HASBRO, INC. This Quarterly Report on Form 10-Q, including the following section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements expressing management's current expectations, goals, objectives and similar matters. These forward-looking statements may include statements concerning: the impact of, and actions and initiatives taken and planned to be taken to try and manage the negative impact of, the global coronavirus outbreak on our business, including the negative impact on supply of products and production of entertainment content, demand for our products and entertainment, our liquidity and our community; the expected adequacy of supply and operation of our manufacturing facilities; the ability to achieve our financial and business goals and objectives; the Company's product and entertainment plans; anticipated product and entertainment performance; anticipated expenses; and working capital and liquidity. See Item 1A, in Part II of this report and Item 1A, in Part I of the Annual Report on Form 10-K for the year endedDecember 29, 2019 ("2019 Form 10-K"), for a discussion of factors which may cause the Company's actual results or experience to differ materially from that anticipated in these forward-looking statements. The Company undertakes no obligation to revise the forward-looking statements in this report after the date of the filing. EXECUTIVE SUMMARY Completion of Acquisition OnDecember 30, 2019 ,Hasbro, Inc. ("Hasbro" or the "Company") completed the acquisition ofEntertainment One Ltd. ("eOne") for an aggregate purchase price of approximately$4.6 billion , comprised of$3.8 billion of cash consideration for shares outstanding and$0.8 billion related to the redemption of eOne's outstanding senior secured notes and the payoff of eOne's revolving credit facility. We financed the acquisition through a combination of debt and equity financings, including (i) the issuance of senior unsecured notes in an aggregate principal amount of$2.4 billion , (ii) the issuance of 10,592,106 shares of common stock at a public offering price of$95.00 per share and (iii)$1.0 billion in term loans. eOne's results of operations and financial position are included in the Company's consolidated financial statements and accompanying condensed footnotes since the date of acquisition. The addition of eOne accelerates the Company's brand blueprint strategy by expanding our brand portfolio with eOne's global preschool brands, adding proven TV and film expertise and executive leadership as well as by enhancing brand building capabilities and our storytelling capabilities to strengthen Hasbro brands. For more information on the eOne Acquisition see Note 3, "Business Combination" to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. For purposes of identifying Hasbro activities that existed before the eOne Acquisition, in some instances, Hasbro may be referred to herein as legacy Hasbro. For purposes of identifying certain activities derived from eOne's historical business, in some instances these activities may be referred to herein as legacy eOne.Hasbro, Inc. is a global play and entertainment company committed to Creating the World's Best Play and Entertainment Experiences. From toys, games and consumer products to television, movies, digital gaming, live action, music, and virtual reality experiences, Hasbro connects to global audiences by bringing to life great innovations, stories and brands and developing and delivering the very best content across established and inventive platforms. Hasbro's iconic brands include MAGIC: THE GATHERING, MY LITTLE PONY, NERF, TRANSFORMERS, PLAY-DOH, MONOPOLY, BABY ALIVE, POWER RANGERS, and through the acquisition of eOne, Hasbro expanded its portfolio with popular preschool brands including PEPPA PIG, PJ MASKS and RICKY ZOOM. In addition, Hasbro leverages its portfolio of premier partner brands. Through our global entertainment studio, we are building our brands worldwide through great storytelling and content on all screens, including content based on our children's and family entertainment brands as well as offering the production and distribution of a broad spectrum of live action scripted and unscripted entertainment content geared toward all audiences. Hasbro is committed to making the world a better place for children and their families through corporate social responsibility and philanthropy. Hasbro's strategic plan is centered around its brand blueprint. Under the brand blueprint strategy, Hasbro re-imagines, re-invents and re-ignites its owned and controlled brands and imagines, invents and ignites new brands, through product innovation, immersive entertainment offerings, including television, film and music, digital gaming and a broad range of consumer products. As the global consumer landscape, shopping behaviors and the retail and entertainment environments continue to evolve, the Company continues to transform and reimagine its business strategy. This transformation includes reexamining the ways Hasbro organizes across its brand blueprint and re-shaping the Company to become a better equipped and adaptive, digitally-driven organization, including the development of an omni-channel retail presence and adding new capabilities through the on-boarding of new skill sets and talent. More recently, to enhance its long-term competitive position the Company has identified and pursued key growth opportunities through strategic acquisitions, to excel in today's converged retail environment as a leading global play and entertainment company across all platforms. -------------------------------------------------------------------------------- Hasbro generates revenue and earns cash by developing, marketing and selling products based on global brands in a broad variety of consumer goods categories and distribution of television programming and other content based on the Company's properties, as well as through the out-licensing of rights for third parties to use its properties in connection with products, including digital media and games and other consumer products. Hasbro also leverages its competencies to develop and market products based on well-known licensed brands including, but not limited to, BEYBLADE, DISNEY PRINCESS and DISNEY FROZEN,DISNEY'S DESCENDANTS, MARVEL, SESAME STREET, STAR WARS, and DREAMWORKS' TROLLS. MARVEL, STAR WARS, DISNEY PRINCESS, DISNEY FROZEN andDISNEY'S DESCENDANTS are owned by The Walt Disney Company. The eOne business also generates revenue and earnings from the production and distribution of a broad spectrum of television and film entertainment, as well as music production and distribution, that is not based on our children's and family entertainment brands. The Company's business is separated into four principal business segments:U.S. andCanada , International, Entertainment, Licensing and Digital and, following the eOne Acquisition, the eOne operating segment was added to the Company's reporting structure. TheU.S. andCanada segment markets and sells both toy and game products primarily inthe United States andCanada . The International segment consists of the Company's European,Asia Pacific and Latin and South American toy and game marketing and sales operations. The Company's Entertainment, Licensing and Digital segment includes the Company's Wizards of the Coast digital gaming business, consumer products licensing, owned and licensed digital gaming, movie and television entertainment operations. The eOne segment engages in the development, acquisition, production, financing, distribution and sales of entertainment content and is comprised of all legacy eOne operations. These diversified offerings span across film, television and music production and sales, family programming, merchandising and licensing, and digital content. Over time, the Company plans to transition towards reflecting all of its entertainment operations in the eOne segment. The Company also expects to shift the consumer product and digital licensing business and toy and game sales related to the eOne preschool brands, to legacy Hasbro segments; including related toy and game operations into the Company's geographic commercial segments in late 2021 and 2022. Coronavirus Outbreak In the first quarter of 2020, the outbreak of the coronavirus disease (COVID-19) was recognized as a pandemic by theWorld Health Organization . The impact of the global outbreak of COVID-19 currently being experienced in markets in which Hasbro, our employees, consumers, customers, partners, licensees, suppliers and manufacturers operate, has been significant and is reflected in our revenues, profitability and business operations overall. As a result of the preventative actions taken worldwide, such as restrictions on travel and business operations, temporary closures or limited reopenings of non-essential businesses, shelter-in-place and stay-at-home orders and other voluntary and government imposed restrictions, the outbreak has had a negative impact on economic conditions in all of our markets. These preventative actions although necessary, have led to market uncertainty and some economic disruption. We have experienced disruptions in supply of products and production of entertainment content, negative impact on sales due to changes in consumer purchasing behavior and availability of product to consumers, including; due to retail store closures, limited reopenings of retail stores and limitations on the capacity of e-comm channels to supply additional products; delays or postponements of entertainment productions and releases of entertainment content both internally and by our partners; and challenges of working remotely. While we have developed and continue to develop plans to help mitigate the negative impact of the coronavirus to our business, the efforts will not prevent our business from being adversely affected, and the longer the outbreak continues or if the virus continues to reemerge or surge in areas in which we do business the more negative the impact on our business, revenues and earnings, and the more limited our ability will be to try and make up for delayed or lost product development, production and sales in future periods. During the first half of 2020, the Company's supply chain experienced lower than planned production levels in certain of its third-party manufacturing facilities across several geographies including, but not limited to,China ,India and the United Sates, due to the impact of COVID-19. After operating at lower than planned production levels during the first quarter due to COVID-19, facilities inChina began to reopen during the second quarter and have returned to planned operating capacity and production output for this time of year. Outside ofChina , manufacturing operated at varying levels during the first half depending on local government action and overall safety considerations. In response, the Company utilized its global supply chain and existing inventory to work to meet demand and the Company currently expects to make up for remaining lost production in the third quarter, to be well positioned for holiday demand later in the year, as nearly all of Hasbro's partner factories and warehouses were open and operating, heading into the third quarter. However, if manufacturing facilities are impacted by a resurgence in COVID-19, we may not be able to make up for the disruption in supply in the nearer term. During the first half of 2020, as more of our consumers remained at home, we creatively found ways to accelerate our business online, expand omni-channel and skip the shopping cart to get our products into cars and homes. For example, we launched Bring Home the Fun, a global initiative created to further the Company's purpose to make the world a better place for children -------------------------------------------------------------------------------- and their families. The initiative provides parents and caregivers resources to help keep kids occupied and engaged during extended time at home and indoors. Another example is the initiative our Wizards of the Coast team undertook to enable players to play MAGIC: THE GATHERING games while in-person play events are not happening. Markets with more developed e-comm and omni-channel business operations performed better during the first half of 2020 than those markets that rely more heavily on physical stores for reaching consumers. Markets inLatin America , which have less advanced ecomm business and where retail store closures remain high, have been and are expected to continue to be challenged during 2020. The negative impact to future periods from store closures or limited reopenings remains unknown. Beginning late in the first quarter and continuing throughout the second quarter of 2020, production and delivery of television and film projects for Hasbro's eOne TV and Film business have been delayed, negatively impacting the level and timing of revenues. For many months live-action productions have been shut down and the industry is still working to resume them in a significant way. It is not clear when that will happen. The eOne team continues to develop new projects and work on animation production, which can be done remotely. The team now expects to deliver finished episodes and film projects later than initially planned. Additionally, several film release dates have moved to later in 2020, into 2021 and in some instances, releases are going straight to video on demand/electronic sell-through windows impacting the timing and level of anticipated revenues. As more people remain at home, content viewership remains high, which we believe bodes well for long-term brand engagement and the Company expects a robust 2021 entertainment slate for eOne productions and from our Partner Brands. We believe we have sufficient liquidity and capital resources available at this time, including approximately$1.0 billion of cash on hand and$1.5 billion available under our revolving credit facility. We are in compliance with our covenants under our revolving credit facility and, while we do not currently foresee a need to borrow under the facility, we believe we would be able to access the facility for the foreseeable future. Our top three customers during the first half of 2020 were Walmart, Target and Amazon. During this time of uncertainty, however, we are managing our expenses to further preserve our liquidity and we are closely monitoring our customers' health and collectability of receivables, with some customers having difficulty making payments or requesting extended payment terms at a time when retailers are experiencing challenges such as store closures and in some cases, bankruptcy filings. The health and safety of Hasbro employees, stakeholders and communities is a top priority. InChina , Hasbro's offices reopened in late March when the COVID-19 outbreak there improved, following shutdowns earlier in the first quarter. Hasbro's global offices, outside ofChina , were closed in March due to the COVID-19 outbreak and only recently have begun to re-open on a limited, as needed basis as we continue to actively work on plans to safely bring workers back to our offices. The majority of our workforce has been able to work remotely in an effective manner since the closure and the timing of re-opening offices will be based on need as well as local governmental, health and safety guidelines. The coronavirus outbreak continues to be fluid and uncertain, making it difficult to forecast the final impact it could have on our future operations. Please see Part II, Item 1A, Risk Factors, for further information. Second quarter 2020 highlights: •Second quarter net revenues of$860.3 million , including the 2020 acquisition of eOne, decreased 13% compared to$984.5 million in the second quarter of 2019. The decrease in net revenues included an unfavorable foreign currency translation of$15.8 million . •Net revenues in theU.S. andCanada segment decreased 30% to$359.7 million ; International segment net revenues decreased 34% to$249.8 million , including an unfavorable foreign currency translation impact of$12.4 million ; Entertainment, Licensing and Digital segment net revenues decreased 7% to$89.8 million ; and eOne segment net revenues were$160.9 million . •Net revenues fromHasbro Gaming increased 11%; Emerging Brands net revenues increased 7%; Franchise Brands and Partner Brands both decreased 35%; and TV,Film and Entertainment portfolio net revenues were$132.2 million and represented 15% of total net revenues in the second quarter of 2020. •Operating profit was$2.2 million , or 0.3% of net revenue, in the second quarter of 2020 compared to operating profit of$128.3 million , or 13.0% of net revenue, in the second quarter of 2019. •Second quarter 2020 operating profit was negatively impacted by acquisition and related expenses of$10.3 million ($8.5 million after-tax);$22.6 million ($17.9 million after-tax) of eOne acquired intangible asset amortization; and$11.6 million ($10.1 million after-tax) of restructuring charges associated with cost savings initiatives. •The net loss attributable toHasbro, Inc. of$33.9 million , or$0.25 per diluted share, in the second quarter of 2020 compared to net earnings of$13.4 million , or$0.11 per diluted share, in the second quarter of 2019. -------------------------------------------------------------------------------- •Second quarter 2019 net earnings included a non-cash charge of$110.8 million ($85.9 million after-tax), or$0.68 per diluted share, related to the Company's settlement of itsU.S. defined benefit pension plan liability. First half 2020 highlights: •Net revenues increased 14% to$1,965.8 million in first six months of 2020, including the 2020 acquisition of eOne, compared to$1,717.0 million in the first six months of 2019. The increase in net revenues included$27.5 million of unfavorable foreign currency translation. •Net revenues in theU.S. andCanada segment decreased 9% to$788.4 million ; International segment net revenues decreased 24% to$500.2 million ; Entertainment, Licensing and Digital segment net revenues decreased 8% to$173.9 million ; while eOne segment net revenues were$503.4 million in the first half of 2020. International segment net revenues were unfavorably impacted by$21.8 million in foreign currency translation. •Net revenues from Emerging Brands increased 31%;Hasbro Gaming increased 20%; Franchise Brands, and Partner Brands net revenues decreased 20% and 17%, respectively; andTV Film and Entertainment portfolio net revenues were$424.7 million representing 22% of total net revenues in the first half of 2020. •Operating losses were$21.1 million , or 1.1% of net revenues, in the first six months of 2020 compared to operating profit of$164.5 million , or 9.6% of net revenues, in the first six months of 2019. •Operating profit in the first half of 2020 was negatively impacted by acquisition and related expenses of$160.0 million ($136.0 million after-tax);$47.6 million ($37.8 million after-tax) of eOne acquired intangible asset amortization; and$11.6 million ($10.1 million after-tax) of restructuring charges associated with cost savings initiatives. •The net loss attributable toHasbro, Inc. of$103.6 million , or$0.75 per diluted share, in the first six months of 2020 compared to a net earnings attributable toHasbro, Inc. of$40.2 million , or$0.32 per diluted share, in the first six months of 2019. •Net earnings for the first six months of 2019 included a non-cash charge of$110.8 million ($85.9 million after-tax), or$0.68 per diluted share, related to the Company's settlement of itsU.S. defined benefit pension plan liability. The impact of changes in foreign currency exchange rates used to translate the consolidated statements of operations is quantified by translating the current period revenues at the prior period exchange rates and comparing this amount to the prior period reported revenues. The Company believes that the presentation of the impact of changes in exchange rates, which are beyond the Company's control, is helpful to an investor's understanding of the performance of the underlying business. Amounts Returned to Shareholders The Company has a long history of returning cash to its shareholders through quarterly dividends and share repurchases. Hasbro maintained its quarterly dividend rate of$0.68 per share for the dividend paid inMay 2020 and expects to maintain this rate for the remaining dividend payments in 2020. In addition to the dividend, the Company historically has returned cash through its share repurchase program. As part of this initiative, since 2005, the Company's Board of Directors (the "Board") adopted nine share repurchase authorizations with a cumulative authorized repurchase amount of$4,325.0 million . The ninth authorization was approved inMay 2018 for$500 million . As ofJune 28, 2020 , the Company had$366.6 million remaining under these authorizations. Share repurchases are subject to market conditions, the availability of funds and other uses of funds. As a result of the financing activities related to the eOne Acquisition, the Company has suspended its current share repurchase program while it prioritizes deleveraging. -------------------------------------------------------------------------------- SUMMARY OF FINANCIAL PERFORMANCE A summary of the results of operations is illustrated below for the quarter and six month periods endedJune 28, 2020 andJune 30, 2019 . Quarter Ended Six Months Ended June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Net revenues$ 860.3 $
984.5
2.2 128.3 (21.1) 164.5
(Loss) earnings before income taxes (43.7) 6.1 (115.6) 35.7
Income tax benefit (10.8) (7.3) (14.9) (4.5)
Net (loss) earnings (32.9) 13.4 (100.7) 40.2
Net earnings attributable to
noncontrolling interests 1.0 - 2.8 -
Net (loss) earnings attributable to
Hasbro, Inc. (33.9) 13.4 (103.6) 40.2
Diluted (loss) earnings per share (0.25) 0.11 (0.75) 0.32
RESULTS OF OPERATIONS - CONSOLIDATED
Second Quarter of 2020
The quarters ended June 28, 2020 and June 30, 2019 were each 13-week periods.
Consolidated net revenues for the second quarter of 2020 decreased $124.3
million , or 13% compared to the second quarter of 2019 and reflect the inclusion
of eOne revenues which represent 19% of consolidated net revenues for the
quarter. Second quarter 2020 net revenues include an $15.8 million unfavorable
impact from foreign currency translation as a result of weakening currencies
compared to the U.S. dollar, primarily in the Latin American, European and Asia
Pacific markets in 2020 compared to 2019.
Operating profit for the second quarter of 2020 was $2.2 million , or 0.3% of net
revenues, compared to operating profit of $128.3 million , or 13.0% of net
revenues, for the second quarter of 2019. Operating profit during the second
quarter of 2020 reflects the consolidation of eOne results of operations and was
negatively impacted by acquisition and related costs of $10.3 million ($8.5
million after-tax); $22.6 million ($17.9 million after-tax) of expenses related
to eOne acquired intangible asset amortization; and restructuring charges
associated with cost savings initiatives of $11.6 million ($10.1 million
after-tax).
Net losses attributable to Hasbro, Inc. were $33.9 million for the second
quarter of 2020 compared to net earnings of $13.4 million for the second quarter
of 2019. The diluted loss per share attributable to Hasbro, Inc. for the second
quarter of 2020 was $0.25 , compared to diluted earnings per share of $0.11 in
the second quarter of 2019 and reflects the negative impact of eOne acquired
intangible asset amortization, acquisition and related costs and restructuring
charges associated with cost savings initiatives of $0.13 per diluted share,
$0.06 per diluted share and $0.07 per diluted share, respectively.
As a result of the 2020 acquisition of eOne, the Company's brand architecture
reflects the addition of the TV, Film and Entertainment brand portfolio which
consists of legacy eOne film and TV revenues. Revenues related to eOne brands,
including PEPPA PIG, PJ MASKS and RICKY ZOOM, are reported in the Emerging
Brands portfolio.
The following table presents net revenues by brand and entertainment portfolio
for the quarters ended June 28, 2020 and June 30, 2019 .
Quarter Ended
%
June 28, 2020 June 30, 2019 Change
Franchise Brands $ 376.8 576.7 -35 %
Partner Brands 138.2 213.4 -35 %
Hasbro Gaming 137.0 123.4 11 %
Emerging Brands 76.0 71.0 7 %
TV, Film and Entertainment 132.2 - 100 %
Total $ 860.3 984.5 -13 %
-------------------------------------------------------------------------------- FRANCHISE BRANDS: Net revenues in the Franchise Brands portfolio decreased 35% in the second quarter of 2020 compared to the second quarter of 2019. Net revenues from all of the Company's Franchise Brands products declined during the second quarter of 2020. PARTNER BRANDS: Net revenues from the Partner Brands portfolio decreased 35% in the second quarter of 2020 compared to the second quarter of 2019. Partner Brands net revenues are reliant on related entertainment, including television and movie releases. During the second quarter of 2020, the Company's Partner Brands portfolio was supported by fourth quarter 2019 theatrical releasesDISNEY'S FROZEN 2 in November and STAR WARS: THE RISE OF SKYWALKER in December, as well as through various distribution channels including home entertainment and streaming video. During the second quarter of 2019, the Company's Partner Brands portfolio was supported by a strong lineup of theatrical releases including MARVEL'S AVENGERS: END GAME in April of 2019 andDISNEY'S ALADDIN in May of 2019. The Company's 2020 Partner Brand entertainment releases include TROLLS WORLD TOUR, which was released in the premium video-on-demand format in April, as a sequel to the 2016 film, TROLLS from DREAMWORKS and BLACK WIDOW fromDISNEY'S MARVEL franchise expected to be in theaters in November, as well as continuous entertainment provided by the subscription video on-demand streaming service, Disney+. Net revenue declines from MARVEL,BEY BLADE and DISNEY PRINCESS products were partially offset by net revenue increases from DISNEY FROZEN, STAR WARS and DREAMWORKS' TROLLS products during the second quarter of 2020.HASBRO GAMING : Net revenues in the Hasbro Gaming portfolio increased 11% in the second quarter of 2020 compared to the second quarter of 2019. Higher net revenues from classic games including,JENGA and CONNECT 4 products were partially offset by lower net revenues from DON'T STEP IN IT and certain otherHasbro Gaming products in the second quarter of 2020. Net revenues for Hasbro's total gaming category, including the Hasbro Gaming portfolio as reported above and all other gaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, which are included in the Franchise Brands portfolio, totaled$319.0 million for the second quarter of 2020, a decrease of 19%, as compared to$393.4 million in the second quarter of 2019. The decrease relates primarily to the timing of MAGIC: THE GATHERING product releases during the second quarter of 2020 compared to the same period in 2019. EMERGING BRANDS: Net revenues from the Emerging Brands portfolio increased 7% during the second quarter of 2020 compared to the second quarter of 2019. Contributing to the net revenue increases were the inclusion of brands acquired through the eOne Acquisition including PEPPA PIG and PJ MASKS, as well as net revenue increases fromEASY BAKE andGI JOE products. These increases were partially offset by declines in LITTLEST PET SHOP, PLAYSKOOL and FURREAL FRIENDS products during the second quarter of 2020. TV, FILM and ENTERTAINMENT: The TV,Film and Entertainment portfolio includes eOne revenues not allocated to the Emerging Brands portfolio. Operations contributing to the TV,Film and Entertainment portfolio focus on high quality, premium film, television and music production and content rights around the world and selling this content globally. During the second quarter of 2020, net revenues from the TV,Film and Entertainment portfolio were approximately 15% of total Company net revenues and included broadcast and licensing net revenues from key scripted deliveries including season two of THE ROOKIE, a television drama series currently airing onABC . In addition to these offerings, TV,Film and Entertainment net revenues benefited from the Company's lineup of unscripted television programming and its library of subscription video on demand ("SVOD") content. First Six Months of 2020 The six month periods endedJune 28, 2020 andJune 30, 2019 were each 26-week periods. For the first six months of 2020, consolidated net revenues increased 14% compared to the first six months of 2019 and reflect the inclusion of eOne revenues which represent 26% of consolidated net revenues for the period. The net revenue increase in the first six months of 2020 included an unfavorable variance of$27.5 million as a result of foreign currency translation due to weaker currencies across the Company's international markets when compared to the first six months of 2019. The operating loss for the first six months of 2020 was$21.1 million , or 1.1% of net revenues, compared to an operating profit of$164.5 million , or 9.6% of net revenues, for the first six months of 2019. The operating loss during the first six months of 2020 reflects the consolidation of eOne results of operations and was negatively impacted by acquisition and related costs of$160.1 million ($136.0 million after-tax);$47.6 million ($37.8 million after-tax) of expenses related to eOne acquired intangible asset amortization; and restructuring charges associated with cost savings initiatives of$11.6 million ($10.1 million after-tax). -------------------------------------------------------------------------------- The net loss attributable toHasbro, Inc. was$103.6 million for the first six months of 2020 compared to net earnings of$40.2 million for the first six months of 2019. The diluted net loss per share attributable toHasbro, Inc. was$0.75 in the first six months of 2020, compared to diluted earnings per share of$0.32 in 2019. The net loss attributable toHasbro, Inc. for the first six months of 2020 reflects the negative impact of acquisition related costs and eOne acquired intangible asset amortization of$0.99 per diluted share and$0.28 per diluted share, respectively, as well as restructuring charges associated with cost savings initiatives of$0.07 per diluted share. Net earnings for the first six months of 2019 included a non-cash, net of tax charge of$0.68 per diluted share, related to the settlement of the Company'sU.S. defined benefit pension plan. The following table presents net revenues by product category for the first six months of 2020 and 2019. Six Months Ended % June 28, 2020 June 30, 2019 Change Franchise Brands$ 773.3 970.3 -20 % Partner Brands 320.6 385.4 -17 % Hasbro Gaming 277.1 231.0 20 % Emerging Brands 170.1 130.3 31 % TV, Film and Entertainment 424.7 - 100 % Total$ 1,965.8 1,717.0 14 % FRANCHISE BRANDS: Net revenues in the Franchise Brands portfolio decreased 20% in the first six months of 2020 compared to 2019. Net revenues from substantially all of the Company's Franchise brands products declined during the first six months of 2020. PARTNER BRANDS: Net revenues from the Partner Brands portfolio decreased 17% during the first six months of 2020 compared to 2019. Partner Brands net revenues are reliant on related entertainment, including television and movie releases. During the first half of 2020, certain scheduled theatrical releases were delayed or postponed due to the closure or limited reopening of theaters as a result of the impact of COVID-19, which negatively impacted sales of the Company's Partner Brands products. During the first six months of 2020, the Company's Partner Brands portfolio was supported by fourth quarter 2019 theatrical releasesDISNEY'S FROZEN 2 in November and STAR WARS: THE RISE OF SKYWALKER in December, as well as through various distribution channels including home entertainment and streaming video. During the first half of 2019, the Company's Partner Brands portfolio was supported by theatrical releases from MARVEL'S AVENGERS: END GAME in April andDISNEY'S ALADDIN in May. In addition to the 2019 filmsDISNEY'S FROZEN 2 and STAR WARS: THE RISE OF SKYWALKER, the Company's 2020 Partner Brand entertainment releases include TROLLS WORLD TOUR, which was released in the premium video-on-demand format in April, as a sequel to the 2016 film, TROLLS from DREAMWORKS and BLACK WIDOW fromDISNEY'S MARVEL franchise expected to be in theaters in November, as well as continuous entertainment provided by the subscription video on-demand streaming service, Disney+. Net revenue increases from DISNEY FROZEN and DREAMWORKS' TROLLS products as well as increases from STAR WARS products, were partially offset by net revenue declines from MARVEL, DISNEY PRINCESS andBEY BLADE products during the first half of 2020.HASBRO GAMING : Net revenues in the Hasbro Gaming portfolio increased 20% in the first six months of 2020 compared to the first six months of 2019. Increased net revenues from DUNGEONS & DRAGONS,JENGA and CONNECT 4 products were partially offset by lower net revenues from DON'T STEP IN IT and SPEAK OUT products. Net revenues for Hasbro's total gaming category, including the Hasbro Gaming portfolio as reported above and all other gaming revenue, most notably from MAGIC: THE GATHERING and MONOPOLY products, which are included in the Franchise Brands portfolio, increased to$659.5 million in the first six months of 2020 versus$636.8 million in the first six months of 2019. EMERGING BRANDS: Net revenues from the Emerging Brands portfolio grew 31% for the first six months of 2020 compared to the first six months of 2019. Contributing to the net revenue increases in the first half of 2020 were the inclusion of brands acquired through the eOne Acquisition including PEPPA PIG and PJ MASKS. These net revenue increases were partially offset by net revenue declines from LITTLEST PET SHOP, PLAYSKOOL and LOST KITTIES products.
TV, FILM and ENTERTAINMENT: Net revenues from the TV,
--------------------------------------------------------------------------------
drama series currently airing onABC . In addition to these offerings, net revenues benefited from the Company's lineup of unscripted television programming and its library of SVOD content. SEGMENT RESULTS The Company's net revenues and operating profits (losses) are primarily derived from its four principal business segments: theU.S. andCanada segment, the International segment, the Entertainment, Licensing and Digital segment and, as a result of the 2020 eOne Acquisition, the eOne operating segment. The eOne segment was added to the Company's reporting structure in the first quarter of 2020 and is comprised of the legacy eOne business. The results of these operations are discussed in detail below. Second Quarter of 2020 The following table presents net external revenues and operating profit (loss) data for the Company's principal segments for the quarters endedJune 28, 2020 andJune 30, 2019 : Quarter Ended % June 28, 2020 June 30, 2019 Change Net Revenues U.S. and Canada segment$ 359.7 $ 510.5 -30 % International segment 249.8 377.4 -34 % Entertainment, Licensing and Digital segment 89.8 96.5 -7 % eOne segment 160.9 - 100 % Operating Profit (Loss) U.S. and Canada segment$ 24.3 $ 106.6 -77 % International segment (24.9) 14.6 >-100% Entertainment, Licensing and Digital segment 27.8 7.9 >100% eOne segment (6.0) - -100 %U.S. and Canada Segment TheU.S. andCanada segment net revenues declined 30% for the second quarter of 2020 compared to the second quarter of 2019, driven in part by disruptions to the business, as a result of the impact of the COVID-19 pandemic. Net revenue decreases from the Company's Franchise Brands, Partner Brands and Emerging Brands portfolios, were partially offset by higher net revenues from the Hasbro Gaming portfolio during the second quarter of 2020. Net revenue declines were noted across the Company's Franchise Brands portfolio during the second quarter; most notably in MAGIC: THE GATHERING and NERF. In the Partner Brands portfolio, higher net revenues from STAR WARS, DISNEY FROZEN and DREAMWORKS' TROLLS products were more than offset by net revenue decreases from MARVEL products and to a lesser extent,BEY BLADE and DISNEY PRINCESS products during the second quarter of 2020. In the Hasbro Gaming portfolio, higher net revenues were delivered across many of the Company's games brands includingJENGA , CONNECT 4, SORRY and TWISTER products. In the Emerging Brands portfolio, lower net revenues from POWER RANGERS and FURREAL FRIENDS products, were partially offset by net revenue contributions from the 2020 relaunch of the Company'sGI JOE product line during the second quarter of 2020.U.S. andCanada segment operating profit for the second quarter of 2020 was$24.3 million or 6.7% of segment net revenues, compared to segment operating profit of$106.6 million or 20.9% of segment net revenues, for the second quarter of 2019. The operating profit decrease in the second quarter of 2020 was driven by lower segment net revenues described above, partially offset by reduced royalty expenses associated with lower Partner Brand sales, and lower advertising, administrative and marketing expense. -------------------------------------------------------------------------------- International Segment International segment net revenues declined 34% in the second quarter of 2020 to$249.8 million from$377.4 million in the second quarter of 2019 and included the impact of an unfavorable$12.4 million currency translation. The following table presents net revenues by geographic region for the Company's International segment for the quarters endedJune 28, 2020 andJune 30, 2019 . Quarter Ended % June 28, 2020 June 30, 2019 Change Europe$ 157.7 201.1 -22 % Latin America 32.5 90.3 -64 % Asia Pacific 59.7 86.0 -31 % Net revenues$ 249.8 377.4 -34 % The decline in International segment net revenues during the second quarter of 2020 was attributable to disruptions to the business related to the COVID-19 pandemic as well as the unfavorable foreign currency translation of$12.4 million . Unfavorable foreign currency translation impacted the Company's major geographic regions as follows:Europe -$3.5 million ,Latin America -$6.7 million andAsia Pacific -$2.2 million . International segment net revenues declined in all brand portfolios including Franchise Brands, Partner Brands,Hasbro Gaming and Emerging Brands during the second quarter of 2020 compared to the second quarter of 2019. In the International segment, net revenues declined from substantially all of the Company's Franchise Brands products during the second quarter, most notably NERF, PLAY-DOH and MAGIC: THE GATHERING products. In the Partner Brands portfolio, net revenue decreases from MARVEL, BEYBLADE and DISNEY PRINCESS products were partially offset by net revenue increases from DISNEY FROZEN, STAR WARS and to a lesser extent, DREAMWORKS' TROLLS products. In the Hasbro Gaming portfolio, higher net revenues fromJENGA products were more than offset by lower net revenues from certain otherHasbro Gaming products. In the Emerging Brands portfolio, net revenues declined from PLAYSKOOL and LITTLEST PET SHOP products in the second quarter of 2020. International segment operating losses were$24.9 million , or -10.0% of segment net revenues for the second quarter of 2020, compared to operating profit of$14.6 million , or 3.9% of segment net revenues, for the second quarter of 2019. International segment operating losses during the second quarter of 2020 were the result of lower sales and unfavorable product mix, partially offset by lower royalty expense as a result of lower partner brand sales and lower advertising and marketing costs as well as lower administrative costs as a result of global cost savings initiatives. Entertainment, Licensing and Digital Segment Entertainment, Licensing and Digital segment net revenues declined 7% to$89.8 million for the second quarter of 2020, compared to$96.5 million for the second quarter of 2019. Net revenue declines were primarily driven by lower digital gaming revenues during the second quarter of 2020 due to the closure of the Backflip business in the fourth quarter of 2019 and lower consumer product licensing revenues during the second quarter of 2020. Entertainment, Licensing and Digital segment operating profit increased to$27.8 million , or 30.9% of segment net revenues for the second quarter of 2020, from$7.9 million , or 8.2% of segment net revenues for the second quarter of 2019. The increase in Entertainment, Licensing and Digital segment operating profit was driven primarily by lower program production expense and amortization and lower advertising costs during the second quarter of 2020 compared to 2019. eOne Segment During the second quarter of 2020, eOne segment net revenues were$160.9 million . The following table presents eOne segment net revenues by channel for the quarter endedJune 28, 2020 . Three Months Ended June 28, 2020 eOne Segment Net Revenues Film and TV $ 106.0 Family Brands 29.0 Music and Other 25.9 Segment Total $ 160.9
-------------------------------------------------------------------------------- The COVID-19 outbreak had a significant and varied impact on the eOne segment during the second quarter of 2020. Specifically, certain scheduled productions have been delayed or postponed due to the shutdown of production work and the closure or limited reopening of studios. Theatrical releases have been delayed due to the closure or limited reopening of theaters, and in some cases, global film releases have moved from theaters to alternative media platforms such as streaming services. During the second quarter of 2020, drivers of the eOne segment net revenues included: (i) broadcast and licensing revenues associated with internationally recognized brands, PEPPA PIG and PJ MASKS: (ii) broadcast and licensing contributions from key scripted deliveries including season two of THE ROOKIE, a television drama series currently airing onABC ; and (iii) the Company's strong lineup of unscripted television programming as well as demand for the Company's vast SVOD library. In addition to these entertainment driven revenues, the Company's music business benefited from both streaming and publishing revenues during the second quarter of 2020. eOne segment operating losses were$6.0 million , or -3.7% of segment net revenues for the second quarter of 2020. This loss was driven by$22.6 million of incremental intangible amortization costs related to the intangible assets acquired in the eOne Acquisition. Global Operations The Global Operations segment operating loss of$5.9 million for the second quarter of 2020 compared to an operating loss of$6.0 million for the second quarter of 2019. Corporate and Eliminations Operating losses in Corporate and Eliminations totaled$13.1 million for the second quarter of 2020 compared to operating profit of$5.2 million for the second quarter of 2019. Operating losses in 2020 were driven primarily by$11.6 million of charges associated with cost-savings initiatives within the Company's commercial and Film and TV businesses combined with charges related to the eOne Acquisition; including acquisition and integration costs of$4.0 million and restructuring and related costs of$6.3 million , comprised of severance and retention costs. First Six Months of 2020 The following table presents net revenues and operating profit (loss) for the Company's principal segments for each of the six month periods endedJune 28, 2020 andJune 30, 2019 . Six Months Ended % June 28, 2020 June 30, 2019 Change Net Revenues U.S. and Canada segment$ 788.4 $ 868.4 -9 % International segment 500.2 660.1 -24 % Entertainment, Licensing and Digital segment 173.9 188.5 -8 % eOne segment 503.4 - 100 % Operating Profit (Loss) U.S. and Canada segment$ 96.1 $ 120.1 -20 % International segment (51.6) (15.8) >-100% Entertainment, Licensing and Digital segment 33.0 38.0 -13 % eOne segment (39.0) - -100 %U.S. and Canada Segment TheU.S. andCanada segment net revenues for the six months endedJune 28, 2020 decreased 9% compared to 2019. The net revenue declines in the first half of 2020 were driven in part by disruptions to the Company's business operations, as a result of the impact of COVID-19. In the first six months of 2020, net revenue declines in the Franchise Brands, Partner Brands and Emerging Brands portfolios were partially offset by higher net revenues in the Hasbro Gaming portfolio. -------------------------------------------------------------------------------- In the Franchise Brands portfolio, net revenue declines from PLAY-DOH, NERF and TRANSFORMERS products and, to a lesser extent, MAGIC: THE GATHERING products, were partially offset by higher net revenues from MONOPOLY products. In the Partner Brands portfolio, lower net revenues from MARVEL and DISNEY PRINCESS products, as well as net revenue declines from the Company's UGLY DOLL and OVERWATCH products, were partially offset by net revenue increases fromDISNEY FROZEN, DREAMWORKS' TROLLS and STAR WARS products. In the Hasbro Gaming portfolio, higher net revenues were delivered across many brands in the portfolio, most notably from DUNGEONS & DRAGONS,JENGA , CONNECT 4, SORRY and THE GAME OF LIFE products. In the Emerging Brands portfolio, net revenue declines from FURREAL FRIENDS, POWER RANGERS and PLAYSKOOL products, were partially offset by net revenues contributions from the 2020 relaunch of the Company'sGI JOE product line.U.S. andCanada segment operating profit for the six months endedJune 28, 2020 decreased to$96.1 million , or 12.2% of segment net revenues, compared to$120.1 million , or 13.8% of segment net revenues, for the six months endedJune 30, 2019 . The decrease in operating profit in the first six months of 2020 was driven by lower net revenues partially offset by reduced administrative costs as a result of cost-savings initiatives, lower royalty expenses driven by the associated reduction in Partner Brands sales and lower sales, marketing and advertising costs during the first half of 2020. International Segment International segment net revenues decreased 24% to$500.2 million for the six months endedJune 28, 2020 from$660.1 million for the six months endedJune 30, 2019 and included an unfavorable$21.8 million impact from foreign currency exchange. The following table presents net revenues by geographic region for the Company's International segment for the six month periods endedJune 28, 2020 andJune 30, 2019 . Six Months Ended % June 28, 2020 June 30, 2019 Change Europe$ 319.9 354.5 -10 % Latin America 66.4 153.1 -57 % Asia Pacific 113.9 152.5 -25 % Net revenues$ 500.2 660.1 -24 % Foreign currency translation negatively impacted the major geographic regions as follows:Europe -$7.3 million ,Latin America -$10.5 million andAsia Pacific -$4.0 million . International segment net revenues declined in all brand portfolios including Franchise Brands, Partner Brands,Hasbro Gaming and Emerging Brands during the first six months of 2020 compared to 2019. The declines in Franchise Brands were the result of lower sales from substantially all Franchise Brands products during the first half of 2020, most notably NERF, PLAY-DOH and TRANSFORMERS. In the Partner Brands portfolio, lower net revenues from MARVEL and to a lesser extent, BEYBLADE and DISNEY PRINCESS products were partially offset by higher net revenues from DISNEY FROZEN, DREAMWORKS' TROLLS and STAR WARS products. In the Hasbro Gaming portfolio, lower net revenues from PIE FACE and certain otherHasbro Gaming products were partially offset by net revenue increases fromJENGA and DUNGEONS & DRAGONS products. In the Emerging Brands portfolio, net revenue declines from LITTLEST PET SHOP and PLAYSKOOL products were partially offset by net revenue increases from POWER RANGERS products in the first six months of 2020. International segment operating losses were$51.6 million for the first six months of 2020, compared to operating losses of$15.8 million for the first six months of 2019. The increase in International segment operating losses for the first six months of 2020 was the result of lower net revenues partially offset by reduced advertising, sales and marketing costs, and administrative and royalty expenses. Entertainment, Licensing and Digital Segment Entertainment, Licensing and Digital segment net revenues for the six months endedJune 28, 2020 decreased 8% to$173.9 million from$188.5 million for the six months endedJune 30, 2019 . The net revenue declines during the first half of 2020 were driven by lower digital gaming revenues due to the closure of the Backflip business in the fourth quarter of 2019, lower net revenues from MAGIC: THE GATHERING ARENA, the Company's free-to-play digital collectible card game due to the timing of product releases and lower consumer product licensing revenues. -------------------------------------------------------------------------------- Entertainment, Licensing and Digital segment operating profit was$33.0 million , or 19.0% of net revenues, for the six months endedJune 28, 2020 down from$38.0 million , or 20.1% of segment net revenues, for the six months endedJune 30, 2019 . The decline in operating profit in the Entertainment, Licensing and Digital segment was driven by lower net revenues as well as asset impairment charges of$20.8 million in production assets driven by the change in entertainment strategy as a result of the eOne Acquisition during the first quarter of 2020. Partially offsetting these negative impacts to operating profit were lower program production expenses and amortization costs as well as lower advertising and development costs during the first half of 2020. eOne Segment During the first half of 2020, eOne segment net revenues were$503.4 million . The following table presents eOne segment net revenues by channel for the six months endedJune 28, 2020 . Six Months Ended June 28, 2020 eOne Segment Net Revenues Film and TV$ 365.5 Family Brands 79.8 Music and Other 58.1 Segment Total$ 503.4 The impact of the COVID-19 outbreak on the eOne segment during the first half of 2020 was felt most significantly during the second quarter of the year. Specifically, scheduled productions were and continue to be delayed or postponed due to the shutdown of production work and the closure or limited reopening of studios. In addition, theatrical releases have been delayed due to the closure or limited reopening of theaters, and in some cases, global film releases were moved from theaters to alternative media platforms such as streaming services. In the first half of 2020, drivers of the eOne segment net revenues included: (i) broadcast and licensing revenues associated with internationally recognized brands, PEPPA PIG and PJ MASKS, (ii) theatrical contributions from theAmblin Partners film 1917, released inDecember 2019 , (iii) broadcast and licensing contributions from key scripted deliveries including season two of THE ROOKIE, a television drama series currently airing onABC , the Company's strong lineup of unscripted television programming as well as the Company's SVOD library. In addition to these entertainment driven revenues, the Company's music business benefited from both strong streaming and publishing revenues during the first half of 2020. eOne segment operating losses were$39.0 million , or -7.8% of segment net revenues for the first half of 2020. This loss was driven by$77.7 million of acquisition and integration costs, including$47.4 million of expense associated with the acceleration of eOne stock-based compensation and$24.5 million of advisor fees settled at the closing of the acquisition. Also contributing to the loss is$47.6 million of incremental intangible amortization costs related to the intangible assets acquired in the eOne Acquisition. Global Operations The Global Operations segment operating loss of$1.3 million for the first six months of 2020 compares to an operating loss of$4.7 million for the first six months of 2019. Corporate and Eliminations Operating losses in Corporate and Eliminations for the first six months of 2020 were$58.2 million , compared to operating profit of$27.0 million for the first six months of 2019. The Corporate and Eliminations operating loss in the first half of 2020 was driven primarily by charges related to the eOne Acquisition; including acquisition and integration costs of$22.0 million and restructuring and related costs of$39.5 million , comprised of severance and retention costs, as well as impairment charges for certain definite-lived intangible assets driven by the change in strategy for the combined company's entertainment assets. In addition to the charges associated with the eOne Acquisition, the Company incurred$11.6 million of severance charges associated with cost-savings initiatives within the Company's commercial and Film and TV businesses. -------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES Second Quarter 2020 Overall, the Company's costs and expenses in the second quarter of 2020 increased compared to the second quarter of 2019 driven by the inclusion of eOne's operations in the Company's consolidated financial statements. Costs and expenses stated as percentages of net revenues, are illustrated below for the quarters endedJune 28, 2020 andJune 30, 2019 . Quarter Ended June 28, 2020 June 30, 2019 Cost of sales 29.4 % 34.9 % Program cost amortization 5.9 2.4 Royalties 11.3 7.2 Product development 6.8 6.7 Advertising 8.4 9.4 Amortization of intangibles 4.0 1.2 Selling, distribution and administration 32.7 25.2 Acquisition and related costs 1.2 0.0 Cost of sales for the second quarter of 2020 was$253.2 million , or 29.4% of net revenues, compared to$343.7 million , or 34.9% of net revenues, for the second quarter of 2019. The decrease of cost of sales in dollars was attributable to lower net revenues during the second quarter of 2020 compared to the same period in 2019. The decrease as a percentage of net revenues is primarily related to the inclusion of net revenues from eOne, which experiences lower costs of sales sold as a percentage of net sales. To a lesser extent, the cost of sales decrease as a percent of net revenues was driven by the impact of$6.4 million of unfavorable foreign exchange and improved inventory closeout rates during the second quarter of 2020 as compared to 2019. Program cost amortization increased to$50.7 million , or 5.9% of net revenues, for the second quarter of 2020 from$23.5 million , or 2.4% of net revenues, for the second quarter of 2019. The increase in this expense both in dollars and as a percentage of net revenues is related to eOne, which experiences higher program cost amortization as a percentage of net sales. Program costs are capitalized as incurred and amortized using the individual-film-forecast method which matches costs to the related recognized revenue. Royalty expense for the second quarter of 2020 increased to$97.3 million , or 11.3% of net revenues, compared to$71.1 million , or 7.2% of net revenues, for the second quarter of 2019. The increase in royalty expense in dollars and as a percent of net revenues was driven by eOne which was partially offset by lower sales of Partner Brand products in the second quarter of 2020 as compared to the second quarter of 2019. Product development expense for the second quarter of 2020 was$58.3 million , or 6.8% of net revenues, compared to$65.6 million , or 6.7% of net revenues, for the second quarter of 2019. The decrease in dollars was primarily related to lower spending as a result of global cost savings initiatives combined with savings related to the closure of the Backflip business in the fourth quarter of 2019, partially offset by increased investments in MAGIC: THE GATHERING tabletop gaming. Product development expense was consistent as a percent of net revenues. Advertising expense for the second quarter of 2020 was$72.4 million , or 8.4% of net revenues, compared to$92.8 million , or 9.4% of net revenues, for the second quarter of 2019. The advertising expense decrease in dollars and as a percent of net revenues was driven by lower advertising levels across the regions reflecting the current environment due to COVID-19 impacts. Amortization of intangible assets increased to$34.7 million , or 4.0% of net revenues, for the second quarter of 2020, compared to$11.8 million , or 1.2% of net revenues, for the second quarter of 2019. The increase in dollars and as a percent of net revenues is primarily related to the acquisition of eOne, which contributed$22.6 million to amortization. Excluding the intangible asset amortization associated with eOne, amortization of intangible assets was consistent with 2019. For the second quarter of 2020, the Company's selling, distribution and administration expenses increased to$281.2 million , or 32.7% of net revenues, from$247.7 million , or 25.2% of net revenues, for the second quarter of 2019. The increase in selling, distribution and administration expenses in dollars was driven primarily by the inclusion and consolidation of eOne's operations during 2020. In addition, the increase in selling, distribution and administration expenses reflects$11.6 million of severance charges associated with cost-savings initiatives within the Company's commercial and Film and TV businesses and increased -------------------------------------------------------------------------------- bad debt expense. These increases were partially offset by lower freight and warehousing expenses as a result of lower shipments and decreased general and administrative spending due to the Company's ongoing cost-reduction efforts in the second quarter of 2020 as compared to the second quarter of 2019. During the three months endedJune 28, 2020 , the Company incurred$10.3 million of acquisition and related costs in connection with the eOne Acquisition. These expenses comprised of$4.0 million of acquisition and integration costs, and$6.3 million of severance and retention costs. First Six Months of 2020 The Company's costs and expenses, stated as percentages of net revenues, are illustrated below for the six month periods endedJune 28, 2020 andJune 30, 2019 . Six Months Ended June 28, 2020 June 30, 2019 Cost of sales 26.2 % 35.2 % Program cost amortization 9.3 1.8 Royalties 10.7 7.6 Product development 5.7 7.1 Advertising 8.9 9.9 Amortization of intangibles 3.6 1.4 Selling, distribution and administration 28.5 27.5 Acquisition and related costs 8.1 - Cost of sales for the six months endedJune 28, 2020 decreased to$515.9 , million or 26.2% of net revenues, from$603.7 million , or 35.2% of net revenues for the six months endedJune 30, 2019 . The decrease as a percentage of net revenues is primarily related to the acquisition of eOne, which experiences lower cost of sales as a percentage of net sales as well as the impact of$10.3 million of unfavorable foreign exchange. The cost of sales decrease in dollars during the first six months of 2020 was driven by lower volumes, partially offset by a less favorable brand mix from lower sales of Partner Brand products. Program cost amortization increased in the first six months of 2020 to$182.8 million , or 9.3% of net revenues, from$30.1 million , or 1.8% of net revenues, in the first six months of 2019. Program production costs are capitalized as incurred and amortized using the individual-film-forecast method which matches costs to the related recognized revenue. The increase in dollars, and as a percent of net revenues, is primarily related to eOne, which experiences higher program cost amortization as a percentage of net sales. Royalty expense for the six months endedJune 28, 2020 was$210.2 million , or 10.7% of net revenues, compared to$130.9 million , or 7.6% of net revenues, for the six months endedJune 30, 2019 . The increase in royalty expense in dollars, and as a percent of net revenues, was driven by the inclusion of eOne operations during the first half of 2020, partially offset by lower sales of Partner Brand product during the first six months of 2020 as compared to the first half of 2019. Product development expense for the six months endedJune 28, 2020 decreased to$112.2 million , or 5.7% of net revenues, from$121.9 million , or 7.1% of net revenues, for the six months endedJune 30, 2019 . The decrease as a percent of net revenues was primarily related to eOne, which experiences lower product development expense as a percentage of net sales. The decrease in dollars during the first six months of 2020 was driven by lower spending as a result of global cost savings initiatives combined with lower investments in digital gaming, primarily related to the closure of the Company's Backflip business during the fourth quarter of 2019. Advertising expense for the six months endedJune 28, 2020 was$174.0 million , or 8.9% of net revenues, compared to$169.4 million , or 9.9% of net revenues, for the six months endedJune 30, 2019 . The advertising expense increase in dollars was driven by eOne advertising expenses and higher costs in support of the MAGIC: THE GATHERING tabletop set release during the first quarter of 2020, partially offset by reduced advertising levels globally, reflecting the current environment due to COVID-19 impacts. -------------------------------------------------------------------------------- Amortization of intangibles was$71.5 million , or 3.6% of net revenues, for the six months endedJune 28, 2020 compared to$23.6 million , or 1.4% of net revenues, in the first six months of 2019. The increase in dollars and as a percent of net revenues is primarily related to the acquisition of eOne, which contributed$47.6 million to amortization. Excluding the intangible asset amortization associated with eOne, amortization of intangible assets was consistent with 2019. For the six months endedJune 28, 2020 , the Company's selling, distribution and administration expenses increased to$560.3 million , or 28.5% of net revenues, from$473.0 million , or 27.5% of net revenues, for the six months endedJune 30, 2019 . The increase in selling, distribution and administration expenses was driven primarily by the inclusion and consolidation of eOne's operations during the first half of 2020 combined with$11.6 million of severance charges associated with cost-savings initiatives within the Company's commercial and Film and TV businesses. This increase was offset by lower freight and warehousing expenses as a result of lower shipments during the first six months and decreased general and administrative spending due to the Company's ongoing cost-reduction efforts. During the first half 2020, the Company incurred$160.0 million of acquisition and related costs in connection with the eOne Acquisition. These expenses comprised of$99.7 million of acquisition and integration costs, primarily related to$47.4 million of expense associated with the acceleration of eOne stock-based compensation and$39.0 million of advisor fees settled at the closing of the acquisition. Also included in the acquisition and related costs were$60.4 million of restructuring and related costs including severance and retention costs of$19.5 million as well as$40.9 million in impairment charges for certain definite-lived intangible and production assets. The impairment charges of$40.9 million were driven by the change in strategy for the combined company's entertainment assets. NON-OPERATING (INCOME) EXPENSE Interest expense for the second quarter and first six months of 2020 totaled$49.6 million and$104.3 million , respectively, compared to$22.0 million and$44.3 million in the second quarter and first six months of 2019, respectively. In connection with the financing of the eOne acquisition, the Company issued an aggregate of$2.4 billion of senior unsecured debt securities duringNovember 2019 and in the first quarter of 2020, on the date of the closing, borrowed$1.0 billion in term loans provided by a term loan agreement. The increase in interest expense for the second quarter and first six months of 2020 reflects interest related to these notes and other borrowings associated with the eOne business, partially offset by lower average short-term borrowings during the first half of 2020. Interest income was$1.0 million and$5.7 million for the second quarter and first six months of 2020, respectively, compared to$6.0 million and$13.7 million in the second quarter and first six months of 2019, respectively. Lower average interest rates in 2020 compared to 2019 contributed to the decrease. Other income, net was$2.6 million and$4.1 million for the second quarter and first six months of 2020, respectively, compared to other expense, net of$106.2 million and$98.1 million in the second quarter and first six months of 2019, respectively. The increase was driven by lower pension expense in 2020 due to the$110.8 million non-cash pension charge as a result of the settlement of the Company'sU.S. pension plan liability during the second quarter of 2019, offset by foreign currency losses in 2020 compared to foreign currency gains in 2019. INCOME TAXES Income tax benefit totaled$10.8 million on pre-tax loss of$43.7 million in the second quarter of 2020 compared to income tax benefit of$7.3 million on pre-tax earnings of$6.1 million in the second quarter of 2019. For the six-month period, the income tax benefit totaled$14.9 million on pre-tax loss of$115.6 million in 2020 compared to income tax benefit of$4.5 million on pre-tax earnings of$35.7 million in 2019. Both periods, as well as the full year 2019, were impacted by discrete tax events including the accrual of potential interest and penalties on uncertain tax positions. During the first six months of 2020, favorable discrete tax adjustments were a net benefit of$24.0 million compared to a net benefit of$31.3 million in the first six months of 2019. The favorable discrete tax adjustments for the first six months of 2020 primarily relate to the costs related to the acquisition of eOne. The favorable discrete tax adjustments for the first six months of 2019 primarily related to the settlement of theU.S. defined benefits pension plan liability, excess tax benefits on share-based payments and the expiration of statutes of limitations for uncertain tax positions. Absent discrete items, the adjusted tax rates for the first six months of 2020 and 2019 were 20.5% and 18.3%, respectively. The increase in the adjusted tax rate of 20.5% for the first six months of 2020 is primarily due to the mix of jurisdictions where the Company earned its profits and the impact of the eOne Acquisition. TheUnited Kingdom enacted the Finance Act of 2020 after receiving royal assent onJuly 22, 2020 . Effective back 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. Changes in tax laws and rates will impact recorded deferred tax assets and liabilities -------------------------------------------------------------------------------- and our effective tax rate in the future. The primary impact will come from the revaluation of Hasbro'sUK tax attributes, which will likely result in an increased tax provision of approximately$16.0 million in the third quarter of 2020. OTHER INFORMATION Brexit Referendum OnJune 23, 2016 , theUnited Kingdom ("UK") voted in a referendum to leave theEuropean Union ("EU"), commonly referred to as Brexit. TheUK government triggered the formal two-year period to negotiate the terms of theUK's exit onMarch 29, 2017 . These events resulted in an immediate weakening of British pound sterling against the US dollar, and increased volatility in the foreign currency markets which continued into 2020. These fluctuations initially affected Hasbro's financial results, although the impact was partially mitigated by the Company's hedging strategy. OnJanuary 31, 2020 , theUK formally withdrew from the EU, entering a transitional period which is currently expected to end onDecember 31, 2020 . During this transitional period, EU law will continue to apply in theUK while providing time for theUK and EU to negotiate the details of their future relationship. Financial, trade and legal implications of theUK leaving the EU remain uncertain. The Company continues to closely monitor the negotiations and the impact to foreign currency markets, taking appropriate actions to support the Company's long-term strategy and to mitigate risks in its operational and financial activities. However, the Company cannot predict the direction of Brexit-related developments nor the impact of those developments on our European operations and the economies of the markets in which they operate. Business Seasonality and Shipments Historically, the revenue pattern of Hasbro's legacy business has shown the second half of the year to be more significant to its overall business than the first half. The Company expects that this concentration will continue, particularly as more of its business has shifted to larger customers with order patterns concentrated in the second half of the year around the holiday season. The concentration of sales in the second half of the year increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items, and (c) failure to achieve tight and compressed shipping schedules. The Company's business is characterized by customer order patterns which vary from year to year largely because of differences each year in the degree of consumer acceptance of product lines, product availability, marketing strategies and inventory policies of retailers, the dates of theatrical releases of major motion pictures for which the Company sells products, and changes in overall economic conditions. As a result, comparisons of the Company's unshipped orders on any date with those at the same date in a prior year are not necessarily indicative of the Company's expected sales for the year. Moreover, quick response inventory management practices result in fewer orders being placed significantly in advance of shipment and more orders being placed for immediate delivery. Although the Company may receive orders from customers in advance, it is a general industry practice that these orders are subject to amendment or cancellation by customers prior to shipment and, as such, the Company does not believe that these unshipped orders, at any given date, are indicative of future sales. Additionally, the impact of the COVID-19 outbreak to the Company's business seasonality and shipments remains uncertain. After operating at lower than planned production levels during most of the first quarter due to COVID-19, the Company's third-party manufacturing facilities inChina are currently operating at planned capacity for this time of year. Manufacturing and warehouse partners outside ofChina operated at close to normal levels during much of the first quarter. Beginning in mid-March and into the second quarter, these locations were operating at varying levels of productivity depending on local government and safety considerations however the majority of manufacturing facilities are now up and running. The COVID-19 situation continues to be fluid, but we currently expect all manufacturing facilities to remain operational in the second half of 2020, based upon our understanding of local governments directions at this time. As production typically builds to peak levels during the summer months, the Company anticipates making up remaining lost production during the third quarter of 2020, unless a resurgence of COVID-19 cases were to cause further manufacturing shutdowns or restrictions, and to be well positioned to meet shipping schedule demands in the second half of the year. However, if manufacturing facilities are impacted by a resurgence in COVID-19, we may not be able to make up for the disruption in supply in the nearer term. Accounting Pronouncement Updates InJune 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-13 (ASU 2016-13) Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this update provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard update replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public companies, this standard is effective for annual reporting periods beginning afterDecember 15, 2019 , and early adoption was -------------------------------------------------------------------------------- permitted. The Company adopted the standard in the first quarter of 2020 and the adoption of the standard did not have a material impact on its consolidated financial statements. InAugust 2018 , the FASB issued Accounting Standards Update No. 2018-13 (ASU 2018-13), Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, specifically related to disclosures surrounding Level 3 asset balances, fair value measurement methods, related gains and losses and fair value hierarchy transfers. For public companies, this standard is effective for annual reporting periods beginning afterDecember 15, 2019 , and early adoption was permitted. The Company adopted the standard in the first quarter of 2020 and the adoption of the standard did not have a material impact on its consolidated financial statements. InMarch 2019 , the FASB issued Accounting Standards Update No. 2019-02 (ASU 2019-02) Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials. The amendments in this update align cost capitalization of episodic television series production costs with that of film production cost capitalization. In addition, this update addresses impairment testing procedures with regard to film groups, when a film or license agreement is expected to be monetized with other films and/or license agreements. The intention of this update is to align accounting treatment with changes in production and distribution models within the entertainment industry and to provide increased transparency of information provided to users of financial statements about produced and licensed content. For public companies, this standard is effective for annual reporting periods beginning afterDecember 15, 2019 , and early adoption was permitted. The Company adopted the standard in the first quarter of 2020 and the adoption of the standard did not have a material impact on its consolidated financial statements. Recently Issued Accounting Pronouncements InAugust 2018 , the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14) Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. For public companies, this standard is effective for annual reporting periods beginning afterDecember 15, 2020 , and early adoption is permitted. The standard relates to financial statement disclosure only and will not have an impact on the Company's consolidated statement of financial position, statement of operations or statement of cash flows. In March of 2020, the FASB issued Accounting Standards Update No. 2020-04 (ASU 2020-04) Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying generally accepted accounting principles ("GAAP") to contracts, hedging relationships, and other transactions, for a limited period of time, to ease the potential burden of recognizing the effects of reference rate reform on financial reporting. The amendments in this update apply to contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to the global transition away from LIBOR and certain other interbank offered rates. An entity may elect to apply the amendments provided by this update beginningMarch 12, 2020 throughDecember 31, 2022 . The Company is currently evaluating this option as it relates to its contracts that reference LIBOR, as well as the impact of the standard to the Company's consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES The Company has historically generated a significant amount of cash from operations. In the first six months of 2020 and 2019 the Company has primarily funded its operations and liquidity needs through cash flows from operations, and when needed, used borrowings under its available lines of credit. In 2020, the Company's eOne operating segment has used production financing to fund certain of its television and film productions which are arranged on an individual production basis by special purpose production subsidiaries. The Company expects to continue to fund its working capital needs primarily through available cash and cash flows from operations as well as its production financing facilities and, when needed, by issuing commercial paper or borrowing under its revolving credit agreement. In the event that the Company is not able to issue commercial paper, the Company intends to utilize its available lines of credit. In addition, beginning in 2020 with the acquisition of eOne, the Company commenced funding certain of its television and film productions using production financing facilities which are secured by the assets and future revenues of the individual production subsidiaries. Under these facilities, the cash generated by the production may be restricted until the production financing is paid. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its available lines of credit and commercial paper program are adequate -------------------------------------------------------------------------------- to meet its working capital needs over the next twelve months. However, unexpected events or circumstances such as material operating losses or increased capital or other expenditures or inability to otherwise access the commercial paper market, may reduce or eliminate the availability of external financial resources. In addition, significant disruptions to credit markets may also reduce or eliminate the availability of external financial resources. Although management believes the risk of nonperformance by the counterparties to the Company's financial facilities is not significant, in times of severe economic downturn in the credit markets it is possible that one or more sources of external financing may be unable or unwilling to provide funding to the Company. During November of 2019, in conjunction with the Company's acquisition of eOne, the Company issued an aggregate of$2.4 billion of senior unsecured debt securities (collectively, the "Notes") consisting of the following tranches:$300 million of notes due 2022 (the "2022 Notes") that bear interest at a fixed rate of 2.60%;$500 million of notes due 2024 (the "2024 Notes") that bear interest at a fixed rate of 3.00%;$675 million of notes due 2026 (the "2026 Notes") that bear interest at a fixed rate of 3.55%; and$900 million of notes due 2029 (the "2029 Notes") that bear interest at a fixed rate of 3.90%. The interest rate payable on each series of the Notes will be subject to adjustment from time to time if either Moody's or S&P (or a substitute rating agency therefor) downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the Notes. Underwriting discount and fees of$20.0 million were deducted from the gross proceeds of the Notes. These costs are being amortized over the life of the Notes, which range from three to ten years. Prior toOctober 19, 2024 (in the case of the 2024 Notes),September 19, 2026 (in the case of the 2026 Notes),August 19, 2029 (in the case of the 2029 Notes) and at any time (in the case of the 2022 Notes), the Company may redeem the Notes at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicableU.S. Treasury bills at the time of repurchase, plus (1) 15 basis points (in the case of the 2022 Notes); (2) 25 basis points (in the case of the 2024 Notes); (3) 30 basis points (in the case of the 2026 Notes); and (4) 35 basis points (in the case of the 2029 Notes). In addition, on and after (1)October 19, 2024 for the 2024 Notes; (2)September 19, 2026 for the 2026 Notes; and (3)August 19, 2029 for the 2029 Notes, such series of Notes will be redeemable, in whole at any time or in part from time to time, at the Company's option at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest. Of the Company's long-term borrowings, the$300.0 million of 3.15% Notes mature in 2021. All of the Company's other long-term borrowings have contractual maturities that occur subsequent to 2021 with the exception of certain of the Company's production financing facilities. In November of 2019, the Company completed an underwritten public offering of 10,592,106 shares of common stock, par value$0.50 per share, at a public offering price of$95.00 per share. Net proceeds from this public offering were approximately$975.2 million , after deducting underwriting discounts and commissions and offering expenses of approximately$31.1 million . The net proceeds were used to finance, in part, the acquisition of eOne and to pay related costs and expenses. As ofJune 28, 2020 , the Company's cash and cash equivalents totaled$1,038.0 million , of which$71.9 million is restricted under the Company's production financing facilities. Prior to 2017, deferred income taxes had not been provided on the majority of undistributed earnings of international subsidiaries as such earnings were considered indefinitely reinvested by the Company. The Tax Act provided significant changes to theU.S. tax system including the elimination of the ability to deferU.S. income tax on unrepatriated earnings by imposing a one-time mandatory deemed repatriation tax on undistributed foreign earnings. As ofJune 28, 2020 , the Company has a total liability of$192.9 million related to this tax,$36.7 million is reflected in current liabilities while the remaining long-term payable related to the Tax Act of$156.2 million is presented within other liabilities, non-current on the Consolidated Balance Sheets. As permitted by the Tax Act, the Company will pay the transition tax in annual interest-free installments through 2025. As a result, the related earnings in foreign jurisdictions are available with greater investment flexibility. The majority of the Company's cash and cash equivalents held outside ofthe United States as ofJune 28, 2020 is denominated in theU.S. dollar. Because of the seasonality in the Company's cash flow, management believes that on an interim basis, rather than discussing only its cash flows, a better understanding of its liquidity and capital resources can be obtained through a discussion of the various balance sheet categories as well. Also, as several of the major categories, including cash and cash equivalents, accounts receivable, inventories and short-term borrowings, fluctuate significantly from quarter to quarter, due to the seasonality of its business, management believes that a comparison to the comparable period in the prior year is generally more meaningful than a comparison to the prior year-end. --------------------------------------------------------------------------------
The table below outlines key financial information (in millions of dollars) pertaining to our consolidated balance sheets including the period-over-period changes.
June 28, 2020 June 30, 2019 % Change
Cash and cash equivalents (including restricted
cash of $86.2 and $0 ) $ 1,038.0 1,151.0 -10 %
Accounts receivable, net 911.3 805.3 13 %
Inventories 564.2 564.8 - %
Prepaid expenses and other current assets 672.2 309.0 >100%
Other assets 1,329.1 665.2 100 %
Accounts payable and accrued liabilities 1,596.6 1,059.9 51 %
Other liabilities 771.7 554.2 39 %
Accounts receivable increased to $911.3 million at June 28, 2020 , compared to
$805.3 million at June 30, 2019 . Absent the unfavorable foreign currency impact
of $31.1 million , accounts receivable increased 17%, or $137.2 million . The
increase in accounts receivable during the first half of 2020 was driven
primarily by the inclusion of eOne balances of $206.2 million . Partially
offsetting these increases were lower accounts receivable balances across the
Company's Latin American, U.S. and Canada and European regions due to lower
revenues as a result of the impact of the COVID-19 pandemic during the six
months ended June 28, 2020 compared to the same period in 2019. Days sales
outstanding increased from 74 days at June 30, 2019 to 96 days at June 28, 2020
as a result of decreased collections and payment term extensions, primarily in
the Company's international markets, due to market disruptions caused by the
COVID-19 pandemic.
Inventories remained flat at $564.2 million as of June 28, 2020 compared to
$564.8 million at June 30, 2019 . Absent the unfavorable foreign currency impact
of $28.0 million , inventories increased 5% reflecting higher inventory levels in
the Company's Latin American and European markets due to lower sales in the
first half of 2020, and higher than normal inventory levels remaining from the
fourth quarter of 2019 in Latin America . These increases were partially offset
by lower inventory levels in U.S. and Canada as a result of lower shipments from
China due to the impact of COVID-19.
Prepaid expenses and other current assets increased to $672.2 million at
June 28, 2020 from $309.0 million at June 30, 2019 . The increase was due to
higher accrued royalty and licensing income, primarily attributable to accrued
revenue balances associated with eOne's intellectual property of $194.3 million ,
higher accrued tax credits related to film and television production costs, the
majority of which are attributable to eOne productions, higher prepaid tax
balances as a result of lower earnings relative to estimated tax payments and
higher prepaid royalty amounts due to the current portion payments made in the
first quarter of 2020 for the extension of the Company's Marvel and Lucas
agreements. These increases were partially offset by lower short-term investment
balances in the first half of 2020.
Other assets increased to approximately $1,329.1 million at June 28, 2020 from
$665.2 million at June 30, 2019 . The increase was primarily due to eOne's
investments in acquired content of $435.0 million , investments in film and
television productions of $146.6 million and investments in development of $30.5
million . Also contributing to the increase are higher long-term accrued royalty
income balances primarily driven by eOne, increased non-current royalty advances
due to the non-current portion of payments made in the first quarter of 2020
related to certain of the Company's partner brands as well as higher deferred
tax balances. These increases were partially offset by lower capitalized
television production costs in the legacy Hasbro business, primarily related to
impairment charges recorded on certain production assets during the first
quarter of 2020, lower capitalized film production costs in the legacy Hasbro
business, as a result of higher amortization of film production assets in 2020
and lower long-term receivable balances related to third-party production studio
rebates.
Accounts payable and accrued liabilities increased to $1,596.6 million at
June 28, 2020 from $1,059.9 million at June 30, 2019 . The increase was primarily
attributable to the acquisition of eOne and inclusion of significant accrued
participation balances, deferred revenue balances primarily related to broadcast
licensing obligations and the addition of eOne's current lease liability and
account payable balances. In addition, increases included higher accrued royalty
balances, higher accrued interest as a result of higher debt levels in 2020 from
the issuance of notes in November 2019 and January 2020 and higher accrued
income tax balances as a result of an extension provided to U.S. companies for
transition tax installment payments. These increases were partially offset by
lower accrued advertising balances due to lower levels of advertising expense in
the second quarter of 2020.
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Other liabilities increased to $771.7 million at June 28, 2020 from $554.2
million at June 30, 2019 . The increase was primarily driven by deferred tax
liabilities recorded as a result of the eOne Acquisition accounting adjustments
during the first quarter of 2020, higher long-term lease liability balances
resulting from the eOne Acquisition, and higher deferred revenue balances as a
result of the inclusion of eOne operations in the Company's consolidated
financial statements beginning in the first quarter of 2020. In addition to
these increases, there were higher long-term international pension balances due
to the 2019 year-end actuarial valuations and higher reserves for uncertain tax
positions. These increases were offset by a lower transition tax liability
balance reflecting the reclassification of the 2020 installment payment.
Cash Flow
The following table summarizes the changes in the Consolidated Statement of Cash
Flows, expressed in millions of dollars, for the quarters ended June 28, 2020
and June 30, 2019 .
June 28, 2020 June 30, 2019
Net cash provided by (used in)
Operating activities $ 258.3 $ 336.3
Investing activities (4,454.8) (60.5)
Financing activities 678.5 (306.6)
Net cash provided by operating activities in the first six months of 2020 was
$258.3 million compared to $336.3 million in the first six months of 2019. The
$77.9 million decrease in net cash provided by operating activities was
primarily attributable to the decrease in earnings before depreciation,
intangible amortization and program cost amortization, and higher film and
television production spend as a result of the inclusion of eOne operations
during the first half of 2020 as well as royalty advances paid in the first half
of 2020 related to the extension of the Company's Marvel and Lucas license
agreements that were due to expire in 2020.
Net cash utilized in investing activities was $4,454.8 million in the first six
months of 2020 compared to $60.5 million in the first six months of 2019. The
increase in 2020 reflects $4.4 billion of cash utilized to acquire eOne, net of
cash acquired. As discussed in the Executive Summary, the cash used for the
purchase of eOne consisted of the net proceeds from the issuance of an aggregate
principal amount of $2.4 billion in senior secured notes, net proceeds $975.2
million from of the issuance of approximately 10.6 million shares of common
stock and $1.0 billion in term loans drawn in the first quarter of 2020.
Additions to property, plant and equipment were $64.0 million in the first six
months of 2020 compared to $58.2 million in the first six months of 2019.
Net cash provided by financing activities was $678.5 million in the first six
months of 2020 compared to net cash utilized of $306.6 million , in the first six
months of 2019. The increase in cash provided by financing activities was
primarily driven by the proceeds from the drawdown of the Company's $1.0 billion
in term loans. Also, in the first quarter of 2020, the Company had drawdowns of
$26.3 million and repayments of $90.7 million related to eOne production
financing loans and paid $47.4 million associated with the redemption of eOne
stock awards that were accelerated as a result of the acquisition as well as a
$7.5 million payment for the Company's first installment towards the repayment
of the $1.0 billion term loans described above.
During the first half of 2019, the Company paid $100.0 million to Saban
Properties related to the 2018 POWER RANGERS acquisition which consisted of a
$75.0 million deferred purchase price payment and $25.0 million released from
escrow. Cash payments related to the purchases of the Company's common stock
were $58.6 million in the first half of 2019. There were no repurchases of the
Company's common stock in the first half of 2020 as the Company suspended the
program while it prioritizes deleveraging. Dividends paid in the first half of
2020 totaled $186.2 million compared to $164.9 million in the first half of 2019
primarily reflecting the additional shares issued in the fourth quarter of 2019.
Sources and Uses of Cash
The Company has an agreement with a group of banks which provides for a
commercial paper program (the "Program"). Under the Program, at the request of
the Company and subject to market conditions, the banks may either purchase from
the Company, or arrange for the sale by the Company, of unsecured commercial
paper notes. The Company may issue notes from time to time up to an aggregate
principal amount outstanding at any given time of $1,000.0 million . The
maturities of the notes may vary but may not exceed 397 days. The notes are
sold under customary terms in the commercial paper market and are issued at a
discount to par, or alternatively, sold at par and bear varying interest rates
based on a fixed or floating rate basis. The interest rates vary based on
market conditions and the ratings assigned to the notes by the credit rating
agencies at the time of issuance. Subject to market conditions, the Company
intends to utilize the Program as its primary short-term borrowing facility and
does not intend to sell unsecured commercial paper notes in excess of the
available amount under the revolving
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credit agreement discussed below. If, for any reason, the Company is unable to
access the commercial paper market, the Company intends to use the revolving
credit agreement to meet the Company's short-term liquidity needs. At June 28,
2020 , the Company had no outstanding borrowings related to the Program.
The Company has a second amended and restated revolving credit agreement with
Bank of America, N.A ., as administrative agent, swing line lender and a letter
of credit issuer and lender and certain other financial institutions, as lenders
thereto (the "Amended Revolving Credit Agreement"), which provides the Company
with commitments having a maximum aggregate principal amount of $1,500.0
million . The Amended Revolving Credit Agreement also provides for a potential
additional incremental commitment increase of up to $500.0 million subject to
agreement of the lenders. The Amended Revolving Credit Agreement contains
certain financial covenants setting forth leverage and coverage requirements,
and certain other limitations typical of an investment grade facility, including
with respect to liens, mergers and incurrence of indebtedness. The Amended
Revolving Credit Agreement extends through September 20, 2024 . The Company was
in compliance with all covenants as of and for the quarter ended June 28, 2020 .
The Company had no borrowings outstanding under its committed revolving credit
facility as of June 28, 2020 . However, letters of credit outstanding under this
facility as of June 28, 2020 were approximately $2.7 million . Amounts available
and unused under the committed line, at June 28, 2020 were approximately
$1,497.3 million , inclusive of borrowings under the Company's commercial paper
program. The Company also has other uncommitted lines from various banks, of
which approximately $19.3 million was utilized at June 28, 2020 . Of the amount
utilized under, or supported by, the uncommitted lines, approximately $6.4
million and $12.9 million represent outstanding short-term borrowings and
letters of credit, respectively.
In September of 2019, the Company entered into a $1.0 billion Term Loan
Agreement (the "Term Loan Agreement") with Bank of America N.A . ("Bank of
America "), as administrative agent, and certain financial institutions as
lenders, pursuant to which such lenders committed to provide, contingent upon
the completion of the eOne Acquisition and certain other customary conditions to
funding, (1) a three-year senior unsecured term loan facility in an aggregate
principal amount of $400.0 million (the "Three-Year Tranche") and (2) a
five-year senior unsecured term loan facility in an aggregate principal amount
of $600.0 million (the "Five-Year Tranche" and together with the Three-Year
Tranche, the "Term Loan Facilities"). On December 30, 2019 , the Company
completed the acquisition of eOne and on that date, borrowed the full amount of
$1.0 billion under the Term Loan Facilities. Loans under the Term Loan
Facilities bear interest, at the Company's option, at either the Eurocurrency
Rate or the Base Rate, in each case plus a per annum applicable rate that
fluctuates (1) in the case of the Three-Year Tranche, between 87.5 basis points
and 175.0 basis points, in the case of loans priced at the Eurocurrency Rate,
and between 0.0 basis points and 75.0 basis points, in the case of loans priced
at the Base Rate, and (2) in the case of the Five-Year Tranche, between 100.0
basis points and 187.5 basis points, in the case of loans priced at the
Eurocurrency Rate, and between 0.0 basis points and 87.5 basis points, in the
case of loans priced at the Base Rate, in each case, based upon the non-credit
enhanced, senior unsecured long-term debt ratings of the Company by Fitch
Ratings Inc. , Moody's Investor Service, Inc. and S&P Global Rankings, subject to
certain provisions taking into account potential differences in ratings issued
to the relevant rating agencies or a lack of ratings issued by such ratings
agencies. Loans under the Five-Year Tranche require principal amortization
payments, payable in equal quarterly installments of 5.0% per annum of the
original principal amount thereof for each of the first two years after funding,
increasing to 10.0% per annum of the original principal amount thereof for each
subsequent year. The Term Loan Agreement contains affirmative and negative
covenants typical of this type of facility, including: (i) restrictions on the
Company's and its domestic subsidiaries' ability to allow liens on their assets,
(ii) restrictions on the incurrence of indebtedness, (iii) restrictions on the
Company's and certain of its subsidiaries' ability to engage in certain mergers,
(iv) the requirement that the Company maintain a Consolidated Interest Coverage
Ratio of no less than 3.00:1.00 as of the end of any fiscal quarter and (v) the
requirement that the Company maintain a Consolidated Total Leverage Ratio of no
more than, depending on the gross proceeds of equity securities issued after the
effective date of the eOne Acquisition, 5.65:1.00 or 5.40:1.00 for each of the
first, second and third fiscal quarters ended after the funding of the Term Loan
Facilities, with periodic step downs to 3.50:1.00 for the fiscal quarter ending
December 31, 2023 and thereafter. The loans were drawn down on December 30, 2019
to fund the acquisition of eOne.
The Company has principal amounts of long-term debt at June 28, 2020 of $5.2
billion , due at varying times from 2021 through 2044. As described above, the
Company issued an aggregate of $2.4 billion of senior unsecured long-term debt
securities in November 2019 and borrowed $1.0 billion under its term loan
facilities on December 30, 2019 in connection with the financing of the eOne
Acquisition. Of the total principal amount of long-term debt, $378.6 million is
current at June 28, 2020 of which $300.0 million is related to the 3.15% 2021
Notes and $30.0 million is related to principal amortization of the 5-year term
loans due December 2024 . Additionally, the Company has outstanding production
financing facilities at June 28, 2020 of $142.0 million of which $93.4 million
is included in long-term debt and $48.6 million is reported as the current
portion of long-term debt within the Company's consolidated financial
statements, included in Item 1 of this Form10-Q.
The Company also had letters of credit and other similar instruments of
approximately $15.6 million and purchase commitments of approximately $676.7
million outstanding at June 28, 2020 .
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Through the eOne Acquisition, the Company assumed eOne's existing future
obligations for film and television content, future minimum contractual royalty
payment obligations and operating lease commitments. Future payments required
under these obligations, expressed in millions of dollars as of June 28, 2020 ,
are as follows:
Remainder 2020 2021 2022 2023 2024 Thereafter Total
Future film and television
obligations $ 35.9 42.4 1.8 - - - $ 80.1
First-look commitments 10.4 16.0 7.3 - - - 33.7
Operating lease commitments 32.4 14.3 11.6 10.5 9.3 23.0 101.1
$ 78.7 72.7 20.7 10.5 9.3 23.0 $ 214.9
Other contractual obligations and commercial commitments, as detailed in the
Company's 2019 Form 10-K, did not materially change outside of commitments
assumed as part of the eOne Acquisition and certain payments made in the normal
course of business and as otherwise set forth in this report. The table of
contractual obligations and commercial commitments, as detailed in the Company's
2019 Form 10-K does not include certain tax liabilities related to uncertain tax
positions. See Note 3, "Business Combinations" to our consolidated financial
statements, which is included in Part I of this Form 10-Q for contractual
commitments assumed through the eOne Acquisition.
The Company believes that cash from operations, and, if necessary, its committed
line of credit and other borrowing facilities, will allow the Company to meet
its obligations over the next twelve months.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America . As
such, management is required to make certain estimates, judgments and
assumptions that it believes are reasonable based on the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the periods presented. The significant accounting
policies which management believes are the most critical to aid in fully
understanding and evaluating the Company's reported financial results include
recoverability of goodwill, intangible assets, income taxes and the valuation of
the Company's equity method investment in Discovery Family Channel. These
critical accounting policies are the same as those detailed in the 2019 Form
10-K with the exception of the use of estimates for business combinations in
relation to the Company's 2020 acquisition of eOne, which is detailed below.
Business Combinations. The Company accounts for business combination under FASB
Accounting Standards Codification Topic 805, Business Combinations ("Topic
805"). Identifiable assets acquired, liabilities assumed and any noncontrolling
interests in the acquiree are recognized and measured as of the acquisition date
at fair value. Goodwill is recognized to the extent by which the aggregate of
the acquisition-date fair value of the consideration transferred and any
noncontrolling interests in the acquiree exceed the recognized basis of the
identifiable assets acquired, net of assumed liabilities. Determining the fair
value of assets acquired, liabilities assumed and noncontrolling interests
requires management's judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect to future cash
flows, discount rates and asset lives among other items.
The Company's evaluation of the facts and circumstances available as of December
30, 2019 , to assign fair values to assets acquired and liabilities assumed,
including income tax related amounts are ongoing. As further analysis of assets
including program rights, investment in films and television content, intangible
assets, as well as deferred revenue, noncontrolling interests, tax and certain
other liabilities is completed, additional information on the assets acquired
and liabilities assumed may become available. A change in the information
related to the net assets acquired may change the amount of the purchase price
assigned to goodwill, and as a result, the preliminary fair values disclosed are
subject to adjustment as additional information is obtained and valuations are
completed. Provisional adjustments, if any, will be recognized during the
reporting period in which the adjustments are determined. We expect to finalize
the purchase price allocation as soon as practicable, but no later than one year
from the acquisition date. For more information on the eOne Acquisition see Note
3, "Business Combinations" to the Consolidated Financial Statements included in
Part I, Item 1 of this Form 10-Q.
FINANCIAL RISK MANAGEMENT
The Company is exposed to market risks attributable to fluctuations in foreign
currency exchange rates, primarily as the result of sourcing products priced in
U.S. dollars, Hong Kong dollars and Euros while marketing those products in more
than twenty currencies. Results of operations may be affected primarily by
changes in the value of the U.S. dollar, Hong Kong dollar, Euro,
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British pound sterling, Canadian dollar, Brazilian real, Russian ruble and
Mexican peso and, to a lesser extent, other currencies in Latin American and
Asia Pacific countries.
To manage this exposure, the Company has hedged a portion of its forecasted
foreign currency transactions for fiscal years 2020 through 2022 using foreign
exchange forward contracts. In addition, during the third quarter of 2019 the
Company hedged a portion of its exposure to fluctuations in the British pound
sterling in relation to the eOne Acquisition purchase price and other
transaction related costs using a series of both foreign exchange forward and
option contracts. These contracts did not qualify for hedge accounting and as
such, were marked to market through the Company's Consolidated Statement of
Operations. For tax purposes these contracts qualified as nontaxable integrated
tax hedges. These contracts matured on December 30, 2019 (the closing date of
the transaction) and net gains or losses recognized on these contracts in the
first half of 2020 were immaterial.
The Company is also exposed to foreign currency risk with respect to its net
cash and cash equivalents or short-term borrowing positions in currencies other
than the U.S. dollar. The Company believes, however, that the on-going risk on
the net exposure should not be material to its financial condition. In addition,
the Company's revenues and costs have been, and will likely continue to be,
affected by changes in foreign currency rates. A significant change in foreign
exchange rates can materially impact the Company's revenues and earnings due to
translation of foreign-denominated revenues and expenses. The Company does not
hedge against translation impacts of foreign exchange. From time to time,
affiliates of the Company may make or receive intercompany loans in currencies
other than their functional currency. The Company manages this exposure at the
time the loan is made by using foreign exchange contracts. Other than as set
forth above, the Company does not hedge foreign currency exposures.
The Company reflects all forward and option contracts at their fair value as an
asset or liability on the consolidated balance sheets. The Company does not
speculate in foreign currency exchange contracts. At June 28, 2020 , these
contracts had net unrealized gains of $26.1 million , of which $22.7 million of
unrealized gains are recorded in prepaid expenses and other current assets, $6.3
million of unrealized gains are recorded in other assets and $2.9 million of
unrealized losses are recorded in accrued liabilities. Included in accumulated
other comprehensive loss at June 28, 2020 are deferred gains, net of tax, of
$24.4 million , related to these derivatives.
At June 28, 2020 , the Company had fixed rate long-term debt of $5.2 billion . Of
this long-term debt, $600 million represents the aggregate issuance of long-term
debt in May 2014 which consists of $300 million of 3.15% Notes Due 2021 and $300
million of 5.10% Notes Due 2044. Prior to the debt issuance, the Company
entered into forward-starting interest rate swap agreements with a total
notional value of $500 million to hedge the anticipated underlying U.S. Treasury
interest rate. These interest rate swaps were matched with this debt issuance
and were designated and effective as hedges of the change in future interest
payments. At the date of debt issuance, the Company terminated these interest
rate swap agreements and their fair value at the date of issuance was recorded
in accumulated other comprehensive loss and is being amortized through the
consolidated statements of operations using an effective interest rate method
over the life of the related debt. Included in accumulated other comprehensive
loss at June 28, 2020 are deferred losses, net of tax, of $17.2 million related
to these derivatives.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is included in Part I, Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is incorporated herein by reference.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures, as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), that are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. The Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of June 28, 2020 . Based on the
evaluation of these disclosure controls and procedures, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective.
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Changes in internal control over financial reporting
Except for the acquisition of eOne described below, there were no changes in the
Company's internal control over financial reporting, as defined in Rule
13a-15(f) promulgated under the Exchange Act, during the quarter ended June 28,
2020 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
On December 30, 2019 , the Company completed the acquisition of eOne. We are
currently integrating eOne into our operations and internal control processes
and, pursuant to the Securities and Exchange Commission's guidance that an
assessment of a recently acquired business may be omitted from the scope of an
assessment in the year of acquisition, the scope of our assessment of the
effectiveness of our internal controls over financial reporting at December 27,
2020 will not include eOne.
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