filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the audited consolidated financial statements of the Company included in Part II, Item 8 of this Form 10-K.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements concerning the Company’s expectations and beliefs. See “Statement Regarding Forward-Looking Statements” and Part I, Item 1A “Risk Factors” for a discussion of other uncertainties, risks and assumptions associated with these statements.
Unless otherwise specifically indicated, all dollar or share amounts herein are expressed in millions of dollars or shares, except for per share amounts.
EXECUTIVE SUMMARY
Hasbro, Inc. ("Hasbro" or the "Company") is a global play and entertainment company committed to Creating the World’s Best Play and Entertainment Experiences. From toys, games and consumer products to television, movies, digital gaming, live action, music, and virtual reality experiences, Hasbro connects to global audiences by bringing to life great innovations, stories and brands across established and inventive platforms. Hasbro’s iconic brands include MAGIC: THE GATHERING, MY LITTLE PONY, NERF, TRANSFORMERS, PLAY-DOH, MONOPOLY, BABY ALIVE, POWER RANGERS and LITTLEST PET SHOP, as well as premier partner brands. Through our acquisition of Entertainment One Ltd. ("eOne"), acquired brands PEPPA PIG and PJ MASKS will be
included in Emerging Brands going forward. Through the Company's entertainment labels, Allspark Pictures and Allspark Animation, and now through the global entertainment studio operated by eOne, the Company is building its brands globally through great storytelling and content on all screens. Hasbro is committed to making the world a better place for children and their families through corporate social responsibility and philanthropy.
Hasbro's strategic plan is centered around its brand blueprint. Under the brand blueprint strategy, Hasbro re-imagines, re-invents and re-ignites its owned and controlled brands and imagines, invents and ignites new brands, through product innovation, immersive entertainment offerings, including television and motion pictures, digital gaming and a broad range of consumer products. As the global consumer landscape, shopping behaviors and the retail environment continue to evolve, the Company continues to transform and reimagine its business strategy. This transformation includes reexamining the ways Hasbro organizes across its brand blueprint and re-shaping the Company to become a better equipped and adaptive, digitally-driven organization, including the development of an omni-channel retail presence and adding new capabilities through the on-boarding of new skill sets and talent. More recently, to enhance its long-term competitive position the Company has identified and pursued key growth opportunities through strategic acquisitions, to excel in today’s converged retail environment as a leading global play and entertainment company across all platforms.
Hasbro generates revenue and earns cash by developing, marketing and selling products based on global brands in a broad variety of consumer goods categories and distribution of television programming based on the Company’s properties, as well as through the out-licensing of rights for third parties to use its properties in connection with products, including digital media and games and other consumer products. Hasbro also leverages its competencies to develop and market products based on well-known licensed brands including, but not limited to, BEYBLADE, DISNEY PRINCESS and DISNEY FROZEN, DISNEY’S DESCENDANTS, MARVEL, SESAME STREET, STAR WARS, and DREAMWORKS’ TROLLS. MARVEL, STAR WARS, DISNEY PRINCESS, DISNEY FROZEN and DISNEY’S DESCENDANTS are owned by The Walt Disney Company.
For the periods presented in this Form 10-K, the Company’s business is separated into three principal business segments: U.S. and Canada, International, and Entertainment, Licensing and Digital. The U.S. and Canada segment markets and sells both toy and game products primarily in the United States and Canada. The International segment consists of the Company’s European, Asia Pacific and Latin and South American toy and game marketing and sales operations. The Company’s Entertainment, Licensing and Digital segment includes the Company’s consumer products licensing, digital licensing and gaming, and movie and television entertainment operations. In addition to these three primary segments, the Company’s product sourcing operations are managed through its Global Operations segment. With the completion of the acquisition of eOne in fiscal 2020, the results of eOne will be reported as a separate operating segment.
The impact of changes in foreign currency exchange rates used to translate the consolidated statements of operations is quantified by translating the current period revenues at the prior period exchange rates and comparing this amount to the prior period reported revenues. The Company believes that the presentation of the impact of changes in exchange rates, which are beyond the Company’s control, is helpful to an investor’s understanding of the performance of the underlying business. The Company has also included in this report, the impact on 2019 net earnings and earnings per share, of the termination and settlement of its U.S. defined benefit pension plan and the impact of certain transaction costs, financing transaction fees and net hedge gains in association with the Company's agreement to acquire eOne. In addition, the Company has included in this report, the impact on 2018 net earnings and earnings per share, of intangible asset and goodwill impairments, organizational restructuring charges, the Toys“R”Us bankruptcy and U.S. tax reform, passed in December 2017.
Acquisition of Entertainment One
On December 30, 2019, the Company completed the acquisition of eOne for an aggregate purchase price of approximately $4.6 billion, comprised of $3.8 billion of cash consideration for shares outstanding and $0.8 billion related to the redemption of eOne's outstanding senior secured notes and the payoff of eOne's revolving credit facility. The Company financed the acquisition through a combination of the following debt and equity financings: (i) the issuance of senior unsecured notes in an aggregate principal amount of $2.4 billion, (ii) the issuance of 10,592,106 shares of common stock at a public offering price of $95.00 per share and (iii) $1.0 billion in term loans. eOne is a global independent studio that specializes in the development, acquisition, production, financing, distribution and sales of entertainment content.
The addition of eOne accelerates the Company’s brand blueprint strategy by expanding our brand portfolio with eOne’s beloved global preschool brands, including PEPPA PIG, PJ MASKS and RICKY ZOOM, adding proven TV and film expertise, and creating additional opportunities for long-term profitable growth. See Part I, Item 1. Business, for a brief description of eOne’s business.
Results discussed herein do not include the results of eOne as the acquisition of eOne was completed in the first quarter of 2020.
2019 highlights
| • | Net revenues of $4,720.2 million increased 3% from $4,579.6 million in 2018. The increase in net revenues includes an unfavorable foreign currency translation of $78.5 million. |
| • | U.S. and Canada segment net revenues increased 3%; International segment net revenues decreased 1%, including an unfavorable foreign currency translation impact of $76.5 million; Entertainment, Licensing and Digital segment net revenues increased 22%. |
| • | Partner Brands net revenues increased 24%; Emerging Brands net revenues increased 5%; Franchise Brands net revenues declined 1%; Hasbro Gaming net revenues declined 10%. |
| • | Operating profit was $652.1 million, or 13.8% of net revenues in 2019 compared to operating profit of $331.1 million, or 7.2% of net revenues in 2018. |
| • | 2019 operating profit was negatively impacted by $17.8 million of pre-tax acquisition related costs associated with the eOne transaction. |
| • | 2018 operating profit was negatively impacted by $60.4 million of costs related to the Toys"R"Us bankruptcy, $89.3 million associated with the Company’s 2018 restructuring program and impairment charges of $117.6 million related to Backflip Studios and other intangible assets. |
| • | Net earnings increased in 2019 to $520.5 million, or $4.05 per diluted share, compared to $220.4 million, or $1.74 per diluted share in 2018. |
| • | 2019 net earnings were impacted by pension settlement charges, net of tax, of $86.0 million, or $0.67 per diluted share, partially offset by a net benefit, net of tax, of $81.8 million, or $0.64 per diluted share, from foreign currency gains related to hedging a portion of the eOne British pound sterling purchase price and other eOne acquisition related costs. |
| • | 2018 net earnings were negatively impacted by costs related to the Toys"R"Us bankruptcy, net of tax, of $52.8 million or $0.42 per diluted share, impairment charges related to Backflip Studios and other intangible assets, net of tax, of $96.9 million, or $0.76 per diluted share, costs associated with the Company’s 2018 restructuring program, net of tax, of $77.9 million or $0.61 per diluted share and charges related to adjustments to provisional U.S. Tax Reform amounts of $40.7 million or $0.32 per diluted share. |
2018 highlights
| • | Net revenues of $4,579.6 million decreased 12% from 5,209.8 million in 2017. The decline in net revenues included an unfavorable foreign currency translation of $43.0 million. |
| • | U.S. and Canada segment net revenues declined 10%; International segment net revenues declined 17% and included an unfavorable foreign currency translation impact of $41.7 million; Entertainment and Licensing segment net revenues increased 9%. |
| • | Franchise Brands net revenues declined 9%, Partner Brands net revenues declined 22%, Hasbro Gaming net revenues declined 12% and Emerging Brands net revenues increased 1%. |
| • | Operating profit was $331.1 million, or 7.2% of net revenues in 2018 compared to operating profit of $810.4 million, or 15.6% of net revenues in 2017. |
| • | 2018 operating profit was negatively impacted by: non-cash goodwill and intangible asset impairment charges of $117.6 million related to Backflip Studios and other intangible assets; severance costs of $89.3 million associated with the Company's 2018 restructuring program; and $60.4 million of costs related to the Toys"R"Us bankruptcy. |
| • | 2017 operating profit was negatively impacted by the Toys"R"Us bankruptcy in the U.S. and Canada as a result of incremental bad debt expense recorded during the third quarter of 2017. |
| • | Impact from U.S. tax reform resulted in a net charge of $40.7 million in 2018 due to the remeasurement of liabilities based on additional guidance and regulations issued in 2018. |
| • | Net earnings declined in 2018 to $220.4 million, or $1.74 per diluted share, compared to $396.6 million, or $3.12 per diluted share in 2017. |
Share Repurchases and Dividends
The Company has historically returned excess cash to its shareholders through dividends and share repurchases. The Company seeks to return cash to its shareholders through the payment of quarterly dividends. Hasbro maintained its 2019 quarterly dividend rate of $0.68 per share into 2020 for the Company's dividend payment scheduled for May 2020. In the previous 17 years, the Company has increased its quarterly cash dividend 15 times from $0.03 to $0.68 per share. In addition to the dividend, the Company periodically returns cash to shareholders through its share repurchase program. As part of this initiative, since 2005 the Company’s Board of Directors adopted nine share repurchase authorizations with a cumulative authorized repurchase amount of $4,325.0 million. The ninth authorization was approved in May 2018 for $500 million. During 2019, Hasbro repurchased approximately 0.7 million shares at a total cost of $61.4 million and an average price of $87.41 per share. Since 2005, Hasbro has repurchased 108.6 million shares at a total cost of $3,961.2 million and an average price of $36.44 per share. At December 29, 2019, Hasbro had $366.6 million remaining available under these share repurchase authorizations. As a result of the financing activities related to the eOne acquisition, the Company has suspended its share repurchase program while it prioritizes reducing its long-term debt and achieving its gross debt to EBITDA targets.
Summary
The following table provides a summary of the Company’s condensed consolidated results as a percentage of net revenues for 2019, 2018 and 2017.
| 2019 | 2018 | 2017 | ||||
| Net Revenues | 100.0 | % | 100.0 | % | 100.0 | % |
| Operating profit | 13.8 | 7.2 | 15.6 | |||
| Earnings before income taxes | 12.6 | 5.9 | 15.1 | |||
| Net earnings | 11.0 | 4.8 | 7.6 |
Results of Operations — Consolidated
The fiscal years ended December 29, 2019 and December 30, 2018 were each fifty-two week periods while the year ended December 31, 2017 was a fifty-three week period.
Net earnings increased to $520.5 million for the fiscal year ended December 29, 2019 compared to $220.4 million for the fiscal year ended December 30, 2018, and $396.6 million for the fiscal year ended December 31, 2017.
Diluted earnings per share were $4.05 in 2019, $1.74 in 2018 and $3.12 in 2017.
Net earnings and diluted earnings per share for each fiscal year in the three years ended December 29, 2019 include certain charges and benefits as described below.
2019
| • | A net charge of $86.0 million or $0.67 per diluted share associated with the settlement of the Company's U.S. defined benefit pension plan in the second quarter of 2019. During 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 and commenced the termination process. During the second and fourth quarters of 2019, the Company settled remaining benefits directly with vested participants. |
| • | A net benefit, of $81.8 million or $0.64 per diluted share related to transaction costs and hedge gains associated with the Company's agreement to acquire eOne in an all cash transaction. The $81.8 million after-tax gain consisted of the following: (i) hedge gains of $114.1 million related to the foreign exchange forward and option contracts to hedge a portion of the eOne purchase price and related costs; (ii) financing transaction fees of $20.6 million, primary related to the Company’s bridge facility which was terminated unused in the fourth quarter of 2019; (iii) eOne acquisition costs of $17.8 million during the fourth quarter of 2019; and (iv) tax benefits of $6.1 million for the full year 2019 related to the charges outlined in (ii) and (iii) above. |
2018
| • | A net charge of $96.9 million or $0.76 per diluted share associated with a fourth quarter 2018 non-cash goodwill impairment charge related to the Company’s Backflip Studios goodwill and impairment of certain other definite-lived intangible assets. |
| • | A net charge of $77.9 million or $0.61 per diluted share of severance costs associated with organizational restructuring. In the first quarter of 2018, the Company incurred a net charge of $15.7 million of severance charges, and in the fourth quarter of 2018, the Company recorded an additional net charge of $62.2 million of severance charges related to actions associated with its 2018 restructuring program. |
| • | A net charge of $52.8 million or $0.42 per diluted share related to the Toys“R”Us bankruptcy and liquidation of its U.S. and other operations around the globe. The Company recognized incremental bad debt expense on outstanding Toys“R”Us receivables, royalty expense, inventory obsolescence as well as other related costs. In the fourth quarter of 2018, based on its final settlement with Toys“R”Us, the Company made adjustments to charges previously recorded during 2018. |
| • | A net charge of $40.7 million or $0.32 per diluted share related to U.S. tax reform. In 2018 the Company made adjustments to provisional U.S. Tax Reform amounts recorded in the fourth quarter of 2017, based on additional guidance issued by the U.S. Treasury Department and the Internal Revenue Service during 2018. |
2017
| • | A net charge of $296.5 million or $2.33 per diluted share related to U.S. tax reform. This net charge includes a $316.4 million charge included in income taxes due to the estimated repatriation tax liability and adjustments to the Company’s deferred tax assets and liabilities; partially offset by a $19.9 million gain within other income due to the change in the value of a long-term liability following the change in the U.S. corporate tax rate beginning in 2018. |
Consolidated net revenues for the year ended December 29, 2019 grew 3% to $4,720.2 million from $4,579.6 million for the year ended December 30, 2018. Net revenues in 2019 include an unfavorable foreign currency translation of $78.5 million, which is the result of weakening currencies compared to the U.S. dollar, primarily in our International segment in 2019 compared to 2018. See discussion of brand portfolio below.
Consolidated net revenues for the year ended December 30, 2018 declined 12% to $4,579.6 million from $5,209.8 million for the year ended December 31, 2017 and included an unfavorable foreign currency translation of $43.0 million, which was the result of weakening currencies primarily in our International segment in 2018 compared to 2017. See discussion of brand portfolio below.
The following chart presents net revenues expressed in millions of dollars, by brand portfolio for each year in the three years ended December 29, 2019.
| 2019 Net Revenues | % Change | 2018 Net Revenues | % Change | 2017 Net Revenues | % Change | ||||||||||
| Franchise Brands | $ | 2,411.8 | -1.4 | % | $ | 2,445.9 | -9.1 | % | $ | 2,690.4 | 13.3 | % | |||
| Partner Brands | 1,221.0 | 23.7 | % | 987.3 | -22.4 | % | 1,271.6 | -10.0 | % | ||||||
| Hasbro Gaming | 709.8 | -9.9 | % | 787.7 | -11.8 | % | 893.0 | 9.8 | % | ||||||
| Emerging Brands | 377.6 | 5.2 | % | 358.8 | 1.1 | % | 354.8 | -15.2 | % |
2019 versus 2018
Partner Brands and Emerging Brands net revenues grew in 2019 compared to 2018, while net revenues from Franchise Brands and the Hasbro Gaming portfolio declined.
Franchise Brands The Franchise Brands portfolio declined 1% in 2019 compared to 2018. Higher net revenues from MAGIC: THE GATHERING, MONOPOLY and PLAY-DOH products were more than offset by net revenue declines from NERF, MY LITTLE PONY, BABY ALIVE and to a lesser extent, TRANSFORMERS products*.*
Partner Brands The Partner Brands portfolio increased 24% in 2019 compared to 2018.
Within the Partner Brands portfolio, there are a number of entertainment-based brands which, from year to year, may be supported by major theatrical releases. As such, category net revenues by brand fluctuate from year-to-year depending on movie popularity, release dates and related product line offerings and success. In 2019,
products related to three Partner Brands were supported by major theatrical releases – MARVEL products were supported by the second quarter 2019 theatrical release, AVENGERS: END GAME and the third quarter 2019 theatrical release, SPIDER-MAN: FAR FROM HOME, DISNEY’S FROZEN products were supported by fourth quarter 2019 theatrical release, FROZEN 2 and STAR WARS products were supported by STAR WARS: THE RISE OF SKYWALKER, released during the fourth quarter of 2019. Historically these entertainment-based brands experience higher revenues during years in which major motion pictures are released.
During 2019, the increase in net revenues was driven by DISNEY FROZEN and MARVEL products, and to a lesser extent DISNEY’S DECENDANTS and STAR WARS products. These increases were partially offset by net revenue declines from DISNEY PRINCESS and DREAMWORKS’ TROLLS products during 2019.
Hasbro Gaming The Hasbro Gaming portfolio declined 10% in 2019 compared to 2018. Lower net revenues from PIE FACE, SPEAK OUT and certain other Hasbro Gaming products were partially offset by net revenue increases from DUNGEONS & DRAGONS products.
Net revenues for Hasbro’s total gaming category, including the Hasbro Gaming portfolio as reported above, and all other gaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, which are included in the Franchise Brands portfolio, totaled $1,528.3 million in 2019, an increase of 6%, versus $1,443.2 million in 2018.
Emerging Brands The Emerging Brands portfolio grew 5% in 2019 compared to 2018. Net revenues were positively impacted by the introduction of the Company's POWER RANGERS products, as well as net revenue increases from PLAYSKOOL products, which were partially offset by net revenue declines from LITTLEST PET SHOP and LOST KITTIES products.
2018 versus 2017
Franchise Brands, Partner Brands and Hasbro Gaming net revenues declined in 2018 compared to 2017, while net revenues from the Emerging Brands portfolio grew slightly.
Franchise Brands The Franchise Brands portfolio declined 9% in 2018 compared to 2017. Higher net revenues from MONOPOLY and MAGIC: THE GATHERING products were more than offset by net revenue declines from NERF products, which were impacted by the loss of sales related to the bankruptcy and subsequent liquidation of Toys“R”Us. Also contributing to Franchise Brands net revenue declines in 2018 were MY LITTLE PONY products, supported in 2017 by the theatrical release of MY LITTLE PONY: THE MOVIE, TRANSFORMERS products, also supported in 2017 by the major theatrical release of TRANSFORMERS: THE LAST KNIGHT, and to a lesser extent, BABY ALIVE products*.*
Partner Brands The Partner Brands portfolio declined 22% in 2018 compared to 2017. Lower net revenues from STAR WARS, DISNEY PRINCESS and DREAMWORKS’ TROLLS products, as well as net revenue declines from DISNEY FROZEN and DISNEY’S DECENDANTS products were partially offset by net revenue increases from BEYBLADE and MARVEL products.
Within the Partner Brands portfolio, there are a number of entertainment-based brands which, from year to year, may be supported by major theatrical releases. As such, category net revenues by brand fluctuate from year-to-year depending on movie popularity, release dates and related product line offerings and success. In 2018, STAR WARS products were supported by the second quarter 2018 major theatrical release SOLO: A STAR WARS STORY. Historically these entertainment-based brands experience revenue growth during film years with sharp declines in subsequent years.
Hasbro Gaming The Hasbro Gaming portfolio declined 12% in 2018 compared to 2017. Lower net revenues from PIE FACE and SPEAK OUT and certain other Hasbro Gaming products were partially offset by net revenue increases from DUNGEONS and DRAGONS, DON’T STEP IN IT, CONNECT 4 and JENGA products.
Net revenues for Hasbro’s total gaming category, including the Hasbro Gaming portfolio as reported above, and all other gaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, which are included in the Franchise Brands portfolio, totaled $1,443.2 million in 2018, down 4%, versus $1,497.8 million in 2017.
Emerging Brands The Emerging Brands portfolio grew 1% in 2018 compared to 2017. Net revenue contributions from the introduction of Hasbro’s new collectable product lines of LOST KITTIES and YELLIES products, as well as contributions from POWER RANGERS licensing revenues, were partially offset by net revenue declines from FURREAL FRIENDS, FURBY and the Company’s core PLAYSKOOL products.
SEGMENT RESULTS
Most of the Company’s net revenues and operating profits are derived from its three principal segments: the U.S. and Canada segment, the International segment and the Entertainment, Licensing and Digital segment, which are discussed in detail below.
As a result of the realignment of the Company's financial reporting segments, 2018 and 2017 net revenues of $57.7 million and $39.8 million, respectively, and operating profit(loss) of $11.8 million and $(13.9) million, respectively, were reclassified from the U.S. and Canada segment to the Entertainment, Licensing and Digital segment to conform to current year presentation.
Net Revenues
The chart below illustrates net revenues expressed in millions of dollars, derived from our principal operating segments in 2019, 2018 and 2017.
| 2019 Net Revenues | % Change | 2018 Net Revenues | % Change | 2017 Net Revenues | % Change | ||||||||||
| U.S. and Canada * | $ | 2,449.3 | 3.1 | % | $ | 2,375.7 | -10.4 | % | $ | 2,650.7 | 3.5 | % | |||
| International | 1,836.4 | -0.6 | % | 1,847.6 | -17.3 | % | 2,233.6 | 1.8 | % | ||||||
| Entertainment, Licensing and Digital * | 434.5 | 21.9 | % | 356.3 | 9.5 | % | 325.4 | 22.7 | % |
*As a result of the realignment of the Company’s financial reporting segments during the first quarter of 2019, net revenues of $57.7 million and $39.8 million from 2018 and 2017, respectively, were reclassified from the U.S. and Canada segment to the Entertainment, Licensing and Digital segment, to conform to current year presentation.
U.S. and Canada
2019 versus 2018
U.S. and Canada segment net revenues increased 3% in 2019 compared to 2018. Revenues in the U.S. and Canada segment were not materially impacted by foreign currency translation. Segment net revenues increased from growth in Partner Brands and Emerging Brands, partially offset by lower net revenues from Franchise Brands and the Hasbro Gaming portfolio.
In the Franchise Brands portfolio, higher net revenues from MAGIC: THE GATHERING, PLAY-DOH and MONOPOLY products were more than offset by lower net revenues from NERF, MY LITTLE PONY, BABY ALIVE and TRANSFORMERS products. In the Partner Brands portfolio, higher net revenues from DISNEY FROZEN, STAR WARS and BEYBLADE products were partially offset by lower net revenues from DREAMWORKS' TROLLS and DISNEY PRINCESS products during 2019. In the Hasbro Gaming portfolio, lower net revenues from PIE FACE, SPEAK OUT and certain other Hasbro Gaming products were partially offset by net revenue increases from DUNGEONS & DRAGONS products. In the Emerging Brands portfolio, the positive impact from the introduction of the Company’s POWER RANGERS products, as well as net revenue increases from PLAYSKOOL products, were partially offset by net revenue declines from LITTLEST PET SHOP and LOST KITTIES products.
2018 versus 2017
U.S. and Canada segment net revenues declined 10% in 2018 compared to 2017. Revenues in the U.S. and Canada segment were not materially impacted by foreign currency translation. Segment net revenues declined in all product categories including Franchise Brands, Partner Brands and Hasbro Gaming, and to a lesser extent, net revenues declined in the Emerging Brands portfolio.
In the Franchise Brands portfolio, higher net revenues from MAGIC: THE GATHERING and MONOPOLY products were more than offset by lower net revenues from NERF, MY LITTLE PONY, BABY ALIVE and TRANSFORMERS products. In the Partner Brands portfolio, contributing to net revenue declines in 2018 were STAR WARS, DISNEY PRINCESS and DREAMWORKS’ TROLLS products, as well as lower net revenues from DISNEY’S DESCENDANTS products and the Company’s DISNEY FROZEN products. These declines were partially offset by net revenue increases from BEYBLADE and MARVEL products. In the Hasbro Gaming portfolio, higher net revenues from DUNGEONS & DRAGONS, CONNECT 4 and DON’T STEP IN IT products were more than offset by lower net revenues from PIE FACE, SPEAK OUT and TOILET TROUBLE products, as well as certain other games brands. In the Emerging Brands portfolio, net revenue increases from the introduction of the
Company’s line of LOST KITTIES, YELLIES and certain other Emerging Brands products were more than offset by lower net revenues from FURREAL FRIENDS, LITTLEST PET SHOP and core PLAYSKOOL products.
International
To calculate the year-over-year percentage change in net revenues absent the impact of foreign currency translation, net revenues were recalculated using those foreign currency translation rates in place for the prior year comparable period.
2019 versus 2018
International segment net revenues decreased approximately 1% in 2019 compared to 2018 which includes an unfavorable foreign currency translation of $76.5 million (Europe — $44.9 million, Latin America — $19.5 million, Asia Pacific — $12.1 million). Unfavorable foreign currency translation reflects the strengthening of the U.S. dollar when compared to the Euro as well as compared to foreign currencies throughout the Latin American and Asia Pacific regions. Absent the impact of foreign currency translation, International segment net revenues increased 4% in 2019 compared to 2018. On a regional basis, net revenues from Europe remained flat, Latin America declined 4% while net revenues from the Company’s Asia Pacific region increased 3% in 2019 from 2018. Net Revenues in emerging markets decreased 5% during 2019.
Higher net revenues from Partner Brands were wholly offset by lower net revenues from the Franchise Brands, Hasbro Gaming and Emerging Brands portfolios.
In the Franchise Brands portfolio, the primary drivers of the net revenue declines include lower sales of MY LITTLE PONY, TRANSFORMERS and NERF products, and to a lesser extent, BABY ALIVE products. These net revenue declines were partially offset by net revenue increases from MONOPOLY and MAGIC: THE GATHERING products. In the Partner Brands portfolio, higher net revenues from DISNEY FROZEN and MARVEL products were partially offset by lower net revenues from BEYBLADE, DISNEY PRINCESS and STAR WARS products. In the Hasbro Gaming portfolio, the International segment saw lower net revenues from PIE FACE and SPEAK OUT products as well as lower net revenues from certain other traditional games brands. These decreases were partially offset by net revenue increases from CONNECT 4, OPERATION and DUNGEONS & DRAGONS products. In the Emerging Brands portfolio, lower net revenues from LITTLEST PET SHOP and LOST KITTIES products were partially offset by net revenue contributions from POWER RANGERS products, as well as net revenue increases from PLAYSKOOL products.
2018 versus 2017
International segment net revenues decreased approximately 17% in 2018 compared to 2017 which includes an unfavorable foreign currency translation of $41.7 million (Latin America — $31.2 million, Europe — $9.0 million, Asia Pacific — $1.5 million). On a regional basis, net revenues from Europe declined 24%, Latin America declined 6% while net revenues from the Company’s Asia Pacific region declined 5% in 2018 from 2017. Net Revenues in emerging markets decreased 12% during 2018. Unfavorable foreign currency translation reflects the strengthening of the U.S. dollar compared to certain foreign currencies, primarily currencies throughout Latin America and the Euro. Absent the impact of foreign currency translation, International segment net revenues decreased 15% in 2018 compared to 2017.
Lower net revenues from the Franchise Brands, Partner Brands and Hasbro Gaming portfolios were partially offset by higher net revenues from the Emerging Brands portfolio.
In the Franchise Brands portfolio, the primary drivers of the net revenue declines include lower sales of MY LITTLE PONY, TRANSFORMERS, NERF and PLAY-DOH products. These net revenue declines were partially offset by net revenue increases from MONOPOLY products. In the Partner Brands portfolio, lower net revenues from STAR WARS and DREAMWORKS’ TROLLS products, as well as net revenue declines from the Company’s line of DISNEY PRINCESS and DISNEY FROZEN fashion and small dolls, were partially offset by net revenue increases from BEYBLADE and to a lesser extent, MARVEL products. In the Hasbro Gaming portfolio, the International segment saw lower net revenues from the majority of Hasbro Gaming products including social gaming products PIE FACE, SPEAK OUT and TOILET TROUBLE as well as lower net revenues from certain other traditional games brands, including LIFE, OPERATION and BOP-IT products. In the Emerging Brands portfolio, net revenue increases from the introduction of LOST KITTIES, LOCK STARS and YELLIES products during 2018, as
well as net revenue increases from LITTLEST PET SHOP products, were partially offset by lower net revenues from FURREAL FRIENDS, FURBY and core PLAYSKOOL products.
Entertainment, Licensing and Digital
2019 versus 2018
Entertainment, Licensing and Digital segment net revenues increased 22% in 2019 compared to 2018. Net Revenue growth in 2019 was driven primarily by MAGIC: THE GATHERING ARENA and the Company's share of revenues related to TRANSFORMERS: BUMBLEBEE, the 2018 theatrical release produced jointly with Paramount Pictures. Increased licensing revenues from the TRANSFORMERS and MONOPOLY brands during 2019 also contributed to the net revenue increase. Partially offsetting these increases were lower net revenues related to streaming digital television content in 2019 compared to 2018.
2018 versus 2017
Entertainment, Licensing and Digital segment net revenues increased 10% in 2018 compared to 2017. Net revenue growth in 2018 was driven by MAGIC: THE GATHERING ARENA as well as increased television programming and movie revenues, primarily recognized for content delivered under a multi-year digital streaming deal entered in the third quarter of 2018. Higher full-year revenues due to the adoption of ASC 606 as discussed in notes 1 and 2 to our consolidated financial statements which are included in Part II, Item 8 of this Form 10-K, also drove the increase in 2018. Partially offsetting these increases were lower digital and consumer product licensing revenues in 2018 compared to 2017.
Operating Profit
The table below illustrates operating profit expressed in millions of dollars and operating profit margins, derived from our principal operating segments in 2019, 2018 and 2017. For a reconciliation of segment operating profit to total Company operating profit, see note 21 to our consolidated financial statements which are included in Part II, Item 8 of this Form 10-K.
| 2019 | % Net Revenues | % Change | 2018 | % Net Revenues | % Change | 2017 | % Net Revenues | ||||||||||||
| U.S. and Canada | $ | 415.4 | 17.0 | % | 12 | % | $ | 370.2 | 15.6 | % | -29 | % | $ | 523.9 | 19.8 | % | |||
| International | 107.3 | 5.8 | % | >100% | 39.5 | 2.1 | % | -83 | % | 228.7 | 10.2 | % | |||||||
| Entertainment & Licensing | 99.7 | 22.9 | % | >100% | 29.1 | 8.2 | % | -65 | % | 82.4 | 25.3 | % |
U.S. and Canada
2019 versus 2018
U.S. and Canada segment operating profit increased $45.2 million to $415.4 million in 2019 compared to $370.2 million in 2018. Absent the impact of the Toys"R"Us bankruptcy filing and subsequent liquidation included within 2018 operating profit, the operating profit for 2019 increased $60.2 million. Operating profit margin increased to 17.0% of net revenues in 2019 from 15.6% of net revenues in 2018. Operating profit in 2018 was negatively impacted by charges of $45.8 million related to the bankruptcy filing and subsequent liquidation of Toys"R"Us. Absent these charges, operating profit declined slightly as higher partner brand sales generated higher royalty expense, and lower advertising and administrative expense was largely offset by increased warehousing costs as a result of higher domestic shipments and higher intangible amortization expense as a result of a full year of amortization from the Power Rangers Acquisition in 2018.
2018 versus 2017
U.S. and Canada segment operating profit decreased 29% in 2018 compared to 2017. The decline in operating profit includes pre-tax charges of $45.8 million in 2018 related to the bankruptcy filing and subsequent liquidation of Toys“R”Us. Segment operating profit was negatively impacted by the loss of Toys“R”Us sales throughout the year as well as a higher mix of retail close-out sales in 2018. Operating profit margin decreased to 15.6% of net revenues in 2018 from 19.8% of net revenues in 2017. The operating profit margin decline was the result of the negative margin impact of the Toys“R”Us bad debt expense in 2018, lower sales and unfavorable product mix as well as higher freight costs in the U.S., partially offset by lower royalty expenses due to lower revenues from Partner Brands products in 2018, as well as lower product development and advertising costs in 2018. Foreign currency translation did not have a material impact on U.S. and Canada operating profit in 2018.
International
2019 versus 2018
International segment operating profit increased $67.8 million to $107.3 million in 2019 compared to $39.5 million in 2018. Absent the impact of the Toys"R"Us bankruptcy filing and subsequent liquidation to 2018 operating profit, operating profit in 2019 increased $60.2 million. Operating profit margin increased to 5.8% in 2019 from 2.1% in 2018. The increase in operating profit and operating profit margin, as reported, is due to increased revenues, lower cost of sales due to improved inventory management, lower advertising costs and lower administrative costs. These decreases were partially offset by increased royalty expenses associated with higher sales of partner brand products and higher intangible amortization expense in 2019 as a result of a full year of amortization from the Power Rangers Acquisition in 2018.
2018 versus 2017
International segment operating profit decreased to $39.5 million in 2018 compared to $228.7 million in 2017 and included pre-tax charges of $7.6 million related to the 2018 Toys“R”Us liquidation. In addition, International operating profit included an unfavorable impact from foreign exchange of $10.9 million. Operating profit margin decreased to 2.1% in 2018 from 10.2% in 2017. The decrease in operating profit and operating profit margin, as reported, is primarily due to increased expenses and lost sales related to the Toys“R”Us liquidation in many European and Asia Pacific markets. The remaining decline was driven by increased obsolescence charges related to efforts to clear excess inventory in a challenging retail environment in Europe, partially offset by lower royalty expenses as the result of lower sales of Partner brand products and lower advertising costs in 2018.
Entertainment, Licensing and Digital
2019 versus 2018
Entertainment and Licensing segment operating profit increased $70.6 million to $99.7 million in 2019 compared to $29.1 million in 2018. Operating profit margin increased to 22.9% of net revenues in 2019 compared to 8.2% in 2018. Absent the impact of an $86.3 million goodwill impairment charge related to Backflip Studios on 2018 operating profit, operating profit in 2019 decreased 14%. This decrease was primarily due to higher program production expense and amortization costs, as well as increased development and administrative costs for MAGIC: THE GATHERING ARENA and other future digital gaming initiatives during 2019.
2018 versus 2017
Entertainment and Licensing segment operating profit declined to $29.1 million in 2018 compared to $82.4 million in 2017. Operating profit margin decreased to 8.2% of net revenues in 2018 compared to 25.3% in 2017. The overall decrease in operating profit and operating profit margin in the segment was primarily due to an $86.3 million goodwill impairment charge recorded in the fourth quarter related to Backflip Studios. In addition, contributing to the decrease in 2018 were higher programming amortization costs primarily related to MY LITTLE PONY: THE MOVIE, and higher advertising and development costs related to MAGIC: THE GATHERING ARENA, partially offset by lower royalty expenses in 2018.
Other Segments and Corporate and Eliminations
In the Global Operations segment, the operating loss was $7.2 million in 2019 compared to an operating loss of $8.4 million in 2018 and operating profit of $4.0 million in 2017.
In Corporate and eliminations, operating profit was $36.9 million in 2019 compared to an operating loss of $99.3 million in 2018 and $28.7 million in 2017. Operating profit in 2019 includes certain transaction costs of $17.8 million associated with the eOne acquisition. Operating losses in 2018 includes impairment charges of $31.3 million, severance charges of $89.3 million and Toys“R”Us related costs of $7.0 million.
OPERATING COSTS AND EXPENSES
The Company’s operating expenses, stated as percentages of net revenues, are illustrated below for the fiscal years ended December 29, 2019, December 30, 2018 and December 31, 2017:
| 2019 | 2018 | 2017 | ||||
| Cost of sales | 38.3 | % | 40.4 | % | 39.0 | % |
| Royalties | 8.8 | 7.7 | 7.8 | |||
| Product development | 5.6 | 5.4 | 5.2 | |||
| Advertising | 8.8 | 9.6 | 9.6 | |||
| Amortization of intangibles | 1.0 | 0.6 | 0.6 | |||
| Program production cost amortization | 1.8 | 1.0 | 0.7 | |||
| Selling, distribution and administration | 22.0 | 28.1 | 21.6 |
Operating expenses for 2019, 2018 and 2017 include benefits and expenses related to the following events:
| • | During 2019, the Company incurred acquisition costs related to eOne of $17.8 million within administrative expenses in the Corporate and Eliminations segment. |
| • | During 2018, the Company recognized charges of $60.4 million consisting of incremental bad debt expense on outstanding Toys“R”Us receivables, royalty expense, inventory obsolescence as well as other costs related to the Toys“R”Us bankruptcy. |
| • | During 2018, the Company incurred $89.3 million of severance charges, related to the 2018 restructuring program. These charges were recorded within selling, distribution and administration ("SD&A") expenses and included in Corporate and Eliminations. |
| • | During 2018, the Company recorded $117.6 million in goodwill impairment and other intangible asset impairment charges, all within administrative expenses in the Entertainment, Licensing & Digital segment and the Corporate and Eliminations segment. |
| • | During 2017 the Company recorded incremental bad debt expenses of $18.0 million within SD&A, related to the bankruptcy filings by Toys“R”Us in the U.S. and Canada. |
Cost of Sales
Cost of sales primarily consists of purchased materials, labor, manufacturing overhead and other inventory-related costs such as obsolescence. Cost of sales decreased 2% to $1,807.8 million, or 38.3% of net revenues, for the year ended December 29, 2019 compared to $1,850.7 million, or 40.4% of net revenues, for the year ended December 30, 2018. The cost of sales decrease in dollars and as a percent of net revenues was driven by favorable product mix from higher Entertainment, Licensing and Digital revenues combined with higher Partner Brand products, such as DISNEY FROZEN, MARVEL and STAR WARS, and additional savings related to favorable obsolescence expense and sales allowances. These savings were partially offset by increased costs to bring products into the U.S. during 2019.
In 2018, cost of sales decreased 9% to $1,850.7 million, or 40.4% of net revenues, for the year ended December 30, 2018 compared to $2,033.7 million, or 39.0% of net revenues, for the year ended December 31, 2017. Cost of sales in 2018 included obsolescence charges related to Toys“R”Us of $3.2 million. Cost of sales decreased in dollars primarily due to lower sales volumes compared to 2017. Increased cost of sales as a percent of net revenues reflects the mix of products sold, higher sales allowances and obsolescence charges as well as higher levels of closeout sales in 2018.
Royalty Expense
Royalty expense of $414.5 million, or 8.8% or net revenues, in 2019 compared to $351.7 million, or 7.7% of net revenues, in 2018 and $405.5 million, or 7.8% of net revenues, in 2017. Fluctuations in royalty expense generally relate to the volume of entertainment-driven products sold in a given period, especially if the Company is selling product tied to one or more major motion picture releases in the period. Product lines related to Hasbro-owned or controlled brands supported by entertainment generally do not incur the same level of royalty expense as licensed properties, particularly DISNEY FROZEN, STAR WARS and MARVEL, as well as DREAMWORKS and BEYBLADE products and certain other licensed properties which carry higher royalty rates than other licensed properties.
Higher royalty expense in dollars and as a percentage of net revenues in 2019 compared to 2018, reflects higher revenues from Partner Brand products as well as the mix of entertainment-driven product sold. In particular, higher royalty expense in 2019 reflects the higher net sales of DISNEY FROZEN and MARVEL products, and to a lesser extent, higher net sales of DISNEY'S DESCENDANTS and STAR WARS products. Lower royalty expense in dollars and as a percentage of net revenues in 2018 compared to 2017, reflects the mix of entertainment-driven product sold. In particular, lower net sales of STAR WARS and DREAMWORKS’ TROLLS products as well as lower net sales of DISNEY PRINCESS and DISNEY FROZEN products were partially offset by higher net sales of BEYBLADE and MARVEL products in 2018. These decreases were partially offset by accelerated royalty charges incurred as a result of the loss of Toys“R”Us product sales in 2018.
Product Development
Product development expense in 2019 totaled $262.2 million, or 5.6% of net revenues, compared to $246.2 million, or 5.4% of net revenues, in 2018. Product development expenditures reflect the Company’s investment in innovation and anticipated growth across our brand portfolio in both Franchise and Partner Brands. In dollars, the increase in product development expense was the result of increased investments in digital gaming, most notably, to MAGIC: THE GATHERING ARENA, which launched out of open beta in the third quarter of 2019, and other digital gaming initiatives. As a percentage of net revenues, product development was consistent with 2018.
Product development expense in 2018 totaled $246.2 million, or 5.4% of net revenues, compared to $269.0 million, or 5.2% of net revenues, in 2017. The decline in dollars was partially the result of the capitalization of certain costs related to MAGIC: THE GATHERING ARENA in 2018 as it progressed through the development cycle and was launched in open beta format, as compared to costs that were expensed in 2017, when the game was in its earlier stages of development. The remaining decline was due to reduced spending resulting from the lower revenue base in 2018. As a percentage of net revenues, product development was consistent with 2017.
Advertising Expense
Advertising expense in 2019 totaled $413.7 million, or 8.8% of net revenues compared to $439.9 million or 9.6% of net revenues in 2018 and $501.8 million or 9.6% in 2017. The level of the Company’s advertising expense is generally impacted by revenue mix, the amount and type of theatrical releases and television programming. The decrease in dollars and as a percentage of net revenues in 2019 was related to higher entertainment backed revenues which require lower advertising expense combined with greater efficiency in advertising programs.
In 2018, advertising as a percentage of net revenues was consistent with 2017 at 9.6% of net revenues.
Amortization of Intangible Assets
Amortization of intangible assets totaled $47.3 million, or 1.0% of net revenues, in 2019 compared to $28.7 million, or 0.6% of net revenues, in 2018 and $28.8 million, or 0.6% of net revenues in 2017. The increase in amortization of intangible assets in both dollars, and as a percent of net revenues reflects amortization related to the POWER RANGERS property rights acquired during the second quarter of 2018 as well as other licensed property rights, which began amortizing in 2019.
In 2018, amortization of intangible assets in dollars and as a percent of net revenues was consistent with 2017 and reflects the full amortization of property rights related to Backflip and other intangible assets during the first half of 2017, offset by the increase in intangible asset amortization related to the acquisition of the POWER RANGERS brand in 2018.
Program Production Cost Amortization
Program production cost amortization totaled $85.6 million, or 1.8% of net revenues in 2019, compared to $43.9 million, or 1.0% of net revenues, in 2018 and $35.8 million, or 0.7% of net revenues, in 2017. Program production costs are capitalized as incurred and amortized using the individual-film-forecast method. Program production cost amortization reflects the phasing of revenues associated with films and television programming as well as the type of television programs produced and distributed. The increase in dollars and as a percent of net revenues in 2019 compared to 2018 reflects amortization of production expenses attributable to certain film production assets, most notably TRANSFORMERS: BUMBLEBEE, partially offset by lower amortization of production expenses related to MY LITTLE PONY: THE MOVIE in 2019.
Program production cost amortization increased in dollars and as a percent of net revenues in 2018 compared to 2017 reflecting amortization of production expenses related to MY LITTLE PONY: THE MOVIE which
was released during the fourth quarter of 2017, as well as higher television programming amortization related to a multi-year, digital distribution agreement for Hasbro television programing, entered during 2018.
Selling, Distribution and Administration Expenses
Selling, distribution and administration expenses were $1,037.1 million, or 22.0% of net revenues, in 2019 compared to $1,287.6 million, or 28.1% of net revenues, in 2018. SD&A expenses in 2019 includes $17.8 million of transaction expenses related to the eOne acquisition while 2018 administrative expenses include the $117.6 million in goodwill impairment and other intangible asset charges, $89.3 million of severance charges, and $50.2 million of incremental expenses related to the Toys"R"Us bankruptcy. Absent these charges, the remaining decrease reflects lower spending due to the Company’s cost-reduction efforts and lower compensation expense. These decreases were partially offset by increased expenses related to opening a new Midwestern U.S. warehouse and higher domestic shipping and warehousing costs to support higher sales. In addition, the Company incurred higher selling and administrative costs in support of the Company’s Wizards of the Coast business.
SD&A expenses were $1,287.6 million, or 28.1% of net revenues, in 2018 compared to $1,124.8 million, or 21.6% of net revenues, in 2017. SD&A expenses in 2018 included the charges noted above. Absent these charges, the decrease in dollars reflects lower spending due to the Company’s cost-reduction efforts, lower incentive compensation expense in 2018 and lower marketing and selling costs due to lower revenues.
NON-OPERATING (INCOME) EXPENSE
Interest Expense
Interest expense totaled $101.9 million in 2019 compared to $90.8 million in 2018 and $98.3 million in 2017. During November 2019, the Company issued an aggregate of $2.4 billion of senior unsecured debt securities in connection with the financing of the acquisition of eOne. The increase in interest expense in 2019 reflects interest related to these notes, which was partially offset by lower average short-term borrowings through the majority of 2019. The decrease in interest expense in 2018 reflects the impact of the Company’s refinancing of debt in 2017. During the third quarter of 2017, the Company refinanced $350 million of 6.3% notes that matured in September 2017 by issuing $500 million of 3.5% notes due in 2027. This action, combined with lower average short-term borrowings in 2018, resulted in lower interest expense in 2018 when compared to 2017.
Interest Income
Interest income was $30.1 million in 2019 compared to $22.4 million in 2018 and $22.2 million in 2017. The Company had higher cash balances driven by the long-term debt and equity financings completed in November 2019 that resulted in proceeds of approximately $3.3 billion which were used in the December 30, 2019 acquisition of eOne. The higher levels of cash on hand in 2019 combined with higher average interest rates in 2019 and 2018 drove the increase in interest income.
Other (Income) Expense, Net
Other (income) expense, net was $(13.9) million, $(7.8) million and $(51.9) million in 2019, 2018 and 2017, respectively. The following table outlines major contributors to other (income) expense, net, expressed in millions of dollars.
| 2019 | 2018 | 2017 | |||||||
| Foreign currency (gains) losses | $ | (124.3 | ) | 10.8 | (1.3 | ) | |||
| Earnings from Discovery Family Channel | (23.6 | ) | (21.1 | ) | (23.3 | ) | |||
| Discovery tax sharing agreement revaluation | — | — | (19.9 | ) | |||||
| Pension expense | 119.5 | 5.8 | — | ||||||
| eOne deferred financing costs | 19.6 | — | — | ||||||
| Gain on sale of certain investments | (6.1 | ) | (3.0 | ) | (3.3 | ) | |||
| Other | 1.0 | (0.3 | ) | (4.1 | ) | ||||
| $ | (13.9 | ) | (7.8 | ) | (51.9 | ) |
| • | Foreign currency gains in 2019 reflect realized and unrealized gains of approximately $114.1 million on the foreign exchange forward and option contracts entered to hedge a portion of the British pound sterling purchase price in relation to the eOne acquisition. Foreign currency losses in 2018 compared to foreign |
currency gains in 2017 reflects the strengthening of the U.S. dollar against certain currencies, primarily in Latin American and European markets.
| • | Earnings from the Discovery joint venture are comprised of the Company’s share in the results of the Network. |
| • | In relation to their joint venture, Hasbro and Discovery are party to a tax sharing agreement. Due to a change in tax law, the liability representing future payments was revalued to reflect the lower future U.S. corporate tax rate beginning in 2018, which resulted in a $19.9 million gain in 2017. |
| • | As a result of the adoption of Accounting Standards Update No. 2017-07 (ASU 2017-07), Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost in 2018, non-service cost components of pension expense previously recorded to operating expense, are now recorded to other expense. |
| • | During 2019, the Company incurred $111.0 million of settlement charges related to the termination of its U.S. defined benefit pension plan which is reflected as a non-cash charge to pension expense. |
| • | During 2019, the Company incurred costs associated with the financing of the eOne transaction. With the termination of the bridge facility, the Company wrote off the associated financing costs in the fourth quarter of 2019. |
| • | The 2019, 2018 and 2017 gain on investments primarily reflects proceeds from the sale of certain long-term investments sold during the year. |
| • | In relation to their joint venture, Discovery owns an option to purchase Hasbro’s share of the Discovery Family Channel. The option’s fair value is periodically re-measured and represents a $1.3 million gain in 2019, a $0.5 million gain in 2018 and a $4.8 million gain in 2017 (included in other in the table above) due to the option’s value decrease. |
INCOME TAXES
Income tax expense totaled 12.4% of pre-tax earnings in 2019 compared with 18.5% in 2018 and 49.6% in 2017. Our effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year but are not consistent from year to year. Income tax expense for 2019 includes a net discrete tax benefit of $33.5 million primarily relating to the settlement of the U.S. defined benefit pension plan liability and the acquisition of eOne, specifically the nontaxable integrated hedging gains and nondeductible transaction costs. Income tax expense for 2018 includes a discrete net tax expense of $40.7 million relating to the Tax Cuts and Jobs Act (the “Tax Act”) and net tax benefits of approximately $50.0 million primarily due to reassessment of prior period tax positions and excess tax benefits relating to share-based compensation. Income tax expense for 2017 includes discrete net tax expense of $316.4 million relating to the Tax Act and net tax benefits of approximately $82.0 million primarily due to reassessment of prior period tax positions, a repatriation of earnings resulting in a foreign tax credit benefit, and excess tax benefits relating to share-based compensation.
As a result of the Tax Act, the Company intends to repatriate substantially all of the accumulated foreign earnings as needed from time to time. The Company still has significant cash needs outside the United States and continues to consistently monitor and analyze its global working capital and cash requirements. However, the Tax Act gives the Company flexibility to manage cash globally. In 2019, the Company recorded $1.7 million of foreign withholding and U.S. state taxes that will be incurred due to future cash distributions. The Company will continue to record additional tax effects, if any, in the period that the on-going distribution analysis is completed and is able to make reasonable estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases. The liability is based on the present value of lease payments and the asset is 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 result in straight-line expense while finance leases result in a front-loaded expense pattern. Certain other quantitative and qualitative disclosures are also required. ASU 2016-02 was 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 provided 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 retained earnings in the period of adoption. 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 were evaluated, including extension and renewal options as well as the lease payments associated with the leases. As a result of the adoption of the standard in the first quarter of 2019, the Company recorded right-of-use assets of $121.2 million and lease liabilities of $139.5 million. The Company’s results of operations were not impacted by this standard. The adoption of this standard did not have an impact on the Company’s cash flows. For further details, see Note 16 to the consolidated financial statements which are included in Part II Item 8 of this Form 10-K.
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 the standard in the second quarter of 2018.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12 (ASU 2017-12), Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the underlying hedged item in the financial statements. The impact of the standard includes elimination of the requirement to separately measure and recognize hedge ineffectiveness and requires the presentation of fair value adjustments to hedging instruments to be included in the same income statement line as the hedged item. For public companies, this standard was effective for annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The Company adopted the standard in the first quarter of 2019 and the adoption of the standard did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued Accounting Standards Update No. 2016-13 (ASU 2016-13) Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. The amendments in this update provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The standard update replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company has evaluated the requirements of ASU 2016-13 and currently does not expect the standard to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13 (ASU 2018-13), Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, specifically related to disclosures surrounding Level 3 asset balances, fair value measurement methods, related gains and losses and fair value hierarchy transfers. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company has evaluated ASU 2018-13 and does not expect the standard to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-14 (ASU 2018-14) Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20)- Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2020, and early
adoption is permitted. The standard relates to financial statement disclosure only and will not have an impact on the Company's statement of financial position, statement of operations or statement of cash flows.
In March 2019, the FASB issued Accounting Standards Update No. 2019-02 (ASU 2019-02) Entertainment-Films-Other Assets-Film Costs (Subtopic 926-20) and Entertainment-Broadcasters-Intangibles-Goodwill and Other (Subtopic 920-350) – Improvements to Accounting for Costs of Films and License Agreements for Program Materials. The amendments in this update align cost capitalization of episodic television series production costs with that of film production cost capitalization. In addition, this update addresses impairment testing procedures with regard to film groups, when a film or license agreement is expected to be monetized with other films and/or license agreements. The intention of this update is to align accounting treatment with changes in production and distribution models within the entertainment industry and to provide increased transparency of information provided to users of financial statements about produced and licensed content. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company has evaluated the standard and does not expect the standard to materially impact its consolidated financial statements.
OTHER INFORMATION
Pension Plan Termination
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 (the “Plan”). During the first quarter of 2018 the Company commenced the U.S. Pension Plan termination process and received regulatory approval during the fourth quarter of 2018. During the second quarter of 2019, the Company settled all remaining benefits directly with vested participants electing a lump sum payout, and purchased a group annuity contract from Massachusetts Mutual Life Insurance Company to administer all future payments to remaining U.S. Pension Plan participants. The U.S. Pension Plan's net funded asset position was sufficient to cover the lump sum payments and the purchase of the group annuity contract and settle all other remaining benefit obligations with no additional cost to the Company. After the settlement of the benefit obligations and payment of expenses, the Company had excess assets in the U.S. Pension Plan of approximately $20.2 million. The Company elected to utilize the remaining surplus after payment of administrative expenses for the Company's future matching contributions under the Company's 401(k) plan. Upon settlement of the pension liability, the Company recognized a non-operating settlement charge of $110.8 million, in May 2019, and an additional settlement charge of $0.2 million in December 2019, related to pension losses, reclassified from accumulated other comprehensive loss to other (income) expense in the Company's consolidated statements of operations, adjusted for market conditions and settlement costs at benefit distribution.
For further discussion on the Company's Plan termination, see note 15 to our consolidated financial statements, which are included in Part II, Item 8 of this Form10-K.
Brexit Referendum
On June 23, 2016, the United Kingdom (“UK”) voted in a referendum to leave the European Union (“EU”), commonly referred to as Brexit. The UK government triggered the formal two-year period to negotiate the terms of the UK’s exit on March 29, 2017. These events resulted in an immediate weakening of British pound sterling against the US dollar, and increased volatility in the foreign currency markets which continued through 2019. These fluctuations initially affected Hasbro’s financial results, although the impact was partially mitigated by the Company’s hedging strategy. On January 31, 2020, the UK formally withdrew from the EU, entering a transitional period which is currently expected to end on December 31, 2020. During this transitional period, EU law will continue to apply in the UK while providing time for the UK and EU to negotiate the details of their future relationship. Financial, trade and legal implications of the UK leaving the EU remain uncertain. The Company continues to closely monitor the negotiations and the impact to foreign currency markets, taking appropriate actions to support the Company’s long-term strategy and to mitigate risks in its operational and financial activities. However, the Company cannot predict the direction of Brexit-related developments nor the impact of those developments on our European operations and the economies of the markets in which they operate.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated a significant amount of cash from operations. In 2019, the Company funded its operations and liquidity needs through available cash and from cash flows from operations. In addition, during 2019 the Company issued debt and equity securities to finance its acquisition of eOne which was consummated on December 30, 2019, following the close of the Company's fiscal year-end.
During 2020, the Company expects to continue to fund its working capital needs primarily through available cash and cash flows from operations and, when needed, by issuing commercial paper or borrowing under its revolving credit agreement. In the event that the Company is not able to issue commercial paper, the Company intends to utilize its available lines of credit. With the acquisition of eOne the Company expects to use production financing to finance certain of eOne's productions in 2020. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its commercial paper program or its available lines of credit as well as production financing, are adequate to meet its working capital needs for 2020. The Company may also issue debt or equity securities from time to time, to provide additional sources of liquidity when pursuing opportunities to enhance our long-term competitive position, while maintaining a strong balance sheet. However, unexpected events or circumstances such as material operating losses or increased capital or other expenditures, or the inability to otherwise access the commercial paper market, may reduce or eliminate the availability of external financial resources. In addition, significant disruptions to credit markets may also reduce or eliminate the availability of external financial resources. Although the Company believes the risk of nonperformance by the counterparties to its financial facilities is not significant, in times of severe economic downturn in the credit markets it is possible that one or more sources of external financing may be unable or unwilling to provide funding to the Company.
During November of 2019, in conjunction with the Company's acquisition of eOne, the Company issued an aggregate of $2.4 billion of senior unsecured debt securities (collectively, the "Notes") consisting of the following tranches: $300 million of notes due 2022 (the "2022 Notes") that bear interest at a fixed rate of 2.60%; $500 million of notes due 2024 (the "2024 Notes") that bear interest at a fixed rate of 3.00%; $675 million of notes due 2026 (the "2026 Notes") that bear interest at a fixed rate of 3.55%; and $900 million of notes due 2029 (the "2029 Notes") that bear interest at a fixed rate of 3.90%. The interest rate payable on each series of the notes will be subject to adjustment from time to time if either Moody’s or S&P (or a substitute rating agency therefor) downgrades (or downgrades and subsequently upgrades) the credit rating assigned to the Notes. Underwriting discount and fees of $20.0 million were deducted from the gross proceeds of the Notes. These costs are being amortized over the life of the Notes, which range from three to ten years. Prior to October 19, 2024 (in the case of the 2024 Notes), September 19, 2026 (in the case of the 2026 Notes), August 19, 2029 (in the case of the 2029 Notes) and at any time (in the case of the 2022 Notes), the Company may redeem the Notes at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase, plus (1) 15 basis points (in the case of the 2022 Notes); (2) 25 basis points (in the case of the 2024 Notes); (3) 30 basis points (in the case of the 2026 Notes); and (4) 35 basis points (in the case of the 2029 Notes). In addition, on and after (1) October 19, 2024 for the 2024 Notes; (2) September 19, 2026 for the 2026 Notes; and (3) August 19, 2029 for the 2029 Notes, such series of Notes will be redeemable, in whole at any time or in part from time to time, at the Company's option at a redemption price equal to 100% of the principal amount of the Notes to be redeemed plus accrued and unpaid interest.
In November of 2019, the Company completed an underwritten public offering of 10,592,106 shares of common stock, par value $0.50 per share, at a public offering price of $95.00 per share. Net proceeds from this public offering were approximately $975.2 million, after deducting underwriting discounts and commissions and offering expenses of approximately $31.1 million. The net proceeds were used to finance, in part, the acquisition of eOne and to pay related costs and expenses.
In September 2017, the Company issued $500.0 million in principal amount of notes due 2027 (the "2027 Notes") that bear interest at a rate of 3.50%. Net proceeds of the 2027 Notes offering, after deduction of the underwriting discount and debt issuance expenses, totaled approximately $493.9 million. The Company may redeem the 2027 Notes at its option at the greater of the principal amount of the 2027 Notes or the present value of the remaining scheduled payments using the effective interest rate on applicable U.S. Treasury bills plus 25 basis points. In addition, on or after June 15, 2027, the Company may redeem at its option, any portion of the 2027 Notes at a redemption price equal to 100% of the principal amount of the notes to be redeemed. The proceeds from the issuance of the 2027 Notes were used, primarily, to repay $350 million aggregate principal amount of the 6.30% notes due 2017 upon maturity, including accrued and unpaid interest. The remaining net proceeds were utilized for general corporate and working capital purposes.
As of December 29, 2019, the Company’s cash and cash equivalents totaled $4,580.4 million, which is higher than prior year due to additional cash on hand from the debt and equity financings completed in anticipation of the eOne transaction. Prior to 2017, deferred income taxes had not been provided on the majority of undistributed earnings of international subsidiaries as such earnings were indefinitely reinvested by the Company. Accordingly, such international cash balances were not available to fund cash requirements in the United States unless the Company was to change its reinvestment policy. The Company has maintained sufficient sources of cash in the United States to fund cash requirements without the need to repatriate any funds. The Tax Act provided significant
changes to the U.S. tax system including the elimination of the ability to defer U.S. income tax on unrepatriated earnings by imposing a one-time mandatory deemed repatriation tax on undistributed foreign earnings. As of December 29, 2019, the remaining long-term payable related to the Tax Act of $174.5 million is presented within other liabilities, non-current on the Consolidated Balance Sheets. As permitted by the Tax Act, the Company will pay the transition tax in annual interest-free installments through 2025. As a result, in the future, the related earnings in foreign jurisdictions will be made available with greater investment flexibility. The majority of the Company’s cash and cash equivalents held outside of the United States as of December 29, 2019 is denominated in the U.S. dollar.
The table below outlines key financial information pertaining to our consolidated balance sheets including the year-over-year changes, expressed in millions of dollars.
| 2019 | % | 2018 | % | 2017 | |||||||||||||
| Cash and cash equivalents, net of short-term borrowings | $ | 4,580.4 | >100% | $ | 1,172.6 | -18 | % | $ | 1,426.3 | ||||||||
| Accounts receivable, net | 1,410.6 | 19 | % | 1,188.1 | -15 | % | 1,405.4 | ||||||||||
| Inventories | 446.1 | 1 | % | 443.4 | 2 | % | 433.3 | ||||||||||
| Prepaid expenses and other current assets | 310.5 | 16 | % | 268.7 | 26 | % | 214.0 | ||||||||||
| Other assets | 585.0 | -21 | % | 744.3 | 23 | % | 605.9 | ||||||||||
| Accounts payable and accrued liabilities | 1,256.6 | -1 | % | 1,264.6 | 15 | % | 1,096.7 | ||||||||||
| Other liabilities | 556.6 | 3 | % | 539.1 | 5 | % | 514.7 |
Accounts receivable, net increased 19% in 2019 compared to 2018. Foreign currency translation did not have a significant impact on account receivable balances in 2019. Days sales outstanding increased to 90 days at December 29, 2019 from 78 days at December 30, 2018. The days sales outstanding increase was the result of higher sales in jurisdictions with longer payment terms as well as the timing of shipments during the fourth quarter of 2019. Accounts receivable, net decreased 15% in 2018 compared to 2017. Excluding the favorable foreign currency translation of $51.9 million, accounts receivable, net, decreased 12%, in line with 2018 net revenue declines, excluding favorable foreign currency translation compared to 2017. Days sales outstanding decreased to 78 days at December 30, 2018 from 80 days at December 31, 2017. Absent the impact of 2017 Toys“R”Us pre-bankruptcy receivables, days sales outstanding at December 30, 2018 were consistent with December 31, 2017.
Inventories increased 1% at the end of 2019 compared to 2018. Foreign currency translation did not have a significant impact on 2019 inventory balances. The Company continues to work to improve inventory management with a focus on ensuring we have the right levels of inventory in new and growing brands. Inventories increased 2% at the end of 2018 compared to 2017. Excluding the unfavorable foreign currency impact of $20.2 million, inventories increased 7% in 2018 compared to 2017. The increase in inventories, excluding the impact of foreign exchange, is due in part to sales declines as well as new markets, partially offset by reduced inventory levels in Europe and higher inventory obsolescence in 2018.
Prepaid expenses and other current assets increased 16% in 2019 compared to 2018. The increase was due to higher unrealized gains on foreign exchange contracts, including $34.1 million of unrealized gains from hedges in relation to the eOne acquisition purchase price and other related transaction costs. In addition, the increase in prepaid expenses and other current assets was due to higher accrued and prepaid royalty and licensing balances in 2019. As a result of the settlement of the Company's U.S. defined benefit pension plan liability, the Company had excess assets of approximately $20.2 million of which $8.6 million is recorded as a current asset and will be used to fund future Company contributions to the Company's 401(k) plan in the U.S. These increases were partially offset by lower prepaid tax balances. Prepaid expenses and other current assets increased 26% in 2018 compared to 2017. The increase was related to higher unrealized gains on foreign exchange contracts, higher accrued tax credits related to certain television and movie production costs, higher prepaid income tax balances as a result of lower taxable earnings in relation to 2018 estimated tax payments and higher accrued royalty income related to the adoption of ASU 2014-09, Revenue from Contracts with Customers (ASC-606).
Other assets decreased 21% in 2019 compared to 2018. Lower balances in 2019 include: lower deferred tax asset balances as a result of a reclassification of certain deferred tax assets to reduce the Company's transition tax liability, lower long-term receivable balances related to third-party production studio rebates, lower capitalized movie production costs as a result of higher amortization of certain production assets during 2019, as well as decreases in non-current royalty advance balances. These decreases were partially offset by the pension surplus as a result of the settlement of the Company's U.S. defined benefit pension plan liability during 2019, of which approximately $11.6 million is recorded in other assets and higher long-term contract assets balances in 2019. Other assets increased 23% in 2018 compared to 2017. Higher balances in 2018 include: increased deferred tax asset balances
related to tax benefits derived from intercompany dividends, higher capitalized movie and television production costs, net of related production rebates, primarily related to the Company’s share of costs related to BUMBLEBEE, the theatrical release produced jointly with Paramount Pictures, and released in December of 2018, higher long-term receivable balances related to the long-term portion of a multi-year digital distribution agreement for Hasbro television programming as well as higher accrued royalty income as a result of the adoption of the ASU 2014-09 in 2018. These increases were partially offset by lower long-term royalty advances and payments received from Cartamundi in relation to a long-term note receivable related to the sale of the Company’s manufacturing operations in August 2015.
Accounts payable and accrued liabilities were essentially flat in 2019 compared to 2018. Increases included higher accrued royalty balances as a result of higher sales of partner brand products, higher accrued incentive compensation balances, the Company’s current lease liability balance of $30.7 million included in accrued liabilities as the result of the adoption of ASU 2016-02, higher accrued dividends resulting from the higher level of shares outstanding and the higher dividend rate, and higher accrued interest as a result of higher debt levels in 2019 from the issuance of notes in November 2019. These increases were primarily offset by the payment of remaining amounts due to Saban Properties for the POWER RANGERS brand acquisition and lower severance accruals from payments made in relation to restructuring actions taken in 2018. Accounts payable and accrued liabilities increased 15% in 2018 compared to 2017. Increases included higher accrued liabilities related to the remaining amounts due for the POWER RANGERS acquisition, increased severance charges related to the Company’s 2018 restructuring program, higher deferred revenue balances primarily related to the launch of the online version of MAGIC: THE GATHERING, higher accrued tax balances related to value added taxes, primarily in Europe and Mexico and higher accrued dividends due to a higher dividend rate announced for 2019. These increases were partially offset by lower accrued incentive compensation balances as a result of the decline in company performance in 2018, lower accrued income tax balances as a result of lower earnings in 2018 and a lower liability for foreign currency forward contracts as the result of a strengthening U.S. dollar against certain foreign currencies in 2018.
Other liabilities increased 3% in 2019 compared to 2018. The increase is primarily due to the adoption of ASU 2016-02 in 2019 which requires the recognition of long-term lease liability balances, which were $113.4 million at December 29, 2019, partially offset by a decrease in the transition tax liability reflecting the reclassification of certain deferred tax assets to reduce the transition tax liability as well as the reclassification of the 2020 installment payment, and the elimination of deferred rent balances which were netted with their corresponding right of use assets as a result of the adoption of ASU 2016-02 in 2019. Other liabilities increased 5% in 2018 compared to 2017. The increase is due to the $258.7 million long-term portion of the repatriation tax liability related to U.S. Tax Reform passed in the fourth quarter of 2017. In addition, the Company’s first quarter 2018 decision to terminate its U.S. defined benefit pension plan resulted in an increase to other liabilities due to remeasurement of the plans projected benefit obligation, in relation to expected termination costs. These increases were partially offset by lower long-term balances related to foreign exchange contracts, lower balances related to accrued compensation for non-employee members of the Company’s Board of Directors due to payments made in 2018 and lower liabilities reflecting changes in management judgment with respect to uncertain tax positions.
Cash Flow
The following table summarizes the changes in the Consolidated Statement of Cash Flows, expressed in millions of dollars, for each of the years ended on December 29, 2019, December 30, 2018 and December 31, 2017.
| 2019 | 2018 | 2017 | |||||||||
| Net cash provided by (used in) | |||||||||||
| Operating Activities | $ | 653.1 | $ | 646.0 | $ | 724.4 | |||||
| Investing Activities | (61.0 | ) | (286.5 | ) | (131.5 | ) | |||||
| Financing Activities | 2,810.6 | (737.1 | ) | (312.2 | ) |
In 2019, 2018 and 2017, Hasbro generated $653.1 million, $646.0 million and $724.4 million of cash from its operating activities, respectively. Operating cash flows in 2019, 2018 and 2017 included $33.9 million, $132.0 million and $48.0 million, respectively, of cash used for television program and film production. The increase in operating cash flows in 2019 compared to 2018 primarily reflects higher earnings offset by higher levels of accounts receivable at December 2019. The decrease in operating cash flows in 2018 compared to 2017 reflects
lower earnings as well as higher film production costs in 2018 related to the production of the BUMBLEBEE film, released in December 2018.
Cash flows utilized by investing activities were $61.0 million, $286.5 million and $131.5 million in 2019, 2018 and 2017, respectively. Additions to property, plant and equipment decreased in 2019 to $133.6 million from $140.4 million and $134.9 million in 2018 and 2017, respectively. Of these additions, 54% in 2019, 58% in 2018 and 59% in 2017 were for purchases of tools, dies and molds related to the Company’s products. During the fiscal years ended December 29, 2019, December 30, 2018 and December 31, 2017, the depreciation of plant and equipment was $133.5 million, $139.3 million and $143.0 million, respectively. Fluctuations in depreciation of plant and equipment correlate with the percentage of additions to property, plant and equipment relating to tools, dies and molds which have shorter useful lives and accelerated depreciation. Excluding capital expenditures, 2019 cash utilized for investing activities reflects a cash payment net of cash acquired of $8.8 million related to the acquisition of Tuque in October of 2019 as well as offsetting realized gains of $80.0 million from hedges in relation to the Company's exposure to fluctuations in the British pound sterling associated with the eOne acquisition purchase price and other transaction related costs. The Company's 2019 investing activities also included $6.4 million received from the installment note relating to the sale of the Company’s manufacturing operations in 2015. Excluding capital expenditures, 2018 cash utilized for investing activities reflects cash payments of $155.5 million related to the acquisition of POWER RANGERS during the second quarter of 2018, partially offset by $6.4 million received on the installment note described above.
Net cash provided (utilized) by financing activities was $2,810.6 million, ($737.1) million, and ($312.2) million in 2019, 2018 and 2017, respectively.
Financing activities associated with the Company's acquisition of eOne in 2019 include:
| • | Net proceeds of $2,355.0 million from the November 2019 issuance of an aggregate of $2,375.0 million of senior unsecured long-term debt securities consisting of the following tranches: $300.0 million 2.60% notes due 2022; $500.0 million 3.00% notes due 2024; $675.0 million 3.55% notes due 2026; and $900.0 million 3.90% notes due 2029. The proceeds were net of debt issuance discount and fees of $20.0 million. The proceeds of the long-term debt issuance were used to finance, in part, the acquisition of eOne. |
| • | Net proceeds of $975.2 million from the issuance of 10,592,106 shares of common stock, par value $0.50 per share, at a public offering price of $95.00 per share. |
| • | Debt acquisition costs of $26.7 million paid in relation to eOne acquisition financing arrangements. |
In addition to the amounts above, net cash from 2019 financing activities includes the Company's payment of $100.0 million related to the 2018 POWER RANGERS brand acquisition, which consisted of a $75.0 million deferred purchase price payment and $25.0 million release from escrow. There are no remaining payments due to Saban Properties related to the POWER RANGERS brand acquisition.
Financing activities in 2019, 2018 and 2017, also reflect $61.4 million, $250.1 million, and $151.3 million, respectively, of cash paid, including transaction costs, to repurchase the Company’s Common Stock. During 2019, 2018 and 2017, the Company repurchased 0.7 million, 2.7 million, and 1.6 million shares, respectively, at an average price of $87.41, $94.15, and $94.74, respectively. A portion of the 2018 share repurchases were executed to offset the issuance of 3.1 million shares to Saban Properties included as part of the POWER RANGERS asset acquisition. At December 29, 2019, $366.6 million remained for share repurchases under the May 2018 Board authorization.
Dividends paid were $336.6 million in 2019, $309.3 million in 2018 and $277.0 million in 2017. The Company has increased its quarterly dividend rate from $0.57 in 2017 to $0.63 in 2018 and to $0.68 in 2019. Net repayments of short-term borrowings were $8.8 million, $142.4 million and $18.4 million in in 2019, 2018 and 2017, respectively. The Company generated cash from employee stock option transactions of $31.8 million, $30.0 million, and $29.4 million in 2019, 2018 and 2017, respectively. The Company paid withholding taxes related to share-based compensation of $13.1 million, $58.3 million and $32.0 million in 2019, 2018 and 2017, respectively.
Financing activities in 2017 include net proceeds of $493.9 million from the September 2017 issuance of $500.0 million 3.50% long-term notes due 2027, net of $6.1 million of debt issuance costs, partially offset by the repayment of $350.0 million 6.30% long-term notes that matured in September 2017.
Sources and Uses of Cash
The Company commits to inventory production, advertising and marketing expenditures prior to the peak fourth quarter retail selling season. Accounts receivable increase during the third and fourth quarter as customers increase their purchases to meet expected consumer demand in their holiday selling season. Due to the concentrated timeframe of this selling period, payments for these accounts receivable are generally not due until the fourth quarter or early in the first quarter of the subsequent year. This timing difference between expenditures and cash collections on accounts receivable sometimes makes it necessary for the Company to borrow amounts during the latter part of the year. During 2019 and 2018, the Company primarily used cash from operations and, to a lesser extent, borrowings under available lines of credit to fund its working capital. During 2017, the Company primarily used cash from operations and, to a lesser extent, borrowings under its commercial paper program and available lines of credit to fund its working capital.
The Company has an agreement with a group of banks which provides for a commercial paper program (the “Program”). Under the Program, at the request of the Company and subject to market conditions, the banks may either purchase from the Company, or arrange for the sale by the Company, of unsecured commercial paper notes. The Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of $1,000.0 million. The maturities of the notes may vary but may not exceed 397 days. The notes are sold under customary terms in the commercial paper market and are issued at a discount to par, or alternatively, sold at par and bear varying interest rates based on a fixed or floating rate basis. The interest rates vary based on market conditions and the ratings assigned to the notes by the credit rating agencies at the time of issuance. Borrowings under the Program are supported by the Company’s revolving credit agreement. The Company had no outstanding borrowings related to the Program at December 29, 2019.
In September of 2019, the Company entered into a $1.0 billion Term Loan Agreement (the "Term Loan Agreement”) with Bank of America N.A. (“Bank of America”), as administrative agent, and certain financial institutions as lenders, pursuant to which such lenders committed to provide, contingent upon the completion of the eOne acquisition and certain other customary conditions to funding, (1) a three-year senior unsecured term loan facility in an aggregate principal amount of $400.0 million (the “Three-Year Tranche”) and (2) a five-year senior unsecured term loan facility in an aggregate principal amount of $600.0 million (the “Five-Year Tranche” and together with the Three-Year Tranche, the “Term Loan Facilities”). Loans under the Term Loan Facilities will bear interest at the Company’s option, at either the Eurocurrency Rate or the Base Rate, in each case plus a per annum applicable rate that fluctuates (1) in the case of the Three-Year Tranche, between 87.5 basis points and 175.0 basis points, in the case of loans priced at the Eurocurrency Rate, and between 0.0 basis points and 75.0 basis points, in the case of loans priced at the Base Rate, and (2) in the case of the Five-Year Tranche, between 100.0 basis points and 187.5 basis points, in the case of loans priced at the Eurocurrency Rate, and between 0.0 basis points and 87.5 basis points, in the case of loans priced at the Base Rate, in each case, based upon the non-credit enhanced, senior unsecured long-term debt ratings of the Company by Fitch Ratings Inc., Moody’s Investor Service, Inc. and S&P Global Rankings, subject to certain provisions taking into account potential differences in ratings issued to the relevant rating agencies or a lack of ratings issued by such rating agencies. Loans under the Five-Year Tranche will require principal amortization payments that will be payable in equal quarterly installments of 5.0% per annum of the original principal amount thereof for each of the first two years after funding, increasing to 10.0% per annum of the original principal amount thereof for each subsequent year. The Term Loan Agreement contains affirmative and negative covenants typical of this type of facility, including: (i) restrictions on the Company’s and its domestic subsidiaries’ ability to allow liens on their assets, (ii) restrictions on the incurrence of indebtedness, (iii) restrictions on the Company’s and certain of its subsidiaries’ ability to engage in certain mergers, (iv) the requirement that the Company maintain a Consolidated Interest Coverage Ratio of no less than 3.00:1.00 as of the end of any fiscal quarter and (v) the requirement that the Company maintain a Consolidated Total Leverage Ratio of no more than, depending on the gross proceeds of equity securities issued after the Effective Date, 5.65:1.00 or 5.40:1.00 for each of the first, second and third fiscal quarters ended after the funding of the Term Loan Facilities, with periodic step downs to 3.50:1.00 for the fiscal quarter ending December 31, 2023 and thereafter.
During the third quarter of 2019, the Company entered into a second amended and restated revolving credit agreement with Bank of America, N.A., as administrative agent, swing line lender and a letter of credit issuer and lender and certain other financial institutions, as lenders thereto (the "Amended Revolving Credit Agreement"), which provides the Company with commitments having a maximum aggregate principal amount of $1,500.0 million, comprised of (1) $1,100.0 million, of commitments effective as of September 20, 2019, and (2) $400.0 million of commitments that became effective upon completion of the acquisition of eOne on December 30, 2019. The Amended Revolving Credit Agreement contains certain financial covenants setting forth leverage and coverage requirements, and certain other limitations typical of an investment grade facility, including with respect to liens, mergers and incurrence of indebtedness. Upon the additional $400.0 million of commitments becoming effective, the Amended Revolving Credit Agreement was extended through September 20, 2024. The Amended Revolving Credit Agreement also provides for a potential additional incremental commitment increase of up to $500.0 million subject to agreement of the lenders. Prior to the September 2019 amendment, the Revolving Credit Agreement provided for a $1,100.0 million revolving credit facility. The Company was in compliance with all covenants as of and for the year ended December 29, 2019. The Company had no borrowings outstanding under its committed revolving credit facility as of December 29, 2019. However, letters of credit outstanding under this facility as of December 29, 2019 were approximately $2.7 million. Amounts available and unused under the committed line at December 29, 2019 were approximately $1,097.3 million, inclusive of borrowings under the Company’s commercial paper program. The Company also has other uncommitted lines from various banks, of which approximately $11.7 million was utilized at December 29, 2019. Of the amount utilized under, or supported by, the uncommitted lines, approximately $0.5 million and $11.2 million represent outstanding short-term borrowings and letters of credit, respectively.
The Company has principal amounts of long-term debt at December 29, 2019 of approximately $4,084.9 million due at varying times from 2021 through 2044. As described above, the Company issued an aggregate of $2,375.0 million of senior unsecured long-term debt securities in November 2019 in connection with the financing of the eOne acquisition. The Company also had letters of credit and other similar instruments of $14.0 million and 2020 purchase commitments of $671.0 million outstanding at December 29, 2019. In 2020, the Company expects capital expenditures to be in the range of $160.0 million to $170.0 million. In addition, the Company expects to be committed to guaranteed royalty payments of approximately $111.0 million in 2020.
On December 30, 2019, the Company completed the acquisition of eOne. The cash transaction was valued at approximately £2.9 billion or $3.8 billion at the December 30, 2019 GBP to USD exchange rate of 1.31. On that date, the Company borrowed the full amount of $1.0 billion under the Term Loan Facilities. In addition, the Company redeemed eOne’s outstanding senior secured notes and paid off the debt outstanding under eOne’s revolving credit facility, which together represented approximately £0.6 billion or approximately $0.8 billion.
Critical Accounting Policies and Significant Estimates
The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company’s reported financial results include recoverability of goodwill and intangible assets and income taxes. Additionally, the Company identified the valuation of the Company’s equity method investment in Discovery Family Channel as a significant accounting estimate.
Recoverability of Goodwill and Intangible Assets
During the fourth quarter of 2018 the Company adopted Accounting Standards Update No. 2017-04 (ASU 2017-04), Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard eliminates the requirement to measure the implied fair value of goodwill by assigning the fair value of a reporting unit to all assets and liabilities within that unit (“the Step 2 test”) from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess, limited by the amount of goodwill in that reporting unit.
The Company tests goodwill for impairment at least annually. If an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim test at that time. The Company may perform a qualitative assessment and bypass the quantitative impairment testing process if it is not more likely than not that impairment exists.
If it is more likely than not that impairment exists, a quantitative goodwill impairment test is performed. When performing a quantitative impairment test, goodwill is tested for impairment by comparing the carrying value to the estimated fair value of the reporting unit which is calculated using an income approach. Other intangible assets with indefinite lives are tested for impairment by comparing their carrying value to their estimated fair value. During the fourth quarter of 2019, the Company performed a qualitative assessment with respect to certain of its reporting units with goodwill totaling $494.6 million. The Company utilized this approach for all reporting units based on the amount by which historical estimated reporting unit fair values exceeded carrying values. Based on its qualitative assessments, the Company concluded that there was no impairment of goodwill to reporting units tested using the qualitative approach during 2019.
During the fourth quarter of 2018, the Company took a number of actions to react to a rapidly changing mobile gaming industry that resulted in a modification to the Company’s long-term plan for its Backflip business. These modifications included organizational actions and related personnel changes, the extension of launch dates for games currently in or planned for development and the addition of partners for the development of future game releases. The modifications resulted in changes to the long-term projections for the Backflip business which led the Company to conclude the goodwill associated with the Backflip reporting unit was impaired. The goodwill impairment analysis involved comparing the Backflip carrying value to its estimated fair value, which was calculated based on the Income Approach. To calculate the fair value of the future cash flows under the Income Approach, a discount rate of 19% was utilized, representing the reporting unit’s estimated weighted-average cost of capital. Based on the results of the impairment test, the Company determined that the carrying value of the Backflip reporting unit exceeded its estimated fair value. The Company recorded an impairment charge of $86.3 million within administrative expense and in the Company’s Entertainment, Licensing and Digital segment, during the fourth quarter of 2018, which was the full amount of remaining goodwill associated with the Backflip reporting unit. Subsequently, during 2019 the Company made the decision to close the Backflip business.
The estimation of future cash flows utilized in the evaluation of the Company’s goodwill requires significant judgments and estimates with respect to future revenues related to the respective asset and the future cash outlays related to those revenues. Actual revenues and related cash flows or changes in anticipated revenues and related cash flows could result in a change in this assessment and result in an impairment charge. The estimation of discounted cash flows also requires the selection of an appropriate discount rate. The use of different assumptions would increase or decrease estimated discounted cash flows and could increase or decrease the related impairment charge.
Intangible assets, other than those with indefinite lives, are reviewed for indications of impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. There were no triggering events in 2019 which would indicate impairment existed in the Company's intangible assets during 2019.
As part of its assessment of intangible assets in the fourth quarter of 2018, the Company completed impairment testing relating to certain property rights, both owned or related to license agreements. Specifically, the Company reviewed intangible assets recorded in connection with licensed property rights and owned technology. Due to a decline in revenue and revised projections for future revenue, it was determined that the intangible asset carrying values exceeded expected future cash flows, indicating that the intangible asset was impaired, and resulted in a charge of $31.3 million recorded within administrative expense.
Income Taxes
The Company’s annual income tax rate is based on its income, statutory tax rates, changes in prior tax positions and tax planning opportunities available in the various jurisdictions in which it operates. Significant judgment and estimates are required to determine the Company’s annual tax rate and evaluate its tax positions. Despite the Company’s belief that its tax return positions are fully supportable, these positions are subject to challenge and estimated liabilities are established in the event that these positions are challenged, and the Company is not successful in defending these challenges. These estimated liabilities, as well as the related interest, are adjusted in light of changing facts and circumstances such as the progress of a tax audit. In addition, on December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that established new tax laws in 2018, including, but not limited to, reducing the U.S. statutory tax rate from 35% to 21% and creating new taxes on certain foreign-sourced earnings and certain related-party payments.
In May 2019, a public referendum held in Switzerland approved Swiss Federal Act on Tax Reform and AHV Financing (TRAF) proposals previously approved by Swiss Parliament. The Swiss tax reform measures are effective on January 1, 2020. Changes in tax reform include the abolishment of preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level. The enacted changes in Swiss federal
tax were not material to the Company's consolidated financial statements. Swiss cantonal tax was enacted in December 2019. Due to the uncertain nature of the cantonal legislation, the Company is still assessing the transitional provision options it may elect; however, the pending legislation is not expected to have a material effect on the Company’s consolidated financial statements. We will continue to review TRAF as the Swiss authorities provide additional interpretive guidance on the new law and related transitional methodology.
In certain cases, tax law requires items to be included in the Company’s income tax returns at a different time than when these items are recognized in the consolidated financial statements or at a different amount than that which is recognized in the consolidated financial statements. Some of these differences are permanent, such as expenses that are not deductible on the Company’s tax returns, while other differences are temporary and will reverse over time, such as depreciation expense. These differences that will reverse over time are recorded as deferred tax assets and liabilities on the consolidated balance sheets. Deferred tax assets represent deductions that have been reflected in the consolidated financial statements but have not yet been reflected in the Company’s income tax returns. Valuation allowances are established against deferred tax assets to the extent that it is determined that the Company will have insufficient future taxable income, including capital gains, to fully realize the future deductions or capital losses. Deferred tax liabilities represent expenses recognized on the Company’s income tax return that have not yet been recognized in the Company’s consolidated financial statements or income recognized in the consolidated financial statements that has not yet been recognized in the Company’s income tax return.
Valuation of Equity Method Investment in Discovery Family Channel
The Company owns an interest in a joint venture, Discovery Family Channel (“the Network”), with Discovery Communications, Inc. (“Discovery”). The Company has determined that it does not meet the control requirements to consolidate the Network and accounts for the investment using the equity method of accounting. The Network was established to create a cable television network in the United States dedicated to high-quality children’s and family entertainment. In October 2009, the Company purchased an initial 50% share in the Network for a payment of $300 million and certain future tax payments based on the value of certain tax benefits expected to be received by the Company. In September 2014, the Company and Discovery amended their relationship with respect to the Network and Discovery increased its equity interest in the Network to 60% while the Company retained a 40% equity interest in the Network.
The Company tests its equity method investment in the Network for impairment annually. If an event occurs or circumstances change that indicate that the carrying value may not be recoverable, the Company will perform an interim test at that time. The Company’s valuation of its equity method investment in the Network includes assumptions surrounding forecasted revenue and expenses, a discount rate and a terminal growth rate, which are used to estimate the fair value of the investment and involve a high degree of subjectivity given the volatility in consumer interest when choosing entertainment media.
Contractual Obligations and Commercial Commitments
In the normal course of its business, the Company enters into contracts related to obtaining rights to produce products under license, which may require the payment of minimum guarantees, as well as contracts related to the leasing of facilities and equipment. In addition, the Company has $4,084.9 million in principal amount of long-term debt outstanding at December 29, 2019. Future payments required under these and other obligations, expressed in millions of dollars as of December 29, 2019, are as follows:
| Payments due by Fiscal Year | |||||||||||||||||||||
| Certain Contractual Obligations | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||
| Long-term debt | $ | — | 300.0 | 300.0 | — | 500.0 | 2,984.9 | 4,084.9 | |||||||||||||
| Interest payments on long-term debt | 163.1 | 158.4 | 153.7 | 145.9 | 145.9 | 1,095.4 | 1,862.4 | ||||||||||||||
| Operating lease commitments | 36.4 | 31.8 | 28.8 | 22.6 | 13.1 | 33.6 | 166.3 | ||||||||||||||
| Future minimum guaranteed contractual royalty payments | 111.0 | 98.5 | 66.9 | 0.2 | 0.2 | 0.5 | 277.3 | ||||||||||||||
| Transition Taxa | 18.4 | 18.4 | 18.4 | 34.4 | 45.9 | 57.3 | 192.8 | ||||||||||||||
| Tax sharing agreementb | 4.7 | 4.9 | 5.1 | 5.4 | 6.0 | 3.2 | 29.3 | ||||||||||||||
| Purchase commitmentsc | 386.0 | 105.0 | 95.0 | 85.0 | — | — | 671.0 | ||||||||||||||
| $ | 719.6 | 717.0 | 667.9 | 293.5 | 711.1 | 4,174.9 | 7,284.0 |
On December 30, 2019, the Company borrowed $1.0 billion under its Term Loan Facilities in order to finance, in part, the acquisition of eOne. The maturities of the Term Loan facilities are $22.5 million in 2020, $30.0 million in 2021, $452.5 million in 2022, $60.0 million in 2023 and $435.0 million in 2024.
| a | As discussed above, the Tax Act requires the Company to pay a one-time mandatory deemed repatriation tax on undistributed foreign earnings of $308.0 million. The Company utilized $78.5 million of existing tax credits to reduce the $308.0 million U.S. federal income tax liability, which resulted in $229.5 million to be paid in interest-free installments through 2025, of which $18.4 million was paid in 2019 and 2018. See note 11 to the consolidated financial statements included in Part II, Item 8 of this Form 10-K for further discussion. |
| b | In connection with the Company’s agreement to form a joint venture with Discovery, the Company is obligated to make future payments to Discovery under a tax sharing agreement. These payments are contingent upon the Company having sufficient taxable income to realize the expected tax deductions of certain amounts related to the joint venture. Accordingly, estimates of these amounts are included in the table above. |
| c | Purchase commitments represent agreements (including open purchase orders) to purchase inventory and tooling in the ordinary course of business as well as purchase commitments under a manufacturing agreement. The reported amounts exclude inventory and tooling purchase liabilities included in accounts payable or accrued liabilities on the consolidated balance sheets as of December 29, 2019. |
Other Expected Future Payments
From time to time, the Company may be party to arrangements, contractual or otherwise, whereby the Company may not be able to estimate the ultimate timing or amount of the related payments. As such, these amounts have been excluded from the table above and described below:
| • | Included in other liabilities in the consolidated balance sheets at December 29, 2019, the Company has a liability of $42.2 million of potential tax, interest and penalties for uncertain tax positions that have been taken or are expected to be taken in various income tax returns. The Company does not know the ultimate resolution of these uncertain tax positions and as such, does not know the ultimate amount or timing of payments related to this liability. |
| • | At December 29, 2019, the Company had letters of credit and related instruments of approximately $14.0 million. |
The Company believes that cash from operations and funds available through its commercial paper program or lines of credit will allow the Company to meet these and other obligations described above.
Financial Risk Management
The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates primarily as the result of sourcing products priced in U.S. dollars and Hong Kong dollars while marketing and selling those products in more than twenty currencies. Results of operations may be affected primarily by changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound sterling, Canadian dollar, Brazilian real, Russian ruble and Mexican peso and, to a lesser extent, other currencies in Latin American and Asia Pacific countries.
To manage this exposure, the Company has hedged a portion of its forecasted foreign currency transactions using foreign exchange forward contracts. At December 29, 2019, the Company estimates that a hypothetical immediate 10% depreciation of the U.S. dollar against all foreign currencies included in these foreign exchange forward contracts could result in an approximate $43.3 million decrease in the fair value of these instruments. A decrease in the fair value of these instruments would be substantially offset by decreases in the value of the forecasted foreign currency transactions.
The Company is also exposed to foreign currency risk with respect to its net cash and cash equivalents or short-term borrowing positions in currencies other than the U.S. dollar. The Company believes, however, that the on-going risk on the net exposure should not be material to its financial condition. In addition, the Company’s revenues and costs have been and will likely continue to be affected by changes in foreign currency rates. A significant change in foreign exchange rates can materially impact the Company’s revenues and earnings due to translation of foreign-denominated revenues and expenses. The Company does not hedge against translation impacts of foreign exchange. From time to time, affiliates of the Company may make or receive intercompany loans in currencies other than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts.
The Company reflects all derivatives at their fair value as an asset or liability on the consolidated balance sheets. The Company does not speculate in foreign currency exchange contracts. At December 29, 2019, these contracts had net unrealized gains of $43.7 million, of which $42.3 million are recorded in prepaid expenses and other current assets, $6.7 million are recorded in other assets and $5.3 million are recorded in accrued liabilities. Included in accumulated other comprehensive earnings at December 29, 2019 are deferred gains of $12.7 million, net of tax, related to these derivatives.
During the third quarter of 2019, the Company hedged a portion of its exposure to fluctuations in the British pound sterling in relation to the eOne acquisition purchase price and other transaction related costs using a series of both foreign exchange forward and option contracts. These contracts do not qualify for hedge accounting and as such, were marked to market through the Company's Consolidated Statement of Operations. As of December 29, 2019, these derivative instruments had a total notional value of $4,468.8 million and a net fair value of $34.1 million which is recorded to prepaid expenses and other assets within the Company's consolidated financial statements. In addition, the Company recorded gains of $80.0 million on matured contracts to other (income) expense, net for the year ended December 29, 2019.
At December 29, 2019, the Company had fixed rate long-term debt of $4,084.9 million. Of this long-term debt, $600.0 million represents the aggregate issuance of long-term debt in May 2014 which consists of $300.0 million of 3.15% notes due 2021 and $300.0 million of 5.10% notes due 2044. Prior to the May 2014 debt issuance, the Company entered into forward-starting interest rate swap agreements with a total notional value of $500.0 million to hedge the anticipated underlying U.S. Treasury interest rate. These interest rate swaps were matched with this debt issuance and were designated and effective as hedges of the change in future interest payments. At the date of issuance, the Company terminated these swap agreements and their fair value at the date of issuance was recorded in accumulated other comprehensive loss and is being amortized through the consolidated statements of operations using an effective interest rate method over the life of the related debt. Included in accumulated other comprehensive loss at December 29, 2019 are deferred losses, net of tax, of $17.9 million related to these derivatives.
On June 23, 2016, the UK voted in a referendum to leave the EU, commonly referred to as Brexit. The UK government triggered the formal two-year period to negotiate the terms of the UK’s exit on March 29, 2017. These events resulted in an immediate weakening of British pound sterling against the US dollar, and increased volatility in the foreign currency markets which continued through 2019. These fluctuations initially affected Hasbro’s financial results, although the impact was partially mitigated by the Company’s hedging strategy. On January 31, 2020, the UK formally withdrew from the EU, entering a transitional period which is currently expected to end on December 31, 2020. During this transitional period, EU law will continue to apply in the UK while providing time for the UK and EU to negotiate the details of their future relationship. Financial, trade and legal implications of the UK leaving the EU remain uncertain. The Company continues to closely monitor the negotiations and the impact to foreign
currency markets, taking appropriate actions to support the Company’s long-term strategy and to mitigate risks in its operational and financial activities. However, the Company cannot predict the direction of Brexit-related developments nor the impact of those developments on our European operations and the economies of the markets in which they operate.
The Economy and Inflation
The principal market for the Company’s products is the retail sector. Revenues from the Company’s top five customers, all retailers, accounted for approximately 38% of its consolidated net revenues in 2019 and 2018 and 42% of its consolidated net revenues in 2017. The Company monitors the creditworthiness of its customers and adjusts credit policies and limits as it deems appropriate.
The Company’s revenue pattern continues to show the second half of the year to be more significant to its overall business for the full year. In 2019, approximately 64% of the Company’s full year net revenues were recognized in the second half of the year. The Company expects that this concentration will continue. The concentration of sales in the second half of the year increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items, and (c) failure to achieve tight and compressed shipping schedules. The business of the Company is characterized by customer order patterns which vary from year to year largely because of differences in the degree of consumer acceptance of a product line, product availability, marketing strategies, inventory levels, policies of retailers and differences in overall economic conditions. Larger retailers generally maintain lower inventories throughout the year and purchase a greater percentage of product within or close to the fourth quarter holiday consumer buying season, which includes Christmas.
Quick response inventory management practices being used by retailers result in orders increasingly placed for immediate delivery and fewer orders placed well in advance of shipment. Retailers are timing their orders so that they are filled by suppliers closer to the time of purchase by consumers. To the extent that retailers do not sell as much of their year-end inventory purchases during this holiday selling season as they had anticipated, their demand for additional product earlier in the following fiscal year may be curtailed, thus negatively impacting the Company’s future revenues. In addition, the bankruptcy or other lack of success of one of the Company’s significant retailers could negatively impact the Company’s future revenues.
The effect of inflation on the Company’s operations during 2019 was not significant and the Company will continue its practice of monitoring costs and adjusting prices, accordingly.
Coronavirus Outbreak
The global outbreak of the coronavirus currently being experienced in markets in which we, our employees, consumers, customers, suppliers and manufacturers operate, could have a significant negative impact on our revenues, profitability and business. While we have developed and continue to develop plans to help mitigate the negative impact of the coronavirus to our business, the efforts will not completely prevent our business from being adversely affected, and the longer the outbreak impacts supply and demand the more negative the impact it will have on our business, revenues and earnings, and the more limited our ability will be to try and make up for delayed or lost product development, production and sales. The coronavirus outbreak continues to be fluid and uncertain, making it difficult to forecast the final impact it could have on our future operations. Please see Part I, Item 1A, Risk Factors, for further information.
Other Information
The Company is not aware of any material amounts of potential exposure relating to environmental matters and does not believe its environmental compliance costs or liabilities to be material to its operating results or financial position.
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