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 is a globalBranded Entertainment leader whose mission is to entertain and connect generations of fans through the wonder of storytelling and exhilaration of play. Hasbro is guided by our Purpose to create joy and community for all people around the world, one game, one toy, one story at a time. Hasbro delivers immersive brand experiences for global audiences through gaming, consumer products and entertainment. Our portfolio of iconic brands includes MAGIC: THE GATHERING, DUNGEONS & DRAGONS, Hasbro Gaming, NERF, TRANSFORMERS, PLAY-DOH and PEPPA PIG, 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 our Blueprint 2.0, 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. 43
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Hasbro generates revenue and earns cash across our Blueprint 2.0 by developing, marketing, licensing, distributing and selling products, play and entertainment experiences, 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, ecommerce platforms and Hasbro Direct, 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, 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. As we continue our Blueprint 2.0 transformation efforts focusing on fewer, bigger brands, we have begun out-licensing certain non-core brands which we believe may be more profitable through a licensing arrangement.
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. 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.
2022 highlights
•Net revenues of$5,856.7 million decreased 9% from$6,420.4 million in 2021. The decline in net revenues includes an unfavorable foreign currency translation of$166.3 million .
•Net revenues in the Consumer Products segment decreased 10% to
•TV/Film/Entertainment portfolio net revenues decreased 17%; Hasbro Gaming net revenues decreased 13%; Emerging Brands net revenues decreased 12%; Partner Brands net revenues decreased 9%; and Franchise Brands net revenues decreased 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, totaled$2.0 billion , a decrease of 5%.
•Operating profit was
•Operating Profit in the Wizards of the Coast and Digital Gaming segment
decreased 2% to
•Net earnings attributable toHasbro, Inc. declined in 2022 to$203.5 million , or$1.46 per diluted share, compared to$428.7 million , or$3.10 per diluted share in 2021. 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 22%; TV/Film/Entertainment portfolio net
revenues increased 24%; Franchise Brands net revenues increased 23%; Partner
Brands net revenues increased 8%; and Hasbro Gaming net revenues increased 4%.
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•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 Wizards of the Coast and Digital Gaming segment
increased 30% to
•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.
Summary of Financial Performance
A summary of the Company's results of operations for 2022, 2021 and 2020 is
illustrated below.
2022 2021 2020
Net revenues $ 5,856.7 $ 6,420.4 $ 5,465.4
Operating profit 407.7 763.3 501.8
Earnings before income taxes 261.5 581.9 322.1
Net earnings 203.0 435.3 225.4
Net (loss) earnings attributable to noncontrolling interests
(0.5) 6.6 2.9
Net earnings attributable to Hasbro, Inc. 203.5 428.7 222.5
Diluted earnings per share 1.46 3.10 1.62
Results of Operations - Consolidated
The fiscal years ended
Net earnings attributable toHasbro, Inc. decreased to$203.5 million for the fiscal year endedDecember 25, 2022 compared to$428.7 million for the fiscal year endedDecember 26, 2021 , and were$222.5 million for the fiscal year endedDecember 27, 2020 .
Diluted earnings per share attributable to
Net earnings and diluted earnings per share attributable to
2022
•In association with the Company's strategic review and subsequent Blueprint 2.0
strategy shift to focus on fewer, bigger brands, the Company incurred net
charges of
•Net asset impairments and other net charges of$231.9 million , or$1.67 per diluted share, of which$215.2 million , or$1.55 per diluted share relates to the partial impairment of the Company's definite-lived Power Rangers intangible asset,$12.4 million , or$0.09 per diluted share, of incurred incremental asset charges related to product cancellations, consisting of inventory and asset write offs, and$4.3 million , or$0.03 per diluted share, of strategy-related asset impairments due to the cancellation of certain projects primarily within the Entertainment segment; and •A net loss on disposal of business of$21.1 million , or$0.15 per diluted share, comprised of a non-cash goodwill impairment loss of$11.8 million and other asset impairments of$9.3 million , related to the exit of non-core businesses within the Entertainment segment. •In support of Blueprint 2.0, Hasbro announced an Operational Excellence program designed to deliver$250-$300 million in annualized run-rate cost savings by year-end 2025. In association with this program the Company incurred net charges of$89.2 million comprised of the following:
•Net severance expense and other employee charges of
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•Net charges of
•In association with the Company's acquisition of eOne, the Company incurred
related expenses of
•Net expenses of$59.4 million , or$0.43 per diluted share, of incremental intangible amortization costs related to the intangible assets acquired in the eOne acquisition; and
•A net charge of
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's music business (e-One 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
•A net charge of
•Charges of$20.9 million , or$0.15 per diluted share, of additional stock compensation expense due to the contractual accelerated vesting of certain equity awards following the passing of the Company's former CEO in the fourth quarter of 2021. •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. Consolidated net revenues for the year endedDecember 25, 2022 declined 9% to$5,856.7 million from$6,420.4 million for the year endedDecember 26, 2021 and include an unfavorable foreign currency translation impact of$166.3 million as the result of foreign currency declines against the US dollar across the Company's regions. 46
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Consolidated net revenues for the year ended
The following table presents net revenues expressed in millions of dollars, by
brand portfolio for each year in the three years ended
2022 % 2021 % 2020
Net Revenues Change Net Revenues Change Net Revenues
Franchise Brands $ 2,830.6 -4 % $ 2,955.6 23 % $ 2,394.3
Partner Brands 1,052.0 -9 % 1,161.0 8 % 1,079.4
Hasbro Gaming 743.3 -13 % 851.4 4 % 814.8
Emerging Brands 402.1 -12 % 454.7 22 % 372.2
TV/Film/Entertainment 828.7 -17 % 997.7 24 % 804.7
Brand portfolio net revenues for the years ended December 26, 2021 and December
27, 2020 have been restated to reflect the elevation of PEPPA PIG from Emerging
Brands to Franchise Brands, effective for the first quarter of 2022. As a
result, net revenues of $162.9 million and $108.2 million , respectively, were
reclassified from Emerging Brands to Franchise Brands.
2022 versus 2021
Net revenues declined in all brand portfolios in 2022 compared to 2021.
Franchise Brands: The Franchise Brands portfolio net revenues decreased 4% in 2022 compared to 2021. Higher net revenues from MAGIC: THE GATHERING products, due to record sales from set releases that include: Kamigawa: Neon Dynasty, Commander Legends: Battle for Baldur's Gate, Double Masters, Dominaria United, Streets of New Capenna and The Brothers War, reflected momentum in the brand, elevating MAGIC: THE GATHERING to the Company's first billion-dollar brand. In addition, the Franchise Brands portfolio benefited from higher sales of PEPPA PIG products, driven by the third quarter 2021 launch of the Company's first line of PEPPA PIG product line and higher sales of PLAY-DOH products. These net revenue increases were offset by lower net revenues from NERF and MONOPOLY products and to a lesser extent, lower net revenues from TRANSFORMERS and BABY ALIVE products. Partner Brands: The Partner Brands portfolio net revenues declined 9% in 2022 compared to 2021. Within the Partner Brands portfolio, there are a number of brands which are reliant on related entertainment, including movie and television 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 films or television programming is released. In 2022, Partner Brands net revenue declines were driven by lower sales of the Company's products for DISNEY FROZEN and DISNEY PRINCESS as the related license neared the end of its term, lower sales of BEYBLADE products, and to a lesser extent, lower sales of GHOSTBUSTERS products. These net revenue decreases were partially offset by higher net revenues from the Company's products for MARVEL, led by momentum in the SPIDER-MAN franchise which benefited from entertainment releases including the children's animated television series, Marvel's Spidey and His Amazing Friends as well asMarvel Studios' Spider-Man: No Way Home, released inDecember 2021 . The Company's products for Marvel's AVENGERS benefited from the release ofMarvel Studios' Doctor Strange in the Multiverse of Madness inMay 2022 and theJuly 2022 release of Thor: Love and Thunder, while the Company's products for BLACK PANTHER were supported by theNovember 2022 release of Black Panther: Wakanda Forever. To a lesser extent, net revenues from the Company's line of STAR WARS products increased as a result of continued STAR WARS entertainment released on Disney+. In addition, Partner Brands net revenues benefited from the introduction of the Company's line of FORTNITE action figures during 2022. Hasbro Gaming: The Hasbro Gaming portfolio net revenues declined 13% in 2022 compared to 2021 driven primarily by lower net revenues from the Dungeons & Dragons:Dark Alliance digital game launched during the second quarter 2021 with no comparable release in 2022, as well as lower net revenues from JENGA, LIFE and certain other Hasbro Gaming products. These decreases were partially offset by higher net revenues fromAVALON HILL'S HeroQuest products during 2022. 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$1,997.5 million in 2022, a decrease 5%, from$2,098.9 million in 2021. 47
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Emerging Brands: The Emerging Brands portfolio net revenues declined 12% in 2022 compared to 2021 primarily driven by FURREAL FRIENDS and PJ MASKS products and to a lesser extent, core PLAYSKOOL and POTATO HEAD products. TV/Film/Entertainment: Net revenues from the TV/Film/Entertainment portfolio declined 17% in 2022 compared to 2021. Lower net revenues in 2022 were driven by the sale of eOne Music during the third quarter of 2021, which represented$65.2 million or 6% of TV,Film and Entertainment portfolio net revenues during 2021. In addition to the sale of eOne Music, net revenue declines in 2022 were driven by the lower number of film deliveries in 2022 compared to 2021 due to timing shifts of certain films into 2023, and to a lesser extent, lower unscripted television deliveries in 2022. These decreases were partially offset by higher net revenues from scripted production deliveries, most notably, Cruel Summer season two, The Rookie seasons four and five and The Rookie: Feds season one.
2021 versus 2020
Net revenues grew in all brand portfolios in 2021 compared to 2020.
Franchise Brands: The Franchise Brands portfolio net revenues increased 23% 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 PEPPA PIG products following the Company's launch of its first PEPPA PIG product line during the second half of 2021, 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 contributed to the increase. In addition to these increases were higher net revenues from TRANSFORMERS products supported by the release of the final chapter of the animated television series trilogy, Transformers: War For Cybertron inJuly 2021 and higher net revenues from PLAY-DOH products. Partner Brands: The Partner Brands portfolio net revenues increased 8% in 2021 compared to 2020. 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 2022. 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, a decrease 19%, from$1,763.8 million in 2020. Emerging Brands: The Emerging Brands portfolio net revenues grew 22% in 2021 compared to 2020. Net revenue increases were primarily driven by the Company's launch of its first PJ MASKS products during the second half of 2021, as well as demand for certain fan-oriented products. TV/Film/Entertainment: During 2021, net revenues from the TV/Film/Entertainment portfolio grew 24% compared to 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 48
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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.
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. 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.
SEGMENT RESULTS
The summary that follows provides a discussion of the results of operations of our four reportable segments: 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 2022, 2021 and 2020.
2022 % 2021 % 2020
Net Revenues Change Net Revenues Change Net Revenues
Consumer Products $ 3,572.5 -10 % $ 3,981.6 9 % $ 3,649.6
Wizards of the Coast & Digital Gaming 1,325.1 3 % 1,286.6 42 % 906.7
Entertainment 959.1 -17 % 1,152.2 27 % 909.1
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 25, 2022 . 2022 % 2021 % 2020 Net Revenues Change Net Revenues Change
Net Revenues
North America $ 2,064.8 -11 % $ 2,315.9 9 % $ 2,116.2
Europe 899.5 -16 % 1,067.7 8 % 989.2
Asia Pacific 293.4 -5 % 310.1 5 % 295.6
Latin America 314.8 9 % 287.9 16 % 248.6
Net Revenues $ 3,572.5 -10 % $ 3,981.6 9 % $ 3,649.6
2022 versus 2021
Consumer Products segment net revenues declined 10% in 2022 compared to 2021 and
included the impact of an unfavorable $117.5 million foreign currency
translation, most notably from the Company's European markets, and to a lesser
extent, the Company's Asia Pacific and Latin American markets. Segment net
revenues declined in all brand portfolios including Franchise Brands, Partner
Brands and to a lesser extent, Hasbro Gaming and Emerging Brands during 2022
compared to 2021.
In addition to the unfavorable foreign exchange, the drivers of the net revenue
decrease include lower sales of NERF, MONOPOLY, TRANSFORMERS and BABY ALIVE
products, lower sales of the Company's products for DISNEY PRINCESS and DISNEY
FROZEN as the related license neared the end of its term and lower sales of
BEYBLADE products. In addition, lower sales of Hasbro Gaming products, primarily
from the Company's tabletop gaming brands such as JENGA, LIFE and certain other
Hasbro Gaming brands and lower net revenues from FURREAL FRIENDS products
contributed to the decrease. These net revenue decreases were partially offset
by higher sales of PEPPA PIG and PLAY-DOH products, and higher sales of the
Company's products for MARVEL and STAR WARS products. Overall segment net
revenue declines were primarily attributable to the challenging consumer
discretionary environment in North America and to a lesser extent, the Company's
European markets during 2022.
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2021 versus 2020
Consumer Products segment net revenues increased 9% in 2021 compared to 2020 and included the impact of a favorable$23.8 million foreign currency translation. Segment net revenues increased from growth in Franchise Brands, Emerging Brands and, to a lesser extent, Partner Brands and were partially offset by lower net revenues from the Hasbro Gaming portfolio. The drivers of the net revenue increase include higher sales of NERF products, higher sales of TRANSFORMERS products as well as higher sales of the Company's Partner Brands for MARVEL and DISNEY PRINCESS, which were supported by recent entertainment releases. Also contributing to the increase were higher sales of PEPPA PIG and PJ MASKS products, following the launch of the Company's own product lines for these brands during the second half of 2021. Partially offsetting these increases were lower sales of certain Partner Brands, notably, the Company's products for DISNEY FROZEN and TROLLS. Revenue grew across all geographic regions in 2021, most notably in theU.S. andEurope , and to a lesser extent, in the Company's Latin American andAsia Pacific markets.
Wizards of the Coast and Digital Gaming Segment
The following table presents Wizards of the Coast and Digital Gaming segment net revenues by category for each fiscal year in the three years endedDecember 25, 2022 . 2022 % 2021 % 2020 Net Revenues Change Net Revenues Change Net Revenues Tabletop Gaming$ 1,067.0 12 %$ 950.6 44 %$ 659.6 Digital and Licensed Gaming 258.1 -23 % 336.0 36 % 247.1 Net Revenues$ 1,325.1 3 %$ 1,286.6 42 %$ 906.7 2022 versus 2021 Wizards of the Coast and Digital Gaming segment net revenues increased 3% in 2022 compared to 2021 and included the impact of an unfavorable$27.9 million foreign currency translation. The net revenue increase in the Wizards of the Coast and Digital Gaming segment was attributable to higher net revenues from Wizards of the Coast tabletop gaming products, most notably, MAGIC: THE GATHERING, which has become the Company's first billion-dollar brand, driven by the number of strong performing card set releases in 2022. In total, 81% of segment net revenues were attributable to Wizards of the Coast tabletop games during 2022. The increase tabletop gaming net revenues was partially offset by lower digital and licensed gaming net revenues, primarily from Magic:The Gathering Arena and from Dungeons & Dragons:Dark Alliance , launched during the first half of 2021 and to a lesser extent, lower net revenues from certain other of the Company's licensed digital games during 2022.
2021 versus 2020
In 2021, net revenues from the Wizards of the Coast and Digital Gaming segment increased 42% 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. 50
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Entertainment Segment
The following table presents Entertainment segment net revenues by category for
each fiscal year in the three years ended
2022 % 2021 % 2020
Net Revenues Change Net Revenues Change Net Revenues
Film and TV $ 837.6 -10 % $ 932.5 33 % $ 700.5
Family Brands 79.4 -40 % 132.9 54 % 86.5
Music and Other 42.1 -51 % 86.8 -29 % 122.1
Net Revenues $ 959.1 -17 % $ 1,152.2 27 % $ 909.1
*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.
2022 versus 2021
Entertainment segment net revenues declined 17% in 2022 compared to 2021 and
included the impact of an unfavorable $21.0 million foreign currency
translation. The segment net revenue decrease primarily reflects the number of
major film deliveries compared to 2021 where films such as Clifford The Big Red
Dog , Mrs. Harris Goes to Paris and Come From Away were delivered, without a
comparable number of major film deliveries in 2022, as well as lower net
revenues from streaming content sales compared to 2021, which benefited from the
September 2021 release of My Little Pony: A New Generation. To a lesser extent,
lower transactional net revenues and lower net revenues from unscripted
television deliveries compared to 2021 contributed to the decline. These
decreases were partially offset by higher scripted television deliveries that
include The Rookie seasons four and five, Cruel Summer season two, The Rookie:
Feds season one and Yellowjackets season two.
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.
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
2022, 2021 and 2020. 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
2022 Revenues Change 2021 Revenues Change 2020 Revenues
Consumer Products $ 217.3 6.1 % -46 % $ 401.4 10.1 % 30 % $ 308.1 8.4 %
Wizards of the Coast &
Digital Gaming 538.3 40.6 % -2 % 547.0 42.5 % 30 % 420.4 46.4 %
Entertainment 22.7 2.4 % >100% (91.8) -8.0 % 35 % (141.1) -15.5 %
Corporate and Other (370.6) n/a >100%
(93.3) n/a -8 % (85.6) n/a
Total 407.7 763.3 501.8
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Effective for the first quarter of 2022, intangible amortization costs related to the intangible assets acquired in the eOne acquisition have been allocated between theConsumer Products and Entertainment segments to match the revenue generated from such intangible assets. In 2021 and 2020, comparable intangible amortization costs were recorded within the Entertainment segment.
Consumer Products Segment
2022 versus 2021
Consumer Products segment operating profit decreased$184.1 million to$217.3 million in 2022, compared to$401.4 million in 2021. Operating profit margin decreased to 6.1% of net revenues in 2022 from 10.1% of net revenues in 2021. As noted above, to align with the revenue generated from the assets acquired in the eOne acquisition, Consumer Products segment operating profit in 2022 includes$37.7 million of incremental intangible asset amortization costs. In 2021, comparable costs were reported in the Entertainment segment results. Additionally, in connection with the Company's Blueprint 2.0 strategy shift, Consumer Products segment operating profit includes charges of$14.9 million of incremental asset charges related to product cancellations, consisting of inventory and asset write offs related to the Company's plans to focus on fewer, bigger brands. The remaining operating profit decrease in 2022 was driven by lower net revenues and higher sales allowances and obsolescence charges, as well as higher levels of closeout sales and warehousing costs associated with higher inventory levels. These negative effects were partially offset by the impact of the expiration of certain Consumer Products licensing agreements acquired through the eOne acquisition, which carried higher royalty expenses in prior periods and higher net revenues from licensing agreements related to certain of the Company's Franchise Brands, most notably TRANSFORMERS. In addition to these benefits were savings realized from the Company's operational excellence program within cost of sales and distribution expense, price increases implemented in 2022 combined with lower product development costs, lower advertising and promotion expenses, and lower incentive compensation.
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 10.1% of net revenues in 2021 from 8.4% 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.
Wizards of the Coast and Digital Gaming Segment
2022 versus 2021 Wizards of the Coast and Digital Gaming segment operating profit decreased$8.7 million to$538.3 million in 2022, compared to$547.0 million in 2021. Operating profit margin decreased to 40.6% in 2022 from 42.5% in 2021. The decrease in segment operating profit in 2022 was the result of higher inventory costs and higher product development costs as we continue to invest in tabletop and digital gaming initiatives and talent to support long-term growth within the segment, as well as higher royalty expense due to the growth of MAGIC: THE GATHERING UNIVERSES BEYOND. These increases were partially offset by lower administrative expenses, including lower incentive compensation expenses and lower advertising expense and depreciation costs compared to 2021, where the Company incurred higher costs associated with the launch of the mobile version of Magic:The Gathering Arena and Dungeons & Dragons:Dark Alliance .
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 was 42.5% in 2021 compared to 46.4% 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. 52
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Table of Contents Entertainment Segment 2022 versus 2021 Entertainment segment operating profit was$22.7 million , or 2.4% of segment net revenues in 2022, compared to operating losses of$91.8 million , or -8.0% of segment net revenues in 2021. The improved operating results in 2022 were driven primarily by the non-cash impairment charge of$108.8 million in 2021 associated with the sale of eOne Music, the allocation of$37.7 million of intangible asset amortization costs to the Consumer Products segment during 2022, as well as lower royalty expenses and lower advertising expense attributable to the lower number of film releases compared to 2021. These impacts to segment operating results were partially offset by a loss on disposal of assets of$22.1 million and asset impairment charges of$4.1 million related to the Company's Blueprint 2.0 strategy to exit non-core businesses, the impact of the sale of the eOne Music business during 2021 described above and higher program amortization costs in proportion to entertainment revenues related to the mix of programming delivered in 2022.
2021 versus 2020
Entertainment segment operating losses were$91.8 million , or 8.0% of segment net revenues in 2021, compared to operating losses of$141.1 million , or 15.5% of segment net revenues in 2020. 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 acquired through 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.
Corporate and Other Segment
In the Corporate and Other segment, the operating losses were$370.6 million in 2022 compared to operating losses of$93.3 million in 2021 and operating losses of$85.6 million in 2020. The Corporate and Other segment operating losses during 2022 were primarily related to impairment charges of$281.0 million related to the Company's Power Rangers intangible asset, severance charges of$94.1 million and transformation office and consultant fees of$12.3 million associated with Company's Blueprint 2.0 strategy shift and operational excellence program related cost-savings initiatives described above, as well as$14.6 million of expense associated with retention awards granted in connection with the eOne acquisition. These operating loss increases were partially offset by lower incentive compensation, royalty expenses and lower advertising costs. 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 Company incurred$8.5 million of severance charges associated with cost-savings initiatives within the Company's commercial and Film and TV businesses. 53
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OPERATING COSTS AND EXPENSES
The Company's operating expenses, stated as percentages of net revenues, are illustrated below for the fiscal years endedDecember 25, 2022 ,December 26, 2021 andDecember 27, 2020 : 2022 2021 2020 Cost of sales 32.6 % 30.0 % 31.5 % Program cost amortization 9.5 9.8 7.1 Royalties 8.4 9.7 10.4 Product development 5.3 4.9 4.7 Advertising 6.6 7.9 7.6 Amortization of intangibles 1.8 1.8 2.6
Selling, distribution and administration 28.4 22.3 22.9 Loss on disposal of business
0.4 1.7 -
Acquisition and related costs - - 4.0
Operating expenses for 2022, 2021 and 2020 include benefits and expenses related to the following events:
2022
•During 2022, in association with actions taken following the Company's strategic review and subsequent Blueprint 2.0 strategy shift to focus on fewer, bigger brands, the Company incurred:
•Asset impairments and charges of$300.3 million of which$281.0 relates to the partial impairment of the Company's definite-lived Power Rangers intangible asset recorded in Selling, Distribution and Administration within the Corporate and Other segment,$14.9 million of incurred incremental asset charges recorded within Cost of Sales related to product cancellations, consisting of inventory and asset write offs within the Consumer Products segment, and$4.4 million of strategy related asset impairments recorded within Program Cost Amortization, due to the cancellation of certain projects within the Entertainment segment; and •Charges of$22.1 million comprised of a non-cash goodwill impairment loss of$11.8 million and other asset impairments of$10.3 million related to the exit of non-core businesses within the Entertainment segment, included in Loss on Disposal of Business. •In support of Blueprint 2.0, Hasbro announced an Operational Excellence program designed to deliver$250-$300 million in annualized run-rate cost savings by year-end 2025. In association with this program the Company incurred:
•Severance and other employee charges of
•Program related consultant fees and transformation office expenses of
•During 2022, the Company incurred incremental intangible amortization costs of$71.4 million related to the intangible assets acquired in the eOne acquisition. Beginning in 2022, these intangible amortization costs have been allocated between theConsumer Products and Entertainment segments, to match the revenue generated from such intangible assets. •During 2022, the Company incurred$14.6 million of stock based compensation expense associated with retention awards granted in connection with the eOne acquisition. These expenses are included within Selling, Distribution and Administration within the Corporate and Other segment.
2021
•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
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•During 2021, the Company incurred$20.9 million of stock based 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 based compensation expense of
2020
•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
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 decreased 1% to$1,911.8 million , or 32.6% of net revenues, for the year endedDecember 25, 2022 compared to$1,927.5 million , or 30.0% of net revenues, for the year endedDecember 26, 2021 . The cost of sales decrease in dollars was driven by lower sales volumes, primarily within the Consumer Products segment, and most notably inNorth America , and to a lesser extentEurope andAsia Pacific markets during 2022 compared to 2021. These decreases were partially offset by cost of sales increases within the Wizards of the Coast and Digital Gaming segment, reflecting higher tabletop gaming sales during 2022. The cost of sales increase as a percent of net revenues was the result of higher product input costs including higher material costs and higher inventory obsolescence, sales allowances and closeout charges to address excess inventory, most notably withinEurope and theU.S. , partially offset by the benefit of implemented price increases and lower freight costs. In 2021, 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.
Program Cost Amortization
Program cost amortization totaled$555.5 million , or 9.5% of net revenues in 2022, compared to$628.6 million , or 9.8% of net revenues in 2021 and$387.1 million , or 7.1% of net revenues, in 2020. 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. The program cost amortization decrease during 2022 was driven by the volume and mix of programming revenues compared to 2021, partially offset by$4.1 million of asset impairment charges recorded during 2022, related to discontinued projects associated with the exit of non-core business within the Entertainment segment.
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.
Royalty Expense
Royalty expense of$493.0 million , or 8.4% of net revenues, in 2022 compared to$620.4 million , or 9.7% of net revenues, in 2021 and$570.0 million , or 10.4% of net revenues, in 2020. Fluctuations in royalty expense generally relate to the volume of entertainment-driven products sold in a given period, especially if the Company is selling 55
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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 products for STAR WARS and MARVEL properties and certain other licensed properties which carry higher royalty rates than other licensed properties. In 2022, the decrease in royalty expense was driven by lower sales of certain Partner Brands products which carry higher royalty rates and a change in product mix within the Consumer Products segment, and to a lesser extent, the mix of entertainment deliveries in 2022 reflecting lower film deliveries compared to 2021. In addition, lower royalty expense in 2022 reflects the impact of the sale of eOne Music during 2021 and the expiration of certain licensing agreements acquired through the eOne acquisition, resulting in lower royalty expenses compared to prior periods. 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. 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 25, 2022 .
Product Development
Product development expense in 2022 totaled$307.9 million , or 5.3% of net revenues, compared to$315.7 million , or 4.9% of net revenues, in 2021. Product development expenditures reflect the Company's investment in innovation and anticipated growth across our brand portfolio. The decrease in dollars compared to 2021 was driven by lower spending in line with the Company's global cost savings initiatives partially offset by higher spending in the Wizards of the Coast and Digital Gaming segment in support of the Company's core initiatives. 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. 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. As a percentage of net revenues, the increase in product development expense reflects lower net revenues overall during 2022 compared 2021.
Advertising Expense
Advertising expense in 2022 totaled$387.3 million , or 6.6% of net revenues, compared to$506.6 million or 7.9% of net revenues in 2021 and$412.7 million or 7.6% in 2020. 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 decrease during 2022 was driven by lower expense within the Consumer Products segment, reflecting the implementation of the Company's Blueprint 2.0 strategy shift to focus on fewer, bigger brands and lower advertising expense in the Entertainment segment related to the sale of the eOne Music business and a shift in the type of entertainment releases delivered in 2022. In 2021, higher advertising expense was driven by support for theSeptember 2021 release of My Little Pony: A New Generation and within the Wizards of the Coast and Digital Gaming segment, expense in support of the 2021 launch of the mobile version of Magic:The Gathering Arena and Dungeons & Dragons:Dark Alliance , with no comparable releases in 2022. The advertising 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.
Amortization of Intangible Assets
Amortization of intangible assets decreased to$105.3 million , or 1.8% of net revenues, in 2022 compared to$116.8 million , or 1.8% of net revenues, in 2021 and$144.7 million , or 2.6% of net revenues in 2020. The decrease in 2022 is the result of the discontinuation of amortization related to the eOne Music intangible assets following the sale of eOne Music during 2021. This decline was partially offset by additional expense associated with assets acquired through the D&D Beyond acquisition during 2022. In 2021, the decrease 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 56
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second quarter of 2021, upon being classified as held for sale assets and subsequently sold in the third quarter of 2021.
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 $1,666.1 million , or 28.4% of net revenues in 2022,
from $1,432.7 million , or 22.3% of net revenues, in 2021. In 2022, selling,
distribution and administration expense reflects lower incentive compensation
expense, lower depreciation expense within the Wizards of the Coast business,
most notably due to the release of Dungeons & Dragons: Dark Alliance in 2021,
with no comparable releases in 2022 and lower shipping costs due to global
supply chain improvements during the year. These decreases were wholly offset by
the impairment charges and severance and other charges associated with the
Company's strategic review noted previously, and higher warehousing expenses,
primarily in the Consumer Products segment and, to a lesser extent, the Wizards
of the Coast and Digital Gaming segment, as a result of higher inventory levels
for the year ended December 25, 2022 .
In 2021, SD&A increased to $1,432.7 million , or 22.3% of net revenues, from
$1,252.1 million or 22.9% of net revenues in 2020. The increase in SD&A expenses
was driven primarily by 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 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.
Loss on Disposal of Business
In 2022, the loss on disposal of business of$22.1 million , or 0.4% of net revenues represents non-cash impairment charges associated with the exit of certain non-core businesses within the Entertainment segment. 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.
NON-OPERATING EXPENSE (INCOME)
Interest Expense
Interest expense totaled$171.0 million in 2022 compared to$179.7 million in 2021 and$201.1 million in 2020. The decrease in interest expense during 2022 primarily reflects long-term debt repayments made throughout 2021, primarily related to borrowings utilized for the eOne acquisition, partially offset by higher interest expense related to borrowings from the Company's production financing credit facilities. The decrease in 2021 compared to 2020 reflects the repayment of eOne acquisition related long-term borrowings during 2021 and lower interest rates. These 2021 decreases were partially offset by expense related to higher production financing borrowings compared to 2020.
Interest Income
Interest income was$11.8 million in 2022 compared to$5.4 million in 2021 and$7.4 million in 2020. Higher interest income in 2022 primarily reflects higher average interest rates in 2022 compared to 2021. Lower interest income in 2021 compared to 2020 is primarily the result of lower cash balances due to long-term debt repayments and lower average interest rates in 2021. 57
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Other (Income) Expense, Net
Other (income) expense, net was
2022 2021 2020
Earnings from Discovery Family Channel (8.1) (20.8) (21.8) Foreign currency (gains) losses
$ (5.3) $ (5.1) $ 2.1 Loss (gain) on investments (1.1) (3.8) 7.3 Loss (gain) on PP&E 0.4 (0.2) (4.9) Legal settlement - (26.7) (3.2) Discovery Family Channel option - (20.1) (1.5) Discovery Family Channel impairment - 74.1 - Other 1.1 9.7 8.0$ (13.0) 7.1 (14.0)
•Earnings from the Discovery joint venture are comprised of the Company's share in the results of the Discovery Family Channel (the "Network").
•Foreign currency (gains) losses reflect fluctuations of foreign currency
translation across the Company's international markets against the
•The 2022 gain on investments primarily reflects an increase in fair value of the Company's available for sale investment as well as further recoupment of the 2020 loss on investments. 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 gain on PP&E in 2020 reflects a
•During the 2021, the Company realized a gain of
•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, the Company recorded a gain of$1.5 million due to the option's value decrease.
•During 2021, the Company recorded an impairment loss of
INCOME TAXES
Income tax expense totaled 22.4% of pre-tax earnings in 2022 compared with 25.2% in 2021 and 30.0% in 2020. 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 2022 includes a net discrete benefit primarily related to: (i) favorable return to provision adjustments; offset by (ii) a discrete expense recording a valuation allowance against net deferred tax assets due toRussia's on-going conflict withUkraine . Income tax expense for 2021 includes a net 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 Finance Act 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 Finance Act 2020; and (iii) an increase of uncertain tax positions based on changes in management judgment; offset by tax planning, including planning directly related to the eOne integration. 58
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Subsequent tothe United States passing the Tax Cuts and Jobs Act of 2017 (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 2022, we have recorded$3.6 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
As ofDecember 25, 2022 , there were no recently adopted accounting standards that had a material effect on the Company's financial statements. The Company's significant accounting policies are summarized in note 1 to the consolidated financial statements included in Part II, Item 8. Financial Statements, of this Form 10-K.
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 provided 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 applied 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. The amendments in this Update were effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . The change from LIBOR to an alternate rate did not have a material impact on the Company's consolidated financial statements. OTHER INFORMATION Russian Sanctions As a result of the military conflict inUkraine , which has led to sanctions and other penalties being levied bythe United States ,European Union and other countries againstRussia , the Company paused all shipments and new content distribution intoRussia . The impact to the Company's operating results includes a loss of both revenue and operating profit, as well as a tax charge associated with recording a valuation allowance against local deferred tax assets. As ofDecember 25, 2022 , the Company has exhausted all locally held inventories, recovered all receivables and released all reserves inRussia .
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated a significant amount of cash from operations. In 2022, 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 using either the Company's revolving film and television production credit facility or through 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 2023, 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 2023, including the repayment of the current portion of long-term debt of$113.2 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 59
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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 25, 2022 , the Company's cash and cash equivalents totaled$513.1 million , of which$14.5 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 25, 2022 , the Company had a total liability of$137.7 million related to this tax,$34.4 million is reflected in current liabilities while the remaining long-term payable related to the Tax Act of$103.3 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: 2023:$34.4 million ; 2024:$45.9 million ; and 2025:$57.4 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 25, 2022 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.
2022 % 2021 % 2020
Cash and cash equivalents, net of
short-term borrowings (including
restricted cash of $14.5 , $35.8 and
$73.2 ) $ 513.1 -50 % $ 1,019.2 -30 % $ 1,449.7
Accounts receivable, net 1,132.4 -25 % 1,500.4 8 % 1,391.7
Inventories 676.8 23 % 552.1 40 % 395.6
Prepaid expenses and other current assets 676.8 3 % 656.4 8 % 609.6
Other assets 1,589.3 23 % 1,297.0 3 % 1,260.3
Accounts payable and accrued liabilities 1,934.1 -14 % 2,255.0 15 % 1,964.1
Other liabilities 533.1 -21 % 670.7 -16 % 794.0
Accounts receivable, net decreased 25% in 2022 compared to 2021. The decrease in
accounts receivable was driven by lower sales and improved collections across
the majority of the Company's markets during 2022. Days sales outstanding
decreased from 68 days at December 26, 2021 to 61 days at December 25, 2022 ,
primarily due to the decrease in revenues and mix of sales, primarily in the
U.S. during 2022 as well as from the improved collections described above. In
2021, accounts receivable balances increased 8% as a result of higher sales,
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, mix of sales and improved collections during 2021.
Inventories increased 23% in 2022 compared to 2021 primarily reflecting
accelerated inventory purchases attributable to the Company's Consumer Products
and Wizards of the Coast businesses to mitigate the impact of certain global
supply chain challenges experienced throughout 2021 and into 2022. Beginning
late in 2022, certain global supply chain constraints began to subside resulting
in reduced in transit times, most notably in the U.S. and Europe , which combined
with lower than anticipated Consumer Products sales, contributed to the
Company's higher inventory levels. In 2021, inventories increased 40% 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.
Prepaid expenses and other current assets increased 3% in 2022 compared to 2021.
The increase was driven by higher accrued royalty and licensing balances,
primarily attributable to the Company's Entertainment business as well as the
reclassification of accrued income balances from long-term to current. These
increases were partially offset by lower prepaid royalty balances in relation to
the Company's Marvel, POWER RANGERS and DISNEY PRINCESS royalty agreements, the
disposal of certain Entertainment assets in relation to the exit of certain
non-core businesses within the Entertainment segment and from lower prepaid
income tax balances during 2022. In
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2021, prepaid expenses and other current assets increased 8% compared to 2020 due to 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 andLucasfilm royalty agreements and lower prepaid tax balances. Other assets increased 23% in 2022 compared to 2021. The increase was primarily driven by higher deferred tax balances, higher investments in film and television productions and higher non-current receivable balances within the Entertainment segment. These increases were partially offset by a lower balance for the Company's investment in Discovery Family Channel, due to distributions received during 2022. 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. Accounts payable and accrued liabilities decreased 14% in 2022 compared to 2021. The drivers of the decrease include lower accounts payable balances associated with the Company's global cost savings initiatives and the timing of payments in 2022, lower incentive bonus accruals, lower accrued royalty balances as a result of partner brand product sales declines, lower accrued freight balances due to improving supply chain conditions within certain markets, as well as the disposal of certain Entertainment liabilities in relation to the exit of non-core businesses within the Entertainment segment. These decreases were partially offset by higher severance accrual balances related to certain cost savings initiatives mentioned above. Accounts payable and accrued liabilities increased 15% in 2021 compared to 2020 as a result of 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. Other liabilities decreased 21% in 2022 compared to 2021. The decrease was driven by a lower transition tax liability balance reflecting the reclassification of the 2022 installment payment dueApril 2023 , lower long-term lease liability balances, lower deferred tax balances reflecting the amortization of certain deferred tax liabilities and the impact of foreign exchange revaluation, primarily related to the British Pound. These decreases were partially offset by an increase to the liability for uncertain tax positions, primarily related to the capitalization of research and experimentation expenditures. Other liabilities decreased 16% in 2021 compared to 2020. The decrease was primarily driven by lower long-term lease liability balances, a lower transition tax liability balance and lower tax reserves. These decreases were partially offset by higher deferred compensation reserve balances.
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 endedDecember 25, 2022 ,December 26, 2021 andDecember 27, 2020 . 2022 2021 2020 Net cash provided by (used in): Operating Activities$ 372.9 $ 817.9 $ 976.3 Investing Activities (313.0) 242.0 (4,500.2) Financing Activities (553.3) (1,459.8) 405.9 In 2022, 2021 and 2020, Hasbro generated$372.9 million ,$817.9 million and$976.3 million of cash from its operating activities, respectively. Operating cash flows in 2022, 2021 and 2020 included$767.7 million ,$697.3 million and$438.9 million , respectively, of cash used for television program and film production. The decrease in cash provided by operating activities during 2022 was attributable to lower earnings and higher working capital requirements, including cash utilized for accounts payable and higher spend 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. 61
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Net cash flows utilized for investing activities were$313.0 million in 2022 compared to net cash flows provided by investing activities of$242.0 million in 2021 and net cash flows utilized for investing activities of$4,500.2 million in 2020. Investing activities in 2022 reflect a cash payment of$146.3 million related to the D&D Beyond Acquisition during the second quarter of 2022. 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. The D&D Beyond Acquisition during 2022 was funded with cash on hand. The net proceeds received from the sale of eOne Music during 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 purchase of eOne in 2020 consisted of the net proceeds from the issuance of an aggregate principal amount of$2.4 billion in senior unsecured 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. Additions to property, plant and equipment were$174.2 million ,$132.7 million and$125.8 million in 2022, 2021 and 2020, respectively. Of these additions, 44% in 2022, 52% in 2021 and 51% in 2020 were for purchases of tools, dies and molds related to the Company's products. During the fiscal years endedDecember 25, 2022 ,December 26, 2021 andDecember 27, 2020 , the depreciation of plant and equipment was$127.3 million ,$163.3 million and$120.2 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.
Net cash (utilized) provided by financing activities was
Net cash utilized for financing activities in 2022 included payments totaling$87.5 million related to the$1.0 billion in term loans described below, consisting of a$50.0 million principal and quarterly principal amortization payments of$37.5 million toward the Five-Year Tranche loan. In addition, cash utilized for financing activities included as drawdowns of$258.6 million and repayments of$231.5 million related to production financing loans and cash payments of$125.0 million to repurchases the Company's Common Stock. Net cash utilized for 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. Net 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. Dividends paid were$385.3 million in 2022,$374.5 million in 2021 and$372.7 million in 2020 reflecting the Company's quarterly dividend rate increase from$0.68 per share in 2020 and 2021, to$0.70 per share in 2022. Net repayments of short-term borrowings were$141.7 million ,$5.6 million and$8.6 million in 2022, 2021 and 2020, respectively. The Company generated cash from employee stock option transactions of$74.2 million ,$30.6 million , and$16.6 million in 2022, 2021 and 2020, respectively. The Company paid withholding taxes related to share-based compensation of$24.0 million ,$13.7 million and$6.0 million in 2022, 2021 and 2020, respectively.
Sources and Uses of Cash
The Company commits to inventory production, advertising and marketing
expenditures in support of its consumer products business, 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. In the Company's
entertainment business, cash expenditures for productions are often made well in
advance of sale and delivery of the content produced whereas trading card and
digital gaming revenues have shorter collection periods, but product development
expense often occurs years prior to release and revenue generation. During 2022,
2021 and 2020 the Company primarily used cash from
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operations and, to a lesser extent, borrowings under available lines of credit, in particular production financing vehicles, to fund its working capital.
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 25, 2022 , the Company had no outstanding borrowings related to the Program. 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$1.5 billion . The Amended Revolving Credit Agreement also provides for a potential additional incremental commitment increase of up to$500.0 million subject to agreement of the lenders. The Amended Revolving Credit Agreement contains certain financial covenants setting forth leverage and coverage requirements, and certain other limitations typical of an investment grade facility, including with respect to liens, mergers and incurrence of indebtedness. The Amended Revolving Credit Agreement extends throughSeptember 20, 2024 . The Company was in compliance with all covenants as ofDecember 25, 2022 . The Company had no borrowings outstanding under its committed revolving credit facility as ofDecember 25, 2022 . However, letters of credit outstanding under this facility as ofDecember 25, 2022 were approximately$4.0 million . Amounts available and unused under the committed line, atDecember 25, 2022 were approximately$1.5 billion , inclusive of borrowings under the Company's commercial paper program. The Company also has other uncommitted lines from various banks, of which approximately$8.7 million was utilized atDecember 25, 2022 . Of the amount utilized under, or supported by, the uncommitted lines, approximately$7.9 million and$0.8 million represent letters of credit and outstanding short-term borrowings, 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. As ofDecember 25, 2022 , the Company has fully repaid the Three-Year Tranche$400.0 million principal term loan, and of the Five-Year Tranche$600.0 million principal balance, the Company has repaid a total of$290.0 million in the following increments:$22.5 million in 2020;$180.0 million in 2021; and,$87.5 million in 2022. The Company is subject to certain financial covenants contained in this agreement and, as ofDecember 25, 2022 , 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.
The Company uses production financing facilities to fund its film and television productions which are arranged on an individual production basis by either special purpose production subsidiaries, each secured by the assets and
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future revenues of such production subsidiaries, which are non-recourse to the Company's assets, or through a senior revolving credit facility obtained inNovember 2021 , dedicated to production financing. The Company's 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") provides the Company with commitments having a maximum aggregate principal amount of$250.0 million . The Revolving Production Financing Agreement also provides the Company with 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 uses the RPCF to fund certain of the Company's original film and TV production costs. Borrowings under the RPCF are non-recourse to the Company's assets. The Company expects to utilize the revolving production financing facility for the majority of its future production financing needs. During 2022, the Company had total drawdowns of$258.6 million and repayments of$231.5 million towards these production financing facilities. As ofDecember 25, 2022 , the Company had outstanding production financing borrowings related to these facilities of$195.6 million ,$53.2 million of which are recorded within the current portion of long-term debt and$142.4 million are recorded within short-term borrowings in the Company's consolidated balance sheets, included in Part II, Item 8. Financial Statements, of this Form 10-K. The Company has principal amounts of long-term debt atDecember 25, 2022 of$3.8 billion due at varying times from 2024 through 2044. Of the total principal amount of long-term debt,$113.2 million is current atDecember 25, 2022 of which$60.0 million is related to principal amortization of the 5-year term loans dueDecember 2024 and$53.2 million represents the Company's outstanding production financing facilities atDecember 25, 2022 . 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. Under a multi-year game production agreement entered withCartamundi , the Company has purchase commitments of$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$367.7 million in 2023. These payments exclude inventory and tooling purchase liabilities included in accounts payable or accrued liabilities on the consolidated balance sheets as ofDecember 25, 2022 .
Share Repurchases and Dividends
The Company has a long history of returning cash to its shareholders through quarterly dividends and share repurchases. Hasbro increased its quarterly dividend rate from$0.68 per share to$0.70 per share effective for the dividend 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 . Following the Company's acquisition of eOne, the Company temporarily suspended its share repurchase program to prioritize deleveraging. During the second quarter of 2022, given the Company's progress towards reducing debt, the Company resumed its share repurchase activity and has since repurchased approximately 1.4 million shares at a total cost of$125.0 million and at an average price of$87.46 per share. AtDecember 25, 2022 , Hasbro had$241.6 million remaining available under these share repurchase authorizations. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number, and value of the shares that are repurchased, if any, will depend on a number of factors, including the price of the Company's stock and the Company's generation of, and uses for, cash. The Company believes that cash from operations, and, if necessary, its committed line of credit and other borrowing facilities, will allow the Company to meet its obligations over the next twelve months.
Critical Accounting Policies and Significant Estimates
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted 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 64
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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 the carrying value of a reporting unit exceeds its fair value. If it is more likely than not the carrying value exceeds its fair value, 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. OnMay 19, 2022 , the Company completed its acquisition of D&D Beyond for$146.3 million , which was funded with cash on hand. Based on the valuation of these assets,$64.7 million was allocated to goodwill within the Wizards of the Coast and Digital Gaming segment during the second quarter of 2022. During the third quarter of 2022, the Company determined to exit certain non-core businesses within the Entertainment segment. A revaluation of the effected businesses resulted in a pre-tax non-cash goodwill impairment charge of$11.8 million , recorded within Loss on Assets Held for Sale in the Consolidated Statement of Operations, and within the Entertainment segment for the quarter endedSeptember 25, 2022 . During the fourth quarter of 2022, the Company performed a qualitative goodwill assessment with respect to each of its reporting units. Based on its qualitative assessments, the Company determined it is not more likely than not that the carrying value exceeds the fair value for any of its reporting units and as a result, the Company concluded it was not necessary to perform a quantitative test for impairment of goodwill for any of its reporting units during 2022. 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 65
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change in relative fair values of the respective reporting units. 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 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 these assessments, 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. 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 the fourth quarter of 2022, following the decision to cancel certain projects in conjunction with the Company's Blueprint 2.0 strategy shift, it was determined that there was a partial impairment of the Company's definite-lived Power Rangers intangible asset. As a result of these cancelled projects, changes to anticipated revenues and related cash flows led to the determination that carrying values of these intangible assets exceeded their related estimated future cash flows, thus indicating impairment. As a result, charges of$281.0 million were recorded in the fourth quarter of 2022 within Selling, Distribution and Administration within the Corporate and Other segment. 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 2022, 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.
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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 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.
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, initially exercisable during
the one-year period following December 31, 2021 . During 2022, the Company and
Discovery agreed to extend the option exercise window to March 31, 2025 . 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, during the fourth quarter of 2021, the Company recorded a gain of$20.1 million in relation to the Company's Discovery option agreement described above. During the fourth quarter of 2022, the Company reviewed its investment in the Network for impairment and concluded there was no impairment to its investment in the Network as ofDecember 25, 2022 .
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$3,711.2 million in principal amount of long-term debt outstanding atDecember 25, 2022 . 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 25, 2022 , the Company has a liability of$69.1 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, 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 and foreign exchange option contracts. AtDecember 25, 2022 , 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$21.8 million decrease in the fair value of these instruments. A decrease in the fair value of these instruments would be 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 68
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exchange. From time to time, affiliates of the Company may make or receive intercompany loans in currencies other than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts.
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 25, 2022 , these contracts had net unrealized gains of$5.0 million , of which$7.5 million are recorded in prepaid expenses and other current assets,$0.3 million are recorded in other assets,$2.8 million are recorded in accrued liabilities. Included in accumulated other comprehensive earnings atDecember 25, 2022 are deferred gains of$3.0 million , net of tax, related to these derivatives. AtDecember 25, 2022 , 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 25, 2022 are deferred losses, net of tax, of$14.9 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 35% of its consolidated net revenues in 2022, 36% in 2021 and 35% of its consolidated net revenues in 2020. 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 2022, approximately 57% 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. In 2022, the Company's inventory levels increased 23% compared to 2021. This increase reflects the impact of global supply chain disruptions, which began in late 2020 and continued into 2022, related to the COVID-19 pandemic and its after-effects. During the first half of 2022, the Company accelerated certain inventory purchases to ensure sufficient finished goods and raw material availability ahead of expected periods of high consumer demand. However, during the third quarter of 2022, as the effects of supply chain disruptions began to subside, most notably in theU.S , andEurope , the accelerated inventory purchases did not see corresponding increases in sales as consumers were impacted by the economic environment, including lower discretionary consumer income due to higher inflation and rising interest rates, leading to higher inventory levels as compared to prior years. In response, during the third quarter the Company launched incremental year-over-year promotional activity behind key holiday toy and game items to reduce inventory on hand and at retail and is continuing to manage inventory levels through closeout sales and by monitoring consumer purchase patterns to ensure adequate supply of new product while clearing excess supply to mitigate the risk of inventory obsolescence. 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. 69
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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 2022; however, due to mitigating actions taken by the Company, such as price increases where deemed necessary, the impact of general price inflation on our financial position and results of operations has been reduced. The Company monitors the impact of inflation to its business operations on an ongoing basis and may need to adjust its prices further to mitigate the impact of changes to the rate of inflation in future periods. However, future volatility of general price inflation could affect consumer purchases of our products and spending on entertainment. Additionally, 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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