filings.toolsItem 8. Financial Statements and Supplementary Data.
191K characters. Original on sec.gov · Markdown
Item 8. Financial Statements and Supplementary Data.
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Hasbro, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Hasbro, Inc. and subsidiaries (the “Company”) as of December 30, 2018 and December 31, 2017, the related consolidated statements of operations, comprehensive earnings, cash flows, and shareholders’ equity and redeemable noncontrolling interest for each of the years in the three-year period ended December 30, 2018, and the related notes and financial statement schedule II (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2018 and December 31, 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 30, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have not been able to determine the specific year that we began serving as the Company’s auditor, however, we are aware that we have served as the Company’s auditor since at least 1968.
Providence, Rhode Island
February 26, 2019
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HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 30, 2018 and December 31, 2017
(Thousands of Dollars Except Share Data)
| 2018 | 2017 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,182,371 | 1,581,234 | |||||
| Accounts receivable, less allowance for doubtful accounts of $9,100 in 2018 and $31,400 in 2017 | 1,188,052 | 1,405,399 | ||||||
| Inventories | 443,383 | 433,293 | ||||||
| Prepaid expenses and other current assets | 268,698 | 214,000 | ||||||
| Total current assets | 3,082,504 | 3,633,926 | ||||||
| Property, plant and equipment, net | 256,473 | 259,710 | ||||||
| Other assets | ||||||||
| Goodwill | 485,881 | 573,063 | ||||||
| Other intangibles, net | 693,842 | 217,382 | ||||||
| Other | 744,288 | 605,902 | ||||||
| Total other assets | 1,924,011 | 1,396,347 | ||||||
| Total assets | $ | 5,262,988 | 5,289,983 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Short-term borrowings | $ | 9,740 | 154,957 | |||||
| Accounts payable | 333,521 | 348,476 | ||||||
| Accrued liabilities | 931,063 | 748,264 | ||||||
| Total current liabilities | 1,274,324 | 1,251,697 | ||||||
| Long-term debt | 1,695,092 | 1,693,609 | ||||||
| Other liabilities | 539,086 | 514,720 | ||||||
| Total liabilities | 3,508,502 | 3,460,026 | ||||||
| Shareholders’ equity | ||||||||
| Preference stock of $2.50 par value. Authorized 5,000,000 shares; none issued | — | — | ||||||
| Common stock of $0.50 par value. Authorized 600,000,000 shares; issued 209,694,630 shares in 2018 and 2017 | 104,847 | 104,847 | ||||||
| Additional paid-in capital | 1,275,059 | 1,050,605 | ||||||
| Retained earnings | 4,184,374 | 4,260,222 | ||||||
| Accumulated other comprehensive loss | (294,514 | ) | (239,425 | ) | ||||
| Treasury stock, at cost, 83,565,598 shares in 2018 and 85,244,923 shares in 2017 | (3,515,280 | ) | (3,346,292 | ) | ||||
| Total shareholders’ equity | 1,754,486 | 1,829,957 | ||||||
| Total liabilities and shareholders’ equity | $ | 5,262,988 | 5,289,983 | |||||
See accompanying notes to consolidated financial statements.
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HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended in December
(Thousands of Dollars Except Per Share Data)
| 2018 | 2017 | 2016 | ||||||||||
| Net revenues | $ | 4,579,646 | 5,209,782 | 5,019,822 | ||||||||
| Costs and expenses | ||||||||||||
| Cost of sales | 1,850,678 | 2,033,693 | 1,905,474 | |||||||||
| Royalties | 351,660 | 405,488 | 409,522 | |||||||||
| Product development | 246,165 | 269,020 | 266,375 | |||||||||
| Advertising | 439,922 | 501,813 | 468,940 | |||||||||
| Amortization of intangible assets | 28,703 | 28,818 | 34,763 | |||||||||
| Program production cost amortization | 43,906 | 35,798 | 35,931 | |||||||||
| Selling, distribution and administration | 1,287,560 | 1,124,793 | 1,110,769 | |||||||||
| Total expenses | 4,248,594 | 4,399,423 | 4,231,774 | |||||||||
| Operating profit | 331,052 | 810,359 | 788,048 | |||||||||
| Non-operating (income) expense | ||||||||||||
| Interest expense | 90,826 | 98,268 | 97,405 | |||||||||
| Interest income | (22,357 | ) | (22,155 | ) | (9,367 | ) | ||||||
| Other (income) expense, net | (7,819 | ) | (51,904 | ) | 7,521 | |||||||
| Total non-operating expense, net | 60,650 | 24,209 | 95,559 | |||||||||
| Earnings before income taxes | 270,402 | 786,150 | 692,489 | |||||||||
| Income taxes | 49,968 | 389,543 | 159,338 | |||||||||
| Net earnings | 220,434 | 396,607 | 533,151 | |||||||||
| Net loss attributable to noncontrolling interests | — | — | (18,229 | ) | ||||||||
| Net earnings attributable to Hasbro, Inc. | $ | 220,434 | 396,607 | 551,380 | ||||||||
| Per common share | ||||||||||||
| Net earnings attributable to Hasbro, Inc. | ||||||||||||
| Basic | $ | 1.75 | 3.17 | 4.40 | ||||||||
| Diluted | $ | 1.74 | 3.12 | 4.34 | ||||||||
| Cash dividends declared | $ | 2.52 | 2.28 | 2.04 | ||||||||
See accompanying notes to consolidated financial statements.
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HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
Fiscal Years Ended in December
(Thousands of Dollars)
| 2018 | 2017 | 2016 | ||||||||||
| Net earnings | $ | 220,434 | 396,607 | 533,151 | ||||||||
| Other comprehensive earnings (loss): | ||||||||||||
| Foreign currency translation adjustments | (55,524 | ) | 32,017 | (5,033 | ) | |||||||
| Unrealized holding (losses) gains on available-for-sale securities, net of tax | (2,000 | ) | (390 | ) | 166 | |||||||
| Net gains (losses) on cash flow hedging activities, net of tax | 36,107 | (90,302 | ) | 25,748 | ||||||||
| Changes in unrecognized pension and postretirement amounts, net of tax | (23,763 | ) | 1,555 | (20,829 | ) | |||||||
| Reclassifications to earnings, net of tax: | ||||||||||||
| Net losses (gains) on cash flow hedging activities | 1,929 | 6,390 | (53,980 | ) | ||||||||
| Amortization of unrecognized pension and postretirement amounts | 9,665 | 5,875 | 5,359 | |||||||||
| Other comprehensive loss | (33,586 | ) | (44,855 | ) | (48,569 | ) | ||||||
| Total comprehensive earnings | 186,848 | 351,752 | 484,582 | |||||||||
| Total comprehensive loss attributable to noncontrolling interests | — | — | (18,229 | ) | ||||||||
| Total comprehensive earnings attributable to Hasbro, Inc. | $ | 186,848 | 351,752 | 502,811 | ||||||||
See accompanying notes to consolidated financial statements.
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HASBRO, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Fiscal Years Ended in December
(Thousands of Dollars)
| 2018 | 2017 | 2016 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net earnings | $ | 220,434 | 396,607 | 533,151 | ||||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||
| Depreciation of property, plant and equipment | 139,255 | 143,018 | 119,707 | |||||||||
| Impairment of goodwill | 86,253 | — | 32,858 | |||||||||
| Impairment of intangible assets | 31,303 | — | — | |||||||||
| Amortization of intangible assets | 28,703 | 28,818 | 34,763 | |||||||||
| Program production cost amortization | 43,906 | 35,798 | 35,931 | |||||||||
| Deferred income taxes | (11,094 | ) | 112,105 | (662 | ) | |||||||
| Stock-based compensation | 27,892 | 56,032 | 61,624 | |||||||||
| Other non-cash items | (18,879 | ) | (44,001 | ) | (16,011 | ) | ||||||
| Changes in operating assets and liabilities, net of acquired and disposed balances: | ||||||||||||
| Decrease (increase) in accounts receivable | 180,113 | (50,376 | ) | (149,923 | ) | |||||||
| Increase in inventories | (37,211 | ) | (25,301 | ) | (12,065 | ) | ||||||
| (Increase) decrease in prepaid expenses and other current assets | (11,929 | ) | 24,450 | 7,422 | ||||||||
| Program production costs | (131,984 | ) | (48,003 | ) | (48,690 | ) | ||||||
| Increase (decrease) in accounts payable and accrued liabilities | 107,426 | (80,461 | ) | 246,223 | ||||||||
| Net deemed repatriation tax | 27,027 | 181,305 | — | |||||||||
| Other, including long-term advances | (35,218 | ) | (5,613 | ) | (27,015 | ) | ||||||
| Net cash provided by operating activities | 645,997 | 724,378 | 817,313 | |||||||||
| Cash flows from investing activities | ||||||||||||
| Additions to property, plant and equipment | (140,426 | ) | (134,877 | ) | (154,900 | ) | ||||||
| Investments and acquisitions, net of cash acquired | (155,451 | ) | — | (12,436 | ) | |||||||
| Other | 9,400 | 3,396 | 28,945 | |||||||||
| Net cash utilized by investing activities | (286,477 | ) | (131,481 | ) | (138,391 | ) | ||||||
| Cash flows from financing activities | ||||||||||||
| Net proceeds from borrowings with maturity greater than three months | — | 493,878 | — | |||||||||
| Repayments of borrowings with maturity greater than three months | — | (350,000 | ) | — | ||||||||
| Net (repayments of) proceeds from other short-term borrowings | (142,357 | ) | (18,419 | ) | 8,978 | |||||||
| Purchases of common stock | (250,054 | ) | (151,311 | ) | (150,075 | ) | ||||||
| Stock-based compensation transactions | 29,999 | 29,431 | 42,207 | |||||||||
| Dividends paid | (309,258 | ) | (276,973 | ) | (248,881 | ) | ||||||
| Payments related to tax withholding for share-based compensation | (58,344 | ) | (31,994 | ) | (21,969 | ) | ||||||
| Other | (7,087 | ) | (6,785 | ) | (5,758 | ) | ||||||
| Net cash utilized by financing activities | (737,101 | ) | (312,173 | ) | (375,498 | ) | ||||||
| Effect of exchange rate changes on cash | (21,282 | ) | 18,225 | 2,111 | ||||||||
| (Decrease) increase in cash and cash equivalents | (398,863 | ) | 298,949 | 305,535 | ||||||||
| Cash and cash equivalents at beginning of year | 1,581,234 | 1,282,285 | 976,750 | |||||||||
| Cash and cash equivalents at end of year | $ | 1,182,371 | 1,581,234 | 1,282,285 | ||||||||
| Supplemental information | ||||||||||||
| Interest paid | $ | 82,258 | 89,294 | 88,525 | ||||||||
| Income taxes paid | $ | 117,854 | 115,753 | 98,913 | ||||||||
See accompanying notes to consolidated financial statements.
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HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity and Redeemable Noncontrolling Interests
(Thousands of Dollars)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders’ Equity | Redeemable Noncontrolling Interests | ||||||||||||||||||||||
| Balance, December 27, 2015 | $ | 104,847 | 893,630 | 3,852,321 | (146,001 | ) | (3,040,895 | ) | $ | 1,663,902 | $ | 40,170 | ||||||||||||||||
| Net earnings attributable to Hasbro, Inc. | — | — | 551,380 | — | — | 551,380 | — | |||||||||||||||||||||
| Net loss attributable to noncontrolling interests | — | — | — | — | — | — | (18,229 | ) | ||||||||||||||||||||
| Other comprehensive loss | — | — | — | (48,569 | ) | — | (48,569 | ) | — | |||||||||||||||||||
| Stock-based compensation transactions | — | 30,230 | — | — | 10,479 | 40,709 | — | |||||||||||||||||||||
| Purchases of common stock | — | — | — | — | (151,331 | ) | (151,331 | ) | — | |||||||||||||||||||
| Stock-based compensation expense | — | 61,558 | — | — | 66 | 61,624 | — | |||||||||||||||||||||
| Dividends declared | — | — | (254,979 | ) | — | — | (254,979 | ) | — | |||||||||||||||||||
| Net contributions received from noncontrolling owners | — | — | — | — | — | — | 763 | |||||||||||||||||||||
| Balance, December 25, 2016 | $ | 104,847 | 985,418 | 4,148,722 | (194,570 | ) | (3,181,681 | ) | $ | 1,862,736 | $ | 22,704 | ||||||||||||||||
| Net earnings attributable to Hasbro, Inc. | — | — | 396,607 | — | — | 396,607 | — | |||||||||||||||||||||
| Impact of adoption of ASU 2016-09 | — | 916 | (697 | ) | — | — | 219 | |||||||||||||||||||||
| Acquisition of remaining interest in Backflip | — | 22,704 | — | — | — | 22,704 | (22,704 | ) | ||||||||||||||||||||
| Other comprehensive loss | — | — | — | (44,855 | ) | — | (44,855 | ) | — | |||||||||||||||||||
| Stock-based compensation transactions | — | (13,021 | ) | — | — | (16,001 | ) | (29,022 | ) | — | ||||||||||||||||||
| Purchases of common stock | — | — | — | — | (150,054 | ) | (150,054 | ) | — | |||||||||||||||||||
| Stock-based compensation expense | — | 54,588 | — | — | 1,444 | 56,032 | — | |||||||||||||||||||||
| Dividends declared | — | — | (284,410 | ) | — | — | (284,410 | ) | — | |||||||||||||||||||
| Balance, December 31, 2017 | $ | 104,847 | 1,050,605 | 4,260,222 | (239,425 | ) | (3,346,292 | ) | $ | 1,829,957 | $ | — | ||||||||||||||||
| Net earnings attributable to Hasbro, Inc. | — | — | 220,434 | — | — | 220,434 | — | |||||||||||||||||||||
| Impact of adoption of ASU 2018-02 | — | — | 21,503 | (21,503 | ) | — | — | |||||||||||||||||||||
| Issuance of shares for Saban purchase | — | 198,853 | — | — | 81,544 | 280,397 | — | |||||||||||||||||||||
| Other comprehensive loss | — | — | — | (33,586 | ) | — | (33,586 | ) | — | |||||||||||||||||||
| Stock-based compensation transactions | — | (2,075 | ) | — | — | (694 | ) | (2,769 | ) | — | ||||||||||||||||||
| Purchases of common stock | — | — | — | — | (250,054 | ) | (250,054 | ) | — | |||||||||||||||||||
| Stock-based compensation expense | — | 27,676 | — | — | 216 | 27,892 | — | |||||||||||||||||||||
| Dividends declared | — | — | (317,785 | ) | — | — | (317,785 | ) | — | |||||||||||||||||||
| Balance, December 30, 2018 | $ | 104,847 | 1,275,059 | 4,184,374 | (294,514 | ) | (3,515,280 | ) | $ | 1,754,486 | $ | — | ||||||||||||||||
See accompanying notes to consolidated financial statements.
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(1) Summary of Significant Accounting Policies
Preparation of Consolidated Financial Statements
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes thereto. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Hasbro, Inc. and all majority-owned subsidiaries (“Hasbro” or the “Company”). Investments representing 20% to 50% ownership interests in other companies are accounted for using the equity method. For those majority-owned subsidiaries that are not 100% owned by Hasbro, the interests of the minority owners are accounted for as noncontrolling interests. At December 30, 2018, the Company had no majority-owned subsidiaries.
All intercompany balances and transactions have been eliminated.
Fiscal Year
Hasbro’s fiscal year ends on the last Sunday in December. The fiscal years ended December 30, 2018 and December 25, 2016 were fifty-two week periods while the year ended December 31, 2017 was a fifty-three week period.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments purchased with an initial maturity to the Company of three months or less.
Marketable Securities
Included in marketable securities are investments in private investment funds. These investments are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets, and, due to the nature and business purpose of these investments, the Company has selected the fair value option which requires the Company to record the unrealized gains and losses on these investments in the consolidated statements of operations at the time they occur. Marketable securities also include common stock in a public company arising from a business relationship. This type of investment is also included in prepaid expenses and other current assets in the accompanying consolidated balance sheets; however, due to its nature and business purpose, the Company records unrealized gains and losses in accumulated other comprehensive loss in the consolidated balance sheets until it is sold or the decline in value is deemed to be other than temporary, at which point the gains or losses will be recognized in the consolidated statements of operations.
Accounts Receivable and Allowance for Doubtful Accounts
Credit is granted to customers predominantly on an unsecured basis. Credit limits and payment terms are established based on extensive evaluations made on an ongoing basis throughout the fiscal year with regard to the financial performance, cash generation, financing availability and liquidity status of each customer. The majority of customers are formally reviewed at least annually; more frequent reviews are performed based on the customer’s financial condition and the level of credit being extended. For customers on credit who are experiencing financial difficulties, management performs additional financial analyses before shipping orders. The Company uses a variety of financial transactions, based on availability and cost, to increase the collectability of certain of its accounts, including letters of credit, credit insurance, and requiring cash in advance of shipping.
The Company records an allowance for doubtful accounts based on management’s assessment of the business environment, customers’ financial condition, historical collection experience, accounts receivable aging and customer disputes.
Accounts receivable, net on the consolidated balance sheet represents amounts due from customers less the allowance for doubtful accounts as well as allowances for discounts, rebates and returns.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or net realizable value. Based upon a consideration of quantities on hand, actual and projected sales volume, anticipated product selling price and product lines
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planned to be discontinued, slow-moving and obsolete inventory is written down to its estimated net realizable value. At both December 30, 2018 and December 31, 2017, substantially all inventory is comprised of finished goods.
Equity Method Investment
For the Company’s equity method investments, only the Company’s investment in and amounts due to and from the equity method investment are included in the consolidated balance sheets and only the Company’s share of the equity method investment’s earnings (losses) is included in other expense, net in the consolidated statements of operations. Dividends, cash distributions, loans or other cash received from the equity method investment, additional cash investments, loan repayments or other cash paid to the investee are included in the consolidated statements of cash flows.
The Company reviews its equity method investments for impairment on a periodic basis. If it has been determined that the fair value of the equity investment is less than its related carrying value and that this decline is other-than-temporary, the carrying value of the investment is adjusted downward to reflect these declines in value. The Company has one significant equity method investment, its 40% interest in a joint venture with Discovery Communications, Inc. (“Discovery”).
The Company and Discovery are party to an option agreement with respect to this joint venture. The Company has recorded a liability for this option agreement at fair value which is included in other liabilities in the consolidated balance sheets. Unrealized gains and losses on this option are recognized in the consolidated statements of operations as they occur.
See notes 6 and 13 for additional information.
Redeemable Noncontrolling Interests
Redeemable noncontrolling interests are those noncontrolling interests which are or may become redeemable at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon occurrence of an event. The financial results and position of the redeemable noncontrolling interest are included in their entirety in the Company’s consolidated statements of operations and consolidated balance sheets. The value of the redeemable noncontrolling interests is presented in the consolidated balance sheets as temporary equity between liabilities and shareholders’ equity. Earnings (losses) attributable to the noncontrolling interest are presented as a separate line on the consolidated statements of operations which is necessary to identify those earnings specifically attributable to Hasbro.
Through 2016, the Company had one investment with a redeemable noncontrolling interest which was the Company’s 70% majority interest in Backflip Studios, LLC (“Backflip”). During the first quarter of 2017, the remaining 30% of Backflip was acquired by Hasbro for no additional consideration, making it a wholly-owned subsidiary of the Company.
Property, Plant and Equipment, Net
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using accelerated and straight-line methods to depreciate the cost of property, plant and equipment over their estimated useful lives. The principal lives, in years, used in determining depreciation rates of various assets are: land improvements 15 to 19, buildings and improvements 15 to 25 and machinery and equipment (including computer hardware and software) 3 to 12. Depreciation expense is classified in the consolidated statements of operations based on the nature of the property and equipment being depreciated. Tools, dies and molds are depreciated over a three-year period or their useful lives, whichever is less, using an accelerated method. The Company generally owns all tools, dies and molds related to its products.
Property, plant and equipment, net is reviewed for impairment whenever events or circumstances indicate the carrying value may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset or asset group. If such assets are considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying value of the assets exceeds their fair value wherein the fair value is the appraised value. Furthermore, assets to be disposed of are carried at the lower of the net book value or their estimated fair value less disposal costs.
Goodwill and Other Intangibles, Net
Goodwill results from acquisitions the Company has made over time. Substantially all of the other intangibles consist of the cost of acquired product rights. In establishing the value of such rights, the Company considers existing
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trademarks, copyrights, patents, license agreements and other product-related rights. These rights were valued on their acquisition date based on the anticipated future cash flows from the underlying product line. The Company has certain intangible assets related to the Tonka and Milton Bradley acquisitions that have an indefinite life.
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.
Goodwill and intangible assets deemed to have indefinite lives are not amortized and are tested for impairment at least annually. The annual goodwill test begins with a qualitative assessment, where qualitative factors and their impact on critical inputs are assessed to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company determines that a reporting unit has an indication of impairment based on the qualitative assessment, it is required to perform a quantitative assessment. Prior to the adoption of ASU 2017-04, the quantitative assessment consisted of a two-step process beginning with an estimation of fair value of the reporting unit using an income approach, which looked to the present value of expected future cash flows. The first step was a screen for potential impairment while the second step was to determine the implied fair value of the goodwill and compare it to its carrying amount on the balance sheet. Under ASU 2017-04, the Step 2 test was eliminated. As a result, once it has been determined that the carrying amount of a reporting unit exceeds its fair value, the excess carrying amount is recognized as an impairment loss.
During the fourth quarter of 2018, the Company recorded a non-cash impairment charge of $86,253 within administrative expense and in the Company’s Entertainment and Licensing segment, which was the full amount of remaining goodwill associated with the Backflip reporting unit. See further discussion in note 5.
Based on its qualitative assessment of goodwill for all reporting units with the exception of Backflip, the company concluded there was no other impairment of goodwill during 2018.
During the fourth quarter of 2017, and prior to the adoption of ASU 2017-04 which eliminated the Step 2 test from the impairment testing process, the Company performed a qualitative assessment with respect to goodwill associated with all but two of its reporting units and determined that it was not necessary to perform a quantitative assessment for the goodwill of these reporting units. The Company performed the first step of the quantitative two-step annual impairment test on the goodwill associated with Backflip and on the goodwill associated with the Company’s Entertainment reporting unit. As a result of the 2017 assessment the Company concluded that no impairments were indicated as the estimated fair values were in excess of the carrying values of the related reporting units.
During the fourth quarter of 2016, the Company performed a qualitative assessment with respect to goodwill associated with all but its Backflip reporting unit and determined that it was not necessary to perform a quantitative assessment for the goodwill of these reporting units. The Company performed a quantitative two-step annual impairment test related to its goodwill associated with Backflip. As a result of the 2016 annual impairment test, the Company concluded the goodwill associated with the Backflip reporting unit was impaired and recorded a non-cash impairment charge of $32,858 for the year ended December 25, 2016. No other impairments were indicated. See further discussion in note 5.
The remaining intangibles having definite lives are being amortized over periods ranging from four to twenty-five years, primarily using the straight-line method.
The Company reviews other intangibles with definite lives for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the asset to future undiscounted cash flows expected to be generated by the asset or asset group. If such assets were considered to be impaired, the impairment to be recognized would be measured by the amount by which the carrying value of the assets exceeds their fair value wherein that fair value is determined based on discounted cash flows. In the fourth quarter of 2018, the Company recorded non-cash impairments of $31,303. No impairments were recorded in 2017 or 2016. See further discussion in note 5.
Financial Instruments
Hasbro’s financial instruments include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and certain accrued liabilities. At December 30, 2018, the carrying cost of these instruments
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approximated their fair value. The Company’s financial instruments at December 30, 2018 also include long-term borrowings (see note 10 for carrying cost and related fair values) as well as certain assets and liabilities measured at fair value (see notes 13 and 17).
Revenue Recognition
Revenue is recognized when control of the promised goods is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
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 for further discussion.
Revenue recognition from the sale of finished products 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 products 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 was 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 are being recognized on a straight-line basis over the license period. While the impact of this change was not material to the year, it impacted 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.
The majority of the Company’s revenues are derived from sales of finished products to customers. Revenues from sales of finished products to customers accounted for 92% and 94% of the Company’s revenues for the years ended December 30, 2018 and December 31, 2017, respectively. When determining whether control of the finished products has transferred to the customer, the Company considers any future performance obligations. Generally, the Company has no post-shipment obligation on sales of finished products to customers and revenues from product sales are recognized upon passing of title to the customer, which is generally at the time of shipment. Any shipping and handling activities that are performed by the Company, whether before or after a customer has obtained control of the products, are considered activities to fulfill our obligation to transfer the products, and are recorded as incurred within selling, distribution, and administration expenses. The Company offers various discounts, rebates, allowances, returns, and markdowns to its customers (collectively, “allowances”), all of which are considered when determining the transaction price. Certain allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenues. Other allowances can vary depending on future outcomes such as customer sales volume (“variable consideration”). The Company estimates the amount of variable consideration using the expected value method. In estimating the amount of variable consideration using the expected value method, the Company considers various factors including but not limited to: customer terms, historical experience, any expected deviations from historical experience, and existing or expected market conditions. The Company then records an estimate of variable consideration as a reduction to revenues at the time of sale. The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change. Historically, adjustments to estimated variable consideration have not been material.
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The Company enters into contracts to license its intellectual property, which consists of its brands, in various channels including but not limited to: consumer products such as apparel or home goods, within formats such as on-line games, within venues such as theme parks, or within formats such as motion picture films. The licensees pay the Company either a sales-based or usage-based royalty, or a combination of both, for use of the brands, in some cases subject to minimum guaranteed amounts or fixed fees. The license of the Company’s brands provide access to the intellectual property over the term of the license, generally without any other performance obligation of the Company other than keeping the intellectual property active, and is therefore considered a right-to-access license of symbolic intellectual property. The Company records sales-based or usage-based royalty revenues for right-to-access licenses at the occurrence of the licensees’ subsequent sale or usage. When the arrangement includes a minimum guarantee, the Company records the minimum guarantee on a ratable basis over the term of the license period and does not record the sales-based or usage-based royalty revenues until they exceed the minimum guarantee.
The Company also produces television or streaming programming for licensing to third parties. The licensees typically pay a fixed fee for the license of the produced content. The content that the Company delivers to its licensees has stand-alone functionality, generally without any other performance obligation of the Company, and is therefore considered a right-to-use license of functional intellectual property. The Company records revenues for right-to-use licenses once the license period has commenced and the licensee has the ability to use the delivered content. In arrangements where the licensee pays the Company a fixed fee for multiple seasons or multiple series of programming, arrangement fees are recorded as revenues based upon their relative fair values.
The Company also develops application based digital games featuring its brands within the games. These games are hosted by third-party platform providers. The Company does not charge a fee to the end users for the download of the games or the ability to play the games. The end users make in-application purchases of digital currencies, via the Company’s platform providers, with such purchased digital currencies to be used in the games. The Company records revenues from in-application purchases based on the usage patterns of the players. For the majority of the Company’s digital games, players use their currencies in the month of purchase, and therefore revenues are recorded at the time of sale. The Company has no additional performance obligations other than delivery of the currency via its platform providers. The Company controls all aspects of the goods delivered to the consumer. The third-party platform providers are providing only the service of hosting and administering receipt from the end users. The Company is the principal in the arrangement and records the gross revenues within Net Revenues in our Consolidated Statements of Operations. The fee charged by the third-party platform providers to the Company are recorded within cost of sales.
Costs of Sales
Cost of sales primarily consists of purchased materials, labor, tooling, manufacturing overheads and other inventory-related costs such as obsolescence.
Royalties
The Company enters into license agreements with strategic partners, inventors, designers and others for the use of intellectual properties in its products. These agreements may call for payment in advance or future payment of minimum guaranteed amounts. Amounts paid in advance are recorded as an asset and charged to expense when the related revenue is recognized in the consolidated statements of operations. If all or a portion of the minimum guaranteed amounts appear not to be recoverable through future use of the rights obtained under the license, the non-recoverable portion of the guaranty is charged to expense at that time.
Advertising
Production costs of commercials are expensed in the fiscal year during which the production is first aired. The costs of other advertising and promotion programs are expensed in the fiscal year incurred.
Program Production Costs
The Company incurs costs in connection with the production of television programming and motion pictures. These costs are capitalized by the Company as they are incurred and amortized using the individual-film-forecast method, whereby these costs are amortized in the proportion that the current year’s revenues bear to management’s estimate of total ultimate revenues as of the beginning of such period related to the program. These capitalized costs are reported at the lower of cost, less accumulated amortization, or fair value, and reviewed for impairment when an event or change in circumstances occurs that indicates that impairment may exist. The fair value is determined using a discounted cash flow model which is primarily based on management’s future revenue and cost estimates.
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Shipping and Handling
Hasbro expenses costs related to the shipment and handling of goods to customers as incurred. For 2018, 2017 and 2016, these costs were $206,307, $190,999 and $180,270, respectively, and are included in selling, distribution and administration expenses.
Operating Leases
Hasbro records lease expense on a straight-line basis inclusive of rent concessions and increases. Reimbursements from lessors for leasehold improvements are deferred and recognized as a reduction to lease expense over the remaining lease term.
In February 2016, the FASB issued Accounting Standards Update No. ASU 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. 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.
Income Taxes
Hasbro uses the asset and liability approach for financial accounting and reporting of income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates expected to apply to taxable income in years in which those temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company uses a two-step process for the measurement of uncertain tax positions that have been taken or are expected to be taken in a tax return. The first step is a determination of whether the tax position should be recognized in the consolidated financial statements. The second step determines the measurement of the tax position. The Company records potential interest and penalties on uncertain tax positions as a component of income tax expense.
The Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Tax Income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A Topic 740, No. 5 “Accounting for Global Intangible Low-Taxed Income,” states that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI as a current period expense when incurred.
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Foreign Currency Translation
Foreign currency assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues, costs and expenses are translated at weighted average exchange rates during each reporting period. Net earnings include gains or losses resulting from foreign currency transactions and, when required, translation gains and losses resulting from the use of the U.S. dollar as the functional currency in highly inflationary economies. Other gains and losses resulting from translation of financial statements are a component of other comprehensive earnings (loss).
Pension Plans, Postretirement and Postemployment Benefits
Pension expense and related amounts in the consolidated balance sheets are based on actuarial computations of current and future benefits. Actual results that differ from the actuarial assumptions are accumulated and, if outside a certain corridor, amortized over future periods and, therefore affect recognized expense in future periods. The corridor used for this purpose is equal to 10% of the greater of plan liabilities or market asset values, and future periods vary by plan, but generally equal the actuarially determined average expected future working lifetime of active plan participants. The Company’s policy is to fund amounts which are required by applicable regulations and which are tax deductible. The estimated amounts of future payments to be made under other retirement programs are being accrued currently over the period of active employment and are also included in pension expense. Hasbro has a contributory postretirement health and life insurance plan covering substantially all employees who retire under any of its United States defined benefit pension plans and meet certain age and length of service requirements. The cost of providing these benefits on behalf of employees who retired prior to 1993 has been substantially borne by the Company.
The cost of providing benefits on behalf of substantially all employees who retire after 1992 is borne by the employee. It also has several plans covering certain groups of employees, which may provide benefits to such employees following their period of employment but prior to their retirement. The Company measures the costs of these obligations based on actuarial computations.
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 was effective for annual reporting periods beginning after December 15, 2017, and early adoption was permitted. The Company adopted this standard January 1, 2018 and the adoption of this standard did not have a material impact on the Company’s results or consolidated financial statements in the fiscal year ended December 30, 2018.
In February 2018, the Compensation Committee of the Company’s Board of Directors approved a resolution to terminate the Company’s U.S. defined benefit pension plan (“Plan”). The Company had frozen the Plan’s benefits effective at the end of December 2007. During 2018 the Company commenced the plan termination process and expects to complete the transfer of the Plan’s assets to a third-party administrator, which the Company expects to complete in the second quarter of 2019.
Stock-Based Compensation
The Company has a stock-based employee compensation plan for employees and non-employee members of the Company’s Board of Directors. Under this plan the Company may grant stock options at or above the fair market value of the Company’s stock, as well as restricted stock, restricted stock units and contingent stock performance awards. All awards are measured at fair value at the date of the grant and amortized as expense on a straight-line basis over the requisite service period of the award. For awards contingent upon Company performance, the measurement of the expense for these awards is based on the Company’s current estimate of its performance over the performance period. For awards contingent upon the achievement of market conditions, the probability of satisfying the market condition is considered in the estimation of the grant date fair value. See note 14 for further discussion.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements including (1) a requirement to prospectively record all of the tax effects related to share-based payments at settlement (or expiration) through the income statement; (2) a requirement that all tax-related cash
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flows resulting from share-based payments be reported as operating activities on the statement of cash flows; (3) the removal of the requirement to withhold shares upon settlement of an award at the minimum statutory withholding requirement; (4) a requirement that all cash payments made to taxing authorities on the employees’ behalf for withheld shares shall be presented as financing activities in the statements of cash flows; and (5) entities will be permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards choosing either to estimate forfeitures as required today or recognize forfeitures as they occur. ASU 2016-09 was effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The Company adopted ASU 2016-09 in the first quarter of 2017. The impact of the adoption included the following:
| • | Prospectively, the requirement to record all of the tax effects related to share-based payments at settlement through the income statement. For the years ended December 30, 2018 and December 31, 2017, excess tax benefits of $10,757 and $32,116, respectively, were recorded to income tax expense. |
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| • | Entities are permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards choosing either to estimate forfeitures as previously required or recognize forfeitures as they occur. The Company elected to change its method of accounting for forfeitures from estimating the number of stock-based awards expected to vest, to accounting for forfeitures as they occur which resulted in a one-time charge, net of tax, of $700 to retained earnings recorded during the first quarter of 2017. |
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Risk Management Contracts
Hasbro uses foreign currency forward contracts to mitigate the impact of currency rate fluctuations on firmly committed and projected future foreign currency transactions. These over-the-counter contracts, which hedge future purchases of inventory and other cross-border currency requirements not denominated in the functional currency of the business unit, are primarily denominated in United States and Hong Kong dollars as well as Euros. All contracts are entered into with a number of counterparties, all of which are major financial institutions. The Company believes that a default by a counterparty would not have a material adverse effect on the financial condition of the Company. Hasbro does not enter into derivative financial instruments for speculative purposes.
At the inception of the contracts, Hasbro designates its derivatives as either cash flow or fair value hedges. The Company formally documents all relationships between hedging instruments and hedged items as well as its risk management objectives and strategies for undertaking various hedge transactions. All hedges designated as cash flow hedges are linked to forecasted transactions and the Company assesses, both at the inception of the hedge and on an on-going basis, the effectiveness of the derivatives used in hedging transactions in offsetting changes in the cash flows of the forecasted transaction. The ineffective portion of a hedging derivative, if any, is recognized in the consolidated statements of operations.
The Company records all derivatives, such as foreign currency exchange contracts, on the consolidated balance sheets at fair value. Changes in the derivative fair values that are designated as cash flow hedges and are effective are deferred and recorded as a component of Accumulated Other Comprehensive Loss (“AOCE”) until the hedged transactions occur and are then recognized in the consolidated statements of operations. The Company’s foreign currency contracts hedging anticipated cash flows are designated as cash flow hedges. When it is determined that a derivative is not highly effective as a hedge, the Company discontinues hedge accounting prospectively. Any gain or loss deferred through that date remains in AOCE until the forecasted transaction occurs, at which time it is reclassified to the consolidated statements of operations. To the extent the transaction is no longer deemed probable of occurring, hedge accounting treatment is discontinued and amounts deferred would be reclassified to the consolidated statements of operations. In the event hedge accounting requirements are not met, gains and losses on such instruments are included in the consolidated statements of operations. The Company uses derivatives to economically hedge intercompany loans denominated in foreign currencies. The Company does not use hedge accounting for these contracts as changes in the fair value of these contracts are substantially offset by changes in the fair value of the intercompany loans.
Prior to the issuance of certain long-term notes due 2021 and 2044, the Company entered into a forward-starting interest rate swap contract to hedge the anticipated U.S. Treasury interest rates on the anticipated debt issuance. These instruments, which were designated and effective as hedges, were terminated on the date of the related debt issuance and the then fair value of these instruments was recorded to AOCE and amortized through the consolidated statements of operations using an effective interest rate method over the life of the related debt.
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Net Earnings Per Common Share
Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding for the year as well as awards that have not been issued but all contingencies have been met. Diluted net earnings per share is similar except that the weighted average number of shares outstanding is increased by dilutive securities, and net earnings are adjusted, if necessary, for certain amounts related to dilutive securities. Dilutive securities include shares issuable upon exercise of stock options for which the market price exceeds the exercise price, less shares which could have been purchased by the Company with the related proceeds. Dilutive securities also include shares issuable under restricted stock unit award agreements. Options and restricted stock unit awards totaling 1,077, 499 and 277 for 2018, 2017, and 2016, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive.
A reconciliation of net earnings and average number of shares for each of the three fiscal years ended December 30, 2018 is as follows:
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| Basic | Diluted | Basic | Diluted | Basic | Diluted | |||||||||||||||||||
| Net earnings attributable to Hasbro, Inc. | $ | 220,434 | 220,434 | 396,607 | 396,607 | 551,380 | 551,380 | |||||||||||||||||
| Average shares outstanding | 126,132 | 126,132 | 125,039 | 125,039 | 125,292 | 125,292 | ||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||
| Options and other share-based awards | — | 758 | — | 1,992 | — | 1,674 | ||||||||||||||||||
| Equivalent shares | 126,132 | 126,890 | 125,039 | 127,031 | 125,292 | 126,966 | ||||||||||||||||||
| Net earnings attributable to Hasbro, Inc. per share | $ | 1.75 | 1.74 | 3.17 | 3.12 | 4.40 | 4.34 | |||||||||||||||||
(2) Revenue Recognition
In addition to the required disclosures below, please see further discussion of the Company revenue recognition policy in note 1.
As of December 30, 2018, the Company did not have any material future performance commitments for film streaming or television orders that have not yet been delivered.
Contract Assets and Liabilities
A contract asset is defined as an entity’s right to consideration for goods or services that the entity has transferred to a customer. A contract liability is defined to occur if the customer’s payment of consideration precedes the entity’s performance and represents the entity’s obligation to transfer goods or services to a customer for which the entity has received consideration. The Company occasionally will require payment from customers for finished product in advance of the customer receiving control of the finished product. In these situations, the Company defers revenue on the advanced payment until the customer has control of the finished product, generally within the next month. Within our Entertainment and Licensing segment, the Company may receive royalty payments from licensees in advance of the licensees’ subsequent sales to their customers, or in advance of the Company’s performance obligation being satisfied. The Company defers revenues on these advanced payments until its performance obligation is satisfied. The aggregate deferred revenues are recorded as liabilities and were $50,759, and $7,549 as of December 30, 2018 and December 31, 2017, respectively, and the changes in deferred revenues are not material to the Company’s consolidated statement of operations for the years ended December 30, 2018 and December 31, 2017. The Company records contract assets in the case of minimum guarantees that are being recognized ratably over the term of the respective license periods. At December 30, 2018 and December 31, 2017, these contract assets were not material to the Company’s consolidated balance sheets.
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable on the consolidated balance sheets as of December 30, 2018 and December 31, 2017 are primarily from contracts with customers. In the year ended December 30, 2018, the Company recorded a bad debt charge of approximately $49,000 related to Toys“R”Us. In the year ended December 31, 2017, the Company recorded a bad debt charge of approximately $18,000 related to Toys“R”Us. The Company had no other material bad debt expense in the years ended December 30, 2018, December 31, 2017, or December 30, 2016.
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Disaggregation of revenues
The Company disaggregates its revenues from contracts with customers by segment: US and Canada, International, Entertainment and Licensing, and Global Operations. The Company further disaggregates revenues within its International segment by major geographic region: Europe, Latin America, and Asia Pacific. Finally, the Company disaggregates its revenues by brand portfolio into four brand categories: Franchise brands, Partner brands, Hasbro gaming, and Emerging brands. We believe these collectively depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. See note 21, for further information.
(3) Other Comprehensive Earnings (Loss)
Components of other comprehensive earnings (loss) are presented within the consolidated statements of comprehensive earnings. The following table presents the related tax effects on changes in other comprehensive earnings (loss) for each of the three fiscal years ended December 30, 2018.
| 2018 | 2017 | 2016 | ||||||||||
| Other comprehensive earnings (loss), tax effect: | ||||||||||||
| Tax benefit (expense) on unrealized holding gains | $ | 581 | 221 | (94 | ) | |||||||
| Tax (expense) benefit on cash flow hedging activities | (930 | ) | 4,850 | 1,340 | ||||||||
| Tax benefit (expense) on unrecognized pension and postretirement amounts | 6,085 | (2,363 | ) | 12,945 | ||||||||
| Reclassifications to earnings, tax effect: | ||||||||||||
| Tax expense (benefit) on cash flow hedging activities | 817 | (4,881 | ) | 4,098 | ||||||||
| Tax benefit on amortization of unrecognized pension and postretirement amounts reclassified to the consolidated statements of operations | (2,729 | ) | (3,482 | ) | (3,038 | ) | ||||||
| Total tax effect on other comprehensive earnings (loss) | $ | 3,824 | (5,655 | ) | 15,251 | |||||||
Changes in the components of accumulated other comprehensive earnings (loss), net of tax are as follows:
| Pension and Postretirement Amounts | Gains (Losses) on Derivative Instruments | Unrealized Holding Gains on Available for-Sale Securities | Foreign Currency Translation Adjustments | Total Accumulated Other Comprehensive Earnings (Loss) | ||||||||||||||||
| 2018 | ||||||||||||||||||||
| Balance at December 31, 2017 | $ | (110,971 | ) | (32,827 | ) | 1,034 | (96,661 | ) | (239,425 | ) | ||||||||||
| Adoption of ASU 2018-02 | (18,065 | ) | (3,660 | ) | 222 | — | (21,503 | ) | ||||||||||||
| Current period other comprehensive earnings (loss) | (23,763 | ) | 36,107 | (2,000 | ) | (55,524 | ) | (45,180 | ) | |||||||||||
| Reclassifications from AOCE to earnings | 9,665 | 1,929 | — | — | 11,594 | |||||||||||||||
| Balance at December 30, 2018 | $ | (143,134 | ) | 1,549 | (744 | ) | (152,185 | ) | (294,514 | ) | ||||||||||
| 2017 | ||||||||||||||||||||
| Balance at December 25, 2016 | $ | (118,401 | ) | 51,085 | 1,424 | (128,678 | ) | (194,570 | ) | |||||||||||
| Current period other comprehensive earnings (loss) | 1,555 | (90,302 | ) | (390 | ) | 32,017 | (57,120 | ) | ||||||||||||
| Reclassifications from AOCE to earnings | 5,875 | 6,390 | — | — | 12,265 | |||||||||||||||
| Balance at December 31, 2017 | $ | (110,971 | ) | (32,827 | ) | 1,034 | (96,661 | ) | (239,425 | ) | ||||||||||
| 2016 | ||||||||||||||||||||
| Balance at December 27, 2015 | $ | (102,931 | ) | 79,317 | 1,258 | (123,645 | ) | (146,001 | ) | |||||||||||
| Current period other comprehensive earnings (loss) | (20,829 | ) | 25,748 | 166 | (5,033 | ) | 52 | |||||||||||||
| Reclassifications from AOCE to earnings | 5,359 | (53,980 | ) | — | — | (48,621 | ) | |||||||||||||
| Balance at December 25, 2016 | $ | (118,401 | ) | 51,085 | 1,424 | (128,678 | ) | (194,570 | ) | |||||||||||
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Gains (Losses) on Derivative Instruments
At December 30, 2018, the Company had remaining net deferred gains on foreign currency forward contracts, net of tax, of $20,861 in AOCE. These instruments hedge payments related to inventory purchased in the fourth quarter of 2018 or forecasted to be purchased from 2019 through 2022, intercompany expenses expected to be paid or received during 2019, television and movie production costs paid in 2018 or expected to be paid in 2019, and cash receipts for sales forecasted to be made in 2019 through 2021. These amounts will be reclassified into the consolidated statements of operations upon the sale of the related inventory or recognition of the related sales, royalties or expenses.
In addition to foreign currency forward contracts, the Company entered into hedging contracts on future interest payments related to the long-term notes due 2021 and 2044. At the date of debt issuance, these contracts were terminated and the fair value on the date of settlement was deferred in AOCE and is being amortized to interest expense over the life of the related notes using the effective interest rate method. At December 30, 2018, deferred losses, net of tax, of $19,313 related to these instruments remained in AOCE. For the year ended December 30, 2018, losses, net of tax of $1,394 related to these hedging instruments were reclassified from AOCE to net earnings. For each of the years ended December 31, 2017 and December 25, 2016, losses, net of tax of $1,170 and $1,148 related to these hedging instruments were reclassified from AOCE to net earnings.
In 2018, 2017 and 2016, net gains on cash flow hedging activities reclassified to earnings, net of tax, included (losses) gains of $(5,807), $(5,497) and $1,428, respectively, as a result of hedge ineffectiveness.
Of the net deferred gains included in AOCE at December 30, 2018, the Company expects approximately $15,218 to be reclassified to the consolidated statements of operations within the next 12 months. However, the amount ultimately realized in earnings is dependent on the fair value of the hedging instruments on the settlement dates.
See notes 15 and 17 for additional discussion on reclassifications from AOCE to earnings.
(4) Property, Plant and Equipment
| 2018 | 2017 | |||||||
| Land and improvements | $ | 3,243 | 3,350 | |||||
| Buildings and improvements | 191,096 | 193,940 | ||||||
| Machinery, equipment and software | 446,628 | 405,209 | ||||||
| 640,967 | 602,499 | |||||||
| Less accumulated depreciation | 462,710 | 422,052 | ||||||
| 178,257 | 180,447 | |||||||
| Tools, dies and molds, net of accumulated depreciation | 78,216 | 79,263 | ||||||
| Total property, plant and equipment, net | $ | 256,473 | 259,710 | |||||
Expenditures for maintenance and repairs which do not materially extend the life of the assets are charged to operations as incurred. In 2018, 2017 and 2016 the Company recorded $139,255, $143,018 and $119,707, respectively, of depreciation expense.
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(5) Goodwill and Intangibles
Goodwill
Changes in the carrying amount of goodwill, by operating segment, for the years ended December 30, 2018 and December 31, 2017 are as follows:
| U.S. and Canada | International | Entertainment and Licensing | Total | |||||||||||||
| 2018 | ||||||||||||||||
| Balance at December 31, 2017 | $ | 296,978 | 170,699 | 105,386 | 573,063 | |||||||||||
| Impairment during the period | — | — | (86,253 | ) | (86,253 | ) | ||||||||||
| Foreign exchange translation | — | (338 | ) | (591 | ) | (929 | ) | |||||||||
| Balance at December 30, 2018 | $ | 296,978 | 170,361 | 18,542 | 485,881 | |||||||||||
| 2017 | ||||||||||||||||
| Balance at December 25, 2016 | $ | 296,978 | 169,833 | 103,744 | 570,555 | |||||||||||
| Foreign exchange translation | — | 866 | 1,642 | 2,508 | ||||||||||||
| Balance at December 31, 2017 | $ | 296,978 | 170,699 | 105,386 | 573,063 | |||||||||||
A portion of the Company’s goodwill and other intangible assets reside in the Corporate segment of the business. For purposes of the goodwill impairment testing, these assets are allocated to the reporting units within the Company’s operating segments.
The Company performs an annual impairment assessment on goodwill. This annual impairment assessment is performed in the fourth quarter of the Company’s fiscal year. In addition, if an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim impairment test at that time.
During the fourth quarter of 2018 the Company adopted (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.
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 game currently in or planned for development and the addition of partners for the development of future games releases. The modifications resulted in changes to the long-term projections for the Backflip business. The goodwill impairment analysis involved comparing the Backflip carrying value to its estimated fair value, which was calculated based on the Income Approach. Discounted cash flows serve as the primary basis for the Income Approach. The Company utilized forecasted cash flows for the Backflip reporting unit that included assumptions including but not limited to: expected revenues to be realized based on planned future mobile game releases, expected EBITDA margins derived in part based on expected future royalty costs, advertising and marketing costs, development costs, overhead costs, and expected future tax rates. The cash flows beyond the forecast period were estimated using a terminal value growth rate of 3%. To calculate the fair value of the future cash flows under the Income Approach, a discount rate of 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. Based on this assessment, the Company recorded an impairment charge of $86,253 in the fourth quarter of 2018, in the Company’s Entertainment and Licensing segment, which was the full amount of remaining goodwill associated with the Backflip reporting unit.
During the fourth quarter of 2016 in conjunction with the Company’s annual review for impairment, the Company recorded an impairment charge of $32,858 after completing its evaluation of the Backflip reporting unit. The Company’s 2016 evaluation was dependent in large part on the performance of related product launches that took place during the fourth quarter of 2016 in addition to revised expectations regarding the timing of future product launches at that time.
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Based on its qualitative assessment of goodwill for all reporting units with the exception of Backflip, the company concluded there was no other impairment of goodwill during 2018 or 2016. The Company completed its annual impairment tests of goodwill in the fourth quarter of 2017 and concluded that there was no impairment of its goodwill.
Other Intangibles, Net
A summary of the Company’s other intangibles, net at December 30, 2018 and December 31, 2017:
| 2018 | 2017 | |||||||
| Acquired product rights | $ | 1,309,344 | 789,940 | |||||
| Licensed rights of entertainment properties | 30,501 | 256,555 | ||||||
| Accumulated amortization | (721,741 | ) | (904,851 | ) | ||||
| Amortizable intangible assets | 618,104 | 141,644 | ||||||
| Product rights with indefinite lives | 75,738 | 75,738 | ||||||
| Total other intangibles, net | $ | 693,842 | 217,382 | |||||
Certain intangible assets relating to rights obtained in the Company’s acquisition of Milton Bradley in 1984 and Tonka in 1991 are not amortized. These rights were determined to have indefinite lives and are included as product rights with indefinite lives in the table above. The Company tests these assets for impairment on an annual basis in the fourth quarter of each year or when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. The Company completed its annual impairment tests of indefinite-lived intangible assets in the fourth quarter of 2018, 2017, and 2016 concluding that there was no impairment of these assets. The Company’s other intangible assets are amortized over their remaining useful lives, and accumulated amortization of these other intangibles is reflected in other intangibles, net in the accompanying consolidated balance sheets.
Intangible assets are reviewed for indications of impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.
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 assets were impaired. The Company calculated the fair value of the intangible assets based on a discounted cash flow, which resulted in a charge of $31,303 million recorded within administrative expense and in the Company’s Corporate and Eliminations segment.
Other than the intangible assets discussed above, no other indications of impairment existed. The Company will continue to incur amortization expense related to the use of acquired and licensed rights to produce various products. A portion of the amortization of these product rights will fluctuate depending on brand activation, related revenues during an annual period and future expectations, as well as rights reaching the end of their useful lives. The Company currently estimates amortization expense related to the above intangible assets for the next five years to be approximately:
| 2019 | $ | 47,000 | ||
| 2020 | 49,000 | |||
| 2021 | 36,000 | |||
| 2022 | 36,000 | |||
| 2023 | 27,000 |
(6) Equity Method Investment
The Company owns an interest in a joint venture, Discovery Family Channel (the “Network”), with Discovery Communications, Inc. (“Discovery”). The Company has determined that it does not meet the control requirements to consolidate the Network and accounts for the investment using the equity method of accounting. The Network was established to create a cable television network in the United States dedicated to high-quality children’s and family entertainment. In October 2009, the Company purchased an initial 50% share in the Network for a payment of $300,000 and certain future tax payments based on the value of certain tax benefits expected to be received by the Company. On September 23, 2014, the Company and Discovery amended their relationship with respect to the Network and Discovery increased its equity interest in the Network to 60% while the Company retained a 40% equity interest in the Network.
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In connection with the amendment, the Company and Discovery entered into an option agreement related to the Company’s remaining 40% ownership in the Network, exercisable during the one-year period following December 31, 2021. The exercise price of the option agreement is based upon 80% of the then fair market value of the Network, subject to a fair market value floor. At December 30, 2018, and December 31, 2017, the fair market value of this option was $23,440 and $23,980, respectively and was included as a component of other liabilities. During 2018, 2017 and 2016, the Company recorded (gains) losses of $(540), $(4,790) and $410 in other (income) expense, net relating to the change in fair value of this option.
The Company also has a related liability due to Discovery under the existing tax sharing agreement. The balance of the associated liability, including imputed interest, was $25,289 and $30,043 at December 30, 2018 and December 31, 2017, respectively, and is included as a component of other liabilities in the accompanying consolidated balance sheets. The Company recognized a gain of $19,911 in the fourth quarter of 2017 related to a reduction of this liability due to the reduction of the future payments under the agreement as a result of U.S. tax reform passed in December 2017. During 2018, 2017 and 2016, the Company made payments under the tax sharing agreement to Discovery of $7,087, $6,785 and $6,520, respectively.
The Company has a license agreement with the Network that requires the payment of royalties by the Company to the Network based on a percentage of revenue derived from products related to television shows broadcast by the joint venture. The license includes a minimum royalty guarantee of $125,000, which was paid in five annual installments of $25,000 per year, commencing in 2009, which can be earned out over approximately a 12-year period. As of December 30, 2018 and December 31, 2017, the Company had $41,041 and $55,072, respectively, of prepaid royalties related to this agreement, $13,216 and $15,958, respectively, of which are included in prepaid expenses and other current assets and $27,825 and $39,114, respectively, of which are included in other assets. The Company and the Network are also parties to an agreement under which the Company will provide the Network with an exclusive first look in the U.S. to license certain types of programming developed by the Company based on its intellectual property. In the event the Network licenses the programming from the Company to air, it is required to pay the Company a license fee.
As of December 30, 2018 and December 31, 2017 the Company’s investment in the Network totaled $236,934 and $237,996, respectively. The Company’s share in the earnings of the Network for the years ended December 30, 2018, December 31, 2017 and December 25, 2016 totaled $21,145, $23,270 and $23,764, respectively and is included as a component of other (income) expense, net in the consolidated statements of operations. The Company also enters into certain other transactions with the Network including the licensing of television programming and the purchase of advertising. During 2018, 2017 and 2016, these transactions were not material.
(7) Program Production Costs
Program production costs are included in other assets and consist of the following at December 30, 2018 and December 31, 2017:
| 2018 | 2017 | |||||||
| Television programming | ||||||||
| Released, less amortization | $ | 30,800 | 40,386 | |||||
| In production | 42,768 | 31,596 | ||||||
| Pre-production | 489 | 326 | ||||||
| Theatrical programming | ||||||||
| Released, less amortization | 71,339 | 16,027 | ||||||
| In production | 9,503 | — | ||||||
| Pre-production | 2,452 | 4,526 | ||||||
| Total program production costs | $ | 157,351 | 92,861 | |||||
Based on management’s total revenue estimates at December 30, 2018, $42,389 of $102,139 unamortized programming costs relating to released productions are expected to be amortized during fiscal 2019. Based on current estimates, the Company expects to amortize all of the programming costs relating to released productions during the next four years.
(8) Financing Arrangements
At December 30, 2018, Hasbro had available an unsecured committed line and unsecured uncommitted lines of credit from various banks approximating $1,100,000 and $148,000, respectively. Substantially all of the short-term
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borrowings outstanding at the end of 2018 and 2017 represent borrowings made under, or supported by, these lines of credit. Borrowings under the lines of credit were made by certain international affiliates of the Company on terms and at interest rates generally extended to companies of comparable creditworthiness in those markets. The weighted average interest rates of the outstanding borrowings under the uncommitted lines of credit as of December 30, 2018 and December 31, 2017 were 3.92% and 4.32%, respectively. The Company had no borrowings outstanding under its committed line of credit at December 30, 2018. During 2018, Hasbro’s working capital needs were fulfilled by cash available and cash generated from operations.
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 $1,100,000 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 $500,000. The Amended Agreement extends the term of our prior facility from March 30, 2020 to November 26, 2023. 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 Company was in compliance with all covenants as of and for the fiscal year ended December 30, 2018.
The Company pays a commitment fee (0.10% as of December 30, 2018) based on the unused portion of the facility and interest equal to a Base Rate or Eurocurrency Rate plus a spread on borrowings under the facility. The Base Rate is determined based on either the Federal Funds Rate plus a spread, Prime Rate or Eurocurrency Rate plus a spread. The commitment fee and the amount of the spread to the Base Rate or Eurocurrency Rate both vary based on the Company’s long-term debt ratings and the Company’s leverage. At December 30, 2018, the interest rate under the facility was equal to Eurocurrency Rate plus 1.125%.
The Company has an agreement with a group of banks providing a commercial paper program (the “Program”). Under the Program, at the Company’s request the banks may either purchase from the Company, or arrange for the sale by the Company of, unsecured commercial paper notes. Borrowings under the Program are supported by the aforementioned unsecured committed line of credit and the Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of $1,000,000. The maturities of the notes may vary but may not exceed 397 days. Subject to market conditions, the notes will be sold under customary terms in the commercial paper market and will be issued at a discount to par, or alternatively, will be sold at par and will bear varying interest rates based on a fixed or floating rate basis. The interest rates will vary based on market conditions and the ratings assigned to the notes by the credit rating agencies at the time of issuance. At December 30, 2018, the Company did not have any notes outstanding under the Program. At December 31, 2017, the Company had notes outstanding under the Program of $137,500 with a weighted average interest rate of 1.85%.
(9) Accrued Liabilities
Components of accrued liabilities for the fiscal years ended on December 30, 2018 and December 31, 2017 are as follows:
| 2018 | 2017 | |||||||
| Royalties | $ | 151,852 | 148,858 | |||||
| Advertising | 68,811 | 75,483 | ||||||
| Payroll and management incentives | 46,472 | 79,976 | ||||||
| Dividends | 79,461 | 70,936 | ||||||
| Severance | 76,920 | 10,952 | ||||||
| Deferred payment on Power Rangers Acquisition | 100,000 | — | ||||||
| Other Taxes | 75,973 | 57,155 | ||||||
| Other | 331,574 | 304,904 | ||||||
| Total accrued liabilities | $ | 931,063 | 748,264 | |||||
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(10) Long-Term Debt
Components of long-term debt for the fiscal years ended on December 30, 2018 and December 31, 2017 are as follows:
| 2018 | 2017 | |||||||||||||||
| Carrying Cost | Fair Value | Carrying Cost | Fair Value | |||||||||||||
| 6.35% Notes Due 2040 | $ | 500,000 | 535,000 | 500,000 | 601,800 | |||||||||||
| 3.50% Notes Due 2027 | 500,000 | 457,350 | 500,000 | 488,300 | ||||||||||||
| 5.10% Notes Due 2044 | 300,000 | 272,640 | 300,000 | 313,320 | ||||||||||||
| 3.15% Notes Due 2021 | 300,000 | 297,600 | 300,000 | 302,640 | ||||||||||||
| 6.60% Debentures Due 2028 | 109,895 | 123,346 | 109,895 | 131,390 | ||||||||||||
| Total long-term debt | 1,709,895 | 1,685,936 | 1,709,895 | 1,837,450 | ||||||||||||
| Less: Deferred debt expenses | 14,803 | — | 16,286 | — | ||||||||||||
| Long-term debt | $ | 1,695,092 | 1,685,936 | 1,693,609 | 1,837,450 | |||||||||||
In September 2017, the Company issued $500,000 of Notes due in 2027 that bear interest at a fixed rate of 3.50% (the “3.50% Notes”). Net proceeds from the issuance of the 3.50% Notes, after deduction of $6,122 of underwriting discount and debt issuance expenses, totaled $493,878. These costs are being amortized over the life of the 3.50% Notes, or 10 years. The Company may redeem the 3.50% Notes at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase, plus 25 basis points. In addition, three months prior to their maturity date, the Company may redeem at its option the 3.50% Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the 3.50% Notes to be redeemed.
The proceeds from this debt issuance were used to repay the $350,000 aggregate principal amount of its 6.30% Notes that matured during the third quarter of 2017. The Company used the remaining net proceeds for general corporate purposes.
The Company may redeem the Notes due in 2021 and 2044 at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase. Prior to the issuance of these Notes, the Company held forward-starting interest rate swap contracts to hedge the variability in the anticipated underlying U.S. Treasury interest rate associated with the expected issuance of the Notes. At the date of issuance, these contracts were terminated and the Company paid $33,306, the fair value of the contracts on that date, to settle. Of this amount, $6,373 related to 3.15% Notes Due 2021 and $26,933 related to 5.10% Notes Due 2044, which have been deferred in AOCE and are being amortized to interest expense over the life of the respective notes using the effective interest rate method.
The fair values of the Company’s long-term debt are considered Level 3 fair values (see note 13 for further discussion of the fair value hierarchy) and are measured using the discounted future cash flows method. In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a similar debt security. This assumption is considered an unobservable input in that it reflects the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believes that this is the best information available for use in the fair value measurement.
The Company’s 3.15% Notes mature in 2021. All of the Company’s other long-term borrowings have contractual maturities that occur subsequent to 2023. The aggregate principal amount of long-term debt maturing in the next five years is $300,000.
(11) Income Taxes
The Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017 introduced significant changes to U.S. income tax law. Effective 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain related-party payments.
In accordance with the Tax Act, the Company recorded a provisional tax expense of $316,423 in the fourth quarter of 2017, the period in which the legislation was enacted. The total expense included $271,605 for the
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deemed repatriation tax and $44,818 of expense primarily due to the remeasurement of deferred taxes associated with the corporate rate reduction. The Company expected to utilize $90,300 of existing tax credits to reduce the $271,605 U.S. federal tax liability due to the deemed repatriation tax, which resulted in $181,305 to be paid over eight years. This liability was included as a component of other liabilities as of December 31, 2017. Additionally, Staff Accounting Bulletin (SAB) 118 was issued to address the application of U.S. GAAP in situations when the registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, the Company has completed its analysis based on legislative updates relating to the Tax Act currently available which resulted in an additional SAB 118 tax expense of $40,650, primarily related to adjustments to the transition tax in the year ended December 30, 2018.
The components of earnings before income taxes, determined by tax jurisdiction, are as follows:
| 2018 | 2017 | 2016 | ||||||||||
| United States | $ | 6,293 | 168,370 | 146,013 | ||||||||
| International | 264,109 | 617,780 | 546,476 | |||||||||
| Total earnings before income taxes | $ | 270,402 | 786,150 | 692,489 | ||||||||
Income taxes attributable to earnings before income taxes are:
| 2018 | 2017 | 2016 | ||||||||||
| Current | ||||||||||||
| United States | $ | 12,805 | 202,374 | 78,958 | ||||||||
| State and local | 5,644 | 2,926 | 3,208 | |||||||||
| International | 42,613 | 72,138 | 77,834 | |||||||||
| 61,062 | 277,438 | 160,000 | ||||||||||
| Deferred | ||||||||||||
| United States | (4,937 | ) | 105,174 | 11,989 | ||||||||
| State and local | (471 | ) | 1,658 | 411 | ||||||||
| International | (5,686 | ) | 5,273 | (13,062 | ) | |||||||
| (11,094 | ) | 112,105 | (662 | ) | ||||||||
| Total income taxes | $ | 49,968 | 389,543 | 159,338 | ||||||||
A reconciliation of the statutory United States federal income tax rate to Hasbro’s effective income tax rate is as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Statutory income tax rate | 21.0 | % | 35.0 | % | 35.0 | % | ||||||
| State and local income taxes, net | 1.5 | 0.3 | 0.3 | |||||||||
| Tax on international earnings | (11.4 | ) | (23.0 | ) | (15.8 | ) | ||||||
| Change in unrecognized tax benefits | (7.9 | ) | 1.0 | 1.7 | ||||||||
| Share-based compensation | (4.0 | ) | (4.1 | ) | — | |||||||
| Tax Cuts and Jobs Act of 2017 | 15.0 | 39.4 | — | |||||||||
| Research and development tax credits | (1.9 | ) | (0.5 | ) | (0.4 | ) | ||||||
| Non-deductible goodwill impairment | 2.0 | — | — | |||||||||
| Other, net | 4.2 | 1.5 | 2.2 | |||||||||
| 18.5 | % | 49.6 | % | 23.0 | % | |||||||
Certain reclassifications have been made to prior year amounts to conform to current year presentation.
The components of deferred income tax expense (benefit) arise from various temporary differences and relate to items included in the consolidated statements of operations as well as items recognized in other comprehensive
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earnings. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 30, 2018 and December 31, 2017 are:
| 2018 | 2017 | |||||||
| Deferred tax assets: | ||||||||
| Accounts receivable | $ | 29,094 | 31,424 | |||||
| Inventories | 11,958 | 11,198 | ||||||
| Loss and credit carryforwards | 105,915 | 36,821 | ||||||
| Operating expenses | 21,213 | 20,424 | ||||||
| Pension | 11,543 | 8,372 | ||||||
| Other compensation | 35,418 | 37,718 | ||||||
| Postretirement benefits | 7,894 | 8,497 | ||||||
| Interest rate hedge | 5,607 | 6,012 | ||||||
| Tax sharing agreement | 4,015 | 5,514 | ||||||
| Other | 9,077 | 11,721 | ||||||
| Gross deferred tax assets | 241,734 | 177,701 | ||||||
| Valuation allowance | (36,311 | ) | (32,851 | ) | ||||
| Net deferred tax assets | 205,423 | 144,850 | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation and amortization of long-lived assets | 12,258 | 29,226 | ||||||
| Equity method investment | 15,113 | 12,829 | ||||||
| Other | 9,885 | 11,018 | ||||||
| Deferred tax liabilities | 37,256 | 53,073 | ||||||
| Net deferred income taxes | $ | 168,167 | 91,777 | |||||
Certain reclassifications have been made to prior year amounts to conform to current year presentation.
The most significant amount of the carryforward relates to tax attributes that will be used to offset the 2017 transition tax.
At December 30, 2018 and December 31, 2017, the Company’s net deferred income taxes are recorded in the consolidated balance sheets as follows:
| 2018 | 2017 | |||||||
| Other assets | 174,077 | 97,870 | ||||||
| Other liabilities | (5,910 | ) | (6,093 | ) | ||||
| Net deferred income taxes | $ | 168,167 | 91,777 | |||||
The Company has a valuation allowance for certain deferred tax assets at December 30, 2018 of $36,311, which is an increase of $3,460 from $32,851 at December 31, 2017. The valuation allowance pertains to certain U.S. state and international loss and credit carryforwards, some of which have no expiration and others that would expire beginning in 2019.
We previously considered the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. The Tax Act eliminates the deferral of U.S. income tax on these foreign earnings by imposing a transition tax which is a one-time mandatory deemed repatriation tax. As a result we now intend to repatriate substantially all of our accumulated foreign earnings. 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, tax reform gives more companies flexibility to manage cash globally. We have recorded $494 of US state income taxes as part of the provisional repatriation tax amount, which will be incurred due to certain future cash distributions. The Company has not finalized the timing of any actual cash distributions or the specific amounts and therefore we could still be subject to some additional foreign withholding taxes and U.S. state taxes. We will record these additional tax effects, if any, in the period that we complete our analysis and are able to make a reasonable estimate.
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A reconciliation of unrecognized tax benefits, excluding potential interest and penalties, for the fiscal years ended December 30, 2018, December 31, 2017, and December 25, 2016 is as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Balance at beginning of year | $ | 84,244 | 80,388 | 63,549 | ||||||||
| Gross increases in prior period tax positions | 4,449 | 2,518 | 2,727 | |||||||||
| Gross decreases in prior period tax positions | (55,752 | ) | (28,653 | ) | (3,103 | ) | ||||||
| Gross increases in current period tax positions | 16,987 | 34,056 | 34,155 | |||||||||
| Decreases related to settlements with tax authorities | (1,102 | ) | (1,375 | ) | (11,662 | ) | ||||||
| Decreases from the expiration of statute of limitations | (2,752 | ) | (2,690 | ) | (5,278 | ) | ||||||
| Balance at end of year | $ | 46,074 | 84,244 | 80,388 | ||||||||
Unrecognized tax benefits as of December 30, 2018, December 31, 2017 and December 25, 2016, were $46,074, $84,244, and $80,388, respectively. If recognized, these tax benefits would have affected our income tax provision for fiscal years 2018, 2017, and 2016, by approximately $45,000, $77,000, and $70,000, respectively.
During 2018, 2017, and 2016, the Company recognized $3,101, $2,431, and $2,135, respectively, of potential interest and penalties, which are included as a component of income taxes in the accompanying consolidated statements of operations. At December 30, 2018, December 31, 2017, and December 25, 2016, the Company had accrued potential interest and penalties of $4,200, $5,157, and $3,966, respectively.
The Company and its subsidiaries file income tax returns in the United States and various state and international jurisdictions. In the normal course of business, the Company is regularly audited by U.S. federal, state and local and international tax authorities in various tax jurisdictions. The Company is no longer subject to U.S. federal income tax examinations for years before 2013. With few exceptions, the Company is no longer subject to U.S. state or local and non-U.S. income tax examinations by tax authorities in its major jurisdictions for years before 2012.
The Company believes it is reasonably possible that a decrease of approximately $15,700 in gross unrecognized tax benefits may be necessary within the coming year as a result of expected tax return settlements and lapse of statute of limitations.
(12) Capital Stock
In May 2018, the Company’s Board of Directors authorized the repurchases of up to $500,000 in common stock. Purchases of the Company’s common stock may be made from time to time, subject to market conditions, and may be made in the open market or through privately negotiated transactions. The Company has no obligation to repurchase shares under the authorization and the time, actual number, and the value of the shares which are repurchased will depend on a number of factors, including the price of the Company’s common stock. In 2018, the Company repurchased 2,655 shares at an average price of $94.15. The total cost of these repurchases, including transaction costs, was $250,054. At December 30, 2018, $427,966 remained under the current authorizations.
(13) Fair Value of Financial Instruments
The Company measures certain assets at fair value in accordance with current accounting standards. The fair value hierarchy consists of three levels: Level 1 fair values are valuations based on quoted market prices in active markets for identical assets or liabilities that the entity has the ability to access; Level 2 fair values are those valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities; and Level 3 fair values are valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. There have been no transfers between levels within the fair value hierarchy.
Current accounting standards permit entities to choose to measure many financial instruments and certain other items at fair value and establish presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities. The Company has elected the fair value option for certain investments using net asset value per share. At December 30, 2018 and December 31, 2017, these investments totaled $23,913 and $24,436, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The Company recorded net (losses) gains of $(180), $1,500 and $1,010 on these investments in other (income) expense, net for the years ended December 30, 2018, December 31, 2017 and December 25, 2016, respectively, relating to the change in fair value of such investments
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At December 30, 2018 and December 31, 2017, the Company had the following assets and liabilities measured at fair value in its consolidated balance sheets (excluding assets for which the fair value is measured using net asset value per share):
| Fair Value | Fair Value Measurements Using | |||||||||||||||
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||
| December 30, 2018 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale securities | $ | 914 | 914 | — | — | |||||||||||
| Derivatives | 26,076 | — | 26,076 | — | ||||||||||||
| Total assets | $ | 26,990 | 914 | 26,076 | — | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | $ | 1,610 | — | 1,610 | — | |||||||||||
| Option agreement | 23,440 | — | — | 23,440 | ||||||||||||
| Total liabilities | $ | 25,050 | — | 1,610 | 23,440 | |||||||||||
| December 31, 2017 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale securities | $ | 3,126 | 3,126 | — | — | |||||||||||
| Derivatives | 12,226 | — | 12,226 | — | ||||||||||||
| Total assets | $ | 15,352 | 3,126 | 12,226 | — | |||||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | $ | 23,051 | — | 23,051 | — | |||||||||||
| Option agreement | 23,980 | — | — | 23,980 | ||||||||||||
| Total liabilities | $ | 47,031 | — | 23,051 | 23,980 | |||||||||||
Available-for-sale securities include equity securities of one company quoted on an active public market. The Company’s derivatives consist of foreign currency forward contracts. The Company used current forward rates of the respective foreign currencies to measure the fair value of these contracts. The option agreement included in other liabilities at December 30, 2018 and December 31, 2017 is valued using an option pricing model based on the fair value of the related investment. Inputs used in the option pricing model include volatility and fair value of the underlying company which are considered unobservable inputs as they reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believes that this is the best information available for use in the fair value measurement. There were no changes in these valuation techniques during 2018.
The following is a reconciliation of the beginning and ending balances of the fair value measurements of the Company’s financial instruments which use significant unobservable inputs (Level 3):
| 2018 | 2017 | |||||||
| Balance at beginning of year | $ | (23,980 | ) | (28,770 | ) | |||
| Net gains from change in fair value | 540 | 4,790 | ||||||
| Balance at end of year | $ | (23,440 | ) | (23,980 | ) | |||
In addition to the above, the Company has three investments for which the fair value is measured using net asset value per share. At December 30, 2018 and December 31, 2017 these investments had fair values of $23,913 and $24,436, respectively. Two of the investments have net asset values that are predominantly based on
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underlying investments which are traded on an active market and are redeemable within 45 days. The third investment invests in hedge funds which are generally redeemable on a quarterly basis with 30 – 90 days’ notice.
(14) Stock Options, Other Stock Awards and Warrants
The Company has reserved 8,495 shares of its common stock for issuance upon exercise of options and other awards granted or to be granted under stock incentive plans for employees and for non-employee members of the Board of Directors (collectively, the “plans”). These awards generally vest and are expensed in equal annual amounts over three to five years. The plans provide that options be granted at exercise prices not less than the market value of the underlying common stock on the date the option is granted and options and share awards are adjusted for such changes as stock splits and stock dividends. Options are exercisable for periods of no more than seven years after date of grant. Upon exercise in the case of stock options, grant in the case of restricted stock or vesting in the case of performance based contingent stock and restricted stock unit grants, shares are issued out of available treasury shares. The Company’s current plan permits the granting of awards in the form of stock, stock appreciation rights, stock awards and cash awards in addition to stock options.
Total compensation expense related to stock options, restricted stock units, including those awards made to non-employee members of its Board of Directors, and stock performance awards for the years ended December 30, 2018, December 31, 2017 and December 25, 2016 was $27,892, $56,032 and $61,624, respectively, and was recorded as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Cost of sales | $ | — | — | 200 | ||||||||
| Product development | 3,466 | 3,312 | 3,248 | |||||||||
| Selling, distribution and administration | 24,426 | 52,720 | 58,176 | |||||||||
| 27,892 | 56,032 | 61,624 | ||||||||||
| Income tax benefit | 2,832 | 9,574 | 20,298 | |||||||||
| $ | 25,060 | 46,458 | 41,326 | |||||||||
The following table represents total stock compensation expense by award type related to stock performance awards, restricted stock units, stock options and awards made to non-employee members of the Company’s Board of Directors, for the years ended December 30, 2018, December 31, 2017 and December 25, 2016:
| 2018 | 2017 | 2016 | ||||||||||
| Stock performance awards | $ | 842 | 27,522 | 34,248 | ||||||||
| Restricted stock units | 17,897 | 20,573 | 19,908 | |||||||||
| Stock options | 7,393 | 6,342 | 5,838 | |||||||||
| Non-employee awards | 1,760 | 1,595 | 1,630 | |||||||||
| 27,892 | 56,032 | 61,624 | ||||||||||
| Income tax benefit | 2,832 | 9,574 | 20,298 | |||||||||
| $ | 25,060 | 46,458 | 41,326 | |||||||||
Stock Performance Awards
In 2018, 2017 and 2016, as part of its annual equity grant to executive officers and certain other employees, the Company issued contingent stock performance awards (the “Stock Performance Awards”). These awards provide the recipients with the ability to earn shares of the Company’s common stock based on the Company’s achievement of stated cumulative operating performance targets over the three fiscal years ended December 2020, December 2019, and December 2018 for the 2018, 2017 and 2016 awards, respectively. Each Stock Performance Award has a target number of shares of common stock associated with such award which may be earned by the recipient if the Company achieves the stated diluted earnings per share and revenue targets. For certain employees, the Stock Performance Awards also include an additional return on invested capital target in addition to the diluted earnings per share and revenue targets. The ultimate amount of the award may vary from 0% to 200% of the target number of shares, depending on the cumulative results achieved.
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Information with respect to Stock Performance Awards for 2018, 2017 and 2016 is as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Outstanding at beginning of year | 900 | 1,074 | 992 | |||||||||
| Granted | 250 | 428 | 529 | |||||||||
| Forfeited | (49 | ) | (28 | ) | (23 | ) | ||||||
| Vested | (468 | ) | (574 | ) | (424 | ) | ||||||
| Outstanding at end of year | 633 | 900 | 1,074 | |||||||||
| Weighted average grant-date fair value: | ||||||||||||
| Granted | $ | 88.18 | 99.58 | 74.69 | ||||||||
| Forfeited | $ | 86.27 | 74.86 | 61.86 | ||||||||
| Vested | $ | 61.86 | 52.21 | 47.21 | ||||||||
| Outstanding at end of year | $ | 86.58 | 77.27 | 62.19 |
Shares granted in 2018 include 14 shares related to the 2016 award, reflecting increases in the ultimate amount of shares to be issued based on the Company’s cumulative results achieved during the performance period. These shares are excluded from the calculation of the weighted average grant-date fair value of Stock Performance awards granted in 2018. Similarly, shares granted in 2017 included 227 additional shares related to the 2015 award, and shares granted in 2016 included 276 additional shares related to the 2014 award. These shares were excluded from the calculation of the weighted average grant-date fair value of Stock Performance awards granted in 2017 and 2016.
During 2018, 2017 and 2016, the Company recognized $842, $27,522 and $34,248, respectively, of expense relating to Stock Performance Awards. Awards are valued at the market value of the underlying common stock at the dates of grant and are expensed over the performance period. On a periodic basis, the Company reviews the actual and forecasted performance of the Company against the stated targets for each award. The total expense is adjusted upward or downward based on the expected amount of shares to be issued as defined in the respective stock performance award agreement. If minimum targets as detailed under the award are not met, no additional compensation expense will be recognized and any previously recognized compensation expense will be reversed. During 2018, it was determined that it was no longer probable that targets would be met for certain Stock Performance Awards and, as a result, a portion of the previously recognized expense related to those awards was reversed. At December 30, 2018, the amount of total unrecognized compensation cost related to these awards is approximately $15,516 and the weighted average period over which this will be expensed is 23 months.
Restricted Stock Units
The Company, as part of its annual equity grant to executive officers and certain other employees, issues restricted stock or grants restricted stock units. These shares or units are nontransferable and subject to forfeiture for periods prescribed by the Company. These awards are valued at the market value of the underlying common stock at the date of grant and are subsequently amortized over the periods during which the restrictions lapse, generally three years. During 2018, 2017 and 2016, the Company recognized compensation expense, net of forfeitures, on these awards of $17,897, $20,573 and $19,908, respectively. At December 30, 2018, the amount of total unrecognized compensation cost related to restricted stock units is $25,152 and the weighted average period over which this will be expensed is 23 months.
In October 2012, as part of an Amended and Restated Employment Agreement, (the “Agreement”), the Company’s Chief Executive Officer was awarded 587 shares to be granted in two tranches across 2013 and 2014, which were expensed from 2013 through 2017. These awards provided the recipient with the ability to earn shares of the Company’s common stock based on the Company’s achievement of four stated stock price hurdles and continued employment through December 31, 2017. In August 2014, the Agreement was further amended to include additional requirements. Specifically, if the third and fourth stock price hurdles were achieved, the number of shares ultimately issued was dependent on the average stock price for the thirty day period immediately prior to December 31, 2017. This amendment did not result in any incremental fair value to the award which was used to record compensation expense for the award. At December 31, 2017, all requirements of the Agreement were met and 587 shares were issued.
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Excluding the aforementioned award for 587 shares, information with respect to the remaining Restricted Stock Awards and Restricted Stock Units for 2018, 2017 and 2016 is as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Outstanding at beginning of year | 636 | 795 | 955 | |||||||||
| Granted | 257 | 203 | 245 | |||||||||
| Forfeited | (40 | ) | (41 | ) | (41 | ) | ||||||
| Vested | (419 | ) | (321 | ) | (364 | ) | ||||||
| Outstanding at end of year | 434 | 636 | 795 | |||||||||
| Weighted average grant-date fair value: | ||||||||||||
| Granted | $ | 97.45 | 98.88 | 75.23 | ||||||||
| Forfeited | $ | 93.45 | 68.01 | 59.37 | ||||||||
| Vested | $ | 67.34 | 57.58 | 43.89 | ||||||||
| Outstanding at end of year | $ | 94.22 | 75.13 | 61.65 |
Stock Options
Information with respect to stock options for each of the three fiscal years ended December 30, 2018 is as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Outstanding at beginning of year | 2,579 | 2,768 | 3,445 | |||||||||
| Granted | 538 | 458 | 492 | |||||||||
| Exercised | (736 | ) | (597 | ) | (1,143 | ) | ||||||
| Expired or forfeited | (71 | ) | (50 | ) | (26 | ) | ||||||
| Outstanding at end of year | 2,310 | 2,579 | 2,768 | |||||||||
| Exercisable at end of year | 1,391 | 1,661 | 1,708 | |||||||||
| Weighted average exercise price: | ||||||||||||
| Granted | $ | 98.10 | 98.80 | 74.42 | ||||||||
| Exercised | $ | 45.64 | 49.31 | 41.75 | ||||||||
| Expired or forfeited | $ | 93.81 | 57.33 | 56.43 | ||||||||
| Outstanding at end of year | $ | 74.78 | 62.12 | 53.21 | ||||||||
| Exercisable at end of year | $ | 61.59 | 50.02 | 45.50 |
With respect to the 2,310 outstanding options and 1,391 options exercisable at December 30, 2018, the weighted average remaining contractual life of these options was 3.90 years and 2.81 years, respectively. The aggregate intrinsic value of the options outstanding and exercisable at December 30, 2018 was $30,574 and $29,652, respectively. Substantially all unvested outstanding options are expected to vest.
The Company uses the Black-Scholes valuation model in determining the fair value of stock options. The expected life of the options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience. The weighted average fair value of options granted in fiscal 2018, 2017 and 2016 was $19.26, $18.25 and $13.01, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the fiscal years 2018, 2017 and 2016:
| 2018 | 2017 | 2016 | ||||||||||
| Risk-free interest rate | 2.57 | % | 1.85 | % | 1.16 | % | ||||||
| Expected dividend yield | 2.57 | % | 2.31 | % | 2.74 | % | ||||||
| Expected volatility | 27 | % | 24 | % | 26 | % | ||||||
| Expected option life | 4 years | 5 years | 5 years |
The intrinsic values, which represent the difference between the fair market value on the date of exercise and the exercise price of the option, of the options exercised in fiscal 2018, 2017 and 2016 were $38,909, $31,406 and $47,992, respectively.
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At December 30, 2018, the amount of total unrecognized compensation cost related to stock options was $10,096 and the weighted average period over which this will be expensed is 22 months.
Non-Employee Awards
In 2018, 2017 and 2016, the Company granted 20, 16 and 23 shares of common stock, respectively, to its non-employee members of its Board of Directors. Of these shares, the receipt of 11 shares from the 2018 grant, 10 shares from the 2017 grant and 16 shares from the 2016 grant has been deferred to the date upon which the respective director ceases to be a member of the Company’s Board of Directors. These awards were valued at the market value of the underlying common stock at the date of grant and vested upon grant. In connection with these grants, compensation cost of $1,760 was recorded in selling, distribution and administration expense in the year ended December 30, 2018, $1,595 in the year ended December 31, 2017 and $1,630 in the year ended December 25, 2016.
(15) Pension, Postretirement and Postemployment Benefits
Pension and Postretirement Benefits
The Company recognizes an asset or liability for each of its defined benefit pension plans equal to the difference between the projected benefit obligation of the plan and the fair value of the plan’s assets. Actuarial gains and losses and prior service costs that have not yet been included in income are recognized in the consolidated balance sheets in AOCE. Prior to 2018, reclassifications to earnings from AOCE related to pension and postretirement plans are recorded to selling, distribution and administration expense. As a result of the adoption of ASU 2017-07 (see Note 1) in 2018, reclassifications to earnings from AOCE related to pension and postretirement plans were recorded to other (income) expense in 2018.
Expenses related to the Company’s defined benefit pension and defined contribution plans for 2018, 2017 and 2016 were approximately $41,900, $45,900 and $45,200, respectively. Of these amounts, $32,300, $36,000 and $33,300, respectively, related to defined contribution plans in the United States and certain international subsidiaries. The remainder of the expense relates to defined benefit pension plans discussed below.
United States Plans
Prior to 2008, substantially all United States employees were covered under at least one of several non-contributory defined benefit pension plans maintained by the Company. Benefits under the two major plans which principally covered non-union employees, were based primarily on salary and years of service. One of these major plans is funded. Benefits under the remaining plans are based primarily on fixed amounts for specified years of service. In 2007, for the two major plans covering its non-union employees, the Company froze benefits being accrued effective at the end of December 2007. Following the August 2015 sale of its manufacturing facility in East Longmeadow, MA, the Company elected to freeze benefits related to its major plan covering union employees. Effective January 1, 2016, the plan covering union employees merged with and into the Hasbro Inc. Pension Plan, and ceased to exist as a separate plan on that date.
In February 2018, the Compensation Committee of the Company’s Board of Directors approved a resolution to terminate the Company’s U.S. defined benefit pension plan (“Plan”). During the first quarter of 2018 the Company commenced the plan termination process and expects to complete the transfer of the Plan’s assets to a third-party administrator in the second quarter of 2019.
In connection with the decision to terminate the Plan, the Company remeasured the projected benefit obligation in the first quarter of 2018 based on the expected Plan termination costs. This remeasurement utilized a discount rate of 3.2% compared to the discount rate of 3.7% utilized in the December 31, 2017 measurement and resulted in an increase in the projected benefit obligation of $35,192 with offsetting amounts recorded to accumulated other comprehensive losses and deferred taxes. Upon settlement of the pension liability, the Company will reclassify the related pension losses, currently recorded to accumulated other comprehensive loss, to the consolidated statements of operations. As of December 30, 2018, the Company had unrecognized losses related to the Plan of $142,439. The Company will recognize this loss upon termination of the Plan, adjusted for year-end remeasurement, as well as the total required payout to plan participants which will be determined based on employee elections and market conditions present at the time of termination.
At December 30, 2018, the measurement date, the projected benefit obligations of the funded plans were in excess of the fair value of the plans’ assets in the amount of $6,423 while the unfunded plans of the Company had an aggregate accumulated and projected benefit obligation of $32,072. At December 31, 2017 the fair value of the
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funded plans’ assets were in excess of the projected benefit obligations in the amount of $25,603 while the unfunded plans of the Company had an aggregate accumulated and projected benefit obligation of $35,981.
Hasbro also provides certain postretirement health care and life insurance benefits to eligible employees who retire and have either attained age 65 with 5 years of service or age 55 with 10 years of service. The cost of providing these benefits on behalf of employees who retired prior to 1993 has been substantially borne by the Company. The cost of providing benefits on behalf of substantially all employees who retire after 1992 is borne by the employee. The plan is not funded.
Reconciliations of the beginning and ending balances for the projected benefit obligation, the fair value of plan assets and the funded status are included below for the years ended December 30, 2018 and December 31, 2017.
| Pension | Postretirement | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Change in Projected Benefit Obligation | ||||||||||||||||
| Projected benefit obligation — beginning | $ | 393,367 | 372,824 | 32,153 | 28,484 | |||||||||||
| Service cost | 1,300 | 1,290 | 756 | 691 | ||||||||||||
| Interest cost | 13,358 | 15,303 | 1,171 | 1,179 | ||||||||||||
| Amendment | (78 | ) | — | — | — | |||||||||||
| Actuarial (gain) loss | 13,010 | 27,670 | (2,339 | ) | 3,432 | |||||||||||
| Benefits paid | (22,718 | ) | (22,579 | ) | (1,660 | ) | (1,633 | ) | ||||||||
| Expenses paid | (2,521 | ) | (1,141 | ) | — | — | ||||||||||
| Projected benefit obligation — ending | $ | 395,718 | 393,367 | 30,081 | 32,153 | |||||||||||
| Accumulated benefit obligation — ending | $ | 395,718 | 393,367 | 30,081 | 32,153 | |||||||||||
| Change in Plan Assets | ||||||||||||||||
| Fair value of plan assets — beginning | $ | 382,989 | 309,380 | — | — | |||||||||||
| Actual return on plan assets | (3,328 | ) | 44,562 | — | — | |||||||||||
| Employer contribution | 2,802 | 52,767 | — | — | ||||||||||||
| Benefits paid | (22,718 | ) | (22,579 | ) | — | — | ||||||||||
| Expenses paid | (2,521 | ) | (1,141 | ) | — | — | ||||||||||
| Fair value of plan assets — ending | $ | 357,224 | 382,989 | — | — | |||||||||||
| Reconciliation of Funded Status | ||||||||||||||||
| Projected benefit obligation | $ | (395,718 | ) | (393,367 | ) | (30,081 | ) | (32,153 | ) | |||||||
| Fair value of plan assets | 357,224 | 382,989 | — | — | ||||||||||||
| Funded status | (38,494 | ) | (10,378 | ) | (30,081 | ) | (32,153 | ) | ||||||||
| Unrecognized net loss | 155,829 | 132,088 | 3,350 | 5,853 | ||||||||||||
| Net amount | $ | 117,335 | 121,710 | (26,731 | ) | (26,300 | ) | |||||||||
| Accrued liabilities | $ | (8,946 | ) | (2,448 | ) | (1,607 | ) | (1,630 | ) | |||||||
| Other liabilities | (29,548 | ) | (7,930 | ) | (28,474 | ) | (30,523 | ) | ||||||||
| Accumulated other comprehensive earnings (loss) | 155,829 | 132,088 | 3,350 | 5,853 | ||||||||||||
| Net amount | $ | 117,335 | 121,710 | (26,731 | ) | (26,300 | ) | |||||||||
In fiscal 2019, the Company expects amortization of unrecognized net losses related to its defined benefit pension plans and post retirement plan of $12,116 and $21, respectively, to be included as a component of net periodic benefit cost.
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Assumptions used to determine the year-end pension and postretirement benefit obligations are as follows:
| 2018 | 2017 | |||||||
| Pension | ||||||||
| Weighted average discount rate | 3.72 | % | 3.71 | % | ||||
| Mortality table | RP-2014/Scale BB | RP-2014/Scale BB | ||||||
| Postretirement | ||||||||
| Discount rate | 4.33 | % | 3.74 | % | ||||
| Health care cost trend rate assumed for next year | 6.50 | % | 6.50 | % | ||||
| Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | 5.00 | % | 5.00 | % | ||||
| Year that the rate reaches the ultimate trend | 2024 | 2024 |
Hasbro’s pension plan assets (the “Plan Assets”) are intended to provide retirement benefits to participants in accordance with the benefit structure established by Hasbro, Inc. The Plan Asset investment managers, who exercise full investment discretion within guidelines outlined in the Plan Asset Investment Policy, are charged with managing the assets with the care, skill, prudence and diligence that a prudent investment professional in similar circumstance would exercise. Investment practices, at a minimum, must comply with the Employee Retirement Income Security Act (ERISA) and any other applicable laws and regulations.
The Plan Asset’s allocations are structured to meet a long-term targeted total return consistent with the ongoing nature of the pension plan liabilities. The shared long-term total return goal, presently 4.75%, includes income plus realized and unrealized gains and/or losses on the Plan’s assets. Utilizing generally accepted diversification techniques, the Plan Assets, in aggregate and at the individual portfolio level, are invested so that the total portfolio risk exposure and risk-adjusted returns best meet the pension plan long-term obligations to employees. The Company’s asset allocation has included alternative investment strategies designed to achieve a modest absolute return in addition to the return on an underlying asset class such as bond or equity indices. These alternative investment strategies used derivatives to gain market returns in an efficient and timely manner; however, derivatives were not used to leverage the portfolio beyond the market value of the underlying assets. The Plan’s Assets were not involved in these alternative investment strategies at December 30, 2018. Investments in these alternative strategies were included in other equity, total return fund and fixed income asset categories at December 31, 2017. Plan asset allocations are reviewed at least quarterly and rebalanced to achieve target allocation among the asset categories when necessary.
The Plan Assets’ investment managers are provided specific guidelines under which they are to invest the assets assigned to them. In general, investment managers are expected to remain fully invested in their asset class with further limitations of risk as related to investments in a single security, portfolio turnover and credit quality.
With the exception of the alternative investment strategies mentioned above, the Plan’s Investment Policy restricts the use of derivatives associated with leverage or speculation. In addition, the Investment Policy also restricts investments in securities issued by Hasbro, Inc. except through index-related strategies (e.g. an S&P 500 Index Fund) and/or commingled funds. In addition, unless specifically approved by the Investment Committee (which comprises members of management, established by the Board to manage and control pension plan assets), certain securities, strategies, and investments are ineligible for inclusion within the Plan Assets.
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The assets of the funded plans are managed by investment advisors. The fair values of the plan assets by asset class and fair value hierarchy level (excluding assets for which the fair value is measured using net asset value per share) as of December 30, 2018 and December 31, 2017 are as follows:
| Fair value measurements using: | ||||||||||||||||
| Fair Value | Quoted Prices in Active Markets For Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| 2018 | ||||||||||||||||
| Equity: | ||||||||||||||||
| Other measured at net asset value(a) | 300 | — | — | — | ||||||||||||
| Fixed Income measured at net asset value(a) | 251,300 | 251,300 | — | — | ||||||||||||
| Cash Equivalents measured as net asset value(a) | 105,600 | — | — | — | ||||||||||||
| $ | 357,200 | 251,300 | — | — | ||||||||||||
| 2017 | ||||||||||||||||
| Equity: | ||||||||||||||||
| Large Cap | $ | 38,400 | 38,400 | — | — | |||||||||||
| Small Cap | 25,300 | 25,300 | — | — | ||||||||||||
| International measured at net asset value(a) | 43,900 | 43,900 | — | — | ||||||||||||
| Other measured at net asset value(a) | 300 | — | — | — | ||||||||||||
| Fixed Income measured at net asset value(a) | 217,200 | — | — | — | ||||||||||||
| Total Return Fund measured at net asset value(a) | 26,900 | 26,900 | — | — | ||||||||||||
| Cash Equivalents measured as net asset value(a) | 31,000 | — | — | — | ||||||||||||
| $ | 383,000 | 134,500 | — | — | ||||||||||||
| (a) | Certain investments that are measured at fair value using the net asset value per share are not classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Schedule of Changes in Plan Assets disclosed previously in this note. |
|---|
The Plan’s Level 1 assets consist of investments traded on active markets that are valued using published closing prices.
At December 30, 2018 the Company’s investments for which the fair value is measured using net asset value per share include the following; Cash and cash equivalents—$105,600 of cash and cash equivalents which are redeemable daily and public-private investment funds—$300 consisting of a public-private investment fund which is valued using the net asset value provided by the investment manager and invests in commercial mortgage-backed securities and non-agency residential mortgage-backed securities. The Company believes that the net asset values are the best information available for use in the fair value measurement of these funds.
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The following is a detail of the components of the net periodic benefit cost for the three years ended December 30, 2018.
| 2018 | 2017 | 2016 | ||||||||||
| Components of Net Periodic Cost | ||||||||||||
| Pension | ||||||||||||
| Service cost | $ | 1,300 | 1,290 | 2,100 | ||||||||
| Interest cost | 13,358 | 15,303 | 16,106 | |||||||||
| Expected return on assets | (18,475 | ) | (19,534 | ) | (17,013 | ) | ||||||
| Amortization of actuarial loss | 10,995 | 9,082 | 7,361 | |||||||||
| Net periodic benefit cost | $ | 7,178 | 6,141 | 8,554 | ||||||||
| Postretirement | ||||||||||||
| Service cost | $ | 756 | 691 | 532 | ||||||||
| Interest cost | 1,171 | 1,179 | 1,175 | |||||||||
| Amortization of actuarial loss | 165 | — | — | |||||||||
| Net periodic benefit cost (income) | $ | 2,092 | 1,870 | 1,707 | ||||||||
Assumptions used to determine net periodic benefit cost of the pension plan and postretirement plan for each fiscal year follow:
| 2018 | 2017 | 2016 | ||||||||||
| Pension | ||||||||||||
| Weighted average discount rate | 3.71 | % | 4.22 | % | 4.58 | % | ||||||
| Long-term rate of return on plan assets | 4.75 | % | 6.25 | % | 6.75 | % | ||||||
| Postretirement | ||||||||||||
| Discount rate | 3.74 | % | 4.26 | % | 4.64 | % | ||||||
| Health care cost trend rate assumed for next year | 6.50 | % | 7.00 | % | 7.00 | % | ||||||
| Rate to which the cost trend rate is assumed to decline (ultimate trend rate) | 5.00 | % | 5.00 | % | 5.00 | % | ||||||
| Year that the rate reaches the ultimate trend rate | 2024 | 2021 | 2021 |
If the health care cost trend rate were increased one percentage point in each year, the accumulated postretirement benefit obligation at December 30, 2018 and the aggregate of the benefits earned during the period and the interest cost would have both increased by approximately 0.7%.
Hasbro works with external benefit investment specialists to assist in the development of the long-term rate of return assumptions used to model and determine the overall asset allocation. Forecast returns are based on the combination of historical returns, current market conditions and a forecast for the capital markets for the next 5-7 years. All asset class assumptions are within certain bands around the long-term historical averages. Correlations are based primarily on historical return patterns.
Expected benefit payments under the defined benefit pension plans (which reflects the expected completion of the termination of the Plan in 2019) and the postretirement benefit plan for the next five years subsequent to 2018 and in the aggregate for the following five years are as follows:
| Pension | Postretirement | |||||||
| 2019 | $ | 368,278 | 1,641 | |||||
| 2020 | 2,465 | 1,594 | ||||||
| 2021 | 2,434 | 1,548 | ||||||
| 2022 | 2,410 | 1,510 | ||||||
| 2023 | 2,420 | 1,472 | ||||||
| 2024-2028 | 11,634 | 7,031 |
International Plans
Pension coverage for employees of Hasbro’s international subsidiaries is provided, to the extent deemed appropriate, through separate defined benefit and defined contribution plans. At December 30, 2018 and
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December 31, 2017, the defined benefit plans had total projected benefit obligations of $98,476 and $127,012, respectively, and fair values of plan assets of $78,184 and $100,766, respectively. Substantially all of the plan assets are invested in equity and fixed income securities. The pension expense related to these plans was $2,392, $3,473 and $1,533 in 2018, 2017 and 2016, respectively. In fiscal 2019, the Company expects amortization of $(34) of prior service costs, $965 of unrecognized net losses and $2 of unrecognized transition obligation to be included as a component of net periodic benefit cost.
Expected benefit payments under the international defined benefit pension plans for the five years subsequent to 2018 and in the aggregate for the five years thereafter are as follows: 2019: $1,774; 2020: $1,958; 2021: $2,072; 2022: $2,279; 2023: $2,531; and 2024 through 2028: $15,337.
Postemployment Benefits
Hasbro has several plans covering certain groups of employees, which may provide benefits to such employees following their period of active employment but prior to their retirement. These plans include certain severance plans which provide benefits to employees involuntarily terminated and certain plans which continue the Company’s health and life insurance contributions for employees who have left Hasbro’s employ under terms of its long-term disability plan.
(16) Leases
Hasbro occupies offices and uses certain equipment under various operating lease arrangements. The rent expense under such arrangements, net of sublease income which is not material, for 2018, 2017 and 2016 amounted to $65,181, $63,615 and $52,585, respectively.
Minimum rentals, net of minimum sublease income, which is not material, under long-term operating leases for the five years subsequent to 2018 and in the aggregate thereafter are as follows: 2019: $47,131; 2020: $31,414; 2021: $22,807; 2022: $15,876; 2023: $12,524; and thereafter: $27,077.
All leases expire prior to the end of 2037. Real estate taxes, insurance and maintenance expenses are generally obligations of the Company. It is expected that, in the normal course of business, leases that expire will be renewed or replaced by leases on other properties; thus, it is anticipated that future minimum lease commitments will not be less than the amounts shown for 2019.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02), which will require lessees to recognize a right-of-use asset and a lease liability for virtually all leases. The liability will be based on the present value of lease payments and the asset will be based on the liability. For income statement purposes, a dual model was retained requiring leases to be either classified as operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. Additional quantitative and qualitative disclosures will be required. ASU 2016-02 is required for public companies for fiscal years beginning after December 15, 2018. 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. 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.
(17) Derivative Financial Instruments
Hasbro uses foreign currency forward contracts to mitigate the impact of currency rate fluctuations on firmly committed and projected future foreign currency transactions. These over-the-counter contracts, which hedge future currency requirements related to purchases of inventory, product sales and other cross-border transactions not denominated in the functional currency of the business unit, are primarily denominated in United States and
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Hong Kong dollars, and Euros. All contracts are entered into with a number of counterparties, all of which are major financial institutions. The Company believes that a default by a single counterparty would not have a material adverse effect on the financial condition of the Company. Hasbro does not enter into derivative financial instruments for speculative purposes.
Cash Flow Hedges
Hasbro uses foreign currency forward contracts to reduce the impact of currency rate fluctuations on firmly committed and projected future foreign currency transactions. All of the Company’s designated foreign currency forward contracts are considered to be cash flow hedges. These instruments hedge a portion of the Company’s currency requirements associated with anticipated inventory purchases and other cross-border transactions in years 2019 through 2022.
At December 30, 2018 and December 31, 2017, the notional amounts and fair values of assets (liabilities) for the Company’s foreign currency forward contracts designated as cash flow hedging instruments were as follows:
| 2018 | 2017 | |||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | |||||||||||||
| Hedged transaction | ||||||||||||||||
| Inventory purchases | $ | 468,305 | 15,089 | 756,673 | (13,695 | ) | ||||||||||
| Sales | 298,194 | 11,232 | 423,315 | 16,144 | ||||||||||||
| Royalties and Other | 26,341 | (304 | ) | 196,889 | (10,383 | ) | ||||||||||
| Total | $ | 792,840 | 26,017 | 1,376,877 | (7,934 | ) | ||||||||||
The Company has a master agreement with each of its counterparties that allows for the netting of outstanding forward contracts. The fair values of the Company’s foreign currency forward contracts designated as cash flow hedges are recorded in the consolidated balance sheet at December 30, 2018 and December 31, 2017 as follows:
| 2018 | 2017 | |||||||
| Prepaid expenses and other current assets | ||||||||
| Unrealized gains | $ | 21,718 | 13,666 | |||||
| Unrealized losses | (972 | ) | (10,319 | ) | ||||
| Net unrealized gain | $ | 20,746 | 3,347 | |||||
| Other assets | ||||||||
| Unrealized gains | $ | 6,173 | 11,255 | |||||
| Unrealized losses | (843 | ) | (2,376 | ) | ||||
| Net unrealized gain | $ | 5,330 | 8,879 | |||||
| Accrued liabilities | ||||||||
| Unrealized gains | $ | 77 | 4,215 | |||||
| Unrealized losses | (136 | ) | (15,484 | ) | ||||
| Net unrealized loss | $ | (59 | ) | (11,269 | ) | |||
| Other liabilities | ||||||||
| Unrealized gains | $ | — | 4,546 | |||||
| Unrealized losses | — | (13,437 | ) | |||||
| Net unrealized loss | $ | — | (8,891 | ) | ||||
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Net gains (losses) on cash flow hedging activities have been reclassified from other comprehensive earnings to net earnings for the years ended December 30, 2018, December 31, 2017 and December 25, 2016 as follows:
| 2018 | 2017 | 2016 | ||||||||||
| Consolidated Statements of Operations Classification | ||||||||||||
| Cost of sales | $ | 3,909 | (1,905 | ) | 57,786 | |||||||
| Sales | 3,479 | 5,315 | 7,467 | |||||||||
| Royalties and other | (527 | ) | (6,000 | ) | (5,776 | ) | ||||||
| Net realized gains (losses) | $ | 6,861 | (2,590 | ) | 59,477 | |||||||
In addition, net (losses) gains of $(6,173), $(6,847) and $400 were reclassified to earnings as a result of hedge ineffectiveness in 2018, 2017 and 2016, respectively.
Undesignated Hedges
The Company also enters into foreign currency forward contracts to minimize the impact of changes in the fair value of intercompany loans due to foreign currency changes. The Company does not use hedge accounting for these contracts as changes in the fair values of these contracts are substantially offset by changes in the fair value of the intercompany loans. As of December 30, 2018 and December 31, 2017, the total notional amount of the Company’s undesignated derivative instruments was $452,773 and $418,471, respectively.
At December 30, 2018 and December 31, 2017, the fair value of the Company’s undesignated derivative financial instruments are recorded in the consolidated balance sheets as follows:
| 2018 | 2017 | |||||||
| Accrued liabilities | ||||||||
| Unrealized gains | $ | 1,269 | 1,793 | |||||
| Unrealized losses | (2,820 | ) | (4,684 | ) | ||||
| Net unrealized loss | $ | (1,551 | ) | (2,891 | ) | |||
| Total unrealized losses | $ | (1,551 | ) | (2,891 | ) | |||
The Company recorded net gains (losses) of $11,698, $(4,267) and $32,524 on these instruments to other (income) expense, net for 2018, 2017 and 2016, respectively, relating to the change in fair value of such derivatives, substantially offsetting gains and losses from the change in fair value of intercompany loans to which the instruments relate.
For additional information related to the Company’s derivative financial instruments see notes 3 and 13.
(18) Acquisition
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, the standard was effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2017-01 in the second quarter of 2018.
On June 12, 2018, the Company completed the acquisition of Saban Properties’ POWER RANGERS and other Entertainment Assets. The Company accounted for the acquisition as an asset acquisition based on the guidance in ASU 2017-01, which uses the cost accumulation and allocation method. As such, the Company included acquisition costs in its calculation of the purchase price to be allocated to the assets acquired.
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The total purchase price for the assets was $535,850, consisting of the following:
| Cash Consideration: | ||||
| To seller(1) | $ | 152,000 | ||
| Held in escrow(2) | 25,000 | |||
| Market value of stock issued to seller(3) | 280,397 | |||
| Deferred purchase price due in January 2019(4) | 75,000 | |||
| 532,397 | ||||
| Acquisition costs | 1,973 | |||
| Other adjustment | 1,480 | |||
| Total Purchase Price to be allocated | $ | 535,850 | ||
| 1. | The Company previously paid Saban Brands $22,250 for the POWER RANGERS master toy license agreement announced in February 2018 and those amounts were credited to, and included above, in the purchase price. |
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| 2. | The $25,000 was placed into an escrow account to support customary indemnification obligations of Saban Properties, and is considered restricted cash within cash and cash equivalents on the balance sheet with an offsetting liability included in other current liabilities. One-half of the $25,000 in escrow was released on January 3, 2019, and the remaining half is scheduled on the one-year anniversary of the closing date, less any claim amounts deducted from the escrow prior to those dates. |
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| 3. | The Company issued 3,074 shares of Hasbro common stock to Saban Properties, valued at $280,397. |
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| 4. | An additional $75,000 was paid in January 2019 with no contingencies. |
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The total purchase price was allocated on a relative fair value basis as follows:
| • | $534,370 was recorded as an intangible asset – POWER RANGERS IP rights, which will be amortized over a period of 25 years; |
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| • | $7,884 as current assets; |
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| • | $325 as capitalized production costs; and |
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| • | $6,729 as other current liabilities. |
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On July 13, 2016, the Company acquired Boulder Media Limited (“Boulder”), an animation studio based in Dublin, Ireland. The consideration included an initial cash payment of approximately $13,177 and provisions for future earnout payments. Based on the Company’s analysis, goodwill in the amount of $11,821 was recorded.
(19) Restructuring Actions
During 2018, the Company announced a comprehensive restructuring plan which consists of re-designing its go-to market strategy and re-shaping its organization to become a more responsive, innovative and digitally-driven play and entertainment company. As the global consumer landscape, shopping behaviors and the retail environment continue to evolve, the Company continues to transform and reimagine its business to make sure it has the right talent and capabilities to stay competitive. This includes adding new capabilities based on our understanding of the consumer and how our retailers are going to market, while also changing many of the ways we organize across our Brand Blueprint. As part of this process the Company has taken certain actions, which will continue through 2019. The actions primarily include headcount reduction aimed at right-sizing the Company’s cost-structure and giving it the ability to add required new talent in the future.
In the first quarter of 2018, the Company recorded a pre-tax severance expense of $17,349, primarily outside of the U.S., related to this 2018 restructuring program. During the fourth quarter of 2018, the Company recorded an additional $72,000 of pre-tax severance charges related to the program. These charges were included within selling, distribution and administration costs on the Consolidated Statements of Operations for the year ended December 30, 2018 and reported within Corporate and Eliminations. The detail of activity related to the program is as follows:
| Total expense recorded in 2018 | $ | 89,349 | ||
| Payments made in 2018 | (20,157 | ) | ||
| Remaining amounts to be paid in 2019 | $ | 69,192 | ||
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(20) Commitments and Contingencies
Hasbro had unused open letters of credit and related instruments of approximately $29,000 and $36,500 at December 30, 2018 and December 31, 2017, respectively.
The Company enters into license agreements with strategic partners, inventors, designers and others for the use of intellectual properties in its products. Certain of these agreements contain provisions for the payment of guaranteed or minimum royalty amounts. Under terms of existing agreements as of December 30, 2018, Hasbro may, provided the other party meets their contractual commitment, be required to pay amounts as follows: 2019: $78,711; 2020: $103,166; 2021: $90,350; 2022: $64,892; 2023: $153; and thereafter: $459. At December 30, 2018, the Company had $72,671 of prepaid royalties, $38,321 of which are included in prepaid expenses and other current assets and $34,350 of which are included in other assets.
In addition to the above commitments, certain of the above contracts impose minimum marketing commitments on the Company. The Company may be subject to additional royalty guarantees totaling $50,000 that are not included in the amounts above that may be payable during the year contingent upon the quantity and types of theatrical movie releases by the licensor.
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. The Company estimates these payments may total approximately $33,800 and may range from approximately $4,500 to $5,400 per year during the period 2019 to 2023, and approximately $9,230 in aggregate for all years occurring thereafter. 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.
At December 30, 2018, the Company estimates payments related to inventory and tooling purchase commitments may total approximately $536,688, including contractual commitments under the manufacturing agreement with Cartamundi as follows: 2019: $102,772 and 2020: $81,423.
Hasbro is party to certain legal proceedings, as well as certain asserted and unasserted claims. Amounts accrued, as well as the total amount of reasonably possible losses with respect to such matters, individually and in the aggregate, are not deemed to be material to the consolidated financial statements.
(21) Segment Reporting
Segment and Geographic Information
Hasbro is a global play and entertainment company with a broad portfolio of brands and entertainment properties spanning toys, games, licensed products ranging from traditional to high-tech and digital, and film and television entertainment. The Company’s segments are (i) U.S. and Canada, (ii) International, (iii) Entertainment and Licensing, and (iv) Global Operations.
The U.S. and Canada segment includes the marketing and selling of action figures, arts and crafts and creative play products, electronic toys and related electronic interactive products, fashion and other dolls, infant products, play sets, preschool toys, plush products, sports action blasters and accessories, vehicles and toy-related specialty products, as well as traditional board games, and trading card and role-playing games primarily within the United States and Canada. Within the International segment, the Company markets and sells both toy and game products in markets outside of the U.S. and Canada, primarily in the European, Asia Pacific, and Latin and South American regions. The Company’s Entertainment and Licensing segment includes the Company’s consumer products licensing, digital gaming, movie and television entertainment operations. The Global Operations segment is responsible for sourcing finished products for the Company’s U.S. and Canada and International segments.
Segment performance is measured at the operating profit level. Included in Corporate and eliminations are certain corporate expenses, including the elimination of intersegment transactions and certain assets benefiting more than one segment. Intersegment sales and transfers are reflected in management reports at amounts approximating cost. Certain shared costs, including global development and marketing expenses and corporate administration, are allocated to segments based upon expenses and foreign exchange rates fixed at the beginning of the year, with adjustments to actual expenses and foreign exchange rates included in Corporate and eliminations. The accounting policies of the segments are the same as those referenced in note 1.
Results shown for fiscal years 2018, 2017 and 2016 are not necessarily those which would be achieved if each segment was an unaffiliated business enterprise.
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Information by segment and a reconciliation to reported amounts are as follows:
| Revenues from External Customers | Affiliate Revenue | Operating Profit (Loss) | Depreciation and Amortization | Capital Additions | Total Assets | |||||||||||||||||||
| 2018 | ||||||||||||||||||||||||
| U.S. and Canada | $ | 2,433,412 | 10,242 | 382,013 | 12,327 | 29,775 | 2,928,209 | |||||||||||||||||
| International | 1,847,585 | 290 | 39,470 | 6,530 | 4,652 | 2,229,053 | ||||||||||||||||||
| Entertainment and Licensing | 298,540 | 15,796 | 17,311 | 3,419 | 2,111 | 592,202 | ||||||||||||||||||
| Global Operations(a) | 109 | 1,439,292 | (8,415 | ) | 84,759 | 82,912 | 3,197,847 | |||||||||||||||||
| Corporate and eliminations(b) | — | (1,465,620 | ) | (99,327 | ) | 60,923 | 20,976 | (3,684,323 | ) | |||||||||||||||
| Consolidated Total | $ | 4,579,646 | — | 331,052 | 167,958 | 140,426 | 5,262,988 | |||||||||||||||||
| 2017 | ||||||||||||||||||||||||
| U.S. and Canada | $ | 2,690,527 | 8,157 | 509,942 | 19,457 | 5,849 | 2,749,384 | |||||||||||||||||
| International | 2,233,579 | 382 | 228,669 | 9,527 | 4,669 | 2,499,985 | ||||||||||||||||||
| Entertainment and Licensing | 285,579 | 21,889 | 96,400 | 5,526 | 7,637 | 626,193 | ||||||||||||||||||
| Global Operations(a) | 97 | 1,644,650 | 4,014 | 92,595 | 89,619 | 2,819,768 | ||||||||||||||||||
| Corporate and eliminations(b) | — | (1,675,078 | ) | (28,666 | ) | 44,731 | 27,103 | (3,405,347 | ) | |||||||||||||||
| Consolidated Total | $ | 5,209,782 | — | 810,359 | 171,836 | 134,877 | 5,289,983 | |||||||||||||||||
| 2016 | ||||||||||||||||||||||||
| U.S. and Canada | $ | 2,559,907 | 7,091 | 522,287 | 12,764 | 8,107 | 2,559,792 | |||||||||||||||||
| International | 2,194,651 | 1,908 | 294,497 | 20,768 | 7,258 | 2,368,761 | ||||||||||||||||||
| Entertainment and Licensing | 265,205 | 23,220 | 49,876 | 9,869 | 13,072 | 692,898 | ||||||||||||||||||
| Global Operations(a) | 59 | 1,617,370 | 19,440 | 78,249 | 89,051 | 2,326,566 | ||||||||||||||||||
| Corporate and eliminations(b) | — | (1,649,589 | ) | (98,052 | ) | 32,820 | 37,412 | (2,856,651 | ) | |||||||||||||||
| Consolidated Total | $ | 5,019,822 | — | 788,048 | 154,470 | 154,900 | 5,091,366 | |||||||||||||||||
| (a) | The Global Operations segment derives substantially all of its revenues, and thus its operating results, from intersegment activities. |
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| (b) | Certain long-term assets, including property, plant and equipment, goodwill and other intangibles, which benefit multiple operating segments, are included in Corporate and eliminations. Allocations of certain expenses related to these assets to the individual operating segments are done at the beginning of the year based on budgeted amounts. Any differences between actual and budgeted amounts are reflected in Corporate and eliminations. Furthermore, Corporate and eliminations includes elimination of inter-company income statement transactions. One such example includes licensing and service arrangements with affiliates. Payments received in advance from affiliates are recognized as revenue and eliminated in consolidation as earned and payment becomes assured over the life of the contract. During 2018, 2017 and 2016, affiliate licensing and service fees of $338,304, $298,693 and $283,078, respectively, that were received in 2017, 2016 and 2015, respectively, were recognized as revenue and eliminated in consolidation. Corporate and eliminations also includes the elimination of inter-company balance sheet amounts. |
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The following table represents consolidated International segment net revenues by major geographic region for the three fiscal years ended December 30, 2018.
| 2018 | 2017 | 2016 | ||||||||||
| Europe | $ | 1,046,901 | 1,381,949 | 1,404,478 | ||||||||
| Latin America | 454,066 | 485,088 | 463,638 | |||||||||
| Asia Pacific | 346,618 | 366,542 | 326,535 | |||||||||
| Net revenues | $ | 1,847,585 | 2,233,579 | 2,194,651 | ||||||||
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The following table presents consolidated net revenues by brand portfolio for the three fiscal years ended December 30, 2018.
| 2018 | 2017 | 2016 | ||||||||||
| Franchise brands | $ | 2,445,902 | 2,690,394 | 2,375,265 | ||||||||
| Partner brands | 987,283 | 1,271,597 | 1,412,770 | |||||||||
| Hasbro gaming | 787,692 | 893,019 | 813,433 | |||||||||
| Emerging brands | 358,769 | 354,772 | 418,354 | |||||||||
| Net revenues | $ | 4,579,646 | 5,209,782 | 5,019,822 | ||||||||
For the years ended December 31, 2017 and December 25, 2016, net revenues of $122,432 and $47,597, respectively, were reclassified from Emerging Brands to Franchise Brands to conform to the presentation for the year ended December 30, 2018.
Hasbro’s total gaming category, including all gaming net revenues, most notably MAGIC: THE GATHERING and MONOPOLY, totaled $1,443,164, $1,497,795 and $1,387,077 for the years ended December 30, 2018, December 31, 2017 and December 25, 2016, respectively.
Information as to Hasbro’s operations in different geographical areas is presented below on the basis the Company uses to manage its business. Net revenues are categorized based on location of the customer, while long-lived assets (property, plant and equipment, goodwill and other intangibles) are categorized based on their location.
| 2018 | 2017 | 2016 | ||||||||||
| Net revenues | ||||||||||||
| United States | $ | 2,497,331 | 2,732,034 | 2,575,696 | ||||||||
| International | 2,082,315 | 2,477,748 | 2,444,126 | |||||||||
| 4,579,646 | 5,209,782 | 5,019,822 | ||||||||||
| Long-lived assets | ||||||||||||
| United States | 1,287,444 | 894,597 | 933,848 | |||||||||
| International | 148,753 | 155,558 | 150,054 | |||||||||
| $ | 1,436,197 | 1,050,155 | 1,083,902 | |||||||||
Principal international markets include Europe, Canada, Mexico and Latin America, Australia, China and Hong Kong. Long-lived assets include property, plant and equipment, goodwill and other intangibles.
Other Information
Hasbro markets its products primarily to customers in the retail sector. Although the Company closely monitors the creditworthiness of its customers, adjusting credit policies and limits as deemed appropriate, a substantial portion of its customers’ ability to discharge amounts owed is generally dependent upon the overall retail economic environment.
In 2018 the Company’s largest customers were Wal-Mart Stores, Inc. and Target Corporation. Sales to these customers amounted to 20% and 9%, respectively of consolidated net revenues in 2018. In 2017 and 2016 the Company’s largest customers were Wal-Mart Stores, Inc., Toys“R”Us, Inc. and Target Corporation. Sales to these customers amounted to 19%, 9% and 9%, respectively, of consolidated net revenues during 2017 and 18%, 9% and 9%, respectively, of consolidated net revenues during 2016. These sales were primarily within the U.S. and Canada segment.
Hasbro purchases certain components used in its manufacturing process and certain finished products from manufacturers in the Far East. The Company’s reliance on external sources of manufacturing can be shifted, over a period of time, to alternative sources of supply for products it sells, should such changes be necessary. However, if the Company were prevented from obtaining products from a substantial number of its current Far East suppliers due to political, labor or other factors beyond its control, the Company’s operations would be disrupted, potentially for a significant period of time, while alternative sources of product were secured. The imposition of trade sanctions, tariffs, border adjustment taxes or other measures by the United States or the European Union against a class of
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products imported by Hasbro from, or the loss of “normal trade relations” status with, China, or other countries where we manufacture products, or other factors which increase the cost of manufacturing in China, or other countries where we manufacture products, such as higher labor costs or an appreciation in the Chinese Yuan, could significantly disrupt our operations and/or significantly increase the cost of the products which are manufactured and imported into other markets.
The Company has agreements which allow it to develop and market products based on properties owned by third parties including its license with Marvel Entertainment, LLC and Marvel Characters B.V. (together “Marvel”) and its license with Lucas Licensing Ltd. and Lucasfilm Ltd. (together “Lucas”). These licenses have multi-year terms and provide the Company with the right to market and sell designated classes of products based on Marvel’s portfolio of brands, including SPIDER-MAN and THE AVENGERS, and Lucas’s STAR WARS brand. The Company also has a license to market products with The Walt Disney Company for DISNEY PRINCESS and DISNEY FROZEN lines. Hasbro’s net revenues from these licenses can be significant in any given year based on the level of third party entertainment. In addition to DISNEY PRINCESS and DISNEY FROZEN, both Marvel and Lucas are owned by The Walt Disney Company.
(22) Quarterly Financial Data (Unaudited – see accompanying accountants’ report)
| Quarter | ||||||||||||||||||||
| First | Second | Third | Fourth | Full Year | ||||||||||||||||
| 2018 | ||||||||||||||||||||
| Net revenues | $ | 716,341 | 904,458 | 1,569,686 | 1,389,161 | 4,579,646 | ||||||||||||||
| Operating profit (loss) | (80,419 | ) | 87,588 | 313,336 | 10,547 | 331,052 | ||||||||||||||
| Earnings (loss) before income taxes | (88,388 | ) | 68,124 | 295,794 | (5,128 | ) | 270,402 | |||||||||||||
| Net earnings (loss) | (112,492 | ) | 60,299 | 263,861 | 8,766 | 220,434 | ||||||||||||||
| Per common share | ||||||||||||||||||||
| Net earnings (loss) | ||||||||||||||||||||
| Basic | $ | (0.90 | ) | 0.48 | 2.08 | 0.07 | 1.75 | |||||||||||||
| Diluted | (0.90 | ) | 0.48 | 2.06 | 0.07 | 1.74 | ||||||||||||||
| Market price | ||||||||||||||||||||
| High | $ | 103.39 | 93.00 | 109.60 | 107.57 | 109.60 | ||||||||||||||
| Low | 83.56 | 79.00 | 91.70 | 76.84 | 76.84 | |||||||||||||||
| Cash dividends declared | $ | 0.63 | 0.63 | 0.63 | 0.63 | 2.52 | ||||||||||||||
| 2017 | ||||||||||||||||||||
| Net revenues | $ | 849,663 | 972,506 | 1,791,502 | 1,596,111 | 5,209,782 | ||||||||||||||
| Operating profit | 78,343 | 99,984 | 360,944 | 271,088 | 810,359 | |||||||||||||||
| Earnings before income taxes | 70,837 | 86,886 | 349,841 | 278,586 | 786,150 | |||||||||||||||
| Net earnings (loss) | 68,599 | 67,723 | 265,583 | (5,298 | ) | 396,607 | ||||||||||||||
| Per common share | ||||||||||||||||||||
| Net earnings (loss) | ||||||||||||||||||||
| Basic | $ | 0.55 | 0.54 | 2.12 | (0.04 | ) | 3.17 | |||||||||||||
| Diluted | 0.54 | 0.53 | 2.09 | (0.04 | ) | 3.12 | ||||||||||||||
| Market price | ||||||||||||||||||||
| High | $ | 101.08 | 113.49 | 116.20 | 99.17 | 116.20 | ||||||||||||||
| Low | 77.20 | 94.76 | 91.57 | 87.92 | 77.20 | |||||||||||||||
| Cash dividends declared | $ | 0.57 | 0.57 | 0.57 | 0.57 | 2.28 | ||||||||||||||
Previous: Item 7A. Quantitative and Qualitative Disclosures About Market Risk. · Next: Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.