HASBRO, INC. OBJECTIVE
Our objective within the following discussion is to provide an analysis of the Company's Financial Condition, Cash Flows and Results of Operations from management's perspective which should be read in conjunction with the Company's audited consolidated financial statements and notes thereto, included in Part II, Item 8. Financial Statements, of this Annual Report on Form 10-K. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning the Company's expectations and beliefs. See "Statement Regarding Forward-Looking Statements" and Part I, Item 1A. Risk Factors, of this Form 10-K for a discussion of other uncertainties, risks and assumptions associated with these statements.
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
Hasbro, Inc. ("Hasbro") is a global play and entertainment company committed to Creating the World's Best Play and Entertainment Experiences and making the world a better place for all children, fans and families. Hasbro delivers immersive brand experiences for global audiences through consumer products, including toys and games; entertainment through Entertainment One ("eOne"), our independent studio; and gaming, led by the team at Wizards of the Coast, an award-winning developer of tabletop and digital games. Our iconic brands include NERF, MAGIC: THE GATHERING, MY LITTLE PONY, TRANSFORMERS, PLAY-DOH, MONOPOLY, BABY ALIVE, DUNGEONS & DRAGONS, POWER RANGERS, PEPPA PIG and PJ MASKS, as well as premier partner brands. For the past decade, we have been consistently recognized for our corporate citizenship, including being named one of the 100 Best Corporate Citizens by3BL Media and one of the World's Most Ethical Companies byEthisphere Institute . Our strategic plan is centered around the Hasbro Brand Blueprint, a framework for bringing compelling and expansive brand experiences to consumers and audiences around the world. Our brands are story-led consumer franchises brought to life through a wide array of consumer products, digital gaming and compelling content offered across a multitude of platforms and media. 44
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Hasbro generates revenue and earns cash across our Brand Blueprint by developing, marketing, licensing, distributing and selling products and entertainment content, based on our global brands as well as other IP in a broad variety of categories. This includes: the marketing and sale of toys and games, including our owned and partner brands, innovative gaming brands and role-playing and fantasy card collecting games, through retail stores, e-commerce platforms and Hasbro PULSE, our direct-to-consumer platform; the distribution, license and sale of digital games developed internally, such as Magic:The Gathering Arena and other digital games based on our IP that is licensed to third parties. Additionally, the Company generates revenue though the development, acquisition, production, distribution and sales of entertainment content as well as out-licensing our brands for uses in consumer products, such as apparel and publishing, and for use in theme park attractions, other forms of location-based entertainment and within formats such as film and TV programming. Effective for the first quarter of 2021, we realigned our reportable segment structure to correspond with the evolution of our company, including the integration of eOne, which was acquired in fiscal 2020. The realigned segments represent changes to our reporting structure and reflect management's allocation of decision-making responsibilities for evaluating the Company's performance. Our reportable segments are: Consumer Products, Wizards of the Coast & Digital Gaming, Entertainment and Corporate and Other. See Part I, Item 1. Business, and note 21 to the consolidated financial statements included in Part II, Item 8. Financial Statements, of this Form 10-K for further information on our reportable segments. 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. The Company's 2021 and 2020 results presented in this Form 10-K include eOne's results of operations and financial position beginning onDecember 30, 2019 , the date of acquisition. The Company's 2019 results do not include eOne results. During each of the periods presented in this Form 10-K there were significant charges and benefits incurred which impacted operating results. These charges are detailed below in the Summary of Financial Performance.
2021 highlights
•Net revenues of$6,420.4 million increased 17% from$5,465.4 million in 2020. The increase in net revenues includes a favorable foreign currency translation of$54.7 million .
•Net revenues in the Consumer Products segment increased 9% to
•Emerging Brands net revenues increased 29%; TV/Film/Entertainment portfolio net revenues increased 24%; Franchise Brands net revenues increased 22%; Partner Brands net revenues increased 8%; and Hasbro Gaming net revenues increased 4%. •Hasbro's total gaming portfolio, including the Hasbro Gaming portfolio as reported above, and all other gaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, increased 19%, and totaled$2,098.9 million .
•Operating profit was
•Operating Profit in the Consumer Products segment increased 30% to$401.4 million ; Wizards of the Coast and Digital Gaming segment increased 30% to$547.0 million ; Entertainment segment operating losses decreased 35% to$91.8 million and Corporate and Other operating losses increased 9% to$93.3 million . •Net earnings attributable toHasbro, Inc. increased in 2021 to$428.7 million , or$3.10 per diluted share, compared to$222.5 million , or$1.62 per diluted share in 2020. 45
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2020 highlights
•Net revenues of
•Net revenues in the Wizards of the Coast and Digital Gaming segment increased 19% to$906.7 million ; Entertainment segment net revenues increased >100% to$909.2 million ; and Consumer Products segment net revenues decreased 6% to$3,649.6 million . •Hasbro Gaming net revenues increased 15%; Emerging Brands net revenues increased 27%; TV/Film/Entertainment portfolio net revenues increased >100%; Partner Brands net revenues decreased 12%; and Franchise Brands net revenues declined 5%.
•Operating profit was
•Operating Profit in the Wizards of the Coast and Digital Gaming segment increased 43% to$420.4 million ; Consumer Products segment remained relatively flat at$308.1 million ; Entertainment segment operating losses increased >100% to$141.1 million and Corporate and Other operating losses increased >100% to$85.6 million . •Net earnings attributable toHasbro, Inc. declined in 2020 to$222.5 million , or$1.62 per diluted share, compared to$520.5 million , or$4.05 per diluted share in 2019.
Summary of Financial Performance
A summary of the Company's results of operations for 2021, 2020 and 2019 is
illustrated below.
2021 2020 2019
Net revenues $ 6,420.4 $ 5,465.4 $ 4,720.2
Operating profit 763.3 501.8 652.1
Earnings before income taxes 581.9 322.1 594.3
Net earnings 435.3 225.4 520.5
Net earnings attributable to noncontrolling interests 6.6 2.9 -
Net earnings attributable to Hasbro, Inc. 428.7 222.5 520.5
Diluted earnings per share 3.10 1.62 4.05
Results of Operations - Consolidated
The fiscal years ended
Net earnings attributable toHasbro, Inc. increased to$428.7 million for the fiscal year endedDecember 26, 2021 compared to$222.5 million for the fiscal year endedDecember 27, 2020 , and were$520.5 million for the fiscal year endedDecember 29, 2019 .
Diluted earnings per share attributable to
Net earnings and diluted earnings per share attributable to
2021
•A net charge of$116.1 million , or$0.84 per diluted share, comprised of a non-cash goodwill impairment charge of$108.8 million and transaction expenses of$7.3 million , associated with the closing of the sale of eOne Music. The goodwill impairment charge of$108.8 million is based on revalued assets and liabilities of eOne music as of the second quarter of 2021 and finalized closing working capital adjustments made during the fourth quarter 2021.
•In association with the Company's acquisition of eOne, the Company incurred
related expenses of
•Net expenses of$70.4 million , or$0.51 per diluted share, of incremental intangible amortization costs related to the intangible assets acquired in the eOne acquisition; and 46
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•A net charge of
•Charges of
•A net impairment charge of$41.3 million , or$0.30 per diluted share, associated with Hasbro's investment in the Discovery Family Channel, due to the impact of accelerating changes in the cable distribution industry. This charge was comprised of a pre-tax impairment of the investment held in Discovery of$74.1 million , which resulted in a pre-tax reduction to the Company's Discovery option agreement liability of$20.1 million . See note 7 to the consolidated financial statements included in Part II, Item 8. Financial Statements, of this Form 10-K for further information on the Company's Discovery option. •A net charge of$39.4 million or$0.28 per diluted share of income tax expense as a result of revaluation of Hasbro'sUK tax attributes in accordance with the Finance Act of 2021 enacted by theUnited Kingdom onJune 10, 2021 . EffectiveApril 1, 2023 , the law increases the corporate income tax rate to 25% from 19%.
2020
•In association with the Company's acquisition of eOne, the Company incurred
related expenses of
•A net charge of
•Net expenses of$80.7 million , or$0.59 per diluted share, of incremental intangible amortization costs related to the intangible assets acquired in the eOne acquisition. •A net charge of$7.4 million , or$0.05 per diluted share, of severance charges associated with cost-savings initiatives within the Company's commercial and Music businesses. •A net charge of$15.4 million , or$0.11 per diluted share, of income tax expense as a result of revaluation of Hasbro'sUK tax attributes in accordance with the Finance Act of 2020 enacted by theUnited Kingdom onJuly 22, 2020 . Retroactive toApril 1, 2020 , the new law maintains the corporate income tax rate at 19% instead of the planned reduction to 17% that was previously enacted in theUK Finance Act of 2016.
2019
•A net charge of$86.0 million or$0.67 per diluted share, associated with the settlement of the Company'sU.S. defined benefit pension plan in the second quarter of 2019. During 2018 the Compensation Committee of the Company's Board of Directors approved a resolution to terminate the Company'sU.S. defined benefit pension plan and commenced the termination process. During the second and fourth quarters of 2019, the Company settled remaining benefits directly with vested participants. •A net benefit, of$81.8 million or$0.64 per diluted share related to transaction costs and hedge gains associated with the Company's agreement to acquire eOne in an all cash transaction. The$81.8 million after-tax gain consisted of the following: (i) hedge gains of$114.1 million related to the foreign exchange forward and option contracts to hedge a portion of the eOne purchase price and related costs; (ii) financing transaction fees of$20.6 million , primarily related to the Company's bridge facility which was terminated unused in the fourth quarter of 2019; (iii) eOne acquisition costs of$17.8 million during the fourth quarter of 2019; and (iv) tax benefits of$6.1 million for the full year 2019 related to the charges outlined in (ii) and (iii) above. Consolidated net revenues for the year endedDecember 26, 2021 grew 17% to$6,420.4 million from$5,465.4 million for the year endedDecember 27, 2020 and include a favorable foreign currency translation impact of$54.7 million as the result of strengthening foreign currencies against the US dollar across the Company's regions.
Consolidated net revenues for the year ended
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The following table presents net revenues expressed in millions of dollars, by
brand portfolio for each year in the three years ended
2021 % 2020 % 2019
Net Revenues Change Net Revenues Change Net Revenues
Franchise Brands $ 2,792.7 22 % $ 2,286.1 -5 % $ 2,411.8
Partner Brands 1,161.0 8 % 1,079.4 -12 % 1,221.0
Hasbro Gaming 851.4 4 % 814.8 15 % 709.8
Emerging Brands 617.6 29 % 480.4 27 % 377.6
TV/Film/Entertainment 997.7 24 % 804.7 100 % -
2021 versus 2020
Net revenues grew in all brand portfolios in 2021 compared to 2020. Emerging
Brands growth of 29%; TV/Film/Entertainment growth of 24%; Franchise Brands
growth of 22%; Partner Brands growth of 8%; and Hasbro Gaming growth of 4% with
Hasbro's total gaming category up 19%.
Franchise Brands: The Franchise Brands portfolio net revenues increased 22% in
2021 compared to 2020. The majority of the 2021 increase was driven by higher
net revenues from MAGIC: THE GATHERING products, as a result of successful card
sets released throughout the year, including multiple record setting releases
and higher digital gaming net revenues from Magic: The Gathering Arena . To a
lesser extent, higher net revenues from NERF products, most notably in the US,
higher net revenues from the MY LITTLE PONY brand, due to the release of the
film MY LITTLE PONY: A NEW GENERATION and the launch of the associated product
line, as well higher net revenues from TRANSFORMERS products supported by the
release of the final chapter of the animated television series trilogy,
TRANSFORMERS: WAR FOR CYBERTRON in July 2021 , contributed to the increase. In
addition to these increases, were higher net revenues from PLAY-DOH products.
Partner Brands: The Partner Brands portfolio net revenues increased 8% in 2021 compared to 2020.
Within the Partner Brands portfolio, there are a number of brands which are reliant on related entertainment, including television and movie releases. As such, net revenues fluctuate from year-to-year by brand, depending on entertainment popularity, release dates and the success of related product line offerings. Historically these entertainment-based brands experience higher revenues during years in which major motion pictures are released. Net revenue increases from the Company's products for MARVEL, DISNEY PRINCESS and STAR WARS drove growth in the Partner Brands portfolio, and to a lesser extent, GHOSTBUSTERS products contributed to net revenue growth during 2021. The Company's products for MARVEL benefited from fan support, primarily in theU.S. , across multiple properties including MARVEL LEGENDS, as well as from entertainment releases including the theatrical release of SPIDER-MAN: NO WAY HOME inDecember 2021 , the launch of the preschool product line supporting the children's animated television series, SPIDEY and HIS AMAZING FRIENDS, and by the introduction of products supported by the theatrical release of SHANG-CHI and the LEGEND of the TEN RINGS which premiered inSeptember 2021 . The Company's products for DISNEY PRINCESS and STAR WARS benefited throughout 2021 from supporting entertainment, including;Disney's RAYA and THE LAST DRAGON, which premiered inMarch 2021 ; the Disney Princess film library, available for streaming on Disney+; and, the Disney+ streaming series STAR WARS: THE MANDALORIAN, season two. These increases were partially offset by net revenue declines from DISNEY FROZEN and TROLLS products in 2021 compared to 2020, as a result of entertainment support in the prior year from theNovember 2019 theatrical release ofDISNEY'S FROZEN 2 and the TROLLS WORLD TOUR film, released inApril 2020 . Hasbro Gaming: The Hasbro Gaming portfolio net revenues increased 4% in 2021 compared to 2020. Higher net revenues from DUNGEONS & DRAGONS products and digital game and to a lesser extent, higher net revenues from DUEL MASTERS products and several other Hasbro Gaming brands, were partially offset by lower net revenues from JENGA, OPERATION and certain other Hasbro Gaming products. During 2020, due in part to the onset of the COVID-19 pandemic, the Hasbro Gaming portfolio experienced accelerated growth in sales of games, as families were playing more games while at home. Net revenues for Hasbro's total gaming category, including the Hasbro Gaming portfolio as reported above, and all other gaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, which are included in the Franchise Brands portfolio, totaled$2,098.9 million in 2021, up 19%, from$1,763.8 million in 2020. 48
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Emerging Brands: The Emerging Brands portfolio net revenues grew 29% in 2021 compared to 2020. Net revenue increases were primarily driven by the Company's launch of its first PEPPA PIG and PJ MASKS products during the second half of 2021, as well as demand for fan-oriented products. TV/Film/Entertainment: During 2021, net revenues from the TV/Film/Entertainment portfolio grew 24% compared to 2020. In 2020, the shutdown of live action TV and film productions and theatrical releases, beginning late in the first quarter of 2020 as a result of the COVID-19 pandemic, had a significant impact on entertainment deliveries during the second half of 2020 and into 2021. However, the Company's production studios were back to operating at pre-pandemic levels across all businesses by mid-2021. Theatrical box office levels, and related film distribution, remained much lower than pre-pandemic levels throughout 2021. The drivers of the net revenue increase during 2021 include higher scripted television production deliveries, most notably from YELLOWJACKETS, CRUEL SUMMER and THE ROOKIE television series, as well as contributions from the Netflix streaming series, GRAYMAIL, premiering in 2022. In addition to these increases were higher deliveries from eOne's slate of unscripted programming, as well as higher film production revenues from 2021 releases that include CLIFFORD theBIG RED DOG , COME FROM AWAY and FINCH. These increases were partially offset by lower 2021 film distribution revenues overall, due to the gap in available entertainment deliveries as described above, compared to 2020 which had a higher number of successful films which were released pre-pandemic.
2020 versus 2019
Net revenues from Hasbro Gaming, Emerging Brands and TV/Film/Entertainment grew in 2020 compared to 2019, while net revenues from Franchise Brands and Partner Brands declined. Growth in TV/Film/Entertainment revenues during 2020 was primarily the result of the addition of eOne entertainment net revenues to legacyHasbro Entertainment net revenues following the Company's acquisition of eOne in 2020. Franchise Brands: The Franchise Brands portfolio net revenues decreased 5% in 2020 compared to 2019. Declines in net revenues from TRANSFORMERS and MY LITTLE PONY products were the primary drivers of the overall decline in Franchise Brands net revenues, while, to a lesser extent, NERF and PLAY-DOH products also contributed to segment net revenue declines. Much of the segment net revenue declines were due to reduced customer ordering, supply chain delays and other disruptions to the business as a result of the impact of the COVID-19 pandemic. Additionally, in 2019 TRANSFORMERS products benefited from theDecember 2018 theatrical release of TRANSFORMERS: BUMBLEBEE, driving lower revenues in 2020 compared to 2019. These declines were partially offset by net revenue increases from MAGIC: THE GATHERING products, due to favorable card set releases, and to a lesser extent, MONOPOLY products during 2020.
Partner Brands: The Partner Brands portfolio declined 12% in 2020 compared to 2019.
Due to the impact of the COVID-19 pandemic on the entertainment industry during 2020, including the postponement of certain theatrical releases, and other production delays during the year, sales of certain of the Company's Partner Brands products declined during 2020 compared to 2019. Further, in 2019, Partner Brands products benefited from a successful entertainment slate that included MARVEL'S theatrical release, AVENGERS: END GAME and SPIDER-MAN: FAR FROM HOME, as well asDISNEY'S FROZEN 2 and STAR WARS: THE RISE OF SKYWALKER, released during 2019. Overall, the decrease in Partner Brands net revenues during 2020 was largely driven by MARVEL products which are dependent on entertainment releases as described above, and to a lesser extent, DISNEY FROZEN products, also heavily reliant on supporting entertainment. In addition to these net revenue declines were lower net revenues from BEYBLADE products. These decreases were partially offset by net revenue increases from STAR WARS and TROLLS products, which were supported by entertainment releases in 2020 despite the industry challenges described above. To a lesser extent, the Partner Brands portfolio benefited from the introduction of select items from the Company's GHOSTBUSTERS product line in 2020, ahead of the release of the GHOSTBUSTERS: AFTERLIFE film. Hasbro Gaming: The Hasbro Gaming portfolio net revenues increased 15% in 2020 compared to 2019. Higher net revenues from DUNGEONS & DRAGONS products and higher net revenues from classic games including, JENGA, OPERATION and CLUE products were partially offset by lower net revenues from PIE FACE and certain other Hasbro Gaming products. 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$1,763.8 million in 2020, an increase of 15%, versus$1,528.3 million in 2019. 49
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Emerging Brands: The Emerging Brands portfolio net revenues grew 27% in 2020 compared to 2019. Contributing to the net revenue increases in 2020 were the inclusion of brands acquired through the eOne acquisition such as PEPPA PIG and PJ MASKS. TV/Film/Entertainment: Net revenues from the TV/Film/Entertainment portfolio grew significantly in 2020 due to the inclusion of a full year of eOne results following the acquisition onDecember 30, 2019 . TV/Film/Entertainment net revenues were approximately 15% of total Company net revenues in 2020 and included (i) theatrical and transactional net revenue contributions from theAmblin Partners film 1917, released inDecember 2019 ; (ii) broadcast and licensing contributions from key scripted deliveries including season two of THE ROOKIE and the fifth season of FEAR THE WALKING DEAD; (iii) the Company's strong lineup of unscripted television programming that includes season one of THE PACK and the NAKED AND AFRAID television series which aired it's eleventh series in 2020; and (iv) participations from the Company's television content library which included well know titles such as GREY'S ANATOMY and CRIMINAL MINDS.
SEGMENT RESULTS
Effective for the first quarter of 2021, we realigned our reportable segment structure to correspond with the evolution of our company, including the integration of eOne, which reflects how we manage our business, and how we allocate resources and decision-making responsibilities for assessing the Company's performance. Our reportable segments are: Consumer Products, Wizards of the Coast & Digital Gaming, Entertainment and Corporate and Other.
Net Revenues
The table below illustrates net revenues expressed in millions of dollars, derived from our principal operating segments in 2021, 2020 and 2019.
2021 % 2020 % 2019
Net Revenues Change Net Revenues Change Net Revenues
Consumer Products $ 3,981.6 9 % $ 3,649.6 -6 % $ 3,881.2
Wizards of the Coast & Digital Gaming 1,286.6 42 % 906.7 19 % 761.2
Entertainment 1,152.2 27 % 909.1 >100% 77.8
Consumer Products Segment
The following table presents the Consumer Products segment net revenues by major geographic region for each fiscal year in the three years endedDecember 26, 2021 . 2021 % 2020 % 2019 Net Revenues Change Net Revenues Change
Net Revenues
North America $ 2,315.9 9 % $ 2,116.2 1 % $ 2,098.1
Europe 1,067.7 8 % 989.2 1 % 982.2
Asia Pacific 310.1 5 % 295.6 -18 % 359.4
Latin America 287.9 16 % 248.6 -44 % 441.5
Net Revenues $ 3,981.6 9 % $ 3,649.6 -6 % $ 3,881.2
2021 versus 2020
Consumer Products segment net revenues increased 9% in 2021 compared to 2020 and
included the impact of a favorable $23.8 million foreign currency translation.
Segment net revenues increased from growth in Franchise Brands, Emerging Brands
and to a lesser extent, Partner Brands and were partially offset by lower net
revenues from the Hasbro Gaming portfolio.
The drivers of the net revenue increase include higher sales of NERF products,
due to new and innovative product launches in 2021, higher sales of TRANSFORMERS
products as well as higher sales of the Company's Partner Brands for MARVEL and
DISNEY PRINCESS, which were supported by recent entertainment releases. Also
contributing to the increase were higher sales of PEPPA PIG and PJ MASKS
products, following the launch of the Company's own product lines for these
brands during the second half of 2021. Partially offsetting these increases were
lower sales of certain Partner Brands, notably, the Company's products for
DISNEY FROZEN and TROLLS. Revenue grew across all geographic regions in 2021,
most notably in the U.S. and Europe , and to a lesser extent, in the Company's
Latin American and Asia Pacific markets.
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2020 versus 2019
Consumer Products segment net revenues decreased 6% in 2020 compared to 2019 and included an unfavorable$20.1 million foreign currency translation. The decline in consumer products revenue in 2020 was primarily driven by the COVID-19 pandemic and its impact on supply chain and retail store closures. Lower net revenues from Franchise Brands and Partner Brands were partially offset by growth in the Hasbro Gaming and Emerging Brands portfolios. The primary drivers of the 2020 net revenue declines included lower sales of MARVEL products and to a lesser extent, lower sales of DISNEY FROZEN, TRANSFORMERS and MY LITTLE PONY products, all of which were impacted in part by the lack of 2020 entertainment releases in support of the Company's product sales, as a result of the COVID-19 pandemic. These decreases were partially offset by net revenue increases from STAR WARS and TROLLS products and from the inclusion of licensed products for brands acquired through the eOne acquisition such as PEPPA PIG and PJ MASKS and, to a lesser extent, higher net revenues delivered across many of the Company's games brands, most notably from JENGA, OPERATION and CLUE products in 2020.
Wizards of the Coast and Digital Gaming Segment
2021 versus 2020
Wizards of the Coast and Digital Gaming segment net revenues increased 42% in 2021 compared to 2020 and included the impact of a favorable$10.7 million foreign currency translation. The net revenue increase was attributable to higher net revenues from Wizards of the Coast tabletop and digital gaming products, most notably, MAGIC: THE GATHERING, driven by the number of strong performing card set releases, and from DUNGEONS & DRAGONS and to a lesser extent, DUEL MASTERS tabletop games. In total, 74% of segment net revenues were attributable to Wizards of the Coast tabletop games. In addition to these increases were higher digital gaming sales from Magic:The Gathering Arena , including the launch on mobile, and net revenue contributions associated with the launch of Dungeons & Dragons:Dark Alliance during the second quarter 2021, as well as growth in certain other of the Company's licensed digital games.
2020 versus 2019
In 2020, net revenues from the Wizards of the Coast and Digital Gaming segment increased 19% compared to 2019 and included the impact of a favorable$2.6 million foreign currency translation. The net revenue increase in 2020 was driven by higher net revenues from tabletop gaming products, primarily MAGIC: THE GATHERING, as a result of popular set releases throughout the year and to a lesser extent, higher revenues from DUNGEONS & DRAGONS products and licensed digital gaming revenues in 2020 which benefited from the stay-at-home COVID-19 environment. These increases were partially offset by lower net revenues associated with the closure of the Backflip business in the fourth quarter of 2019. Entertainment Segment
The following table presents Entertainment segment net revenues by category for
each fiscal year in the three years ended
2021 % 2020 % 2019
Net Revenues Change Net Revenues Change Net Revenues
Film and TV $ 932.5 33 % $ 700.5 >100% $ 45.1
Family Brands 132.9 54 % 86.5 >100% 31.8
Music and Other 86.8 -29 % 122.1 >100% 0.9
Net Revenues $ 1,152.2 27 % $ 909.1 >100% $ 77.8
*Music and Other category net revenues for the periods ended December 26, 2021
and December 27, 2020 include $65.2 million and $116.7 million , respectively,
from eOne Music, which was sold by the Company early in the third fiscal quarter
of 2021.
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2021 versus 2020
Entertainment segment net revenues grew 27% in 2021 compared to 2020 and included the impact of a favorable$20.1 million foreign currency translation. The segment net revenue increase was primarily driven by higher scripted programming and film production deliveries and to a lesser extent, increased deliveries of unscripted programming following the return of live-action entertainment production in late 2020 and throughout 2021. Also contributing to the increase were higher Family Brands net revenues from streaming content deals related to programming featuring the Company's brands, such as the Netflix release of MY LITTLE PONY: A NEW GENERATION. These increases were partially offset by the sale of the eOne Music business during the third quarter of 2021 and from lower film distribution revenues in 2021.
2020 versus 2019
In 2020, Entertainment segment net revenues were$909.1 million compared to$77.8 million in 2019. Foreign currency exchange did not have a material impact on the Entertainment segment results in 2020. The segment net revenue increase reflects the inclusion of eOne entertainment revenues following the acquisition of eOne in early fiscal 2020. The drivers of Entertainment segment net revenues included television production revenues from key scripted programming deliveries, theatrical and transactional net revenue contributions from theAmblin Partners film 1917, a strong lineup of unscripted television programming deliveries as well as distribution revenues from acquired content libraries. These revenue contributions were partially offset by lower film revenues associated with the Company's share of revenue related to the 2018 theatrical release of TRANSFORMERS: BUMBLEBEE film.
Operating Profit (Loss)
The table below illustrates operating profit expressed in millions of dollars
and operating profit margins, derived from our principal operating segments in
2021, 2020 and 2019. For a reconciliation of segment operating profit to total
Company operating profit, see note 21 to our consolidated financial statements
which are included in Part II, Item 8. Financial Statements, of this Form 10-K.
% Net % % Net % % Net
2021 Revenues Change
2020 Revenues Change 2019 Revenues
Consumer Products
10 % 30 % $ 308.1 8 % - % $ 306.9 8 %
Wizards of the Coast &
Digital Gaming 547.0 43 % 30 % 420.4 46 % 43 % 294.7 39 %
Entertainment (91.8) -8 % 35 % (141.1) -16 % >-100% 13.6 17 %
Consumer Products Segment
2021 versus 2020
Consumer Products segment operating profit increased $93.3 million to $401.4
million in 2021, compared to $308.1 million in 2020. Operating profit margin
increased to 10% of net revenues in 2021 from 8% of net revenues in 2020. The
increase in segment operating profit and profit margin was driven by higher
segment net revenues as a result of increased sales volumes, product price
increases and lower sales allowances and obsolescence charges. These benefits
were partially offset by higher freight costs, increased royalty expenses from
higher sales of the Company's Partner Brand products and higher advertising
costs in support of the sales increase within the segment.
2020 versus 2019
Consumer Products segment operating profit increased$1.2 million to$308.1 million in 2020, compared to$306.9 million in 2019. Operating profit margin remained flat at 8% of net revenues in 2020 compared to 2019. The increase in segment operating profit was primarily due to a favorable brand mix, lower royalty expense associated with lower sales of the Company's Partner Brand products and lower marketing and advertising costs. These increases were mostly offset by lower net revenues related to disruptions to the business as a result of the COVID-19 pandemic, most notably from within the Company's international geographies and from higher freight costs as a result of greater domestic shipments and increased direct-to-customer shipments which carry higher fulfillment costs. 52
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Wizards of the Coast and Digital Gaming Segment
2021 versus 2020
Wizards of the Coast and Digital Gaming segment operating profit increased$126.6 million to$547.0 million in 2021, compared to$420.4 million in 2020. Operating profit margin decreased to 43% in 2021 from 46% in 2020. The increase in segment operating profit in 2021 is due to higher net revenue volumes, partially offset by higher product development costs and higher advertising and marketing costs in support of segment digital gaming initiatives and tabletop set releases, as well as increased administrative expenses, including digital game depreciation expense and personnel costs. The decrease in segment operating profit margin is primarily due to higher expenses associated with the support of certain digital gaming initiatives and tabletop set releases during 2021.
2020 versus 2019
Wizards of the Coast and Digital Gaming segment operating profit increased$125.7 million to$420.4 million in 2020, compared to$294.7 million in 2019. Operating profit margin increased to 46% in 2020 from 39% in 2019. The increase in segment operating profit and operating profit margin in 2020 was driven by higher net revenues, a favorable mix from growth in Wizards tabletop gaming and licensed digital gaming, and reduced operating expenses associated with the closure of the Backflip business in the fourth quarter of 2019. These increases were partially offset by higher administrative expenses including higher compensation expense and higher shipping and warehousing costs during 2020.
Entertainment Segment
2021 versus 2020
Entertainment segment operating losses were
The 2021 results were negatively impacted by a non-cash impairment charge of$108.8 million associated with the sale of eOne Music and$85.0 million of intangible amortization costs related to the intangible assets acquired in the eOne acquisition. The 2020 results were impacted by$133.2 million of acquisition and related costs including expense associated with the acceleration of eOne stock-based compensation and advisor fees settled at closing of the acquisition, as well as integration costs and impairment charges for certain definite-lived intangible and production assets driven by a change in entertainment strategy as a result of the eOne acquisition; combined with$97.9 million of intangible amortization costs related to the intangible assets acquired in the eOne acquisition. Absent these charges, the 2021 results reflect increased deliveries compared to 2020, offset by higher content amortization and increased compensation expense.
2020 versus 2019
Entertainment segment operating losses were$141.1 million , or 16% of segment net revenues in 2020, compared to operating profit of$13.6 million , or 17% of segment net revenues in 2019. The decrease in 2020 operating profit in the Entertainment segment was driven by the acquisition and integration costs and intangible amortization costs described above and reflects the addition of the eOne entertainment business results, following the Company's acquisition of eOne in fiscal 2020. Operating profit in 2019 reflects the Company's share of revenues related to TRANSFORMERS: BUMBLEBEE, the 2018 theatrical release produced jointly with Paramount Pictures, partially offset by related program production cost amortization.
Corporate and Other Segment
In the Corporate and Other segment, the operating losses were$93.3 million in 2021 compared to operating losses of$85.6 million in 2020 and operating profit of$36.9 million in 2019. Segment operating losses in 2021 were primarily driven by stock compensation expense of$20.9 million associated with the contractual accelerated vesting of certain equity awards as a result of the passing of the Company's former CEO, higher administrative expenses and advertising costs; including$9.5 million of transaction costs associated with the sale of eOne Music and higher compensation expense as well as retention costs of$7.6 million in relation to the eOne acquisition. The Corporate and Other operating loss in 2020 was driven by charges related to the eOne acquisition; including acquisition and integration costs of$32.8 million and restructuring costs of$52.6 million , including impairment charges for certain definite-lived intangible assets driven by the change in strategy for the combined company's entertainment assets. In addition to the charges associated with the eOne acquisition, the 53
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Company incurred$8.5 million of severance charges associated with cost-savings initiatives within the Company's commercial and Film and TV businesses. Corporate and Other segment operating profit in 2019 includes$17.8 million of transaction costs associated with the eOne acquisition.
OPERATING COSTS AND EXPENSES
The Company's operating expenses, stated as percentages of net revenues, are illustrated below for the fiscal years endedDecember 26, 2021 ,December 27, 2020 andDecember 29, 2019 : 2021 2020 2019 Cost of sales 30.0 % 31.5 % 38.3 % Program cost amortization 9.8 7.1 1.8 Royalties 9.7 10.4 8.8 Product development 4.9 4.7 5.6 Advertising 7.9 7.6 8.8 Amortization of intangibles 1.8 2.6 1.0
Selling, distribution and administration 22.3 22.9 22.0 Loss on disposal of business
1.7 - -
Acquisition and related costs - 4.0 -
Operating expenses for 2021, 2020 and 2019 include benefits and expenses related to the following events:
•During 2021, in association with the sale of the eOne Music business, the Company incurred a loss of$118.3 million comprised of a goodwill impairment charge of$108.8 million included within Loss on Disposal of Business, and transaction costs of$9.5 million included within Selling, Distribution and Administration.
•During 2021, the Company incurred incremental intangible amortization costs of
•During 2021, the Company incurred$20.9 million of stock compensation expense associated with the accelerated vesting of certain equity awards as a result of the passing of its former CEO included within Selling, Distribution and Administration.
•During 2021, in association with the Company's acquisition of eOne, the Company
incurred stock compensation expense of
•During 2020, in association with the Company's acquisition of eOne, the Company incurred related expenses of$218.6 million , comprised of$145.2 million of acquisition and integration costs and restructuring and related costs of$73.4 million , included within Acquisition and related costs.
•During 2020, the Company incurred incremental intangible amortization costs of
•During 2020 the Company incurred
•During 2019, the Company incurred acquisition costs related to eOne of
Cost of Sales
Cost of sales primarily consists of purchased materials, labor, manufacturing overhead and other inventory-related costs such as obsolescence. Cost of sales increased 12% to$1,927.5 million , or 30.0% of net revenues, for the year endedDecember 26, 2021 compared to$1,718.9 million , or 31.5% of net revenues, for the year endedDecember 27, 2020 . The cost of sales increase in dollars was primarily due to higher sales volumes and higher inventory costs as a result of increased freight costs and, to a lesser extent, the impact of$10.0 million of foreign currency exchange. As a percent of net revenues, the cost of sales decrease was the result of a favorable product mix due to higher sales of Wizards of the Coast tabletop games and higher entertainment revenues, as well as lower sales allowances and obsolescence charges compared to 2020. 54
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In 2020, cost of sales decreased 5% to$1,718.9 million , or 31.5% of net revenues, for the year endedDecember 27, 2020 compared to$1,807.8 million , or 38.3% of net revenues, for the year endedDecember 29, 2019 . The cost of sales decrease as a percent of net revenues is primarily related to the acquisition of eOne, which experiences lower cost of sales as a percentage of net sales, and to a lesser extent, the decrease was due to the impact of$14.4 million of foreign exchange translation. The cost of sales decrease in dollars was driven by a favorable brand mix including an increase in net sales of MAGIC: THE GATHERING products, and improved inventory costing, partially offset by higher markdowns to address excess retail inventory, primarily across certain international markets.
Program Cost Amortization
Program cost amortization totaled$628.6 million , or 9.8% of net revenues in 2021, compared to$387.1 million , or 7.1% of net revenues in 2020 and$85.6 million , or 1.8% of net revenues, in 2019. The majority of the Company's program costs are capitalized as incurred and amortized using the individual-film-forecast method. The Company also utilizes the percentage of completion methodology, primarily related to unscripted content. Program cost amortization reflects both the phasing of revenues associated with films and television programming, as well as the type of content being produced and distributed. Program production cost amortization increased in dollars and as a percent of net revenues in 2021 as a result of the increase in TV and Film deliveries overall, and from the mix of programs delivered, some of which carry higher programming costs. In addition to these increases was amortization of film production costs associated with the MY LITTLE PONY: A NEW GENERATION film released on Netflix in 2021. Program production cost amortization increased in dollars and as a percent of net revenues in 2020 as a result of the addition of eOne's business, which experiences higher program cost amortization as a percentage of net sales. Program cost amortization attributable to eOne was 6.2% of net revenues in 2020. This increase was partially offset by lower program cost amortization attributable to the TRANSFORMERS: BUMBLEBEE theatrical release, which the Company began to amortize during the third quarter of 2019.
Royalty Expense
Royalty expense of$620.4 million , or 9.7% of net revenues, in 2021 compared to$570.0 million , or 10.4% of net revenues, in 2020 and$414.5 million , or 8.8% of net revenues, in 2019. Fluctuations in royalty expense generally relate to the volume of entertainment-driven products sold in a given period, especially if the Company is selling product tied to one or more major motion picture releases in the period. Product lines related to Hasbro-owned or controlled brands supported by entertainment generally do not incur the same level of royalty expense as licensed properties, particularly DISNEY FROZEN and DISNEY PRINCESS, STAR WARS and MARVEL, as well as DREAMWORKS products and certain other licensed properties which carry higher royalty rates than other licensed properties. In 2021, higher royalty expense in dollars was driven primarily by higher sales of Partner Brand products as compared to 2020, and to a lesser extent, higher expense for guaranteed minimum royalty payments for certain brands. The decrease in royalty expense as a percentage of net revenues was due to product mix, most notably, higher sales of Wizards of the Coast products, Franchise Brands and higher sales of certain of the Company's Emerging Brands during 2021. Higher royalty expense in dollars and as a percentage of net revenues in 2020 compared to 2019, was driven by the addition of eOne royalty expenses in 2020 which represented 3.2% of net revenues, partially offset by lower sales of Partner Brand products. See note 20 to the Company's consolidated financial statements in Part II, Item 8. Financial Statements, of this Form 10-K for information on the Company's future royalty commitments as ofDecember 26, 2021 .
Product Development
Product development expense in 2021 totaled$315.7 million , or 4.9% of net revenues, compared to$259.5 million , or 4.7% of net revenues, in 2020. Product development expenditures reflect the Company's investment in innovation and anticipated growth across our brand portfolio. The increase in 2021 was primarily related to investments in the Wizards of the Coast & Digital Gaming segment, for both tabletop and digital gaming initiatives, such as for the development of MAGIC: THE GATHERING tabletop set releases and for the development of digital games such as Dungeons & Dragons:Dark Alliance , and to a lesser extent, increased investments in certain other mobile gaming projects and other product lines currently in development. 55
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Product development expense in 2020 totaled$259.5 million , or 4.7% of net revenues, compared to$262.2 million , or 5.6% of net revenues, in 2019. The decrease as a percentage of net revenues was primarily related to the addition of eOne revenues, with no associated product development costs. The decrease in dollars during 2020 was driven by lower spending as a result of global cost savings initiatives combined with the impact of the closure of the Company's Backflip business during the fourth quarter of 2019. These decreases were partially offset by increased investments in the Company's Wizards of the Coast business. Advertising Expense Advertising expense in 2021 totaled$506.6 million , or 7.9% of net revenues, compared to$412.7 million or 7.6% of net revenues in 2020 and$413.7 million or 8.8% in 2019. The level of the Company's advertising expense is generally impacted by revenue mix, the amount and type of theatrical releases and television programming delivered. The advertising expense increase in 2021 reflects growth in revenues compared to 2020 and higher advertising costs in support of MAGIC: THE GATHERING tabletop gaming releases, higher advertising costs in support of the feature length film, MY LITTLE PONY: A NEW GENERATION, and for the Company's digital gaming initiatives, most notably, Magic:The Gathering Arena and Dungeons & Dragons:Dark Alliance . These increases were partially offset by reduced promotional spend in the Entertainment segment due to fewer theatrical releases in 2021 compared to 2020. The decrease in dollars in 2020 was driven by lower advertising costs related to the Company's digital gaming initiatives due to the timing of launch dates and reduced advertising levels across substantially all of the Company's regions, most notably inLatin America , reflecting the impact of COVID-19. These decreases were partially offset by increased advertising expenses as a result of the addition of eOne operations in 2020. Advertising expense attributable to eOne was 1.5% of net revenues in 2020, as early 2020 included the advertising behind the film 1917 prior to Covid-related shutdown of theaters.
Amortization of Intangible Assets
Amortization of intangible assets decreased to$116.8 million , or 1.8% of net revenues, in 2021 compared to$144.7 million , or 2.6% of net revenues, in 2020 and$47.3 million , or 1.0% of net revenues in 2019. The decrease in 2021 is primarily related to certain licensed property rights which became fully amortized in the fourth quarter of 2020 combined with the discontinuation of amortization related to the eOne Music intangible assets in the second quarter of 2021, upon being classified as held for sale assets and subsequently sold in the third quarter of 2021.
In 2020, the increase in dollars and as a percentage of net revenues is
primarily related to the acquisition of eOne, which contributed intangible asset
amortization of
Selling, Distribution and Administration Expenses
In addition to the following drivers, Selling, Distribution and Administration
("SD&A") expenses include certain charges noted under the Operating Costs and
Expenses table above.
SD&A expenses increased to $1,432.7 million , or 22.3% of net revenues in 2021,
from $1,252.1 million , or 22.9% of net revenues, in 2020. In 2021, the increase
reflects higher marketing and sales costs consistent with the increase in net
revenues, higher compensation expense and increased freight and warehousing
costs, primarily due to ongoing global supply chain disruptions. In addition,
2021 included higher depreciation expense associated with capitalized games held
and used within the Wizards of the Coast business. These increases were
partially offset by the divestiture of eOne Music and lower expense for credit
losses during 2021.
In 2020, SD&A increased to $1,252.1 million , or 22.9% of net revenues, from
$1,037.0 million or 22.0% of net revenues in 2019. The increase in SD&A expenses
was driven primarily by the inclusion of eOne's operations, accounting for 3.9%
of net revenues. Also contributing to the increase was higher freight costs and
higher expense for credit losses due to the impacts of the COVID-19 pandemic.
This increase was partially offset by lower marketing, sales and warehousing
expenses across the regions during the year.
Loss on Disposal of Business
The loss on disposal of business of$108.8 million , or 1.7% of net revenues, represents a non-cash impairment charge associated with the disposition of eOne Music during 2021. 56
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Acquisition and Related Costs
During 2020, the Company incurred charges of$218.6 million , or 4.0% of net revenues, of acquisition and related costs in connection with the eOne acquisition. These expenses were comprised of$145.2 million of acquisition and integration costs and$73.4 million of restructuring and related costs. Most notably,$47.4 million of expenses associated with the acceleration of eOne stock-based compensation and$38.2 million of advisor fees, substantially all of which were settled at the closing of the acquisition as well as certain other integration costs.
NON-OPERATING EXPENSE (INCOME)
Interest Expense
Interest expense totaled$179.7 million in 2021 compared to$201.1 million in 2020 and$101.9 million in 2019. The decrease in interest expense during 2021 primarily reflects long-term debt repayments made throughout the year primarily related to borrowings utilized for the eOne acquisition, and lower interest rates. These decreases were partially offset by higher production financing borrowings compared to 2021. The increase in interest expense in 2020 compared to 2019 reflects interest related to long-term debt issued in connection with the financing of the eOne acquisition, partially offset by lower average short-term borrowings during 2020.
Interest Income
Interest income was$5.4 million in 2021 compared to$7.4 million in 2020 and$30.1 million in 2019. Lower interest income in 2021 is primarily the result of lower cash balances due to long-term debt repayments and lower average interest rates in 2021 compared to 2020. In 2019, the Company's cash balances were higher due to the long-term debt and equity financings completed inNovember 2019 , resulting in proceeds of approximately$3.3 billion which were used in theDecember 30, 2019 acquisition of eOne. In 2020, the decrease in interest income was primarily the result of lower cash balances and lower average interest rates compared to 2019. Other Expense (Income), Net
Other expense (income), net was
2021 2020 2019
Foreign currency (gains) losses $ (5.1) $ 2.1 $ (124.3) Earnings from Discovery Family Channel (20.8) (21.8) (23.6) Discovery Family Channel impairment 74.1
- -
Discovery Family Channel option (20.1) (1.5) (1.2)
Pension expense 1.7 1.2 119.5
Gain on PP&E (0.2) (4.9) (0.4)
eOne deferred financing costs - 1.0 19.6
Loss (gain) on investments (3.8) 7.3 (6.1)
Legal settlement (26.7) (3.2) -
Other 8.0 5.8 2.6
$ 7.1 (14.0) (13.9)
•Foreign currency (gains) losses reflect fluctuations of foreign currency
translation across the Company's international markets against the
•Earnings from the Discovery joint venture are comprised of the Company's share in the results of the Network.
•During 2021, the Company recorded an impairment loss of
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•In relation to the Discovery joint venture, Hasbro and Discovery have a put/call option on the share of the Discovery Family Channel. The option's fair value is periodically re-measured and in 2021, as a result of the Discovery Family Channel impairment, the adjustment of the option's fair value resulted in a$20.1 million gain. In 2020 and 2019, the Company recorded gains of$1.5 million and$1.3 million , respectively, due to the option's value decrease. •During 2019, the Company incurred$111.0 million of settlement charges related to the termination of itsU.S. defined benefit pension plan which is reflected as a non-cash charge to pension expense.
•The gain on PP&E in 2020 reflects a
•During 2019, the Company incurred costs associated with the financing of the eOne transaction. With the termination of the bridge facility, the Company wrote off the associated financing costs in the fourth quarter of 2019. •During 2021, the gain on investments primarily reflects a recoupment of the 2020 loss on investments, which was driven by a partial write off of an investment in Quibi, a mobile streaming service, which was obtained as part of the eOne acquisition. The 2019 gain on investments primarily reflects proceeds from the sale of certain long-term investments sold during the year.
•During the 2021, the Company realized a gain of
INCOME TAXES
Income tax expense totaled 25.2% of pre-tax earnings in 2021 compared with 30.0% in 2020 and 12.4% in 2019. Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Income tax expense for 2021 includes a discrete expense primarily related to: (i) a non-deductible impairment charge from the sale of eOne Music and; (ii) the remeasurement ofUK net deferred tax liability as a result of theUnited Kingdom's enactment of the Finance Act of 2021; offset by (iii) a benefit from the release of uncertain tax positions resulting from a change in management judgement; and (iv) discrete tax planning benefits. Income tax expense for 2020 includes a discrete net tax benefit primarily related to: (i) eOne acquisition and related costs; (ii) the remeasurement ofUK net deferred tax liability as a result of theUnited Kingdom's enactment of the Finance Act of 2020; and (iii) an increase of uncertain tax positions based on changes in management judgment; offset by (iv) tax planning, including planning directly related to the eOne integration. Income tax expense for 2019 includes discrete tax benefits primarily related to: (i) the settlement of theU.S. defined benefit pension plan liability; and (ii) the acquisition of eOne, specifically the nontaxable integrated hedging gains and nondeductible transaction costs. Subsequent tothe United States passing the Tax Cuts and Jobs Act (the Tax Act), the Company has greater flexibility to manage cash globally. The Company intends to repatriate the accumulated foreign earnings as needed from time to time. The Company still has significant cash needs outsidethe United States and continues to consistently monitor and analyze its global working capital and cash requirements. As of 2021, we have recorded$3.4 million of foreign withholding andU.S. state income tax liability. The Company will continue to record additional tax effects, if any, in the period that the on-going distribution analysis is completed and is able to make reasonable estimates.
NEW 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 . The Company adopted the standard in the first quarter of 2021 and the adoption of the standard did not have a material impact on its consolidated financial statements. 58
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InDecember 2019 , the FASB issued Accounting Standards Update No. 2019-12 (ASU 2019-12), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update remove certain exceptions for performing intra-period tax allocations, recognizing deferred taxes for investments, and calculating income taxes in interim periods. The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods. ASU 2019-12 is effective for fiscal years beginning afterDecember 15, 2020 . The Company adopted the standard in the first quarter of 2021 and the adoption of the standard did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In March of 2020, the FASB issued Accounting Standards Update No. 2020-04 (ASU 2020-04) Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applyingU.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 beginningMarch 12, 2020 throughDecember 31, 2022 . The change from LIBOR to an alternate rate has not had a material impact on the Company's consolidated financial statements and the Company is continuing to evaluate the standard's potential impact to its consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated a significant amount of cash from operations. In 2021, the Company primarily funded its operations and liquidity needs through cash on hand and from cash flows from operations, and when needed, used borrowings under its available lines of credit. In addition, the Company's Entertainment operating segment used production financing to fund certain of its television and film productions which are typically arranged on an individual production basis by special purpose production subsidiaries. For more information on the Company's production financing facilities, including expected future repayments, see notes 9 and 11 to the consolidated financial statements included in Part II, Item 8. Financial Statements, of this Form 10-K. During 2022, the Company expects to continue to fund its working capital needs primarily through available cash, cash flows from operations and from production financing facilities and, if needed, by issuing commercial paper or borrowing under its revolving credit agreement. In the event that the Company is not able to issue commercial paper, the Company intends to utilize its available lines of credit. The Company believes that the funds available to it, including cash expected to be generated from operations, funds available through its commercial paper program or its available lines of credit and production financing, are adequate to meet its working capital needs for 2022, including the repayment of the current portion of long-term debt of$200.1 million , as shown on the consolidated balance sheets which represents the current portion of required quarterly principal amortization payments for our term loan facilities and other production financing facilities, each as described below. The Company may also issue debt or equity securities from time to time, to provide additional sources of liquidity when pursuing opportunities to enhance our long-term competitive position, while maintaining a strong balance sheet. However, unexpected events or circumstances such as material operating losses or increased capital or other expenditures, or the inability to otherwise access the commercial paper market, may reduce or eliminate the availability of external financial resources. In addition, significant disruptions to credit markets may also reduce or eliminate the availability of external financial resources. Although the Company believes the risk of nonperformance by the counterparties to its financial facilities is not significant, in times of severe economic downturn in the credit markets, it is possible that one or more sources of external financing may be unable or unwilling to provide funding to the Company. As ofDecember 26, 2021 , the Company's cash and cash equivalents totaled$1,019.2 million , of which$35.8 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 indefinitely reinvested by the Company. Accordingly, such international cash balances were not available to fund cash requirements inthe United States unless the Company was to change its reinvestment policy. The Company has maintained sufficient sources of cash inthe United States to fund cash requirements without the need to repatriate any funds. 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 ofDecember 26, 2021 , the Company had a total liability of$156.1 million related to this tax,$18.4 million is reflected in current liabilities while the remaining long-term payable related to the Tax Act 59
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of$137.7 million is presented within other liabilities, non-current on the consolidated balance sheets included in Part II, Item 8. Financial Statements, of this Form 10-K. As permitted by the Tax Act, the Company will pay the transition tax in annual interest-free installments through 2025 as follows: 2022:$18.4 million ; 2023:$34.4 million ; 2024:$45.9 million ; and 2025:$57.3 million . As a result, in the future, the related earnings in foreign jurisdictions will be made available with greater investment flexibility. The majority of the Company's cash and cash equivalents held outside ofthe United States as ofDecember 26, 2021 are denominated in theU.S. dollar.
The table below outlines key financial information pertaining to our consolidated balance sheets including the year-over-year changes, expressed in millions of dollars.
2021 % 2020 % 2019
Cash and cash equivalents, net of short-term
borrowings (including restricted cash of
$35.8 , $73.2 and $0.0 ) $ 1,019.2 -30 % $ 1,449.7 -68 % $ 4,580.4
Accounts receivable, net 1,500.4 8 % 1,391.7 -1 % 1,410.6
Inventories 552.1 40 % 395.6 -11 % 446.1
Prepaid expenses and other current assets 656.4 8 % 609.6 96 % 310.5
Other assets 1,297.0 3 % 1,260.3 >100% 585.0
Accounts payable and accrued liabilities 2,255.0 15 % 1,964.1 56 % 1,256.6
Other liabilities 670.7 -16 % 794.0 43 % 556.6
Accounts receivable, net increased 8% in 2021 compared to 2020. The increase in
accounts receivable was driven primarily by higher sales during 2021, partially
offset by improved collections, most notably in the Company's European and Latin
American markets. Days sales outstanding decreased from 74 days at December 27,
2020 to 68 days at December 26, 2021 , primarily due to the increase in revenues
and mix of sales during 2021 as well as from the improved collections described
above. In 2020, absent eOne, accounts receivable balances decreased 15% due to
improved collections and fewer sales to customers that carry longer payment
terms. Days sales outstanding decreased to 74 days at December 27, 2020 from 90
days at December 29, 2019 . The days sales outstanding primarily reflects
improved collections throughout 2020 as well as the mix of sales.
Inventories increased 40% in 2021 compared to 2020 reflecting increased
lead-times from supply chain disruptions, as well as higher freight-in costs,
primarily in the U.S. and Europe , impacting the Company's Consumer Products and
Wizards of the Coast tabletop gaming businesses. This increase was partially
offset by lower inventory levels in the Company's Asia Pacific and Latin
American markets. In 2020, inventories decreased 11% compared to 2019 reflecting
lower levels, primarily in the U.S. , and across all regions, due to improved
inventory management and lower sales.
Prepaid expenses and other current assets increased 8% in 2021 compared to 2020.
The increase was driven by higher accrued tax credit balances related to film
and television production costs, due to increased productions and timing of tax
credit claims, as well as higher unrealized gains on foreign exchange contracts.
These increases were partially offset by lower accrued income and prepaid
expense balances associated with the sale of eOne Music, lower prepaid royalty
balances in relation to the 2020 extension of Company's Marvel and Lucasfilm
royalty agreements and lower prepaid tax balances. In 2020, prepaid expenses and
other current assets increased 96% compared to 2019 due to higher accrued
royalty and licensing income, primarily attributable to accrued revenue balances
of $236.9 million associated with eOne's properties and content, higher prepaid
royalty amounts due to payments made in the first quarter of 2020 in relation to
the Company's Marvel and Lucas agreements, higher accrued tax credits related to
film and television production costs and higher prepaid tax balances as a result
of lower earnings relative to estimated tax payments. These 2020 increases were
partially offset by lower unrealized gains on foreign exchange contracts and
lower short-term investment balances as a result of the Company's global cash
management strategy.
Other assets increased 3% in 2021 compared to 2020. The increase was driven by
higher investments in film and television productions, higher investments in
content development and higher long-term accrued income balances related to
certain of the Company's content distribution arrangements. These increases were
partially offset by a lower balance for the Company's investment in Discovery
Family Channel, due to impairment charges recorded in the fourth quarter of
2021. Other assets increased 115% in 2020 compared to 2019. The increase was
primarily due to the addition of eOne's investments in acquired content and
production for film, television and music content of $627.9 million . Also
contributing to the increase in 2020 are higher long-term accrued income
balances primarily driven by eOne and higher deferred tax balances resulting
from the eOne acquisition. These increases were
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partially offset by lower capitalized television production costs in the legacy Hasbro business and lower non-current royalty advances which have been reclassified from non-current to current.
Accounts payable and accrued liabilities increased 15% in 2021 compared to 2020. The drivers of the increase include higher account payable balances driven by an extension of payable terms, higher accrued expenses for investments in content and productions, higher accrued freight balances due to increased costs as a result of supply chain disruptions and higher incentive compensation accruals. These increases were partially offset by lower accrued participations and residuals, lower balances of certain accounts payable and accrued liabilities associated with the sale of eOne Music and lower severance accruals from payments made in relation to restructuring actions taken in 2018 and eOne integration severance in 2020. Accounts payable and accrued liabilities increased 56% in 2020 compared to 2019. The increase was primarily attributable to accrued participation and deferred revenue balances attributable to eOne. In addition, increases included higher account payable balances, higher accrued royalty balances, and higher accrued salaries and incentive compensation balances. Other liabilities decreased 16% in 2021 compared to 2020. The decrease was driven by lower long-term lease liability balances and a lower transition tax liability balance reflecting the reclassification of the 2022 installment payment, lower tax reserves and a lower Discovery option agreement balance due to a revaluation of the Discovery Family Channel investment during the fourth quarter of 2021. These decreases were partially offset by higher deferred compensation reserve balances. Other liabilities increased 43% in 2020 compared to 2019. The increase was primarily driven by deferred tax liabilities recorded as a result of the eOne acquisition, higher long-term lease liability balances resulting from the eOne acquisition and higher reserves for uncertain tax positions. In addition, the balance in 2020 includes the inclusion of long-term deferred revenue balances related to eOne. These increases were partially offset by a lower transition tax liability balance reflecting the reclassification of the 2021 installment payment.
Cash Flow
The following table summarizes the changes in the consolidated statement of cash flows included in Part II, Item 8. Financial Statements, of this Form 10-K, expressed in millions of dollars, for each of the years ended onDecember 26, 2021 ,December 27, 2020 andDecember 29, 2019 . 2021 2020 2019 Net cash provided by (used in): Operating Activities$ 817.9 $ 976.3 $ 653.1 Investing Activities 242.0 (4,500.2) (60.9) Financing Activities (1,459.8) 405.9 2,810.6 In 2021, 2020 and 2019, Hasbro generated$817.9 million ,$976.3 million and$653.1 million of cash from its operating activities, respectively. Operating cash flows in 2021, 2020 and 2019 included$697.3 million ,$438.9 million and$33.9 million , respectively, of cash used for television program and film production. The decrease in net cash provided by operating activities during 2021, was primarily attributable to the increased spend for television program and film production, as well as an increase in working capital cash outflows associated with increased accounts receivable and inventory balances as noted above. These outflows were partially offset by higher earnings in 2021 and favorable changes in accounts payable terms in certain markets. The increase in operating cash flows in 2020 was primarily attributable to higher collections of accounts receivable balances and higher earnings excluding non-cash charges. These increases were partially offset by higher film and television production spend as a result of the inclusion of eOne operations during 2020. Cash flows provided by investing activities were$242.0 million in 2021 compared to cash flows utilized by investing activities of$4,500.2 million in 2020 and$60.9 million in 2019. Investing activities in 2021 include$378.5 million of proceeds, net of cash sold, from the sale of eOne Music. Investing activities in 2020 reflect$4.4 billion of cash utilized to acquire eOne, net of cash acquired. Additions to property, plant and equipment were$132.7 million ,$125.8 million and$133.6 million in 2021, 2020 and 2019, respectively. Of these additions, 52% in 2021, 51% in 2020 and 54% in 2019 were for purchases of tools, dies and molds related to the Company's products. During the fiscal years endedDecember 26, 2021 ,December 27, 2020 andDecember 29, 2019 , the depreciation of plant and equipment was$163.3 million ,$120.2 million and$133.5 million , respectively. Fluctuations in depreciation of plant and equipment correlate with the percentage of additions to property, plant and equipment relating to tools, dies and molds which have shorter useful lives and accelerated depreciation. The net proceeds received from the sale of eOne Music during the third quarter of 2021, were used for long-term debt repayments as part of the Company's plan to accelerate deleveraging, and for general corporate purposes to run the business. The cash used for the 61
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purchase of eOne in 2020 consisted of the net proceeds from the issuance of an aggregate principal amount of$2.4 billion in senior secured notes inNovember 2019 , net proceeds$975.2 million from of the issuance of approximately 10.6 million shares of common stock inNovember 2019 and$1.0 billion in term loans drawn in the first quarter of 2020. Excluding capital expenditures, 2019 cash utilized for investing activities reflects a cash payment net of cash acquired of$8.8 million related to the acquisition of Tuque Games in October of 2019 as well as offsetting realized gains of$80.0 million from hedges in relation to the Company's exposure to fluctuations in the British pound sterling associated with the eOne acquisition purchase price and other transaction related costs. The Company's 2019 investing activities also included$6.4 million received from the installment note relating to the sale of the Company's manufacturing operations in 2015.
Net cash (utilized) provided by financing activities was
Cash utilized by financing activities in 2021 included repayment of$300.0 million aggregate principal amount of 3.15% Notes due 2021, during the first quarter; early repayment of$300.0 million aggregate principal of 2.60% Notes due 2022 and related debt extinguishment costs of$9.1 million during the third quarter; payments totaling$480 million related to the$1.0 billion in term loans consisting of$300.0 million for the remaining principal balance of the Three-Year Tranche loans and$150.0 million principal and quarterly principal amortization payments totaling$30 million toward the Five-Year Tranche loan; and drawdowns of$144.0 million and repayments of$140.1 million related to production financing loans. Cash provided by financing activities in 2020 included the drawdown of the Company's$1.0 billion in term loans, as well as drawdowns of$115.6 million related to production financing loans. Partially offsetting these cash inflows were production financing loan repayments of$159.8 million , payments of$47.4 million associated with the redemption of eOne stock awards that were accelerated as a result of the acquisition and payments totaling$122.5 million towards the$1.0 billion term loans described above. In 2019, net cash provided by financing activities included the following financing activities associated with the Company's acquisition of eOne: net proceeds of$2,355.0 million from theNovember 2019 issuance of senior unsecured long-term debt securities, net proceeds of$975.2 million from the issuance of 10.6 million shares of common stock and debt acquisition costs of$26.7 million paid in relation to eOne acquisition financing arrangements. In addition, net cash from 2019 financing activities included the Company's remaining payment of$100.0 million related to the 2018 POWER RANGERS brand acquisition. Financing activities in 2019 also reflect$61.4 million of cash paid, including transaction costs, to repurchase the Company's Common Stock. There were no repurchases of the Company's common stock in 2021 or 2020 as the Company suspended its share repurchase program while it prioritizes deleveraging. During 2019, the Company repurchased 0.7 million shares at an average price of$87.41 . AtDecember 26, 2021 ,$366.6 million remained for share repurchases under theMay 2018 Board authorization. Dividends paid were$374.5 million in 2021,$372.7 million in 2020 and$336.6 million in 2019. The Company has a long history of returning cash to its shareholders through quarterly dividends and has maintained its quarterly dividend rate of$0.68 per share throughout 2021. The increase in dividends from 2019 to 2020 reflects higher shares outstanding as a result of theNovember 2019 stock issuance. Net repayments of short-term borrowings were$5.6 million ,$8.6 million and$8.8 million in 2021, 2020 and 2019, respectively. The Company generated cash from employee stock option transactions of$30.6 million ,$16.6 million , and$31.8 million in 2021, 2020 and 2019, respectively. The Company paid withholding taxes related to share-based compensation of$13.7 million ,$6.0 million and$13.1 million in 2021, 2020 and 2019, respectively.
Sources and Uses of Cash
In relation to the Company's consumer products business, the Company commits to
inventory production, advertising and marketing expenditures prior to the peak
fourth quarter retail selling season. Accounts receivable increase during the
third and fourth quarter as customers increase their purchases to meet expected
consumer demand in their holiday selling season. Due to the concentrated
timeframe of this selling period, payments for these accounts receivable are
generally not due until the fourth quarter or early in the first quarter of the
subsequent year. This timing difference between expenditures and cash
collections on accounts receivable sometimes makes it necessary for the Company
to borrow amounts during the latter part of the year. The entertainment business
often expends cash for production well in advance of sale and delivery of the
content. Trading card and digital gaming revenues have shorter collection
periods, but development expense occurs often years prior to release and revenue
generation. During 2021, 2020 and 2019 the Company primarily used cash from
operations and, to a lesser extent, borrowings under available lines of credit,
in particular production financing vehicles, to fund its working capital.
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The Company has an agreement with a group of banks which provides for a commercial paper program (the "Program"). Under the Program, at the request of the Company and subject to market conditions, the banks may either purchase from the Company, or arrange for the sale by the Company, of unsecured commercial paper notes. The Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of$1.0 billion . The maturities of the notes may vary but may not exceed 397 days. The notes are sold under customary terms in the commercial paper market and are issued at a discount to par, or alternatively, sold at par and bear varying interest rates based on a fixed or floating rate basis. The interest rates vary based on market conditions and the ratings assigned to the notes by the credit rating agencies at the time of issuance. Subject to market conditions, the Company intends to utilize the Program as its primary short-term borrowing facility and does not intend to sell unsecured commercial paper notes in excess of the available amount under the revolving credit agreement discussed below. If, for any reason, the Company is unable to access the commercial paper market, the Company intends to use the revolving credit agreement to meet the Company's short-term liquidity needs. AtDecember 26, 2021 , the Company had no outstanding borrowings related to the Program and has not borrowed under the program in 2021 or 2020. The Company has a second amended and restated revolving credit agreement withBank 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 throughSeptember 20, 2024 . The Company was in compliance with all covenants as ofDecember 26, 2021 . The Company had no borrowings outstanding under its committed revolving credit facility as ofDecember 26, 2021 . However, letters of credit outstanding under this facility as ofDecember 26, 2021 were approximately$3.1 million . Amounts available and unused under the committed line, atDecember 26, 2021 were approximately$1,496.9 million , inclusive of borrowings under the Company's commercial paper program. The Company also has other uncommitted lines from various banks, of which approximately$11.2 million was utilized atDecember 26, 2021 . Of the amount utilized under, or supported by, the uncommitted lines, approximately$0.7 million and$10.5 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") withBank 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"). OnDecember 30, 2019 , the Company completed the acquisition of eOne and on that date, borrowed the full amount of$1.0 billion under the Term Loan Facilities. Of the Three-Year Tranche$400 million principal balance, the Company repaid$100 million during the fourth quarter 2020 and the remaining$300 million balance during 2021. Of the Five-Year Tranche$600.0 million principal balance, the Company repaid$22.5 million and$180.0 million during 2020 and 2021, respectively. The Company is subject to certain financial covenants contained in this agreement and, as ofDecember 26, 2021 , the Company was in compliance with these covenants. The terms of the Term Loan Facilities are described in note 11 to the consolidated financial statements included in Part II, Item 8. Financial Statements, of this Form 10-K. During November 2019 , in conjunction with the Company's acquisition of eOne, the Company issued an aggregate of$2.4 billion of senior unsecured debt securities (collectively, the "Notes") consisting of the following tranches:$300 million of notes due 2022 (the "2022 Notes") that bear interest at a fixed rate of 2.60%;$500 million of notes due 2024 (the "2024 Notes") that bear interest at a fixed rate of 3.00%;$675 million of notes due 2026 (the "2026 Notes") that bear interest at a fixed rate of 3.55%; and$900 million of notes due 2029 (the "2029 Notes") that bear interest at a fixed rate of 3.90%. During the third quarter of 2021, the Company repaid in full, its 2022 Notes in the aggregate principal amount of$300.0 million , including early redemption premiums and accrued interest of$10.8 million . The terms of the Notes are described in note 11 to the consolidated financial statements in Part II, Item 8. Financial Statements, of this Form 10-K. During 2021 and 2020, the Company used production financing to fund certain of its film and television productions which were typically arranged on an individual production basis by special purpose production subsidiaries. Production financing facilities were secured by the assets and future revenue of the individual production 63
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subsidiaries and were non-recourse to the Company's assets. During 2021, the Company had drawdowns of$144.0 million and repayments of$140.1 million towards its production financing facilities. As ofDecember 26, 2021 the Company outstanding production financing borrowings related to these facilities were$170.1 million , all of which are recorded within the current portion of long-term debt in the Company's consolidated balance sheets, included in Part II, Item 8. Financial Statements, of this Form 10-K. During November 2021 , the Company secured a senior revolving film and television production credit facility (the "RPCF") withMUFG Union Bank, N.A. , as administrative agent and lender and certain other financial institutions, as lenders thereto (the "Revolving Production Financing Agreement") which provides the Company with commitments having a maximum aggregate principal amount of$250.0 million . The Revolving Production Financing Agreement also provides the Company the option to request a commitment increase up to an aggregate additional amount of$150.0 million subject to agreement of the lenders. The Revolving Production Financing Agreement extends throughNovember 22, 2024 . The Company will use the RPCF to fund certain of the Company's original film and TV production costs. Borrowings under the RPCF will be non-recourse to the Company's assets. The Company has principal amounts of long-term debt atDecember 26, 2021 of$4.1 billion due at varying times from 2022 through 2044. Of the total principal amount of long-term debt,$200.1 million is current atDecember 26, 2021 of which$30.0 million is related to principal amortization of the 5-year term loans dueDecember 2024 and$170.1 million represents the Company's outstanding production financing facilities atDecember 26, 2021 . In addition to the early repayment of the 2022 Notes described above, during the first quarter of 2021, the Company repaid in full, its 3.15% Notes in the aggregate principal amount of$300.0 million due inMay 2021 , including accrued interest. See note 11 and note 20 to the Company's consolidated financial statements in Part II, Item 8. Financial Statements, of this Form 10-K for additional information on long-term debt and long-term debt interest repayment, respectively. In November of 2019, the Company completed an underwritten public offering of 10.6 million shares of common stock, par value$0.50 per share, at a public offering price of$95.00 per share. Net proceeds from this public offering were approximately$975.2 million , after deducting underwriting discounts and commissions and offering expenses of approximately$31.1 million . The net proceeds were used to finance, in part, the acquisition of eOne and to pay related costs and expenses. See note 9 to the consolidated financial statements in Part II, Item 8. Financial Statements, of this Form 10-K for more information on the Company's eOne acquisition financing. Under a multi-year game production agreement entered withCartamundi , the Company has purchase commitments of$95.0 million in 2022 and$85.0 million in 2023. The Company also has various third-party, inventory and tooling purchase commitments related primarily to the Company's Consumer Products segment which may total approximately$441.7 million in 2022. These payments exclude inventory and tooling purchase liabilities included in accounts payable or accrued liabilities on the consolidated balance sheets as ofDecember 26, 2021 .
Share Repurchases and Dividends
The Company has a long history of returning cash to its shareholders through quarterly dividends and share repurchases. In 2021, Hasbro maintained its quarterly dividend rate of$0.68 per share. InFebruary 2022 the Company's Board announced a 3% increase in the Company's quarterly dividend rate to$0.70 per share for the quarterly dividend scheduled to be paid inMay 2022 . In addition to the dividend, the Company periodically returns cash to shareholders through its share repurchase program. As part of this initiative, since 2005 the Company's Board of Directors (the "Board") adopted numerous share repurchase authorizations with a cumulative authorized repurchase amount of$4.3 billion . The most recent authorization was approved inMay 2018 for$500 million . Since 2005, Hasbro has repurchased 108.6 million shares at a total cost of$4.0 billion and an average price of$36.44 per share. AtDecember 26, 2021 , Hasbro had$366.6 million remaining available under these share repurchase authorizations. Share repurchases are subject to market conditions, the availability of funds and other uses of funds. As a result of the financing activities related to the eOne acquisition, the Company has suspended its current share repurchase program while it prioritizes deleveraging. There were no share repurchases made in 2020 or 2021, however a share repurchase program continues to be an important long-term component of Hasbro's capital allocation strategy and Hasbro has$367 million available under its authorized share repurchase programs. We anticipate resuming share repurchase when it is not expected to materially impact the timeline to reach our deleverage targets. The Company believes this could be in the second half of 2023 or sooner, depending on business performance and other factors. 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. The Company intends to resume this program when it will not materially impact its ability to de-lever. 64
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Critical Accounting Policies and Significant Estimates
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America . As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. The critical accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company's reported financial results include film and television production costs, recoverability of goodwill, intangible assets, income taxes and business combinations. Additionally, the Company identified the valuation of the Company's equity method investment in Discovery Family Channel as a significant accounting estimate.
Film and Television Production Costs
The Company incurs certain costs in connection with the production of television programs and films which are capitalized as they are incurred, the majority of which are amortized using the individual-film-forecast method. These costs, which include direct production costs, development costs, acquisition and inventory costs as well as residuals and participations, are amortized in the proportion that the current year's revenues bear to management's estimate of total ultimate revenues as of the beginning of each fiscal year related to the film or television program. These capitalized costs are reported at the lower of cost, less accumulated amortization, or fair value, and reviewed for impairment when an event or change in circumstances occurs that indicates that impairment may exist. The fair value is determined using a discounted cash flow model which is primarily based on management's future revenue and cost estimates. The most significant estimates are those used in the determination of ultimate revenue in the individual-film-forecast method. Ultimate revenue estimates impact the timing of program production cost amortization in the consolidated statements of operations. Ultimate revenue includes revenue from all sources that are estimated to be earned related to a film or television program and include theatrical exhibition; first run program distribution fees; toy, game and other consumer product licensing fees; and other revenue sources, such as secondary market home entertainment formats and subscription video on demand services. Our ultimate revenue estimates for each film or television program are developed based on our estimates of expected future results. We review and revise these estimates at each reporting date to reflect the most current available information. When estimates for a film or television program are revised, the difference between the program production cost amortization determined using the revised estimate and any amounts previously expensed during that fiscal year, are included as an adjustment to program production cost amortization in the consolidated statements of operations in the period in which the estimates are revised. Prior period amounts are not adjusted for subsequent changes in estimates. Factors that can impact our revenue estimates include the historical performance of similar films and television programs, expected distribution platforms, factors unique to our television and film content and the success of our program-related toy, game and other merchandise.
Recoverability of
The Company tests goodwill for impairment at least annually. If an event occurs or circumstances change that indicate that the carrying value of a reporting unit exceeds its fair value, the Company will perform an interim goodwill impairment test at that time. The Company may perform a qualitative assessment and bypass the quantitative impairment testing process, if it is not more likely than not that impairment exists. If it is more likely than not that impairment exists, a quantitative goodwill impairment test is performed. When performing a quantitative impairment test, goodwill is tested for impairment by comparing the carrying value to the estimated fair value of the reporting unit which is calculated using an income approach. Other intangible assets with indefinite lives are tested for impairment by comparing their carrying value to their estimated fair value. In 2020, following the acquisition of eOne during the first quarter, the Company allocated its$4.6 billion purchase price to tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of the acquisition date. The excess of the purchase price over those fair values amounted to$3.2 billion and was recorded to goodwill and allocated to the Company's reportable segments as follows: Entertainment:$2.241 million and Consumer Products:$954.0 million . During the first quarter of 2021, the Company realigned its financial reporting structure creating the following three principal reporting segments: Consumer Products, Wizards of the Coast andDigital Gaming and Entertainment . As a result of these changes, the Company reallocated its goodwill among the revised reporting units based on the change in relative fair values of the respective reporting units. See note 6 to the Company's consolidated financial 65
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statements in Part II, Item 8. Financial Statements, of this Form 10-K for details on the allocation of goodwill across the Company's new reporting structure.
In conjunction with the goodwill reallocation described above, during the first quarter of 2021, the Company performed a qualitative impairment test of goodwill balances held by the reporting units impacted by the segment realignment. The reporting units were tested as ofDecember 28, 2020 and included ourEurope ,Asia Pacific ,Global Consumer Products Licensing , Wizards of the Coast and Family Brands reporting units. Based on the results of the goodwill assessment, we determined that the fair values of each of these reporting units exceeded their carrying values, and as such, we concluded that there was no indication of goodwill impairment for these reporting units as ofDecember 28, 2020 . In the third quarter 2021, the Company sold eOne Music for net proceeds of$397.0 million . The Company acquired eOne Music through its acquisition of eOne in fiscal 2020. Based on the value of the net assets held by eOne Music, which included certain goodwill and intangible assets allocated as described above, to the eOne reportable segment and attributable to eOne Music, the Company recorded a pre-tax non-cash goodwill impairment charge of$108.8 million within Loss on Disposal of Business on the Consolidated Statements of Operations for the year endedDecember 26, 2021 . See note 6 to the Company's consolidated financial statements in Part II, Item 8. Financial Statements, of this Form 10-K for details on the eOne Music goodwill impairment. During the fourth quarter of 2021, the Company performed a quantitative goodwill analysis with respect to each of its reporting units to determine the existence and extent of any impairment. The quantitative analysis concluded that the fair values of the Company's reporting units exceeded their carrying values. As a result of this assessment, the Company concluded there was no impairment to any of its reporting units as ofDecember 26, 2021 other than the Music impairment loss noted above. During the fourth quarter of 2020 the Company performed a qualitative goodwill assessment with respect to each of its reporting units, including an assessment of eOne. The assessment included the consideration of COVID-19 and the impact to the business in 2020. Based on the conclusions reached, the Company determined that it was not necessary to perform a quantitative assessment for the goodwill of the reporting units in 2020. The estimation of future cash flows utilized in the evaluation of the Company's goodwill requires significant judgments and estimates with respect to future revenues related to the respective asset and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in a change in this assessment and result in an impairment charge. The estimation of discounted cash flows also requires the selection of an appropriate discount rate. The use of different assumptions would increase or decrease estimated discounted cash flows and could increase or decrease the related impairment charge.
Intangible assets, other than those with indefinite lives, are reviewed for indications of impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.
During 2020, the Company determined that certain of its definite-lived intangible entertainment and production assets related to properties, from both the legacy Hasbro business as well as properties acquired through the eOne acquisition, were impaired. It was determined that the carrying values of these intangible assets exceeded their related future cash flows, thus indicating impairment. As a result, charges of$20.1 and$30.7 million were recorded in the first and fourth quarters of 2020, respectively, within acquisition and related costs in the Company's consolidated statement of operations, included in Part II, Item 8. Financial Statements, of this Form 10-K.
There were no other triggering events in 2021 or 2020 which would indicate the Company's intangible assets were impaired.
Income Taxes
The Company's annual income tax rate is based on its income, statutory tax rates, changes in prior tax positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant judgment and estimates are required to determine the Company's annual tax rate and evaluate its tax positions. Despite the Company's belief that its tax return positions are fully supportable, these positions are subject to challenge and estimated liabilities are established in the event that these positions are challenged, and the Company is not successful in defending these challenges. These estimated liabilities, as well as the related interest, are adjusted in light of changing facts and circumstances such as the progress of a tax audit. InMay 2019 , a public referendum held inSwitzerland approved the Swiss Federal Act on Tax Reform and AHV Financing (TRAF) proposals previously approved by theSwiss Parliament . The Swiss tax reform measures were effective onJanuary 1, 2020 . Changes in tax reform include the abolishment of preferential tax regimes for holding 66
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companies, domicile companies and mixed companies at the cantonal level. The enacted changes in Swiss federal and cantonal tax, including cantonal transitional provisions adopted in 2021, were not material to the Company's financial statements.
In certain cases, tax law requires items to be included in the Company's income tax returns at a different time than when these items are recognized in the consolidated financial statements or at a different amount than that which is recognized in the consolidated financial statements. Some of these differences are permanent, such as expenses that are not deductible on the Company's tax returns, while other differences are temporary and will reverse over time, such as depreciation expense. These differences that will reverse over time are recorded as deferred tax assets and liabilities on the consolidated balance sheets. Deferred tax assets represent deductions that have been reflected in the consolidated financial statements but have not yet been reflected in the Company's income tax returns. Valuation allowances are established against deferred tax assets to the extent that it is determined that the Company will have insufficient future taxable income, including capital gains, to fully realize the future deductions or capital losses. Deferred tax liabilities represent expenses recognized on the Company's income tax return that have not yet been recognized in the Company's consolidated financial statements or income recognized in the consolidated financial statements that has not yet been recognized in the Company's income tax return.
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 interests 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 interests in the
acquiree exceed the recognized basis of the identifiable assets acquired, net of
assumed liabilities. Determining the fair value of assets acquired, liabilities
assumed and noncontrolling interests 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 eOne assets acquired and liabilities assumed,
including income tax related amounts continued throughout 2020. As further
analysis of assets including program rights, investment in films and television
content, intangible assets, as well as deferred revenue, noncontrolling
interests, tax and certain other liabilities was completed during the year,
additional information on the assets acquired and liabilities assumed became
available. Changes in the information related to the net assets acquired changed
the amount of the purchase price assigned to goodwill, and as a result, the
preliminary fair values disclosed were adjusted as additional information was
obtained and valuations were finalized. Provisional adjustments were recognized
during the reporting periods in which the adjustments were determined. For more
information on the eOne acquisition see note 3 to the consolidated financial
statements included in Part II, Item 8. Financial Statements, of this Form 10-K.
Valuation of
The Company owns an interest in a joint venture, Discovery Family Channel ("the
Network"), with Discovery Communications, Inc. ("Discovery"). The Company has
determined that it does not meet the control requirements to consolidate the
Network and accounts for the investment using the equity method of accounting.
The Network was established to create a cable television network in the United
States dedicated to high-quality children's and family entertainment. In October
2009 , the Company purchased an initial 50% share in the Network for a payment of
$300 million and certain future tax payments based on the value of certain tax
benefits expected to be received by the Company. In September 2014 , the Company
and Discovery amended their relationship with respect to the Network and
Discovery increased its equity interest in the Network to 60% while the Company
retained a 40% equity interest in the Network. In connection with the amendment,
the Company and Discovery entered into an option agreement related to the
Company's remaining 40% ownership in the Network, exercisable during the
one-year period following December 31, 2021 . The exercise price of the option
agreement is based upon 80% of the then fair market value of the Network,
subject to a fair market value floor.
The Company tests its equity method investment in the Network for impairment
annually. If an event occurs or circumstances change that indicate that the
carrying value may not be recoverable, the Company will perform an interim test
at that time. The Company's valuation of its equity method investment in the
Network includes assumptions surrounding forecasted revenue and expenses, a
discount rate and a terminal growth rate, which are used to estimate the fair
value of the investment and involve a high degree of subjectivity given the
volatility in consumer interest when choosing entertainment media.
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During the fourth quarter of 2021, the Company reviewed its investment in the Network for impairment and concluded that the fair value of the Company's interest in the joint venture was less than its carrying value. Recent accelerating changes in the cable distribution industry, including technological changes and expanding options for digital content offerings, has resulted in the fragmentation of viewership, declines in subscribers to the traditional cable bundle, and pricing pressure. These factors led to a lower valuation of the Network as compared to its carrying value. As a result, the Company recorded an impairment loss of$74.1 million , related to its investment in the Network, which is included in other (income) expense, net in the consolidated statements of operations for the year endedDecember 26, 2021 . As result of the Network's revaluation, the Company recorded a gain of$20.1 million in relation to the Company's Discovery option agreement described above.
Contractual Obligations and Commercial Commitments
In the normal course of its business, the Company enters into contracts related to obtaining rights to produce products under license, which may require the payment of minimum guarantees. In addition, the Company enters into contractual commitments to obtain film and television content distribution rights and minimum guarantee commitments related to the purchase of film and television rights for content to be delivered in the future. The Company has also entered into operating leases for certain facilities and equipment. In addition, the Company has$3,824.2 million in principal amount of long-term debt outstanding atDecember 26, 2021 . See note 20 to the consolidated financial statements included in Part II, Item 8. Financial Statements, of this Form 10-K for further information on the Company's contractual obligations and commercial commitments.
Other Expected Future Payments
From time to time, the Company may be party to arrangements, contractual or otherwise, whereby the Company may not be able to estimate the ultimate timing or amount of the related payments. These amounts are described below:
•Included in other liabilities in the consolidated balance sheets atDecember 26, 2021 , the Company has a liability of$41.4 million of potential tax, interest and penalties for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. The Company does not know the ultimate resolution of these uncertain tax positions and as such, does not know the ultimate amount or timing of payments related to this liability.
•At
The Company believes that cash from operations and funds available through its commercial paper program or lines of credit, as described above under "Liquidity and Capital Resources", will allow the Company to meet these and the other contractual obligations and commercial commitments described above.
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 inU.S. dollars,Hong Kong dollars and Euros while marketing and selling those products in more than twenty currencies. Results of operations may be affected primarily by changes in the value of theU.S. dollar, Euro, British pound sterling, Canadian dollar, Brazilian real, Russian ruble and Mexican peso and, to a lesser extent, other currencies in Latin American andAsia Pacific countries. To manage this exposure, the Company has hedged a portion of its forecasted foreign currency transactions using foreign exchange forward contracts. AtDecember 26, 2021 , the Company estimates that a hypothetical immediate 10% depreciation of theU.S. dollar against all foreign currencies included in these foreign exchange forward contracts could result in an approximate$24.3 million decrease in the fair value of these instruments. A decrease in the fair value of these instruments would be substantially offset by increases in the value of the forecasted foreign currency transactions. 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 theU.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 68
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than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts.
The Company reflects all derivatives at their fair value as an asset or liability on the consolidated balance sheets. The Company does not speculate in foreign currency exchange contracts. AtDecember 26, 2021 , these contracts had net unrealized gains of$8.3 million , of which$10.7 million are recorded in prepaid expenses and other current assets,$0.2 million are recorded in other assets,$2.6 million are recorded in accrued liabilities. Included in accumulated other comprehensive earnings atDecember 26, 2021 are deferred gains of$9.6 million , net of tax, related to these derivatives. 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 a 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. The Company recorded realized gains of$80.0 million to other (income) expense, net on the matured portion of these contracts for the year endedDecember 29, 2019 . The remaining contracts matured onDecember 30, 2019 , the closing date of the transaction. The net gains or losses recognized in 2020 were immaterial to the Company's consolidated financial statements. AtDecember 26, 2021 , the Company had fixed rate long-term debt of$3,484.9 million . InMay 2014 the Company issued an aggregate$600.0 million of long-term debt which consisted of$300.0 million of 3.15% Notes, subsequently repaid in 2021, and$300.0 million of 5.10% Notes due 2044. Prior to theMay 2014 debt issuance, the Company entered into forward-starting interest rate swap agreements with a total notional value of$500.0 million to hedge the anticipated underlyingU.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 issuance, the Company terminated these 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 atDecember 26, 2021 are deferred losses, net of tax, of$15.6 million related to these derivatives.
Industry Trends, the Economy and Inflation
The principal market for the Company's toys and games and licensed consumer
products, is the retail sector. Revenues from the Company's top five retail
customers, accounted for approximately 36% of its consolidated net revenues in
2021, 35% in 2020 and 38% of its consolidated net revenues in 2019. The Company
monitors the creditworthiness of its customers and adjusts credit policies and
limits as it deems appropriate.
The Company's revenue pattern continues to show the second half of the year to
be more significant to its overall business for the full year. In 2021,
approximately 62% of the Company's full year net revenues were recognized in the
second half of the year. The Company expects that this concentration will
continue. 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 business of the Company is characterized by customer order
patterns which vary from year to year largely because of differences in the
degree of consumer acceptance of a product line, product availability, marketing
strategies, inventory levels, policies of retailers and differences in overall
economic conditions. Larger retailers generally maintain lower inventories
throughout the year and purchase a greater percentage of product within or close
to the fourth quarter holiday consumer buying season, which includes Christmas.
Quick response inventory management practices being used by retailers as well as
growth in ecommerce result in orders increasingly placed for immediate delivery
and fewer orders placed well in advance of shipment. Retailers are timing their
orders so that they are filled by suppliers closer to the time of purchase by
consumers. To the extent that retailers do not sell as much of their year-end
inventory purchases during this holiday selling season as they had anticipated,
their demand for additional product earlier in the following fiscal year may be
curtailed, thus negatively impacting the Company's future revenues. However, in
2021, the Company's inventory levels increased 40% compared to 2020. This
increase is the result of ongoing global supply chain disruptions, which began
in late 2020 as economies slowly recovered from COVID-19 shutdowns, while
consumer demand began to outpace the capacity of the global supply chain
infrastructure. Supply chain inefficiencies including overcrowding of cargo
ports and shipping container and truck transportation shortages, have led to
higher costs for ocean, air and over the road freight and delays in the
availability of products, as inventory remains in transit for extended periods
of time. These and other disruptions are expected to continue throughout 2022.
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In addition to these inventory management challenges, the bankruptcy or other lack of success of one of the Company's significant retailers could negatively impact the Company's future revenues. Unlike the Company's retail sales patterns, revenue patterns from the Company's entertainment businesses fluctuate based on the timing and popularity of television, film, streaming and digital content releases. Release dates are determined by factors including the timing of holiday periods, geographical release dates and competition in the market. In addition, entertainment business operating results fluctuate due to expenses recorded in relation to film and television productions and content such as program amortization costs and advertising expenses, which are incurred and recognized, beginning prior to initial releases and then continue throughout the related distribution windows.
Inflation
The impact of inflation on the Company's business operations has been significant during 2021 compared to prior years. However, due to mitigating actions taken by the Company, such as modest price increases when deemed necessary, the impact of general price inflation on our 2021 financial position and results of operations has not been significant. The Company continues to monitor the impact of inflation to its business operations on an ongoing basis and may need to adjust its prices further to mitigate the impacts of changes to the rate of inflation during 2022 or in future years. However, future volatility of general price inflation and the impact of inflation on costs and availability of materials, costs for shipping and warehousing and other operational overhead could adversely affect the Company's financial results.
Other Information
The Company is not aware of any material amounts of potential exposure relating to environmental matters and does not believe its environmental compliance costs or liabilities to be material to its operating results or financial position.
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