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 Form 10-K.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning the Company’s expectations and beliefs. See “Statement Regarding Forward-Looking Statements” and Part I, Item 1A “Risk Factors ” 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, 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, MAGIC: THE GATHERING, MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and TRANSFORMERS, Emerging Brands POWER RANGERS and LITTLEST PET SHOP, as well as the brands of our partners included in our Partner Brands portfolio. 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 entertainment labels, Allspark Pictures and Allspark Animation, create entertainment-driven brand 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. As the global consumer landscape, shopping behaviors and the retail environment continue to evolve, the Company continues to transform and reimagine its business strategy. This transformation includes changing many of the ways Hasbro organizes across its brand blueprint, re-shaping the Company to become a better equipped and adaptive, digitally-driven organization, including investing in the development of an omni-channel retail presence. In 2018, the Company has also focused on adding new capabilities through the on-boarding of new skill sets and talent to lead in today’s converged retail environment based on Hasbro’s understanding of the consumer and how its retailers are going to market.

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 intangible asset and goodwill impairments, organizational restructuring charges, the Toys“R”Us bankruptcy and U.S. tax reform, passed in December 2017, on 2018 and 2017 net earnings, as well as earnings per share.

2018 highlights

	•		Net revenues of $4,579.6 million decreased 12% from $5,209.8 million in 2017. The decline in net revenues includes an unfavorable foreign currency translation of $43.0 million.

	•		U.S. and Canada segment net revenues declined 10%; International segment net revenues declined 17%, including an unfavorable foreign currency translation impact of $41.7 million; Entertainment and Licensing segment net revenues increased 5%.

	•		Franchise Brands net revenues declined 9%, Partner Brands net revenues declined 22%, Hasbro Gaming net revenues declined 12% and Emerging Brands net revenues increased 1%.

	•		Operating profit was $331.1 million, or 7.2% of net revenues in 2018 compared to operating profit of $810.4 million, or 15.6% of net revenues in 2017.

	•		2018 operating profit was negatively impacted by: non-cash goodwill and intangible asset impairment charges of $117.6 million related to goodwill from the Company’s acquisition of Backflip Studios and other intangible assets; severance costs of $89.3 million associated with previously announced organizational restructuring; and $60.4 million of costs related to the Toys“R”Us bankruptcy recorded during the year.

	•		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.

	•		Impact from U.S. tax reform resulted in a net charge of $40.7 million in 2018 due to the remeasurement of liabilities based on additional guidance and regulations issued in 2018.

	•		Net earnings attributable to Hasbro, Inc. declined in 2018 to $220.4 million, or $1.74 per diluted share, compared to $396.6 million, or $3.12 per diluted share in 2017.

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 net revenues grew 13%; Hasbro Gaming net revenues grew 10%; Emerging Brands net revenues declined 15%; 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.

	•		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.

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 $0.63 per share in 2018 to $0.68 per share in 2019, with this increase first being effective for the dividend payable in May 2019. This was the fifteenth dividend increase in the previous 16 years. During that period, the Company has increased the quarterly cash dividend from $0.03 to $0.68 per share. In addition to the dividend, the Company returns cash to shareholders through its share repurchase program. As part of this initiative, from 2005 to 2018, the Company’s Board of Directors adopted nine successive share repurchase authorizations with a cumulative authorized repurchase amount of $4,325.0 million. The ninth authorization was approved in May 2018 for $500 million. During 2018, Hasbro repurchased approximately 2.7 million shares at a total cost of $250.1 million and an average price of $94.15 per share. Since 2005, Hasbro has repurchased 107.9 million shares at a total cost of $3,899.8 million and an average price of $36.11 per share. At December 30, 2018, Hasbro had $428.0 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 2018, 2017 and 2016.


	2018			2017			2016
Net Revenues		100.0	%		100.0	%		100.0	%
Operating profit		7.2			15.6			15.7
Earnings before income taxes		5.9			15.1			13.8
Net earnings		4.8			7.6			10.6
Net earnings attributable to Hasbro, Inc.		4.8	%		7.6	%		11.0	%

Results of Operations — Consolidated

The fiscal years ended December 30, 2018 and December 25, 2016 were each fifty-two week periods while the year ended December 31, 2017 was a fifty-three week period.

Net earnings attributable to Hasbro, Inc. decreased to $220.4 million for the fiscal year ended December 30, 2018 compared to $396.6 million for the fiscal year ended December 31, 2017, and were $551.4 million for the fiscal year ended December 25, 2016.

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 $1.74 in 2018, $3.12 in 2017 and $4.34 in 2016.

Net earnings and diluted earnings per share attributable to Hasbro, Inc. for each fiscal year in the three years ended December 30, 2018 include certain charges and benefits as described below.

2018

	•		A net charge of $96.9 million or $0.76 per diluted share associated with a fourth quarter 2018 non-cash goodwill impairment charge related to the Company’s Backflip Studios goodwill and impairment of certain other definite-lived intangible assets.

	•		A net charge of $77.9 million or $0.61 per diluted share of severance costs associated with a previously announced organizational restructuring. In the first quarter of 2018, the Company incurred a net charge of $15.7 million of severance charges, and in the fourth quarter of 2018, the Company recorded an additional net charge of $62.2 million of severance charges related to actions associated with its 2018 restructuring program.

	•		A net charge of $52.8 million or $0.42 per diluted share related to the Toys“R”Us bankruptcy and liquidation of its U.S. and other operations around the globe. The Company recognized incremental bad debt expense on outstanding Toys“R”Us receivables, royalty expense, inventory obsolescence as well as other related costs. In the fourth quarter of 2018, based on its final settlement with Toys“R”Us, the Company made adjustments to charges previously recorded during 2018.

	•		A net charge of $40.7 million or $0.32 per diluted share related to U.S. tax reform. In 2018 the Company made adjustments to provisional U.S. Tax Reform amounts recorded in the fourth quarter of 2017, based on additional guidance issued by the U.S. Treasury Department and the Internal Revenue Service during 2018.

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

	•		Net 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.

Consolidated net revenues for the year ended December 30, 2018 declined 12% to $4,579.6 million from $5,209.8 million for the year ended December 31, 2017. Net revenues in 2018 include an unfavorable foreign currency translation of $43.0 million, which is the result of weakening currencies primarily in our International segment in 2018 compared to 2017. In 2018, net revenues from Franchise Brands declined 9% compared to 2017 and comprised 53% of consolidated net revenues. Growth in Franchise Brands MONOPOLY and MAGIC: THE GATHERING was more than offset by declines from NERF, MY LITTLE PONY, TRANSFORMERS, PLAY-DOH and, to a lesser extent, BABY ALIVE.

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 and included a favorable foreign currency translation of $79.2 million, which was 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 13% compared to 2016 and comprised 47% of consolidated net revenues. Growth in Franchise Brands TRANSFORMERS, NERF, MONOPOLY, BABY ALIVE and MY LITTLE PONY was partially offset by declines in PLAY-DOH and, to a lesser extent, MAGIC: THE GATHERING.

The following chart presents net revenues by brand portfolio for each year in the three years ended December 30, 2018.


	2018 Net Revenues		% Change			2017 Net Revenues		% Change			2016 Net Revenues		% Change
Franchise Brands	$	2,445.9		-9.1	%	$	2,690.4		13.3	%	$	2,375.3		5.4	%
Partner Brands		987.3		-22.4	%		1,271.6		-10.0	%		1,412.8		28.3	%
Hasbro Gaming		787.7		-11.8	%		893.0		9.8	%		813.4		22.8	%
Emerging Brands		358.8		1.1	%		354.8		-15.2	%		418.4		-2.7	%

2018 versus 2017

Franchise Brands, Partner Brands and Hasbro Gaming net revenues declined in 2018 compared to 2017, while net revenues from the Emerging Brands portfolio grew slightly.

Franchise Brands The Franchise Brands portfolio declined 9% in 2018 compared to 2017. Higher net revenues from MONOPOLY and MAGIC: THE GATHERING products were more than offset by net revenue declines from NERF products, which were impacted by the loss of sales related to the bankruptcy and subsequent liquidation of Toys“R”Us. Also contributing to Franchise Brands net revenue declines in 2018 were MY LITTLE PONY products,

supported in 2017 by the theatrical release of MY LITTLE PONY: THE MOVIE, TRANSFORMERS products, also supported in 2017 by the major theatrical release of TRANSFORMERS: THE LAST KNIGHT, and to a lesser extent, BABY ALIVE products_._

Partner Brands The Partner Brands portfolio declined 22% in 2018 compared to 2017. Lower net revenues from STAR WARS, DISNEY PRINCESS and DREAMWORKS’ TROLLS products, as well as net revenue declines from DISNEY FROZEN and DISNEY’S DECENDANTS products were partially offset by net revenue increases from BEYBLADE and MARVEL products in addition to contributions from new brands TOP WING and SUPER MONSTERS products in 2018.

Hasbro Gaming The Hasbro Gaming portfolio declined 12% in 2018 compared to 2017. Lower net revenues from PIE FACE and SPEAK OUT and certain other Hasbro Gaming products were partially offset by net revenue increases from DUNGEONS and DRAGONS, DON’T STEP IN IT, CONNECT 4 and JENGA 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 $1,443.2 million in 2018, down 4%, versus $1,497.8 million in 2017.

Emerging Brands The Emerging Brands portfolio grew 1% in 2018 compared to 2017. Net revenue contributions from the introduction of Hasbro’s new collectable product lines of LOST KITTIES and YELLIES products, as well as contributions from POWER RANGERS licensing revenues, were partially offset by net revenue declines from FURREAL FRIENDS, FURBY and the Company’s core PLAYSKOOL products.

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 13% 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, BABY ALIVE 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 PLAY-DOH and MAGIC: THE GATHERING products in 2017.

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 lower overall brand revenues in 2017. 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 these 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 and 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 declined 15% in 2017 compared to 2016. Higher net revenues from FURREAL FRIENDS products drove growth, which were more than offset by lower net revenues from FURBY and LITTLEST PET SHOP products and the Company’s core PLAYSKOOL 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 2018, 2017 and 2016.


	2018 Net Revenues		% Change			2017 Net Revenues		% Change			2016 Net Revenues		% Change
U.S. and Canada	$	2,433.4		-9.6	%	$	2,690.5		5.1	%	$	2,559.9		15.0	%
International		1,847.6		-17.3	%		2,233.6		1.8	%		2,194.7		11.3	%
Entertainment & Licensing		298.5		4.5	%		285.6		7.7	%		265.2		8.4	%

U.S. and Canada

2018 versus 2017

U.S. and Canada segment net revenues declined 10% in 2018 compared to 2017. Revenues in the U.S. and Canada segment were not materially impacted by foreign currency translation. Segment net revenues declined in all product categories including Franchise Brands, Partner Brands and Hasbro Gaming, and to a lesser extent, net revenues declined in the Emerging Brands portfolio.

In the Franchise Brands portfolio, higher net revenues from MAGIC: THE GATHERING and MONOPOLY products were more than offset by lower net revenues from NERF, MY LITTLE PONY, BABY ALIVE and TRANSFORMERS products. In the Partner Brands portfolio, contributing to net revenue declines in 2018 were STAR WARS, DISNEY PRINCESS and DREAMWORKS’ TROLLS products, as well as lower net revenues from DISNEY’S DESCENDANTS products and the Company’s DISNEY FROZEN products. These declines were partially offset by net revenue increases from BEYBLADE and MARVEL products in addition to net revenue contributions from the introduction of the Company’s TOP WING and SUPER MONSTERS products during 2018. In the Hasbro Gaming portfolio, higher net revenues from DUNGEONS & DRAGONS, CONNECT 4 and DON’T STEP IN IT products were more than offset by lower net revenues from PIE FACE, SPEAK OUT and TOILET TROUBLE products, as well as certain other games brands. In the Emerging Brands portfolio, net revenue increases from the introduction of the Company’s line of LOST KITTIES, YELLIES and certain other Emerging Brands products were more than offset by lower net revenues from FURREAL FRIENDS, LITTLEST PET SHOP and core PLAYSKOOL products.

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, BABY ALIVE and MONOPOLY products were partially offset by lower net revenues from 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 FURREAL FRIENDS products were partially offset by lower net revenues from FURBY, LITTLEST PET SHOP and core PLAYSKOOL 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.

2018 versus 2017

International segment net revenues decreased approximately 17% in 2018 compared to 2017 which includes an unfavorable foreign currency translation of $41.7 million (Latin America — $31.2 million, Europe — $9.0 million, Asia Pacific — $1.5 million). On a regional basis, net revenues from Europe declined 24%, Latin America declined 6% while net revenues from the Company’s Asia Pacific region declined 5% in 2018 from 2017. Net Revenues in emerging markets decreased 12% during 2018. Unfavorable foreign currency translation reflects the strengthening of the U.S. dollar compared to certain foreign currencies, primarily currencies throughout Latin America and the Euro. Absent the impact of foreign currency translation, International segment net revenues decreased 15% in 2018 compared to 2017.

Lower net revenues from the Franchise Brands, Partner Brands and Hasbro Gaming portfolios were partially offset by higher net revenues from the Emerging Brands portfolio.

In the Franchise Brands portfolio, the primary drivers of the net revenue declines include lower sales of MY LITTLE PONY, TRANSFORMERS, NERF and PLAY-DOH products. These net revenue declines were partially offset by net revenue increases from MONOPOLY products. In the Partner Brands portfolio, lower net revenues from STAR WARS and DREAMWORKS’ TROLLS products, as well as net revenue declines from the Company’s line of DISNEY PRINCESS and DISNEY FROZEN fashion and small dolls, were partially offset by net revenue increases from BEYBLADE and to a lesser extent, MARVEL products. In the Hasbro Gaming portfolio, the International segment saw lower net revenues from the majority of Hasbro Gaming products including social gaming products PIE FACE, SPEAK-OUT and TOILET TROUBLE as well as lower net revenues from certain other traditional games brands, including LIFE, OPERATION and BOP-IT products. In the Emerging Brands portfolio, net revenue increases from the introduction of LOST KITTIES, LOCK STARS and YELLIES products during 2018, as well as net revenue increases from LITTLEST PET SHOP products, were partially offset by lower net revenues from FURREAL FRIENDS, FURBY and core PLAYSKOOL products.

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 BABY ALIVE 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 LITTLEST PET SHOP products, and the introduction of HANAZUKI products.

Entertainment and Licensing

2018 versus 2017

Entertainment and Licensing segment net revenues increased 5% in 2018 compared to 2017. Increased television programming and movie revenues, primarily recognized for content delivered under a multi-year digital

streaming deal entered in the third quarter of 2018, as well as higher full-year revenues due to the adoption of ASC 606 as discussed in note 2 to our consolidated financial statements which are included in Part II, Item 8 of this Form 10-K, drove the increase in 2018. Partially offsetting these increases were lower digital and consumer product licensing revenues in 2018 compared to 2017.

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.

Operating Profit

The table below illustrates operating profit and operating profit margins derived from our principal operating segments in 2018, 2017 and 2016. For a reconciliation of segment operating profit to total Company operating profit, see note 21 to our consolidated financial statements which are included in Part II, Item 8 of this Form 10-K.


	2018		% Net Revenues			% Change			2017		% Net Revenues			% Change			2016		% Net Revenues
U.S. and Canada	$	382.0		15.7	%		-25	%	$	509.9		19.0	%		-2	%	$	522.3		20.4	%
International		39.5		2.1	%		-83	%		228.7		10.2	%		-22	%		294.5		13.4	%
Entertainment & Licensing		17.3		5.8	%		-82	%		96.4		33.8	%		93	%		49.9		18.8	%

U.S. and Canada

2018 versus 2017

U.S. and Canada segment operating profit decreased 25% in 2018 compared to 2017. The decline in operating profit includes pre-tax charges of $45.8 million in 2018 related to the bankruptcy filing and subsequent liquidation of Toys“R”Us. Segment operating profit was negatively impacted by the loss of Toys“R”Us sales throughout the year as well as a higher mix of retail close-out sales in 2018. Operating profit margin decreased to 15.7% of net revenues in 2018 from 19.0% of net revenues in 2017. The operating profit margin decline was the result of the negative margin impact of the Toys“R”Us bad debt expense in 2018, lower sales and unfavorable product mix as well as higher freight costs in the U.S., partially offset by lower royalty expenses due to lower revenues from Partner Brands products in 2018, as well as lower product development and advertising costs in 2018.

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 of $18.0 million 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.

International

2018 versus 2017

International segment operating profit decreased to $39.5 million in 2018 compared to $228.7 million in 2017 and included pre-tax charges of $7.6 million related to the 2018 Toys“R”Us liquidation. In addition, International operating profit included an unfavorable impact from foreign exchange of $10.9 million. Operating profit margin decreased to 2.1% in 2018 from 10.2% in 2017. The decrease in operating profit and operating profit margin, as reported, is primarily due to increased expenses and lost sales related to the Toys“R”Us liquidation in many European and Asia Pacific markets. The remaining decline was driven by increased obsolescence charges related to efforts to clear excess inventory in a challenging retail environment in Europe, partially offset by lower royalty expenses as the result of lower sales of Partner brand products and lower advertising costs in 2018.

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.

Entertainment and Licensing

2018 versus 2017

Entertainment and Licensing segment operating profit declined to $17.3 million in 2018 compared to $96.4 million in 2017. Operating profit margin decreased to 5.8% of net revenues in 2018 compared to 33.8% in 2017. The overall decrease in operating profit and operating profit margin in the segment was primarily due to an $86.3 million goodwill impairment charge recorded in the fourth quarter related to Backflip Studios. In addition, contributing to the decrease in 2018 were higher programming amortization costs primarily related to MY LITTLE PONY: THE MOVIE, partially offset by lower royalty expenses and lower advertising costs in 2018.

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.

Other Segments and Corporate and Eliminations

In the Global Operations segment, the operating loss was $8.4 million in 2018 compared to operating profit of $4.0 million in 2017 and $19.4 million in 2016 primarily relating to lower sourcing volumes.

In Corporate and eliminations, operating costs were $99.3 million in 2018 compared to operating costs of $28.7 million in 2017 and $98.1 million in 2016. Operating costs in 2018 include impairment charges of $31.3 million, severance charges of $89.3 million and Toys“R”Us related costs of $7.0 million.

OPERATING COSTS AND EXPENSES

The Company’s operating expenses, stated as percentages of net revenues, are illustrated below for the fiscal years ended December 30, 2018, December 31, 2017 and December 25, 2016:


	2018			2017			2016
Cost of sales		40.4	%		39.0	%		38.0	%
Royalties		7.7			7.8			8.2
Product development		5.4			5.2			5.3
Advertising		9.6			9.6			9.3
Amortization of intangibles		0.6			0.6			0.7
Program production cost amortization		1.0			0.7			0.7
Selling, distribution and administration		28.1			21.6			22.1

Operating expenses for 2018, 2017 and 2016 include benefits and expenses related to the following events:

	•		During 2018, the Company recognized charges of $60.4 million consisting of incremental bad debt expense on outstanding Toys“R”Us receivables, royalty expense, inventory obsolescence as well as other costs related to the Toys“R”Us bankruptcy.

	•		During 2018, the Company incurred $89.3 million of severance charges, related to the 2018 restructuring program. These charges were recorded within SD&A expenses and included in Corporate and Eliminations.

	•		During 2018, the Company recorded $117.6 million in goodwill impairment and other intangible asset impairment charges, all within administrative expenses within the Corporate and Eliminations segment.

	•		During 2017 the Company recorded incremental bad debt expenses of $18.0 million within selling, distribution and administration expenses (SD&A), related to the bankruptcy filings by Toys“R”Us in the U.S. and Canada.

	•		During 2016, the Company recorded a goodwill impairment charge of $32.9 million within SD&A expenses.

Cost of Sales

Cost of sales primarily consists of purchased materials, labor, manufacturing overhead and other inventory-related costs such as obsolescence. Cost of sales decreased 9% to $1,850.7 million, or 40.4% of net revenues, for the year ended December 30, 2018 compared to $2,033.7 million, or 39.0% of net revenues, for the year ended December 31, 2017. Cost of sales in 2018 included obsolescence charges related to Toys“R”Us of $3.2 million. Cost of sales decreased in dollars primarily due to lower sales volumes compared to 2017. Increased cost of sales as a percent of net revenues reflects the mix of products sold, higher sales allowances and obsolescence charges as well as higher levels of closeout sales in 2018.

In 2017, 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.

Royalty Expense

Royalty expense of $351.7 million, or 7.7% or net revenues, in 2018 compared to $405.5 million, or 7.8% of net revenues, in 2017 and $409.5 million, or 8.2% of net revenues, in 2016. 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 and BEYBLADE products and certain other licensed properties which carry higher royalty rates than other licensed properties. Lower royalty expense in dollars and as a percentage of net revenues in 2018 compared to 2017, reflects the mix of entertainment-driven product sold. In particular, lower royalty expense in 2018 compared to 2017 reflects the lower net sales of STAR WARS and DREAMWORKS’ TROLLS products as well as lower net sales of DISNEY PRINCESS and DISNEY FROZEN products partially offset by higher net sales of BEYBLADE and MARVEL products. These decreases were partially offset by accelerated royalty changes incurred as a result of the loss of Toys“R”Us product sales in 2018. 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.

Product Development

Product development expense in 2018 totaled $246.2 million, or 5.4% of net revenues, compared to $269.0 million, or 5.2% of net revenues, in 2017. Product development expenditures reflect the Company’s investment in innovation and anticipated growth across our brand portfolio in both Franchise and Partner Brands. The decline in dollars was partially the result of the capitalization of certain costs of the digital version of MAGIC: THE GATHERING in 2018 as it progressed further through the developmental cycle and has been launched in open beta format, as compared to costs that were expensed in 2017, when the game was in its earlier stages of development. The remaining decline was due to reduced spending resulting from the lower revenue base in 2018. As a percentage of net revenues, product development was consistent with 2017.

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. 2017 product development expenditures were significant but consistent with 2016. As a percentage of net revenues, product development was also consistent with 2016.

Advertising Expense

Advertising expense in 2018 totaled $439.9 million compared to $501.8 million in 2017 and $468.9 million in 2016. The level of the Company’s advertising expense is generally impacted by revenue mix, the amount and type

of theatrical releases and television programming. The decrease in 2018 was primarily due to lower sales volume compared to 2017. Advertising as a percentage of net revenues in 2018 remained consistent with 2017 at 9.6% of net revenues.

In 2017, advertising as a percentage of net revenues increased slightly to 9.6% from 9.3% in 2016.

Amortization of Intangibles

Amortization of intangibles totaled $28.7 million, or 0.6% of net revenues, in 2018 compared to $28.8 million, or 0.6% of net revenues, in 2017 and $34.8 million, or 0.7% of net revenues in 2016. Amortization of intangibles in dollars and as a percent of net revenues was consistent with 2017 and reflects the decrease due to the full amortization of property rights related to Backflip and other intangible assets during the first half of 2017, offset by the increase in intangible asset amortization related to the acquisition of the POWER RANGERS brand in 2018. 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.

Program Product Cost Amortization

Program production cost amortization totaled $43.9 million, or 1.0% of net revenues in 2018, compared to $35.8 million, or 0.7% of net revenues, in 2017 and $35.9 million, or 0.7% of net revenues, in 2016. 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. The increase in dollars and as a percent of net revenues in 2018 compared to 2017 reflects amortization of production expenses related to MY LITTLE PONY: THE MOVIE which was released during the fourth quarter of 2017 as well as higher television programming amortization related to a multi-year, digital distribution agreement for Hasbro television programing, entered during 2018. 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.

Selling, Distribution and Administration Expenses

Selling, distribution and administration (“SD&A”) expenses were $1,287.6 million, or 28.1% of net revenues, in 2018 compared to $1,124.8 million, or 21.6% of net revenues, in 2017. SD&A expenses in 2018 include $50.2 million of expenses related to Toys“R”Us, $89.3 million related to the 2018 restructuring program discussed above, and $117.6 million of goodwill and intangible asset impairment charges. Absent these charges, the decrease in dollars reflects lower spending due to the Company’s cost-reduction efforts, lower incentive compensation expense in 2018 and lower marketing and selling costs due to lower revenues.

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 $18.0 million 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.

NON-OPERATING (INCOME) EXPENSE

Interest Expense

Interest expense totaled $90.8 million in 2018 compared to $98.3 million in 2017 and $97.4 million in 2016. During the third quarter of 2017, the Company refinanced $350 million of 6.3% notes that matured in September 2017 by issuing $500 million of 3.5% notes due 2027. The decrease in interest expense in 2018 reflects the impact of the 2017 debt refinancing and, to a lesser extent, lower average short-term borrowings in 2018. Interest expense in 2017 was relatively consistent with the Company’s 2016 interest expense.

Interest Income

Interest income was $22.4 million in 2018 compared to $22.2 million in 2017 and $9.4 million in 2016. The Company continues to invest available cash balances and has benefitted from higher average interest rates in 2017 and 2018.

Other (Income) Expense, Net

Other income, net of $7.8 million in 2018 compared to other income, net of $51.9 million in 2017 and other expense, net of $7.5 million in 2016. The following table outlines major contributors to other (income) expense, net.


	2018			2017			2016
Foreign currency (gains) losses	$	10.8			(1.3	)		32.9
Earnings from Discovery Family Channel		(21.1	)		(23.3	)		(23.8	)
Discovery tax sharing agreement revaluation		—			(19.9	)		—
Pension expense		5.8			—			—
Gain on sale of certain investments		(3.0	)		(3.3	)		(6.2	)
Other		(0.3	)		(4.1	)		4.6

	$	(7.8	)		(51.9	)		7.5

	•		Foreign currency losses in 2018 compared to foreign currency gains in 2017 reflects the strengthening of the U.S. dollar against certain currencies, primarily in Latin American and European markets. 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.

	•		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.

	•		As a result of the adoption Accounting Standards Update No. 2017-07 (ASU 2017-07), Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost in 2018, non-service cost components of pension expense previously recorded to operating expense, are now recorded to other expense.

	•		The 2018, 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 $0.5 million gain in 2018 and a $4.8 million gain in 2017 (included in other in the table above) due to the option’s value decrease.

INCOME TAXES

Income tax expense totaled 18.5% of pre-tax earnings in 2018 compared with 49.6% in 2017 and 23.0% in 2016. Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Income tax expense for 2018 includes a discrete net tax expense of $40.7 million relating to the Tax Cuts and Jobs Act (the “Tax Act”) and net tax benefits of approximately $50.0 million primarily due to reassessment of prior period tax positions and excess tax benefits relating to share-based compensation. Income tax expense for 2017 includes discrete 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 discrete 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.

As a result of the Tax Act, the Company intends to repatriate substantially all of the accumulated foreign earnings as needed from time to time. The Company still has significant cash needs outside the United States and continues to consistently monitor and analyze its global working capital and cash requirements. However, the Tax Act gives the Company flexibility to manage cash globally. In 2018, the Company recorded $0.5 million of state taxes that will be incurred due to future cash distributions. The Company will continue to record additional tax effects, if any, in the period that the on-going distribution analysis is completed and is able to make reasonable estimates.

NEW ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncement Updates

On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB_”) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers_ (ASC 606 or the “New Revenue Standard”) using the modified retrospective method. ASC 606 supersedes the revenue recognition requirements in ASC 605 – Revenue Recognition and most industry-specific guidance in U.S. GAAP. The New Revenue Standard 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. The cumulative impact of the adoption of the New Revenue Standard was not material to the Company therefore the Company did not record any adjustments to retained earnings. This was determined by analyzing contracts not completed as of January 1, 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For further details, see note 2 to our consolidated financial statements, which are included in Part II, Item 8 of this Form 10-K.

Revenue recognition from the sale of finished product to customers, which is the majority of the Company’s revenues, did not change under the new standard and the Company does not expect material changes in the future as a result of the New Revenue Standard related to the sale of finished product to its customers. Within the Company’s Entertainment and Licensing segment, the timing of revenue recognition for minimum guarantees that the Company receives from licensees is impacted by the New Revenue Standard. Prior to the adoption of ASC 606, for licenses of the Company’s brands that are subject to minimum guaranteed license fees, the Company 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 the fourth quarter for most of the Company’s licensee arrangements. In periods following January 1, 2018, 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 impacts the timing of revenue recognition within the Company’s Entertainment and Licensing segment such that under ASC 606, less revenues are recorded in the fourth quarter and more revenues are recorded within the first, second, and third quarters. No other areas of the Company’s business were materially impacted by the New Revenue Standard.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02 (ASU 2018-02), Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard provides for a reclassification from accumulated other comprehensive earnings (“AOCE”) to retained earnings, of disproportionate income tax effects arising from the impact of the Tax Cuts and Jobs Act of 2017. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company adopted ASU 2018-02 in the first quarter of 2018. The impact of the adoption resulted in a one-time reclassification in the amount of $21.5 million from AOCE with a corresponding credit to retained earnings.

In January 2018, the FASB issued Accounting Standards Update No. 2017-01(ASU 2017-01), Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard clarifies the definition of a business with the objective of providing guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this standard was effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2017-01 in the second quarter of 2018. For further details, see Note 18 to the consolidated financial statements, which are included in Part II, Item 8 of this Form 10-K.

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 adopted the standard in the fourth quarter of 2018 eliminating the Step 2 test from its goodwill impairment testing procedures performed during the fourth quarter of 2018. For further details on the Company’s goodwill impairment testing, see note 5 to the consolidated financial statements, which are included in Part II, Item 8 of this Form 10-K.

In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Compensation – Retirement Benefits (Topic 715_), 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 was permitted. The Company adopted this standard in the first quarter of 2018. 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 Accounting Standards Update 2016-15 (ASU 2016-15), Statement of Cash Flows (Topic 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 was effective for public companies for fiscal years beginning after December 15, 2017. The Company adopted this standard in the first quarter of 2018 and the adoption of this standard did not have an 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 (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. For public companies, this standard was effective for annual reporting periods beginning after December 15, 2017, and early adoption was 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 adopted this standard in the first quarter of 2018 and the adoption did not have an impact on the Company’s results or consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842), 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. ASU 2016-02 as originally issued required modified retrospective adoption. In July 2018, the FASB issued ASU 2018-11, which provides an alternative transition method in addition to the existing method by allowing entities to apply ASU 2016-02 as of the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASU-2016-02 on December 31, 2018 using the retrospective basis as provided in ASU 2018-11. No cumulative effect was recorded to the balance sheet. The Company also elected certain practical expedients as provided under the standard. These included (i) the election not to reassess whether contracts existing at the adoption date contain a lease under the new definition of a lease under the standard; (ii) the election not to reassess the lease classification for existing leases as of the adoption date; (iii) the election not to reassess whether previously capitalized initial direct costs would qualify for capitalization under the standard; (iv) the election to use hindsight in determining the relevant lease terms for use in the capitalization of the lease liability; and (v) the election to use hindsight in reviewing the right-of-use assets for impairment. For all leases, the terms are being evaluated, including extension and renewal options as well as the lease payments associated with the leases. As a result of the adoption of the standard, the Company expects to book right-of-use assets between $110.0 million and $120.0 million and lease liabilities between $130.0 million and $140.0 million. The Company does not expect that its results of operations will be materially impacted by this standard. The adoption of this standard will not have an impact on the Company’s cash flows.

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 does not expect the standard to have a material impact on its consolidated financial statements however the impact of the standard will be dependent on the effectiveness of the Company’s hedging program.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued Accounting Standards Update No. 2018-13 (ASU 2018-13), Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, specifically related to disclosures surrounding Level 3 asset balances, fair value measurement methods, related gains and losses and fair value hierarchy transfers. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the standard but does not expect the standard to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14) Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)-Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the standard but does not expect the standard to have a material impact on its consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update No.2016-13 (ASU 2016-13) Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. The amendments in this update provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard update replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the standard but does not expect the standard to have a material impact on its 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. We saw a weakening of British pound sterling against the US dollar around the time of the Brexit vote, which increased volatility in the foreign currency markets, notably the euro which continued through 2018. These fluctuations initially affected our financial results, although the impact was partially mitigated by our hedging strategy. 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 2018 the Company funded its operations and liquidity needs primarily through available cash and cash flows from operations. During 2019, 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 2019, 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 30, 2018, the Company’s cash and cash equivalents totaled $1,182.4 million. 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. The Tax Cuts and Jobs Act (the “Tax Act”) provided 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. As of December 30, 2018, the remaining long-term payable related to the Tax Act of $258.7 million is presented within other liabilities, non-current on the Consolidated Balance Sheets. As permitted by the Tax Act, the Company will pay the transition tax in annual interest-free installments through 2025. As a result, 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 30, 2018 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.


	2018		%			2017		%			2016
Cash and cash equivalents, net of short-term borrowings	$	1,172.6		-18	%	$	1,426.3		29	%	$	1,109.7
Accounts receivable, net		1,188.1		-15	%		1,405.4		7	%		1,320.0
Inventories		443.4		2	%		433.3		12	%		387.7
Prepaid expenses and other current assets		268.7		26	%		214.0		-10	%		237.7
Other assets		744.3		23	%		605.9		-22	%		779.9
Accounts payable and accrued liabilities		1,264.6		15	%		1,096.7		0	%		1,095.6
Other liabilities		539.1		5	%		514.7		32	%		389.4

Accounts receivable, net decreased 15% in 2018 compared to 2017. Excluding the favorable foreign currency translation of $51.9 million, accounts receivable, net, decreased 12%, in line with 2018 net revenue declines, excluding favorable foreign currency translation compared to 2017. Days sales outstanding decreased to 78 days at December 30, 2018 from 80 days at December 31, 2017. Days sales outstanding at December 31, 2017 were higher by 2 days due to balances related to the Toys“R”Us pre-bankruptcy receivables. Absent this impact, days sales outstanding at December 30, 2018 were consistent with December 31, 2017. 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 7 days to 80 days at December 31, 2017 from 73 days at December 25, 2016. The increase was primarily due to the impact of the Toys“R”Us balances noted above and the timing of collections.

Inventories increased 2% at the end of 2018 compared to 2017. Excluding the unfavorable foreign currency impact of $20.2 million, inventories increased 7% in 2018 compared to 2017. The increase in inventories, excluding the impact of foreign exchange, is due in part to sales declines as well as new markets, partially offset by reduced inventory levels in Europe and higher inventory obsolescence in 2018. 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 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, was due in part to higher inventory levels in growing brands and in newly entered markets to support growth in the business during 2017.

Prepaid expenses and other current assets increased 26% in 2018 compared to 2017. The increase was related to higher unrealized gains on foreign exchange contracts, higher accrued tax credits related to certain television and movie production costs, higher prepaid income tax balances as a result of lower taxable earnings in relation to 2018 estimated tax payments and higher accrued royalty income related to the adoption of ASU 2014-09, Revenue from Contracts with Customers (ASC-606). Prepaid expenses and other current assets decreased 10% in 2017

compared to 2016. The majority of the decrease was 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 compared to 2016. These decreases were partially offset by higher prepaid non-income related taxes, primarily value-added taxes.

Other assets increased 23% in 2018 compared to 2017. Higher balances in 2018 include: increased deferred tax asset balances related to tax benefits derived from intercompany dividends, higher capitalized movie and television production costs, net of related production rebates, primarily related to the Company’s share of costs related to BUMBLEBEE, the theatrical release produced jointly with Paramount Pictures, and released in December of 2018, higher long-term receivable balances related to the long-term portion of a multi-year digital distribution agreement for Hasbro television programming as well as higher accrued royalty income as a result of the adoption of the ASU 2014-09 in 2018. These increases were partially offset by lower long-term royalty advances and 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. 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 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.

Accounts payable and accrued liabilities increased 15% in 2018 compared to 2017. Increases included higher accrued liabilities related to the remaining amounts due for the POWER RANGERS acquisition, increased severance charges related to the Company’s 2018 restructuring program, higher deferred revenue balances primarily related to the launch of the online version of MAGIC: THE GATHERING, higher accrued tax balances related to value added taxes, primarily in Europe and Mexico and higher accrued dividends due to a higher dividend rate announced for 2019. These increases were partially offset by lower accrued incentive compensation balances as a result of the decline in company performance in 2018, lower accrued income tax balances as a result of lower earnings in 2018 and a lower liability for foreign currency forward contracts as the result of a strengthening U.S. dollar against certain foreign currencies in 2018. 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 14 to our consolidated financial statements included within Part II, Item 8 of this 10-K for further discussion), higher accrued dividends and increased accounts payable balances due to timing of payments in 2017. These increases were offset by lower incentive compensation accruals and other miscellaneous accruals in 2017.

Other liabilities increased 5% in 2018 compared to 2017. The increase is due to the $258.7 million long-term portion of the repatriation tax liability related to U.S. Tax Reform passed in the fourth quarter of 2017. In addition, the Company’s first quarter 2018 decision to terminate its U.S. defined benefit pension plan resulted in an increase to other liabilities due to a remeasurement of the plans projected benefit obligation, in relation to expected termination costs. These increases were partially offset by lower long-term balances related to foreign exchange contracts, lower balances related to accrued compensation for non-employee members of the Company’s Board of Directors due to payments made in 2018 and lower liabilities reflecting changes in management judgment with respect to uncertain tax positions. 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.

Cash Flow

The following table summarizes the changes in the Consolidated Statement of Cash Flows for each of the years ended on December 30, 2018, December 31, 2017 and December 25, 2016.


	2018			2017			2016
Net cash provided by (used in)
Operating Activities	$	646.0			724.4			817.3
Investing Activities		(286.5	)		(131.5	)		(138.4	)
Financing Activities		(737.1	)		(312.2	)		(375.5	)

In 2018, 2017 and 2016, Hasbro generated $646.0 million, $724.4 million and $817.3 million of cash from its operating activities, respectively. Operating cash flows in 2018, 2017 and 2016 included $132.0 million, $48.0 million

and $48.7 million, respectively, of cash used for television program and film production. The decrease in operating cash flows in 2018 compared to 2017 reflects lower earnings as well as higher film production costs in 2018 related to the production of the BUMBLEBEE film, released in December 2018. In addition, the decrease in operating cash flows in 2017 compared to 2016 was the result of unfavorable changes in working capital, excluding the impact of the net $296.5 million charge related to tax reform.

Cash flows utilized by investing activities were $286.5 million, $131.5 million and $138.4 million in 2018, 2017 and 2016, respectively. Additions to property, plant and equipment increased in 2018 to $140.4 million from $134.9 million and $154.9 in 2017 and 2016, respectively. Of these additions, 58% in 2018, 59% in 2017 and 57% in 2016 were for purchases of tools, dies and molds related to the Company’s products. During the fiscal years ended December 30, 2018, December 31, 2017 and December 25, 2016, the depreciation of plant and equipment was $139.3 million, $143.0 million and $119.7 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, 2018 cash utilized for investing activities reflects cash payments of $155.5 million related to the acquisition of POWER RANGERS during the second quarter of 2018, partially offset by $6.4 million received on the installment note relating to the sale of the Company’s manufacturing operations in 2015. Excluding capital expenditures, 2017 proceeds from investing activities includes a $6.4 million installment note payment. 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.

Net cash utilized by financing activities was $737.1 million, $312.2 million, and $375.5 million in 2018, 2017 and 2016, 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, partially offset by the repayment of $350.0 million 6.30% long-term notes that matured in September 2017. Of the amounts utilized in 2018, 2017 and 2016, $250.1 million, $151.3 million, and $150.1 million, respectively, reflect cash paid, including transaction costs, to repurchase the Company’s Common Stock. During 2018, 2017 and 2016, the Company repurchased 2.7 million, 1.6 million, and 1.9 million shares, respectively, at an average price of $94.15, $94.74, and $79.86, respectively. A portion of the 2018 share repurchases were executed to offset the issuance of 3.1 million shares to Saban Properties included as part of the POWER RANGERS asset acquisition. At December 30, 2018, $428.0 million remained for share repurchases under the May 2018 Board authorization. Dividends paid were $309.3 million in 2018, $277.0 million in 2017 and $248.9 million in 2016. The Company has increased its quarterly dividend rate from $0.51 in 2016 to $0.57 in 2017 and $0.63 in 2018. Net repayments of short-term borrowings of $142.4 million in 2018 compared to net repayments of short-term borrowings of $18.4 million in 2017 and net proceeds of short-term borrowings of $9.0 million in 2016. The Company generated cash from employee stock option transactions of $30.0 million, $29.4 million, and $42.2 million in 2018, 2017 and 2016, respectively. The Company paid withholding taxes related to share-based compensation of $58.3 million, $32.0 million and $22.0 million in 2018, 2017 and 2016, 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 increase during the third and fourth quarter as customers increase their purchases to meet expected consumer demand in their holiday selling season. Due to the concentrated timeframe of this selling period, payments for these accounts receivable are generally not due until the fourth quarter or early in the first quarter of the subsequent year. This timing difference between expenditures and cash collections on accounts receivable makes it necessary for the Company to borrow higher amounts during the latter part of the year. During 2018, 2017 and 2016, 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. 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 $1,100.0 million revolving credit agreement. The Company had no outstanding borrowings related to the Program at December 30, 2018.

During the fourth quarter of 2018, the Company entered into an amended and restated revolving credit agreement with the lenders party thereto (the “Amended Agreement”) which provides the Company with a $1,100.0 million committed borrowing facility. The Amended Agreement contains certain financial covenants setting forth leverage and coverage requirements, and certain other limitations typical of an investment grade facility, including with respect to liens, mergers and incurrence of indebtedness. The Amended Agreement also provides for a potential additional incremental commitment increase of up to $500.0 million. The Amended Agreement extends the term of our prior facility from March 30, 2020 to November 26, 2023. The Company was in compliance with all covenants in the Amended Agreement as of and for the fiscal year ended December 30, 2018. The Company had no borrowings outstanding under its committed revolving credit facility at December 30, 2018. However, letters of credit outstanding under this facility as of December 30, 2018 were approximately $1.5 million. Amounts available and unused under the committed line at December 30, 2018 were approximately $1,098.5 million, inclusive of borrowings under the Company’s commercial paper program. The Company also has other uncommitted lines from various banks, of which approximately $37.4 million was utilized at December 30, 2018. Of the amount utilized under, or supported by, the uncommitted lines, approximately $9.8 million and $27.6 million represent outstanding short-term borrowings and letters of credit, respectively.

The Company has principal amounts of long-term debt at December 30, 2018 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 $29.1 million and 2019 purchase commitments of $536.7 million outstanding at December 30, 2018. In 2019, the Company expects capital expenditures to be in the range of $155.0 million to $165.0 million. In addition, the Company expects to be committed to guaranteed royalty payments of approximately $78.7 million in 2019.

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 intangible assets and income taxes.

Recoverability of Goodwill and Intangible Assets

During the fourth quarter of 2018 the Company adopted 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.

The Company tests goodwill 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 impairment testing process if it is not more likely than not that impairment exists.

If it is more likely than not that impairment exists, a quantitative goodwill impairment test is performed. When performing a quantitative impairment test, goodwill is tested for impairment by comparing the carrying value to the estimated fair value of the reporting unit which is calculated using an income approach. Other intangible assets with indefinite lives are tested for impairment by comparing their carrying value to their estimated fair value. During the fourth quarter of 2018, the Company performed a qualitative assessment with respect to certain of its reporting units with goodwill totaling $485.9 million. The Company utilized this approach for all reporting units with the exception of Backflip based on the amount by which historical estimated reporting unit fair values exceeded carrying values. Based on its qualitative assessments, the Company concluded that there was no impairment of goodwill to reporting units tested using the qualitative approach during 2018. Further discussion of the Company’s quantitative assessment of Backflip goodwill is discussed below.

During the fourth quarter of 2018, the Company took a number of actions to react to a rapidly changing mobile gaming industry that resulted in a modification to the Company’s long-term plan for its Backflip business. These modifications included organizational actions and related personnel changes, the extension of launch dates for games currently in or planned for development and the addition of partners for the development of future game

releases. The modifications resulted in changes to the long-term projections for the Backflip business which led the Company to conclude the goodwill associated with the Backflip reporting unit was impaired. The goodwill impairment analysis involved comparing the Backflip carrying value to its estimated fair value, which was calculated based on the Income Approach. To calculate the fair value of the future cash flows under the Income Approach, a discount rate of 19% was utilized, representing the reporting unit’s estimated weighted-average cost of capital. Based on the results of the impairment test, the Company determined that the carrying value of the Backflip reporting unit exceeded its estimated fair value. The Company recorded an impairment charge of $86.3 million within administrative expense and in the Company’s Entertainment and Licensing segment, during the fourth quarter of 2018, which was the full amount of remaining goodwill associated with the Backflip reporting unit.

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 recorded an impairment charge of $32.9 million during the fourth quarter of 2016.

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

Intangible assets, other than those with indefinite lives, are reviewed for indications of impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.

As part of its assessment of intangible assets in the fourth quarter of 2018, the Company completed impairment testing relating to certain property rights, both owned or related to license agreements.

In the fourth quarter of 2018, the Company reviewed intangible assets recorded in connection with licensed property rights and owned technology. Due to a decline in revenue and revised projections for future revenue, it was determined that the intangible asset carrying values exceeded expected future cash flows, indicating that the intangible asset was impaired, and resulted in a charge of $31.3 million recorded within administrative expense.

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 established new tax laws in 2018, including, but not limited to, reducing the U.S. statutory tax rate from 35% to 21% and creating new taxes on certain foreign-sourced earnings and certain related-party payments.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in the consolidated financial statements as of December 31, 2017. As the Company collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, and other standard-setting bodies, the Company made adjustments over the course of the year to the provisional amounts, including refinements to deferred taxes. The accounting for the tax effects of the Tax Act has been completed as of December 30, 2018.

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

determined that the Company will have insufficient future taxable income, including capital gains, to fully realize the future deductions or capital losses. Deferred tax liabilities represent expenses recognized on the Company’s income tax return that have not yet been recognized in the Company’s consolidated financial statements or income recognized in the consolidated financial statements that has not yet been recognized in the Company’s income tax return.

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 30, 2018. Future payments required under these and other obligations, expressed in millions as of December 30, 2018, are as follows:


	Payments due by Fiscal Year
Certain Contractual Obligations	2019		2020		2021		2022		2023		Thereafter		Total
Long-term debt	$	—		—		300.0		—		—		1,409.9		1,709.9
Interest payments on long-term debt		81.3		81.3		75.7		71.8		71.8		927.2		1,309.1
Operating lease commitments		47.1		31.4		22.8		15.9		12.5		27.1		156.8
Future minimum guaranteed contractual royalty payments		78.7		103.2		90.3		64.9		0.2		0.5		337.8
Transition Taxa		14.5		18.4		18.4		18.4		34.4		103.1		207.2
Tax sharing agreementb		4.5		4.7		4.9		5.1		5.4		9.2		33.8
Purchase commitmentsc		455.3		81.4		—		—		—		—		536.7

	$	681.4		320.4		512.1		176.1		124.3		2,477.0		4,291.3

As discussed above, the Tax Cuts and Jobs Act requires the Company to pay a one-time mandatory deemed repatriation tax on undistributed foreign earnings of $308.0 million. The Company utilized $78.5 million of existing tax credits to reduce the $308.0 million U.S. federal income tax liability, which resulted in $229.5 million to be paid in interest-free installments through 2025, of which $18.4 million was paid in 2018. See note 11 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further discussion.

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.

c	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 30, 2018.

Theatrical 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 contingent on the release of a new STAR WARS theatrical release in 2019.

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 30, 2018, the Company has a liability of $50.3 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 30, 2018, the Company had letters of credit and related instruments of approximately $29.1 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 $47.5 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 30, 2018, these contracts had net unrealized gains of $24.5 million, of which $20.8 million are recorded in prepaid expenses and other current assets, $5.3 million are recorded in other assets and ($1.6) million are recorded in accrued liabilities. Included in accumulated other comprehensive earnings at December 30, 2018 are deferred gains of $20.9 million, net of tax, related to these derivatives.

At December 30, 2018, 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 30, 2018 are deferred losses, net of tax, of $19.3 million related to these derivatives.

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 38% of its consolidated net revenues in 2018 and 42% and 41% of its consolidated net revenues in 2017 and 2016, 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 2018, 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 2018 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 6. Selected Financial Data. · 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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