Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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The following discussion should be read in conjunction with the audited consolidated financial statements of the Company included in Part II Item 8 of this document.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning the Company’s expectations and beliefs. See Item 1A “Forward-Looking Information and Risk Factors That May Affect Future Results” for a discussion of other uncertainties, risks and assumptions associated with these statements.

Unless otherwise specifically indicated, all dollar or share amounts herein are expressed in millions of dollars or shares, except for per share amounts.

EXECUTIVE SUMMARY

Hasbro, Inc. (“Hasbro” or the “Company”) is a global play and entertainment company dedicated to Creating the World’s Best Play Experiences. The Company strives to do this through deep consumer engagement and the

application of consumer insights, the use of immersive storytelling to build brands, product innovation and development of global business reach. Hasbro applies these principles to leverage its beloved owned and controlled brands, including Franchise Brands BABY ALIVE (beginning in 2018), MAGIC: THE GATHERING, MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and TRANSFORMERS, as well as Partner Brands. From toys and games, to television, motion pictures, digital gaming and a comprehensive consumer products licensing program, Hasbro fulfills the fundamental need for play and connection for children and families around the world. The Company’s wholly-owned Hasbro Studios and its film labels, AllSpark Pictures and Allspark Animation, create entertainment brand-driven storytelling across mediums, including television, film, digital and more.

Each of these principles is executed globally in alignment with Hasbro’s strategic plan, its brand blueprint. At the center of this blueprint, 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 and motion pictures, digital gaming and a broad range of consumer products. 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 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 and DISNEY’S DESCENDANTS are owned by The Walt Disney Company.

The Company’s business is separated into three principal business segments: U.S. and Canada, International, and Entertainment and Licensing. The U.S. and Canada segment markets and sells both toy and game products primarily in the United States and Canada. 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 and Licensing segment includes the Company’s consumer products licensing, digital licensing and gaming, and movie and television entertainment operations. In addition to these three primary segments, the Company’s product sourcing operations are managed through its Global Operations segment.

The impact of changes in foreign currency exchange rates used to translate the consolidated statements of operations is quantified by translating the current period revenues at the prior period exchange rates and comparing this amount to the prior period reported revenues. The Company believes that the presentation of the impact of changes in exchange rates, which are beyond the Company’s control, is helpful to an investor’s understanding of the performance of the underlying business. The Company has also included in this report the impact of U.S. tax reform, passed in December 2017, on net earnings, as well as earnings per share.

2017 highlights

	•		Net revenues grew 4% to $5,209.8 million in 2017 from $5,019.8 million in 2016. Growth in net revenues includes a favorable foreign currency translation of $79.2 million. Absent favorable foreign currency translation, 2017 net revenues grew 2% compared to 2016.

	•		2017 net revenues grew in all major operating segments: 5% in the U.S. and Canada segment; 2% in the International segment, including a favorable foreign currency translation impact of $75.3 million; and 8% in the Entertainment and Licensing segment.

	•		Franchise Brands and Hasbro Gaming net revenues each grew 10%; Emerging Brands net revenues increased 2%; and Partner Brands revenues declined 10%.

	•		2017 operating profit increased 3% from $788.0 million in 2016 to $810.4 million in 2017.

	•		2017 operating profit was negatively impacted by the Toys“R”Us bankruptcy in the U.S. and Canada as a result of incremental bad debt expense recorded during the third quarter of 2017.

	•		2016 operating profit was negatively impacted by a non-cash goodwill impairment charge of $32.9 million related to the Company’s investment in Backflip.

	•		U.S. tax reform, passed in December 2017, resulted in a net charge of $296.5 million including a one-time repatriation tax payable over eight years. See Note 22, “Subsequent Event,” for disclosure of additional tax guidance related to the Tax Act.

	•		Net earnings attributable to Hasbro, Inc. declined in 2017 to $396.6 million, or $3.12 per diluted share, compared to $551.4 million, or $4.34 per diluted share in 2016.

	•		2017 earnings were negatively impacted by a net charge of $296.5 million, or $2.33 per diluted share, related to U.S. tax reform

	•		2016 earnings were negatively impacted by the post-tax $14.7 million, or $0.12 per diluted share non-cash goodwill impairment charge, related to the Company’s investment in Backflip.

2016 highlights

	•		Net revenues grew 13% to $5,019.8 million in 2016 from $4,447.5 million in 2015. Absent unfavorable foreign currency translation of approximately $61.0 million, 2016 net revenues grew 14% compared to 2015.

	•		2016 net revenues grew in all major operating segments: 15% in the U.S. and Canada segment; 11% in the International segment, including an unfavorable foreign currency translation impact of $58.4 million; and 8% in the Entertainment and Licensing segment.

	•		Net revenues grew in all brand portfolios, Partner Brands growth of 28%; Hasbro Gaming growth of 23%; Emerging Brands growth of 17% and Franchise Brands growth of 2%.

	•		2016 operating profit improved 14% in 2016 compared to 2015 while net earnings attributable to Hasbro, Inc. increased 22% to $551.4 million compared to $451.8 million in 2015.

Share Repurchases and Dividends

The Company is committed to returning excess cash to its shareholders through dividends and share repurchases. The Company seeks to return cash to its shareholders through the payment of quarterly dividends. Hasbro increased the quarterly dividend rate from $0.57 per share in 2017 to $0.63 per share in 2018 which will be effective for the dividend payable in May 2018. This was the fourteenth dividend increase in the previous 15 years. During that period, the Company has increased the quarterly cash dividend from $0.03 to $0.63 per share. In addition to the dividend, the Company returns cash through its share repurchase program. As part of this initiative, from 2005 to 2015, the Company’s Board of Directors adopted eight successive share repurchase authorizations with a cumulative authorized repurchase amount of $3,825.0 million. The eighth authorization was approved in February 2015 for $500 million. During 2017, Hasbro repurchased approximately 1.6 million shares at a total cost of $150.1 million and an average price of $94.74 per share. Since 2005, Hasbro has repurchased 105.5 million shares at a total cost of $3,647.0 million and an average price of $34.80 per share. At December 31, 2017, Hasbro had $178.0 million remaining available under these share repurchase authorizations.

Summary

The following table provides a summary of the Company’s condensed consolidated results as a percentage of net revenues for 2017, 2016 and 2015.


	2017			2016			2015
Net Revenues		100.0	%		100.0	%		100.0	%
Operating profit		15.6			15.7			15.6
Earnings before income taxes		15.1			13.8			13.6
Net earnings		7.6			10.6			10.0
Net earnings attributable to Hasbro, Inc.		7.6	%		11.0	%		10.2	%

Results of Operations — Consolidated

The fiscal year ended December 31, 2017 was a fifty-three week period while the fiscal years ended December 25, 2016 and December 27, 2015 were each fifty-two week periods.

Net earnings attributable to Hasbro, Inc. decreased to $396.6 million for the fiscal year ended December 31, 2017 compared to $551.4 million for the fiscal year ended December 25, 2016, and were $451.8 million for the fiscal year ended December 27, 2015.

Through 2016, the Company owned a 70% majority interest in Backflip Studios, LLC (“Backflip”). The Company consolidated the financial results of Backflip in its consolidated financial statements and, accordingly, the Company’s reported revenues, costs and expenses, assets and liabilities, and cash flows included 100% of Backflip, with the 30% noncontrolling interests share reported as net loss attributable to noncontrolling interests in the consolidated statements of operations and redeemable noncontrolling interests on the consolidated balance

sheets. During the first quarter of 2017, the Company acquired the remaining 30% of Backflip making it a wholly-owned subsidiary of the Company. As a result, beginning in 2017 the Company no longer reports noncontrolling interests in its consolidated statements of operations or redeemable noncontrolling interests on its consolidated balance sheets. The results of Backflip are reported in the Entertainment and Licensing segment.

Diluted earnings per share attributable to Hasbro, Inc. were $3.12 in 2017, $4.34 in 2016 and $3.57 in 2015.

Net earnings and diluted earnings per share attributable to Hasbro, Inc. for each fiscal year in the three years ended December 31, 2017 include certain charges and benefits as described below.

2017

	•		A net charge of $296.5 million or $2.33 per diluted share related to U.S. tax reform. This net charge includes a $316.4 million charge included in income taxes due to the estimated repatriation tax liability and adjustments to the Company’s deferred tax assets and liabilities; partially offset by a $19.9 million gain within other income due to the change in the value of a long-term liability following the change in the U.S. corporate tax rate beginning in 2018.

	•		Benefit, net of tax, of $32.1 million or $0.25 per diluted share from the adoption of FASB Accounting Standards Update 2016-09, Improvements to Employee Share-Based Accounting.

2016

	•		Post-tax charge of $14.7 million, or $0.12 per diluted share, due to a $32.9 million non-cash goodwill impairment charge on the Company’s Backflip investment.

2015

	•		Benefit, net of tax, of $6.9 million, or $0.05 per diluted share, related to a gain on the sale of the Company’s manufacturing operations in East Longmeadow, MA and Waterford, Ireland.

Consolidated net revenues for the year ended December 31, 2017 grew 4% to $5,209.8 million from $5,019.8 million for the year ended December 25, 2016. Net revenues in 2017 include a favorable foreign currency translation of $79.2 million, which is the result of stronger currencies across our international segment in 2017 compared to 2016. Absent the impact of foreign currency translation, consolidated net revenues grew 2% in 2017 compared to 2016. In 2017, net revenues from Franchise Brands grew 10% compared to 2016 and comprised 49% of consolidated net revenues. Growth in Franchise Brands TRANSFORMERS, NERF, MONOPLY and MY LITTLE PONY was partially offset by declines in LITTLEST PET SHOP, PLAY-DOH and, to a lesser extent, MAGIC: THE GATHERING.

Consolidated net revenues for the year ended December 25, 2016 grew 13% to $5,019.8 million from $4,447.5 million for the year ended December 27, 2015 and were impacted by unfavorable foreign currency translation of $61.0 million as a result of the stronger U.S. dollar in 2016 compared to 2015. Absent the impact of foreign currency translation, consolidated net revenues grew 14% in 2016 compared to 2015. In 2016, net revenues from Franchise Brands grew 2% compared to 2015 and comprised 46% of consolidated net revenues. Growth in Franchise Brands NERF, PLAY-DOH and MAGIC: THE GATHERING was partially offset by declines in Franchise Brands LITTLEST PET SHOP, MY LITTLE PONY, MONOPLY and TRANSFORMERS.

The following chart presents net revenues by brand portfolio for each year in the three years ended December 31, 2017.


	2017 Net Revenues		% Change			2016 Net Revenues		% Change			2015 Net Revenues		% Change
Franchise Brands	$	2,568.0		10.3	%	$	2,327.7		1.9	%	$	2,285.4		-2.5	%
Partner Brands		1,271.6		-10.0	%		1,412.8		28.3	%		1,101.3		68.4	%
Hasbro Gaming		893.0		9.8	%		813.4		22.8	%		662.3		2.9	%
Emerging Brands		477.2		2.4	%		466.0		16.9	%		398.5		-37.2	%

2017 versus 2016

Net revenue growth in Franchise Brands, Hasbro Gaming and Emerging Brands in 2017 compared to 2016, was partially offset by lower net revenues from the Partner Brands portfolio.

Franchise Brands The Franchise Brands portfolio grew 10% in 2017 compared to 2016. Contributing to growth were higher net revenues from TRANSFORMERS products, supported by the major theatrical release of TRANSFORMERS: THE LAST KNIGHT during the second quarter of 2017, in addition to higher net revenues from NERF and MONOPOLY products. To a lesser extent, MY LITTLE PONY products, also supported by the fourth quarter 2017 theatrical release of MY LITTLE PONY: THE MOVIE, contributed to growth during 2017_._ These increases were partially offset by lower net revenues from LITTLEST PET SHOP, PLAY-DOH and MAGIC: THE GATHERING products in 2017. Beginning in 2018, BABY ALIVE will be included as a Franchise Brand and LITTLEST PET SHOP will be included in Emerging Brands.

Partner Brands The Partner Brands portfolio declined 10% in 2017 compared to 2016. Higher net revenues from the introduction of BEYBLADE, and to a lesser extent, MARVEL and SESAME STREET products were more than offset by lower net revenues from STAR WARS and YO-KAI WATCH products in addition to lower net revenues from Hasbro’s line of DISNEY FROZEN products in 2017 compared to 2016.

Within the Partner Brands portfolio, there are a number of entertainment-based brands which, from year to year, may be supported by major theatrical releases. As such, category net revenues by brand fluctuate from year-to-year depending on movie popularity, release dates and related product line offerings and success. In 2017, STAR WARS products were supported by the fourth quarter 2017 major theatrical release STAR WARS: THE LAST JEDI. Despite that release in 2017 the Company had lower overall brand revenues from STAR WARS products for the year. Historically, these entertainment-based brands experience revenue growth during film years with sharp declines thereafter. However with yearly film releases during 2015, 2016 and 2017, STAR WARS product revenues are not experiencing those highs and lows recently and have maintained a more consistent level as compared to past years without theatrical release support.

Hasbro Gaming The Hasbro Gaming portfolio grew 10% in 2017 compared to 2016. Higher net revenues resulted from new social gaming products such as SPEAK OUT, TOILET TROUBLE and FANTASTIC GYMNASTICS and other Hasbro Gaming products such as DUNGEONS & DRAGONS as well as the successful launch of DROPMIX, an electronic music mixing game. These increases were partially offset by lower net revenues from PIE FACE products.

Net revenues for Hasbro’s total gaming category, including the Hasbro Gaming portfolio as reported above and all other gaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, which are included in the Franchise Brands portfolio, totaled $1,497.8 million in 2017, up 8%, versus $1,387.1 million in 2016.

Emerging Brands The Emerging Brands portfolio grew 2% in 2017 compared to 2016. Higher net revenues from BABY ALIVE and FURREAL FRIENDS products were partially offset by lower net revenues from FURBY products and the Company’s core PLAYSKOOL products. Beginning in 2018 BABY ALIVE will be included as a Franchise Brand and LITTLEST PET SHOP has moved into Emerging Brands to allow for further innovation.

2016 versus 2015

Net revenue grew in the Franchise Brands, Partner Brands, Hasbro Gaming and Emerging Brands portfolios in 2016 compared to 2015.

Franchise Brands The Franchise Brands portfolio grew 2% in 2016 compared to 2015. Higher net revenues from NERF and PLAY-DOH products and, to a lesser extent MAGIC: THE GATHERING products were offset by lower net revenues from LITTLEST PET SHOP and MY LITTLE PONY products, as well as lower net revenues from MONOPOLY and TRANSFORMERS products.

Partner Brands The Partner Brands portfolio grew 28% in 2016 compared to 2015. Contributing to 2016 revenue growth were the introduction of several new product lines including: Hasbro’s line of DISNEY PRINCESS and DISNEY FROZEN fashion and small dolls, DREAMWORKS’ TROLLS products and YO-KAI WATCH products. These increases were partially offset by lower net revenues from JURRASIC WORLD, MARVEL and SESAME STREET products, and to a lesser extent, STAR WARS products.

Within the Partner Brands portfolio, there are a number of entertainment-based brands which, from year to year, may be supported by major theatrical releases. As such, portfolio net revenues by brand fluctuate from year-to-year depending on movie popularity, release dates and related product line offerings and success. In 2016, products related to three Partner Brands were supported by major theatrical releases – STAR WARS was supported by STAR WARS: THE FORCE AWAKENS released during the fourth quarter of 2015, along with the December 2016 release, ROGUE ONE: A STAR WARS STORY, MARVEL was supported by the May 2016 release of CAPTAIN AMERICA: CIVIL WAR and the DREAMWORKS’ TROLLS brand was supported by the theatrical release, TROLLS in November 2016.

Hasbro Gaming The Hasbro Gaming portfolio grew 23% in 2016 compared to 2015. Higher net revenues resulted from PIE FACE, SIMON, BOP-IT, YAHTZEE, TRIVIAL PURSUIT, CLUE and other Hasbro Gaming products as well as the successful launch of the SPEAK-OUT game in 2016. These higher net revenues were marginally offset by lower net revenues from TROUBLE, TWISTER and ELEFUN & FRIENDS products as well as lower net revenues from OPERATION and SCRABBLE products.

Net revenues for Hasbro’s total gaming category, including the Hasbro Gaming portfolio as reported above and all other gaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, which are included in the Franchise Brands portfolio, totaled $1,387.1 million in 2016, up 9%, versus $1,276.5 million in 2015.

Emerging Brands The Emerging Brands portfolio grew 17% in 2016 compared to 2015. Higher net revenues from BABY ALIVE and FURREAL FRIENDS products as well as increases in revenues from several other Emerging Brand products were partially offset by lower net revenues from the Company’s core PLAYSKOOL and certain other Emerging Brands products.

SEGMENT RESULTS

Most of the Company’s net revenues and operating profits are derived from its three principal segments: the U.S. and Canada segment, the International segment and the Entertainment and Licensing segment, which are discussed in detail below.

Net Revenues

The chart below illustrates net revenues derived from our principal operating segments in 2017, 2016 and 2015.


	2017 Net Revenues		% Change			2016 Net Revenues		% Change			2015 Net Revenues		% Change
U.S. and Canada Segment	$	2,690.5		5.1	%	$	2,559.9		15.0	%	$	2,225.5		10.0	%
International Segment		2,233.6		1.8	%		2,194.7		11.3	%		1,971.9		-2.5	%
Entertainment and Licensing		285.6		7.7	%		265.2		8.4	%		244.7		11.5	%

U.S. and Canada

2017 versus 2016

U.S. and Canada segment net revenues grew 5% in 2017 compared to 2016. Revenues in the U.S. and Canada segment were not materially impacted by foreign currency translation. Segment net revenues increased in 2017 from growth in Franchise Brands, Hasbro Gaming and the Emerging Brands portfolios, partially offset by declines in Partner Brands.

In the Franchise Brands portfolio, higher net revenues from NERF, TRANSFORMERS and MONOPOLY products were partially offset by lower net revenues from LITTLEST PET SHOP, PLAY-DOH and MAGIC: THE GATHERING products. In the Partner Brands portfolio, higher net revenues from the BEYBLADE and MARVEL products and, to a lesser extent, revenue increases from DISNEY’S DESCENDANTS and DREAMWORKS’ TROLLS products were more than offset by declines in revenues from STAR WARS and YOKAI WATCH products as well as the Company’s DISNEY PRINCESS and DISNEY FROZEN fashion and small dolls. In the Hasbro Gaming portfolio higher net revenues from DUNGEONS & DRAGONS products and new social gaming products including SPEAK OUT, FANTASTIC GYMNASTICS and TOILET TROUBLE drove a revenue increase in 2017. These increases were only partially offset by lower net revenues from PIE FACE products as well as certain other games brands. In the Emerging Brands portfolio, higher net revenues from BABY ALIVE and FURREAL FRIENDS products were partially offset by lower net revenues from FURBY and core PLAYSKOOL products.

2016 versus 2015

U.S. and Canada segment net revenues grew 15% in 2016 compared to 2015. Revenues in the U.S. and Canada segment were not materially impacted by foreign currency translation. Segment net revenues grew in all categories during 2016.

In the Franchise Brands portfolio, higher net revenues from NERF and PLAY-DOH products were partially offset by lower net revenues from MY LITTLE PONY, TRANSFORMERS and LITTLEST PET SHOP products and to a lesser extent, MONOPOLY products. In the Partner Brands portfolio, higher net revenues from the Company’s DISNEY PRINCESS and DISNEY FROZEN fashion and small dolls, DREAMWORKS’ TROLLS and STAR WARS products as

well as the introduction of YO-KAI WATCH products were only partially offset by lower net revenues from JURASSIC WORLD, MARVEL and SESAME STREET products. In the Hasbro Gaming portfolio higher net revenues from PIE FACE, SIMON, BOP-IT and TRIVIAL PURSUIT as well as the successful launch of the SPEAK-OUT game were only partially offset by lower net revenues from ELEFUN & FRIENDS, JENGA, TWISTER and SCRABBLE as well as certain other games brands. In the Emerging Brands portfolio, higher net revenues from BABY ALIVE, FURBY and FURREAL FRIENDS products were partially offset by lower net revenues from core PLAYSKOOL, and other Emerging Brands products.

International

To calculate the year-over-year percentage change in net revenues absent the impact of foreign currency translation, net revenues were recalculated using those foreign currency translation rates in place for the prior year comparable period.

2017 versus 2016

International segment net revenues increased approximately 2% in 2017 compared to 2016 which includes favorable foreign currency translation of $75.3 million (Europe — $56.6 million, Latin America — $13.8 million, Asia Pacific — $4.9 million). Net revenues in the Asia Pacific and Latin American regions increased 12% and 5%, respectively, while net revenues from Europe declined 2% in 2017 from 2016. Revenues in emerging markets increased 5% in 2017. Favorable foreign currency translation reflects the strengthening of certain foreign currencies, primarily the Euro and other Latin American currencies compared to the U.S. dollar. Absent the impact of foreign currency translation, International segment net revenues decreased 2% in 2017 compared to 2016.

Higher net revenues from the Franchise Brands and Hasbro Gaming portfolios were partially offset by lower net revenues from the Partner Brands and Emerging Brands portfolios.

In the Franchise Brands portfolio, net revenues from growth in TRANSFORMERS, NERF, MONOPOLY, MAGIC: THE GATHERING, MY LITTLE PONY and LITTLEST PET SHOP products, were partially offset by lower net revenues from PLAY-DOH products. In the Partner Brands portfolio higher net revenues from a new line of BEYBLADE products as well as DISNEY PRINCESS products were more than offset by declines in STAR WARS, YO-KAI WATCH, MARVEL, DISNEY FROZEN and DREAMWORKS’ TROLLS products. In the Hasbro Gaming portfolio, higher net revenues from social gaming products including PIE FACE, SPEAK-OUT, FANTASTIC GYMNASTICS and TOILET TROUBLE as well as higher net revenues from certain other traditional games brands, including LIFE, OPERATION and CLUE products contributed to revenue growth. In the Emerging Brands portfolio, lower net revenues from FURBY and PLAYSKOOL products were partially offset by higher net revenues from BABY ALIVE products, and the introduction of HANAZUKI products.

2016 versus 2015

International segment net revenues increased approximately 11% in 2016 compared to 2015. Net revenues grew in all regions. Net revenues in Europe, Latin America and Asia Pacific increased 14%, 9% and 6%, respectively, in 2016 from 2015. Revenues in emerging markets increased 9% in 2016. In 2016, net revenues were impacted by unfavorable currency translation of approximately $58.4 million (Latin America — $37.4 million, Europe — $16.0 million, Asia Pacific — $5.0 million). Unfavorable foreign currency translation reflects the weakening of certain foreign currencies, primarily the Euro and other Latin American currencies compared to the U.S. dollar. Absent the impact of foreign currency translation, International segment net revenues grew 14% in 2016 compared to 2015 and emerging markets increased 12%.

International segment net revenues grew in all product portfolios during 2016. In the Franchise Brands portfolio, higher net revenues from NERF, PLAY-DOH and MAGIC: THE GATHERING products, and to a lesser extent, MY LITTLE PONY products, were partially offset by lower net revenues from MONOPOLY, LITTLEST PET SHOP and TRANSFORMERS products. In the Partner Brands portfolio higher net revenues from the Company’s line of DISNEY PRINCESS and DISNEY FROZEN fashion dolls and small dolls, revenues from the introduction of YO-KAI WATCH products as well as higher net revenues from DREAMWORKS’ TROLLS products were only partially offset by lower net revenues from MARVEL, JURASSIC WORLD and STAR WARS products. In the Hasbro Gaming portfolio, higher net revenues from PIE FACE, the successful introduction of the SPEAK-OUT game as well as higher net revenues from certain other games brands, including TRIVIAL PURSUIT and SIMON products were partially offset by lower revenues from OPERATION and various other games brands. In the Emerging Brands portfolio, higher net revenues from BABY ALIVE products, and to a lesser extent, FURREAL FRIENDS products, were only partially offset by FURBY, PLAYSKOOL and other Emerging Brands products.

Entertainment and Licensing

2017 versus 2016

Entertainment and Licensing segment net revenues increased 8% in 2017 compared to 2016. Higher segment net revenues were driven by higher revenues from Backflip, growth in the Consumer Products and Digital Gaming licensing groups, as well as a full year of contributions from Boulder Media which was acquired in July 2016. Partially offsetting these increases was lower television programming revenue in 2017 compared to 2016.

2016 versus 2015

Entertainment and Licensing segment net revenues increased 8% in 2016 compared to 2015. Higher segment net revenues were driven by higher revenues from Backflip, growth in the Consumer Products and Digital Gaming licensing groups, as well as contributions from Boulder Media which was acquired in July 2016. Lower entertainment revenues in 2016 compared to 2015 reflect a multi-year digital distribution agreement for Hasbro Studios signed in 2015 which was not repeated in 2016.

Operating Profit

The table below illustrates operating profit and operating profit margins derived from our principal operating segments in 2017, 2016 and 2015. For a reconciliation of segment operating profit to total Company operating profit, see Note 20 to our consolidated financial statements which are included in Item 8 of this Form 10-K.


	2017		% Net Revenues			% Change			2016		% Net Revenues			% Change			2015		% Net Revenues
U.S. and Canada	$	509.9		19.0	%		-2	%	$	522.3		20.4	%		21	%	$	430.7		19.4	%
International		228.7		10.2	%		-22	%		294.5		13.4	%		15	%		255.4		13.0	%
Entertainment & Licensing		96.4		33.8	%		93	%		49.9		18.8	%		-35	%		76.9		31.4	%

U.S. and Canada

2017 versus 2016

U.S. and Canada segment operating profit decreased 2% in 2017 compared to 2016. The decline in operating profit is primarily due to increased advertising and administrative expenses as well higher incremental bad debt expense related to the bankruptcy filing of Toys “R” Us in the U.S. and Canada in the third quarter of 2017. Operating profit margin decreased to 19.0% of net revenues in 2017 from 20.4% of net revenues in 2016 as a result of increases in expenses including advertising and product development as a percentage of net revenues, as well as the negative margin impact of the Toys “R” Us bad debt expense in 2017. Foreign currency translation did not have a material impact on U.S. and Canada operating profit in 2017.

2016 versus 2015

U.S. and Canada segment operating profit increased 21% in 2016 compared to 2015. Higher operating profit reflects higher net revenues discussed above and lower intangible amortization, partially offset by higher royalties, product development, advertising, and selling, distribution and administration expenses. Operating profit margin improved to 20.4% of net revenues in 2016 from 19.4% of net revenues in 2015 reflecting higher revenues providing improved expense leverage. Foreign currency translation did not have a material impact on U.S. and Canada operating profit in 2016.

International

2017 versus 2016

International segment operating profit decreased 22% in 2017 compared to 2016 and included a favorable impact from foreign exchange of $15.2 million. Absent the impact of the favorable foreign currency translation, International segment operating profit decreased 28%. Operating profit margin decreased to 10.2% in 2017 from 13.4% in 2016. The decrease in operating profit and operating profit margin, as reported, is primarily due to higher sales allowances and higher advertising and product development costs as well as a less favorable product mix in 2017.

2016 versus 2015

International segment operating profit increased 15% in 2016 compared to 2015 and included a favorable impact from foreign exchange of $11.5 million. Absent the impact of the favorable foreign currency translation, International segment operating profit grew 11%. The increase in operating profit, as reported, is primarily due to the impact of higher net revenues, partially offset by higher expense levels, primarily royalties, advertising, and selling distribution and administration expenses. Operating profit margin increased to 13.4% in 2016 from 13.0% in 2015 reflecting the improved expense leverage as a result of the higher revenues.

Entertainment and Licensing

2017 versus 2016

Entertainment and Licensing segment operating profit increased 93% in 2017 compared to 2016 and operating profit margin increased to 33.8% of net revenues in 2017 compared to 18.8% in 2016. The overall increase in operating profit and operating profit margin in the segment was primarily due to a $32.9 million goodwill impairment charge recorded in 2016 on the Backflip business. In addition, also contributing to the increase in 2017 was higher revenues with lower intangible amortization and administrative expenses, partially offset by higher royalty expenses associated with the sales increases mentioned above.

2016 versus 2015

Entertainment and Licensing segment operating profit decreased 35% in 2016 compared to 2015 and operating profit margin decreased to 18.8% of net revenues in 2016 compared to 31.4% in 2015. Operating profit in the segment in 2016 was negatively impacted by a non-cash goodwill impairment charge of $32.9 million related to the Company’s investment in Backflip reporting. The remaining decrease in the Entertainment and Licensing segment operating profit and operating profit margin was primarily due to higher costs associated with the launch of new games from Backflip and investments in the consumer products business globally. These higher costs were partially offset by the higher revenues discussed above as well as a decrease in programming amortization costs and royalties as well as lower intangible amortization expense.

Other Segments and Corporate and Eliminations

In the Global Operations segment, operating profit of $4.0 million in 2017 compared to $19.4 million in 2016 and $12.0 million in 2015.

In Corporate and eliminations, operating costs of $28.7 million in 2017 compared to operating costs of $98.1 million in 2016 and $83.0 million in 2015.

OPERATING COSTS AND EXPENSES

The Company’s operating expenses, stated as percentages of net revenues, are illustrated below for each of the three fiscal years ended December 31, 2017:


	2017			2016			2015
Cost of sales		39.0	%		38.0	%		37.7	%
Royalties		7.8			8.2			8.5
Product development		5.2			5.3			5.5
Advertising		9.6			9.3			9.2
Amortization of intangibles		0.6			0.7			1.0
Program production cost amortization		0.7			0.7			1.0
Selling, distribution and administration		21.6			22.1			21.6

Operating expenses for 2017, 2016 and 2015 include benefits and expenses related to the following events:

	•		During third quarter of 2017 the Company recorded incremental bad debt within selling, distribution and administration expenses (SD&A), related to the bankruptcy filings by Toys“R”Us in the U.S. and Canada.

	•		During the fourth quarter of 2016 in conjunction with the Company’s annual review for impairment, the Company completed step one of the annual goodwill impairment test and determined the fair value of the Backflip reporting unit to be below its carrying value. The Company then performed step two of the

	impairment test and determined the carrying value of goodwill exceeded its implied fair value. Based on those results, the Company recognized an impairment charge of $32.9 million within SD&A expenses, related to Backflip in the fourth quarter of 2016.

	•		In August 2015, the Company finalized the sale of its manufacturing operations in East Longmeadow, MA and Waterford, Ireland. This transaction resulted in a benefit to SD&A expenses of $3.1 million.

Cost of Sales

Cost of sales primarily consists of purchased materials, labor, manufacturing overheads and other inventory-related costs such as obsolescence. Cost of sales increased 7% to $2,033.7 million, or 39.0% of net revenues, for the year ended December 31, 2017 compared to $1,905.5 million, or 38.0% of net revenues, for the year ended December 25, 2016. Increased cost of sales in dollars was primarily driven by higher net revenues. Increased cost of sales as a percent of net revenues reflects higher sales allowances and higher levels of closeout sales in 2017 combined with increased tooling costs and less favorable foreign currency hedging results as a result of a weaker U.S. dollar.

In 2016, cost of sales increased 14% to $1,905.5 million, or 38.0% of net revenues, for the year ended December 25, 2016 compared to $1,677.0 million, or 37.7% of net revenues, for the year ended December 27, 2015. Increased cost of sales in dollars reflects the overall increase in net revenues and product and revenue mix. Product mix partially reflects higher net revenues from royalty-bearing products however the lower cost of sales on royalty-bearing products is offset by higher royalty expense. In 2016, the following entertainment-driven, royalty-bearing brands were supported by major theatrical releases: STAR WARS, DREAMWORKS’ TROLLS and MARVEL. Likewise, revenue mix reflects lower net revenue contributions from the Company’s Entertainment and Licensing segment as a percentage of overall sales. In 2016, Entertainment and Licensing segment net revenues were 5.3% of consolidated net revenues compared to 5.5% in 2015.

Royalty Expense

Royalty expense of $405.5 million, or 7.8% or net revenues, in 2017 compared to $409.5 million, or 8.2% of net revenues, in 2016 and $379.2 million, or 8.5% of net revenues, in 2015. Fluctuations in royalty expense generally relate to the volume of entertainment-driven products sold in a given period, especially if the Company is selling product tied to one or more major motion picture releases in the period. Product lines related to Hasbro-owned or controlled brands supported by entertainment generally do not incur the same level of royalty expense as licensed properties, particularly DISNEY, DREAMWORKS, STAR WARS, MARVEL, BEYBLADE and YO-KAI WATCH products and certain licensed properties carry higher royalty rates than other licensed properties. Lower royalty expense in dollars and as a percentage of net revenues in 2017 compared to 2016, reflects the mix of entertainment-driven product sold. In particular, lower royalty expense in 2017 compared to 2016 reflects the lower net sales of STAR WARS, YO-KAI WATCH and DREAMWORKS’ TROLLS products as well as lower net sales of DISNEY FROZEN and DISNEY PRINCESS products partially offset by higher net sales of BEYBLADE and MARVEL products . Higher royalty expense in dollars, but lower royalty expense as a percentage of net revenues in 2016 compared to 2015, reflects the mix of entertainment-driven product sold. In particular, higher royalty expense in dollars in 2016 compared to 2015 reflects the mix of licensed properties sold with higher net sales of DISNEY, DREAMWORKS, and YO-KAI WATCH products partially offset by lower net sales of JURRASIC WORLD, MARVEL and STAR WARS royalty-bearing movie products in 2016 compared to 2015.

Product Development

Product development expense in 2017 totaled $269.0 million, or 5.2% of net revenues, compared to $266.4 million, or 5.3% of net revenues, in 2016. Product development expenditures were significant but consistent with 2016 reflecting the Company’s continued investment in innovation and anticipated growth across our brand portfolio in both Franchise and Partner Brands. As a percentage of net revenues, product development was also consistent with 2016.

Product development expense in 2016 totaled $266.4 million, or 5.3% of net revenues, compared to $242.9 million, or 5.5% of net revenues, in 2015. The decrease as a percentage of sales primarily represents increased leverage resulting from higher revenues as well as higher costs in 2015 relating to the development of the DISNEY PRINCESS and DISNEY FROZEN lines.

Advertising Expense

Advertising expense in 2017 totaled $501.8 million compared to $468.9 million in 2016 and $409.4 million in 2015. The level of the Company’s advertising expense is generally impacted by revenue mix, the amount and type

of theatrical releases, and television programming. Advertising as a percentage of net revenues increased slightly to 9.6% in 2017 from 9.3% in 2016 reflecting higher spending to support the Company’s brands.

In 2016, advertising as a percentage of net revenues increased slightly to 9.3% from 9.2% in 2015.

Amortization of Intangibles

Amortization of intangibles totaled $28.8 million, or 0.6% of net revenues, in 2017 compared to $34.8 million, or 0.7% of net revenues, in 2016 and $43.7 million, or 1.0% of net revenues in 2015. Lower amortization of intangibles in 2017 compared to 2016 reflects the full amortization of property rights related to Backflip during the first half of 2017. Lower amortization of intangibles in 2016 compared to 2015 reflects the impact of intangible assets, primarily digital gaming rights, which were fully amortized during 2015.

Program Product Cost Amortization

Program production cost amortization totaled $35.8 million, or 0.7% of net revenues in 2017, compared to $35.9 million, or 0.7% of net revenues, in 2016 and $42.4 million, or 1.0% of net revenues, in 2015. Program production costs are capitalized as incurred and amortized using the individual-film-forecast method. Program production cost amortization reflects the phasing of revenues associated with films and television programming as well as the type of television programs produced and distributed. Program production cost amortization remained flat in 2017 compared to 2016 primarily due to lower television programming amortization offset by amortization of movie costs related to MY LITTLE PONY: THE MOVIE which was released during the fourth quarter of 2017. The decrease in program production cost amortization in 2016 compared to 2015 was primarily due to the timing of new programming deliveries and a lower number of television programs being amortized in 2016. In addition, higher revenues in 2015 primarily due to a multi-year digital distribution agreement contributed to a higher 2015 expense level.

Selling, Distribution and Administration Expenses

SD&A expenses were $1,124.8 million, or 21.6% of net revenues, in 2017 compared to $1,110.8 million, or 22.1% of net revenues, in 2016. The increase in dollars primarily reflects the bad debt expense related to the Toys ”R” Us bankruptcy in the U.S. and Canada during the third quarter of 2017, as well as higher depreciation expense, expenditures related to ongoing information technology initiatives and the impact of unfavorable foreign exchange translation of $7.4 million. These increases were partially offset by lower incentive compensation expense in 2017 compared to 2016, and a 2016 charge of $32.9 million related to a non-cash goodwill impairment charge to Backflip that did not reoccur in 2017.

SD&A expenses were $1,110.8 million, or 22.1% of net revenues, in 2016 compared to $960.8 million, or 21.6% of net revenues, in 2015. SD&A expense for 2016 includes a charge of $32.9 million related to a non-cash goodwill impairment charge to Backflip recorded in December, while 2015 includes a benefit of $3.1 million related to the August 2015 sale of the Company’s manufacturing operations. Absent this charge in 2016 and benefit in 2015, the increase in SD&A expense was primarily due to higher performance-based stock compensation, higher depreciation, higher selling and distribution costs related to the higher revenues and higher bad debt expense related to an uncollectible account in the International segment partially offset by the favorable impact of foreign exchange translation.

NON-OPERATING (INCOME) EXPENSE

Interest Expense

Interest expense totaled $98.3 million in 2017 compared to $97.4 million in 2016 and $97.1 million in 2015. During the third quarter of 2017, the Company repaid $350 million of 6.3% notes that matured in September 2017 and issued $500 million of 3.5% notes due 2027. The increase in 2017 interest expense is attributable to the higher level of long-term debt as a result of the debt refinancing offset by lower levels of short-term borrowings compared to 2016. Interest expense in 2016 was consistent with the Company’s 2015 interest expense.

Interest Income

Interest income was $22.2 million in 2017 compared to $9.4 million in 2016 and $3.1 million in 2015. The company continues to increase its invested cash balances and has benefitted from higher average interest rates in 2016 and 2017.

Other (Income) Expense, Net

Other income, net of $51.9 million in 2017 compared to other expense, net of $7.5 million in 2016 and other income, net of $6.0 million in 2015. The following table outlines major contributors to other (income) expense, net.


	2017			2016			2015
Foreign currency (gains) losses	$	(1.3	)		32.9			16.1
Earnings from Discovery Family Channel		(23.3	)		(23.8	)		(19.0	)
Discovery tax sharing agreement revaluation		(19.9	)		—			—
Sale of manufacturing facilities		—			—			(6.6	)
Gain on sale of certain assets		—			—			(2.8	)
Gain on sale of certain investments		(3.3	)		(6.2	)		—
Other		(4.1	)		4.6			6.3

	$	(51.9	)		7.5			(6.0	)

	•		Foreign currency gains in 2017 compared to a significant loss in 2016 reflects the strengthening of foreign currencies against the U.S. dollar across the Company’s international markets. Foreign currency losses increased in 2016 compared to 2015 primarily due to higher losses in the fourth quarter of 2016 due to the weakening of certain currencies, primarily the Euro, against the U.S. dollar.

	•		Earnings from the Discovery joint venture are comprised of the Company’s share in the results of the Network.

	•		In relation to their joint venture, Hasbro and Discovery are party to a tax sharing agreement. Due to a change in tax law, the liability representing future payments was revalued to reflect the lower future U.S. corporate tax rate beginning in 2018, which resulted in a $19.9 million gain.

	•		The 2017 and 2016 gain on investments primarily reflects proceeds from the sale of certain long-term investments sold during the year.

	•		In relation to their joint venture, Discovery owns an option to purchase Hasbro’s share of the Discovery Family Channel. The option’s fair value is periodically re-measured and represents a $4.8 million gain in 2017 (included in other in the table above) due to the option’s value decrease.

	•		In August 2015, the Company sold its manufacturing operations in East Longmeadow, MA and Waterford, Ireland which resulted in the recognition of a gain of $6.6 million in other (income) expense, net.

INCOME TAXES

Income tax expense totaled 49.6% of pre-tax earnings in 2017 compared with 23.0% in 2016 and 26.0% in 2015. Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. The following discrete items had the most significant impact on our effective tax rate. Income tax expense for 2017 includes net tax expense of $316.4 million relating to the Tax Act and net tax benefits of approximately $82.0 million primarily due to reassessment of prior period tax positions, a repatriation of earnings resulting in a foreign tax credit benefit, and excess tax benefits relating to share-based compensation. Income tax expense for 2016 includes net tax benefits of approximately $12.0 million primarily related to the expiration of the statute of limitations for tax audits and settlements of exams in certain jurisdictions. Income tax expense for 2015 includes net tax benefits of approximately $4.0 million primarily related to the expiration of the statute of limitations for tax audits in various international jurisdictions.

See Note 22, “Subsequent Event,” for disclosure of additional tax guidance related to the Tax Act.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncement Updates

In May 2014, the Financial Accounting Standards Board (“FASB”), in cooperation with the International Accounting Standards Board (“IASB”), issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 – Revenue Recognition and most industry-specific guidance throughout the Codification. This new guidance provides

a five-step model for analyzing contracts and transactions to determine when, how, and if revenue is recognized. Revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires enhanced qualitative and quantitative revenue related disclosures. ASU 2014-09 may be adopted on a full retrospective basis and applied to all prior periods presented, or on a modified retrospective basis through a cumulative adjustment recorded to opening retained earnings in the year of initial application. This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The Company adopted ASU 2014-09 on January 1, 2018 using the modified retrospective basis.

The Company’s revenue is primarily generated from the sale of finished product to customers. Revenue is recognized at the point of time when ownership, risks, and rewards transfer. These transactions are generally not impacted by the new standard. The Company does however offer certain types of variable payments to these customers such as pricing allowances, rebates, coupons and collaborative marketing arrangements. These types of payments are defined as variable consideration under ASU 2014-09. The Company has completed evaluating the quantitative impact related to ASU 2014-09. Based on the analysis performed, revenue recognition from the sale of finished product to our customers, which is the majority of our revenues, is not expected to change under the new standard in the periods following adoption. Within our Entertainment and Licensing segment, the timing of revenue recognition for minimum guarantees that we receive from licensees will change under ASU 2014-09. Prior to the adoption of ASU 2014-09, for licenses of our brands that are subject to minimum guaranteed license fees, we recognized the difference between the minimum guaranteed amount and the actual royalties earned from licensee merchandise sales (“shortfalls”) at the end of the contract period, which was in our fourth quarter for most of our licensee arrangements. In periods following our adoption of the new standard, minimum guaranteed amounts will be recognized on a straight-line basis over the license period. While the impact of this change will not be material to the year, it will impact the timing of revenue recognition within our Entertainment and Licensing segment such that under the new standard, we will record less revenues in our fourth quarter and more revenues within our first, second, and third quarters. No other areas of our business will be materially impacted by the new standard.

Our assessment of the impact of adopting ASU 2014-09 also included a review of our business processes, systems, and controls, as well as an assessment of the impact to future disclosures. As a result of our evaluation, we identified changes to and modified certain of our accounting policies and practices. We also designed and implemented specific controls over our evaluation of the impact of ASU 2014-09. Although there were not significant changes to our accounting systems or controls upon adoption of the new standard, we modified certain of our existing controls to incorporate the revisions we made to our accounting policies and practices. Under the new standard, our notes to our Consolidated Financial Statements related to revenue recognition will be expanded specifically around the quantitative and qualitative information about variable consideration on sales of finished products to customers.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which will require lessees to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be based on the present value of lease payments and the asset will be based on the liability. For income statement purposes, a dual model was retained requiring leases to be either classified as operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. Additional quantitative and qualitative disclosures will be required. ASU 2016-02 is required for public companies for fiscal years beginning after December 15, 2018 and must be adopted using a modified retrospective transition. The Company is evaluating the requirements of ASU 2016-02 and its potential impact on the Company’s consolidated financial statements. The Company has a significant number of leases globally, primarily for property and office equipment, and is in the process of identifying and evaluating these leases in relation to the requirements of ASU 2016-02. For each of these leases, the term will be evaluated, including extension and renewal options as well as the lease payments associated with the leases. The Company does not expect that its results of operations will be materially impacted by this standard. The Company expects to record assets and liabilities on its consolidated balance sheets upon adoption of this standard, which may be material. The adoption of this standard will not have an impact on the Company’s cash flows.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The Company adopted ASU 2016-09 in the first quarter of 2017. A summary of the impact of the adoption is provided below, however see Note 1, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in Item 8. of this Form 10-K for further disclosure.

	•		The Company recorded excess tax benefits related to share-based payment awards of $32.1 million as part of income tax expense for the year ended December 31, 2017.

	•		Beginning in 2017, the Company classified excess tax benefits related to share-based employee awards as part of operating activities in the consolidated statements of cash flows which were previously recorded as cash inflows from financing activities. To keep the statements of cash flows comparable, the Company elected to apply this portion of the standard retrospectively and restate its statement of cash flows for 2016 and 2015.

	•		Beginning in 2017, the Company classifies cash outflows for employee taxes paid related to shares withheld from share-based payment awards as financing activities in the consolidated statements of cash flows which were previously included as operating activities. The Company has restated the consolidated statement of cash flows for 2016 and 2015 to reflect this new classification.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory (ASU 2015-11), which replaces the concept of market price with the single measurement of net realizable value. ASU 2015-11 was effective for public companies for fiscal years beginning after December 15, 2016 and interim periods within fiscal years beginning after December 15, 2017. The adoption of this standard did not have a material impact on the Company’s results or consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice across all industries, in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for public companies for fiscal years beginning after December 15, 2017. The Company has evaluated the requirements of ASU 2016-15 and does not presently believe that the adoption of the new standard will have a material impact on the Company’s results or consolidated financial statements.

In October 2016, the FASB issued Accounting Standards Update No. 2016-16 (ASU 2016-16), Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs requiring any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings. The Company has evaluated the standard, and does not expect that it will have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update No. 2017- 04 (ASU 2017-04), Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (“the Step 2 test”) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit. For public companies, this standard is effective and must be applied to annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the standard, but expects that it will not have a material impact on our consolidated financial statements.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires companies to present the service cost component of net benefit cost in the income statement line items where they report compensation cost. Companies will present all other components of net benefit cost outside operating income, if this subtotal is presented. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this standard will not have a material impact on its consolidated financial statements.

In August 2017, the FASB issued Accounting Standards Update No. 2017-12 (ASU 2017-12), Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the underlying hedged item in the financial statements. The impact of the standard includes elimination of the requirement to separately measure and recognize hedge ineffectiveness and requires the presentation of fair value adjustments to hedging instruments to be included in the same income statement line as the hedged item. For public companies, this standard is effective for annual

reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company is currently evaluating the standard and its impact on our consolidated financial statements.

OTHER INFORMATION

On June 23 2016, the United Kingdom (“UK”) voted in a referendum to leave the European Union (“EU”), commonly referred to as Brexit. The UK government triggered the formal two-year period to negotiate the terms of the UK’s exit and future relationship with the EU on March 29 2017. The terms of this future relationship are uncertain but the UK government has confirmed its intention to remove the UK from the EU single market and implement additional controls on the movement of people from the EU. An additional two-year transitional period to 2021 has been proposed. The Brexit vote resulted in a weakening of British pound sterling against the US dollar and increased volatility in the foreign currency markets, notably the euro. These fluctuations initially affected our financial results, although the impact was partially mitigated by our hedging strategy. Sterling has strengthened in recent months due to a weaker US dollar. Our revenues in Europe are predominantly denominated in local currency. Hasbro will continue to closely monitor the Brexit negotiations and the foreign currency markets, taking appropriate actions to support its long term strategy and to mitigate risks in its operational and financial activities.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically generated a significant amount of cash from operations. In 2017 the Company funded its operations and liquidity needs primarily through cash flows from operations, and, when needed, using borrowings under its available lines of credit and its commercial paper program. During 2018, the Company expects to continue to fund its working capital needs primarily through available cash and cash flows from operations and, when needed, by issuing commercial paper or borrowing under its revolving credit agreement. In the event that the Company is not able to issue commercial paper, the Company intends to utilize its available lines of credit. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its commercial paper program or its available lines of credit are adequate to meet its working capital needs for 2018, 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 the Company believes the risk of nonperformance by the counterparties to its financial facilities is not significant, in times of severe economic downturn in the credit markets it is possible that one or more sources of external financing may be unable or unwilling to provide funding to the Company.

In September 2017, the Company issued $500.0 million in principal amount of Notes Due 2027 that bear interest at a rate of 3.50%. Net proceeds of the Notes offering, after deduction of the underwriting discount and debt issuance expenses, totaled approximately $493.9 million. 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 using the effective interest rate on applicable U.S. Treasury bills plus 25 basis points. In addition, on or after June 15, 2027, the Company may redeem at its option, any portion of the Notes at a redemption price equal to 100% of the principal amount of the notes to be redeemed. The proceeds from the issuance of the Notes were used, primarily, to repay $350 million aggregate principal amount of the 6.30% Notes Due 2017 upon maturity, including accrued and unpaid interest. The remaining net proceeds were utilized for general corporate and working capital purposes.

As of December 31, 2017, the Company’s cash and cash equivalents totaled $1,581.2 million, substantially all of which is held by international subsidiaries. Prior to 2017, deferred income taxes had not been provided on the majority of undistributed earnings of international subsidiaries as such earnings were indefinitely reinvested by the Company. Accordingly, such international cash balances were not available to fund cash requirements in the United States unless the Company was to change its reinvestment policy. The Company has maintained sufficient sources of cash in the United States to fund cash requirements without the need to repatriate any funds. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law which provides significant changes to the U.S. tax system including the elimination of the ability to defer U.S. income tax on unrepatriated earnings by imposing a one-time mandatory deemed repatriation tax on undistributed foreign earnings, estimated to be $271.6 million as of December 31, 2017. As a result, in the future, the related earnings in foreign jurisdictions will be made available with greater investment flexibility. The majority of the Company’s cash and cash equivalents held outside of the United States as of December 31, 2017 is denominated in the U.S. dollar.

The table below outlines key financial information pertaining to our consolidated balance sheets including the year-over-year changes.


	2017		% Change			2016		% Change			2015
Cash and cash equivalents, net of short-term borrowings	$	1,426.3		29	%	$	1,109.7		37	%	$	812.2
Accounts receivable, net		1,405.4		7	%		1,320.0		8	%		1,217.9
Inventories		433.3		12	%		387.7		1	%		384.5
Prepaid expenses and other current assets		214.0		-10	%		237.7		-17	%		286.5
Other assets		605.9		-22	%		779.9		5	%		744.1
Accounts payable and accrued liabilities		1,096.7		0	%		1,095.6		22	%		900.1
Other liabilities		514.7		32	%		389.4		-4	%		404.9

Accounts receivable, net increased 7% in 2017 compared to 2016. Excluding a $57.8 million foreign currency translation benefit, accounts receivable, net, increased 2% in line with 2017 net revenue growth. Days sales outstanding increased 6 days to 79 days at December 31, 2017 from 73 days at December 25, 2016, including two days related to the Toys “R” Us pre-bankruptcy receivables not yet collected. The remaining increase was primarily due to the timing of collections. Accounts receivable, net increased 8% in 2016 compared to 2015. Excluding the impact of foreign currency translation, accounts receivable, net increased 11% in 2016 compared to 2015, reflecting 12% revenue growth in the fourth quarter of 2016, excluding unfavorable foreign currency translation, compared to 2015. Days sales outstanding decreased to 73 days at December 25, 2016 from 75 days at December 27, 2015.

Inventories increased 12% at the end of 2017 compared to 2016. Excluding the $24.8 million benefit from foreign currency translation, inventories increased 5% in 2017 compared to 2016. The increase in inventories, excluding the impact of foreign exchange, is due in part to higher inventory levels in growing brands and in newly entered markets to support growth in the business. The Company continues to work to improve inventory management with a focus on ensuring we have the right levels of inventory in new and growing brands. Inventories increased by 1% in 2016 compared to 2015 and 2% excluding the impact of foreign exchange. The slight increase in inventories, excluding the impact of foreign exchange, was primarily due to higher levels in the Latin America and Europe regions in support of growth initiatives.

Prepaid expenses and other current assets decreased 10% in 2017 compared to 2016. The majority of the decrease is due to lower unrealized gains on foreign exchange contracts as a result of the weakening of the U.S. dollar against foreign currencies across the Company’s international markets and to a lesser extent, lower prepaid royalty balances in 2017. These decreases were partially offset by higher prepaid non-income related taxes, primarily value-added taxes. Prepaid expenses and other current assets decreased 17% in 2016 compared to 2015. The majority of the decrease was due to a decrease in the value of foreign exchange contracts in 2016 compared to 2015 and, to a lesser extent, reduced prepaid royalties.

Other assets decreased 22% in 2017 compared to 2016. Lower balances in 2017 relate primarily to reduced deferred tax asset balances as a result of the decrease in the U.S. corporate tax rate beginning in 2018, as provided by the Tax Cuts and Jobs Act enacted in December 2017. In addition, other assets decreased from declines in the value of long-term foreign exchange contracts, payments received from Cartamundi in relation to a long-term note receivable related to the sale of the Company’s manufacturing operations in August 2015 and lower long-term royalty advances. These decreases were partially offset by higher capitalized movie and television production costs, net of related production rebates in 2017. Other assets increased approximately 5% in 2016 compared to 2015. Increases in deferred taxes, foreign exchange contracts and other receivables were partially offset by decreases in royalty advances and a payment reducing amounts due from Cartamundi.

Accounts payable and accrued liabilities were essentially flat in 2017 compared to 2016. Increases included a tax withholding on the multi-year stock award agreement earned by the Company’s CEO at December 31, 2017 (see note 13, “Stock Options, Other Stock Awards and Warrants,” to the Company’s Consolidated Financial Statements included within Item 8 of this 10-K for further discussion), higher accrued dividends due to a higher dividend rate announced for 2018, and increased accounts payable balances due to timing of payments in 2017 and the Company’s focus on improving payable terms. These increases were offset by lower incentive compensation accruals and other miscellaneous accruals in 2017. Accounts payable and accrued expenses increased approximately 22% in 2016 compared to 2015. The increase was primarily due to increased accounts payable due to timing of payments, higher accrued royalties for licensed properties reflecting a strong entertainment line-up and utilization of guarantee payments in 2016 compared to 2015 as well as higher accrued income taxes due to higher fourth quarter earnings, higher accrued advertising due to lower levels of advertising in the fourth quarter of 2015 and increased foreign exchange currency liability related to certain strengthening foreign currencies in 2016.

Other liabilities increased 32% in 2017 compared to 2016. The increase is primarily due to the $181.3 million estimated repatriation tax liability, which is net of certain foreign tax credits. This increase is partially offset by a decline of $53.0 million in the funded status of the Company’s pension plan liability, primarily due to a $50.0 million contribution in 2017, as well as a decrease in the long-term tax receivable agreement with Discovery due to the U.S. federal tax rate reduction that will begin in 2018 as discussed above. Other liabilities decreased 4% in 2016 compared to 2015. The decrease is primarily due to a $62 million contribution made to the Company’s U.S. pension plan in 2016 partially offset by an increase in the pension liability reflecting changes in actuarial assumptions, primarily lower discount rates, and an increase in the liability for uncertain tax positions.

Cash Flow

The following table summarizes the changes in the Consolidated Statement of Cash Flows for each of the years ended on December 31, 2017, December 25, 2016 and December 27, 2015.


	2017			2016			2015
Net cash provided by (used in)
Operating Activities	$	724.4			817.3			571.4
Investing Activities		(131.5	)		(138.4	)		(103.6	)
Financing Activities		(312.2	)		(375.5	)		(365.4	)

In 2017, 2016 and 2015, Hasbro generated $724.4 million, $817.3 million and $571.4 million of cash from its operating activities, respectively. Operating cash flows in 2017, 2016 and 2015 included $48.0 million, $48.7 million and $42.5 million, respectively, of cash used for television program and film production. The decrease in operating cash flows in 2017 compared to 2016 was the result of unfavorable changes in working capital, as described above, excluding the impact of the net $296.5 million charge related to tax reform. In 2016, the increase in cash flows provided by operating activities compared to 2015 can be attributed to net earnings growth and working capital initiatives.

Cash flows utilized by investing activities were $131.5 million, $138.4 million and $103.6 million in 2017, 2016 and 2015, respectively. Additions to property, plant and equipment decreased in 2017 to $134.9 million from $154.9 million and $142.0 in 2016 and 2015, respectively. Of these additions, 59% in 2017, 57% in 2016 and 54% in 2015 were for purchases of tools, dies and molds related to the Company’s products. During the three years ended December 31, 2017, the depreciation of plant and equipment was $143.0 million, $119.7 million and $111.6 million, respectively. Fluctuations in depreciation of plant and equipment correlate with the percentage of additions to property, plant and equipment relating to tools, dies and molds which have shorter useful lives and accelerated depreciation. Excluding capital expenditures, 2017 proceeds from investing activities includes $6.4 million received on the installment note relating to the sale of the Company’s manufacturing operations in 2015. Excluding capital expenditures, 2016 proceeds from investing activities includes $19.8 million in capital and tax distributions from Discovery Family Channel and a $6.4 million installment note payment partially offset by utilization of $12.4 million to purchase the net assets of Boulder in July of 2016. 2015 proceeds from investing activities, excluding capital expenditures, reflects $18.6 million related to the sale of the Company’s manufacturing operations and $20.7 million in capital and tax distributions from Discovery Family Channel.

Net cash utilized by financing activities was $312.2 million, $375.5 million, and $365.4 million in 2017, 2016 and 2015, respectively. Financing activities in 2017 include net proceeds of $493.9 million from the September 2017 issuance of $500.0 million 3.50% long-term notes due 2027, net of $6.1 million of debt issuance costs, offset by the repayment of $350.0 million 6.30% long-term notes that matured in September 2017. Of the amounts utilized in 2017, 2016 and 2015, $151.3, $150.1 million, and $87.2 million, respectively, reflects cash paid, including transaction costs, to repurchase the Company’s common stock. During 2017, 2016 and 2015, the Company repurchased 1.6 million, 1.9 million, and 1.2 million shares, respectively, at an average price of $94.74, $79.86, and $68.01, respectively. At December 31, 2017, $178.0 million remained for share repurchases under the February 2015 Board authorization. Dividends paid were $277.0 million in 2017, $248.9 million in 2016 and $225.8 million in 2015. The Company has increased its quarterly dividend rate from $0.46 in 2015 to $0.51 in 2016 and $0.57 in 2017. Net repayments of short-term borrowings of $18.4 million in 2017 compared to net proceeds from short-term borrowings of $9.0 million in 2016 and net repayments of short-term borrowings of $87.3 million in 2015. The Company generated cash from employee stock option transactions of $29.4 million, $42.2 million, and $43.3 million in 2017, 2016 and 2015, respectively. The Company paid withholding taxes related to share-based compensation of $32.0 million, $22.0 million and $4.7 million in 2017, 2016 and 2015, respectively.

Sources and Uses of Cash

The Company commits to inventory production, advertising and marketing expenditures prior to the peak fourth quarter retail selling season. Accounts receivable increases during the third and fourth quarter as customers increase their purchases to meet expected consumer demand in their holiday selling season. Due to the concentrated timeframe of this selling period, payments for these accounts receivable are generally not due until the fourth quarter or early in the first quarter of the subsequent year. This timing difference between expenditures and cash collections on accounts receivable makes it necessary for the Company to borrow higher amounts during the latter part of the year. During 2017, 2016 and 2015, the Company primarily used cash from operations and borrowings under its commercial paper program and available lines of credit to fund its working capital.

The Company has an agreement with a group of banks which provides for a commercial paper program (the “Program”). Under the Program, at the request of the Company and subject to market conditions, the banks may either purchase from the Company, or arrange for the sale by the Company, of unsecured commercial paper notes. The Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of $1,000.0 million, increased from $700.0 million in during the fourth quarter of 2016.. 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. Borrowings under the Program are supported by the Company’s $1,000.0 million revolving credit agreement. At December 31, 2017, the Company had $137.5 million in borrowings outstanding related to the Program.

The Company has a revolving credit agreement (the “Agreement”) which provides the Company with a $1,000.0 million committed borrowing facility. The 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. Prior to September 2017, the Agreement provided for a $700.0 million revolving credit facility. During the third quarter of 2017 and pursuant to the Agreement, the Company proposed and the Lenders agreed to increase the committed borrowing facility from $700.0 million to $1,000.0 million. The Company was in compliance with all covenants in the Agreement as of and for the fiscal year ended December 31, 2017. The Company had no borrowings outstanding under its committed revolving credit facility at December 31, 2017. However, letters of credit outstanding under this facility as of December 31, 2017 were approximately $1.1 million. Amounts available and unused under the committed line at December 31, 2017 were approximately $861.4 million, inclusive of borrowings under the Company’s commercial paper program. The Company also has other uncommitted lines from various banks, of which approximately $53.3 million was utilized at December 31, 2017. Of the amount utilized under, or supported by, the uncommitted lines, approximately $17.5 million and $35.8 million represent outstanding short-term borrowings and letters of credit, respectively.

Including the notes described above, as well as certain Notes due 2040 and Debentures due 2028, the Company has principal amounts of long-term debt at December 31, 2017 of approximately $1,709.9 million due at varying times from 2021 through 2044. The Company also had letters of credit and other similar instruments of $36.5 million and 2018 purchase commitments of $740.3 million outstanding at December 31, 2017. In 2018, the Company expects capital expenditures to be in the range of $135.0 million to $155.0 million. In addition, the Company expects to be committed to guaranteed royalty payments of approximately $78.3 million in 2018.

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 information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. The 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 and income taxes.

Recoverability of Goodwill

Goodwill is tested for impairment at least annually. If an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim test at that time. The Company may perform a qualitative assessment and bypass the quantitative two-step impairment process if it is not more likely than not that impairment exists.

Performing a qualitative assessment of goodwill requires a high degree of judgment regarding assumptions underlying the valuation. Qualitative factors and their impact on critical inputs are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is more likely than not that impairment exists, the quantitative two-step goodwill impairment test is performed. When performing the quantitative two-step impairment test, goodwill and other intangible assets with indefinite lives are tested for impairment by comparing their carrying value to their estimated fair value which is calculated using an income approach. During the fourth quarter of 2017, the Company performed a qualitative assessment with respect to certain of its reporting units with goodwill totaling $486.8 million. The Company utilized this approach for all reporting units with the exception of Backflip and the Company’s Entertainment reporting unit based on the amount by which historical estimated reporting unit fair values exceeded carrying values. Based on its qualitative and quantitative assessments, the Company concluded that there was no impairment of the goodwill during 2017. Further discussion of the Company’s quantitative assessment of Backflip goodwill is discussed below.

As of December 27, 2015 the Company had $119.1 million of goodwill related to its 2013 acquisition of Backflip, which represents a separate reporting unit. The Company’s strategy when it purchased its interest in Backflip was to produce game titles based on Backflip’s DRAGONVALE brand and to develop and market games based on Hasbro brands. Because Backflip was a recent acquisition and to date had been investment spending in anticipation of 2016 game releases, the Company performed the quantitative two-step impairment test during the fourth quarter of 2015 for this reporting unit. At that time, the Company concluded that there was no goodwill impairment related to Backflip. During the fourth quarter of 2016 in conjunction with the Company’s annual review for impairment, we completed step one of the annual goodwill impairment test for the Backflip reporting unit. Prior to the fourth quarter of 2016, there were no triggering events that would have required the Company to complete an impairment test. Our evaluation of the 2016 year performance of the Backflip reporting unit was dependent in large part on the performance of launches that took place during the fourth quarter of 2016. Additionally, during the fourth quarter of 2016, we revised our expectations regarding the timing of future launches. The first step of the goodwill impairment analysis involved comparing the Backflip carrying value to its estimated fair value, which was calculated based on the Income Approach. Discounted cash flows serve as the primary basis for the Income Approach. The Company utilized forecasted cash flows for the Backflip reporting unit that included assumptions including but not limited to: expected revenues to be realized based on planned future mobile game releases; expected EBITDA margins derived in part based on expected future royalty costs, advertising and marketing costs, development costs, and overhead costs; and expected future tax rates. The cash flows beyond the forecast period were estimated using a terminal value growth rate of 3%. To calculate the fair value of the future cash flows under the Income Approach, a discount rate of 14% was utilized, representing the reporting unit’s estimated weighted-average cost of capital. Based on the results of the step one impairment test the Company determined that the fair value of the Backflip reporting unit was below its carrying value, and therefore, impairment was indicated. Because indicators of impairment existed, the Company commenced the second step of the goodwill impairment analysis to determine the implied fair value of goodwill for the Backflip reporting unit, which was determined in the same manner utilized to estimate the amount of goodwill recognized in a business combination. As part of the second step of the goodwill impairment analysis, the Company assigned the fair value of the Backflip reporting unit, as calculated under the first step of the goodwill impairment analysis, to all the assets and liabilities, including identifiable intangibles assets, of that reporting unit. The implied fair value of goodwill was measured as the excess of the fair value of the Backflip reporting unit over the amounts assigned to its assets and liabilities. Based on this assessment, the Company recorded an impairment charge of $32.9 million during the fourth quarter of 2016. During the fourth quarter of 2017, the Company performed the annual quantitative two-step impairment test with respect to Backflip. Based on the results of the impairment test, the Company concluded that there was no impairment in 2017 as the estimated fair value of the reporting unit exceeded its carrying value. Should Backflip not achieve its profitability and growth targets, including the anticipated game releases in 2018 and beyond, or if industry discount rates significantly increase, the carrying value of this reporting unit may become impaired.

The estimation of future cash flows utilized in the evaluation of the Company’s goodwill requires significant judgments and estimates with respect to future revenues related to the respective asset and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in a change in this assessment and result in an impairment charge. The estimation of discounted cash flows also requires the selection of an appropriate discount rate. The use of different assumptions would increase or decrease estimated discounted cash flows and could increase or decrease the related impairment charge.

Income Taxes

The Company’s annual income tax rate is based on its income, statutory tax rates, changes in prior tax positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant judgment and estimates are required to determine the Company’s annual tax rate and evaluate its tax positions. Despite the Company’s belief that its tax return positions are fully supportable, these positions are subject to challenge and estimated liabilities are established in the event that these positions are challenged and the Company is not successful in defending these challenges. These estimated liabilities, as well as the related interest, are adjusted in light of changing facts and circumstances such as the progress of a tax audit. In addition, on December 22, 2017 the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that affected 2017, including the requirement for the Company to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years. The Tax Act also established new tax laws that will affect 2018, including, but not limited to, (i) reducing the U.S. federal corporate tax rate from 35 to 21 percent; (ii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iii) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (iv) creating a new limitation on deductible interest expense; and (v) imposing limitations on the deductibility of certain executive compensation.

The Tax Act requires complex computations to be performed, significant judgments to be made in interpretation of the provisions of the Tax Act, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered, with a possible retroactive effect, which is different from our interpretation. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.

In certain cases, tax law requires items to be included in the Company’s income tax returns at a different time than when these items are recognized on the consolidated financial statements or at a different amount than that which is recognized on the consolidated financial statements. Some of these differences are permanent, such as expenses that are not deductible on the Company’s tax returns, while other differences are temporary and will reverse over time, such as depreciation expense. These differences that will reverse over time are recorded as deferred tax assets and liabilities on the consolidated balance sheets. Deferred tax assets represent deductions that have been reflected in the consolidated financial statements but have not yet been reflected in the Company’s income tax returns. Valuation allowances are established against deferred tax assets to the extent that it is determined that the Company will have insufficient future taxable income, including capital gains, to fully realize the future deductions or capital losses. Deferred tax liabilities represent expenses recognized on the Company’s income tax return that have not yet been recognized in the Company’s consolidated financial statements or income recognized in the consolidated financial statements that has not yet been recognized in the Company’s income tax return.

Contractual Obligations and Commercial Commitments

In the normal course of its business, the Company enters into contracts related to obtaining rights to produce products under license, which may require the payment of minimum guarantees, as well as contracts related to the leasing of facilities and equipment. In addition, the Company has $1,709.9 million in principal amount of long-term debt outstanding at December 31, 2017. Future payments required under these and other obligations as of December 31, 2017 are as follows:


	Payments due by Fiscal Year
Certain Contractual Obligations	2018		2019		2020		2021		2022		Thereafter		Total
Long-term debt	$	—		—		—		300.0		—		1,409.9		1,709.9
Interest payments on long-term debt		81.3		81.3		81.3		75.7		71.8		999.0		1390.4
Operating lease commitments		46.9		41.3		27.4		22.9		14.5		21.9		174.9
Future minimum guaranteed contractual royalty payments		78.3		61.2		20.2		27.0		27.0		15.9		229.6
Tax sharing agreementa		7.1		4.5		4.7		4.9		5.1		14.6		40.9
Purchase commitmentsb		552.8		104.6		82.9		—		—		—		740.3

	$	766.4		292.9		216.5		430.5		118.4		2,461.3		4,286.0

In connection with the Company’s agreement to form a joint venture with Discovery, the Company is obligated to make future payments to Discovery under a tax sharing agreement. These payments are contingent upon the Company having sufficient taxable income to realize the expected tax deductions of certain amounts related to the joint venture. Accordingly, estimates of these amounts are included in the table above. In December 2017 the liability was revalued as a result of the reduction of the U.S. federal corporate tax rate provided by the Tax Act.

b	Purchase commitments represent agreements (including open purchase orders) to purchase inventory and tooling in the ordinary course of business as well as purchase commitments under a manufacturing agreement. The reported amounts exclude inventory and tooling purchase liabilities included in accounts payable or accrued liabilities on the consolidated balance sheets as of December 31, 2017.

As discussed above, the Tax Act requires the Company to pay a one-time mandatory deemed repatriation tax on undistributed foreign earnings, estimated to be $271.6 million as of December 31, 2017. The Company expects to utilize $90.3 million of existing tax credits to reduce the $271.6 million U.S. federal tax liability, which will result in $181.3 million to be paid over eight years. The timing and ultimate amount of payment is unknown at this time. See Note 22, “Subsequent Event,” to the consolidated financial statements included in Item 8. of this Form 10-K for further discussion on additional tax guidance that will change this liability.

Theatrical and Other Contingencies

The table above also excludes $50.0 million in guaranteed royalties related to the Company’s license agreement related to STAR WARS as the amount and timing of such payments are due in accordance with the anticipated releases of a new STAR WARS theatrical release in 2018.

The Company and Saban Brands LLC (“Saban”) have entered a license agreement under which Saban granted to the Company the right to develop, market and sell a range of products based upon Saban’s Power Rangers property for sale to the public beginning in the spring of 2019. In connection with that license agreement Saban Properties LLC (“Saban Properties”) an affiliate of Saban, and the Company entered into an agreement that provides each of Saban Properties and the Company with a right to initiate the Company’s purchase of Saban Properties’ rights in the Power Rangers property during designated periods in the future, which periods begin in 2022. If either party initiates a sale process the Company will pay Saban Properties a purchase price determined by a fair market value computation specified in the agreement, with the purchase price subject to specified floors depending on which party initiates the process. The table above does not include any amount attributable to the exercise of this right as there is no guarantee the right will be exercised by either party, and if it is exercised the amount of the purchase price will be determinable only at the time of exercise.

Other Expected Future Payments

From time to time, the Company may be party to arrangements, contractual or otherwise, whereby the Company may not be able to estimate the ultimate timing or amount of the related payments. As such, these amounts have been excluded from the table above and described below:

	•		Included in other liabilities in the consolidated balance sheets at December 31, 2017, the Company has a liability of $89.4 million of potential tax, interest and penalties for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. The Company does not know the ultimate resolution of these uncertain tax positions and as such, does not know the ultimate amount or timing of payments related to this liability.

	•		At December 31, 2017, the Company had letters of credit and related instruments of approximately $35.8 million.

The Company believes that cash from operations and funds available through its commercial paper program or lines of credit will allow the Company to meet these and other obligations described above.

Financial Risk Management

The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates primarily as the result of sourcing products priced in U.S. dollars and Hong Kong dollars while marketing and selling 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, 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 using foreign exchange forward contracts. The Company estimates that a hypothetical immediate 10% depreciation of the U.S. dollar against all foreign currencies included in these foreign exchange forward contracts could result in an approximate $95.7 million decrease in the fair value of these instruments. A decrease in the fair value of these instruments would be substantially offset by decreases in the value of the forecasted foreign currency transactions.

The Company is also exposed to foreign currency risk with respect to its net cash and cash equivalents or short-term borrowing positions in currencies other than 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.

The Company reflects all derivatives at their fair value as an asset or liability on the consolidated balance sheets. The Company does not speculate in foreign currency exchange contracts. At December 31, 2017, these contracts had net unrealized losses of $10.9 million, of which $3.3 million are recorded in prepaid expenses and other current assets, $8.9 million are recorded in other assets and ($14.2) million are recorded in accrued liabilities and $(8.9) million are recorded in other liabilities. Included in accumulated other comprehensive earnings at December 31, 2017 are deferred losses of $15.8 million, net of tax, related to these derivatives.

At December 31, 2017, the Company had fixed rate long-term debt of $1,709.9 million. Of this long-term debt, $600.0 million represents the aggregate issuance of long-term debt in May 2014 which consists of $300.0 million of 3.15% Notes Due 2021 and $300.0 million of 5.10% Notes Due 2044. Prior to the May 2014 debt issuance, the Company entered into forward-starting interest rate swap agreements with a total notional value of $500.0 million to hedge the anticipated 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 issuance, the Company terminated these swap agreements and their fair value at the date of issuance was recorded in accumulated other comprehensive loss and is being amortized through the consolidated statements of operations using an effective interest rate method over the life of the related debt. Included in accumulated other comprehensive loss at December 31, 2017 are deferred losses, net of tax, of $17.0 million related to these derivatives.

On June 23, 2016, the United Kingdom (“UK”) voted in a referendum to leave the European Union (“EU”), commonly referred to as Brexit. The UK government triggered the formal two-year period to negotiate the terms of the UK’s exit and future relationship with the EU on March 29, 2017. The terms of this future relationship are uncertain but the UK government has confirmed its intention to remove the UK from the EU single market and implement additional controls on the movement of people from the EU. An additional two-year transitional period to 2021 has been proposed. The Brexit vote resulted in a weakening of British pound sterling against the US dollar and increased volatility in the foreign currency markets, notably the euro. These fluctuations initially affected our financial results, although the impact was partially mitigated by our hedging strategy. Sterling has strengthened in recent months due to a weaker US dollar. Our revenues in Europe are predominantly denominated in local currency. Hasbro will continue to closely monitor the Brexit negotiations and the foreign currency markets, taking appropriate actions to support its long term strategy and to mitigate risks in its operational and financial activities.

The Economy and Inflation

The principal market for the Company’s products is the retail sector. Revenues from the Company’s top five customers, all retailers, accounted for approximately 42% of its consolidated net revenues in 2017 and 41% and 38% of its consolidated net revenues in 2016 and 2015, respectively. The Company monitors the creditworthiness of its customers and adjusts credit policies and limits as it deems appropriate.

The Company’s revenue pattern continues to show the second half of the year to be more significant to its overall business for the full year. In 2017, approximately 65% of the Company’s full year net revenues were recognized in the second half of the year. The Company expects that this concentration will continue. The concentration of sales in the second half of the year increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items, and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by customer order patterns which vary from year to year largely because of differences in the degree of consumer acceptance of a product line, product availability, marketing strategies, inventory levels, policies of retailers and differences in overall economic conditions. Larger retailers generally

maintain lower inventories throughout the year and purchase a greater percentage of product within or close to the fourth quarter holiday consumer buying season, which includes Christmas.

Quick response inventory management practices being used by retailers result in orders increasingly placed for immediate delivery and fewer orders placed well in advance of shipment. Retailers are timing their orders so that they are filled by suppliers closer to the time of purchase by consumers. To the extent that retailers do not sell as much of their year-end inventory purchases during this holiday selling season as they had anticipated, their demand for additional product earlier in the following fiscal year may be curtailed, thus negatively impacting the Company’s future revenues. In addition, the bankruptcy or other lack of success of one of the Company’s significant retailers could negatively impact the Company’s future revenues.

The effect of inflation on the Company’s operations during 2017 was not significant and the Company will continue its practice of monitoring costs and adjusting prices, accordingly.

Other Information

The Company is not aware of any material amounts of potential exposure relating to environmental matters and does not believe its environmental compliance costs or liabilities to be material to its operating results or financial position.

Previous: Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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