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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
__________________
FORM 10-Q
__________________
(Mark One)
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 27, 2020
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-6682
__________________
HASBRO, INC.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
Rhode Island | 05-0155090 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
1027 Newport Avenue |
|
Pawtucket, | Rhode Island | 02861 |
(Address of Principal Executive Offices) | (Zip Code) |
(401) 431-8697
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.50 par value per share | HAS | The NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | x | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No [x]
The number of shares of Common Stock, par value $.50 per share, outstanding as of October 26, 2020 was 137,030,619.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of Dollars Except Share Data)
(Unaudited)
| | | | | | | | | | | | | | | | | |
| September 27, 2020 | | September 29, 2019 | | December 29, 2019 |
ASSETS | | | | | |
Current assets | | | | | |
Cash and cash equivalents including restricted cash of $71,200, $0 and $0 | $ | 1,132,405 | | | 1,060,432 | | | 4,580,369 | |
Accounts receivable, less allowance for doubtful accounts of $23,700 $18,200 and $17,200 | 1,438,360 | | | 1,416,879 | | | 1,410,597 | |
Inventories | 540,039 | | | 589,132 | | | 446,105 | |
Prepaid expenses and other current assets | 648,158 | | | 346,687 | | | 310,450 | |
Total current assets | 3,758,962 | | | 3,413,130 | | | 6,747,521 | |
Property, plant and equipment, less accumulated depreciation of $546,800 $496,700 and $505,900 | 477,154 | | | 371,881 | | | 382,248 | |
Other assets | | | | | |
Goodwill | 3,644,118 | | | 485,042 | | | 494,584 | |
Other intangible assets, net of accumulated amortization of $885,800 $771,700 and $783,500 | 1,546,810 | | | 658,350 | | | 646,305 | |
Other | 1,276,133 | | | 626,221 | | | 584,970 | |
Total other assets | 6,467,061 | | | 1,769,613 | | | 1,725,859 | |
Total assets | $ | 10,703,177 | | | 5,554,624 | | | 8,855,628 | |
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY | | | | | |
Current liabilities | | | | | |
Short-term borrowings | $ | 10,032 | | | 7,903 | | | 503 | |
Current portion of long-term debt | 369,269 | | | — | | | — | |
Accounts payable | 466,172 | | | 501,136 | | | 343,927 | |
Accrued liabilities | 1,470,076 | | | 957,696 | | | 912,652 | |
Total current liabilities | 2,315,549 | | | 1,466,735 | | | 1,257,082 | |
Long-term debt | 4,777,807 | | | 1,696,204 | | | 4,046,457 | |
Other liabilities | 778,514 | | | 550,778 | | | 556,559 | |
Total liabilities | 7,871,870 | | | 3,713,717 | | | 5,860,098 | |
Redeemable noncontrolling interests | 22,876 | | | — | | | — | |
Shareholders' equity | | | | | |
Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued | — | | | — | | | — | |
Common stock of $0.50 par value. Authorized 600,000,000 shares; issued 220,286,736 shares at September 27, 2020, 209,694,630 shares at September 29, 2019, and 220,286,736 shares at December 29, 2019 | 110,143 | | | 104,847 | | | 110,143 | |
Additional paid-in capital | 2,311,433 | | | 1,301,366 | | | 2,275,726 | |
Retained earnings | 4,192,434 | | | 4,180,331 | | | 4,354,619 | |
Accumulated other comprehensive loss | (280,330) | | | (185,376) | | | (184,220) | |
Treasury stock, at cost; 83,256,622 shares at September 27, 2020; 83,442,005 shares at September 29, 2019; and 83,424,129 shares at December 29, 2019 | (3,559,929) | | | (3,560,261) | | | (3,560,738) | |
Noncontrolling interests | 34,680 | | | — | | | — | |
Total shareholders' equity | 2,808,431 | | | 1,840,907 | | | 2,995,530 | |
Total liabilities, noncontrolling interests and shareholders' equity | $ | 10,703,177 | | | 5,554,624 | | | 8,855,628 | |
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of Dollars Except Per Share Data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
Net revenues | $ | 1,776,623 | | | 1,575,173 | | | $ | 3,742,472 | | | 3,292,220 | |
Costs and expenses: | | | | | | | |
Cost of sales | 610,105 | | | 627,119 | | | 1,126,044 | | | 1,230,800 | |
Program cost amortization | 85,424 | | | 28,028 | | | 268,245 | | | 58,105 | |
Royalties | 176,938 | | | 128,008 | | | 387,097 | | | 258,957 | |
Product development | 62,709 | | | 67,354 | | | 174,863 | | | 189,246 | |
Advertising | 137,408 | | | 140,256 | | | 311,415 | | | 309,659 | |
Amortization of intangibles | 36,172 | | | 11,814 | | | 107,685 | | | 35,445 | |
Selling, distribution and administration | 325,360 | | | 275,384 | | | 885,680 | | | 748,338 | |
Acquisition and related costs | 5,949 | | | — | | | 165,993 | | | — | |
Total costs and expenses | 1,440,065 | | | 1,277,963 | | | 3,427,022 | | | 2,830,550 | |
Operating profit | 336,558 | | | 297,210 | | | 315,450 | | | 461,670 | |
Non-operating expense (income): | | | | | | | |
Interest expense | 49,400 | | | 22,764 | | | 153,702 | | | 67,096 | |
Interest income | (713) | | | (5,486) | | | (6,411) | | | (19,164) | |
Other (income) expense, net | (11,327) | | | 20,186 | | | (15,429) | | | 118,289 | |
Total non-operating expense, net | 37,360 | | | 37,464 | | | 131,862 | | | 166,221 | |
Earnings before income taxes | 299,198 | | | 259,746 | | | 183,588 | | | 295,449 | |
Income tax expense | 79,215 | | | 46,797 | | | 64,313 | | | 42,340 | |
Net earnings | 219,983 | | | 212,949 | | | 119,275 | | | 253,109 | |
Net earnings (loss) attributable to noncontrolling interests | (915) | | | — | | | 1,929 | | | — | |
Net earnings attributable to Hasbro, Inc. | $ | 220,898 | | | 212,949 | | | $ | 117,346 | | | 253,109 | |
| | | | | | | |
Net earnings per common share: | | | | | | | |
Basic | $ | 1.61 | | | 1.68 | | | $ | 0.86 | | | 2.00 | |
Diluted | $ | 1.61 | | | 1.67 | | | $ | 0.85 | | | 1.99 | |
Cash dividends declared per common share | $ | 0.68 | | | 0.68 | | | $ | 2.04 | | | 2.04 | |
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | Nine Months Ended |
| September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
Net earnings | $ | 219,983 | | | 212,949 | | | $ | 119,275 | | | 253,109 | |
Other comprehensive earnings (losses): | | | | | | | |
Foreign currency translation adjustments, net of tax | 40,821 | | | (16,447) | | | (98,144) | | | (6,120) | |
Unrealized holding (losses) gains on available-for-sale securities, net of tax | (809) | | | (155) | | | 1,315 | | | 400 | |
Net (losses) gains on cash flow hedging activities, net of tax | (5,655) | | | 9,514 | | | 15,670 | | | 14,027 | |
Changes in unrecognized pension amounts, net of tax | — | | | — | | | — | | | 19,589 | |
Reclassifications to earnings, net of tax: | | | | | | | |
Net gains on cash flow hedging activities | (6,833) | | | (5,392) | | | (15,775) | | | (10,188) | |
Amortization of unrecognized pension and postretirement amounts | 274 | | | 279 | | | 824 | | | 5,578 | |
Settlement of U.S. defined benefit plan | — | | | — | | | — | | | 85,852 | |
Total other comprehensive earnings (loss), net of tax | 27,798 | | | (12,201) | | | (96,110) | | | 109,138 | |
Total comprehensive earnings (loss) attributable to noncontrolling interests | (915) | | | — | | | 1,929 | | | — | |
Total comprehensive earnings attributable to Hasbro, Inc. | $ | 248,696 | | | 200,748 | | | $ | 21,236 | | | 362,247 | |
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended |
| September 27, 2020 | | September 29, 2019 |
Cash flows from operating activities: | | | |
Net earnings | $ | 119,275 | | | 253,109 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation of plant and equipment | 94,100 | | | 101,016 | |
Amortization of intangibles | 107,685 | | | 35,445 | |
Asset impairments | 40,878 | | | — | |
Program cost amortization | 268,245 | | | 58,105 | |
Deferred income taxes | 12,549 | | | (27,974) | |
Stock-based compensation | 40,015 | | | 24,787 | |
Non-cash pension settlement | — | | | 110,777 | |
Other non-cash items | (1,646) | | | 13,347 | |
Change in operating assets and liabilities net of acquired balances: | | | |
Decrease (increase) in accounts receivable | 165,593 | | | (236,010) | |
Increase in inventories | (96,907) | | | (154,476) | |
(Increase) decrease in prepaid expenses and other current assets | (10,007) | | | 2,440 | |
Program spend, net | (294,597) | | | (43,857) | |
Increase in accounts payable and accrued liabilities | 18,980 | | | 236,777 | |
Change in net deemed repatriation tax | (18,364) | | | (14,550) | |
Other | 48,511 | | | 30,632 | |
Net cash provided by operating activities | 494,310 | | | 389,568 | |
Cash flows from investing activities: | | | |
Additions to property, plant and equipment | (92,059) | | | (90,800) | |
Acquisitions, net of cash acquired | (4,403,929) | | | — | |
Other | 24,297 | | | 4,340 | |
Net cash utilized by investing activities | (4,471,691) | | | (86,460) | |
Cash flows from financing activities: | | | |
Proceeds from borrowings with maturity greater than three months | 1,036,037 | | | — | |
Repayments of borrowings with maturity greater than three months | (147,324) | | | — | |
Net proceeds from other short-term borrowings | (319) | | | (1,425) | |
Purchases of common stock | — | | | (60,137) | |
Stock-based compensation transactions | 1,830 | | | 29,737 | |
Dividends paid | (279,423) | | | (250,760) | |
Payments related to tax withholding for share-based compensation | (5,935) | | | (13,061) | |
Redemption of equity instruments | (47,399) | | | — | |
Deferred acquisition payments | — | | | (100,000) | |
Debt acquisition costs | — | | | (21,534) | |
Other | (6,949) | | | — | |
Net cash provided (utilized) by financing activities | 550,518 | | | (417,180) | |
Effect of exchange rate changes on cash | (21,101) | | | (7,867) | |
Decrease in cash, cash equivalents and restricted cash | (3,447,964) | | | (121,939) | |
Cash, cash equivalents and restricted cash at beginning of year | 4,580,369 | | | 1,182,371 | |
Cash, cash equivalents and restricted cash at end of period | $ | 1,132,405 | | | 1,060,432 | |
| | | |
Supplemental information | | | |
Cash paid during the period for: | | | |
Interest | $ | 123,595 | | | 69,601 | |
Income taxes | $ | 66,008 | | | 64,917 | |
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Redeemable Noncontrolling Interests
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended September 27, 2020 | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Noncontrolling Interests | | Total Shareholders' Equity | | | Redeemable Noncontrolling Interests |
Balance, June 28, 2020 | $ | 110,143 | | | 2,297,267 | | | 4,064,715 | | | (308,128) | | | (3,559,990) | | | 38,144 | | | $ | 2,642,151 | | | | $ | 24,133 | |
| | | | | | | | | | | | | | | | |
Net earnings attributable to Hasbro, Inc. | — | | | — | | | 220,898 | | | — | | | — | | | — | | | 220,898 | | | | — | |
Net loss attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (901) | | | (901) | | | | (14) | |
Buyout of noncontrolling interest | — | | | 606 | | | — | | | — | | | — | | | — | | | 606 | | | | — | |
Other comprehensive earnings | — | | | — | | | — | | | 27,798 | | | — | | | — | | | 27,798 | | | | — | |
Stock-based compensation transactions | — | | | (325) | | | — | | | — | | | 61 | | | — | | | (264) | | | | — | |
| | | | | | | | | | | | | | | | |
Stock-based compensation expense | — | | | 13,885 | | | — | | | — | | | — | | | — | | | 13,885 | | | | — | |
Dividends declared | — | | | — | | | (93,179) | | | — | | | — | | | — | | | (93,179) | | | | — | |
Distributions paid to noncontrolling owners and other foreign exchange | — | | | — | | | — | | | — | | | — | | | (2,563) | | | (2,563) | | | | (1,243) | |
Balance, September 27, 2020 | $ | 110,143 | | | 2,311,433 | | | 4,192,434 | | | (280,330) | | | (3,559,929) | | | 34,680 | | | $ | 2,808,431 | | | | $ | 22,876 | |
| | | | | | | | | | | | | | | | |
| Quarter Ended September 29, 2019 | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Noncontrolling Interests | | Total Shareholders' Equity | | | Redeemable Noncontrolling Interests |
Balance, June 30, 2019 | $ | 104,847 | | | 1,290,540 | | | 4,053,266 | | | (173,175) | | | (3,559,609) | | | — | | | $ | 1,715,869 | | | | $ | — | |
Net earnings | — | | | — | | | 212,949 | | | — | | | — | | | — | | | 212,949 | | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Other comprehensive loss | — | | | — | | | — | | | (12,201) | | | — | | | — | | | (12,201) | | | | — | |
Stock-based compensation transactions | — | | | 1,933 | | | — | | | — | | | 852 | | | — | | | 2,785 | | | | — | |
Purchases of common stock | — | | | — | | | — | | | — | | | (1,504) | | | — | | | (1,504) | | | | — | |
Stock-based compensation expense | — | | | 8,893 | | | — | | | — | | | — | | | — | | | 8,893 | | | | — | |
Dividends declared | — | | | — | | | (85,884) | | | — | | | — | | | — | | | (85,884) | | | | — | |
Balance, September 29, 2019 | $ | 104,847 | | | 1,301,366 | | | 4,180,331 | | | (185,376) | | | (3,560,261) | | | — | | | $ | 1,840,907 | | | | $ | — | |
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Redeemable Noncontrolling Interests
(Thousands of Dollars)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 27, 2020 | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Noncontrolling Interests | | Total Shareholders' Equity | | | Redeemable Noncontrolling Interests |
Balance, December 29, 2019 | $ | 110,143 | | | 2,275,726 | | | 4,354,619 | | | (184,220) | | | (3,560,738) | | | — | | | $ | 2,995,530 | | | | $ | — | |
Noncontrolling interests related to acquisition of Entertainment One Ltd. | — | | | — | | | — | | | — | | | — | | | 38,561 | | | 38,561 | | | | 26,241 | |
Net earnings attributable to Hasbro, Inc. | — | | | — | | | 117,346 | | | — | | | — | | | — | | | 117,346 | | | | |
Net earnings (loss) attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 2,067 | | | 2,067 | | | | (138) | |
Buyout of noncontrolling interest | — | | | 606 | | | — | | | — | | | — | | | — | | | 606 | | | | — | |
Other comprehensive loss | — | | | — | | | — | | | (96,110) | | | — | | | — | | | (96,110) | | | | — | |
Stock-based compensation transactions | — | | | (4,613) | | | — | | | — | | | 508 | | | — | | | (4,105) | | | | — | |
| | | | | | | | | | | | | | | | |
Stock-based compensation expense | — | | | 39,714 | | | — | | | — | | | 301 | | | — | | | 40,015 | | | | — | |
Dividends declared | — | | | — | | | (279,531) | | | — | | | — | | | — | | | (279,531) | | | | — | |
Distributions paid to noncontrolling owners and other foreign exchange | — | | | — | | | — | | | — | | | — | | | (5,948) | | | (5,948) | | | | (3,227) | |
Balance, September 27, 2020 | $ | 110,143 | | | 2,311,433 | | | 4,192,434 | | | (280,330) | | | (3,559,929) | | | 34,680 | | | $ | 2,808,431 | | | | $ | 22,876 | |
| | | | | | | | | | | | | | | | |
| Nine Months Ended September 29, 2019 | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Noncontrolling Interests | | Total Shareholders' Equity | | | Redeemable Noncontrolling Interests |
Balance, December 30, 2018 | $ | 104,847 | | | 1,275,059 | | | 4,184,374 | | | (294,514) | | | (3,515,280) | | | — | | | $ | 1,754,486 | | | | $ | — | |
Net earnings | — | | | — | | | 253,109 | | | — | | | — | | | — | | | 253,109 | | | | — | |
| | | | | | | | | | | | | | | | |
Other comprehensive earnings | — | | | — | | | — | | | 109,138 | | | — | | | — | | | 109,138 | | | | — | |
Stock-based compensation transactions | — | | | 1,756 | | | — | | | — | | | 14,920 | | | — | | | 16,676 | | | | — | |
Purchases of common stock | — | | | — | | | — | | | — | | | (60,137) | | | — | | | (60,137) | | | | — | |
Stock-based compensation expense | — | | | 24,551 | | | — | | | — | | | 236 | | | — | | | 24,787 | | | | — | |
Dividends declared | — | | | — | | | (257,152) | | | — | | | — | | | — | | | (257,152) | | | | — | |
Balance, September 29, 2019 | $ | 104,847 | | | 1,301,366 | | | 4,180,331 | | | (185,376) | | | (3,560,261) | | | — | | | $ | 1,840,907 | | | | $ | — | |
| | | | | | | | | | | | | | | | |
See accompanying condensed notes to consolidated financial statements.
HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the consolidated financial position of Hasbro, Inc. and all majority-owned subsidiaries ("Hasbro" or the "Company") as of September 27, 2020 and September 29, 2019, and the results of its operations and cash flows and shareholders' equity for the periods then ended in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes thereto. Actual results could differ from those estimates.
The quarters ended September 27, 2020 and September 29, 2019 were each 13-week periods. The nine-month periods ended September 27, 2020 and September 29, 2019 were each 39-week periods.
The results of operations for the quarter ended September 27, 2020 are not necessarily indicative of results to be expected for the full year 2020, nor were those of the comparable 2019 period representative of those actually experienced for the full year 2019.
Following the Company's acquisition of Entertainment One Ltd. ("eOne" or "eOne Acquisition") (see Note 3), beginning with the first quarter of 2020, the eOne operating segment was added to the Company's reporting structure and is comprised of all legacy eOne operations. Over time, the Company plans to transition towards reflecting all of its entertainment operations within the eOne segment. The Company also expects to shift the consumer product and digital licensing business and toy and game sales related to the eOne preschool brands to legacy Hasbro segments, including related toy and game operations into the Company's geographic commercial segments in late 2021 and 2022. In addition to the eOne segment, the Company's brand architecture now reflects the addition of the TV, Film and Entertainment brand portfolio which consists of legacy eOne film and TV revenues. Operations related to eOne brands, including PEPPA PIG, PJ MASKS and RICKY ZOOM, are reported in the Emerging Brands portfolio.
eOne's results of operations and financial position are included in the Company's consolidated financial statements and accompanying condensed footnotes since the date of acquisition. For more information on the eOne Acquisition see Note 3.
Significant Accounting Policies
The Company's significant accounting policies are summarized in Note 1 to the consolidated financial statements included in our Form 10-K for the year ended December 29, 2019. An update and supplement to these accounting policies associated with our acquisition of eOne is below.
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
Noncontrolling Interests
The financial results and position of the noncontrolling interests acquired through the acquisition of eOne are included in their entirety in the Company’s consolidated statements of operations and consolidated balance sheets beginning with the first quarter of 2020. The value of the redeemable noncontrolling interests is presented in the consolidated balance sheets as temporary equity between liabilities and shareholders' equity. The value of the non-redeemable noncontrolling interests is presented in the consolidated balance sheets within total shareholders' equity. Earnings (losses) attributable to the redeemable noncontrolling interests and non-redeemable noncontrolling interests are presented as a separate line on the consolidated statements of operations which is necessary to identify those earnings (losses) specifically attributable to Hasbro. A breakout of the redeemable noncontrolling interests and non-redeemable noncontrolling interests acquired is listed below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Country of Incorporation | | Ownership Interest | | Proportion Held | | Principal Activity | | |
Astley Baker Davies Limited | | England and Wales | | Nonredeemable | | 70 | % | | Ownership of intellectual property | | |
Whizz Kid Entertainment Limited (1) | | England and Wales | | Redeemable | | 100 | % | | Production of television programs | | |
MR Productions Holdings, LLC | | United States | | Redeemable | | 75 | % | | Film development | | |
Renegade Entertainment, LLC | | United States | | Redeemable | | 65 | % | | Production of television programs | | |
Round Room Live, LLC | | United States | | Nonredeemable | | 60 | % | | Production of live events | | |
(1) During the third quarter of 2020, Entertainment One U.K. Holdings Ltd., a subsidiary of the Company, acquired the remaining 30% of Whizz Kid Entertainment Limited, making it a wholly owned affiliate of the Company.
Production Financing
Production financing relates to financing facilities for certain of the Company's television and film productions. Beginning in the first quarter of 2020 with the acquisition of eOne, the Company funded certain of its television and film productions using production financing facilities. Production financing facilities are secured by the assets and future revenues of the individual production subsidiaries, typically have maturities of less than two years while the titles are in production, and are repaid once the production is delivered and all tax credits, broadcaster pre-sales and international sales have been received. In connection with the production of a television or film program, the Company records initial cash outflows within cash flows from operating activities due to its investment in the production and concurrently records cash inflows within cash flows from financing activities from the production financing it normally obtains. Under these facilities, certain of the Company's cash is restricted while the financing is outstanding. At September 27, 2020, $71,194 of the Company's cash was restricted by such facilities.
Investment in Productions and Acquired Content Rights
The cost of investments in programming ("IIP") and investments in content rights ("IIC") for eOne's television and film libraries are recorded in the consolidated balance sheets at amounts considered recoverable against future revenues. These amounts are amortized to program cost amortization using a model that reflects the consumption of the asset as it is released through different exploitation windows (e.g., broadcast licenses, theatrical release and home entertainment) and the expected revenue earned in each of those stages of release over a period not exceeding 10 years. Amounts capitalized are reviewed regularly and any portion of the unamortized amount that appears not to be recoverable from future net revenues will be written off to program cost amortization during the period in which the loss becomes evident. Certain of these agreements require the Company to pay minimum guaranteed advances ("MGs") for participations and residuals. MGs are recognized in the consolidated balance sheets when a liability arises, usually on delivery of the television or film program to the Company. The current portion of MGs are recorded as Payables and Accrued Liabilities and the long-term portion are recorded as Other Liabilities.
These consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The Company filed with the SEC audited consolidated financial statements for the fiscal year ended December 29, 2019 in its Annual Report on Form 10-K ("2019 Form 10-K"), which includes all such information and disclosures and, accordingly, should be read in conjunction with the financial information included herein.
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
Recently Adopted Accounting Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-13 (ASU 2016-13) Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard update replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption was permitted. The Company adopted the standard in the first quarter of 2020 and the adoption of the standard did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13 (ASU 2018-13), Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, specifically related to disclosures surrounding Level 3 asset balances, fair value measurement methods, related gains and losses and fair value hierarchy transfers. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption was permitted. The Company adopted the standard in the first quarter of 2020 and the adoption of the standard did not have a material impact on its consolidated financial statements.
In March 2019, the FASB issued Accounting Standards Update No. 2019-02 (ASU 2019-02) Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials. The amendments in this update align cost capitalization of episodic television series production costs with that of film production cost capitalization. In addition, this update addresses impairment testing procedures with regard to film groups, when a film or license agreement is expected to be monetized with other films and/or license agreements. The intention of this update is to align accounting treatment with changes in production and distribution models within the entertainment industry and to provide increased transparency of information provided to users of financial statements about produced and licensed content. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption was permitted. The Company adopted the standard in the first quarter of 2020 and the adoption of the standard did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
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 standard relates to financial statement disclosure only and will not have an impact on the Company's consolidated statement of financial position, statements of operations and comprehensive earnings (loss) or statement of cash flows.
In March 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 is currently evaluating this option as it relates to its contracts that reference LIBOR, as well as the impact of the standard to the Company's consolidated financial statements.
(2) Revenue Recognition
Revenue Recognition
Revenue is recognized when control of the promised goods or content is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or content. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
Contract Assets and Liabilities
Within our Entertainment, Licensing and Digital segment and our eOne segment the Company may receive royalty payments from licensees in advance of the licensees’ subsequent sales to their customers, or in advance of the Company’s performance obligation being satisfied. In addition, the Company may receive payments from its digital gaming business in advance of the recognition of the revenues. The Company defers revenues on these advanced payments until its performance obligation is satisfied and records the aggregate deferred revenues as contract liabilities. The current portion of contract liabilities were recorded within Accrued Liabilities and the long-term portion were recorded as Other Non-current Liabilities in the Company’s consolidated balance sheets. The Company records contract assets in the case of minimum guarantees that are being recognized ratably over the term of the respective license periods which varies based on sales over and above the contracts’ minimum guarantee. The current portion of contract assets were recorded in Prepaid Expenses and Other Current Assets, respectively, and the long-term portion were recorded as Other Long-Term Assets.
At September 27, 2020 and September 29, 2019, the Company had the following contract assets and liabilities in its consolidated balance sheets:
| | | | | | | | | | | |
| September 27, 2020 | | September 29, 2019 |
Assets | | | |
Contract assets - current | $ | 271,786 | | | 32,199 | |
Contract assets - long term | 84,892 | | | 12,802 | |
Total | $ | 356,678 | | | 45,001 | |
| | | |
Liabilities | | | |
Contract liabilities - current | $ | 147,554 | | | 48,465 | |
Contract liabilities - long term | 17,872 | | | 8,423 | |
Total | $ | 165,426 | | | 56,888 | |
In connection with the Company’s acquisition of eOne, the Company acquired $283,329 of contract assets, of which $232,184 were recorded in Prepaid Expenses and Other Current Assets and $51,145 were recorded in Other Long-term Assets, within the Company’s consolidated balances sheets. In addition, the Company acquired deferred revenues from eOne in the amount of $152,266, of which $144,094 were recorded in Accrued Liabilities and $8,172 were recorded in Other Non-current Liabilities within the Company's consolidated balance sheets. For the nine months ended September 27, 2020, the Company recognized all revenues related to the acquired current contract liabilities.
Contract assets and liabilities attributable to eOne represent approximately 80% and 56% of total contract asset balances and total contract liability balances, respectively, as of September 27, 2020.
Disaggregation of revenues
The Company disaggregates its revenues from contracts with customers by segment: U.S. and Canada, International, Entertainment, Licensing and Digital, and eOne. The Company further disaggregates revenues within its International segment by major geographic region: Europe, Latin America, and Asia Pacific. Finally, the Company disaggregates its revenues by brand portfolio into five brand categories: Franchise brands, Partner brands, Hasbro gaming, Emerging brands, and TV/Film/Entertainment. We believe these collectively depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See Note 13 for further information.
(3) Business Combination
On December 30, 2019, the Company completed its acquisition of eOne, a global independent studio that specializes in the development, acquisition, production, financing, distribution and sales of entertainment content. eOne's principal brand, PEPPA PIG, which was launched in the United Kingdom in May 2004, entertains preschool children worldwide with much of its historical revenue generated through licensing and merchandising programs across multiple retail categories. eOne’s portfolio of preschool brands also includes PJ MASKS and RICKY ZOOM.
The addition of eOne accelerates the Company's brand blueprint strategy by expanding our brand portfolio with eOne's global preschool brands, adding proven TV and film expertise and executive leadership as well as by enhancing brand building capabilities and our storytelling capabilities to strengthen Hasbro brands.
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
The all-cash transaction was valued at approximately £2,900,000 based on the consideration of £5.60 per common share of eOne. Converted at the rate of $1.31 USD/GBP on December 30, 2019, the cash consideration for shares outstanding was approximately $3,658,000. The Company also redeemed eOne's outstanding senior secured notes and paid off the debt outstanding under eOne's revolving credit facility, which together represented approximately $831,000 of eOne's indebtedness. The total cash consideration transferred by the Company was approximately $4,635,000.
The total consideration transferred, in thousands of dollars except per share data, was as follows:
| | | | | |
Acquisition Consideration | |
eOne common shares outstanding as of December 30, 2019 | 498,040 | |
Cash consideration per share | $ | 7.35 | |
Total consideration for shares outstanding | 3,658,345 | |
Cash consideration for employee share based payment awards outstanding | 145,566 | |
Cash consideration for extinguishment of debt | 831,130 | |
Total cash consideration | 4,635,041 | |
Less: Employee awards to be recorded as future stock compensation expense | 47,399 | |
Total consideration transferred | $ | 4,587,642 | |
The Company financed the acquisition with proceeds from the following debt and equity financings: (1) the issuance of senior unsecured notes in an aggregate principal amount of $2,375,000 in November 2019, (2) the issuance of 10,592 shares of common stock at a public offering price of $95.00 per share in November 2019 (resulting in net proceeds of $975,185) and (3) $1,000,000 in term loans provided by a term loan agreement, which were borrowed on the date of closing. See Note 7 for further discussion of the issuance of the senior unsecured notes and term loan agreement.
The acquisition was accounted for as a business combination under FASB Accounting Standards Codification Topic 805, Business Combinations (“Topic 805”). Pursuant to Topic 805, the Company allocated the eOne purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, December 30, 2019. The excess of the purchase price over those fair values was recorded to goodwill. The Company's evaluations of the facts and circumstances available as of December 30, 2019, to assign fair values to assets acquired and liabilities assumed, including income tax related amounts, are ongoing. As we complete further analysis of assets including program rights, investment in films and television content, intangible assets, as well as deferred revenue, noncontrolling interest, tax and certain other liabilities, additional information impacting the assets acquired, liabilities assumed and the related allocation thereof, may become available. A change in information related to the net assets acquired may change the amount of the purchase price assigned to goodwill, and as a result, the preliminary fair values set forth below are subject to adjustment as additional information is obtained and valuations are completed. Provisional adjustments, if any, will be recognized during the reporting period in which the adjustments are determined. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
During the first nine months of 2020 the Company made adjustments to the preliminary allocation based on more detailed information obtained about the specific assets acquired and liabilities assumed. The adjustments made to the fair value of acquired investments in productions and content and intangible assets did not result in material changes to the amortization expense recorded in the previous quarter.
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
The following table summarizes our preliminary allocation of the December 30, 2019 eOne purchase price (in thousands of dollars), as adjusted during the first nine months of 2020:
| | | | | | | | | | | | | | | | | |
| Initial Estimated Fair Value | | Measurement Period Adjustments | | Updated Estimated Fair Value |
Cash, cash equivalents and restricted cash | $ | 183,713 | | | $ | — | | | $ | 183,713 | |
Accounts receivable, net | 259,061 | | | 36,093 | | | 295,154 | |
Inventories | 7,029 | | | — | | | 7,029 | |
Other current assets | 286,270 | | | (570) | | | 285,700 | |
Property, plant and equipment (including right of use assets) | 90,339 | | | 35,333 | | | 125,672 | |
Intangible assets | 1,055,249 | | | 751 | | | 1,056,000 | |
Content assets - IIC and IIP | 751,524 | | | (140,234) | | | 611,290 | |
Other assets | 183,209 | | | (93,490) | | | 89,719 | |
Short-term borrowings | (11,011) | | | — | | | (11,011) | |
Current portion of long-term debt | (60,533) | | | (55,267) | | | (115,800) | |
Accounts payable, and accrued liabilities | (761,086) | | | 58,344 | | | (702,742) | |
Long-term debt | (149,118) | | | 55,267 | | | (93,851) | |
Other liabilities | (262,644) | | | 34,878 | | | (227,766) | |
Noncontrolling interests | (63,541) | | | (1,261) | | | (64,802) | |
Estimated fair value of net assets acquired | 1,508,461 | | | (70,156) | | | 1,438,305 | |
Goodwill | 3,079,181 | | | 70,156 | | | 3,149,337 | |
Total purchase price | $ | 4,587,642 | | | $ | — | | | $ | 4,587,642 | |
Intangible assets consist of intellectual property associated with established brands, eOne artist relationships, eOne music catalogs and trademarks and tradenames with estimated useful lives ranging from 7 to 15 years, determined based on when the related cash flows are expected to be realized. The fair value of the intangible assets acquired was determined based on the estimated future cash flows to be generated from the acquired assets, considering assumptions related to contract renewal rates and estimated brand franchise revenue growth.
Investments in productions and content, or IIP and IIC, includes the fair value of completed films and television programs which have been produced by eOne or for which eOne has acquired distribution rights, as well as the fair value of films and television programs in production, pre-production and development. For films and television programs, fair values were estimated based on forecasted cash flows, discounted to present value. For titles less than 3 years old and titles in development, the content assets will be amortized using the individual film forecast method, wherein the amortization will phase to the revenues incurred. For titles over 3 years old, the estimated useful life is 10 years, and will be amortized straight-line over that period.
Deferred tax liabilities within other liabilities were adjusted to record the deferred tax impact of purchase price accounting adjustments, primarily related to intangible assets.
Other fair value adjustments were made to accounts receivable, net and other assets to reflect the fair value of certain assets upon acquisition.
The former eOne senior notes were adjusted to fair value prior to extinguishment using quoted market values, and the fair value of the outstanding amounts under eOne's credit facility were estimated to approximate their carrying values.
Goodwill of $3,149,337 represents the excess of the purchase price over the fair value of the underlying tangible and identifiable intangible assets acquired and liabilities assumed. The acquisition goodwill represents the value placed on the combined company’s brand building capabilities, our storytelling capabilities and franchise economics in TV, film and other mediums to strengthen Hasbro brands. In addition, the acquisition goodwill depicts added benefits of long-term profitable growth through in-sourcing toy and game production for the acquired preschool brands and cost-synergies, as well as future revenue growth opportunities. The goodwill recorded as part of this acquisition is included in the newly created eOne segment. The goodwill associated with the acquisition will not be amortized for financial reporting purposes and will not be deductible for federal tax purposes.
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
Changes in the carrying amount of goodwill, by operating segment, for the quarter and nine months ended September 27, 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 27, 2020 |
(in thousands of dollars) | U.S and Canada | | International | | Entertainment, Licensing and Digital | | eOne | | Total |
| | | | | | | | | |
Balance at December 29, 2019 | $ | 291,577 | | | 170,218 | | | 32,789 | | | — | | | $ | 494,584 | |
Acquired during the period | — | | | — | | | — | | | 3,079,181 | | | 3,079,181 | |
Measurement period adjustments | — | | | — | | | — | | | 70,156 | | | 70,156 | |
Foreign exchange translation | — | | | 188 | | | 9 | | | — | | | 197 | |
Balance at September 27, 2020 | $ | 291,577 | | | 170,406 | | | 32,798 | | | |