HASBRO, INC. 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, including the negative impact on supply of products and production of entertainment content, demand for our products and entertainment, our liquidity and our community; the expected adequacy of supply and operation of our manufacturing facilities; the ability to achieve our financial and business goals and objectives; the Company's product and entertainment plans; anticipated product and entertainment performance; anticipated expenses; and working capital and liquidity. 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 endedDecember 29, 2019 ("2019 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. Unless otherwise specifically indicated, all dollar or share amounts herein are expressed in millions of dollars or shares, except for per share amounts. EXECUTIVE SUMMARY Completion of Acquisition OnDecember 30, 2019 ,Hasbro, Inc. ("Hasbro" or the "Company") completed the acquisition ofEntertainment One Ltd. ("eOne") for an aggregate purchase price of approximately$4.6 billion , comprised of$3.8 billion of cash consideration for shares outstanding and$0.8 billion related to the redemption of eOne's outstanding senior secured notes and the payoff of eOne's revolving credit facility. We financed the acquisition through a combination of debt and equity financings, including (i) the issuance of senior unsecured notes in an aggregate principal amount of$2.4 billion , (ii) the issuance of 10,592,106 shares of common stock at a public offering price of$95.00 per share and (iii)$1.0 billion in term loans. 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. 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. For more information on the eOne Acquisition see Note 3, "Business Combination" to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. For purposes of identifying Hasbro activities that existed before the eOne Acquisition, in some instances, Hasbro may be referred to herein as legacy Hasbro. For purposes of identifying certain activities derived from eOne's historical business, in some instances these activities may be referred to herein as legacy eOne.Hasbro, Inc. 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, live action, music, and virtual reality experiences, Hasbro connects to global audiences by bringing to life great innovations, stories and brands and developing and delivering the very best content across established and inventive platforms. Hasbro's iconic brands include MAGIC: THE GATHERING, MY LITTLE PONY, NERF, TRANSFORMERS, PLAY-DOH, MONOPOLY, BABY ALIVE, POWER RANGERS, and through the acquisition of eOne, Hasbro expanded its portfolio with popular pre-school brands including PEPPA PIG, PJ MASKS and RICKY ZOOM. In addition, Hasbro leverages its portfolio of premier partner brands. Through our global entertainment studio, we are building our brands worldwide through great storytelling and content on all screens, as well as offering the production and distribution of a broad spectrum of live action scripted and unscripted entertainment content that is not based on our children's and family entertainment brands. Hasbro is committed to making the world a better place for children and their families through corporate social responsibility and philanthropy. Hasbro's strategic plan is centered around its brand blueprint. Under the brand blueprint strategy, Hasbro re-imagines, re-invents and re-ignites its owned and controlled brands and imagines, invents and ignites new brands, through product innovation, immersive entertainment offerings, including television, film and music, digital gaming and a broad range of consumer products. As the global consumer landscape, shopping behaviors and the retail and entertainment environments continue to evolve, the Company continues to transform and reimagine its business strategy. This transformation includes reexamining the ways Hasbro organizes across its brand blueprint and re-shaping the Company to become a better equipped and adaptive, digitally-driven organization, including the development of an omni-channel retail presence and adding new capabilities through the on-boarding of new skill sets and talent. More recently, to enhance its long-term competitive position the Company has identified and pursued key growth opportunities through strategic acquisitions, to excel in today's converged retail environment as a leading global play and entertainment company across all platforms. -------------------------------------------------------------------------------- Hasbro generates revenue and earns cash by developing, marketing and selling products based on global brands in a broad variety of consumer goods categories and distribution of television programming and other content based on the Company's properties, as well as through the out-licensing of rights for third parties to use its properties in connection with products, including digital media and games and other consumer products. Hasbro also leverages its competencies to develop and market products based on well-known licensed brands including, but not limited to, BEYBLADE, DISNEY PRINCESS and DISNEY FROZEN,DISNEY'S DESCENDANTS, MARVEL, SESAME STREET, STAR WARS, and DREAMWORKS' TROLLS. MARVEL, STAR WARS, DISNEY PRINCESS, DISNEY FROZEN andDISNEY'S DESCENDANTS are owned by The Walt Disney Company. The eOne business also generates revenue and earnings from the production and distribution of a broad spectrum of television and film entertainment, as well as music production and distribution, that is not based on our children's and family entertainment brands. The Company's business is separated into four principal business segments:U.S. andCanada , International, Entertainment, Licensing and Digital and, following the eOne Acquisition, the eOne operating segment was added to the Company's reporting structure. TheU.S. andCanada segment markets and sells both toy and game products primarily inthe United States andCanada . The International segment consists of the Company's European,Asia Pacific and Latin and South American toy and game marketing and sales operations. The Company's Entertainment, Licensing and Digital segment includes the Company's Wizards of the Coast digital gaming business, consumer products licensing, owned and licensed digital gaming, movie and television entertainment operations. The eOne segment engages in the development, acquisition, production, financing, distribution and sales of entertainment content and is comprised of all legacy eOne operations. These diversified offerings span across film, television and music production and sales, family programming, merchandising and licensing, and digital content. Over time, the Company plans to transition towards reflecting all of its entertainment operations in 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. Coronavirus Outbreak In the first quarter of 2020, the outbreak of the coronavirus disease (COVID-19) was recognized as a pandemic by theWorld Health Organization . The global outbreak of COVID-19 currently being experienced in markets in which Hasbro, our employees, consumers, customers, partners, licensees, suppliers and manufacturers operate, could have a significant negative impact on our revenues, profitability and business. As a result of the preventative actions taken worldwide, such as restrictions on travel and business operations, temporary closures of non-essential businesses, shelter-in-place and stay-at-home orders and other voluntary and government imposed restrictions, the outbreak has had a negative impact on economic conditions in all of our markets. These preventative actions although necessary, have led to market uncertainty and some economic disruption. We have experienced, and expect to continue to experience, disruptions in supply of products and production of entertainment content, negative impact on sales due to changes in consumer purchasing behavior and availability of product to consumers, including due to retail store closures and limitations on the capacity of e-comm channels to supply additional products; delays or postponements of entertainment productions and releases of entertainment content both internally and by our partners; and challenges of working remotely. While we have developed and continue to develop plans to help mitigate the negative impact of the coronavirus to our business, the efforts will not prevent our business from being adversely affected, and the longer the outbreak continues the more negative the impact on our business, revenues and earnings, and the more limited our ability will be to try and make up for delayed or lost product development, production and sales in future periods. During the first quarter of 2020, the Company's supply chain experienced lower than planned production levels in certain of its third-party manufacturing facilities located inChina , due to the impact of COVID-19. After operating at lower than planned production levels during the first quarter due to COVID-19, these facilities are currently operating at planned capacity for this time of year. Outside ofChina , manufacturing operated at varying levels depending on local government action and overall safety considerations. In response, the Company utilized its global supply chain and existing inventory to work to meet demand and the Company currently expects to make up for any lost production in the second and third quarters, to be well positioned for holiday demand later in the year. However, if significant manufacturing facilities remained closed or limited in operation for longer than expected, or are impacted by a resurgence in COVID-19, we may not be able to make up for the disruption in supply in the nearer term. During the first quarter, as more of our consumers remained at home, we creatively found ways to accelerate our business online, expand omni-channel and skip the shopping cart to get our products into cars and homes. For example, we launched Bring Home the Fun, a global initiative created to further the Company's purpose to make the world a better place for children and their families. The initiative provides parents and caregivers resources to help keep kids occupied and engaged during -------------------------------------------------------------------------------- extended time at home and indoors. Another example is the initiative our Wizards of the Coast team undertook to enable players to play MAGIC: THE GATHERING games while in person play events are not happening. Markets with more developed e-comm and omni-channel business operations performed relatively well during the quarter whereas markets that rely more heavily on physical stores for reaching consumers are being negatively impacted to a greater degree. Our top three customers during the first quarter were Walmart, Target and Amazon. The negative impact to future periods from store closures is unknown: however, we expect a greater impact to the second quarter of 2020. As of the close of the first quarter, we remain focused on managing credit risk and are taking steps to manage expenses, bad debt exposures and preserve cash in the near term. Beginning late in the first quarter, production and delivery of television and film projects for Hasbro's eOne TV and Film business were delayed, negatively impacting the level and timing of revenues. The eOne team continues to develop new projects and work on animation production, which can be done remotely. The team now expects to deliver finished episodes and film projects later in the year than planned. Additionally, several film release dates have moved to later in 2020, into 2021 and in some instances are going straight to video on demand/electronic sell-through windows impacting the timing and level of anticipated revenues. As more people are home, content viewership is high, which we believe bodes well for long-term brand engagement. The health and safety of Hasbro employees, stakeholders and communities is a top priority. InChina , Hasbro's offices reopened in late March following shutdowns earlier in the first quarter. Hasbro's global offices, outside ofChina , were closed in March due to the COVID-19 outbreak and remain closed today. Hasbro employees have been working virtually since the closure and the timing of re-opening offices will be based on local governmental, health and safety guidelines. The coronavirus outbreak continues to be fluid and uncertain, making it difficult to forecast the final impact it could have on our future operations. Please see Part II, Item 1A, Risk Factors, for further information. First quarter 2020 highlights: • First quarter net revenues of$1,105.6 million increased 51% compared to
acquisition of eOne. The increase in net revenues included an unfavorable
foreign currency translation of
• Net revenues in theU.S. andCanada segment increased 20% to$428.6 million ; International segment net revenues decreased 11% to$250.4 million , including an unfavorable foreign currency translation impact of$9.3 million ; Entertainment, Licensing and Digital segment net revenues decreased 9% to$84.0 million ; and eOne segment net revenues were$342.5 million . • Net revenues fromHasbro Gaming increased 30%; Partner Brands increased 6%; Franchise Brands increased 1%; Emerging Brands net revenues increased 58% and include the addition of preschool brands, PEPPA PIG, PJ MASKS and RICKY ZOOM, acquired as part of the eOne Acquisition; and eOneTV Film and Entertainment portfolio net revenues were$292.5 and represented 26% of total net revenues in the first quarter of 2020.
• Operating losses were
quarter of 2020 compared to operating profit of $36.1 million , or 4.9% of
net revenue, in the first quarter of 2019.
• First quarter 2020 operating losses were negatively impacted by
acquisition and related expenses of $149.8 million ($127.5 million
after-tax) and $25.0 million ($19.9 million after-tax) of eOne
acquired intangible asset amortization.
• The net loss attributable to Hasbro, Inc. of $69.6 million , or $0.51 per
diluted share, in the first quarter of 2020 compared to net earnings of
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. -------------------------------------------------------------------------------- Amounts Returned to Shareholders The Company has a long history of returning cash to its shareholders through quarterly dividends and share repurchases. Hasbro maintained its quarterly dividend rate of$0.68 per share for the dividend scheduled to be paid inMay 2020 . In addition to the dividend, the Company historically has returned cash through its share repurchase program. As part of this initiative, since 2005, the Company's Board of Directors (the "Board") adopted nine share repurchase authorizations with a cumulative authorized repurchase amount of$4,325.0 million . The ninth authorization was approved inMay 2018 for$500 million . As ofMarch 29, 2020 , the Company had$366.6 million remaining under these authorizations. Share repurchases are subject to market conditions, the availability of funds and other uses of funds. As a result of the financing activities related to the eOne Acquisition, the Company has suspended its current share repurchase program while it prioritizes reducing its long-term debt and achieving its gross debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") targets. SUMMARY OF FINANCIAL PERFORMANCE A summary of the results of operations is illustrated below for the quarters endedMarch 29, 2020 andMarch 31, 2019 . Quarter Ended March 29, 2020 March 31, 2019 Net revenues$ 1,105.6 $ 732.5 Operating profit (loss) (23.3 ) 36.1 Earnings (loss) before income taxes (71.9 ) 29.6 Income tax expense (benefit) (4.1 ) 2.9 Net earnings (loss) (67.8 ) 26.7 Net earnings attributable to noncontrolling interests 1.8 - Net earnings (loss) attributable to Hasbro, Inc. (69.6 ) 26.7 Diluted earnings (loss) per share (0.51 ) 0.21 RESULTS OF OPERATIONS - CONSOLIDATED The quarters endedMarch 29, 2020 andMarch 31, 2019 were each 13-week periods. Consolidated net revenues for the first quarter of 2020 increased$373.1 million , or 51% compared to the first quarter of 2019 and reflect the inclusion of eOne revenues which represent 31.0% of consolidated net revenues for quarter. First quarter 2020 net revenues include an$11.7 million unfavorable impact from foreign currency translation as a result of weakening currencies compared to theU.S. dollar, primarily in the European, Latin American andAsia Pacific markets in 2020 compared to 2019. Operating losses for the first quarter of 2020 were$23.3 million , or 2.1% of net revenues, compared to operating profit of$36.1 million , or 4.9% of net revenues, for the first quarter of 2019. Operating losses during the first quarter of 2020 reflect the consolidation of eOne results of operations and were negatively impacted by acquisition and related costs of$149.8 million ($127.5 million after-tax) and$25.0 million ($19.9 million after-tax) of expenses related to eOne acquired intangible asset amortization. Net losses, including the impact of noncontrolling interests were$67.8 million for the first quarter of 2020 compared to net earnings of$26.7 million for the first quarter of 2019. The diluted loss per share attributable toHasbro, Inc. for the first quarter of 2020 was$0.51 , down from$0.21 in the first quarter of 2019 and reflects the negative impact of acquisition related costs and eOne acquired intangible asset amortization of$0.93 per diluted share and$0.14 per diluted share, respectively. As a result of the 2020 acquisition of eOne, the Company's brand architecture reflects the addition of the TV, Film and Entertainment brand portfolio which consists of legacy eOne film and TV revenues. Revenues related to eOne brands, including PEPPA PIG, PJ MASKS and RICKY ZOOM, are reported in the Emerging Brands portfolio. --------------------------------------------------------------------------------
The following table presents net revenues by brand and entertainment portfolio
for the quarters ended
Quarter Ended
%
March 29, 2020 March 31, 2019 Change
Franchise Brands $ 396.5 393.6 1 %
Partner Brands 182.3 172.0 6 %
Hasbro Gaming 140.1 107.6 30 %
Emerging Brands 94.1 59.4 58 %
TV, Film and Entertainment 292.5 - 100 %
Total $ 1,105.6 732.5 51 %
FRANCHISE BRANDS: Net revenues in the Franchise Brands portfolio increased 1% in
the first quarter of 2020 compared to the first quarter of 2019. Higher net
revenues from MAGIC: THE GATHERING and MONOPOLY products were offset by lower
net revenues from PLAY-DOH, TRANSFORMERS, MY LITTLE PONY and to a lesser extent,
NERF and Baby Alive products during the first quarter of 2020.
PARTNER BRANDS: Net revenues from the Partner Brands portfolio increased 6% in
the first quarter of 2020 compared to the first quarter of 2019. Partner Brands
net revenues are reliant on related entertainment, including television and
movie releases. During the first quarter of 2020, the Company's Partner Brands
portfolio was supported by fourth quarter 2019 theatrical releases DISNEY'S
FROZEN 2 in November and STAR WARS: THE RISE OF SKYWALKER in December. In
addition to these 2019 films, the Company's 2020 Partner Brand entertainment
releases include TROLLS WORLD TOUR, which was released in the premium
video-on-demand format in April, as a sequel to the 2016 film, TROLLS from
DREAMWORKS and BLACK WIDOW from DISNEY'S MARVEL franchise expected in theaters
in November, as well as continuous entertainment provided by the subscription
video on-demand streaming service, Disney+.
Net revenue increases from DISNEY FROZEN and DREAMWORKS' TROLLS products as well
as increases from STAR WARS products, were partially offset by net revenue
declines from MARVEL and DISNEY PRINCESS products during the first quarter of
2020.
HASBRO GAMING : Net revenues in the Hasbro Gaming portfolio increased 30% in the
first quarter of 2020 compared to the first quarter of 2019. Higher net revenues
from DUNGEONS & DRAGONS as well as classic games including, THE GAME OF LIFE,
JENGA and OPERATION were partially offset by lower net revenues from PIE FACE in
the first quarter of 2020.
Net revenues for Hasbro's total gaming category, including the Hasbro Gaming
portfolio as reported above and all other gaming revenue, most notably MAGIC:
THE GATHERING and MONOPOLY, which are included in the Franchise Brands
portfolio, totaled $340.5 million for the first quarter of 2020, an increase of
40%, as compared to $243.4 million in the first quarter of 2019.
EMERGING BRANDS: Net revenues from the Emerging Brands portfolio increased 58%
during the first quarter of 2020 compared to the first quarter of 2019.
Contributing to the net revenue increases were the inclusion of brands acquired
through the eOne Acquisition including PEPPA PIG and PJ MASKS, as well as net
revenue increases from POWER RANGERS products. These increases were partially
offset by declines in LITTLEST PET SHOP and LOST KITTIES products during the
first quarter of 2020.
TV, FILM and ENTERTAINMENT: The TV, Film and Entertainment portfolio includes
eOne revenues not allocated to the Emerging Brands portfolio. Operations
contributing to the TV, Film and Entertainment portfolio focus on high quality,
premium film, television and music production and content rights around the
world and selling this content globally.
During the first quarter of 2020, net revenues from the TV, Film and
Entertainment portfolio were approximately 26% of total Company net revenues and
included theatrical contributions from the Amblin Partners film 1917, released
in December 2019 and broadcast and licensing net revenues from key scripted
deliveries including season two of THE ROOKIE, a television drama series
currently airing on ABC . In addition to these offerings, net revenues benefited
from the Company's lineup of unscripted television programming.
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SEGMENT RESULTS
The Company's net revenues and operating profits are primarily derived from its
four principal business segments: the U.S. and Canada segment, the International
segment, the Entertainment, Licensing and Digital segment and as a result of the
2020 eOne Acquisition, the eOne operating segment. The eOne segment was added to
the Company's reporting structure in the first quarter of 2020 and is comprised
of the legacy eOne business. The results of these operations are discussed in
detail below.
The following table presents net external revenues and operating profit data for
the Company's principal segments for the quarters ended March 29, 2020 and
March 31, 2019 :
Quarter Ended
%
March 29, 2020 March 31, 2019 Change
Net Revenues
U.S. and Canada segment $ 428.6 $ 357.9 20 %
International segment 250.4 282.6 -11 %
Entertainment, Licensing and Digital segment 84.0 92.0 -9 %
eOne segment 342.5 - 100 %
Operating Profit
U.S. and Canada segment $ 71.8 $ 13.5 >100%
International segment (26.7 ) (30.4 ) 12 %
Entertainment, Licensing and Digital segment 5.2 30.0 -83 %
eOne segment (33.1 ) - -100 %
U.S. and Canada Segment
The U.S. and Canada segment net revenues for the first quarter of 2020 increased
20% compared to the first quarter of 2019. Net revenue increases from Franchise
Brands, Hasbro Gaming and to a lesser extent the Company's Partner Brands
portfolio, were partially offset by lower net revenues from the Emerging Brands
portfolio during the first quarter of 2020.
In the Franchise Brands portfolio, higher net revenues from MAGIC: THE GATHERING
and MONOPOLY products were partially offset by net revenue decreases from
PLAY-DOH, TRANSFORMERS and MY LITTLE PONY products. In the Partner Brands
portfolio, higher net revenues from DISNEY FROZEN, DREAMWORKS' TROLLS and
BEYBLADE products were partially offset by net revenue decreases from MARVEL and
DISNEY PRINCESS products during the first quarter of 2020. In the Hasbro Gaming
portfolio, higher net revenues were delivered across many brands in the
portfolio, most notably from DUNGEONS & DRAGONS, THE GAME OF LIFE, OPERATION and
JENGA products. In the Emerging Brands portfolio, lower net revenues from
FURREAL FRIENDS and PLAYSKOOL products, were partially offset by higher net
revenues from POWER RANGERS products during the first quarter of 2020.
U.S. and Canada segment operating profit for the first quarter of 2020 was $71.8
million or 16.7% of segment net revenues, compared to segment operating profit
of $13.5 million or 3.8% of segment net revenues, for the first quarter of
2019. The operating profit increase in the first quarter of 2020 was driven by
higher revenues and lower administrative and warehousing expenses offset by
higher royalty expenses associated with increases in Partner Brand sales and
higher freight costs.
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International Segment
International segment net revenues declined 11% in the first quarter of 2020 to
$250.4 million from $282.6 million in the first quarter of 2019. Absent the
impact of foreign exchange, International segment net revenues decreased $22.9
million or 8% during the first quarter of 2020. The following table presents net
revenues by geographic region for the Company's International segment for the
quarters ended March 29, 2020 and March 31, 2019 .
Quarter Ended
%
March 29, 2020 March 31, 2019 Change
Europe $ 162.2 153.4 6 %
Latin America 33.9 62.8 -46 %
Asia Pacific 54.2 66.5 -18 %
Net revenues $ 250.4 282.6 -11 %
The decline in International segment net revenues during the first quarter of
2020 was partially driven by unfavorable foreign currency translation of $9.3
million . Unfavorable foreign currency translation impacted the Company's major
geographic regions as follows: Europe - $3.8 million , Latin America - $3.8
million and Asia Pacific - $1.7 million . Absent the impact of foreign exchange,
net revenues for the first quarter of 2020 increased 8% in Europe and decreased
40% and 16% in the Company's Latin American and Asia Pacific regions,
respectively. International segment net revenues from Partner Brands grew while
net revenues from Franchise Brands, Hasbro Gaming and Emerging Brands declined
during the first quarter of 2020 compared to the first quarter of 2019. In the
Franchise Brands portfolio, lower net revenues from TRANSFORMERS, PLAY-DOH, MY
LITTLE PONY and NERF products, were partially offset by higher net revenues from
MAGIC: THE GATHERING products. In the Partner Brands portfolio, net revenue
increases from DISNEY FROZEN and DREAMWORKS' TROLLS products were partially
offset by net revenue declines from MARVEL and BEY BLADE products. In the Hasbro
Gaming portfolio, higher net revenues from DUNGEONS & DRAGONS products and
certain other Hasbro Gaming products were more than offset by lower net revenues
from PIE FACE products. In the Emerging Brands portfolio, lower net revenues
from LITTLEST PET SHOP and LOST KITTIES products were partially offset by higher
net revenues from POWER RANGERS and FURREAL FRIENDS products in the first
quarter of 2020.
International segment operating losses were $26.7 million , or 10.7% of segment
net revenues for the first quarter of 2020, compared to operating losses of
$30.4 million , or 10.8% of segment net revenues, for the first quarter of 2019.
The decrease in International segment operating losses during the first quarter
of 2020 was the result of lower cost of sales due to improved inventory
management, lower advertising and marketing costs as well as lower
administrative costs. These decreases were partially offset by increased royalty
expenses associated with higher sales of partner brand products.
Entertainment, Licensing and Digital Segment
Entertainment, Licensing and Digital segment net revenues declined 9% to $84.0
million for the first quarter of 2020, compared to $92.0 million for the first
quarter of 2019. Net revenue declines were primarily driven by lower digital
gaming revenues during the first quarter of 2020 due to the timing of game
releases combined with the closure of the Backflip business in the fourth
quarter of 2019.
Entertainment, Licensing and Digital segment operating profit decreased to $5.2
million , or 6.2% of segment net revenues for the first quarter of 2020, from
$30.0 million , or 32.6% of segment net revenues for the first quarter of 2019.
The decrease in Entertainment, Licensing and Digital segment operating profit
was primarily driven by asset impairment charges of $20.8 million in production
assets driven by the change in entertainment strategy as a result of the eOne
Acquisition.
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eOne Segment
During the first quarter of 2020, eOne segment net revenues were $342.5 million .
The following table presents eOne segment net revenues by channel for the
quarter ended March 29, 2020 .
Three Months Ended
March 29, 2020
eOne Segment Net Revenues
Film and TV $ 259.5
Family Brands 50.8
Music and Other 32.2
Segment Total $ 342.5
In the first quarter of 2020, drivers of the eOne segment net revenues include;
(i) broadcast and licensing revenues associated with internationally recognized
brands, PEPPA PIG and PJ MASKS, (ii) theatrical contributions from the Amblin
Partners film 1917, released in December 2019 , (iii) broadcast and licensing
contributions from key scripted deliveries including season two of THE ROOKIE, a
television drama series currently airing on ABC as well as the Company's strong
lineup of unscripted television programming. In addition to these entertainment
driven revenues, the Company's music business benefited from both strong
streaming and publishing revenues during the first quarter of 2020.
eOne segment operating losses were $33.1 million , or 9.7% of segment net
revenues for the first quarter of 2020. This loss was driven by $77.7 million of
acquisition and integration costs, including $47.4 million of expense associated
with the acceleration of eOne stock-based compensation and $24.5 million of
advisor fees settled at the closing of the acquisition. Also contributing to the
loss is $25.0 million of incremental intangible amortization costs related to
the intangible assets acquired in the eOne Acquisition.
Global Operations
The Global Operations segment operating profit of $4.6 million for the first
quarter of 2020 compared to an operating profit of $1.3 million for the first
quarter of 2019.
Corporate and Eliminations
Operating losses in Corporate and Eliminations totaled $45.1 million for the
first quarter of 2020 compared to operating profit of $21.7 million for the
first quarter of 2019. Operating losses in 2020 were driven primarily by charges
related to the eOne Acquisition; including acquisition and integration costs of
$17.1 million and restructuring and related costs of $34.1 million , comprised of
severance and retention costs, as well as impairment charges for certain
definite-lived intangible assets driven by the change in strategy for the
combined company's entertainment assets.
OPERATING COSTS AND EXPENSES
Overall, the Company's costs and expenses in the first quarter of 2020 increased
compared to the first quarter of 2019 driven by the inclusion of eOne's
operations in the Company's consolidated financial statements. Costs and
expenses stated as percentages of net revenues, are illustrated below for the
quarters ended March 29, 2020 and March 31, 2019 .
Quarter Ended
March 29, 2020 March 31, 2019
Cost of sales 23.8 % 35.5 %
Program cost amortization 12.0 0.9
Royalties 10.2 8.2
Product development 4.9 7.7
Advertising 9.2 10.5
Amortization of intangibles 3.3 1.6
Selling, distribution and administration 25.2 30.8
Acquisition and related costs 13.5 0.0
-------------------------------------------------------------------------------- Cost of sales for the first quarter of 2020 was$262.7 million , or 23.8% of net revenues, compared to$260.0 million , or 35.5% of net revenues, for the first quarter of 2019. The decrease as a percentage of net revenues is primarily related to higher revenues as a result of the acquisition of eOne, which experiences lower costs of sales sold as a percentage of net sales. To a lesser extent, the cost of sales decrease as a percent of net revenues was driven by favorable product mix from strong MAGIC:THE GATHERING revenues combined with higher Partner Brand products, partially offset by higher costs to bring inventory into theU.S. during the first quarter of 2020 as compared to 2019. Program cost amortization increased to$132.1 million or 12.0% of net revenues, for the first quarter of 2020 from$6.6 million , or 0.9% of net revenues, for the first quarter of 2019. The increase in this expense both in dollars and as a percentage of net revenues is primarily related to eOne, which experiences higher program cost amortization as a percentage of net sales. Program costs are capitalized as incurred and amortized using the individual-film-forecast method which matches costs to the related recognized revenue. Royalty expense for the first quarter of 2020 increased to$112.8 million , or 10.2% of net revenues, compared to$59.9 million , or 8.2% of net revenues, for the first quarter of 2019. The increase in royalty expense in dollars and as a percent of net revenues was driven by eOne combined with higher sales of Partner Brand products in the first quarter of 2020 as compared to the first quarter of 2019. Product development expense for the first quarter of 2020 was$53.8 million , or 4.9% of net revenues, compared to$56.3 million , or 7.7% of net revenues, for the first quarter of 2019. The decrease as a percent of net revenues was primarily related to eOne, which experiences lower product development expense as a percentage of net sales combined with lower spending as a result of global cost savings initiatives partially offset by increased investments in digital gaming. Advertising expense for the first quarter of 2020 was$101.6 million , or 9.2% of net revenues, compared to$76.6 million , or 10.5% of net revenues, for the first quarter of 2019. The advertising expense increase in dollars was driven by eOne advertising expenses and higher costs in support of the first quarter MAGIC: THE GATHERING tabletop set release, partially offset by reduced advertising levels across the regions reflecting the current environment due to COVID-19 impacts. Amortization of intangible assets increased to$36.8 million , or 3.3% of net revenues for the first quarter of 2020, compared to$11.8 million , or 1.6% of net revenues, for the first quarter of 2019. The increase in dollars and as a percent of net revenues is primarily related to the acquisition of eOne, which contributed$25.0 million to amortization. Excluding the intangible asset amortization associated with eOne, amortization of intangible assets was consistent with 2019. For the first quarter of 2020, the Company's selling, distribution and administration expenses increased to$279.1 million , or 25.2% of net revenues, from$225.3 million , or 30.8% of net revenues, for the first quarter of 2019. The increase in selling, distribution and administration expenses in dollars was driven primarily by the inclusion and consolidation of eOne's operations during the first quarter. In addition, the increase in selling, distribution and administration expenses reflects higher shipping costs in the first quarter of 2020 due to an increase in domestic sales ofHasbro Gaming products and higher stock compensation expense. These increases were partially offset by lower warehousing expenses and decreased general and administrative spending due to the Company's ongoing cost-reduction efforts in the first quarter of 2020 as compared to the first quarter of 2019. During the three months endedMarch 29, 2020 , the Company incurred$149.8 million of acquisition and related costs in connection with the eOne Acquisition. These expenses comprised of$95.7 million of acquisition and integration costs, primarily related to$47.4 million of expense associated with the acceleration of eOne stock-based compensation and$38.2 million of advisor fees settled at the closing of the acquisition. Also included in the acquisition and related costs were$54.1 million of restructuring and related costs including severance and retention costs of$13.2 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 first quarter of 2020 totaled$54.7 million compared to$22.3 million in the first quarter of 2019, respectively. DuringNovember 2019 , the Company issued an aggregate of$2.4 billion of senior unsecured debt securities in connection with the financing of the acquisition of eOne. The increase in interest expense for the first quarter of 2020 reflects interest related to these notes and other borrowings associated with the eOne business, partially offset by lower average short-term borrowings during the quarter. Interest income was$4.7 million for the first quarter of 2020, compared to$7.7 million in the first quarter of 2019. Lower average interest rates in 2020 compared to 2019 contributed to the decrease. -------------------------------------------------------------------------------- Other income, net was$1.5 million for the first quarter of 2020 compared to other income, net of$8.1 million in the first quarter of 2019. The decrease in other income, net in the first quarter was driven by foreign currency losses in 2020 compared to foreign currency gains in 2019, partially offset by lower pension expense as a result of the termination of the Company'sU.S. pension plans in the second quarter of 2019. INCOME TAXES Income tax benefit totaled$4.1 million on pre-tax loss of$71.9 million in the first quarter of 2020 compared to income tax expense of$2.9 million on pre-tax earnings of$29.6 million in the first quarter of 2019. Both periods were impacted by discrete tax events including the accrual of potential interest and penalties on uncertain tax positions. During the first quarter of 2020, favorable discrete tax adjustments were a net benefit of$20.1 million compared to a net benefit of$2.6 million in the first quarter of 2019. The favorable discrete tax adjustments for the first quarter of 2020 primarily relate to the costs related to the acquisition of eOne. The favorable discrete tax adjustments for the first quarter of 2019 primarily related to expiration of statutes of limitations for uncertain tax positions. Absent discrete items, the adjusted tax rates for the first quarters of 2020 and 2019 were 20.6% and 18.5%, respectively. The increase in the adjusted tax rate of 20.6% for the first quarter of 2020 is primarily due to the mix of jurisdictions where the Company earned its profits and the impact of the eOne Acquisition. OTHER INFORMATION Brexit Referendum OnJune 23, 2016 , theUnited Kingdom ("UK") voted in a referendum to leave theEuropean Union ("EU"), commonly referred to as Brexit. TheUK government triggered the formal two-year period to negotiate the terms of theUK's exit onMarch 29, 2017 . These events resulted in an immediate weakening of British pound sterling against the US dollar, and increased volatility in the foreign currency markets which continued into 2020. These fluctuations initially affected Hasbro's financial results, although the impact was partially mitigated by the Company's hedging strategy. OnJanuary 31, 2020 , theUK formally withdrew from the EU, entering a transitional period which is currently expected to end onDecember 31, 2020 . During this transitional period, EU law will continue to apply in theUK while providing time for theUK and EU to negotiate the details of their future relationship. Financial, trade and legal implications of theUK leaving the EU remain uncertain. The Company continues to closely monitor the negotiations and the impact to foreign currency markets, taking appropriate actions to support the Company's long-term strategy and to mitigate risks in its operational and financial activities. However, the Company cannot predict the direction of Brexit-related developments nor the impact of those developments on our European operations and the economies of the markets in which they operate. Business Seasonality and Shipments Historically, the revenue pattern of Hasbro's legacy 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 business is characterized by customer order patterns which vary from year to year largely because of differences each year 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 the Company sells products, and changes in overall economic conditions. As a result, comparisons of the Company's unshipped orders on any date with those at the same date in a prior year are not necessarily indicative of the Company's expected sales for the year. Moreover, quick response inventory management practices result in fewer orders being placed significantly in advance of shipment and more orders being placed for immediate delivery. Although the Company may receive orders from customers in advance, it is a 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 indicative of future sales. Additionally, the impact of the COVID-19 outbreak to the Company's business seasonality and shipments remains uncertain. After operating at lower than planned production levels during most of the first quarter due to COVID-19, the Company's third-party manufacturing facilities inChina are currently operating at planned capacity for this time of year. Manufacturing and warehouse partners outside ofChina operated at close to normal levels during much of the first quarter. Beginning in mid-March and through the remainder of the first quarter of 2020 these locations were operating at varying levels of productivity depending on local government and safety considerations, with some markets operating at lower than normal production levels while other facilities have been closed entirely. The COVID-19 situation continues to be fluid, but we currently expect all manufacturing facilities to reopen in the second quarter, based upon our understanding of local governments directions at this -------------------------------------------------------------------------------- time. As production typically builds to peak levels during the summer months, the Company anticipates making up lost production during the second quarter of 2020, unless a resurgence of COVID-19 cases were to cause further manufacturing shutdowns or restrictions, to be well positioned to meet shipping schedule demands in the second half of the year. Accounting Pronouncement Updates InJune 2016 , theFinancial 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 afterDecember 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. InAugust 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 afterDecember 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. InMarch 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 afterDecember 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 InAugust 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 afterDecember 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, statement of operations or statement of cash flows. LIQUIDITY AND CAPITAL RESOURCES The Company has historically generated a significant amount of cash from operations. In the first three months of 2020 and 2019 the Company funded its operations and liquidity needs primarily through cash flows from operations, and when needed, used borrowings under its available lines of credit. The Company expects to continue to fund its working capital needs primarily through available cash and cash flows from operations 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. In addition, beginning in 2020 with the acquisition of eOne, the Company commenced funding certain of its television and film productions using production financing facilities which are secured by the assets and future revenues of the individual production subsidiaries. Under these facilities, the cash generated by the production may be restricted until the production financing is paid. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its available lines of credit and commercial paper program are adequate to meet its working capital needs -------------------------------------------------------------------------------- over the next twelve months. 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 management believes the risk of nonperformance by the counterparties to the Company's 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. During November of 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 interest rate payable on each series of the Notes will be subject to adjustment from time to time if either Moody's or S&P (or a substitute rating agency therefor) downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the Notes. Underwriting discount and fees of$20.0 million were deducted from the gross proceeds of the Notes. These costs are being amortized over the life of the Notes, which range from three to ten years. Prior toOctober 19, 2024 (in the case of the 2024 Notes),September 19, 2026 (in the case of the 2026 Notes),August 19, 2029 (in the case of the 2029 Notes) and at any time (in the case of the 2022 Notes), the Company may redeem the Notes at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicableU.S. Treasury bills at the time of repurchase, plus (1) 15 basis points (in the case of the 2022 Notes); (2) 25 basis points (in the case of the 2024 Notes); (3) 30 basis points (in the case of the 2026 Notes); and (4) 35 basis points (in the case of the 2029 Notes). In addition, on and after (1)October 19, 2024 for the 2024 Notes; (2)September 19, 2026 for the 2026 Notes; and (3)August 19, 2029 for the 2029 Notes, such series of Notes will be redeemable, in whole at any time or in part from time to time, at the Company's option at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest. Of the Company's long-term borrowings, the$300.0 million of 3.15% Notes mature in 2021. All of the Company's other long-term borrowings have contractual maturities that occur subsequent to 2021 with the exception of certain of the Company's production financing facilities. In November of 2019, the Company completed an underwritten public offering of 10,592,106 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. As ofMarch 29, 2020 , the Company's cash and cash equivalents totaled$1,237.9 million , of which$86.2 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 Act provided significant changes to theU.S. tax system including the elimination of the ability to deferU.S. income tax on unrepatriated earnings by imposing a one-time mandatory deemed repatriation tax on undistributed foreign earnings. As ofMarch 29, 2020 , the Company has a total liability of$192.9 million related to this tax,$18.4 million is reflected in current liabilities while the remaining long-term payable related to the Tax Act of$174.5 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 ofthe United States as ofMarch 29, 2020 is denominated in theU.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 as well. 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.
March 29, 2020 March 31, 2019 % Change
Cash and cash equivalents (including
restricted cash of $86.2 and $0 ) $ 1,237.9 1,196.6 3 %
Accounts receivable, net 963.8 638.4 51 %
Inventories 444.4 491.8 -10 %
Prepaid expenses and other current assets 672.4 305.1 >100%
Other assets 1,461.5 739.7 98 %
Accounts payable and accrued liabilities 1,664.7 935.3 78 %
Other liabilities 739.0 636.1 16 %
Accounts receivable increased to $963.8 million at March 29, 2020 , compared to
$638.4 million at March 31, 2019 . Absent the unfavorable foreign currency impact
of $36.7 million , accounts receivable increased 57%, or $362.1 million . The
increase in accounts receivable was primarily driven by the inclusion of eOne
balances in the first quarter of 2020 of $224.2 million combined with higher
U.S. and Canada segment accounts receivable balances driven by the increase in
domestic revenues in the quarter ended March 29, 2020 compared to the quarter
ended March 31, 2019 . Days sales outstanding remained flat at 79 days in the
first quarter of 2020 compared to the first quarter of 2019.
Inventories decreased to $444.4 million at March 29, 2020 from $491.8 million at
March 31, 2019 . Absent the unfavorable foreign currency impact of $22.5 million ,
inventories decreased 5%, or $24.8 million . The decrease at March 29, 2020
reflects improved inventory management initiatives and lower shipments from
China due to the impact of COVID-19 in the first quarter, partially offset by
higher inventory levels in the Company's Latin American markets as the Company
works through higher than normal inventory levels remaining from the fourth
quarter of 2019.
Prepaid expenses and other current assets increased to $672.4 million at
March 29, 2020 from $305.1 million at March 31, 2019 . The increase was due to
higher accrued royalty and licensing balances, primarily attributable to accrued
revenue balances associated with eOne's intellectual property of $245.0 , higher
accrued foreign tax credits related to film and television production costs, the
majority of which are attributable to eOne productions and higher unrealized
gains on foreign exchange contracts. As a result of the settlement of the
Company's U.S. defined benefit pension plan liability, the Company has remaining
excess assets of approximately $12.5 million of which $8.0 million is recorded
as a current asset and will be used to fund future Company contributions to the
Company's 401(k) plan in the U.S. These increases were partially offset by lower
prepaid value-added taxes in the first quarter of 2020.
Other assets increased to approximately $1,461.5 million at March 29, 2020 from
$739.7 million at March 31, 2019 . The increase was primarily due to the
inclusion of assets obtained through the eOne Acquisition including investments
in acquired content of $471.3 million , investments in film and television
productions of $209.3 million and investment in development of $42.2 million .
Also contributing to the increase are higher accrued royalty income balances
primarily driven by eOne balances, increased non-current royalty advances due to
payments made in the first quarter of 2020 relating to the extension of the
agreements related to certain of the Company's partner brands. These increases
were partially offset by lower capitalized television production costs, net of
related production rebates in the legacy Hasbro business, primarily related to
impairment charges recorded on certain production assets during the first
quarter of 2020, lower capitalized film production costs in the legacy Hasbro
business, net of related production rebates, as a result of higher amortization
of film production assets in 2020 and lower long-term receivable balances
related to third-party production studio rebates.
Accounts payable and accrued liabilities increased to $1,664.7 million at
March 29, 2020 from $935.3 million at March 31, 2019 . The increase was primarily
attributable to the acquisition of eOne and inclusion of significant accrued
participation balances, deferred revenue balances primarily related to broadcast
licensing obligations and the addition of eOne's current lease liability and
account payable balances. In addition, increases included higher accrued royalty
balances and higher accrued interest as a result of higher debt levels in 2020
from the issuance of notes in November 2019 and January 2020 . These increases
were partially offset by lower severance accruals from payments made in relation
to restructuring actions accrued in 2018, lower accrued advertising balances due
to COVID-19 related shutdowns late in the first quarter of 2020, lower accrued
liabilities due to payments made in 2019 for remaining amounts due to Saban
Properties for the POWER RANGERS brand acquisition and lower accrued income tax
balances in the first quarter of 2020.
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Other liabilities increased to $739.0 million at March 29, 2020 from $636.1
million at March 31, 2019 . The increase was primarily driven by deferred tax
liabilities recorded as a result of the eOne Acquisition accounting adjustments
during the first quarter of 2020 as well as higher long-term lease liability
balances resulting from the eOne Acquisition, and higher deferred revenue
balances as a result of the inclusion of eOne operations in the Company's
consolidated financial statements beginning in the first quarter of 2020. In
addition to these increases, there were higher long-term pension balances due to
the 2019 year-end actuarial valuations and higher reserves for uncertain tax
positions. These increases were offset by a lower transition tax liability
balance reflecting the reclassification of certain deferred tax assets in 2019,
to reduce the transition tax liability as well as the reclassification of the
2020 installment payment.
Cash Flow
The following table summarizes the changes in the Consolidated Statement of Cash
Flows, expressed in millions of dollars, for the quarters ended March 29, 2020
and March 31, 2019 .
March 29, 2020 March 31, 2019
Net cash provided by (used in)
Operating activities $ 291.6 $ 264.5
Investing activities (4,430.5 ) (27.0 )
Financing activities 819.5 (220.4 )
Net cash provided by operating activities in the first three months of 2020 was
$291.6 million compared to $264.5 million in the first three months of 2019. The
$27.1 million increase in net cash provided by operating activities was
primarily attributable to an increase in earnings before depreciation,
intangible amortization and program cost amortization, partially offset by
higher film and television production spend as a result of the inclusion of eOne
operations during the first quarter of 2020 as well as long-term royalty
advances paid in the first quarter of 2020 related to the extension of certain
license agreements that were due to expire in 2020.
Net cash utilized by investing activities was $4,430.5 million in the first
three months of 2020 compared to $27.0 million in the first three months of
2019. The increase in 2020 reflects $4.4 billion of cash utilized to acquire
eOne, net of cash acquired. As discussed in the Executive Summary, the cash used
for the purchase of eOne consisted of the net proceeds from the issuance of an
aggregate principal amount of $2.4 billion in senior secured notes, net proceeds
$975.2 million from of the issuance of approximately 10.6 million shares of
common stock and $1.0 billion in term loans drawn in the first quarter of 2020.
Additions to property, plant and equipment were $30.8 million in the first three
months of 2020 compared to $25.2 million in the first three months of 2019.
Net cash provided by financing activities was $819.5 million in the first three
months of 2020 compared to net cash utilized of $220.4 million , in the first
three months of 2019. The increase in cash provided by financing activities was
primarily driven by the proceeds of the Company's $1.0 billion term loan. Also,
in the first quarter of 2020, the Company had repayments of $50.2 million
related to eOne production financing loans and paid $47.4 million associated
with the redemption of eOne stock awards that were accelerated as a result of
the acquisition. During the first quarter of 2019, the Company paid $87.5
million to Saban Properties related to the 2018 POWER RANGERS acquisition which
consisted of a $75.0 million deferred purchase price payment and $12.5 million
released from escrow. Cash payments related to the purchases of the Company's
common stock were $47.5 million in the first quarter of 2019 compared to $0 in
the first quarter of 2020 as the Company suspended the program to prioritize the
reduction in long-term debt and achieving its gross debt to EBITDA targets.
Dividends paid in the first quarter of 2020 totaled $93.2 million compared to
$79.3 million in the first quarter of 2019 primarily reflecting the additional
shares issued in the fourth quarter of 2019.
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 $1,000.0 million . 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
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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 March 29,
2020 , 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 $1,500.0
million . 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 and for the quarter ended March 29, 2020 .
The Company had no borrowings outstanding under its committed revolving credit
facility as of March 29, 2020 . However, letters of credit outstanding under this
facility as of March 29, 2020 were approximately $2.7 million . Amounts available
and unused under the committed line, at March 29, 2020 were approximately
$1,497.3 million , inclusive of borrowings under the Company's commercial paper
program. The Company also has other uncommitted lines from various banks, of
which approximately $22.2 million was utilized at March 29, 2020 . Of the amount
utilized under, or supported by, the uncommitted lines, approximately $9.4
million and $12.8 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. Loans under the Term Loan
Facilities bear interest, at the Company's option, at either the Eurocurrency
Rate or the Base Rate, in each case plus a per annum applicable rate that
fluctuates (1) in the case of the Three-Year Tranche, between 87.5 basis points
and 175.0 basis points, in the case of loans priced at the Eurocurrency Rate,
and between 0.0 basis points and 75.0 basis points, in the case of loans priced
at the Base Rate, and (2) in the case of the Five-Year Tranche, between 100.0
basis points and 187.5 basis points, in the case of loans priced at the
Eurocurrency Rate, and between 0.0 basis points and 87.5 basis points, in the
case of loans priced at the Base Rate, in each case, based upon the non-credit
enhanced, senior unsecured long-term debt ratings of the Company by Fitch
Ratings Inc. , Moody's Investor Service, Inc. and S&P Global Rankings, subject to
certain provisions taking into account potential differences in ratings issued
to the relevant rating agencies or a lack of ratings issued by such ratings
agencies. Loans under the Five-Year Tranche require principal amortization
payments, payable in equal quarterly installments of 5.0% per annum of the
original principal amount thereof for each of the first two years after funding,
increasing to 10.0% per annum of the original principal amount thereof for each
subsequent year. The Term Loan Agreement contains affirmative and negative
covenants typical of this type of facility, including: (i) restrictions on the
Company's and its domestic subsidiaries' ability to allow liens on their assets,
(ii) restrictions on the incurrence of indebtedness, (iii) restrictions on the
Company's and certain of its subsidiaries' ability to engage in certain mergers,
(iv) the requirement that the Company maintain a Consolidated Interest Coverage
Ratio of no less than 3.00:1.00 as of the end of any fiscal quarter and (v) the
requirement that the Company maintain a Consolidated Total Leverage Ratio of no
more than, depending on the gross proceeds of equity securities issued after the
effective date of the eOne Acquisition, 5.65:1.00 or 5.40:1.00 for each of the
first, second and third fiscal quarters ended after the funding of the Term Loan
Facilities, with periodic step downs to 3.50:1.00 for the fiscal quarter ending
December 31, 2023 and thereafter. The loans were drawn down on December 30, 2019
to fund the acquisition of eOne.
The Company has principal amounts of long-term debt at March 29, 2020 of $5.3
billion , due at varying times from 2021 through 2044. As described above, the
Company issued an aggregate of $2.4 billion of senior unsecured long-term debt
securities in November 2019 and borrowed $1.0 billion under its term loan
facilities on December 30, 2019 in connection with the financing of the eOne
Acquisition. Of the total principal amount, $30 million is current at March 29,
2020 related to the 5-year term loans due December 2024 . Additionally, the
Company has outstanding production financing facilities at March 29, 2020 of
$175.5 million of which $141.1 million is included in long-term debt and $34.4
million is reported as the current portion of long-term debt within the
Company's consolidated financial statements, included in Item 1 of this
Form10-Q.
The Company also had letters of credit and other similar instruments of
approximately $15.5 million and purchase commitments of approximately $763.1
million outstanding at March 29, 2020 .
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Through the eOne Acquisition, the Company assumed eOne's existing future
obligations for film and television content, future minimum contractual royalty
payment obligations and operating lease commitments. Future payments required
under these obligations, expressed in millions of dollars as of March 29, 2020 ,
are as follows:
Remainder 2020 2021 2022 2023 2024 Thereafter Total
Future film and
television
obligations $ 75.7 17.1 1.7 - - - 94.5
First-look
commitments 18.7 15.9 7.7 - - - 42.3
Operating lease
commitments 15.8 13.2 8.9 7.5 6.2 21.7 73.3
$ 110.2 46.2 18.3 7.5 6.2 21.7 210.1
Other contractual obligations and commercial commitments, as detailed in the
Company's 2019 Form 10-K, did not materially change outside of commitments
assumed as part of the eOne Acquisition and 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
2019 Form 10-K does not include certain tax liabilities related to uncertain tax
positions. See Note 3 to our consolidated financial statements, which is
included in Part I of this Form 10-Q for contractual commitments assumed in the
eOne Acquisition.
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
recoverability of goodwill, intangible assets, income taxes and the valuation of
the Company's equity method investment in Discovery Family Channel. These
critical accounting policies are the same as those detailed in the 2019 Form
10-K with the exception of the use of estimates for business combinations in
relation to the Company's 2020 acquisition of eOne, which is detailed below.
Business Combinations. The Company accounts for business combination under FASB
Accounting Standards Codification Topic 805, Business Combinations ("Topic
805"). Identifiable assets acquired, liabilities assumed and any noncontrolling
interest in the acquiree are recognized and measured as of the acquisition date
at fair value. Goodwill is recognized to the extent by which the aggregate of
the acquisition-date fair value of the consideration transferred and any
noncontrolling interest in the acquiree exceeds the recognized basis of the
identifiable assets acquired, net of assumed liabilities. Determining the fair
value of assets acquired, liabilities assumed and noncontrolling interest
requires management's judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect to future cash
flows, discount rates and asset lives among other items.
The Company's evaluation 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 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 is completed, additional information on the assets acquired
and liabilities assumed may become available. A change in the 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 disclosed 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. For more information on the eOne Acquisition see Note
3, "Business Combinations" to the Consolidated Financial Statements included in
Part I, Item 1 of this Form 10-Q.
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,
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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 2020 through 2022 using foreign
exchange forward contracts. In addition, during the third quarter of 2019 the
Company hedged a portion of its exposure to fluctuations in the British pound
sterling in relation to the eOne Acquisition purchase price and other
transaction related costs using series of both foreign exchange forward and
option contracts. These contracts did not qualify for hedge accounting and as
such, were marked to market through the Company's Consolidated Statement of
Operations. For tax purposes these contracts qualified as nontaxable integrated
tax hedges. These contracts matured on December 30, 2019 (the closing date of
the transaction) and net gains or losses recognized on these contracts in the
first quarter of 2020 were immaterial.
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. Other than as set
forth above, the Company does not hedge foreign currency exposures.
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 March 29, 2020 , these
contracts had net unrealized gains of $33.6 million , of which $39.6 million of
unrealized gains are recorded in prepaid expenses and other current assets, $7.1
million of unrealized gains are recorded in other assets and $13.1 million of
unrealized losses are recorded in accrued liabilities. Included in accumulated
other comprehensive loss at March 29, 2020 are deferred gains, net of tax, of
$33.7 million , related to these derivatives.
At March 29, 2020 , the Company had fixed rate long-term debt of $5.3 billion . Of
this long-term debt, $600 million represents the aggregate issuance of long-term
debt in May 2014 which consists of $300 million of 3.15% Notes Due 2021 and $300
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 March 29, 2020 are deferred losses, net of tax, of $17.6 million related
to these derivatives.
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 March 29, 2020 . 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.
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Changes in internal control over financial reporting
Except for the acquisition of eOne described below, 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 March 29,
2020 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting. However, on
December 30, 2019 , the Company completed the acquisition of eOne. We are
currently integrating eOne into our operations and internal control processes
and, pursuant to the Securities and Exchange Commission's guidance that an
assessment of a recently acquired business may be omitted from the scope of an
assessment in the year of acquisition, the scope of our assessment of the
effectiveness of our internal controls over financial reporting at December 27,
2020 will not include eOne.
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