHERING, driven by the number of strong performing card set releases, and from DUNGEONS & DRAGONS table-top games. In addition to these increases were net revenue contributions associated with the launch of DUNGEONS & DRAGONS: DARK ALLIANCE, and higher sales from Magic: The Gathering Arena. In addition to the net revenue increases from the Company's Wizards of the Coast business, the segment benefited from growth in certain of the Company's licensed digital games.
Wizards of the Coast & Digital Gaming segment operating profit was $302.9 million, or 47% of segment net revenues for the first six months of 2021, compared to operating profit of $169.9 million, or 43% of segment net revenues for the first six months of 2020. The operating profit increase during the first half of 2021 was the result of increased sales described above, partially offset by higher product development costs, administrative costs and advertising costs, primarily related to support of the Company's digital gaming initiatives.
Entertainment Segment
Entertainment segment net revenues for the six months ended June 27, 2021 decreased 7% to $445.4 million from $476.6 million for the six months ended June 28, 2020 and included the impact of a favorable $13.8 million foreign currency translation. The segment net revenue declines were primarily driven by lower revenues from theatrical film releases and lower unscripted television production revenues in 2021 as compared to 2020, partially offset by new scripted programming delivered in 2021. During the first six months of 2020, the Entertainment segment benefited from film releases and television programming produced and released prior to the onset of the COVID-19 pandemic whereas the limited production of live-action entertainment content during 2020, due to the shutdown and gradual reopening of production studios, resulted in fewer deliveries and fewer theatrical film releases during the first six months of 2021.
The Entertainment segment operating losses were $96.7 million, or 22% of net revenues, for the six months ended June 27, 2021, compared to $77.8 million, or 16% of segment net revenues, for the six months ended June 28, 2020. The operating loss in the first six months of 2021 includes a non-cash impairment charge of $101.8 million associated with the sale of eOne Music. The operating loss in the first six months of 2020 included $98.5 million of acquisition and integration costs consisting of $47.4 million of expense associated with the acceleration of eOne stock-based compensation, $24.5 million of advisor fees settled at the closing of the acquisition and $20.9 million in impairment charges for certain production assets. Also contributing to the loss is $47.6 million of incremental intangible amortization costs related to the intangible assets acquired in the eOne Acquisition.
Absent these charges in both periods, operating profit for the segment declined due to lower segment net revenues and higher program cost amortization due to certain television programming deliveries that carry higher programming costs. These decreases were partially offset by lower advertising expenses as a result of fewer theatrical releases during the first six months of 2021 compared to 2020.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
The following table presents Entertainment segment net revenues by category for the six-month periods ended June 27, 2021 and June 28, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 27, 2021
|
|
June 28, 2020
|
|
|
|
|
Film and TV
|
$
|
330.7
|
|
|
$
|
372.9
|
|
|
|
|
|
Family Brands
|
44.9
|
|
|
44.7
|
|
|
|
|
|
Music and Other
|
69.8
|
|
|
59.0
|
|
|
|
|
|
Net revenues
|
$
|
445.4
|
|
|
$
|
476.6
|
|
|
|
|
|
Corporate and Other Segment
Operating losses in the Corporate and Other Segment for the first six months of 2021 were $32.4 million, compared to operating losses of $58.2 million for the first six months of 2020. Operating losses in 2021 were driven by higher administrative expenses including $9.5 million of transaction costs associated with the sale of eOne Music and higher compensation expense, including retention costs of $3.8 million in relation to the eOne acquisition. Operating losses in the first six months of 2020 were driven primarily by charges related to the eOne Acquisition; including acquisition and integration costs of $22.0 million and restructuring and related costs of $39.5 million. In addition to the charges associated with the eOne Acquisition, the Company incurred $11.6 million of severance charges associated with cost-savings initiatives.
OPERATING COSTS AND EXPENSES
Second Quarter 2021
The Company's costs and expenses, stated as percentages of net revenues, are illustrated below for the quarters ended June 27, 2021 and June 28, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
June 27, 2021
|
|
June 28, 2020
|
Cost of sales
|
26.1
|
%
|
|
29.4
|
%
|
Program cost amortization
|
8.4
|
|
|
5.9
|
|
Royalties
|
8.4
|
|
|
11.3
|
|
Product development
|
6.6
|
|
|
6.8
|
|
Advertising
|
8.0
|
|
|
8.4
|
|
Amortization of intangibles
|
2.2
|
|
|
4.0
|
|
Selling, distribution and administration
|
26.8
|
|
|
32.7
|
|
Loss on assets held for sale
|
7.7
|
|
|
—
|
|
Acquisition and related costs
|
—
|
|
|
1.2
|
|
Cost of sales for the second quarter of 2021 was $345.0 million, or 26.1% of net revenues, compared to $253.2 million, or 29.4% of net revenues, for the second quarter of 2020. The cost of sales increase in dollars was primarily due to higher sales volumes and higher inventory costs driven by increased freight costs and, to a lesser extent, from the impact of $9.3 million of foreign currency exchange. As a percentage of net revenues, the cost of sales decrease was driven by product mix, primarily from Wizards of the Coast table-top games and lower allowances, combined with more profitable closeout sales in the second quarter of 2021.
Program cost amortization increased to $110.7 million, or 8.4% of net revenues, for the second quarter of 2021 from $50.6 million, or 5.9% of net revenues, for the second quarter of 2020. Program costs are capitalized as incurred and amortized using the individual-film-forecast method which matches costs to the related recognized revenue. The increase during the second quarter of 2021 was driven by higher programming revenues from scripted television deliveries compared to the second quarter of 2020. Lower program cost amortization as a percentage of net sales in the second quarter of 2020, reflects purchase accounting adjustments made to programming assets acquired through the eOne acquisition.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
Royalty expense for the second quarter of 2021 increased to $111.5 million, or 8.4% of net revenues, compared to $97.4 million, or 11.3% of net revenues, for the second quarter of 2020. Fluctuations in royalty expense are generally related to the volume of content releases and deliveries and entertainment-driven products sold. The increase in royalty expense in dollars was driven primarily by higher sales of Partner Brand products in the second quarter of 2021 as compared to the second quarter of 2020. The decrease in royalty expense as a percent of net revenues during the second quarter of 2021 was the result of a higher percentage of product sales that don't carry significant royalty expenses.
Product development expense for the second quarter of 2021 was $87.2 million, or 6.6% of net revenues, compared to $58.4 million, or 6.8% of net revenues, for the second quarter of 2020. The increase was primarily related to increased investments in the Wizards of the Coast game development, most notably development costs related to the Company's digital gaming initiatives.
Advertising expense for the second quarter of 2021 was $105.4 million, or 8.0% of net revenues, compared to $72.3 million, or 8.4% of net revenues, for the second quarter of 2020. The advertising expense increase was driven by net revenue increases, most notably in the Consumer Products segment, during the second quarter of 2021 compared to the second quarter of 2020, as advertising spend is generally impacted by revenue mix and the number and type of entertainment releases. In addition, the advertising expense increase was impacted by costs associated with the launch of the Company’s digital gaming initiatives, primarily DUNGEONS & DRAGONS: DARK ALLIANCE in 2021.
Amortization of intangible assets decreased to $29.7 million, or 2.2% of net revenues, for the second quarter of 2021, compared to $34.7 million, or 4.0% of net revenues, for the second quarter of 2020. The decrease is related to the discontinuation of amortization related to the eOne Music intangible assets, upon being classified as held for sale assets, as well as certain licensed property rights which became fully amortized in the fourth quarter of 2020.
For the second quarter of 2021, the Company's selling, distribution and administration expenses increased to $354.3 million, or 26.8% of net revenues, from $281.2 million, or 32.7% of net revenues, for the second quarter of 2020. The increase in selling, distribution and administration expenses reflects higher bonus and stock compensation expense, higher marketing and sales costs consistent with the increase in net revenues, higher freight and warehousing costs and higher depreciation expense associated with capitalized games in the Wizards of the Coast business. These increases were partially offset by lower expense for credit losses during the second quarter of 2021.
The loss on assets held for sale of $101.8 million, or 7.7% of net revenues, represents a non-cash impairment charge associated with the disposition of eOne Music.
During the second quarter of 2020, the Company incurred $10.3 million of acquisition and related costs in connection with the eOne Acquisition. These expenses comprised of $4.0 million of acquisition and integration costs, and $6.3 million of severance and retention costs.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
First Six Months of 2021
The Company's costs and expenses, stated as percentages of net revenues, are illustrated below for the six month periods ended June 27, 2021 and June 28, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 27, 2021
|
|
June 28, 2020
|
Cost of sales
|
26.1
|
%
|
|
26.2
|
%
|
Program cost amortization
|
8.5
|
|
|
9.3
|
|
Royalties
|
9.0
|
|
|
10.7
|
|
Product development
|
6.1
|
|
|
5.7
|
|
Advertising
|
7.9
|
|
|
8.9
|
|
Amortization of intangibles
|
2.6
|
|
|
3.6
|
|
Selling, distribution and administration
|
26.4
|
|
|
28.5
|
|
Loss on assets held for sale
|
4.2
|
|
|
—
|
|
Acquisition and related costs
|
—
|
|
|
8.1
|
|
Cost of sales for the six months ended June 27, 2021 increased to $634.9 million, or 26.1% of net revenues, from $515.9 million, or 26.2% of net revenues for the six months ended June 28, 2020. The cost of sales increase in dollars was primarily due to higher sales volumes and higher inventory costs as a result of increased freight costs and, to a lesser extent, from the impact of $13.4 million of foreign currency exchange. These increases were partially offset by more profitable closeout sales during the first half of 2021.
Program cost amortization increased in the first six months of 2021 to $208.2 million, or 8.5% of net revenues, from $182.8 million, or 9.3% of net revenues, in the first six months of 2020. Programming costs are capitalized as incurred and amortized using the individual-film-forecast method which matches costs to the related recognized revenue. The increase during the first six months of 2021 was the result of higher television programming revenues, primarily from deliveries that carry higher programming costs, as well as certain purchase accounting adjustments in 2020.
Royalty expense for the six months ended June 27, 2021 was $220.4 million, or 9.0% of net revenues, compared to $210.2 million, or 10.7% of net revenues, for the six months ended June 28, 2020. Fluctuations in royalty expense are generally related to the volume of content releases and deliveries and entertainment-driven products sold. The increase in royalty expense during the first six months of 2021 was driven primarily by higher sales of Partner Brand products as compared to the first six months of 2020.
Product development expense for the six months ended June 27, 2021 increased to $149.0 million, or 6.1% of net revenues, from $112.2 million, or 5.7% of net revenues, for the six months ended June 28, 2020. The increase was primarily related to investments in the Wizards of the Coast and Digital Gaming segment, most notably development costs related to the Company's digital gaming initiatives such as MAGIC SPELLSLINGERS and DUNGEONS & DRAGONS: DARK ALLIANCE and certain mobile gaming apps.
Advertising expense for the six months ended June 27, 2021 was $193.3 million, or 7.9% of net revenues, compared to $174.0 million, or 8.9% of net revenues, for the six months ended June 28, 2020. The advertising expense increase reflects growth in revenues during the first half of 2021 compared to the first half of 2020 and higher costs associated with the launch of the Company’s digital initiatives, most notably, DUNGEONS & DRAGONS: DARK ALLIANCE. These increases were partially offset by reduced promotional spend in the Entertainment segment due to fewer theatrical releases during the first six months of 2021 compared to 2020.
Amortization of intangible assets was $62.6 million, or 2.6% of net revenues, for the six months ended June 27, 2021 compared to $71.5 million, or 3.6% of net revenues, in the first six months of 2020. The decrease is primarily related to certain licensed property rights which became fully amortized in the fourth quarter of 2020 combined with the discontinuation of amortization related to the eOne Music intangible assets in the second quarter of 2021, upon being classified as held for sale assets.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
For the six months ended June 27, 2021, the Company's selling, distribution and administration expenses increased to $642.9 million, or 26.4% of net revenues, from $560.3 million, or 28.5% of net revenues, for the six months ended June 28, 2020. The increase in selling, distribution and administration expenses reflects higher marketing and sales costs consistent with the increase in net revenues, higher bonus and stock compensation expense and increased freight and warehousing costs. These increases were partially offset by lower expense for credit losses during the first six months of 2021.
The loss on assets held for sale of $101.8 million, or 4.2% of net revenues, represents a non-cash impairment charge associated with the disposition of eOne Music.
During the first six months of 2020, the Company incurred $160.0 million of acquisition and related costs in connection with the eOne Acquisition. These expenses comprised $99.7 million of acquisition and integration costs, primarily related to $47.4 million of expense associated with the acceleration of eOne stock-based compensation and $39.0 million of advisor fees settled at the closing of the acquisition. Also included in the acquisition and related costs were $60.4 million of restructuring and related costs including severance and retention costs of $19.5 million, as well as $40.9 million in impairment charges for certain definite-lived intangible and production assets. The impairment charges of $40.9 million were driven by the change in strategy for the combined company’s entertainment assets.
NON-OPERATING (INCOME) EXPENSE
Interest expense for the second quarter and first six months of 2021 totaled $46.1 million and $94.0 million, respectively, compared to $49.6 million and $104.3 million in the second quarter and first six months of 2020, respectively. The decrease in interest expense for the second quarter and first six months of 2021 primarily reflects 2020 and 2021 debt paydown activities related to borrowings utilized for the eOne acquisition and lower interest rates, partially offset by higher production financing borrowings during the second quarter and first six months of 2021.
Interest income was $1.2 million and $2.4 million for the second quarter and first six months of 2021, respectively, compared to $0.9 million and $5.6 million in the second quarter and first six months of 2020, respectively. Lower average interest rates in 2021 compared to 2020 contributed to the decrease for the six-month period.
Other income, net was $9.4 million and $38.3 million for the second quarter and first six months of 2021, respectively, compared to other income, net of $2.8 million and $4.1 million in the second quarter and first six months of 2020, respectively. The increase was driven by $26.7 million gain realized in the first six months of 2021, of which $1.1 million was recognized in the second quarter of 2021, from a legal settlement.
INCOME TAXES
Income tax expense totaled $63.0 million on pre-tax earnings of $41.1 million in the second quarter of 2021 compared to income tax benefit of $10.8 million on pre-tax loss of $43.7 million in the second quarter of 2020. For the six-month period, the income tax expense totaled $75.0 million on pre-tax earnings of $170.6 million compared to an income tax benefit of $14.9 million on a pre-tax loss of $115.7 million in 2020. Both periods were impacted by discrete tax events including the accrual of potential interest and penalties on uncertain tax positions. During the first six months of 2021, unfavorable discrete tax adjustments were a net expense of $17.4 million compared to a net discrete tax benefit of $24.0 million in the first six months of 2020. The unfavorable discrete tax adjustments for the first six months of 2021 are primarily associated with the revaluation of net deferred tax liabilities as a result of the United Kingdom's ("UK") enactment of Finance Act 2021 during the second quarter, which increases the corporate income tax rate from 19% to 25% as of April 1, 2023. This is reduced by the release of a valuation allowance on net operating losses that offsets income received from a one-time legal settlement and certain benefits associated with normal business activities, including the reversal of uncertain tax positions that resulted from statues of limitations expiring in certain jurisdictions and operational tax planning during the second quarter. In addition, included in the second quarter of 2021 is an impairment expense on assets held for sale for which there is no corresponding tax benefit. The favorable discrete tax adjustments for the first six months of 2020 primarily relate to the costs related to the acquisition of eOne. Absent discrete items, the tax rates for the first six months of 2021 and 2020 were 22.6% and 20.5% respectively. The increase in the base rate of 22.6% for the first six months of 2021 is primarily due to the mix of jurisdictions where the Company earned its profits.
Changes in income tax laws could materially impact our recorded deferred tax assets and liabilities and our effective tax rate. We monitor such rules and adjust our deferred tax assets and liabilities in the quarter in which such laws become enacted. Accordingly, we recorded the impact of the United Kingdom’s Finance Act 2021 upon receiving royal assent on June 10, 2021. The primary impact from this legislation resulted in the revaluation of deferred net tax liabilities from eOne, increasing the tax provision by $39.4 million in the second quarter of 2021.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
OTHER INFORMATION
Business Seasonality and Shipments
Historically, the revenue pattern of Hasbro’s consumer products business has shown the second half of the year to be more significant to its overall business than the first half. The Company expects that this concentration will continue, particularly as more of its business has shifted to larger customers with order patterns concentrated in the second half of the year around the holiday season. The concentration of sales in the second half of the year increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items, and (c) failure to achieve tight and compressed shipping schedules.
The Company’s consumer products customer order patterns vary from year to year largely due to fluctuations in the degree of consumer acceptance of product lines, product availability, marketing strategies and inventory policies of retailers, the dates of theatrical releases of major motion pictures for which we offer products, and changes in overall economic conditions. A disproportionate volume of our net revenues has historically been earned during the third and fourth quarters leading up to the retail industry’s holiday selling season, including Christmas. As a result, comparisons of unshipped orders on any date with those at the same date in the prior year are not necessarily indicative of our sales for that year. Moreover, quick response, or just-in-time, inventory management practices result in a significant proportion of orders being placed for immediate delivery. Although the Company may receive orders from customers in advance, it is general industry practice that these orders are subject to amendment or cancellation by customers prior to shipment and, as such, the Company does not believe that these unshipped orders, at any given date, are necessarily indicative of future sales. We expect retailers will continue to follow this strategy.
Accounting Pronouncement Updates
In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14) Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)- Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2020, and early adoption is permitted. The Company adopted the standard in the first quarter of 2021 and the adoption of the standard did not have a material impact on its consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12 (ASU 2019-12), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update remove certain exceptions for performing intra-period tax allocations, recognizing deferred taxes for investments, and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company adopted the standard in the first quarter of 2021 and the adoption of the standard did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In March of 2020, the FASB issued Accounting Standards Update No. 2020-04 (ASU 2020-04) Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions, for a limited period of time, to ease the potential burden of recognizing the effects of reference rate reform on financial reporting. The amendments in this update apply to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to the global transition away from LIBOR and certain other interbank offered rates. An entity may elect to apply the amendments provided by this update beginning March 12, 2020 through December 31, 2022. The Company does not currently expect the change from LIBOR to an alternate rate to have a material impact on its consolidated financial statements, and the Company is continuing to evaluate the standard's potential impact to its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated a significant amount of cash from operations. In the first six months of 2021 and 2020 the Company primarily funded its operations and liquidity needs through cash on hand and cash flows from operations. In addition, the Company’s Entertainment operating segment used production financing to fund certain of its television and film productions which are typically arranged on an individual production basis by special purpose production subsidiaries.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
The Company expects to continue to fund its working capital needs primarily through available cash and cash flows from operations as well as production financing facilities and, when needed, by issuing commercial paper or borrowing under its revolving credit agreement. In the event that the Company is not able to issue commercial paper, the Company intends to utilize its available lines of credit. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its commercial paper program or its available lines of credit and production financing are adequate to meet its working capital needs for the remainder of 2021. The Company may also issue debt or equity securities from time to time, to provide additional sources of liquidity when pursuing opportunities to enhance our long-term competitive position, while maintaining a strong balance sheet. However, unexpected events or circumstances such as material operating losses or increased capital or other expenditures or inability to otherwise access the commercial paper market, may reduce or eliminate the availability of external financial resources. In addition, significant disruptions to credit markets may also reduce or eliminate the availability of external financial resources. Although the Company believes the risk of nonperformance by the counterparties to its financial facilities is not significant, in times of severe economic downturn in the credit markets, it is possible that one or more sources of external financing may be unable or unwilling to provide funding to the Company.
As of June 27, 2021, the Company's cash and cash equivalents totaled $1,228.2 million, of which $83.1 million is restricted under the Company’s production financing facilities.
Prior to 2017, deferred income taxes had not been provided on the majority of undistributed earnings of international subsidiaries as such earnings were considered indefinitely reinvested by the Company. The Tax Cuts and Jobs Act of 2017 provided significant changes to the U.S. tax system including the elimination of the ability to defer U.S. income tax on unrepatriated earnings by imposing a one-time mandatory deemed repatriation tax on undistributed foreign earnings. As of June 27, 2021, the Company has a total liability of $156.1 million related to this tax, $18.4 million is reflected in current liabilities while the remaining long-term payable related to the Tax Cuts and Jobs Act of 2017 of $137.7 million is presented within other liabilities, non-current on the Consolidated Balance Sheets. As permitted by the Tax Act, the Company will pay the transition tax in annual interest-free installments through 2025. As a result, the related earnings in foreign jurisdictions are available with greater investment flexibility. The majority of the Company’s cash and cash equivalents held outside of the United States as of June 27, 2021 is denominated in the U.S. dollar.
Because of the seasonality in the Company's cash flow, management believes that on an interim basis, rather than discussing only its cash flows, a better understanding of its liquidity and capital resources can be obtained through a discussion of the various balance sheet categories. Also, as several of the major categories, including cash and cash equivalents, accounts receivable, inventories and short-term borrowings, fluctuate significantly from quarter to quarter, due to the seasonality of its business, management believes that a comparison to the comparable period in the prior year is generally more meaningful than a comparison to the prior year-end.
The table below outlines key financial information (in millions of dollars) pertaining to our consolidated balance sheets including the period-over-period changes.
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June 27, 2021
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June 28, 2020
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% Change
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Cash and cash equivalents (including restricted cash of $83.1 and $71.9)
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$
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1,228.2
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$
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1,038.0
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18
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%
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Accounts receivable, net
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865.9
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911.3
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-5
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Inventories
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499.6
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564.2
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-11
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Prepaid expenses and other current assets
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543.2
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672.2
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-19
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Other assets
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1,350.5
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1,329.1
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2
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Accounts payable and accrued liabilities
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1,778.9
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1,596.6
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11
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Other liabilities
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753.0
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771.7
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-2
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Accounts receivable decreased to $865.9 million at June 27, 2021, compared to $911.3 million at June 28, 2020. Absent the favorable foreign currency impact of $22.1 million, accounts receivable decreased 7%, or $67.5 million. The decrease in accounts receivable was driven primarily by improved collections during the first half of 2021 and by lower sales during the fourth quarter of 2020, primarily in the Company's Latin American and Asia Pacific markets. Days sales outstanding decreased from 96 days at June 28, 2020 to 60 days at June 27, 2021 primarily due to the increase in revenues and mix of sales during the first half of 2021 as well as from improved collections across all geographies during the year.
Inventories decreased to $499.6 million as of June 27, 2021, compared to $564.2 million at June 28, 2020. Absent the favorable foreign currency impact of $15.9 million, inventories decreased 14% reflecting lower levels, primarily in the Latin American,
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
Europe and Asia Pacific markets due to improved inventory management and higher obsolescence charges taken during 2020, as a result of the impact of COVID-19.
Prepaid expenses and other current assets decreased to $543.2 million at June 27, 2021 from $672.2 million at June 28, 2020. The decrease was driven primarily by the reclassification of eOne Music assets as assets held for sale during the second quarter of 2021. Absent the impact of this reclassification, prepaid expenses and other current assets decreased as a result of lower prepaid royalty balances in relation to the Company’s Marvel and Lucasfilm royalty agreements, lower prepaid tax balances, lower short-term investment balances as a result of the Company's global cash management strategy and lower unrealized gains on foreign exchange contracts.
Other assets increased to approximately $1,350.5 million at June 27, 2021 from $1,329.1 million at June 28, 2020. The increase was driven by higher capitalized film and television content and production balances due to increased investments in productions and acquired content, partially offset by lower non-current receivable balances within the Entertainment segment during the first six months of 2021.
Accounts payable and accrued liabilities increased to $1,778.9 million at June 27, 2021 from $1,596.6 million at June 28, 2020 driven by higher deferred revenue balances in the first half of 2021 due to 2020 purchase accounting fair value adjustments related to the eOne acquisition, higher incentive compensation accruals and higher accrued advertising balances.
Other liabilities decreased to $753.0 million at June 27, 2021 from $771.7 million at June 28, 2020. The decrease was driven by lower long-term lease liability balances and a lower transition tax liability balance reflecting the reclassification of the 2021 installment payment, partially offset by higher deferred compensation and tax reserves.
Cash Flow
The following table summarizes the changes in the Consolidated Statement of Cash Flows, expressed in millions of dollars, for the quarters ended June 27, 2021 and June 28, 2020.
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June 27, 2021
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June 28, 2020
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Net cash provided by (used in):
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Operating activities
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$
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577.1
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$
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258.2
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Investing activities
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(66.3)
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(4,454.8)
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Financing activities
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(718.4)
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678.5
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Net cash provided by operating activities in the first six months of 2021 was $577.1 million compared to $258.2 million in the first six months of 2020. The $318.9 million increase in net cash provided by operating activities was primarily attributable to higher earnings in 2021, combined with improved working capital, partially offset by higher film and television production spend as a result of increased production activities during the first six months of 2021.
Net cash utilized by investing activities was $66.3 million in the first six months of 2021 compared to $4,454.8 million in the first six months of 2020. Investing activities in 2020 included $4.4 billion of cash utilized to acquire eOne, net of cash acquired funded by the net proceeds from the issuance of an aggregate principal amount of $2.4 billion in senior secured notes in November 2019, net proceeds $975.2 million from of the issuance of approximately 10.6 million shares of common stock in November 2019 and $1.0 billion in term loans drawn in the first quarter of 2020.
Additions to property, plant and equipment were $63.1 million in the first six months of 2021 compared to $64.0 million in the first six months of 2020.
Net cash utilized by financing activities was $718.4 million in the first six months of 2021 compared to net cash provided by financing activities of $678.5 million in the first six months of 2020. Financing activities in the first six months of 2021 include the repayment of $300.0 million aggregate principal amount of 3.15% Notes and payments totaling $265.0 million related to the $1.0 billion in term loans described above consisting of $250.0 million towards the principal balance of the Three-Year Tranche loans and quarterly principal payments totaling $15.0 million. In addition, the Company had drawdowns of $114.7 million and repayments of $70.2 million related to production financing loans. In the first six months of 2020, cash provided by financing activities was driven by the proceeds of the Company's $1.0 billion term loans, partially offset by repayments of $90.7 million related to production financing loans, payments totaling $47.4 million associated with the redemption of stock awards that were accelerated as a result of the eOne acquisition and $7.5 million for the Company's first installment towards the term loan repayment.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
Dividends paid in the first half of 2021 totaled $187.5 million, consistent with dividends paid in the first half of 2020 of $186.2 million. There were no repurchases of the Company’s common stock in the first six months of 2021 as the Company suspended its share repurchase program while it prioritizes deleveraging.
Sources and Uses of Cash
The Company has an agreement with a group of banks which provides for a commercial paper program (the "Program"). Under the Program, at the request of the Company and subject to market conditions, the banks may either purchase from the Company, or arrange for the sale by the Company, of unsecured commercial paper notes. The Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of $1.0 billion. The maturities of the notes may vary but may not exceed 397 days. The notes are sold under customary terms in the commercial paper market and are issued at a discount to par, or alternatively, sold at par and bear varying interest rates based on a fixed or floating rate basis. The interest rates vary based on market conditions and the ratings assigned to the notes by the credit rating agencies at the time of issuance. Subject to market conditions, the Company intends to utilize the Program as its primary short-term borrowing facility and does not intend to sell unsecured commercial paper notes in excess of the available amount under the revolving credit agreement discussed below. If, for any reason, the Company is unable to access the commercial paper market, the Company intends to use the revolving credit agreement to meet the Company's short-term liquidity needs. At June 27, 2021, the Company had no outstanding borrowings related to the Program.
The Company has a second amended and restated revolving credit agreement with Bank of America, N.A., as administrative agent, swing line lender and a letter of credit issuer and lender and certain other financial institutions, as lenders thereto (the "Amended Revolving Credit Agreement"), which provides the Company with commitments having a maximum aggregate principal amount of $1.5 billion. The Amended Revolving Credit Agreement also provides for a potential additional incremental commitment increase of up to $500.0 million subject to agreement of the lenders. The Amended Revolving Credit Agreement contains certain financial covenants setting forth leverage and coverage requirements, and certain other limitations typical of an investment grade facility, including with respect to liens, mergers and incurrence of indebtedness. The Amended Revolving Credit Agreement extends through September 20, 2024. The Company was in compliance with all covenants as of June 27, 2021. The Company had no borrowings outstanding under its committed revolving credit facility as of June 27, 2021. However, letters of credit outstanding under this facility as of June 27, 2021 were approximately $2.7 million. Amounts available and unused under the committed line, at June 27, 2021 were approximately $1.5 billion, inclusive of borrowings under the Company’s commercial paper program. The Company also has other uncommitted lines from various banks, of which approximately $12.4 million was utilized at June 27, 2021. Of the amount utilized under, or supported by, the uncommitted lines, approximately $0.8 million and $11.6 million represent outstanding short-term borrowings and letters of credit, respectively.
In September of 2019, the Company entered into a $1.0 billion Term Loan Agreement (the "Term Loan Agreement") with Bank of America N.A. (“Bank of America”), as administrative agent, and certain financial institutions as lenders, pursuant to which such lenders committed to provide, contingent upon the completion of the eOne Acquisition and certain other customary conditions to funding, (1) a three-year senior unsecured term loan facility in an aggregate principal amount of $400.0 million (the “Three-Year Tranche”) and (2) a five-year senior unsecured term loan facility in an aggregate principal amount of $600.0 million (the “Five-Year Tranche” and together with the Three-Year Tranche, the “Term Loan Facilities”). On December 30, 2019, the Company completed the acquisition of eOne and on that date, borrowed the full amount of $1.0 billion under the Term Loan Facilities. Of the Three-Year Tranche $400 million principal balance, the Company repaid $100 million during the fourth quarter 2020 and $250 million during the second quarter 2021. The Company is subject to certain financial covenants contained in this agreement and as of June 27, 2021, the Company was in compliance with these covenants. The terms of the Term Loan Facilities are described in Note 8 to the consolidated financial statements included in Part I of this Form 10-Q.
During November 2019, in conjunction with the Company's acquisition of eOne, the Company issued an aggregate of $2.4 billion of senior unsecured debt securities (collectively, the "Notes") consisting of the following tranches: $300 million of notes due 2022 (the "2022 Notes") that bear interest at a fixed rate of 2.60%; $500 million of notes due 2024 (the "2024 Notes") that bear interest at a fixed rate of 3.00%; $675 million of notes due 2026 (the "2026 Notes") that bear interest at a fixed rate of 3.55%; and $900 million of notes due 2029 (the "2029 Notes") that bear interest at a fixed rate of 3.90%. The terms of the Notes are described in Note 8 to the consolidated financial statements in Part I of this Form 10-Q.
The Company has principal amounts of long-term debt as of June 27, 2021 of $4.4 billion, due at varying times from 2022 through 2044. Of the total principal amount of long-term debt, $189.6 million is current at June 27, 2021 of which $30.0 million is related to principal amortization of the 5-year term loans due December 2024. During the first quarter of 2021, the Company repaid in full, its 3.15% Notes in the aggregate principal amount of $300.0 million due in May 2021, including accrued interest. Additionally, the Company has outstanding production financing facilities at June 27, 2021 of $212.6 million of which $53.0 million is included in long-term debt and $159.6 million is reported as the current portion of long-term debt within the
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
Company's consolidated financial statements, included in Part I of this Form 10-Q. All of the Company’s other long-term borrowings have contractual maturities that occur subsequent to the first quarter of 2022 with the exception of certain of the Company’s production financing facilities discussed above.
In November of 2019, the Company completed an underwritten public offering of 10.6 million shares of common stock, par value $0.50 per share, at a public offering price of $95.00 per share. Net proceeds from this public offering were approximately $975.2 million, after deducting underwriting discounts and commissions and offering expenses of approximately $31.1 million. The net proceeds were used to finance, in part, the acquisition of eOne and to pay related costs and expenses.
The Company also had letters of credit and other similar instruments of approximately $14.3 million and purchase commitments of approximately $428.3 million outstanding at June 27, 2021.
Other contractual obligations and commercial commitments, as detailed in the Company's 2020 Form 10-K, did not materially change outside of certain payments made in the normal course of business and as otherwise set forth in this report. The table of contractual obligations and commercial commitments, as detailed in the Company's 2020 Form 10-K does not include certain tax liabilities related to uncertain tax positions and certain unsatisfied performance obligations primarily related to in-production television content to be delivered in the future, under existing agreements.
The Company has a long history of returning cash to its shareholders through quarterly dividends and share repurchases. In 2021 Hasbro maintained its quarterly dividend rate of $0.68 per share for the dividends paid in February and May and has declared a third cash dividend of $0.68 per share scheduled for August 2021. In addition to the dividend, the Company periodically returns cash to shareholders through its share repurchase program. As part of this initiative, since 2005, the Company's Board of Directors (the "Board") adopted numerous share repurchase authorizations with a cumulative authorized repurchase amount of $4.3 billion. The most recent authorization was approved in May 2018 for $500 million. Since 2005, Hasbro has repurchased 108.6 million shares at a total cost of $4.0 billion and an average price of $36.44 per share. At June 27, 2021, the Company had $366.6 million remaining under these share repurchase authorizations. Share repurchases are subject to market conditions, the availability of funds and other uses of funds. As a result of the financing activities related to the eOne Acquisition, the Company has suspended its current share repurchase program while it prioritizes deleveraging.
The Company believes that cash from operations, and, if necessary, its committed line of credit and other borrowing facilities, will allow the Company to meet its obligations over the next twelve months.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company's reported financial results include film and television production costs, recoverability of goodwill and intangible assets, income taxes and business combinations. Additionally, the Company identified the valuation of the Company’s equity method investment in Discovery Family Channel as a significant accounting estimate. These critical accounting policies are the same as those detailed in the 2020 Form 10-K.
FINANCIAL RISK MANAGEMENT
The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates, primarily as the result of sourcing products priced in U.S. dollars, Hong Kong dollars and Euros while marketing those products in more than twenty currencies. Results of operations may be affected primarily by changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound sterling, Canadian dollar, Brazilian real, Russian ruble and Mexican peso and, to a lesser extent, other currencies in Latin American and Asia Pacific countries.
To manage this exposure, the Company has hedged a portion of its forecasted foreign currency transactions for fiscal years 2021 and 2022 using foreign exchange forward contracts. The Company is also exposed to foreign currency risk with respect to its net cash and cash equivalents or short-term borrowing positions in currencies other than the U.S. dollar. The Company believes, however, that the on-going risk on the net exposure should not be material to its financial condition. In addition, the Company's revenues and costs have been, and will likely continue to be, affected by changes in foreign currency rates. A significant change in foreign exchange rates can materially impact the Company's revenues and earnings due to translation of foreign-denominated revenues and expenses. The Company does not hedge against translation impacts of foreign exchange. From time to time, affiliates of the Company may make or receive intercompany loans in currencies other than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)
The Company reflects all forward and option contracts at their fair value as an asset or liability on the consolidated balance sheets. The Company does not speculate in foreign currency exchange contracts. At June 27, 2021, these contracts had net unrealized gains of $1.1 million, of which $5.1 million of unrealized gains are recorded in prepaid expenses and other current assets, $1.7 million of unrealized gains are recorded in other assets, $5.6 million of unrealized losses are recorded in accrued liabilities and $0.1 million of unrealized losses are recorded in other liabilities. Included in accumulated other comprehensive loss at June 27, 2021 are deferred losses, net of tax, of $3.2 million, related to these derivatives.
At June 27, 2021, the Company had principal amounts of long-term debt of $4.4 billion. In May 2014, the Company issued an aggregate amount of $600.0 million of long-term debt consisting of $300.0 million of 3.15% Notes, which were repaid in full during the first quarter of 2021, and $300.0 million of 5.10% Notes due 2044. Prior to the debt issuance, the Company entered into forward-starting interest rate swap agreements with a total notional value of $500 million to hedge the anticipated underlying U.S. Treasury interest rate. These interest rate swaps were matched with this debt issuance and were designated and effective as hedges of the change in future interest payments. At the date of debt issuance, the Company terminated these interest rate swap agreements and their fair value at the date of issuance was recorded in accumulated other comprehensive loss and is being amortized through the consolidated statements of operations using an effective interest rate method over the life of the related debt. Included in accumulated other comprehensive loss at June 27, 2021 are deferred losses, net of tax, of $15.9 million, all of which relates to the remaining $300.0 million of 5.10% Notes due 2044.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is included in Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is incorporated herein by reference.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 27, 2021. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
Changes in internal control over financial reporting
There were no changes in the Company's internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the quarter ended June 27, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. In the first quarter of fiscal 2020, we completed the acquisition of eOne as described in Note 3 to the consolidated financial statements in Part I of this Form 10-Q. We are currently integrating eOne into our internal control over financial reporting processes. This integration will be completed in 2021.
Condensed Notes to Consolidated Financial Statements
(Millions of Dollars and Shares Except Per Share Data)