PART I.
FINANCIAL INFORMATION
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Item 1. Financial Statements.
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HASBRO, INC. AND SUBSIDIARIES
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Consolidated Balance Sheets
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(Thousands of Dollars Except Share Data)
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(Unaudited)
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September 30,
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October 1,
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December 31,
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2018
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2017
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2017
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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907,107
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1,244,778
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1,581,234
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Accounts receivable, less allowance for doubtful accounts of
$96,000
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$33,900 and $31,400
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1,391,242
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1,655,752
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1,405,399
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Inventories
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610,918
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629,120
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433,293
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Prepaid expenses and other current assets
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283,183
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232,590
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214,000
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Total current assets
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3,192,450
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3,762,240
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3,633,926
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Property, plant and equipment, less accumulated depreciation of
$452,000
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$417,000 and $422,100
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255,150
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263,862
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259,710
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Other assets
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Goodwill
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572,387
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572,762
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573,063
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Other intangible assets, net of accumulated amortization of
$924,700
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$898,300 and $904,900
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732,235
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223,695
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217,382
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Other
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743,107
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722,089
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605,902
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Total other assets
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2,047,729
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1,518,546
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1,396,347
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Total assets
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$
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5,495,329
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5,544,648
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5,289,983
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities
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Short-term borrowings
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$
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20,307
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189,012
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154,957
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Accounts payable
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458,808
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525,852
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348,476
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Accrued liabilities
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842,808
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769,893
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748,264
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Total current liabilities
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1,321,923
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1,484,757
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1,251,697
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Long-term debt
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1,694,721
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1,693,261
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1,693,609
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Other liabilities
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591,404
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410,378
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514,720
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Total liabilities
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3,608,048
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3,588,396
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3,460,026
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Shareholders' equity
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Preference stock of $2.50 par value. Authorized 5,000,000
shares; none
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issued
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-
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Common stock of $0.50 par value. Authorized 600,000,000 shares;
issued
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209,694,630 at September 30, 2018, October 1, 2017,
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and December 31, 2017
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104,847
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104,847
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104,847
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Additional paid-in capital
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1,282,405
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1,043,981
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1,050,605
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Retained earnings
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4,254,919
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4,336,420
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4,260,222
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Accumulated other comprehensive loss
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(296,738)
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(234,792)
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(239,425)
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Treasury stock, at cost; 82,979,119 shares at September 30,
2018; 85,139,302
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shares at October 1, 2017; and 85,244,923 shares at December 31,
2017
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(3,458,152)
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(3,294,204)
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(3,346,292)
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Total shareholders' equity
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1,887,281
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1,956,252
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1,829,957
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Total liabilities and shareholders' equity
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$
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5,495,329
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5,544,648
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5,289,983
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See accompanying condensed notes to consolidated financial
statements.
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HASBRO, INC. AND SUBSIDIARIES
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Consolidated Statements of Operations
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(Thousands of Dollars Except Per Share
Data)
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(Unaudited)
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Quarter Ended
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Nine Months Ended
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September 30,
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October 1,
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September 30,
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October 1,
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2018
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2017
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2018
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2017
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Net revenues
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$
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1,569,686
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1,791,502
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3,190,485
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3,613,671
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Costs and expenses:
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Cost of sales
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655,597
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730,656
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1,249,090
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1,404,971
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Royalties
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105,265
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139,222
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240,962
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282,754
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Product development
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65,807
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67,386
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183,050
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192,765
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Advertising
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134,384
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168,926
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290,001
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342,236
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Amortization of intangibles
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8,841
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6,492
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19,873
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22,254
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Program production cost amortization
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14,088
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5,394
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33,419
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16,152
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Selling, distribution and administration
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272,368
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312,482
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853,585
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813,268
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Total costs and expenses
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1,256,350
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1,430,558
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2,869,980
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3,074,400
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Operating profit
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313,336
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360,944
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320,505
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539,271
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Non-operating (income) expense:
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Interest expense
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22,779
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25,072
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68,391
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73,752
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Interest income
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(4,671)
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(5,362)
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(17,227)
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(16,042)
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Other income, net
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(566)
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(8,607)
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(6,189)
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(26,003)
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Total non-operating expense, net
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17,542
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11,103
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44,975
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31,707
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Earnings before income taxes
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295,794
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349,841
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275,530
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507,564
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Income tax expense
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31,933
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84,258
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63,862
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105,659
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Net earnings
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$
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263,861
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265,583
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211,668
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401,905
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Net earnings per common share
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Basic
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$
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2.08
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2.12
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1.68
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3.21
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Diluted
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$
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2.06
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2.09
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1.67
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3.16
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Cash dividends declared per common share
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$
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0.63
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0.57
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1.89
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1.71
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See accompanying condensed notes to consolidated financial
statements.
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HASBRO, INC. AND SUBSIDIARIES
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Consolidated Statements of Comprehensive
Earnings
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(Thousands of Dollars)
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(Unaudited)
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Quarter Ended
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Nine Months Ended
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September 30,
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October 1,
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September 30,
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October 1,
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2018
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2017
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2018
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2017
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Net earnings
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$
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263,861
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265,583
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211,668
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401,905
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Other comprehensive earnings (loss):
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Foreign currency translation adjustments
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(6,762)
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13,142
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(44,560)
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41,954
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Unrealized holding losses on available
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-for-sale securities, net of tax
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(617)
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(784)
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(673)
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(555)
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Net gains (losses) on cash flow hedging activities,
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net of tax
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5,323
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(26,532)
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23,765
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(83,729)
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Changes in unrecognized pension amounts, net of tax
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-
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-
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(26,058)
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-
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Reclassifications to earnings, net of tax:
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Net (gains) losses on cash flow hedging activities
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(1,672)
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4,547
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5,318
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(2,237)
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Amortization of unrecognized pension and
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and postretirement amounts
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2,066
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1,448
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6,398
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4,345
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Total other comprehensive loss, net of tax
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(1,662)
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(8,179)
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(35,810)
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(40,222)
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Comprehensive earnings
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$
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262,199
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257,404
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175,858
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361,683
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See accompanying condensed notes to consolidated financial
statements.
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HASBRO, INC. AND SUBSIDIARIES
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Consolidated Statements of Cash Flows
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(Thousands of Dollars)
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(Unaudited)
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Nine Months Ended
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September 30,
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October 1,
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2018
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2017
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Cash flows from operating activities:
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Net earnings
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$
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211,668
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401,905
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Adjustments to reconcile net earnings to net cash provided by
operating activities:
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Depreciation of plant and equipment
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104,915
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107,853
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Amortization of intangibles
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19,873
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22,254
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Program production cost amortization
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33,419
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16,152
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Deferred income taxes
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(7,189)
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17,797
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Stock-based compensation
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35,823
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37,390
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Other non-cash items
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(12,124)
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(16,033)
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Change in operating assets and liabilities net of
acquired balances:
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Increase in accounts receivable
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(9,252)
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(300,693)
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Increase in inventories
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(197,253)
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(222,546)
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Increase in prepaid expenses and other current assets
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(52,005)
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(4,437)
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Program production costs
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(95,724)
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(25,309)
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Increase in accounts payable and accrued liabilities
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124,755
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137,518
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Changes in net deemed repatriation tax
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18,074
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-
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Other
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(234)
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29,945
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Net cash provided by operating activities
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174,746
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201,796
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Cash flows from investing activities:
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Additions to property, plant and equipment
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(104,015)
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(102,512)
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Acquisitions
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(155,451)
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-
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Other
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8,587
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5,516
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Net cash utilized by investing activities
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(250,879)
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(96,996)
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Cash flows from financing activities:
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Proceeds of borrowings with maturity greater than three months
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-
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493,878
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Repayments of borrowings with maturity greater than three months
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-
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(350,000)
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Net (repayments of) proceeds from other short-term borrowings
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(131,629)
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15,663
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Purchases of common stock
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(187,850)
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(112,241)
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Stock-based compensation transactions
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28,827
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29,432
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Dividends paid
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(229,562)
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(206,012)
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Payments related to tax withholding for share-based compensation
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(58,336)
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(31,973)
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Net cash utilized by financing activities
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(578,550)
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(161,253)
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Effect of exchange rate changes on cash
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(19,444)
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18,946
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Decrease in cash and cash equivalents
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(674,127)
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(37,507)
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Cash and cash equivalents at beginning of year
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1,581,234
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1,282,285
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Cash and cash equivalents at end of period
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$
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907,107
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1,244,778
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Supplemental information
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Cash paid during the period for:
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Interest
|
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$
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69,603
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|
|
75,567
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Income taxes
|
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$
|
87,704
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|
|
86,441
|
|
|
|
|
|
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See accompanying condensed notes to consolidated financial
statements.
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HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)
(1)
Basis of Presentation
In the opinion of
management, the accompanying unaudited interim consolidated financial
statements contain all normal and recurring adjustments necessary to present
fairly the consolidated financial position of Hasbro, Inc. and all
majority-owned subsidiaries ("Hasbro" or the "Company") as
of September 30, 2018 and October 1, 2017, and the results of its operations
and cash flows for the periods then ended in accordance with accounting
principles generally accepted in the United States of America ("U.S.
GAAP"). The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and notes thereto. Actual results
could differ from those estimates.
The quarters ended September
30, 2018 and October 1, 2017 were each 13-week periods. The nine-month period
ended September 30, 2018 was a 39-week period while the nine-month period ended
October 1, 2017 was a 40-week period.
The results of operations
for the quarter and nine-month periods ended September 30, 2018 are not necessarily
indicative of results to be expected for the full year, nor were those of the
comparable 2017 periods representative of those actually experienced for the
full year 2017. Certain reclassifications have been made to prior year amounts
to conform to the current period presentation.
These condensed consolidated
financial statements have been prepared without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and disclosures normally included in the consolidated financial
statements prepared in accordance with U.S. GAAP have been condensed or omitted
pursuant to such rules and regulations. The Company filed audited
consolidated financial statements for the fiscal year ended December 31, 2017
in its Annual Report on Form 10-K (“2017 Form 10-K”), which includes all such
information and disclosures and, accordingly, should be read in conjunction
with the financial information included herein.
Recently Adopted
Accounting Standards
The Company's accounting
policies are the same as those described in Note 1 to the Company's
consolidated financial statements in its 2017 Form 10-K with the exception of
the accounting policies related to revenue recognition, reclassification of
disproportionate tax effects from accumulated other comprehensive income (“AOCI”)
caused by the Tax Cuts and Jobs Act of 2017, the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost and Business
Combinations, Clarifying the Definition of a Business.
On January 1, 2018, the
Company adopted Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification Topic 606,
Revenue from Contracts with Customers
(ASC 606 or the “New Revenue Standard”) using the modified retrospective
method. ASC 606 supersedes the revenue recognition requirements in ASC 605 –
Revenue
Recognition
and most industry-specific guidance in U.S. GAAP. The New
Revenue Standard provides a five-step model for analyzing contracts and
transactions to determine when, how, and if revenue is recognized. Revenue
should be recognized to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which an entity expects
to be entitled in exchange for those goods or services. The cumulative impact
of the adoption of the New Revenue Standard was not material to the Company
therefore the Company did not record any adjustments to retained earnings. This
was determined by analyzing contracts not completed as of January 1, 2018. The
comparative information has not been restated and continues to be reported
under the accounting standards in effect for those periods. For further
details, see Note 2.
Revenue
recognition from the sale of finished product to customers, which is the
majority of the Company’s revenues, did not change under the new standard and
the Company does not expect material changes in the future as a result of the
New Revenue Standard related to the sale of finished product to its customers.
Within the Company’s Entertainment and Licensing segment, the timing of revenue
recognition for minimum guarantees that the Company receives from licensees is
impacted by the New Revenue Standard. Prior to the adoption of ASC 606, for
licenses of the Company’s brands that are subject to minimum guaranteed license
fees, the Company recognized the difference between the minimum guaranteed amount
and the actual royalties earned from licensee merchandise sales (“shortfalls”)
at the end of the contract period, which was in the fourth quarter for most of
the Company’s licensee arrangements. In periods following January 1, 2018,
minimum guaranteed amounts will be recognized on a straight-line basis over the
license period. While the impact of this change will not be material to the
year, it will impact the timing of revenue recognition within the Company’s
Entertainment and Licensing segment such that under ASC 606, less revenues will
be recorded in the fourth quarter and more revenues will be recorded within the
first, second, and third quarters. No other areas of the Company’s business
were materially impacted by the New Revenue Standard.
In January 2018, the FASB
issued
Accounting Standards Update No. 2017-01(“ASU 2017-01”),
Business
Combinations (Topic 805): Clarifying the Definition of a Business. The standard
clarifies the definition of a business with the objective of providing guidance
when evaluating whether transactions should be accounted for as acquisitions
(or disposals) of assets or businesses. For public companies, this standard was
effective for annual reporting periods beginning after December 15, 2017. For
further details, see Note 3.
In February 2018, the FASB issued
Accounting Standards Update No. 2018-02 (“ASU 2018-02”), Income Statement
-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax
Effects from Accumulated Other Comprehensive Income. The standard provides for
a reclassification from accumulated other comprehensive earnings (“AOCE”) to
retained earnings, of disproportionate income tax effects arising from the
impact of the Tax Cuts and Jobs Act of 2017. For public companies, this
standard is effective for annual reporting periods beginning after December 15,
2018. Early adoption is permitted. The Company adopted ASU 2018-02 in the
first quarter of 2018. The impact of the adoption resulted in a one-time
reclassification in the amount of $
21,503
from AOCE with a
corresponding credit to retained earnings.
In March 2017, the FASB
issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost. The standard requires companies to present the service cost
component of net benefit cost in the income statement line items where they
report compensation cost. Companies will present all other components of net
benefit cost outside operating income, if this subtotal is presented. For
public companies, this standard was effective for annual reporting periods
beginning after December 15, 2017, and early adoption was permitted. The
Company adopted this standard in the first quarter of 2018 and the adoption of
this standard did not have a material impact on the Company’s results or
consolidated financial statements in the quarter or nine-months ended September
30, 2018.
In August 2016, the FASB issued ASU 2016-15,
Statement
of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash
Payments
. The new guidance is intended to reduce diversity in practice
across all industries, in how certain transactions are classified in the
statement of cash flows. ASU 2016-15 was effective for public companies for
fiscal years beginning after December 15, 2017. The Company adopted this
standard in 2018 and the adoption of this standard did not have an impact on
the Company’s statement of cash flows for the nine-month periods ended
September 30, 2018 and October 1, 2017.
In October 2016, the FASB issued Accounting Standards
Update No. 2016-16 (ASU 2016-16),
Accounting for Income Taxes: Intra-Entity
Transfers of Assets Other Than Inventory
. For public companies, this
standard was effective for annual reporting periods beginning after December
15, 2017, and early adoption is permitted. The standard requires that the
income tax impact of intra-entity sales and transfers of property, except for
inventory, be recognized when the transfer occurs requiring any deferred taxes
not yet recognized on intra-entity transfers to be recorded to retained
earnings. The Company adopted this standard in the first quarter of 2018 and
the adoption did not have an impact on the Company’s results or consolidated
financial statements.
(2) Revenue Recognition
Revenue Recognition
Revenue is recognized when control of the promised
goods is transferred to the customers, in an amount that reflects the
consideration the Company expects to be entitled to in exchange for
transferring those goods. The Company accounts for a contract when it has
approval and commitment from both parties, the rights of the parties are
identified, payment terms are identified, the contract has commercial substance,
and collectability of consideration is probable.
Toy and Games
The majority of the Company’s revenues are derived from sales of
finished products to customers. Revenues from sales of finished products to
customers accounted for
92
% and
95
% of the Company’s revenues
for the nine-month periods ended September 30, 2018 and October 1, 2017,
respectively. When determining whether control of the finished products has transferred
to the customer, the Company considers any future performance obligations.
Generally, the Company has no post-shipment obligation on sales of finished
products to customers and revenues from product sales are recognized upon
passing of title to the customer, which is generally at the time of shipment.
Any shipping and handling activities that are performed by the Company, whether
before or after a customer has obtained control of the products, are considered
activities to fulfill our obligation to transfer the products, and are recorded
as incurred within selling, distribution, and administration expenses. For the
quarters ended September 30, 2018 and October 1, 2017 these costs were
approximately $
55,029
and $
57,725
, respectively, and for the
nine-month periods ended September 30, 2018 and October 1, 2017, these costs
were approximately $
138,916
and $
131,809
, respectively. The
Company offers various discounts, rebates, allowances, returns, and markdowns
to its customers, (collectively, “allowances”), all of which are considered
when determining the transaction price. Certain allowances are fixed and
determinable at the time of sale and are recorded at the time of sale as a
reduction to revenues. Other allowances can vary depending on future outcomes
such as customer sales volume (“variable consideration”). The Company
estimates the amount of variable consideration using the expected value
method. In estimating the amount of variable consideration using the expected
value method, the Company considers various factors including but not limited
to: customer terms, historical experience, any expected deviations from
historical experience, and existing or expected market conditions. The Company
then records an estimate of variable consideration as a reduction to revenues
at the time of sale. The Company adjusts its estimate of variable
consideration at least quarterly or when facts and circumstances used in the
estimation process may change. Historically, adjustments to estimated variable
consideration have not been material.
Entertainment
and Licensing
Revenues within the Company’s Entertainment and Licensing segment,
which accounted for
6
% and
5
% of the Company’s revenues
for the nine-month periods ended September 30, 2018 and October 1, 2017,
respectively, are recorded either over a period of time or at a point in time.
The Company enters into contracts to license its intellectual property, which
consists of its brands, in various channels including but not limited to:
consumer products such as apparel or home goods, within formats such as on-line
games, within venues such as theme parks, or within formats such as motion
picture films. The licensees pay the Company either a sales-based or
usage-based royalty, or a combination of both, for use of the brands, in some
cases subject to minimum guaranteed amounts or fixed fees. The license of the
Company’s brands provide access to the intellectual property over the term of
the license, generally without any other performance obligation of the Company
other than keeping the intellectual property active, and is therefore
considered a right-to-access license of symbolic intellectual property. The
Company records sales-based or usage-based royalty revenues for right-to-access
licenses at the occurrence of the licensees’ subsequent sale or usage. When the
arrangement includes a minimum guarantee, the Company records the minimum
guarantee on a ratable basis over the term of the license period and does not
record the sales-based or usage-based royalty revenues until they exceed the
minimum guarantee. The Company also produces television or streaming
programming for licensing to third parties. The licensees typically pay a
fixed fee for the license of the produced content. The content that the
Company delivers to its licensees has stand-alone functionality, generally
without any other performance obligation of the Company, and is therefore
considered a right-to-use license of functional intellectual property. The
Company records revenues for right-to-use licenses once the license period has
commenced and the licensee has the ability to use the delivered content. In
arrangements where the licensee pays the Company a fixed fee for multiple
seasons or multiple series of programming, arrangement fees are recorded as
revenues based upon their relative fair values. As of September 30, 2018, the
Company did not have any material future performance commitments for film
streaming or television orders that have not yet been delivered. The Company
also develops application based digital games featuring its brands within the
games. These games are hosted by third-party platform providers. The Company
does not charge a fee to the end users for the download of the games or the ability
to play the games. The end users make in-application purchases of digital
currencies, via the Company’s platform providers, with such purchased digital
currencies to be used in the games. The Company records revenues from
in-application purchases based on the usage patterns of the players. For the
majority of the Company’s digital games, players use their currencies in the
month of purchase, and therefore revenues are recorded at the time of sale.
The Company has no additional performance obligations other than delivery of
the currency via its platform providers. The Company controls all aspects of
the goods delivered to the consumer. The third-party platform providers are
providing only the service of hosting and administering receipt from the end
users. The Company is the principal in the arrangement and records the gross
revenues within Net Revenues in our Consolidated Statements of Operations. The
fee charged by the third-party platform providers to the Company are recorded
within cost of sales.
Contract Assets and Liabilities
A
contract asset is defined as an entity's right to consideration for goods or
services that the entity has transferred to a customer. A contract liability
is defined to occur if the customer's payment of consideration precedes the
entity's performance and represents the entity's obligation to transfer goods
or services to a customer for which the entity has received consideration. The
Company occasionally will require payment from customers for finished product
in advance of the customer receiving control of the finished product. In these
situations, the Company defers revenue on the advanced payment until the
customer has control of the finished product, generally within the next month.
Within our Entertainment and Licensing segment, the Company may receive royalty
payments from licensees in advance of the licensees’ subsequent sales to their
customers, or in advance of the Company’s performance obligation being
satisfied. The Company defers revenues on these advanced payments until its
performance obligation is satisfied. The aggregate deferred revenues are
recorded as liabilities and were $
43,653
, and $
10,261
as of September 30, 2018
and December 31, 2017, respectively, and the changes in deferred revenues are
not material to the Company’s consolidated statement of operations for the nine-months
ended September 30, 2018 and October 1, 2017. The Company records contract
assets in the case of minimum guarantees that are being recognized ratably over
the term of the respective license periods. At September 30, 2018 and October
1, 2017, these contract assets were not material to the Company’s consolidated
balance sheets.
Accounts
Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable on the consolidated balance
sheets as of September 30, 2018, October 1, 2017 and December 31, 2017 are
primarily from contracts with customers. In the nine-months ended September 30,
2018, the Company recorded a bad debt charge of $
59,115
related to a significant
customer. In the quarter ended October 1, 2017, the Company recorded a bad debt
charge of $
18,000
related to a significant
customer. The Company had no other material bad debt expense in the nine-month
period ended October 1, 2017 or the quarter ended on September 30, 2018.
Disaggregation of revenues
The Company disaggregates its revenues from contracts with
customers by segment: US and Canada, International, Entertainment and
Licensing, and Global Operations. The Company further disaggregates revenues
within its International segment by major geographic region: Europe, Latin
America, and Asia Pacific. Finally, the Company disaggregates its revenues by
brand portfolio into four brand categories: Franchise brands, Partner brands,
Hasbro gaming, and Emerging brands. We believe these collectively depict how
the nature, amount, timing and uncertainty of revenue and cash flows are
affected by economic factors. See Note 11, Segment Reporting, for further
information.
(3)
Asset Acquisition
On
June
12, 2018
, the
Company completed the acquisition of Saban Properties’ Power Rangers and other
Entertainment Assets. The Company accounted for the acquisition as an asset
acquisition based on the guidance in ASU 2017-01, which uses the cost
accumulation and allocation method. As such, the Company included acquisition
costs in its calculation of the purchase price to be allocated to the assets
acquired.
The total purchase price for the assets was $535,850,
consisting of the following:
|
|
|
Cash Consideration:
|
|
To seller
(1)
|
$
|
152,000
|
Held in escrow
(2)
|
|
25,000
|
Market value of stock issued to seller
(3)
|
|
280,397
|
Deferred purchase price due in January 2019
(4)
|
|
75,000
|
|
|
532,397
|
Acquisition costs
|
|
1,973
|
Other adjustment
|
|
1,480
|
Total Purchase Price to be allocated
|
$
|
535,850
|
1. The Company previously paid Saban Brands $
22,250
for the
Power Rangers master toy license agreement announced in February 2018 and those
amounts were credited to, and included above, in the purchase price.
2. The $25,000 was placed into an escrow
account to support customary indemnification obligations of Saban Properties,
and is considered restricted cash within cash and cash equivalents on the
balance sheet with an offsetting liability included in other current
liabilities. One-half of the $25,000 in escrow is scheduled to be released on
January 3, 2019, and the remaining half to be released on the one-year
anniversary of the closing date, less any claim amounts deducted from the
escrow prior to those dates.
3. The Company issued
3,074,190
shares of Hasbro common
stock to Saban Properties, valued at $280,397.
4. An additional $75,000 will be paid in
January 2019 with no contingencies.
The total purchase price was allocated on a relative
fair value basis as follows:
• $
534,370
was recorded as an intangible
asset – Power Rangers IP rights, which will be amortized over a period of 25
years;
• $
7,884
as current assets;
• $
325
as capitalized production
costs; and
• $
6,729
as other current
liabilities.
(4)
Earnings Per Share
Net
earnings per share data for the quarter and nine-month periods ended September
30, 2018 and October 1, 2017 were computed as follows:
|
2018
|
|
2017
|
Quarter
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Net earnings
|
$
|
263,861
|
|
|
263,861
|
|
|
265,583
|
|
|
265,583
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
127,161
|
|
|
127,161
|
|
|
125,170
|
|
|
125,170
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Options and other share-based awards
|
|
-
|
|
|
731
|
|
|
-
|
|
|
1,980
|
Equivalent Shares
|
|
127,161
|
|
|
127,892
|
|
|
125,170
|
|
|
127,150
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share
|
$
|
2.08
|
|
|
2.06
|
|
|
2.12
|
|
|
2.09
|
|
2018
|
|
2017
|
Nine Months
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
Net earnings
|
$
|
211,668
|
|
|
211,668
|
|
|
401,905
|
|
|
401,905
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
125,982
|
|
|
125,982
|
|
|
125,204
|
|
|
125,204
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Options and other share-based awards
|
|
-
|
|
|
792
|
|
|
-
|
|
|
2,044
|
Equivalent Shares
|
|
125,982
|
|
|
126,774
|
|
|
125,204
|
|
|
127,248
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share
|
$
|
1.68
|
|
|
1.67
|
|
|
3.21
|
|
|
3.16
|
For the quarters ended
September 30, 2018 and October 1, 2017, options and restricted stock units
totaling 949 and 450, respectively, were excluded from the calculation of
diluted earnings per share
because to include them
would have been
antidilutive. For the nine-month periods ended September
30, 2018 and October 1, 2017, options and restricted stock units totaling 1,124
and 514, respectively, were excluded from the calculation of diluted earnings
per share because to include them would have been antidilutive.
(5)
Other Comprehensive
Earnings (Loss)
Components of other
comprehensive earnings (loss) are presented within the consolidated statements
of comprehensive earnings (loss). The following table presents the related tax
effects on changes in other comprehensive earnings (loss) for the quarter and nine-month
periods ended September 30, 2018 and October 1, 2017.
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
October 1,
|
|
September 30,
|
|
October 1,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings (loss), tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit on unrealized holding losses
|
$
|
179
|
|
|
445
|
|
|
195
|
|
|
315
|
Tax (expense) benefit on cash flow hedging activities
|
|
(73)
|
|
|
1,700
|
|
|
238
|
|
|
5,936
|
Tax benefit on changes in unrecognized pension amounts
|
|
-
|
|
|
-
|
|
|
7,565
|
|
|
-
|
Reclassifications to earnings, tax effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) on cash flow hedging activities
|
|
1,015
|
|
|
(1,875)
|
|
|
107
|
|
|
(2,884)
|
|
Tax benefit on unrecognized pension and
|
|
|
|
|
|
|
|
|
|
|
|
|
postretirement amounts reclassified to the
|
|
|
|
|
|
|
|
|
|
|
|
|
consolidated statements of operations
|
|
(600)
|
|
|
(822)
|
|
|
(1,857)
|
|
|
(2,466)
|
Total tax effect on other comprehensive earnings (loss)
|
$
|
521
|
|
|
(552)
|
|
|
6,248
|
|
|
901
|
Changes in the components of
accumulated other comprehensive earnings (loss) for the nine months ended September
30, 2018 and October 1, 2017 are as follows:
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
|
|
Total
|
|
|
|
|
Gains
|
|
(Losses) on
|
|
Foreign
|
|
Accumulated
|
|
Pension and
|
|
(Losses) on
|
|
Available-
|
|
Currency
|
|
Other
|
|
Postretirement
|
|
Derivative
|
|
for-Sale
|
|
Translation
|
|
Comprehensive
|
|
Amounts
|
|
Instruments
|
|
Securities
|
|
Adjustments
|
|
Loss
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
(110,971)
|
|
|
(32,827)
|
|
|
1,034
|
|
|
(96,661)
|
|
|
(239,425)
|
Adoption of ASU 2018-02
|
|
(18,065)
|
|
|
(3,660)
|
|
|
222
|
|
|
-
|
|
|
(21,503)
|
Current period other comprehensive earnings (loss)
|
|
(19,660)
|
|
|
29,083
|
|
|
(673)
|
|
|
(44,560)
|
|
|
(35,810)
|
Balance at September 30, 2018
|
$
|
(148,696)
|
|
|
(7,404)
|
|
|
583
|
|
|
(141,221)
|
|
|
(296,738)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 25, 2016
|
$
|
(118,401)
|
|
|
51,085
|
|
|
1,424
|
|
|
(128,678)
|
|
|
(194,570)
|
Current period other comprehensive earnings (loss)
|
|
4,345
|
|
|
(85,966)
|
|
|
(555)
|
|
|
41,954
|
|
|
(40,222)
|
Balance at October 1, 2017
|
$
|
(114,056)
|
|
|
(34,881)
|
|
|
869
|
|
|
(86,724)
|
|
|
(234,792)
|
At September 30, 2018, the
Company had remaining net deferred gains on foreign currency forward contracts,
net of tax, of $12,255 in accumulated other comprehensive loss
("AOCE"). These instruments hedge payments related to inventory
purchased in the third quarter of 2018 or forecasted to be purchased during the
remainder of 2018 and, to a lesser extent, 2019 through 2022, intercompany
expenses expected to be paid or received during 2018 and 2019, television and
movie production costs paid in 2018 or expected to be paid in 2018 or 2019 and cash
receipts for sales made at the end of the third quarter 2018 or forecasted to be
made in the remainder of 2018 and, to a lesser extent, 2019 through 2020. These
amounts will be reclassified into the consolidated statements of operations
upon the sale of the related inventory or recognition of the related sales or
expenses.
In addition to foreign
currency forward contracts, the Company entered into hedging contracts on future
interest payments related to the long-term notes due 2021 and 2044. At
the date of debt issuance, these contracts were terminated and the fair value
on the date of settlement was deferred in AOCE and is being amortized to
interest expense over the life of the related notes using the effective
interest rate method. At September 30, 2018, deferred losses, net of tax, of $19,659
related to these instruments remained in AOCE. For the quarters ended September
30, 2018 and October 1, 2017, previously deferred losses of $450 were
reclassified from AOCE to net earnings, respectively. For the nine-month
periods ended September 30, 2018 and October 1, 2017, previously deferred losses
of $1,349 and $1,384 were reclassified from AOCE to net earnings, respectively.
Of the amount included in
AOCE at September 30, 2018, the Company expects net gains of approximately $10,898
to be reclassified to the consolidated statements of operations within the next
12 months. However, the amount ultimately realized in earnings is dependent on
the fair value of the hedging instruments on the settlement dates.
(6)
Financial Instruments
The
Company's financial instruments include cash and cash equivalents, accounts
receivable, short-term borrowings, accounts payable and certain accrued
liabilities. At September 30, 2018, October 1, 2017 and December 31, 2017, the
carrying cost of these instruments approximated their fair value. The Company's
financial instruments at September 30, 2018, October 1, 2017 and December 31, 2017
also include certain assets and liabilities measured at fair value (see Notes 8
and 10) as well as long-term borrowings. The carrying costs, which are equal to
the outstanding principal amounts, and fair values of the Company's long-term
borrowings as of September 30, 2018, October 1, 2017 and December 31, 2017 are
as follows:
|
September 30, 2018
|
|
October 1, 2017
|
|
December 31, 2017
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
6.35% Notes Due 2040
|
$
|
500,000
|
|
|
546,450
|
|
|
500,000
|
|
|
613,750
|
|
|
500,000
|
|
|
601,800
|
3.50% Notes Due 2027
|
|
500,000
|
|
|
466,350
|
|
|
500,000
|
|
|
496,850
|
|
|
500,000
|
|
|
488,300
|
5.10% Notes Due 2044
|
|
300,000
|
|
|
285,390
|
|
|
300,000
|
|
|
324,300
|
|
|
300,000
|
|
|
313,320
|
3.15% Notes Due 2021
|
|
300,000
|
|
|
297,720
|
|
|
300,000
|
|
|
306,840
|
|
|
300,000
|
|
|
302,640
|
6.60% Debentures Due 2028
|
|
109,895
|
|
|
124,698
|
|
|
109,895
|
|
|
132,830
|
|
|
109,895
|
|
|
131,390
|
Total long-term debt
|
$
|
1,709,895
|
|
|
1,720,608
|
|
|
1,709,895
|
|
|
1,874,570
|
|
|
1,709,895
|
|
|
1,837,450
|
Less: Deferred debt expenses
|
|
15,174
|
|
|
-
|
|
|
16,634
|
|
|
-
|
|
|
16,286
|
|
|
-
|
Long-term debt
|
$
|
1,694,721
|
|
|
1,720,608
|
|
|
1,693,261
|
|
|
1,874,570
|
|
|
1,693,609
|
|
|
1,837,450
|
The fair values of the
Company's long-term debt are considered Level 3 fair values (see Note 8 for
further discussion of the fair value hierarchy) and are measured using the
discounted future cash flows method. In addition to the debt terms, the
valuation methodology includes an assumption of a discount rate that
approximates the current yield on a similar debt security. This assumption is
considered an unobservable input in that it reflects the Company's own
assumptions about the inputs that market participants would use in pricing the
asset or liability. The Company believes that this is the best information
available for use in the fair value measurement.
(7)
Income Taxes
The Company
and its subsidiaries file income tax returns in the United States and various
state and international jurisdictions. In the normal course of business, the
Company is regularly audited by U.S. federal, state and local, and
international tax authorities in various tax jurisdictions.
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 made broad and complex changes to
the U.S. tax code which impacted 2017 including, but not limited to, reducing
the U.S. federal corporate tax rate and requiring a one-time tax on certain
unrepatriated earnings of foreign subsidiaries.
On December
22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) established a one-year
measurement period to complete the accounting for the ASC 740 income tax
effects of the Tax Act. An entity recognizes the impact of those amounts
for which the accounting is complete. For matters that have not been
completed, provisional amounts are recorded to the extent they can be
reasonably estimated. For amounts for which a reasonable estimate cannot
be determined, no adjustment is made until such estimate can be
completed.
As a result, the Company recorded a one-time tax expense of $
47,800
in the first quarter of
2018 which reversed certain discrete benefits recorded in 2017 as well as
increased our provisional deemed repatriation tax liability. In the third
quarter, the estimate was further revised based on additional guidance and a
one-time tax benefit of $
17,336
was recorded.
Prior to
the enactment of the Tax Act, the Company previously considered the earnings in
non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded
no deferred income taxes. The Tax Act eliminates the deferral of U.S. income
tax on these foreign earnings by imposing a one-time mandatory deemed
repatriation tax and as a result, the Company now intends to repatriate
substantially all of the accumulated foreign earnings. The Company still has
significant cash needs outside the United States and we are currently analyzing
our global working capital and cash requirements. However, tax reform gives the
Company flexibility to manage cash globally. In 2017, the Company recorded $
1,657
of non-US local country
withholding taxes as part of the provisional repatriation tax amount, which
will be incurred due to certain future cash distributions. In the third
quarter, the Company recorded an additional $
2,412
of net tax that reflects
the state and local impact of proposed dividends from non-US subsidiaries to
the parent Company. The Company will continue to record these additional tax
effects, if any, in the period that the on-going distribution analysis is
completed and is able to make reasonable estimates.
The Company
is no longer subject to U.S. federal income tax examinations for years before
2013. With few exceptions, the Company is no longer subject to U.S. state or
local and non-U.S. income tax examinations by tax authorities in its major
jurisdictions for years before 2012. The Company is currently under income tax
examination in several U.S. state and local and non-U.S. jurisdictions.
(8)
Fair Value of
Financial Instruments
The Company measures certain
financial instruments at fair value. The fair value hierarchy consists of three
levels: Level 1 fair values are based on quoted market prices in active markets
for identical assets or liabilities that the entity has the ability to access;
Level 2 fair values are those based on quoted prices for similar assets or
liabilities, quoted prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable data for substantially the
full term of the assets or liabilities; and Level 3 fair values are based on
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
Accounting standards permit
entities to measure many financial instruments and certain other items at fair
value and establish presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement
attributes for similar assets and liabilities. The Company has elected the fair
value option for certain available-for-sale investments. At September 30, 2018,
October 1, 2017 and December 31, 2017, these investments totaled $24,201, $24,405
and $24,436, respectively, and are included in prepaid expenses and other
current assets in the consolidated balance sheets. The Company recorded net (losses)
gains of $(10) and $96 on these investments in other (income) expense, net for
the quarter and nine months ended September 30, 2018, respectively, related to
the change in fair value of such instruments. For the quarter and
nine-month periods ended October 1, 2017, the Company recorded net gains of $446
and $1,461, respectively, in other (income) expense, net, related to the change
in fair value of such instruments.
At September 30, 2018, October 1, 2017 and December 31, 2017, the
Company had the following assets and liabilities measured at fair value in its
consolidated balance sheets (excluding assets for which the fair value is
measured using net asset value per share):
|
Fair Value Measurements
Using:
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
Significant
|
|
|
|
|
|
|
|
for
|
|
Other
|
|
Significant
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
Fair
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
2,346
|
|
|
2,346
|
|
|
-
|
|
|
-
|
Derivatives
|
|
20,079
|
|
|
-
|
|
|
20,079
|
|
|
-
|
Total assets
|
$
|
22,425
|
|
|
2,346
|
|
|
20,079
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
2,113
|
|
|
-
|
|
|
2,113
|
|
|
-
|
Option agreement
|
|
23,460
|
|
|
-
|
|
|
-
|
|
|
23,460
|
Total liabilities
|
$
|
25,573
|
|
|
-
|
|
|
2,113
|
|
|
23,460
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
2,866
|
|
|
2,866
|
|
|
-
|
|
|
-
|
Derivatives
|
|
11,975
|
|
|
-
|
|
|
11,975
|
|
|
-
|
Total assets
|
$
|
14,841
|
|
|
2,866
|
|
|
11,975
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
22,671
|
|
|
-
|
|
|
22,671
|
|
|
-
|
Option agreement
|
|
28,510
|
|
|
-
|
|
|
-
|
|
|
28,510
|
Total liabilities
|
$
|
51,181
|
|
|
-
|
|
|
22,671
|
|
|
28,510
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
$
|
3,126
|
|
|
3,126
|
|
|
-
|
|
|
-
|
Derivatives
|
|
12,226
|
|
|
-
|
|
|
12,226
|
|
|
-
|
Total assets
|
$
|
15,352
|
|
|
3,126
|
|
|
12,226
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
$
|
23,051
|
|
|
-
|
|
|
23,051
|
|
|
-
|
Option agreement
|
|
23,980
|
|
|
-
|
|
|
-
|
|
|
23,980
|
Total Liabilities
|
$
|
47,031
|
|
|
-
|
|
|
23,051
|
|
|
23,980
|
Available-for-sale
securities include equity securities of one company quoted on an active public
market.
The
Company's derivatives consist of foreign currency forward contracts. The
Company used current forward rates of the respective foreign currencies to
measure the fair value of these contracts. The Company’s option agreement
relates to an equity method investment in Discovery Family Channel
(“Discovery”). The option agreement is included in other liabilities at September
30, 2018, October 1, 2017 and December 31, 2017, and is valued using an option
pricing model based on the fair value of the related investment. Inputs
used in the option pricing model include the volatility and fair value of
the underlying company which are considered unobservable inputs as they reflect
the Company's own assumptions about the inputs that market participants would
use in pricing the asset or liability. The Company believes that this is the
best information available for use in the fair value measurement. There were no
changes in these valuation techniques during the nine-month period ended
September 30, 2018.
The following is a
reconciliation of the beginning and ending balances of the fair value
measurements of the Company's financial instruments which use significant
unobservable inputs (Level 3):
|
2018
|
|
2017
|
Balance at beginning of year
|
$
|
(23,980)
|
|
|
(28,770)
|
Gain from change in fair value
|
|
520
|
|
|
260
|
Balance at end of third quarter
|
$
|
(23,460)
|
|
|
(28,510)
|
In addition to the above,
the Company has three investments for which the fair value is measured using
net asset value per share. At September 30, 2018, October 1, 2017 and December
31, 2017, these investments had fair values of $24,201, $24,405 and $24,436,
respectively. Two of the investments have net asset values that are
predominantly based on underlying investments which are traded on an active
market and are redeemable within 45 days. The third investment invests in hedge
funds which are generally redeemable on a quarterly basis with 30 – 90 days’
notice.
(9)
Pension and
Postretirement Benefits
The components of the net
periodic cost of the Company's defined benefit pension and other postretirement
plans for the quarter and nine-month periods ended September 30, 2018 and October
1, 2017 are as follows:
|
Quarter Ended
|
|
Pension
|
|
Postretirement
|
|
September 30,
|
|
October 1,
|
|
September 30,
|
|
October 1,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
678
|
|
|
925
|
|
|
189
|
|
|
172
|
Interest cost
|
|
3,997
|
|
|
4,443
|
|
|
292
|
|
|
295
|
Expected return on assets
|
|
(5,190)
|
|
|
(5,896)
|
|
|
-
|
|
|
-
|
Net amortization and deferrals
|
|
2,971
|
|
|
2,525
|
|
|
42
|
|
|
-
|
Net periodic benefit cost
|
$
|
2,456
|
|
|
1,997
|
|
|
523
|
|
|
467
|
|
Nine Months Ended
|
|
Pension
|
|
Postretirement
|
|
September 30,
|
|
October 1,
|
|
September 30,
|
|
October 1,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost
|
$
|
2,030
|
|
|
2,798
|
|
|
566
|
|
|
517
|
Interest cost
|
|
11,993
|
|
|
13,598
|
|
|
877
|
|
|
885
|
Expected return on assets
|
|
(15,569)
|
|
|
(18,057)
|
|
|
-
|
|
|
-
|
Net amortization and deferrals
|
|
8,913
|
|
|
7,738
|
|
|
127
|
|
|
-
|
Net periodic benefit cost
|
$
|
7,367
|
|
|
6,077
|
|
|
1,570
|
|
|
1,402
|
During
the nine months ended September 30, 2018, the Company made cash contributions
of $770 to its defined benefit pension plans. During fiscal 2018, the Company
expects to make cash contributions to its defined benefit pension plans of
approximately $1,300 in the aggregate.
In
February 2018
, the Compensation
Committee of the Company’s Board of Directors approved a resolution to
terminate the Company’s U.S. defined benefit pension plan (“Plan”). During the
first quarter of 2018 the Company commenced the plan termination process and
expects to complete the transfer of the Plan’s assets to a third-party
administrator over a period of eighteen months. The decision to terminate the
Plan follows the 2015 decision to freeze benefits being accrued covering
non-union employees after the sale of the Company’s manufacturing facility in
East Longmeadow, MA. Benefits covering non-union employees were frozen in
December 2007
.
In connection with the
decision to terminate the Plan, the Company remeasured the projected benefit
obligation based on the expected Plan termination costs. This remeasurement
utilized a discount rate of
3.2
% compared to the discount
rate of
3.7
% utilized in the December
31, 2017 measurement and resulted in an increase in the projected benefit
obligation of $
35,192
with offsetting amounts
recorded to accumulated other comprehensive losses and deferred taxes. Upon
settlement of the pension liability, the Company will reclassify the related
pension losses currently recorded to accumulated other comprehensive loss, to
the consolidated statements of operations. As of September 30, 2018, the
Company had unrecognized losses related to the Plan of $
142,997
. The Company will
recognize this loss upon termination of the Plan, adjusted for year-end
remeasurement, as well as the total required payout to plan participants which
will be determined based on employee elections and market conditions present at
the time of termination.
(10)
Derivative Financial
Instruments
Hasbro uses foreign currency
forward contracts to mitigate the impact of currency rate fluctuations on
firmly committed and projected future foreign currency transactions. These
over-the-counter contracts, which hedge future currency requirements related to
purchases of inventory, product sales and other cross-border transactions not
denominated in the functional currency of the business unit, are primarily
denominated in United States and Hong Kong dollars, and Euros. All contracts
are entered into with a number of counterparties, all of which are major
financial institutions. The Company believes that a default by a single
counterparty would not have a material adverse effect on the financial
condition of the Company. Hasbro does not enter into derivative financial
instruments for speculative purposes.
Cash Flow Hedges
The Company uses foreign
currency forward contracts to reduce the impact of currency rate fluctuations
on firmly committed and projected future foreign currency transactions. All of
the Company's designated foreign currency forward contracts are considered to
be cash flow hedges. These instruments hedge a portion of the Company's
currency requirements associated with anticipated inventory purchases, product
sales and other cross-border transactions in 2018 through 2022.
At September
30, 2018, October 1, 2017 and December 31, 2017, the notional amounts and fair
values of the Company's foreign currency forward contracts designated as cash
flow hedging instruments were as follows:
|
September 30, 2018
|
|
October 1, 2017
|
|
December 31, 2017
|
|
Notional
|
|
Fair
|
|
Notional
|
|
Fair
|
|
Notional
|
|
Fair
|
Hedged transaction
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Inventory purchases
|
$
|
555,661
|
|
|
6,827
|
|
|
894,529
|
|
|
(16,597)
|
|
|
756,673
|
|
|
(13,695)
|
Sales
|
|
319,421
|
|
|
13,027
|
|
|
579,421
|
|
|
17,215
|
|
|
423,315
|
|
|
16,144
|
Royalties and Other
|
|
117,534
|
|
|
(2,420)
|
|
|
266,670
|
|
|
(12,567)
|
|
|
196,889
|
|
|
(10,383)
|
Total
|
$
|
992,616
|
|
|
17,434
|
|
|
1,740,620
|
|
|
(11,949)
|
|
|
1,376,877
|
|
|
(7,934)
|
The
Company has a master agreement with each of its counterparties that allows for
the netting of outstanding forward contracts. The fair values of the Company's
foreign currency forward contracts designated as cash flow hedges are recorded
in the consolidated balance sheets at September 30, 2018, October 1, 2017 and December
31, 2017 as follows:
|
September 30,
|
|
October 1,
|
|
December 31,
|
|
2018
|
|
2017
|
|
2017
|
Prepaid expenses and other current
assets
|
|
|
|
|
|
|
|
|
Unrealized gains
|
$
|
15,414
|
|
|
10,207
|
|
|
13,666
|
Unrealized losses
|
|
(4,079)
|
|
|
(7,977)
|
|
|
(10,319)
|
Net unrealized gains
|
$
|
11,335
|
|
|
2,230
|
|
|
3,347
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
|
|
|
Unrealized gains
|
$
|
9,591
|
|
|
11,631
|
|
|
11,255
|
Unrealized losses
|
|
(1,455)
|
|
|
(3,139)
|
|
|
(2,376)
|
Net unrealized gains
|
$
|
8,136
|
|
|
8,492
|
|
|
8,879
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
|
|
Unrealized gains
|
$
|
596
|
|
|
5,354
|
|
|
4,215
|
Unrealized losses
|
|
(1,182)
|
|
|
(20,999)
|
|
|
(15,484)
|
Net unrealized losses
|
$
|
(586)
|
|
|
(15,645)
|
|
|
(11,269)
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
Unrealized gains
|
$
|
1,035
|
|
|
8,325
|
|
|
4,546
|
Unrealized losses
|
|
(2,486)
|
|
|
(15,351)
|
|
|
(13,437)
|
Net unrealized losses
|
$
|
(1,451)
|
|
|
(7,026)
|
|
|
(8,891)
|
Net gains (losses) on cash
flow hedging activities have been reclassified from other comprehensive
earnings (loss) to net earnings for the quarter and nine-month periods ended September
30, 2018 and October 1, 2017 as follows:
|
Quarter Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
October 1,
|
|
September 30,
|
|
October 1,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Statements of Operations Classification
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
$
|
3,358
|
|
|
(5,971)
|
|
|
(1,483)
|
|
|
6,614
|
Net revenues
|
|
1,328
|
|
|
2,316
|
|
|
2,090
|
|
|
3,332
|
Other
|
|
(17)
|
|
|
(2,311)
|
|
|
(101)
|
|
|
(2,716)
|
Net realized (losses) gains
|
$
|
4,669
|
|
|
(5,966)
|
|
|
506
|
|
|
7,230
|
In addition, losses of $1,532
and $4,368 were reclassified to earnings as a result of hedge ineffectiveness
for the quarter and nine-month periods ended September 30, 2018, respectively.
Net losses of $9 and $6,495 were reclassified to earnings as a result of hedge
ineffectiveness for the quarter and nine-month periods ended October 1, 2017,
respectively.
Undesignated Hedges
The
Company also enters into foreign currency forward contracts to minimize the
impact of changes in the fair value of intercompany loans due to foreign
currency changes.
The Company does not use hedge accounting for these contracts as
changes in the fair values of these contracts are substantially offset by
changes in the fair value of the intercompany loans. As of September 30,
2018, October 1, 2017 and December 31, 2017 the total notional amounts of the
Company's undesignated derivative instruments were $311,331, $339,227 and
$418,471, respectively.
At September 30, 2018, October 1, 2017 and December 31, 2017, the
fair values of the Company's undesignated derivative financial instruments were
recorded in the consolidated balance sheets as follows:
|
September 30,
|
|
October 1,
|
|
December 31,
|
|
2018
|
|
2017
|
|
2017
|
Prepaid expenses and other current
assets
|
|
|
|
|
|
|
|
|
Unrealized gains
|
$
|
2,060
|
|
|
2,606
|
|
|
-
|
Unrealized losses
|
|
(1,452)
|
|
|
(1,353)
|
|
|
-
|
Net unrealized gains
|
$
|
608
|
|
|
1,253
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
|
|
Unrealized gains
|
$
|
12
|
|
|
-
|
|
|
1,793
|
Unrealized losses
|
|
(33)
|
|
|
-
|
|
|
(4,684)
|
Net unrealized losses
|
|
(21)
|
|
|
-
|
|
|
(2,891)
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
Unrealized gains
|
$
|
30
|
|
|
-
|
|
|
-
|
Unrealized losses
|
|
(85)
|
|
|
-
|
|
|
-
|
Net unrealized losses
|
|
(55)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unrealized gains (losses), net
|
$
|
532
|
|
|
1,253
|
|
|
(2,891)
|
The Company recorded net gains
of $5,030 and $8,781 on these instruments to other (income) expense, net for
the quarter and nine-month periods ended September 30, 2018, respectively, and
net losses of $2,976 and $2,251 on these instruments to other (income) expense,
net for the quarter and nine-month periods ended October 1, 2017, respectively,
relating to the change in fair value of such derivatives, substantially
offsetting gains and losses from the change in fair value of intercompany loans
to which the contracts relate.
For additional information
related to the Company's derivative financial instruments see Notes 6 and 8.
(11)
Segment Reporting
Hasbro is a global play and
entertainment company with a broad portfolio of brands and entertainment
properties spanning toys, games, licensed products ranging from traditional to
high-tech and digital, and film and television entertainment. The Company's
segments are (i) U.S. and Canada, (ii) International, (iii) Entertainment and
Licensing, and (iv) Global Operations.
The U.S. and Canada segment
includes the marketing and selling of action figures, arts and crafts and
creative play products, electronic toys and related electronic interactive
products, fashion and other dolls, infant products, play sets, preschool toys, plush
products, sports action blasters and accessories, vehicles and toy-related
specialty products, as well as traditional board games, and trading card and
role-playing games primarily within the United States and Canada. Within the
International segment, the Company markets and sells both toy and game products
in markets outside of the U.S. and Canada, primarily in the European, Asia
Pacific, and Latin and South American regions. The Company's Entertainment and
Licensing segment includes the Company's consumer products licensing, digital licensing
and gaming, and movie and television entertainment operations. The Global
Operations segment is responsible for sourcing finished products for the
Company's U.S. and Canada and International segments.
Segment
performance is measured at the operating profit level. Included in Corporate
and Eliminations are certain corporate expenses, including the elimination of
intersegment transactions and certain assets benefiting more than one segment.
Intersegment sales and transfers are reflected in management reports at amounts
approximating cost. Certain shared costs, including global development and
marketing expenses and corporate administration, are allocated to segments
based upon expenses and foreign exchange rates fixed at the beginning of the
year, with adjustments to actual expenses and foreign exchange rates included
in Corporate and Eliminations. The accounting policies of the segments are the
same as those referenced in note 1.
Results shown for the
quarter and nine months are not necessarily representative of those which may
be expected for the full year 2018, nor were those of the comparable 2017
period representative of those actually experienced for the full year 2017.
Similarly, such results are not necessarily those which would be achieved were
each segment an unaffiliated business enterprise.
Information
by segment and a reconciliation to reported amounts for the quarter and nine-month
periods ended September 30, 2018 and October 1, 2017 are as follows:
|
Quarter Ended
|
|
September 30, 2018
|
|
October 1, 2017
|
Net revenues
|
External
|
|
Affiliate
|
|
External
|
|
Affiliate
|
U.S. and Canada
|
$
|
924,178
|
|
|
2,364
|
|
|
993,833
|
|
|
2,201
|
International
|
|
560,704
|
|
|
2
|
|
|
739,229
|
|
|
198
|
Entertainment and Licensing
|
|
84,804
|
|
|
4,712
|
|
|
58,440
|
|
|
7,714
|
Global Operations (a)
|
|
-
|
|
|
557,049
|
|
|
-
|
|
|
665,746
|
Corporate and Eliminations(b)
|
|
-
|
|
|
(564,127)
|
|
|
-
|
|
|
(675,859)
|
|
$
|
1,569,686
|
|
|
-
|
|
|
1,791,502
|
|
|
-
|
|
Nine Months Ended
|
|
September 30, 2018
|
|
October 1, 2017
|
Net revenues
|
External
|
|
Affiliate
|
|
External
|
|
Affiliate
|
U.S. and Canada
|
$
|
1,747,807
|
|
|
7,093
|
|
|
1,939,837
|
|
|
7,047
|
International
|
|
1,229,093
|
|
|
290
|
|
|
1,511,074
|
|
|
213
|
Entertainment and Licensing
|
|
213,476
|
|
|
11,378
|
|
|
162,663
|
|
|
14,727
|
Global Operations (a)
|
|
109
|
|
|
1,152,851
|
|
|
97
|
|
|
1,329,516
|
Corporate and Eliminations(b)
|
|
-
|
|
|
(1,171,612)
|
|
|
-
|
|
|
(1,351,503)
|
|
$
|
3,190,485
|
|
|
-
|
|
|
3,613,671
|
|
|
-
|
|
Quarter Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
October 1,
|
|
September 30,
|
|
October 1,
|
Operating profit (loss)
|
2018
|
|
2017
|
|
2018
|
|
2017
|
U.S. and Canada
|
$
|
226,516
|
|
|
217,278
|
|
|
279,364
|
|
|
363,589
|
International
|
|
66,274
|
|
|
132,007
|
|
|
10,359
|
|
|
149,435
|
Entertainment and Licensing
|
|
33,658
|
|
|
16,910
|
|
|
66,191
|
|
|
39,580
|
Global Operations (a)
|
|
3,179
|
|
|
11,497
|
|
|
(4,623)
|
|
|
4,723
|
Corporate and Eliminations (b)
|
|
(16,291)
|
|
|
(16,748)
|
|
|
(30,786)
|
|
|
(18,056)
|
|
$
|
313,336
|
|
|
360,944
|
|
|
320,505
|
|
|
539,271
|
|
September 30,
|
|
October 1,
|
|
December 31,
|
Total assets
|
2018
|
|
2017
|
|
2017
|
U.S. and Canada
|
$
|
3,053,179
|
|
|
3,423,213
|
|
|
2,749,384
|
International
|
|
2,323,866
|
|
|
2,524,821
|
|
|
2,499,985
|
Entertainment and Licensing
|
|
865,638
|
|
|
884,014
|
|
|
626,193
|
Global Operations
|
|
4,306,291
|
|
|
3,080,573
|
|
|
2,819,768
|
Corporate and Eliminations (b)
|
|
(5,053,645)
|
|
|
(4,367,973)
|
|
|
(3,405,347)
|
|
$
|
5,495,329
|
|
|
5,544,648
|
|
|
5,289,983
|
(a)
The Global Operations
segment derives substantially all of its revenues, and thus its operating results,
from intersegment activities.
(b)
Certain long-term assets,
including property, plant and equipment, goodwill and other intangibles, which
benefit multiple operating segments, are included in Corporate and
Eliminations. Allocations of certain expenses related to these assets to the
individual operating segments are done at the beginning of the year based on
budgeted amounts. Any differences between actual and budgeted amounts are
reflected in Corporate and Eliminations because allocations are translated from
the U.S. Dollar to local currency at budgeted rates when recorded. Corporate
and Eliminations also includes the elimination of inter-company balance sheet
amounts.
The following table
represents consolidated International segment net revenues by major geographic
region for the quarters and nine-month periods ended September 30, 2018 and October
1, 2017.
|
Quarter Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
October 1,
|
|
September 30,
|
|
October 1,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Europe
|
$
|
331,353
|
|
|
467,740
|
|
|
686,490
|
|
|
921,467
|
Latin America
|
|
145,703
|
|
|
174,446
|
|
|
308,065
|
|
|
339,071
|
Asia Pacific
|
|
83,648
|
|
|
97,043
|
|
|
234,538
|
|
|
250,536
|
Net revenues
|
$
|
560,704
|
|
|
739,229
|
|
|
1,229,093
|
|
|
1,511,074
|
The following table presents
consolidated net revenues by brand portfolio for the quarters and nine-month
periods ended September 30, 2018 and October 1, 2017.
|
Quarter Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
October 1,
|
|
September 30,
|
|
October 1,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Franchise brands
|
$
|
847,745
|
|
|
892,546
|
|
|
1,715,986
|
|
|
1,894,140
|
Partner brands
|
|
305,827
|
|
|
485,747
|
|
|
714,424
|
|
|
928,724
|
Hasbro gaming
|
|
280,832
|
|
|
280,097
|
|
|
520,334
|
|
|
549,736
|
Emerging brands
|
|
135,282
|
|
|
133,112
|
|
|
239,741
|
|
|
241,071
|
Net revenues
|
$
|
1,569,686
|
|
|
1,791,502
|
|
|
3,190,485
|
|
|
3,613,671
|
For the quarter
and nine-months ended October 1, 2017, revenues of $
65,264
and $
90,396
, respectively, were
reclassified from Emerging Brands to Franchise Brands to conform to the
presentation for the quarter and nine-months ended September 30, 2018.
Hasbro's total
gaming category, including
all
gaming net revenues,
most notably MAGIC: THE GATHERING and MONOPOLY, totaled $
447,844
and
$
964,159
for the quarter and nine-months ended September 30, 2018,
respectively. For the quarter and nine-months ended October 1, 2017, total
gaming net revenues were $
424,847
and $
951,397
, respectively.
(12)
Commercial Reorganization
In the
first quarter of 2018, the Company recorded a pre-tax severance expense of $
17,349
associated with
accelerating its commercial organization transformation. The charge was
included within selling, distribution and administration costs on the
Consolidated Statements of Operations for the nine-months ended September 30,
2018 and reported within Corporate and Eliminations in Note 11. Over the past
several years, the Company has invested in developing an omni-channel retail
presence, and in 2018 is bringing onboard new skill sets and talent to lead in
today’s converged retail environment. The expense represents the total cost of
this commercial reorganization for which the Company has a liability of $
10,820
remaining on its
Consolidated Balance Sheet as of September 30, 2018.
(13)
Subsequent Event
On
October 22, 2018
, the Company
announced that it will incur restructuring charges in the fourth quarter of
2018.
As
the global consumer landscape, shopping behaviors and the retail environment
continue to evolve, the Company continues to transform and reimagine its
business to make sure it has the right talent and capabilities to stay
competitive. This includes adding new capabilities based on our understanding
of the consumer and how our retailers are going to market, while also changing
many of the ways we organize across our Brand Blueprint. As part of this
process the Company is taking certain actions, which began on
October 17, 2018
and will continue through
2019. The actions primarily include headcount reduction aimed at right-sizing
the Company’s cost-structure and giving it the ability to add required new
talent in the future. Under the plan, the Company expects to incur pre-tax
restructuring charges relating to severance and other employee costs of
approximately $
50,000
to $
60,000
in the fourth quarter of
2018.
This cash charge is expected
to be paid from October 2018 through December 2019.
Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.
This Quarterly Report on
Form 10-Q, including the following section entitled Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains forward-looking
statements expressing management's current expectations, goals, objectives and
similar matters. These forward-looking statements may include statements
concerning the Company's product and entertainment plans, anticipated product
and entertainment performance, business opportunities, plans and strategies,
financial goals, cost savings and efficiency enhancing initiatives and
expectations for achieving the Company's financial goals and other objectives.
See Item 1A, in Part II of this report and Item 1A, in Part I of the Annual
Report on Form 10-K for the year ended December 31, 2017 (“2017 Form 10-K”), for
a discussion of factors which may cause the Company's actual results or
experience to differ materially from that anticipated in these forward-looking
statements. The Company undertakes no obligation to revise the forward-looking
statements in this report after the date of the filing. Unless otherwise
specifically indicated, all dollar or share amounts herein are expressed in
millions of dollars or shares, except for per share amounts.
EXECUTIVE
SUMMARY
Hasbro, Inc. ("Hasbro"
or the "Company") is a global play and entertainment company
dedicated to Creating the World's Best Play Experiences. The Company strives to
do this through deep consumer engagement and the application of consumer
insights, the use of immersive storytelling to build brands, product innovation
and development of global business reach. Hasbro applies these principles to
leverage its beloved owned and controlled brands, including Franchise Brands
BABY ALIVE, MAGIC: THE GATHERING, MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and
TRANSFORMERS, as well as Partner Brands. From toys and games, to television,
motion pictures, digital gaming and a comprehensive consumer products licensing
program, Hasbro fulfills the fundamental need for play and connection for
children and families around the world. The Company's wholly-owned Hasbro
Studios and its film labels, Allspark Pictures and Allspark Animation, create
entertainment brand-driven storytelling across mediums, including television,
film, digital and more.
Each
of these principles is executed globally in alignment with Hasbro's strategic plan,
its brand blueprint. At the center of this blueprint, Hasbro re-imagines,
re-invents and re-ignites its owned and controlled brands and imagines, invents
and ignites new brands, through product innovation, immersive entertainment offerings,
including television and motion pictures, digital gaming and a broad range of
consumer products. Hasbro generates revenue and earns cash by developing,
marketing and selling products based on global brands in a broad variety of
consumer goods categories and distribution of television programming based on
the Company's properties, as well as through the out-licensing of rights for
third parties to use its properties in connection with products, including
digital media and games and other consumer products. Hasbro also leverages its
competencies to develop and market products based on well-known licensed brands
including, but not limited to, BEYBLADE, DISNEY PRINCESS and DISNEY FROZEN,
DISNEY’S DESCENDANTS, MARVEL, SESAME STREET, STAR WARS, and DREAMWORKS’ TROLLS.
MARVEL, STAR WARS, DISNEY PRINCESS, DISNEY FROZEN and DISNEY’S DESCENDANTS are
owned by The Walt Disney Company.
The Company's business is
separated into three principal business segments: U.S. and Canada,
International and Entertainment and Licensing. The U.S. and Canada segment
markets and sells both toy and game products primarily in the United States and
Canada. The International segment consists of the Company's European, Asia
Pacific and Latin and South American toy and game marketing and sales
operations. The Company's Entertainment and Licensing segment includes the
Company's consumer products licensing, digital licensing and gaming, and movie
and television entertainment operations. In addition to these three primary
segments, the Company's product sourcing operations are managed through its
Global Operations segment.
Third
quarter 2018 highlights:
· Third
quarter net revenues declined 12% to $1,569.7 million from $1,791.5 million in
the third quarter of 2017. The lower revenues reflect lost Toys“R”Us revenues
in the U.S., Europe and Asia Pacific. In addition, revenues declined
internationally, most notably in Europe, as the Company addresses changing
consumer shopping behaviors, a rapidly evolving retail landscape and clearing
through retail inventory.
· Net
revenues in the U.S. and Canada and International segments declined 7% and 24%,
respectively, while the Entertainment and Licensing segment net revenues
increased 45%. International segment net revenues were unfavorably impacted by
$30.3 million in foreign currency translation.
· Net
revenues from Franchise Brands and Partner Brands declined by 5% and 37%,
respectively, Emerging Brands revenues increased 2% and Hasbro Gaming revenues
increased slightly during the third quarter of 2018 compared to the third
quarter of 2017.
· Operating
profit was $313.3 million, 20.0% of net revenues, in the third quarter of 2018
compared to operating profit of $360.9 million, 20.1% of net revenues, in third
quarter of 2017. The decline in net sales was partially offset by lower
royalty, advertising and administrative costs. In the third quarter of 2017,
the Company recorded $18 million for Toys“R”Us bad debt.
· Net
earnings of $263.9 million, or $2.06 per diluted share, in the third quarter of
2018 compared to net earnings of $265.6 million, or $2.09 per diluted share, in
the third quarter of 2017. In the third quarter of 2018, the Company recognized
a $17.3 million, or $0.14 per share tax benefit within income tax expense, from
the interpretation of additional guidance released during the quarter related
to U.S. tax reform.
First
nine months 2018 highlights:
· Net
revenues decreased 12% to $3,190.5 million in first nine months of 2018
compared to $3,613.7 million in the first nine months of 2017 driven by the
loss of revenues from Toys“R”Us in the U.S., Europe and Asia Pacific, as well
as higher retail inventory at year-end, primarily in Europe, which carried into
2018.
· In the first quarter of 2018, Toys“R”Us announced its
plan to liquidate its stores in the United States and the United Kingdom.
· Net
revenues in the U.S. and Canada and International segments declined 10% and
19%, respectively, while the Entertainment and Licensing segment net revenues
increased 31%. International segment net revenues were unfavorably impacted by
$8.1 million in foreign currency translation.
· Net
revenues declined in Franchise Brands by 9%, Partner Brands by 23%, Hasbro
Gaming by 5% and Emerging Brands by 1% during the first nine months of 2018
compared to the first nine months of 2017.
· Operating
profit was $320.5 million, or 10% of net revenues, in the first nine months of
2018 compared to operating profit of $539.3 million, or 14.9% of net revenues,
in the first nine months of 2017.
· Operating
profit for the first nine months of 2018 was negatively impacted by pre-tax
expenses of $87.7 million related to the Toys“R”Us liquidation and severance
associated with the reorganization of the Company’s commercial organization
during the first quarter of 2018. See “2018 Events” below for further
discussion. In the first nine months of 2017, the Company recorded $18 million
for Toys“R”Us bad debt.
· Net
earnings of $211.7 million, or $1.67 per diluted share, in the first nine months
of 2018 compared to net earnings of $401.9 million, or $3.16 per diluted share,
in the first nine months of 2017.
· In
addition to the pre-tax expenses of $87.7 million described above ($77.1
million after-tax), net income for the first nine months of 2018 included a net
income tax expense of $30.5 million related to guidance issued on U.S. tax
reform in 2018. See “2018 Events” below for further discussion.
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.
2018 Events
Power
Rangers Acquisition
During the
second quarter of 2018, the Company completed the acquisition of Power Rangers
and other Entertainment Assets (“Power Rangers Acquisition”) from Saban
Properties. The transaction was funded through a combination of cash and stock
valued at $535.9 million. See Footnote 3, “Asset Acquisition,” to the
Consolidated Financial Statements for further discussion.
Toys“R”Us
During the
first quarter of 2018, Toys“R”Us went into liquidation in the U.S. and the
U.K.. As a result, the Company recorded lower revenues in part due to the loss
of revenues from Toys“R”Us in the U.S. and Europe, as a result of the related
liquidations, as well as uncertainty in the other Toys“R”Us operations. In
association with this, the Company recorded pre-tax expenses of $70.4 million
($61.4 million after-tax) consisting of bad debt expense of $59.1 million,
accelerated royalty expense of $7 million and other charges of $4.3 million.
Commercial
Reorganization
In the
first quarter of 2018, the Company recorded pre-tax severance expense of $17.3 million
($15.7 million after-tax) associated with accelerating its commercial
organization transformation. Over the past several years, the Company has
invested in developing an omni-channel retail presence, and in 2018 is bringing
onboard new skill sets and talent to lead in today’s converged retail
environment.
U.S. Tax
Reform Update
In
the fourth quarter of 2017, the Company recognized a provisional net charge of
$296.5 million from the U.S. Tax Cuts and Jobs Act. In 2018, the Company
obtained additional information affecting the provisional amount initially
recorded in the fourth quarter of 2017. As a result, the Company recorded a
one-time tax expense of $47.8 million during the first quarter of 2018 which
reversed certain discrete benefits recorded in 2017 as well as increased our
provisional deemed repatriation tax liability. In the third quarter of 2018,
as a result of new tax guidance released, the Company recorded a tax benefit of
$17.3 million which offset the charge recorded in the first quarter of 2018,
totaling $30.5 million of one-time expense for the nine-months ended September
30, 2018.
Amounts
Returned to Shareholders
The Company is
committed to returning excess cash to its shareholders through quarterly
dividends and share repurchases. Hasbro increased the quarterly dividend rate
from $0.57 per share to $0.63 per share effective for the dividend paid in May
2018.
In addition to the dividend, the Company returns cash through its
share repurchase program.
As part of this initiative,
from 2005 to 2018, the Company's Board of Directors (the "Board")
adopted nine successive share repurchase authorizations with a cumulative
authorized repurchase amount of $4,325 million. The ninth authorization was
approved in May 2018 for $500 million.
During the first nine months of
2018, Hasbro repurchased approximately 2.0 million shares at a total cost of
$192.3 million and at an average price of $93.88 per share.
As of September 30, 2018, the Company had $485.7 million
remaining under these authorizations.
Share repurchases are subject to
market conditions, the availability of funds and other uses of funds.
SUMMARY OF FINANCIAL
PERFORMANCE
The
components of the results of operations, stated as a percent of net revenues,
are illustrated below for the quarter and nine-month periods ended September
30, 2018 and October 1, 2017.
|
Quarter Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
October 1,
|
|
|
September 30,
|
|
|
October 1,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
Net revenues
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
41.8
|
|
|
|
40.8
|
|
|
|
39.2
|
|
|
|
38.9
|
|
|
Royalties
|
|
6.7
|
|
|
|
7.8
|
|
|
|
7.6
|
|
|
|
7.8
|
|
|
Product development
|
|
4.2
|
|
|
|
3.8
|
|
|
|
5.7
|
|
|
|
5.3
|
|
|
Advertising
|
|
8.6
|
|
|
|
9.4
|
|
|
|
9.1
|
|
|
|
9.5
|
|
|
Amortization of intangibles
|
|
0.6
|
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.6
|
|
|
Program production cost amortization
|
|
0.9
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
0.4
|
|
|
Selling, distribution and administration
|
|
17.4
|
|
|
|
17.4
|
|
|
|
26.8
|
|
|
|
22.5
|
|
|
Operating profit
|
|
20.0
|
|
|
|
20.1
|
|
|
|
10.0
|
|
|
|
14.9
|
|
|
Interest expense
|
|
1.5
|
|
|
|
1.4
|
|
|
|
2.1
|
|
|
|
2.0
|
|
|
Interest income
|
|
(0.3)
|
|
|
|
(0.3)
|
|
|
|
(0.5)
|
|
|
|
(0.4)
|
|
|
Other income, net
|
|
-
|
|
|
|
(0.5)
|
|
|
|
(0.2)
|
|
|
|
(0.7)
|
|
|
Earnings before income taxes
|
|
18.8
|
|
|
|
19.5
|
|
|
|
8.6
|
|
|
|
14.0
|
|
|
Income tax expense
|
|
2.0
|
|
|
|
4.7
|
|
|
|
2.0
|
|
|
|
2.9
|
|
|
Net earnings
|
|
16.8
|
%
|
|
|
14.8
|
%
|
|
|
6.6
|
%
|
|
|
11.1
|
%
|
|
RESULTS
OF OPERATIONS – CONSOLIDATED
Third
Quarter of 2018
The quarters ended September
30, 2018 and October 1, 2017 were each 13-week periods. Net earnings decreased
to $263.9 million for the third quarter of 2018 compared to net earnings of
$265.6 million for the third quarter of 2017. Diluted earnings per share
for the third quarter of 2018 was $2.06, down from diluted earnings per share
of $2.09 in the third quarter of 2017.
Consolidated net revenues
for the third quarter of 2018 decreased 12% compared to the third quarter of
2017 and included the impact of an unfavorable $32.0 million foreign currency
translation as a result of weaker currencies in the Latin American, European
and to a lesser extent, Asia Pacific and Canada markets in 2018 compared to
2017.
The following table presents net revenues by brand portfolio for
the quarters ended September 30, 2018 and October 1, 2017.
|
Quarter Ended
|
|
September 30,
|
|
October 1,
|
|
%
|
|
2018
|
|
2017
|
|
Change
|
Franchise Brands
|
$
|
847.7
|
|
|
892.5
|
|
-5
|
%
|
Partner Brands
|
|
305.8
|
|
|
485.7
|
|
-37
|
%
|
Hasbro Gaming
|
|
280.8
|
|
|
280.1
|
|
0
|
%
|
Emerging Brands
|
|
135.3
|
|
|
133.1
|
|
2
|
%
|
Total
|
$
|
1,569.7
|
|
|
1,791.5
|
|
-12
|
%
|
Franchise and Emerging Brands
net revenues for the third quarter of 2017 have been restated to reflect the move
of BABY ALIVE from Emerging Brands to Franchise Brands and the move of LITTLEST
PET SHOP from Franchise Brands to Emerging Brands.
FRANCHISE BRANDS:
Net revenues in the Franchise Brands portfolio decreased 5% in
the third quarter of 2018 compared to the third quarter of 2017 due to net
revenues declines from NERF products and declines from MY LITTLE PONY and
TRANSFORMERS products as a result of the positive impact in the prior year from
the release of
MY LITTLE PONY: THE MOVIE,
in September 2017 and
TRANSFORMERS:
THE LAST KNIGHT,
in June 2017. These net revenue declines were partially
offset by higher net revenue contributions from MONOPOLY, PLAY-DOH, MAGIC: THE
GATHERING and BABY ALIVE products during the third quarter of 2018.
PARTNER BRANDS:
Net
revenues from the Partner
Brands portfolio decreased 37% in the third quarter of 2018 compared to the
third quarter of 2017. Partner Brands net revenues are reliant on related
entertainment, including television and movie releases. During the third
quarter of 2018, net revenue declines from STAR WARS, DISNEY PRINCESS and
DREAMWORKS’ TROLLS products, as well as declines from DISNEY FROZEN and DISNEY
DESCENDANTS products, were partially offset by net revenue increases from
BEYBLADE and to a lesser extent, MARVEL products.
HASBRO GAMING:
Net revenues in the Hasbro Gaming portfolio increased slightly in
the third quarter of 2018 compared to the third quarter of 2017. Higher net
revenues from DUNGEONS & DRAGONS, CONNECT 4 and JENGA products, as well as
new social and preschool games, such as CHOW CROWN, DON’T LOSE YOUR COOL and
DON’T STEP IN IT, were offset by declines in PIE FACE, SPEAK OUT, BOP-IT and
certain other Hasbro Gaming products in the third quarter of 2018.
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 $447.8 million
for the third quarter of 2018, an increase of 5% as compared to, $424.8 million
in the third quarter 2017.
EMERGING BRANDS:
Net revenues from the Emerging Brands portfolio increased 2%
during the third quarter of 2018 compared to the third quarter of 2017. Net
revenues from the introduction of LOST KITTIES, LOCK STARS, and YELLIES
products in 2018, as well as the addition of licensing revenues under the POWER
RANGERS brand, were partially offset by declines in FURREAL FRIENDS and certain
other Emerging Brands products during the third quarter of 2018.
Operating
p
rofit for the third quarter of 2018 was $313.3 million, or 20.0%
of net revenues, compared to operating profit of $360.9 million, or 20.1% of
net revenues, for the third quarter of 2017. Included in the third quarter of
2017 operating profit was a bad debt charge of $18.0 million relating to Toys
“R” Us’ initial bankruptcy filing in September 2017. The decline in operating
profit was driven by lower net revenues, as well as higher program production
amortization and intangible asset amortization costs during the third quarter
of 2018. These declines were partially offset by lower royalty, advertising
and marketing and sales costs, as well as lower administrative costs during the
third quarter of 2018.
First
Nine Months of 2018
The nine-month period ended
September 30, 2018 was a 39-week period while the nine-month period ended
October 1, 2017 was a 40-week period. Net earnings for the first nine months of
2018 were $211.7 million compared to net earnings of $401.9 million for the
first nine months of 2017. Diluted earnings per share was $1.67 in the first
nine months of 2018, down from diluted earnings per share of $3.16 in 2017.
Net earnings for the first nine months of 2018 includes bad debt expense and
other costs, net of tax, of $61.4 million, or $0.49 per diluted share, related
to Toys“R”Us, $15.7 million net of tax, or $0.12 per diluted share, of
severance costs related to a commercial reorganization, and tax expense of
$30.5 million, or $0.24 per diluted share, related to U.S. tax reform and
additional guidance issued in 2018. The nine-month period ended October 1, 2017
includes a bad debt expense of $18.0 million related to Toys “R” Us’ initial
bankruptcy filing in September 2017.
For the first nine months of
2018, consolidated net revenues decreased 12% compared to the first nine months
of 2017 and included an unfavorable variance of $7.9 million as a result of
foreign currency translation due to weaker currencies, primarily in the Latin American
markets, partially offset by foreign currency translation benefits in the
European and Asia Pacific markets during the first nine months of 2018 compared
to 2017.
The
following table presents net revenues by product category for the first nine
months of 2018 and 2017.
|
Nine Months Ended
|
|
September 30,
|
|
October 1,
|
|
%
|
|
2018
|
|
2017
|
|
Change
|
Franchise Brands
|
$
|
1,716.0
|
|
|
1,894.1
|
|
-9
|
%
|
Partner Brands
|
|
714.4
|
|
|
928.7
|
|
-23
|
%
|
Hasbro Gaming
|
|
520.3
|
|
|
549.7
|
|
-5
|
%
|
Emerging Brands
|
|
239.7
|
|
|
241.1
|
|
-1
|
%
|
Total
|
$
|
3,190.5
|
|
|
3,613.7
|
|
-12
|
%
|
FRANCHISE BRANDS:
Net revenues in the Franchise Brands
portfolio decreased 9% in the first nine months of 2018 compared to 2017.
Higher net revenues from MONOPOLY and MAGIC: THE GATHERING products were more
than offset by lower net revenues from NERF products, as well as TRANSFORMERS
and MY LITTLE PONY products as a result of the positive impact in 2017 from the
release of
MY LITTLE PONY: THE MOVIE,
in September 2017 and
TRANSFORMERS:
THE LAST KNIGHT,
in June 2017, and to a lesser extent, declines in PLAY-DOH
product net revenues.
PARTNER BRANDS:
Net revenues from the Partner Brands portfolio declined 23% during
the first nine months of 2018 compared to 2017. Partner Brands net revenues
are reliant on related entertainment, including television and movie releases.
During the first nine months of 2018, the decrease was driven by lower net
revenues from STAR WARS, DISNEY PRINCESS and DREAMWORKS’ TROLLS products and to
a lesser extent, DISNEY FROZEN, YOKAI WATCH and DISNEY’S DESCENDANTS products.
These declines were partially offset by higher net revenues from BEYBLADE and
MARVEL products in the first nine months of 2018 compared to the same period in
2017.
HASBRO GAMING:
Net
revenues in the Hasbro Gaming portfolio decreased 5% in the first nine months
of 2018 compared to the first nine months of 2017. Increased net revenues from
new social gaming products, as well as higher net sales of DUNGEONS &
DRAGONS, JENGA and CONNECT 4 products, were more than offset by lower net
revenues from PIE FACE, SPEAK OUT, BOP-IT and certain other Hasbro Gaming
products.
Net
revenues for Hasbro’s total gaming category, including the Hasbro Gaming
portfolio as reported above and all other gaming revenue, most notably from
MAGIC: THE GATHERING and MONOPOLY products, which are included in the Franchise
Brands portfolio, increased to $964.2 million in the first nine months of 2018
versus $951.4 million in the first nine months of 2017.
EMERGING BRANDS:
Net revenues from the
Emerging Brands portfolio remained
relatively flat for the first nine months of 2018 compared to the first nine
months of 2017.
Net revenues from the introduction of new Emerging
Brands, including LOST KITTIES and LOCK STARS products, as well as the addition
of entertainment and licensing revenues under the POWER RANGERS and STRETCH
ARMSTRONG brands, were wholly offset by lower net revenues from FURREAL
FRIENDS, core PLAYSKOOL and FURBY products.
Operating profit for the
first nine months of 2018 decreased to $320.5 million, or 10.0% of net
revenues, from $539.3 million, or 14.9% of net revenues, for the first nine
months of 2017. Operating profit was negatively impacted by the loss of
revenues and incremental bad debt expense associated with the Toys“R”Us
liquidations in the U.S. and U.K. and uncertainty related to other Toys“R”Us
operations, as well as severance costs associated with the reorganization of
the Company’s commercial organization during the first quarter of 2018.
SEGMENT
RESULTS
Most of the Company's net revenues
and operating profit are derived from its three principal business segments:
the U.S. and Canada segment, the International segment and the Entertainment
and Licensing segment. The results of these operations are discussed in
detail below.
The Company adopted ASU
2014-09, Revenue from Contracts with Customers (ASC-606), on January 1, 2018.
Prior
to the adoption of ASC 606, for licenses of the Company’s brands that are
subject to minimum guaranteed license fees, the Company recognized the
difference between the minimum guaranteed amount and the actual royalties
earned from licensee merchandise sales (“shortfalls”) at the end of the
contract period, which was in the fourth quarter for most of the Company’s
licensee arrangements. In periods following January 1, 2018, minimum guaranteed
amounts will be recognized on a straight-line basis over the license period.
While the impact of this change will not be material to the year, it will
impact the timing of revenue recognition within the Company’s Entertainment and
Licensing segment such that under ASC 606, less revenues will be recorded in
the fourth quarter and more revenues will be recorded within the first, second,
and third quarters.
Third
Quarter of 2018
The
following table presents net revenues and operating profit data for the
Company's three principal segments for the quarters ended September 30, 2018
and October 1, 2017.
|
Quarter Ended
|
|
September 30,
|
|
October 1,
|
|
%
|
|
2018
|
|
2017
|
|
Change
|
Net Revenues
|
|
|
|
|
|
|
|
|
U.S. and Canada segment
|
$
|
924.2
|
|
$
|
993.8
|
|
-7
|
%
|
International segment
|
|
560.7
|
|
|
739.2
|
|
-24
|
%
|
Entertainment and Licensing segment
|
|
84.8
|
|
|
58.4
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
|
|
|
|
|
|
|
U.S. and Canada segment
|
$
|
226.5
|
|
$
|
217.3
|
|
4
|
%
|
International segment
|
|
66.3
|
|
|
132.0
|
|
-50
|
%
|
Entertainment and Licensing segment
|
|
33.7
|
|
|
16.9
|
|
99
|
%
|
U.S.
and Canada Segment
The U.S. and Canada segment net revenues for the third
quarter of 2018 decreased 7% compared to the third quarter of 2017.
Foreign currency translation did not have a significant impact on this
segment's net revenues. Net revenues declined in the Partner Brands portfolio
and to a lesser extent, the Emerging Brands portfolio, which were partially
offset by net revenue increases in the Hasbro Gaming portfolio and a slight
increase in Franchise Brands portfolio during the third quarter of 2018.
In the Franchise Brands portfolio, increases in net revenues
from PLAY-DOH, TRANSFORMERS, MONOPOLY, and to a lesser extent, MAGIC: THE
GATHERING and BABY ALIVE products were mostly offset by lower net revenues from
MY LITTLE PONY and NERF products. In the Partner Brands portfolio, higher net
revenues from BEYBLADE and MARVEL products were more than offset by lower net
revenues from STAR WARS, DISNEY PRINCESS, DREAMWORKS’ TROLLS and DISNEY’S
DESCENDANTS products as well as DISNEY FROZEN, and SESAME STREET products. In
the Hasbro Gaming portfolio, higher net revenues from new social games as well
DUNGEONS & DRAGONS, CONNECT 4 and certain other Hasbro Gaming products were
partially offset by decreased net revenues from PIE FACE products. In the
Emerging Brands portfolio, net revenue increases from the introduction of the
Company’s line of LOST KITTIES, LOCK STARS and YELLIES products as well higher
net revenues from EASY-BAKE products and certain other Emerging Brands products
were more than offset by lower net revenues from FURREAL FRIENDS, core
PLAYSKOOL and LITTLEST PET SHOP products.
U.S. and Canada segment
operating profit for the third quarter of 2018 was $226.5 million, compared to
segment operating profit of $217.3 million, for the third quarter of 2017. The
increase in operating profit was due to favorable product mix, as well as lower
royalty, advertising and administrative expenses during the third quarter of
2018. In the third quarter of 2017, the Company recognized $18 million of bad
debt expense related to Toys“R”Us.
International
Segment
International segment net revenues
declined 24% to $560.7 million in the third quarter of 2018 from $739.2 million
in the third quarter of 2017. The following table presents net revenues by
geographic region for the Company's International segment for the quarters
ended September 30, 2018 and October 1, 2017.
|
Quarter Ended
|
|
September 30,
|
|
October 1,
|
|
%
|
|
2018
|
|
2017
|
|
Change
|
Europe
|
$
|
331.4
|
|
|
467.7
|
|
-29
|
%
|
Latin America
|
|
145.7
|
|
|
174.5
|
|
-16
|
%
|
Asia Pacific
|
|
83.6
|
|
|
97.0
|
|
-14
|
%
|
Net revenues
|
$
|
560.7
|
|
|
739.2
|
|
-24
|
%
|
The
variance in International segment net revenues during the third quarter of 2018
includes an unfavorable foreign currency translation of $30.3 million related
to the Company’s European, Latin American and to a lesser extent, Asia Pacific
regions. The declines in net revenues in the International segment were driven
by a challenging retail environment including the loss of Toys“R”Us revenues in
several European and Asia Pacific markets during the quarter combined with the
Company’s efforts to clear excess retail inventory, primarily in Europe, during
the third quarter of 2018. In the International segment, net revenues declined
in the Franchise Brands, Partner Brands and Hasbro Gaming portfolios while net
revenues from the Emerging Brands portfolio remained essentially flat during
the third quarter of 2018 compared to the third quarter of 2017. In the
Franchise Brands portfolio, lower net revenues from MY LITTLE PONY, NERF and
TRANSFORMERS products were partially offset by higher net revenues from MAGIC:
THE GATHERING products. The primary drivers of the net revenue declines from
the Partner Brands portfolio include lower sales of STAR WARS and DISNEY
PRINCESS products and to a lesser extent, DREAMWORKS’ TROLLS, MARVEL, DISNEY
FROZEN and BEYBLADE products. In the Hasbro Gaming portfolio, lower net
revenues from PIE FACE and other Hasbro Gaming products were partially offset
by contributions from new social games. In the Emerging Brands portfolio,
contributions from new brands such as LOST KITTIES and LOCK STARS products,
were mostly offset by net revenue declines from FURREAL FRIENDS and core
PLAYSKOOL products in the third quarter of 2018.
International
segment operating profit was $66.3 million for the third quarter of 2018, down
from operating profit of $132.0 million for the third quarter of 2017. The
operating profit decrease in the third quarter of 2018 was driven by lower net
revenues, as well as higher obsolescence charges partially offset by lower
royalty, advertising and marketing and sales costs.
Entertainment
and Licensing Segment
Entertainment and Licensing
segment net revenues increased 45% for the third quarter of 2018 to $84.8
million compared to $58.4 million for the third quarter of 2017. During the
third quarter of 2018, Hasbro entered into a multi-year agreement for digital distribution
of Hasbro television programming, which contributed to the revenue growth. In
addition, higher revenues from consumer products and digital game licensing,
primarily due to the timing of revenue recognition under ASC 606 as discussed
above, as well as movie revenues from
MY LITTLE PONY: THE MOVIE
,
contributed to the increase in the third quarter of 2018.
Entertainment and Licensing
segment operating profit increased to $33.7 million, or 39.7% of segment net
revenues for the third quarter of 2018, from $16.9 million, or 28.9% of segment
net revenues, for the third quarter of 2017. Overall, the increase in
Entertainment and Licensing segment operating profit was primarily due to
increased revenues noted above, partially offset by higher programing
amortization costs related to
MY LITTLE PONY: THE MOVIE
in the third
quarter of 2018.
Global
Operations
The Global Operations segment
operating profit of $3.2 million for the third quarter of 2018 compared to an
operating profit of $11.5 million for the third quarter of 2017. The decrease
in operating profit is primarily attributable to lower sourcing volume in the
third quarter of 2018 compared to the third quarter of 2017.
Corporate and Eliminations
The operating loss in
Corporate and eliminations totaled $16.3 million for the third quarter of 2018
compared to an operating loss of $16.7 million for the third quarter of 2017.
First
Nine Months of 2018
The
following table presents net revenues and operating profit for the Company's
three principal segments for each of the nine months ended September 30, 2018
and October 1, 2017.
|
Nine Months Ended
|
|
September 30,
|
|
October 1,
|
|
%
|
|
2018
|
|
2017
|
|
Change
|
Net Revenues
|
|
|
|
|
|
|
|
|
U.S. and Canada segment
|
$
|
1,747.8
|
|
|
1,939.8
|
|
-10
|
%
|
International segment
|
|
1,229.1
|
|
|
1,511.1
|
|
-19
|
%
|
Entertainment and Licensing segment
|
|
213.5
|
|
|
162.7
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
Operating Profit
|
|
|
|
|
|
|
|
|
U.S. and Canada segment
|
$
|
279.4
|
|
|
363.6
|
|
-23
|
%
|
International segment
|
|
10.4
|
|
|
149.4
|
|
-93
|
%
|
Entertainment and Licensing segment
|
|
66.2
|
|
|
39.6
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
U.S.
and Canada Segment
The U.S. and Canada segment
net revenues for the nine months ended September 30, 2018 decreased 10%
compared to 2017. Foreign currency translation did not have a significant
impact on this segment’s net revenues. In the first nine months of 2018, net
revenue declines in the Franchise Brands, Partner Brands and Emerging Brands
portfolios were partially off-set by higher net revenues in the Hasbro Gaming
portfolio.
In the Franchise Brands
portfolio, increases in net revenues from MONOPOLY and MAGIC: THE GATHERING
products were more than offset by lower net revenues from NERF, MY LITTLE PONY
and TRANSFORMERS products. In the Partner Brands portfolio, higher net
revenues from BEYBLADE and MARVEL products were more than offset by lower net
revenues from STAR WARS, DISNEY PRINCESS and DREAMWORKS’ TROLLS products, as
well as declines from DISNEY’S DESCENDANTS and DISNEY FROZEN products. In the
Hasbro Gaming portfolio, higher net revenues from DUNGEONS & DRAGONS, CONNECT
4 and JENGA products and higher net revenues from new social and preschool
games, were partially offset by lower net revenues from PIE FACE, SPEAK OUT and
certain other Hasbro Gaming products. In the Emerging Brands portfolio,
decreased net revenues from FURREAL FRIENDS, core PLAYSKOOL and LITTLEST PET
SHOP products and certain other Emerging Brands were partially offset by net
revenues from the introduction of the Company’s line of LOST KITTIES and
YELLIES products.
U.S. and Canada segment
operating profit for the nine months ended September 30, 2018 decreased to
$279.4 million, or 16.0% of segment net revenues, compared to $363.6 million,
or 18.7% of segment net revenues, for the nine months ended October 1, 2017.
The operating profit in the first nine months of 2017 included expenses of
$52.3 million related to the Toys“R”Us liquidation in the U.S. The operating
profit in the first nine months of 2017 included bad debt expense of $18.0
million related the Toys “R” Us initial bankruptcy filing in September 2017.
The remaining decline in operating profit was due to 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.
International
Segment
International segment net
revenues decreased 19% to $1,229.1 million for the nine months ended September
30, 2018 from $1,511.1 million for the nine months ended October 1, 2017. The
following table presents net revenues by geographic region for the Company's
International segment for the nine-month periods ended September 30, 2018 and October
1, 2017.
|
Nine Months Ended
|
|
September 30,
|
|
October 1,
|
|
%
|
|
2018
|
|
2017
|
|
Change
|
Europe
|
$
|
686.5
|
|
|
921.5
|
|
-26
|
%
|
Latin America
|
|
308.1
|
|
|
339.1
|
|
-9
|
%
|
Asia Pacific
|
|
234.5
|
|
|
250.5
|
|
-6
|
%
|
Net revenues
|
$
|
1,229.1
|
|
|
1,511.1
|
|
-19
|
%
|
International
segment net revenues were negatively impacted by foreign currency translation
of approximately $8.1 million relating to the Company’s Latin American region,
offset by foreign currency translation benefits from the European region, and
to lesser extent, the Asia Pacific region. The declines in net revenues in the
International segment were driven by decreases in the European and Asia Pacific
regions due to lost Toys“R”Us revenues, and a challenging retail environment
combined with excess retail inventory, primarily in Europe, during the first
nine months of 2018. Net revenues declined in the Franchise Brands, Partner
Brands and Hasbro Gaming portfolios during the first nine months of 2018, while
net revenues from the Emerging Brands portfolio grew compared to the same
period in 2017. In the Franchise Brands category, growth in MAGIC: THE
GATHERING and BABY ALIVE products, were more than offset by net revenue
decreases from TRANSFORMERS, MY LITTLE PONY, NERF, and PLAY-DOH products.
Partner Brand portfolio net revenues decreased due to lower net revenues from
STAR WARS, DISNEY PRINCESS, YOKAI WATCH, DREAMWORKS’ TROLLS and DISNEY FROZEN
products, partially offset by higher net revenues from BEYBLADE and MARVEL
products. In the Hasbro Gaming portfolio, lower net revenues from PIE FACE and
certain other Hasbro Gaming products were partially offset by higher net
revenues from social gaming products such as DON’T STEP IN IT and CHOW CROWN,
as well as higher net revenues from JENGA products. In the Emerging Brands
portfolio, contributions from new brands such as LOST KITTIES, LOCK STARS and
CHOMP SQUAD products, as well as net revenue increases from LITTLEST PET SHOP
products, were partially offset by declines from FURREAL FRIENDS, core
PLAYSKOOL and FURBY products in the first nine months of 2018.
International
segment operating profit was $10.4 million for the first nine months of 2018,
compared to operating profit of $149.4 million for the first nine months of
2017. Operating profit for the first nine months of 2018 includes $11.2
million of expenses related to the Toys“R”Us liquidation in the United Kingdom
and impacts to other European countries. The remaining decline in operating
profit was driven by the lower net revenues and increased obsolescence expense
partially offset by lower royalty and product development expenses.
Entertainment
and Licensing Segment
Entertainment and Licensing segment net revenues for the nine
months ended September 30, 2018 increased 31% to $213.5 million from $162.7
million for the nine months ended October 1, 2017. Increased television
programming and movie revenues, primarily recognized for content delivered
under the multi-year digital streaming deal signed in the third quarter of
2018, as well as higher revenues from consumer products and digital game
licensing, primarily due to the adoption of ASC 606 as discussed above, drove the
increase in the first nine months of 2018.
Entertainment
and Licensing segment operating profit increased to $66.2 million, or 31.0% of
net revenues, for the nine months ended September 30, 2018 from $39.6 million,
or 24.3% of segment net revenues, for the nine months ended October 1, 2017.
Overall, the increase in Entertainment and Licensing segment operating profit
and operating profit margin reflects the higher revenues noted above, as well
as lower advertising and marketing and sales costs, partially offset by higher
programing amortization costs related to
MY LITTLE PONY:THE MOVIE.
Global
Operations
The Global Operations
segment operating losses of $4.6 million for the first nine months of 2018 compares
to operating profit of $4.7 million for the first nine months of 2017. The loss
in 2018 was the result of lower sourcing volume and, to a lesser extent,
increased operating expenses in 2018.
Corporate
and Eliminations
Operating loss in Corporate
and Eliminations for the first nine months of 2018 was $30.8 million, compared
to a loss of $18.1 million for the first nine months of 2017. Included in the
Corporate and eliminations operating loss in the first nine months of 2018 was
$7 million of expenses associated with the Toys“R”Us liquidation and $17.3
million of severance for the reorganization of the Company’s commercial
organization.
OPERATING COSTS AND EXPENSES
Third Quarter 2018
The
Company's costs and expenses, stated as percentages of net revenues, are
illustrated below for the quarters ended September 30, 2018 and October 1, 2017.
|
Quarter Ended
|
|
|
September 30,
|
|
|
October 1,
|
|
|
2018
|
|
|
2017
|
|
Cost of sales
|
41.8
|
%
|
|
40.8
|
%
|
Royalties
|
6.7
|
|
|
7.8
|
|
Product development
|
4.2
|
|
|
3.8
|
|
Advertising
|
8.6
|
|
|
9.4
|
|
Amortization of intangibles
|
0.6
|
|
|
0.4
|
|
Program production cost amortization
|
0.9
|
|
|
0.3
|
|
Selling, distribution and administration
|
17.4
|
|
|
17.4
|
|
Cost of sales decreased 10%
from $730.7 million, or 40.8% of net revenues, for the third quarter of 2017 to
$655.6 million, or 41.8% of net revenues for the third quarter of 2018. Costs
of sales decreased in dollars primarily due to lower sales volumes compared to
the third quarter of 2017. As a percent of net revenues, the cost of sales
increase was driven by a shift in product mix in the third quarter of 2018
compared to 2017 as well as higher costs associated with clearing excess retail
inventories.
Royalty expense for the
third quarter of 2018 was $105.3 million, or 6.7% of net revenues, compared to
$139.2 million, or 7.8% of net revenues, for the third quarter of 2017.
Fluctuations in royalty expense are generally related to the volume of entertainment-driven
products sold in a given period, especially if there is a major motion picture
release. In the third quarter of 2018, the decrease in royalty expense both in
dollars and as a percentage of revenues was driven primarily by declines in
partner brand net revenues, and to a lesser extent, declines in TRANSFORMERS products
related to the 2017 theatrical release
TRANSFORMERS:THE LAST KNIGHT.
Product
development expense for the third quarter of 2018 was $65.8 million, or 4.2% of
net revenues, compared to $67.4 million, or 3.8% of net revenues, for the third
quarter of 2017. The decline in dollars was driven by the capitalization of
certain costs of the digital version of MAGIC: THE GATHERING in 2018 as it has
reached the later stages of its development and has been launched in open beta
format, as compared to costs that were expensed in 2017 based on the fact that
the game was in its earlier stages of development. The increase as a percentage
of sales reflects the lower revenue base in the third quarter of 2018.
Advertising expense for the third
quarter of 2018 was $134.4 million, or 8.6% of net revenues, compared to $168.9
million, or 9.4% of net revenues, for the third quarter of 2017. The lower
spend in advertising expense was primarily due to lower revenues in the third
quarter of 2018.
Amortization of intangibles was
$8.8 million, or 0.6% of net revenues for the third quarter of 2018 compared to
$6.5 million, or 0.4% of net revenues, for the third quarter of 2017. The
increase reflects amortization related to the POWER RANGERS acquisition
partially offset by the full amortization of property rights related to
Backflip and other intangible assets during 2017.
Program production cost
amortization increased to $14.1 million or 0.9% of net revenues, for the third
quarter of 2018 from $5.4 million, or 0.3% of net revenues, for the third
quarter of 2017. Program production costs are capitalized as incurred and
amortized using the individual-film-forecast method. The increase in dollars,
and as a percent of net revenues, reflects amortization of production expense
related to
MY LITTLE PONY: THE MOVIE
and higher television programming amortization
in the third quarter of 2018.
For the quarter ended
September 30, 2018, the Company's selling, distribution and administration
expenses decreased to $272.4 million, or 17.4% of net revenues, from $312.5
million, also 17.4% of net revenues, for the quarter ended October 1, 2017. The
decrease in dollars was driven by $18.0 million of bad debt expense recorded in
the third quarter of 2017 related to Toys“R”Us, as well as lower marketing and
sales costs in line with the reduction in sales volume.
First Nine Months of 2018
The
Company's costs and expenses, stated as percentages of net revenues, are
illustrated below for the nine-month periods ended September 30, 2018 and October
1, 2017.
|
Nine Months Ended
|
|
|
September 30,
|
|
|
October 1,
|
|
|
2018
|
|
|
2017
|
|
Cost of sales
|
39.2
|
%
|
|
38.9
|
%
|
Royalties
|
7.6
|
|
|
7.8
|
|
Product development
|
5.7
|
|
|
5.3
|
|
Advertising
|
9.1
|
|
|
9.5
|
|
Amortization of intangibles
|
0.6
|
|
|
0.6
|
|
Program production cost amortization
|
1.0
|
|
|
0.4
|
|
Selling, distribution and administration
|
26.8
|
|
|
22.5
|
|
Cost of sales for the nine
months ended September 30, 2018 decreased to $1,249.1 million, or 39.2% of net
revenues, from $1,405.0 million, or 38.9% of net revenues, for the nine months
ended October 1, 2017.
Costs of sales decreased in dollars
primarily due to lower sales volumes compared to the third quarter of 2017. As
a percent of net revenues, the cost of sales was slightly higher due to the mix
of products sold in 2018 as well as higher costs related to excess inventories
in 2018.
Royalty
expense for the nine months ended September 30, 2018 was $241.0 million, or
7.6% of net revenues, compared to $282.8 million, or 7.8% of net revenues, for
the nine months ended October 1, 2017. Fluctuations in royalty expense are
generally related to the volume of entertainment-driven products sold in a
given period, especially if there is a major motion picture release. In the
first nine months of 2018, the decrease in royalty expense was driven primarily
by overall declines in partner brand net revenues as well as decreases in
revenues from movie-related TRANSFORMERS products, partially offset by
accelerated royalty charges incurred as a result of the loss of Toys“R”Us
product sales.
Product development expense
for the nine months ended September 30, 2018 decreased to $183.1 million, or
5.7% of net revenues, from $192.8 million, or 5.3% of net revenues for the nine
months ended October 1, 2017. Product development expenditures reflect the
Company’s continued investment in innovation across our brand portfolio. The
decline was partially the result of the capitalization of certain costs of the
digital version of MAGIC: THE GATHERING in 2018 as it has been launched in open
beta format, as compared to costs that were expensed in 2017 based on the fact
that the game was in its earlier stages of development. The increase as a
percentage of revenue reflects the lower revenue base in 2018.
Advertising expense for the nine
months ended September 30, 2018 was $290.0 million, or 9.1% of net revenues,
compared to $342.2 million, or 9.5% of net revenues, for the nine months ended
October 1, 2017. The decrease in advertising expense was primarily due to lower
revenues in the first nine months of 2018. Advertising expense was relatively
consistent as a percent of net revenues.
Amortization of intangibles
was $19.9 million, or 0.6% of net revenues, in the first nine months of 2018
compared to $22.3 million, or 0.6% of net revenues, in the first nine months of
2017. The decrease reflects the full amortization of property rights related to
Backflip and other intangible assets during 2017, partially offset by the
addition of amortization related to the acquisition of the Power Rangers brand
in June 2018.
Program production cost
amortization increased in the first nine months of 2018 to $33.4 million, or
1.0% of net revenues, from $16.2 million, or 0.4% of net revenues, in the first
nine months of 2017. Program production costs are capitalized as incurred and
amortized using the individual-film-forecast method. The increase in dollars
and as a percent of net revenues reflects amortization of production expenses
related to
MY LITTLE PONY: THE MOVIE
and higher television programming amortization
during the first nine months of 2018.
For the nine months ended
September 30, 2018, the Company's selling, distribution and administration
expenses increased to $853.6 million or 26.8% of net revenues from $813.3
million or 22.5% of net revenues for the nine months ended October 1, 2017.
The higher costs in 2018 were primarily driven by $60.3 million of bad debt and
other expenses related to Toys“R”Us, as well as $17.3 million of severance
costs related to the reorganization of the Company’s commercial organization.
Administration expense in the nine months ended October 1, 2017 included an
$18.0 million bad debt expense related to Toys “R” Us initial bankruptcy filing
in September 2017. In addition to these expenses, the increase was also due to
higher bad debt expense in the International segment and higher freight and
warehousing expenses.
NON-OPERATING
(INCOME) EXPENSE
Interest expense for the
third quarter and first nine months of 2018 totaled $22.8 million and $68.4
million, respectively, compared to $25.1 million and $73.8 million in the third
quarter and first nine months of 2017, respectively. In 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. The decrease in interest
expense for the quarter and nine months primarily reflects the impact of the
above refinancing and, to a lesser extent, lower short-term borrowings in 2018.
Interest
income was $4.7 million and $17.2 million for the third quarter and first nine
months of 2018, respectively, compared to $5.4 million and $16.0 million in the
third quarter and first nine months of 2017, respectively. The decrease in the
third quarter of 2018 reflects lower invested cash balances compared to 2017.
The increase during the first nine months of 2018 reflects higher levels of
invested cash and higher average interest rates in 2018 compared to 2017.
Other income, net of $0.6
million for the third quarter of 2018, compared to other income, net, of $8.6
million for the third quarter of 2017. Other income, net, of $6.2 million
for the first nine months of 2018, compared to other income, net, of $26.0
million for same period in 2017. The decrease in other income, net in the
third quarter and first nine months of 2018 was primarily driven by foreign
currency exchange losses in 2018 compared to foreign currency exchange gains in
2017. In addition, the adoption of a new pension accounting standard in 2018
resulted in pension expense recorded to other expense in 2018, that was
previously reflected as administrative expense in 2017 and prior.
INCOME
TAXES
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 made broad and complex
changes to the U.S. tax code which impacted 2017 including, but not limited to,
reducing the U.S. federal corporate tax rate and requiring a one-time tax on
certain unrepatriated earnings of foreign subsidiaries.
On December 22, 2017, Staff
Accounting Bulletin No. 118 (“SAB 118”) established a one-year measurement
period to complete the accounting for the income tax effects of the Tax Act
according to standards provided by the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification Topic 740, Accounting for
Uncertainty in Income Taxes (ASC 740). An entity recognizes the impact of those
amounts for which the accounting is complete. For matters that have not been
completed, provisional amounts are recorded to the extent they can be
reasonably estimated. For amounts for which a reasonable estimate cannot be
determined, no adjustment is made until such estimate can be completed.
Income tax expense totaled
$31.9 million on pre-tax earnings of $295.8 million in the third quarter of
2018 compared to income tax expense of $84.3 million on pre-tax earnings of
$349.8 million in the third quarter of 2017. For the nine-month period, income
tax expense totaled $63.9 million on pre-tax earnings of $275.5 million in 2018
compared to income tax expense of $105.7 million on pre-tax earnings of $507.6
million in 2017. Both periods, as well as the full year 2017, were impacted by
discrete tax events including the accrual of potential interest and penalties
on uncertain tax positions. During the first nine months of 2018, unfavorable
discrete tax adjustments were a net expense of $10.6 million compared to a net
benefit of $15.6 million in the first nine months of 2017. The unfavorable
discrete tax adjustments for the first nine months of 2018 primarily relate to
changes in guidance on U.S. tax reform, which resulted in the reversal of a tax
benefit recorded in 2017 and additional repatriation tax liability, partially
offset by excess tax benefits on share-based payments and audit settlements. Absent
discrete items, the underlying tax rates for the first nine months of 2018 and
2017 were 17.6% and 23.9%, respectively. The decrease in the underlying tax
rate of 17.6% for the nine months ended September 30, 2018 is primarily due to
the tax impact of the lower U.S. corporate tax rate.
Prior
to the enactment of the Tax Cuts and Jobs Act, the Company previously considered
the earnings in non-U.S. subsidiaries to be indefinitely reinvested and,
accordingly, recorded no deferred income taxes. The Tax Act eliminates the
deferral of U.S. income tax on these foreign earnings by imposing a transition
tax which is a one-time mandatory deemed repatriation tax. As a result, the
Company now intends to repatriate substantially all of the accumulated foreign
earnings. The Company still has significant cash needs outside the United
States and we are currently analyzing our global working capital and cash
requirements. However, tax reform gives the Company flexibility to manage cash
globally. In 2017, the Company recorded $1,657 of non-US local country
withholding taxes as part of the provisional repatriation tax amount, which will
be incurred due to certain future cash distributions. In the third quarter,
the Company recorded an additional $2,412 of net tax that reflects the state
and local impact of proposed dividends from non-US subsidiaries to the parent
Company. The Company will continue to record these additional tax effects, if
any, in the period that the on-going distribution analysis is completed and is
able to make reasonable estimates.
OTHER
INFORMATION
Business Seasonality
and Shipments
Historically, the Company's
revenue pattern has shown the second half of the year to be more significant to
its overall business than the first half. The Company expects that this
concentration will continue, particularly as more of its business has shifted
to larger customers with order patterns concentrated in the second half of the
year around the holiday season. The concentration of sales in the second half
of the year increases the risk of (a) underproduction of popular items, (b)
overproduction of less popular items, and (c) failure to achieve compressed
shipping schedules.
The toy and game business is
characterized by customer order patterns which vary from year to year largely
because of differences each year in the degree of consumer acceptance of
product lines, product availability, marketing strategies and inventory policies
of retailers, the dates of theatrical releases of major motion pictures for
which the Company sells products, and changes in overall economic conditions.
As a result, comparisons of the Company's unshipped orders on any date with
those at the same date in a prior year are not necessarily indicative of the
Company's expected sales for the year. Moreover, quick response inventory
management practices result in fewer orders being placed significantly in
advance of shipment and more orders being placed for immediate delivery.
Although the Company may receive orders from customers in advance, it is a
general industry practice that these orders are subject to amendment or
cancellation by customers prior to shipment and, as such, the Company does not
believe that these unshipped orders, at any given date, are indicative of
future sales.
Accounting
Pronouncement Updates
On January 1, 2018, the
Company adopted Financial Accounting Standards Board Accounting Standards
Codification Topic 606,
Revenue from Contracts with Customers
(ASC 606
or the New Revenue Standard) using the modified retrospective method. ASC 606
supersedes the revenue recognition requirements in ASC 605 –
Revenue
Recognition
and most industry-specific guidance in U.S. GAAP. The New
Revenue Standard provides a five-step model for analyzing contracts and
transactions to determine when, how, and if revenue is recognized. Revenue
should be recognized to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which an entity
expects to be entitled in exchange for those goods or services. The cumulative
impact of the adoption of the New Revenue Standard was not material to the
Company therefore the Company did not record any adjustments to retained
earnings. This was determined by analyzing contracts not completed as of
January 1, 2018. The comparative information has not been restated
and continues to be reported under the accounting standards in
effect for those periods.
Revenue
recognition from the sale of finished product to customers, which is the
majority of the Company’s revenues, did not change under the new standard and
the Company does not expect material changes in the future as a result of the
New Revenue Standard related to the sale of finished product to its customers.
Within the Company’s Entertainment and Licensing segment, the timing of revenue
recognition for minimum guarantees that the Company receives from licensees is
impacted by the New Revenue Standard. Prior to the adoption of ASC 606, for
licenses of the Company’s brands that are subject to minimum guaranteed license
fees, the Company recognized the difference between the minimum guaranteed
amount and the actual royalties earned from licensee merchandise sales
(“shortfalls”) at the end of the contract period, which was in the fourth
quarter for most of the Company’s licensee arrangements. In periods following
January 1, 2018, minimum guaranteed amounts will be recognized on a
straight-line basis over the license period. While the impact of this change
will not be material to the year, it will impact the timing of revenue recognition
within the Company’s Entertainment and Licensing segment such that under ASC
606, less revenues will be recorded in the fourth quarter and more revenues
will be recorded within the first, second, and third quarters. No other areas
of the Company’s business were materially impacted by the New Revenue Standard.
Refer to Notes 1 and 2 of our Consolidated Financial Statements for further
information.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842) (ASU 2016-02), which will require lessees to recognize a
right-of-use asset and a lease liability for virtually all leases. The
liability will be based on the present value of lease payments and the asset
will be based on the liability. For income statement purposes, a dual model was
retained requiring leases to be either classified as operating or finance.
Operating leases will result in straight-line expense while finance leases will
result in a front-loaded expense pattern. Additional quantitative and
qualitative disclosures will be required. ASU 2016-02 is required for public
companies for fiscal years beginning after December 15, 2018. ASU 2016-02 as
originally issued required modified retrospective adoption. In July 2018, the
FASB issued ASU 2018-11, which provides an alternative transition method in
addition to the existing method by allowing entities to apply ASU 2016-02 as of
the adoption date and recognize a cumulative effect adjustment to the opening
balance of retained earnings in the period of adoption. The Company has
evaluated the requirements of ASU 2016-02, including updates issued to the
standard in 2018, and is continuing to assess its potential impact on the
Company’s consolidated financial statements. The Company expects to adopt the
new standard on its effective date at the start of fiscal year 2019. The
Company has a significant number of leases globally, primarily for property and
office equipment, and is in the process of identifying and evaluating these
leases as well as designing systems and processes to properly record these leases
in relation to the requirements of ASU 2016-02. For each of these leases, the
term will be evaluated, including extension and renewal options as well as the
lease payments associated with the leases. The standard also includes certain
practical expedients that may be used in the adoption of the standard. These
practical expedients which the Company expects to use in the adoption include
the election not to reassess: (i) whether expired or existing contracts contain
a lease under the new definition of a lease under the standard; (ii) lease
classification for expired or existing leases; and (iii) whether previously
capitalized initial direct costs would qualify for capitalization under the
standard. The Company is in the process of evaluating which of the other
practical expedients it will use when adopting the standard. The Company does
not expect that its results of operations will be materially impacted by this
standard. Currently under provisions of an operating lease, neither an
obligation nor an asset is recorded and lease payments are expensed when incurred.
The Company expects to record right-of-use assets and liabilities on its
consolidated balance sheets upon the adoption of this standard, which may be
material. The adoption of this standard will not have an impact on the
Company’s cash flows.
In August 2016, the FASB
issued ASU 2016-15,
Statement of Cash Flows (ASC 230) – Classification
of Certain Cash Receipts and Cash Payments
. The new guidance is intended to
reduce diversity in practice across all industries, in how certain transactions
are classified in the statement of cash flows. ASU 2016-15 was effective for
public companies for fiscal years beginning after December 15, 2017. The
Company adopted this standard in 2018 and the adoption of this standard did not
have an impact on the Company’s statement of cash flows for the nine-month
periods ended September 30, 2018 and October 1, 2017.
In October 2016, the FASB
issued Accounting Standards Update No. 2016-16 (ASU 2016-16),
Accounting for
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
. For
public companies, this standard was effective for annual reporting periods
beginning after December 15, 2017, and early adoption is permitted. The
standard requires that the income tax impact of intra-entity sales and
transfers of property, except for inventory, be recognized when the transfer
occurs requiring any deferred taxes not yet recognized on intra-entity
transfers to be recorded to retained earnings. The Company adopted this
standard in the first quarter of 2018 and the adoption did not have an impact
on the Company’s results or consolidated financial statements.
In March 2017, the FASB
issued Accounting Standards Update No. 2017-07 (ASU 2017-07),
Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost
. The standard requires companies to present the service cost
component of net benefit cost in the income statement line items where they
report compensation cost. Companies will present all other components of net
benefit cost outside operating income, if this subtotal is presented. For
public companies, this standard was effective for annual reporting periods
beginning after December 15, 2017, and early adoption was permitted. The
Company adopted this standard in the first quarter of 2018 and the adoption of
this standard did not have a material impact on the Company’s results or
consolidated financial statements in the quarter or nine-month period ended
September 30, 2018.
In January 2018, the FASB
issued Accounting Standards Update No. 2017-01(“ASU 2017-01”),
Business
Combinations (Topic 805): Clarifying the Definition of a Business
. The
standard clarifies the definition of a business with the objective of providing
guidance when evaluating whether transactions should be accounted for as
acquisitions (or disposals) of assets or businesses. For public companies, this
standard is effective for annual reporting periods beginning after December 15,
2017. For further details, see Note 3 to the consolidated financial statements.
In February 2018, the
FASB issued Accounting Standards Update No. 2018-02 (ASU 2018-02),
Income
Statement -Reporting Comprehensive Income (Topic 220):
Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income
. The
standard provides for a reclassification from accumulated other comprehensive
income (“AOCI”) to retained earnings, of disproportionate income tax effects
(“stranded tax effects”) arising from the impact of the Tax Cuts and Jobs Act.
For public companies, this standard is effective for annual reporting periods
beginning after December 15, 2018. Early adoption is permitted. The Company
adopted ASU 2018-02 in the first quarter of 2018. The impact of the adoption
resulted in a decrease to AOCI in the amount of $21.5 million with a
corresponding increase to retained earnings.
Recently Issued
Accounting Pronouncements
In January 2017, the FASB
issued Accounting Standards Update No. 2017- 04 (ASU 2017-04),
Intangibles
-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
.
The standard eliminates the requirement to measure the implied fair value of
goodwill by assigning the fair value of a reporting unit to all assets and
liabilities within that unit (“the Step 2 test”) from the goodwill impairment
test. Instead, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss is recognized in an amount equal to that excess,
limited by the amount of goodwill in that reporting unit. For public companies,
this standard is effective and must be applied to annual or any interim
goodwill impairment tests beginning after December 15, 2019. Early adoption is
permitted. The Company is currently evaluating the standard, but expects that
it will not have a material impact on our consolidated financial statements.
In August 2017, the FASB
issued Accounting Standards Update No. 2017-12 (ASU 2017-12),
Derivatives
and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging
Activities.
The amendments expand and refine hedge accounting for both
nonfinancial and financial risk components and align the recognition and
presentation of the effects of the hedging instrument and the underlying hedged
item in the financial statements. The impact of the standard includes
elimination of the requirement to separately measure and recognize hedge
ineffectiveness and requires the presentation of fair value adjustments to
hedging instruments to be included in the same income statement line as the
hedged item. For public companies, this standard is effective for annual
reporting periods beginning after December 15, 2018, and early adoption is
permitted. The Company is currently evaluating the standard but does not
expect the standard to have a material impact on its consolidated financial
statements.
In August 2018, the FASB
issued Accounting Standards Update No. 2018-13 (ASU 2018-13),
Fair Value
Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement.
The amendments in this update
modify the disclosure requirements on fair value measurements in Topic 820,
Fair Value Measurement, specifically related to disclosures surrounding Level 3
asset balances, fair value measurement methods, related gains and losses and
fair value hierarchy transfers. For public companies, this standard is
effective for annual reporting periods beginning after December 15, 2019, and
early adoption is permitted. The Company is currently evaluating the standard
but does not expect the standard to have a material impact on its consolidated
financial statements.
In August 2018, the FASB
issued Accounting Standards Update No. 2018-14 (ASU 2018-14)
Compensation—Retirement
Benefits—Defined Benefit Plans—General (Subtopic 715-20)-Disclosure
Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.
The
amendments in this update modify the disclosure requirements for employers that
sponsor defined benefit pension or other postretirement plans. For public
companies, this standard is effective for annual reporting periods beginning
after December 15, 2020, and early adoption is permitted. The Company is
currently evaluating the standard but does not expect the standard to have a
material impact on its consolidated financial statements.
Recent Securities and Exchange Commission Rulings
In August 2018, the U.S.
Securities and Exchange Commission (“SEC”) issued a final ruling amending
numerous SEC rules covering a diverse group of topics. One noteworthy rule
change expands disclosure requirements related to changes in shareholders’
equity by extending to interim periods, the annual requirement of SEC
Regulation S-X, Rule 3-04, of presenting changes in stockholders’ equity. An
analysis of changes in stockholders’ equity in the form of a reconciliation
will be required for the current and comparative year-to-date interim periods effective
for all filings submitted on or after November 5, 2018. The Company is
currently evaluating the ruling and expects to include a statement of
stockholders’ equity in its interim reports beginning with the first quarter
2019, similar to the statement included annually in the Company’s 10-k report.
LIQUIDITY AND CAPITAL
RESOURCES
The Company has historically
generated a significant amount of cash from operations. In the first nine
months of 2018 and 2017 the Company funded its operations and liquidity needs
primarily through cash flows from operations, and, when needed, used borrowings
under its available lines of credit and commercial paper program.
The
Company believes that the funds available to it, including cash expected to be
generated from operations and funds available through its available lines of
credit and commercial paper program, are adequate to meet its working capital
needs for the remainder of 2018 and through 2019. However, unexpected events or
circumstances such as material operating losses or increased capital or other
expenditures may reduce or eliminate the availability of external financial
resources. In addition, significant disruptions to credit markets may also
reduce or eliminate the availability of external financial resources. Although
management believes the risk of nonperformance by the counterparties to the
Company's financial facilities is not significant, in times of severe economic
downturn in the credit markets it is possible that one or more sources of
external financing may be unable or unwilling to provide funding to the
Company.
In September 2017, the
Company issued $500.0 million in principal amount of Notes Due 2027 that bear
interest at a rate of 3.50%. Net proceeds of the Notes offering, after
deduction of the underwriting discount and debt issuance expenses, totaled
approximately $493.9 million. The Company may redeem the Notes at its option at
the greater of the principal amount of the Notes or the present value of the
remaining scheduled payments using the effective interest rate on applicable
U.S. Treasury bills plus 25 basis points. In addition, on or after June 15,
2027, the Company may redeem at its option, any portion of the Notes at a
redemption price equal to 100% of the principal amount of the notes to be
redeemed. The proceeds from the issuance of the Notes were used, primarily, to
repay $350 million aggregate principal amount of the 6.30% Notes Due 2017 upon
maturity, including accrued and unpaid interest. The remaining net proceeds
were utilized for general corporate and working capital purposes.
As of September 30, 2018,
the Company's cash and cash equivalents totaled $907.1 million, the majority of
which is currently held outside of the United States. Prior to 2017, deferred
income taxes had not been provided on the majority of undistributed earnings of
international subsidiaries as such earnings were indefinitely reinvested by the
Company. Accordingly, such international cash balances were not available to
fund cash requirements in the United States unless the Company was to change
its reinvestment policy. The Company has maintained sufficient sources of cash
in the United States to fund cash requirements without the need to repatriate
any funds. On December 22, 2017, the Tax Cuts and Jobs Act was signed into law
which provides significant changes to the U.S. tax system including the
elimination of the ability to defer U.S. income tax on unrepatriated earnings
by imposing a one-time mandatory deemed repatriation tax on undistributed foreign
earnings, estimated to be $299.9 million as of September 30, 2018. 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 September 30,
2018 is denominated in the U.S. dollar.
Because of the seasonality
in the Company's cash flow, management believes that on an interim basis,
rather than discussing only its cash flows, a better understanding of its
liquidity and capital resources can be obtained through a discussion of the
various balance sheet categories as well. Also, as several of the major
categories, including cash and cash equivalents, accounts receivable,
inventories and short-term borrowings, fluctuate significantly from quarter to
quarter, due to the seasonality of its business, management believes that a
comparison to the comparable period in the prior year is generally more
meaningful than a comparison to the prior quarter or prior year-end.
The table below outlines key
financial information pertaining to our consolidated balance sheets including
the period-over-period changes.
|
|
|
September 30,
|
|
October 1,
|
|
%
|
|
2018
|
|
2017
|
|
Change
|
Cash and cash equivalents
|
$
|
907.1
|
|
|
1,244.8
|
|
-27
|
%
|
Accounts receivable, net
|
|
1,391.2
|
|
|
1,655.8
|
|
-16
|
%
|
Inventories
|
|
610.9
|
|
|
629.1
|
|
-3
|
%
|
Prepaid expenses and other current assets
|
|
283.2
|
|
|
232.6
|
|
22
|
%
|
Other assets
|
|
743.1
|
|
|
722.1
|
|
3
|
%
|
Accounts payable and accrued liabilities
|
|
1,301.6
|
|
|
1,295.7
|
|
0
|
%
|
Other liabilities
|
|
591.4
|
|
|
410.4
|
|
44
|
%
|
Accounts receivable
decreased 16% to $1,391.2 million at September 30, 2018, compared to $1,655.8
million at October 1, 2017. The decrease reflects the impact of a $48.8 million
decline from foreign exchange translation and a decrease resulting from the 12%
decrease in net revenues in the third quarter of 2018 as compared to the third
quarter of 2017. The balance at September 30, 2018 includes a $77.0 million
allowance for doubtful accounts related to Toys“R”Us. Days sales outstanding decreased
to 81 days at September 30, 2018 from 84 days at October 1, 2017 primarily
reflecting improved collections.
Inventories decreased 3% to
$610.9 million at September 30, 2018 from $629.1 million at October 1, 2017.
The decrease relates primarily to unfavorable foreign currency translation of
$23.7 million in 2018. Absent this impact, inventories at September 30, 2018
were consistent with inventories at October 1, 2017.
Prepaid expenses and other
current assets increased 22% to $283.2 million at September 30, 2018 from
$232.6 million at October 1, 2017. The increase was related to higher accrued
royalty income
related to
the adoption of ASU 2014-09, Revenue from Contracts with
Customers (ASC-606) and higher unrealized gains on foreign exchange contracts. These
increases were offset by lower prepaid advertising balances as a result of
lower advertising spending in 2018.
Other assets increased
approximately 3% to $743.1 million at September 30, 2018 from $722.1 million at
October 1, 2017. The increase was primarily related to higher capitalized movie
and television production costs, net of related production rebates, primarily
for the Company’s share of costs related to
BUMBLEBEE
, the theatrical
release to be produced jointly with Paramount Pictures, expected in December of
2018, as well as higher long-term receivable balances related to the long-term
portion of a multi-year digital distribution agreement for Hasbro television
programming. These increases were partially offset by lower deferred tax asset
balances reflecting the decrease in the Company’s U.S. tax rate as a result of
tax reform enacted in the fourth quarter of 2017, lower long-term royalty
advances and a lower long-term note receivable balance at September 30, 2018
due to scheduled payments.
Accounts payable and accrued
liabilities remained flat at $1,301.6 million at September 30, 2018 from
$1,295.7 million at October 1, 2017. Contributing to the balance at September
30, 2018 were accrued liabilities related to the remaining amounts due for the
Power Rangers acquisition, higher deferred revenue balances related to the
launch of the online version of MAGIC: THE GATHERING and the licensing of other
digital assets, severance charges accrued during the first quarter of 2018 in
addition to higher accrued dividends due to a higher dividend rate in 2018 and
higher accrued tax balances related to value added taxes, primarily in Europe.
These increases were partially offset by lower accrued advertising reflecting
the lower level of expense in 2018, a lower liability for foreign currency
forward contracts as the result of a strengthening U.S. dollar against certain
foreign currencies, and lower accrued employee compensation balances.
Other liabilities increased
44% to $591.4 million at September 30, 2018 from $410.4 million at October 1,
2017. The increase is primarily due to the $249.8 million estimated long-term
portion of the repatriation tax liability related to U.S. Tax Reform passed in
the fourth quarter of 2017. This increase is partially offset by a decrease in
the tax liability owed to Discovery Communications Inc. as the result of
re-measurement based on new U.S. tax rates in 2018, as well as a decrease in
the Company’s reserves for uncertain tax positions.
Cash Flow
Net cash provided by
operating activities in the first nine months of 2018 was $174.7 million
compared to $201.8 million in the first nine months of 2017. The reduction in
cash flow from operations primarily reflects lower earnings in the first nine
months of 2018 as compared to the first nine months of 2017 as well as higher
film production costs in 2018 relating to the production of the BUMBLEBEE film,
which is scheduled to be released in theaters in December 2018. For the fiscal
year ended December 31, 2017, net cash provided by operating activities was
$724.4 million.
Net cash utilized by
investing activities was $250.9 million in the first nine months of 2018
compared to $97.0 million in the first nine months of 2017. The increase in
cash used reflects cash payments of $155.5 million related to the acquisition
of Power Rangers during the second quarter of 2018. The Company has a remaining
payment of $75 million related to the acquisition that is due in January 2019
and is scheduled to release the $25 million escrow payment by June 2019.
Additions to property, plant and equipment were $104.0 million in the first
nine months of 2018 compared to $102.5 million in the first nine months of
2017.
Net cash utilized by
financing activities was $578.6 million in the first nine months of 2018
compared to $161.3 million in the first nine months of 2017. Financing
activities in the first nine months of 2017 reflect the proceeds from the
issuance of $500.0 million in principal amount of Notes Due 2027 that bear
interest at a rate of 3.50%. Net proceeds of the Notes offering, after
deduction of the underwriting discount and debt issuance expenses, totaled
approximately $493.9 million. In addition, financing activities in the nine
months ended October 1, 2017 include the repayment of $350 million aggregate
principal amount of the 6.30% Notes Due 2017 upon maturity. Cash payments
related to purchases of the Company's common stock were $187.9 million in the
first nine months of 2018 compared to $112.2 million in the first nine months
of 2017. At September 30, 2018, the Company had $485.7 million remaining
available under its current share repurchase authorization approved by the
Board of Directors. Dividends paid in the first nine months of 2018 totaled
$229.6 million compared to $206.0 million in the first nine months of 2017
reflecting a higher dividend rate commencing with the May 2018 dividend
payments. Net repayments of short-term borrowings were $131.6 million in the
first nine months of 2018 compared to net proceeds from short-term borrowings
of $15.7 million in the first nine months of 2017 reflecting lower short-term
borrowings in 2018. Financing activities in the first nine months of 2018 and
2017 include payments of $58.3 million and $32.0 million, respectively,
relating to tax payments made to tax authorities for which shares were withheld
from employees’ share-based payment awards.
Sources and Uses of
Cash
The Company has an agreement
with a group of banks 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. Under the Program
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 or par, or
alternatively, sold at par and bear varying interest rates based on a fixed or
floating rate basis. The interest rates vary based on market conditions and
the ratings assigned to the notes by the credit rating agencies at the time of
issuance. Subject to market conditions, the Company intends to utilize the
Program as its primary short-term borrowing facility and does not intend to
sell unsecured commercial paper notes in excess of the available amount under
the revolving credit agreement discussed below. If, for any reason, the
Company is unable to access the commercial paper market, the Company intends to
use the revolving credit agreement to meet the Company's short-term liquidity
needs. At September 30, 2018, the Company had no outstanding borrowings
related to the Program.
The
Company has a revolving credit agreement (the "Agreement"), which
provides it with a $1,000.0 million committed borrowing facility. The Agreement
contains certain financial covenants setting forth leverage and coverage
requirements, and certain other limitations typical of an investment grade
facility, including with respect to liens, mergers and incurrence of
indebtedness. Prior to September 2017, the Agreement provided for a $700.0
million revolving credit facility. During the third quarter of 2017 and
pursuant to the Agreement, the Company proposed and the Lenders agreed to
increase the committed borrowing facility from $700.0 million to $1,000.0
million. The Company was in compliance with all covenants as of and for the
quarter ended September 30, 2018. The Company had no borrowings outstanding
under its committed revolving credit facility at September 30, 2018. However,
the Company had letters of credit outstanding under this facility as of
September 30, 2018 of approximately $1.5 million. Amounts available and unused
under the committed line, less outstanding balances under the commercial paper
program, as of September 30, 2018 were approximately $998.5 million. The
Company also has other uncommitted lines from various banks, of which approximately
$59.1 million was utilized at September 30, 2018, including $38.8 million of
outstanding letters of credit and $20.3 million of outstanding borrowings.
The Company has principal
amounts of long-term debt at September 30, 2018 of $1,709.9 million, due at
varying times from 2021 through 2044. The Company also had letters of credit of
approximately $40.3 million and purchase commitments of approximately $326.5 million
outstanding at September 30, 2018.
Other
contractual obligations and commercial commitments, as detailed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2017, were
impacted by the Power Rangers acquisition. The Company has a remaining payment
of $75 million on the acquisition that is due in January 2019 as well as the
balance of a $25 million escrow account, subject to adjustment,
scheduled to release by June
2019. Outside of these changes, the other contractual obligations and
commercial commitments as detailed in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2017 did not materially change outside of
payments made in the normal course of business and as otherwise set forth in
this report. The table of contractual obligations and commercial commitments,
as detailed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017, does not include certain tax liabilities recorded related to
uncertain tax positions. These liabilities were $84.4 million at September 30,
2018, and are included as a component of other liabilities in the accompanying
consolidated balance sheets.
The Company
believes that cash from operations, and, if necessary, its committed line of
credit and other borrowing facilities, will allow the Company to meet its
obligations over the next twelve months.
CRITICAL
ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
The Company prepares its
consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America. As such, management
is required to make certain estimates, judgments and assumptions that it believes
are reasonable based on the information available. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
for the periods presented. The significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating the Company's reported financial results include recoverability of
goodwill and income taxes. These critical accounting policies are the same as
those detailed in the 2017 Form 10-K.
FINANCIAL
RISK MANAGEMENT
The
Company is exposed to market risks attributable to fluctuations in foreign
currency exchange rates, primarily as the result of sourcing products priced in
U.S. dollars, Hong Kong dollars and Euros while marketing those products in
more than twenty currencies. Results of operations may be affected primarily by
changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound
sterling, Brazilian real, Russian ruble and Mexican peso and, to a lesser extent,
other currencies in Latin American and Asia Pacific countries.
To
manage this exposure, the Company has hedged a portion of its forecasted
foreign currency transactions for fiscal years 2018 through 2022 using foreign
exchange forward contracts. The Company is also exposed to foreign currency
risk with respect to its net cash and cash equivalents or short-term borrowing
positions in currencies other than the U.S. dollar. The Company believes, however,
that the on-going risk on the net exposure should not be material to its
financial condition. In addition, the Company's revenues and costs have been,
and will likely continue to be, affected by changes in foreign currency rates.
A significant change in foreign exchange rates can materially impact the
Company's revenues and earnings due to translation of foreign-denominated
revenues and expenses. The Company does not hedge against translation impacts
of foreign exchange. From time to time, affiliates of the Company may make or
receive intercompany loans in currencies other than their functional currency.
The Company manages this exposure at the time the loan is made by using foreign
exchange contracts. Other than as set forth above, the Company does not
hedge foreign currency exposures.
The Company reflects all
forward contracts at their fair value as an asset or liability on the
consolidated balance sheets. The Company does not speculate in foreign currency
exchange contracts. At September 30, 2018, these contracts had net unrealized
gains of $17.9 million, of which $11.9 million of unrealized gains are recorded
in prepaid expenses and other current assets, $8.1 million of unrealized gains
are recorded in other assets, $0.6 million of unrealized losses are recorded in
accrued liabilities and $1.5 million of unrealized losses are recorded in other
liabilities. Included in accumulated other comprehensive loss at September 30,
2018 are deferred gains, net of tax, of $12.3 million, related to these
derivatives.
At September 30, 2018, the
Company had fixed rate long-term debt of $1,709.9 million. Of this long-term
debt, $600 million represents the aggregate issuance of long-term debt in May
2014 which consists of $300 million of 3.15% Notes Due 2021 and $300 million of
5.10% Notes Due 2044. Prior to the May 2014 debt issuance, the Company
entered into forward-starting interest rate swap agreements with a total
notional value of $500 million to hedge the anticipated underlying U.S.
Treasury interest rate. These interest rate swaps were matched with this debt
issuance and were designated and effective as hedges of the change in future
interest payments. At the date of debt issuance, the Company terminated these
interest rate swap agreements and their fair value at the date of issuance was
recorded in accumulated other comprehensive loss and is being amortized through
the consolidated statements of operations using an effective interest rate
method over the life of the related debt. Included in accumulated other
comprehensive loss at September 30, 2018 are deferred losses, net of tax, of
$19.7 million related to these derivatives.
Item 3.
|
Quantitative and
Qualitative Disclosures About Market Risk.
|
The information required by
this item is included in Part I Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and is
incorporated herein by reference.
Item 4.
|
Controls and Procedures.
|
The Company maintains
disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act"), that
are designed to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to the Company's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. The Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as of September 30, 2018. Based on the evaluation of
these disclosure controls and procedures, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective.
There were no changes in the
Company's internal control over financial reporting, as defined in Rule
13a-15(f) promulgated under the Exchange Act, during the quarter ended September
30, 2018 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.