UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C.   20549

_________________

 

FORM 10-Q

______________

(Mark One)

 

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended OctoberApril 1, 20172018

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-6682

_______________

 

HASBRO, INC.

(Exact name of registrant as specified in its charter)

 

Rhode Island

05-0155090

(State of Incorporation)

(I.R.S. Employer Identification No.)

 

1027 Newport Avenue, Pawtucket, Rhode Island  02861

(Address of Principal Executive Offices, Including Zip Code)

 

(401) 431-8697

(Registrant's Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [x]  No  [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x]  No  [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  [x]

Accelerated filer  [ ]

Non-accelerated filer (Do not check if a smaller reporting company)  [  ]

Smaller reporting Company  [  ]

Emerging growth Company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [ ]

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes [ ]  No  [x]

 

The number of shares of Common Stock, par value $.50 per share, outstanding as of OctoberApril 23, 20172018 was 124,555,586.124,937,746.

 

 

PART I. FINANCIAL INFORMATION
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HASBRO, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Thousands of Dollars Except Share Data)

(Unaudited)

 

 

 

 

OctoberApril 1,

 

September 25,April 2,

 

December 25,31,

 

 

 

 

2018

2017

 

2016

20162017

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

  

Cash and cash equivalents

$

1,244,7781,598,944

 

 

830,3721,463,081

 

 

1,282,2851,581,234

 

Accounts receivable, less allowance for doubtful accounts of $33,900$94,300

 

 

 

 

 

 

 

 

 

 

$36,50013,200 and $16,800$31,400

 

1,655,752612,698

 

 

1,452,931676,945

 

 

1,319,9631,405,399

  

Inventories

 

629,120517,439

 

 

607,701416,232

 

 

387,675433,293

  

Prepaid expenses and other current assets

 

232,590292,756

 

 

255,983243,475

 

 

237,684214,000

  

  

  

Total current assets

 

3,762,2403,021,837

 

 

3,146,9872,799,733

 

 

3,227,6073,633,926

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation of $417,000,$436,600,

 

 

 

 

 

 

 

 

 

 

$358,100392,900 and $383,700$422,100

 

263,862262,418

 

 

247,231270,023

 

 

267,398259,710

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

  

Goodwill

 

572,762573,574

 

 

604,700570,937

 

 

570,555573,063

  

Other intangibles, net, accumulated amortization of $898,300, $867,300$911,300, $883,900

 

 

 

 

 

 

 

 

 

 

and $876,000$904,900

 

223,695210,904

 

 

254,637238,069

 

 

245,949217,382

  

Other

 

722,089660,339

 

 

701,592767,108

 

 

779,857605,902

  

 

Total other assets

 

1,518,5461,444,817

 

 

1,560,9291,576,114

 

 

1,596,3611,396,347

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Total assets

$

5,544,6484,729,072

 

 

4,955,1474,645,870

 

 

5,091,3665,289,983

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES REDEEMABLE NONCONTROLLING INTERESTS

AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

  

Short-term borrowings

$

189,01221,611

 

 

178,66665,294

 

 

172,582154,957

 

Current portion of long-term debt

 

-

 

 

349,611349,814

 

 

349,713-

  

Accounts payable

 

525,852256,433

 

 

344,874241,214

 

 

319,525348,476

  

Accrued liabilities

 

769,893574,482

 

 

742,568545,492

 

 

776,039748,264

  

 

Total current liabilities

 

1,484,757852,526

 

 

1,615,7191,201,814

 

 

1,617,8591,251,697

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,693,2611,693,977

 

 

1,198,4611,198,896

 

 

1,198,6791,693,609

Other liabilities

 

410,378611,210

 

 

364,378393,516

 

 

389,388514,720

  

 

Total liabilities

 

3,588,3963,157,713

 

 

3,178,5582,794,226

 

 

3,205,9263,460,026

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

-

34,829

22,704

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

  

Preference stock of $2.50 par value. Authorized 5,000,000 shares; none

 

 

 

 

 

 

 

 

 

 

 

issued

 

-

 

 

-

 

 

-

  

Common stock of $0.50 par value. Authorized 600,000,000 shares; issued

 

 

 

 

 

 

 

 

 

 

209,694,630 at OctoberApril 1, 2018, April 2, 2017, September 25, 2016,

 

 

 

 

 

 

 

 

 

 

and December 25, 201631, 2017

 

104,847

 

 

104,847

 

 

104,847

  

Additional paid-in capital

 

1,043,9811,053,368

 

 

959,8591,008,737

 

 

985,4181,050,605

  

Retained earnings

 

4,336,4204,090,637

 

 

4,019,3704,145,469

 

 

4,148,7224,260,222

  

Accumulated other comprehensive loss

 

(234,792)(292,395)

 

 

(203,989)(197,171)

 

 

(194,570)(239,425)

  

Treasury stock, at cost; 85,139,30284,706,373 shares at OctoberApril 1, 2017; 84,751,7732018; 84,685,145

 

 

 

 

 

 

 

 

 

 

shares at September 25, 2016;April 2, 2017; and 85,207,67785,244,923 shares at December 25, 201631, 2017

 

(3,294,204)(3,385,098)

 

 

(3,138,327)(3,210,238)

 

 

(3,181,681)(3,346,292)

  

 

Total shareholders' equity

 

1,956,2521,571,359

 

 

1,741,7601,851,644

 

 

1,862,7361,829,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities redeemable noncontrolling interests and shareholders' equity

$

4,729,072

 

 

4,645,870

 

 

shareholders' equity

$

5,544,648

4,955,147

5,091,3665,289,983

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

 

Consolidated Statements of Operations

 

 

(Thousands of Dollars Except Per Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

 

October 1,

 

September 25,

 

October 1,

 

September 25,

 

 

 

 

2017

 

2016

 

2017

 

2016

Net revenues

 

$

1,791,502

 

 

1,679,757

 

 

3,613,671

 

 

3,389,882

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

730,656

 

 

658,986

 

 

1,404,971

 

 

1,270,902

 

Royalties

 

 

139,222

 

 

134,294

 

 

282,754

 

 

273,671

 

Product development

 

 

67,386

 

 

70,083

 

 

192,765

 

 

190,918

 

Advertising

 

 

168,926

 

 

154,132

 

 

342,236

 

 

320,948

 

Amortization of intangibles

 

 

6,492

 

 

8,691

 

 

22,254

 

 

26,073

 

Program production cost amortization

 

 

5,394

 

 

6,282

 

 

16,152

 

 

17,501

 

Selling, distribution and administration

 

 

312,482

 

 

285,188

 

 

813,268

 

 

756,978

 

 

Total costs and expenses

 

 

1,430,558

 

 

1,317,656

 

 

3,074,400

 

 

2,856,991

Operating profit

 

 

360,944

 

 

362,101

 

 

539,271

 

 

532,891

Non-operating (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

25,072

 

 

24,305

 

 

73,752

 

 

72,263

 

Interest income

 

 

(5,362)

 

 

(1,944)

 

 

(16,042)

 

 

(6,469)

 

Other income, net

 

 

(8,607)

 

 

(6,584)

 

 

(26,003)

 

 

(5,460)

 

 

Total non-operating expense, net

 

 

11,103

 

 

15,777

 

 

31,707

 

 

60,334

Earnings before income taxes

 

 

349,841

 

 

346,324

 

 

507,564

 

 

472,557

Income tax expense

 

 

84,258

 

 

90,162

 

 

105,659

 

 

120,005

Net earnings

 

 

265,583

 

 

256,162

 

 

401,905

 

 

352,552

Net loss attributable to noncontrolling interests

 

 

-

 

 

(1,636)

 

 

-

 

 

(6,103)

Net earnings attributable to Hasbro, Inc.

 

$

265,583

 

 

257,798

 

 

401,905

 

 

358,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Hasbro, Inc. per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.12

 

 

2.05

 

 

3.21

 

 

2.86

 

Diluted

 

$

2.09

 

 

2.03

 

 

3.16

 

 

2.82

Cash dividends declared per common share

 

$

0.57

 

 

0.51

 

 

1.71

 

 

1.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

 

HASBRO, INC. AND SUBSIDIARIES

 

 

Consolidated Statements of Comprehensive Earnings

 

 

(Thousands of Dollars)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

 

October 1,

 

September 25,

 

October 1,

 

September 25,

 

 

 

 

2017

 

2016

 

2017

 

2016

Net earnings

 

$

265,583

 

 

256,162

 

 

401,905

 

 

352,552

Other comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

13,142

 

 

(1,483)

 

 

41,954

 

 

18,482

 

Net losses on cash flow hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

  

net of tax

 

 

(26,532)

 

 

(12,960)

 

 

(83,729)

 

 

(37,004)

 

Unrealized holding (losses) gains on available

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-for-sale securities, net of tax

 

 

(784)

 

 

(390)

 

 

(555)

 

 

963

 

Reclassifications to earnings, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses (gains) on cash flow hedging activities

 

 

4,547

 

 

(16,028)

 

 

(2,237)

 

 

(43,952)

 

 

Unrecognized pension and postretirement amounts

 

 

1,448

 

 

1,173

 

 

4,345

 

 

3,523

Total other comprehensive loss, net of tax

 

 

(8,179)

 

 

(29,688)

 

 

(40,222)

 

 

(57,988)

Comprehensive earnings

 

 

257,404

 

 

226,474

 

 

361,683

 

 

294,564

Comprehensive loss attributable to noncontrolling interests

 

 

-

 

 

(1,636)

 

 

-

 

 

(6,103)

Comprehensive earnings attributable to Hasbro, Inc.

 

$

257,404

 

 

228,110

 

 

361,683

 

 

300,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Statements of Operations

 

(Thousands of Dollars Except Per Share Data)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

April 1,

 

April 2,

 

 

 

 

2018

 

2017

Net revenues

 

$

716,341

 

 

849,663

Costs and expenses:

 

 

 

 

 

 

  

Cost of sales

 

 

255,187

 

 

306,082

  

Royalties

 

 

69,652

 

 

64,380

  

Product development

 

 

57,384

 

 

62,586

  

Advertising

 

 

68,016

 

 

80,936

  

Amortization of intangibles

 

 

6,478

 

 

7,881

  

Program production cost amortization

 

 

12,034

 

 

5,570

  

Selling, distribution and administration

 

 

328,009

 

 

243,885

  

  

Total costs and expenses

 

 

796,760

 

 

771,320

Operating profit (loss)

 

 

(80,419)

 

 

78,343

Non-operating (income) expense:

 

 

 

 

 

 

  

Interest expense

 

 

22,809

 

 

24,456

  

Interest income

 

 

(6,248)

 

 

(5,564)

  

Other income, net

 

 

(8,592)

 

 

(11,386)

  

 

Total non-operating expense, net

 

 

7,969

 

 

7,506

Earnings (loss) before income taxes

 

 

(88,388)

 

 

70,837

Income tax expense

 

 

24,104

 

 

2,238

Net earnings (loss)

 

$

(112,492)

 

 

68,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share:

 

 

 

 

 

  

Basic

 

$

(0.90)

 

 

0.55

  

Diluted

 

$

(0.90)

 

 

0.54

Cash dividends declared per common share

 

$

0.63

 

 

0.57

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

 

   

HASBRO, INC. AND SUBSIDIARIES

  

Consolidated Statements of Cash Flows

  

(Thousands of Dollars)

  

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

October 1,

 

September 25,

 

 

 

 

 

2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

 

  

Net earnings

 

$

401,905

 

 

352,552

  

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

  

 

Depreciation of plant and equipment

 

 

107,853

 

 

89,327

 

 

Amortization of intangibles

 

 

22,254

 

 

26,073

  

 

Program production cost amortization

 

 

16,152

 

 

17,501

  

 

Deferred income taxes

 

 

17,797

 

 

25,091

  

 

Stock-based compensation

 

 

37,390

 

 

39,673

 

 

Other non-cash items

 

 

(16,033)

 

 

(15,523)

Change in operating assets and liabilities net of acquired and disposed balances:

 

 

 

 

 

 

  

 

Increase in accounts receivable

 

 

(300,693)

 

 

(224,172)

  

 

Increase in inventories

 

 

(222,546)

 

 

(214,734)

  

 

Increase in prepaid expenses and other current assets

 

 

(4,437)

 

 

(4,063)

  

 

Program production costs

 

 

(25,309)

 

 

(36,010)

  

 

Increase in accounts payable and accrued liabilities

 

 

137,518

 

 

171,287

  

 

Other

 

 

29,945

 

 

(31,595)

  

 

 

Net cash provided by operating activities

 

 

201,796

 

 

195,407

Cash flows from investing activities:

 

 

 

 

 

 

  

 

Additions to property, plant and equipment

 

 

(102,512)

 

 

(103,639)

  

 

Investments and acquisitions, net of cash acquired

 

 

-

 

 

(12,436)

  

 

Other

 

 

5,516

 

 

25,576

  

 

 

Net cash utilized by investing activities

 

 

(96,996)

 

 

(90,499)

Cash flows from financing activities:

 

 

 

 

 

 

  

 

Net proceeds from borrowings with maturity greater than three months

 

 

493,878

 

 

-

  

 

Repayments of borrowings with maturity greater than three months

 

 

(350,000)

 

 

-

  

 

Net proceeds from other short-term borrowings

 

 

15,663

 

 

14,160

  

 

Purchases of common stock

 

 

(112,241)

 

 

(104,273)

  

 

Stock-based compensation transactions

 

 

29,432

 

 

37,515

  

 

Dividends paid

 

 

(206,012)

 

 

(185,265)

 

 

Payments related to tax withholding for share-based compensation

 

 

(31,973)

 

 

(21,914)

  

 

Other

 

 

-

 

 

762

  

 

 

Net cash utilized by financing activities

 

 

(161,253)

 

 

(259,015)

Effect of exchange rate changes on cash

 

 

18,946

 

 

7,729

Decrease in cash and cash equivalents

 

 

(37,507)

 

 

(146,378)

Cash and cash equivalents at beginning of year

 

 

1,282,285

 

 

976,750

Cash and cash equivalents at end of period

 

$

1,244,778

 

 

830,372

 

 

 

 

 

 

 

 

 

 

Supplemental information

 

 

 

 

 

 

  

Cash paid during the period for:

 

 

 

 

 

 

  

 

Interest

 

$

75,567

 

 

74,700

  

 

Income taxes

 

$

86,441

 

 

64,854

 

 

 

 

 

 

 

 

 

  

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Earnings (Loss)

 

(Thousands of Dollars)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

April 1,

 

April 2,

 

 

 

 

2018

 

2017

Net earnings (loss)

 

$

(112,492)

 

 

68,599

Other comprehensive earnings (loss):

 

 

 

 

 

 

  

Foreign currency translation adjustments

 

 

12,829

 

 

24,673

  

Unrealized holding losses on available-for-sale securities,

 

 

(143)

 

 

(31)

  

  

net of tax

 

 

 

 

 

 

  

Net losses on cash flow hedging activities, net of tax

 

 

(25,270)

 

 

(23,317)

 

Changes in unrecognized pension amounts, net of tax

 

 

(26,058)

 

 

-

  

Reclassifications to earnings (loss), net of tax:

 

 

 

 

 

 

  

 

Net losses (gains) on cash flow hedging activities

 

 

5,355

 

 

(5,374)

  

 

Amortization of unrecognized pension and postretirement amounts

 

 

1,820

 

 

1,448

Total other comprehensive loss, net of tax

 

 

(31,467)

 

 

(2,601)

Comprehensive earnings (loss)

 

$

(143,959)

 

 

65,998

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

   

HASBRO, INC. AND SUBSIDIARIES

  

Consolidated Statements of Cash Flows

  

(Thousands of Dollars)

  

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

April 1,

 

April 2,

 

 

 

 

 

2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

 

  

Net earnings (loss)

 

$

(112,492)

 

 

68,599

  

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

  

 

Depreciation of plant and equipment

 

 

26,221

 

 

27,702

 

 

Amortization of intangibles

 

 

6,478

 

 

7,881

  

 

Program production cost amortization

 

 

12,034

 

 

5,570

  

 

Deferred income taxes

 

 

(16,437)

 

 

13,428

  

 

Stock-based compensation

 

 

10,291

 

 

10,844

 

 

Other non-cash items

 

 

(4,971)

 

 

(5,498)

Change in operating assets and liabilities net of acquired and disposed balances:

 

 

 

 

 

 

  

 

Decrease in accounts receivable

 

 

808,367

 

 

660,253

  

 

Increase in inventories

 

 

(76,516)

 

 

(21,377)

  

 

Increase in prepaid expenses and other current assets

 

 

(78,540)

 

 

(7,200)

  

 

Program production costs

 

 

(11,398)

 

 

(11,738)

  

 

Decrease in accounts payable and accrued liabilities

 

 

(297,669)

 

 

(342,533)

 

 

Changes in net deemed repatriation tax

 

 

75,805

 

 

-

  

 

Other

 

 

(23,434)

 

 

5,997

  

 

 

Net cash provided by operating activities

 

 

317,739

 

 

411,928

Cash flows from investing activities:

 

 

 

 

 

 

  

 

Additions to property, plant and equipment

 

 

(28,235)

 

 

(30,243)

  

 

Other

 

 

2,007

 

 

(781)

  

 

 

Net cash utilized by investing activities

 

 

(26,228)

 

 

(31,024)

Cash flows from financing activities:

 

 

 

 

 

 

  

 

Net repayments of other short-term borrowings

 

 

(133,698)

 

 

(107,336)

  

 

Purchases of common stock

 

 

(38,126)

 

 

(19,312)

  

 

Stock-based compensation transactions

 

 

19,518

 

 

9,743

  

 

Dividends paid

 

 

(70,781)

 

 

(63,404)

 

 

Payments related to tax withholding for share-based compensation

 

 

(52,637)

 

 

(31,391)

  

 

 

Net cash utilized by financing activities

 

 

(275,724)

 

 

(211,700)

Effect of exchange rate changes on cash

 

 

1,923

 

 

11,592

Increase in cash and cash equivalents

 

 

17,710

 

 

180,796

Cash and cash equivalents at beginning of year

 

 

1,581,234

 

 

1,282,285

Cash and cash equivalents at end of period

 

$

1,598,944

 

 

1,463,081

 

 

 

 

 

 

 

 

 

 

Supplemental information

 

 

 

 

 

 

  

Cash paid during the period for:

 

 

 

 

 

 

  

 

Interest

 

$

28,699

 

 

31,446

  

 

Income taxes

 

$

42,481

 

 

31,571

 

 

 

 

 

 

 

 

 

  

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

 

 

 

 

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 OctoberApril 1, 20172018 and September 25, 2016,April 2, 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 quartersquarter ended OctoberApril 1, 2017 and September 25, 2016 were each2018 was a 13-week periods.period. The nine-month periodquarter ended October 1,April 2, 2017 was a 40-week period while the nine-month period ended September 25, 2016 was a 39-week14-week period.

 

The results of operations for the quarter and nine-month periods ended October 1, 2017 are not necessarily indicative of results to be expected for the full year, nor were those of the comparable 2016 periods2017 period representative of those actually experienced for the full year 2016. Certain reclassifications have been made to prior year amounts to conform to the current period presentation.2017.

 

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 25, 201631, 2017 in its Annual Report on Form 10-K (“20162017 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 20162017 Form 10-K with the exception of the accounting policypolicies related to stock compensation.  Duringrevenue recognition, reclassification of disproportionate tax effects from accumulated other comprehensive income (“AOCI”) caused by the Tax Cuts and Jobs Act of 2017 and the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

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 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 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 AOCI with a corresponding credit to retained earnings. 

In March 2017, the Company adoptedFASB issued Accounting Standards Update (“ASU”) 2016-09, ImprovementsNo. 2017-07 (ASU 2017-07), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  The standard requires companies to Employee Share-Based Payment Accounting.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 first quarter of 2018.

In August 2016, the FASB issued ASU includes provisions2016-15, Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to simplifyreduce diversity in practice across all industries, in how share-based paymentscertain transactions are accounted for and presentedclassified in the financial statements including:

·Prospectively, the requirement to record all of the tax effects related to share-based payments at settlement through the income statement.  For the quarter and nine months ended October 1, 2017, excess tax benefits of $5,014 and $20,478, respectively, were recorded to income tax expense.  

·A requirement that all tax-related cash flows resulting from share-based payments be reported as operating activities, included with other income tax cash flows on the statement of cash flows. Previously, these amounts were reported as a cash inflow from financing activities.ASU 2016-15 was effective for public companies for fiscal years beginning after December 15, 2017. The Company elected to applyadopted this requirementstandard in 2018 and the adoption of thethis standard retrospectively.  Accordingly, the cash flow statement for the nine months ended September 25, 2016 has been restated to include $19,712 of cash flows from excess tax benefits, previously included as financing activities, in operating activities within the increase in accounts payable and other accrued liabilities.  For the nine months ended October 1, 2017 excess tax benefits of $20,478 were reported as operating activities.

·A requirement that all cash payments made to taxing authoritiesdid not have an impact on the employees’ behalf for withheld shares shall be presented as financing activities in the statements of cash flows.  Prior to adoption of ASU 2016-09, these cash flows were included as operating activities. This change was required to be applied on a retrospective basis and as a result, the Company has restated the consolidatedCompany’s statement of cash flows for the nine monthsquarters ended September 25, 2016. This change resultedApril 1, 2018 and April 2, 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 paymentsthe first quarter of $21,9142018 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 90% and 92% of the Company’s revenues for the quarters ended April 1, 2018 and April 2, 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 April 1, 2018 and April 2, 2017, these costs were $41,486 forand $36,609, respectively.  The Company offers various discounts, rebates, allowances, returns, and markdowns to its customers, (collectively, “allowances”), all of which are considered when determining the nine months ended September 25, 2016 being includedtransaction 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 financing activities.  For the nine months ended October 1, 2017, such payments amountedestimation process may change.  Historically, adjustments to $31,973.estimated variable consideration have not been material.

Entertainment and Licensing

 

 

·Entities are permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards choosing either to estimate forfeitures as previously required or recognize forfeitures as they occur. The Company elected to change its method of accounting for forfeitures from estimating the number of stock-based awards expected to vest, to accounting for forfeitures as they occur which resulted in a one-time charge, net of tax, of $700 to retained earnings recorded during the first quarter of 2017. Based uponRevenues within the Company’s history of forfeitures, it is not expected that this election will have a material impact on its financial statements going forward however, as any impact will be based on future forfeitures, the actual impact could differ from the Company’s expectation.

Recent Transactions

Through 2016, the Company had one investment with a redeemable noncontrolling interestEntertainment and Licensing segment, which was the Company’s 70accounted for 9% majority interest in Backflip Studios, LLC (“Backflip”). During the first quarter of 2017, the Company acquired the remaining 30and 6% of Backflipthe Company’s revenues for the quarters ended April 1, 2018 and April 2, 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 April 1, 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 spending patterns of the players.  For the majority of the Company’s digital games, players spend their currencies in the month of purchase, and therefore revenues are recorded at the time of sale.  The Company has no additional consideration, making it a wholly-owned subsidiaryperformance obligations other than delivery of the Company.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 revenues are recorded in net revenues inclusive of the fees charged by the third-party platform providers.  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 are not material to the Company’s consolidated balance sheets as of April 1, 2018 and December 31, 2017, and the changes in deferred revenues are not material to the Company’s consolidated statement of operations for the quarter ended April 1, 2018.  The Company historically has not recorded contract assets and does not currently expect to record any material contract assets in the future.

Accounts Receivable and Allowance for Doubtful Accounts

The Company’s accounts receivable on the consolidated balance sheets as of April 1, 2018, April 2, 2017 and December 31, 2017 are materially from contracts with customers.  In the quarter ended April 1, 2018, the Company recorded a bad debt charge of $59,115 related to a significant customer. The Company had no other material bad debt expense in the quarters ended April 1, 2018 and April 2, 2017.

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 10, Segment Reporting, for further information.

 

(2)(3) Earnings (Loss) Per Share

 

Net earnings (loss) per share data for the quarters ended April 1, 2018 and nine-month periods ended October 1,April 2, 2017 and September 25, 2016 were computed as follows:

 

 

2017

 

2016

Quarter

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings attributable to Hasbro, Inc.

$

265,583

 

 

265,583

 

 

257,798

 

 

257,798

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

125,170

 

 

125,170

 

 

125,500

 

 

125,500

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

   Options and other share-based awards

 

-

 

 

1,980

 

 

-

 

 

1,678

Equivalent Shares

 

125,170

 

 

127,150

 

 

125,500

 

 

127,178

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Hasbro, Inc. per common share

$

2.12

 

 

2.09

 

 

2.05

 

 

2.03

2017

 

2016

2018

 

2017

Nine Months

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings attributable to Hasbro, Inc.

$

401,905

 

 

401,905

 

 

358,655

 

 

358,655

Quarter

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings (loss)

$

(112,492)

 

 

(112,492)

 

 

68,599

 

 

68,599

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

125,204

 

 

125,204

 

 

125,414

 

125,414

 

125,073

 

 

125,073

 

 

125,182

 

125,182

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options and other share-based awards

 

-

 

 

2,044

 

 

-

 

 

1,642

 

-

 

 

-

 

 

-

 

 

2,047

Equivalent Shares

 

125,204

 

 

127,248

 

 

125,414

 

 

127,056

 

125,073

 

 

125,073

 

 

125,182

 

 

127,229

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Hasbro, Inc. per common share

$

3.21

 

 

3.16

 

 

2.86

 

 

2.82

Net earnings (loss) per common share

$

(0.90)

 

 

(0.90)

 

 

0.55

 

 

0.54

 

For the quarters ended OctoberApril 1, 20172018 and September 25, 2016,April 2, 2017, options and restricted stock units totaling 4503,191 and 492, 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 October 1, 2017 and September 25, 2016, options and restricted stock units totaling 514 and 492,638, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive.Of this amount 1,993 would have been included in the calculation of diluted shares had the Company not had a net loss in the first quarter of 2018. Assuming that these awards and options were included, under the treasury stock method, they would have resulted in an additional 1,022 shares being included in the diluted earnings per share calculation for the quarter ended April 1, 2018.

 

(3)(4) Other Comprehensive Earnings (Loss)

 

Components of other comprehensive earnings (loss) are presented within the consolidated statements of comprehensive earnings.earnings (loss). The following table presents the related tax effects on changes in other comprehensive earnings (loss) for the quarterquarters ended April 1, 2018 and nine-month periods ended October 1, 2017 and September 25, 2016.April 2, 2017.

 

 

 

 

Quarter Ended

 

Nine Months Ended

 

Quarter Ended

 

October 1,

 

September 25,

 

October 1,

 

September 25,

 

April 1,

 

April 2,

 

2017

 

2016

 

2017

 

2016

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings (loss), tax effect:

Other comprehensive earnings (loss), tax effect:

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings (loss), tax effect:

 

 

 

 

 

Tax benefit on unrealized holding losses

Tax benefit on unrealized holding losses

$

41

 

 

18

Tax benefit on cash flow hedging activities

Tax benefit on cash flow hedging activities

$

1,700

 

 

1,420

 

 

5,936

 

 

9,423

Tax benefit on cash flow hedging activities

 

5,980

 

 

5,310

Tax benefit (expense) on unrealized holding losses and gains

 

445

 

 

221

 

 

315

 

 

(547)

Tax benefit on changes in unrecognized pension amounts

Tax benefit on changes in unrecognized pension amounts

 

7,565

 

 

-

Reclassifications to earnings, tax effect:

Reclassifications to earnings, tax effect:

 

 

 

 

 

 

 

 

 

 

 

Reclassifications to earnings, tax effect:

 

 

 

 

 

Tax (benefit) expense on cash flow hedging activities

 

(1,875)

 

 

2,456

 

 

(2,884)

 

 

5,274

Tax benefit on cash flow hedging activities

 

(794)

 

 

(369)

Tax benefit on unrecognized pension and

 

 

 

 

 

 

 

 

 

 

 

Tax benefit on unrecognized pension and postretirement

 

 

 

 

 

postretirement amounts reclassified to the

 

 

 

 

 

 

 

 

 

 

 

amounts reclassified to the consolidated statements of operations

 

(528)

 

 

(822)

consolidated statements of operations

 

(822)

 

 

(666)

 

 

(2,466)

 

 

(1,999)

Total tax effect on other comprehensive earnings (loss)

Total tax effect on other comprehensive earnings (loss)

$

(552)

 

 

3,431

 

 

901

 

 

12,151

Total tax effect on other comprehensive earnings (loss)

$

12,264

 

 

4,137

 

Changes in the components of accumulated other comprehensive loss for the ninethree months ended OctoberApril 1, 20172018 and September 25, 2016April 2, 2017 are as follows:

  

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

Holding

 

 

 

 

Total

 

 

 

 

 

 

Holding

 

 

 

 

Total

 

 

 

Gains

 

Gains on

 

Foreign

 

Accumulated

 

 

 

Gains

 

Gains on

 

Foreign

 

Accumulated

Pension and

 

(Losses) on

 

Available-

 

Currency

 

Other

Pension and

 

(Losses) on

 

Available-

 

Currency

 

Other

Postretirement

 

Derivative

 

for-Sale

 

Translation

 

Comprehensive

Postretirement

 

Derivative

 

for-Sale

 

Translation

 

Comprehensive

Amounts

 

Instruments

 

Securities

 

Adjustments

 

Loss

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)

 

(24,238)

 

 

(19,915)

 

 

(143)

 

 

12,829

 

 

(31,467)

Balance at April 1, 2018

$

(153,274)

 

 

(56,402)

 

 

1,113

 

 

(83,832)

 

 

(292,395)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 25, 2016

$

(118,401)

 

 

51,085

 

 

1,424

 

 

(128,678)

 

 

(194,570)

$

(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)

 

1,448

 

 

(28,691)

 

 

(31)

 

 

24,673

 

 

(2,601)

Balance at October 1, 2017

$

(114,056)

 

 

(34,881)

 

 

869

 

 

(86,724)

 

 

(234,792)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 27, 2015

$

(102,931)

 

 

79,317

 

 

1,258

 

 

(123,645)

 

 

(146,001)

Current period other comprehensive earnings (loss)

 

3,523

 

 

(80,956)

 

 

963

 

 

18,482

 

 

(57,988)

Balance at September 25, 2016

$

(99,408)

 

 

(1,639)

 

 

2,221

 

 

(105,163)

 

 

(203,989)

Balance at April 2, 2017

$

(116,953)

 

 

22,394

 

 

1,393

 

 

(104,005)

 

 

(197,171)

 

Gains (Losses) on Derivative Instruments

At OctoberApril 1, 2017,2018, the Company had remaining net deferred losses on foreign currency forward contracts, net of tax, of $17,547$36,046 in accumulated other comprehensive loss ("AOCE"). These instruments hedge payments related to inventory purchased in the thirdfirst quarter of 20172018 or forecasted to be purchased during the remainder of 20172018 and, to a lesser extent, 20182019 through 2022, intercompany expenses expected to be paid or received during 20172018 and 2018, and2019, cash receipts for sales made at the end of the first quarter of 2018 or forecasted to be made in the remainder of 20172018 and, to a lesser extent, 20182019 through 2019.2020. 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 in 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 OctoberApril 1, 2017,2018, deferred losses, net of tax of $17,332$20,356 related to these instruments remained in AOCE. For the quarters ended OctoberApril 1, 20172018 and September 25, 2016, previously deferredApril 2, 2017, losses of $450 and $484, respectively, were reclassified from AOCE to net earnings. For the nine-month periods ended October 1, 2017 and September 25, 2016, previously deferred losses of $1,384 and $1,349 were reclassified from AOCE to net earnings, respectively.

 

Of the amount included in AOCE at OctoberApril 1, 2017,2018, the Company expects net losses of approximately $18,932$21,415 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.

 

(4)(5) Financial Instruments

 

The Company's financial instruments include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and certain accrued liabilities. At OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 2016,31, 2017, the carrying cost of these instruments approximated their fair value. The Company's financial instruments at OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 201631, 2017 also include certain assets and liabilities measured at fair value (see Notes 67 and 8)9) 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 OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 201631, 2017 are as follows:

 

October 1, 2017

 

September 25, 2016

 

December 25, 2016

April 1, 2018

 

April 2, 2017

 

December 31, 2017

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

6.35% Notes Due 2040

$

500,000

 

 

613,750

 

 

500,000

 

 

611,200

 

 

500,000

 

 

584,850

$

500,000

 

 

585,400

 

 

500,000

 

 

597,150

 

 

500,000

 

 

601,800

3.50% Notes Due 2027

 

500,000

 

496,850

 

-

 

-

 

-

 

 

-

 

500,000

 

468,000

 

-

 

-

 

500,000

 

 

488,300

6.30% Notes Due 2017

 

-

 

-

 

350,000

 

366,205

 

350,000

 

 

361,900

 

-

 

-

 

350,000

 

357,385

 

-

 

 

-

5.10% Notes Due 2044

 

300,000

 

324,300

 

300,000

 

324,450

 

300,000

 

 

297,600

 

300,000

 

299,460

 

300,000

 

306,570

 

300,000

 

 

313,320

3.15% Notes Due 2021

 

300,000

 

306,840

 

300,000

 

310,620

 

300,000

 

 

300,450

 

300,000

 

300,480

 

300,000

 

305,490

 

300,000

 

 

302,640

6.60% Debentures Due 2028

 

109,895

 

 

132,830

 

 

109,895

 

 

132,786

 

 

109,895

 

 

123,984

 

109,895

 

 

128,006

 

 

109,895

 

 

125,390

 

 

109,895

 

 

131,390

Total long-term debt

$

1,709,895

 

 

1,874,570

 

 

1,559,895

 

 

1,745,261

 

 

1,559,895

 

 

1,668,784

$

1,709,895

 

 

1,781,346

 

 

1,559,895

 

 

1,691,985

 

 

1,709,895

 

 

1,837,450

Less: Current portion

 

-

 

-

 

350,000

 

366,205

 

350,000

 

  

361,900

 

-

 

-

 

350,000

 

357,385

 

-

 

  

-

Less: Deferred debt expenses

 

16,634

 

 

-

 

 

11,434

 

 

-

 

 

11,216

 

 

-

 

15,918

 

 

-

 

 

10,999

 

 

-

 

 

16,286

 

 

-

Long-term debt

$

1,693,261

 

 

1,874,570

 

 

1,198,461

 

 

1,379,056

 

 

1,198,679

 

 

1,306,884

$

1,693,977

 

 

1,781,346

 

 

1,198,896

 

 

1,334,600

 

 

1,693,609

 

 

1,837,450

 

In September 2017 the Company issued $500,000 of Notes due in 2027 that bear interest at a fixed rate of 3.50% (the "3.50% Notes"). Net proceeds from the issuance of the 3.50% Notes, after deduction of $6,122 of underwriting discount and debt issuance expenses, totaled $493,878. These costs are being amortized over the life of the 3.50% Notes, or 10 years. The Company may redeem the 3.50% Notes at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments discounted using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase, plus 25 basis points. In addition, three months prior to their maturity date, the Company may redeem at its option the 3.50% Notes, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the 3.50% Notes to be redeemed. 

The proceeds from this debt issuance were used to repay the $350,000 aggregate principal amount of its 6.30% Notes that matured during the third quarter 2017. The Company used the remaining net proceeds for general corporate purposes.

Current portion of long-term debt at September 25, 2016 and December 25, 2016April 2, 2017 of $349,611$349,814 and $349,713, respectively, as shown on the consolidated balance sheet represents the $350,000 principal of 6.30% notes less $389$186 and $287, respectively, of deferred debt expenses.

 

The fair values of the Company's long-term debt are considered Level 3 fair values (see Note 67 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.

  

 

(5)(6) 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.  For the quarter ended April 1, 2018, the Company obtained additional information affecting the provisional amount initially recorded for the quarter ended December 31, 2017.  As a result, the Company recorded a one-time tax expense of $47,800 which reversed certain discrete benefits recorded in 2017 as well as increased our provisional deemed repatriation tax liability.

The Company is no longer subject to U.S. federal income tax examinations for years before 2012.2013. 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 2009. In the third quarter of 2016, the U.S. Internal Revenue Service commenced an examination related to the 2012 and 2013 amended U.S. federal income tax returns.2012. The Company is currently under income tax examination in several U.S. state and local and non-U.S. jurisdictions.     

 

(6)(7) 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 OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 2016,31, 2017, these investments totaled $24,405, $23,490$24,584, $23,603 and $23,571,$24,436, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The Company recorded net gains of $446$448 and $1,461$631 on these investments in other income, net for the quarterquarters ended April 1, 2018 and nine months ended October 1,April 2, 2017, respectively, related to the change in fair value of such instruments. For the quarter and nine-month periods ended September 25, 2016, the Company recorded net gains of $440 and $922, respectively, in other income, net, related to the change in fair value of such instruments.

 

 

 

At OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 2016,31, 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:

Fair Value Measurements Using:

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

Active

 

 

 

 

 

 

 

 

 

Active

 

 

 

 

 

 

 

 

 

Markets

 

Significant

 

 

 

 

 

 

Markets

 

Significant

 

 

 

 

 

 

for

 

Other

 

Significant

 

 

 

for

 

Other

 

Significant

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Identical

 

Observable

 

Unobservable

Fair

 

Assets

 

Inputs

 

Inputs

Fair

 

Assets

 

Inputs

 

Inputs

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

October 1, 2017

 

 

 

 

 

 

 

 

 

 

 

April 1, 2018

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

2,866

 

 

2,866

 

 

-

 

-

$

2,941

 

 

2,941

 

 

-

 

-

Derivatives

 

11,975

 

 

-

 

 

11,975

 

 

-

 

2,960

 

 

-

 

 

2,960

 

 

-

Total assets

$

14,841

 

 

2,866

 

 

11,975

 

 

-

$

5,901

 

 

2,941

 

 

2,960

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

22,671

 

 

-

 

 

22,671

 

-

$

39,428

 

 

-

 

 

39,428

 

-

Option agreement

 

28,510

 

 

-

 

 

-

 

 

28,510

 

23,665

 

 

-

 

 

-

 

 

23,665

Total liabilities

$

51,181

 

 

-

 

 

22,671

 

 

28,510

$

63,093

 

 

-

 

 

39,428

 

 

23,665

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 25, 2016

 

 

 

 

 

 

 

 

 

 

April 2, 2017

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

4,986

 

 

4,986

 

 

-

 

-

$

3,687

 

 

3,687

 

 

-

 

-

Derivatives

 

39,115

 

 

-

 

 

39,115

 

 

-

 

56,017

 

 

-

 

 

56,017

 

 

-

Total assets

$

44,101

 

 

4,986

 

 

39,115

 

 

-

$

59,704

 

 

3,687

 

 

56,017

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

19,390

 

 

-

 

 

19,390

 

-

$

20,595

 

 

-

 

 

20,595

 

-

Option agreement

 

27,460

 

 

-

 

 

-

 

 

27,460

 

28,710

 

 

-

 

 

-

 

 

28,710

Total liabilities

$

46,850

 

 

-

 

 

19,390

 

 

27,460

$

49,305

 

 

-

 

 

20,595

 

 

28,710

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 25, 2016

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

3,736

 

 

3,736

 

 

-

 

-

$

3,126

 

 

3,126

 

 

-

 

-

Derivatives

 

87,894

 

 

-

 

 

87,894

 

 

-

 

12,226

 

 

-

 

 

12,226

 

 

-

Total assets

$

91,630

 

 

3,736

 

 

87,894

 

 

-

$

15,352

 

 

3,126

 

 

12,226

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

11,309

 

 

-

 

 

11,309

 

-

$

23,051

 

 

-

 

 

23,051

 

-

Option agreement

 

28,770

 

 

-

 

 

-

 

 

28,770

 

23,980

 

 

-

 

 

-

 

 

23,980

Total Liabilities

$

40,079

 

 

-

 

 

11,309

 

 

28,770

$

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 OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 2016,31, 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-monththree-month period ended OctoberApril 1, 2017.2018.

 

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):

 

2017

 

2016

2018

 

2017

Balance at beginning of year

$

(28,770)

 

 

(28,360)

$

(23,980)

 

 

(28,770)

Gain from change in fair value

 

260

 

 

900

 

315

 

 

60

Balance at end of third quarter

$

(28,510)

 

 

(27,460)

Balance at end of first quarter

$

(23,665)

 

 

(28,710)

 

In addition to the above, the Company has three investments for which the fair value is measured using net asset value per share. At OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 2016,31, 2017, these investments had fair values of $24,405, $23,490$24,584, $23,603 and $23,571,$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.

 

(7)(8) Pension and Postretirement Benefits

 

The components of the net periodic cost of the Company's defined benefit pension and other postretirement plans for the quarterquarters ended April 1, 2018 and nine-month periods ended October 1,April 2, 2017 and September 25, 2016 are as follows:

 

 

Quarter Ended

 

Pension

 

Postretirement

 

October 1,

 

September 25,

 

October 1,

 

September 25,

 

2017

 

2016

 

2017

 

2016

Service cost

$

925

 

 

1,002

 

 

172

 

 

132

Interest cost

 

4,443

 

 

4,611

 

 

295

 

 

294

Expected return on assets

 

(5,896)

 

 

(5,512)

 

 

-

 

 

-

Net amortization and deferrals

 

2,525

 

 

2,134

 

 

-

 

 

-

Net periodic benefit cost

$

1,997

 

 

2,235

 

 

467

 

 

426

Nine Months Ended

Quarter Ended

Pension

 

Postretirement

Pension

 

Postretirement

October 1,

 

September 25,

 

October 1,

 

September 25,

April 1,

 

April 2,

 

April 1,

 

April 2,

2017

 

2016

 

2017

 

2016

2018

 

2017

 

2018

 

2017

Service cost

$

2,798

 

 

2,995

 

 

517

 

 

397

$

685

 

 

952

 

 

188

 

 

172

Interest cost

 

13,598

 

 

13,821

 

 

885

 

881

 

4,016

 

 

4,725

 

 

292

 

295

Expected return on assets

 

(18,057)

 

 

(16,523)

 

 

-

 

-

 

(5,205)

 

 

(6,281)

 

 

-

 

-

Net amortization and deferrals

 

7,738

 

 

6,398

 

 

-

 

-

 

2,977

 

 

2,694

 

 

42

 

-

Net periodic benefit cost

$

6,077

 

 

6,691

 

 

1,402

 

 

1,278

$

2,473

 

 

2,090

 

 

522

 

 

467

 

During the ninethree months ended OctoberApril 1, 2017,2018, the Company made cash contributions of $26,600$280 to its defined benefit pension plans. During fiscal 2017,2018, the Company expects to make cash contributions to its defined benefit pension plans of approximately $29,000$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.

 

(8)(9) 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 20172018 through 2022.

 

At OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 2016,31, 2017, the notional amounts and fair values of the Company's foreign currency forward contracts designated as cash flow hedging instruments were as follows:

  

October 1, 2017

 

September 25, 2016

 

December 25, 2016

April 1, 2018

 

April 2, 2017

 

December 31, 2017

Notional

 

Fair

 

Notional

 

Fair

 

Notional

 

Fair

Notional

 

Fair

 

Notional

 

Fair

 

Notional

 

Fair

Hedged transaction

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

Inventory purchases

$

894,529

 

 

(16,597)

 

 

1,045,400

 

 

23,662

 

 

945,728

 

 

60,520

$

718,925

 

 

(31,453)

 

 

974,235

 

 

35,711

 

 

756,673

 

 

(13,695)

Sales

 

579,421

 

 

17,215

 

 

318,283

 

 

(559)

 

 

290,181

 

9,775

 

375,441

 

 

7,323

 

 

423,828

 

 

1,083

 

 

423,315

 

16,144

Royalties and Other

 

266,670

 

 

(12,567)

 

 

233,367

 

 

(4,111)

 

 

198,849

 

 

1,633

 

178,896

 

 

(11,602)

 

 

324,008

 

 

(1,345)

 

 

196,889

 

 

(10,383)

Total

$

1,740,620

 

 

(11,949)

 

 

1,597,050

 

 

18,992

 

 

1,434,758

 

 

71,928

$

1,273,262

 

 

(35,732)

 

 

1,722,071

 

 

35,449

 

 

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 OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 201631, 2017 as follows:

 

 

 

October 1,

 

September 25,

 

December 25,

April 1,

 

April 2,

 

December 31,

2017

 

2016

 

2016

2018

 

2017

 

2017

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

$

10,207

 

 

34,179

 

 

34,265

$

458

 

 

23,241

 

 

13,666

Unrealized losses

 

(7,977)

 

 

(9,247)

 

 

(2,075)

 

(405)

 

 

(3,204)

 

 

(10,319)

Net unrealized gains

$

2,230

 

 

24,932

 

 

32,190

$

53

 

 

20,037

 

 

3,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

$

11,631

 

 

20,974

 

 

51,839

$

5,996

 

 

39,032

 

 

11,255

Unrealized losses

 

(3,139)

 

 

(7,524)

 

 

(792)

 

(3,089)

 

 

(3,052)

 

 

(2,376)

Net unrealized gains

$

8,492

 

 

13,450

 

 

51,047

$

2,907

 

 

35,980

 

 

8,879

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

$

5,354

 

 

4,352

 

 

8,481

$

8,218

 

 

9,041

 

 

4,215

Unrealized losses

 

(20,999)

 

 

(19,420)

 

 

(19,790)

 

(30,826)

 

 

(28,591)

 

 

(15,484)

Net unrealized losses

$

(15,645)

 

 

(15,068)

 

 

(11,309)

$

(22,608)

 

 

(19,550)

 

 

(11,269)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

$

8,325

 

 

992

 

 

-

$

2,846

 

 

149

 

 

4,546

Unrealized losses

 

(15,351)

 

 

(5,314)

 

 

-

 

(18,930)

 

 

(1,167)

 

 

(13,437)

Net unrealized losses

$

(7,026)

 

 

(4,322)

 

 

-

$

(16,084)

 

 

(1,018)

 

 

(8,891)

 

Net gains (losses) on cash flow hedging activities have been reclassified from other comprehensive earnings (loss) to net earnings for the quarterquarters ended April 1, 2018 and nine-month periods ended October 1,April 2, 2017 and September 25, 2016 as follows:

 

Quarter Ended

 

Nine Months Ended

Quarter Ended

October 1,

 

September 25,

 

October 1,

 

September 25,

April 1,

 

April 2,

2017

 

2016

 

2017

 

2016

2018

 

2017

Statements of Operations Classification

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

$

(5,971)

 

 

13,863

 

 

6,614

 

 

40,999

$

(3,891)

 

 

9,874

Net Revenues

 

2,316

 

 

7,125

 

 

3,332

 

 

7,541

Sales

 

332

 

 

541

Other

 

(2,311)

 

 

(1,505)

 

 

(2,716)

 

 

(2,236)

 

(1,423)

 

 

31

Net realized (losses) gains

$

(5,966)

 

 

19,483

 

 

7,230

 

 

46,304

Net realized gains

$

(4,982)

 

 

10,446

 

In addition, losses of $9$718 and $6,495$4,958 were reclassified to earnings as a result of hedge ineffectiveness for the quarterquarters ended April 1, 2018 and nine-month periods ended October 1,April 2, 2017, respectively. Net (losses) gains of $(549) and $4,271 were reclassified to earnings as a result of hedge ineffectiveness for the quarter and nine-month periods ended September 25, 2016, respectively.

 

Undesignated Hedges

 

The Company also enters into foreign currency forward contracts to minimize the impact of changes in the fair value of intercompany loans due to foreign currency changes. The Company does not use hedge accounting for these contracts as changes in the fair values of these contracts are substantially offset by changes in the fair value of the intercompany loans.  As of OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 201631, 2017 the total notional amounts of the Company's undesignated derivative instruments were $339,227, $264,029$132,945, $62,806 and $268,308,$418,471, respectively.

 

At OctoberApril 1, 2018, April 2, 2017 September 25, 2016 and December 25, 2016,31, 2017, the fair values of the Company's undesignated derivative financial instruments were recorded in the consolidated balance sheets as follows:

 

 

 

October 1,

 

September 25,

 

December 25,

April 1,

 

April 2,

 

December 31,

2017

 

2016

 

2016

2018

 

2017

 

2017

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

Unrealized gains

$

2,606

 

 

812

 

 

5,854

$

383

 

 

289

 

 

1,793

Unrealized losses

 

(1,353)

 

 

(79)

 

 

(1,197)

 

(1,119)

 

 

(316)

 

 

(4,684)

Net unrealized gain

$

1,253

 

 

733

 

 

4,657

Net unrealized loss

 

(736)

 

 

(27)

 

 

(2,891)

 

  

 

  

  

 

 

  

 

 

 

 

 

 

 

 

Total unrealized gain, net

$

1,253

 

 

733

 

 

4,657

$

(736)

 

 

(27)

 

 

(2,891)

 

The Company recorded net losses(losses) gains of $2,976$(6,700) and $2,251$3,581 on these instruments to other income, net for the quarterquarters ended April 1, 2018 and nine-month periods ended October 1,April 2, 2017, respectively, and net gains of $6,533 and $14,867 on these instruments to other income, net for the quarter and nine-month periods ended September 25, 2016, respectively, relating to the change in fair value of such derivatives, substantially offsetting gains and losses from the change in fair value of intercompany loans to which the contracts relate.

 

For additional information related to the Company's derivative financial instruments see Notes 45 and 6.7.

 

(9)(10) 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.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 2017,2018, nor were those of the comparable 20162017 period representative of those actually experienced for the full year 2016.2017. 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 quarterquarters ended April 1, 2018 and nine-month periods ended October 1,April 2, 2017 and September 25, 2016 are as follows.follows:

 

 

 

Quarter Ended

Quarter Ended

October 1, 2017

 

September 25, 2016

April 1, 2018

 

April 2, 2017

Net revenues

External

 

Affiliate

 

External

 

Affiliate

External

 

Affiliate

 

External

 

Affiliate

U.S. and Canada

$

993,833

 

 

2,201

 

 

932,844

 

 

2,392

$

364,297

 

 

2,133

 

 

451,577

 

 

2,391

International

 

739,229

 

 

198

 

690,745

 

 

417

 

287,945

 

 

62

 

345,281

 

 

-

Entertainment and Licensing

 

58,440

 

 

7,714

 

56,130

 

 

7,806

 

64,021

 

 

3,576

 

52,729

 

 

3,502

Global Operations (a)

 

-

 

 

665,746

 

38

 

 

629,090

 

78

 

 

253,320

 

76

 

 

260,229

Corporate and Eliminations(b)

 

-

 

 

(675,859)

 

 

-

 

 

(639,705)

 

-

 

 

(259,091)

 

 

-

 

 

(266,122)

$

1,791,502

 

 

-

 

 

1,679,757

 

 

-

$

716,341

 

 

-

 

 

849,663

 

 

-

 

Nine Months Ended

Quarter Ended

October 1, 2017

 

September 25, 2016

April 1,

 

April 2,

Net revenues

External

 

Affiliate

 

External

 

Affiliate

Operating profit (loss)

2018

 

2017

U.S. and Canada

$

1,939,837

 

 

7,047

 

 

1,802,391

 

 

5,388

$

(23,383)

 

 

64,754

International

 

1,511,074

 

 

213

 

1,436,911

 

 

678

 

(56,088)

 

 

544

Entertainment and Licensing

 

162,663

 

 

14,727

 

150,521

 

 

16,607

 

13,906

 

 

11,346

Global Operations (a)

 

97

 

 

1,329,516

 

59

 

 

1,298,337

 

2,176

 

 

833

Corporate and Eliminations(b)

 

-

 

 

(1,351,503)

 

 

-

 

 

(1,321,010)

 

(17,030)

 

 

866

$

3,613,671

 

 

-

 

 

3,389,882

 

 

-

$

(80,419)

 

 

78,343

 

 

Quarter Ended

 

Nine Months Ended

 

October 1,

 

September 25,

 

October 1,

 

September 25,

Operating profit (loss)

2017

 

2016

 

2017

 

2016

U.S. and Canada

$

217,278

 

 

228,034

 

 

363,589

 

 

364,322

International

 

132,007

 

 

133,075

 

 

149,435

 

 

165,582

Entertainment and Licensing

 

16,910

 

 

14,095

 

 

39,580

 

 

33,367

Global Operations (a)

 

11,497

 

 

24,852

 

 

4,723

 

 

25,428

Corporate and Eliminations (b)

 

(16,748)

 

 

(37,955)

 

 

(18,056)

 

 

(55,808)

 

$

360,944

 

 

362,101

 

 

539,271

 

 

532,891

October 1,

 

September 25,

 

December 25,

April 1,

 

April 2,

 

December 31,

Total assets

2017

 

2016

 

2016

2018

 

2017

 

2017

U.S. and Canada

$

3,423,213

 

 

2,316,624

 

 

2,559,792

$

2,745,209

 

 

2,618,808

 

 

2,749,384

International

 

2,524,821

 

 

2,261,742

 

 

2,368,761

 

2,033,928

 

 

1,964,343

 

 

2,499,985

Entertainment and Licensing

 

884,014

 

 

632,933

 

 

692,898

 

673,248

 

 

763,988

 

 

626,193

Global Operations

 

3,080,573

 

 

2,038,736

 

 

2,326,566

 

3,293,265

 

 

2,218,817

 

 

2,819,768

Corporate and Eliminations (b)

 

(4,367,973)

 

 

(2,294,888)

 

 

(2,856,651)

 

(4,016,578)

 

 

(2,920,086)

 

 

(3,405,347)

$

5,544,648

 

 

4,955,147

 

 

5,091,366

$

4,729,072

 

 

4,645,870

 

 

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 budget 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 ended April 1, 2018 and nine-month periods ended October 1, 2017 and September 25, 2016.April 2, 2017.

 

Quarter Ended

 

Nine Months Ended

Quarter Ended

October 1,

 

September 25,

 

October 1,

 

September 25,

April 1,

 

April 2,

2017

 

2016

 

2017

 

2016

2018

 

2017

Europe

$

467,740

 

 

452,834

 

 

921,467

 

 

905,081

$

155,562

 

 

216,120

Latin America

 

174,446

 

 

154,985

 

 

339,071

 

 

307,949

 

65,961

 

 

64,756

Asia Pacific

 

97,043

 

 

82,926

 

 

250,536

 

 

223,881

 

66,422

 

 

64,405

Net revenues

$

739,229

 

 

690,745

 

 

1,511,074

 

 

1,436,911

$

287,945

 

 

345,281

 

The following table presents consolidated net revenues by brand portfolio for the quarters ended April 1, 2018 and nine-month periods ended October 1, 2017 and September 25, 2016.April 2, 2017.

 

 

Quarter Ended

 

Nine Months Ended

 

October 1,

 

September 25,

 

October 1,

 

September 25,

 

2017

 

2016

 

2017

 

2016

Franchise brands

$

827,282

 

 

773,415

 

 

1,803,744

 

 

1,642,057

Partner brands

 

485,747

 

 

493,738

 

 

928,724

 

 

979,051

Hasbro gaming

 

280,097

 

 

229,850

 

 

549,736

 

 

456,516

Emerging brands

 

198,376

 

 

182,754

 

 

331,467

 

 

312,258

Net revenues

$

1,791,502

 

 

1,679,757

 

 

3,613,671

 

 

3,389,882

 

Quarter Ended

 

April 1,

 

April 2,

 

2018

 

2017

Franchise Brands

$

361,706

 

 

449,160

Partner Brands

 

200,592

 

 

212,962

Hasbro Gaming

 

105,227

 

 

135,766

Emerging Brands

 

48,816

 

 

51,775

Total

$

716,341

 

 

849,663

 

Franchise and Emerging Brands net revenues for the first 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.

Hasbro's total gaming category, including the Hasbro Gaming portfolio as reported above and all othergaming revenue, most notably MAGIC: THE GATHERING and MONOPOLY, which are included intotaled $203,542for the Franchise Brands portfolio, totaled $424,836 and $951,386first quarter of 2018, compared to revenues of $253,289 for the first quarter and nine months ended October 1, 2017, respectively.  For the quarter and nine months ended September 25, 2016, revenues were $409,528of 2017.

  

(11) Subsequent Event

Power Rangers Agreement

On May 1, 2018, the Company announced that it has entered into a definitive agreement with Saban Properties LLC to purchase Saban’s Power Rangers and $868,373several other entertainment brands for $, respectively.522,000 to be paid in a combination of cash and stock.

Hasbro has previously paid Saban Brands $22,250 pursuant to the Power Rangers master toy license agreement, announced by the parties in February of 2018, that was scheduled to begin in 2019. Under the terms of the purchase agreement, Hasbro will pay an additional $229,750 in cash and will issue $270,000 worth of Hasbro common stock for the Power Rangers brand and several other entertainment brands. The agreement includes all related intellectual property, category rights and content libraries owned by Saban Properties and its affiliates. The transaction is subject to a number of closing conditions, including obtaining required regulatory approvals, and is expected to close during the second quarter of 2018.

  Hasbro believes its gaming portfolioThe transaction, including intangible amortization expense, is not expected to have a competitive differentiator and views it in its entirety.material impact on Hasbro’s 2018 results of operations.

 

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 25, 201631, 2017 (“20162017 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 committeddedicated 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 LITTLEST PET SHOP,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, movies,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 label,labels, Allspark Pictures and Allspark Animation, create entertainment brand-driven storytelling across mediums, including television, film, digital and more.

 

These elements areEach 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 toy and gameproduct 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 and motion pictures 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 lifestyleother consumer products. Hasbro also leverages its competencies to develop and market products based on well-known licensed partners’ 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 DECENDANTS 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.

  

First quarter 2018 highlights:

·           First quarter net revenues declined 16% to $716.3 million from $849.7 million in the first quarter of 2017 driven by the loss of revenues from the liquidations of Toys“R”Us in the U.S. and the U.K. and uncertainty in other Toys“R”Us operations, as well as higher retail inventory at year-end, 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 19% and 17%, respectively, while the Entertainment and Licensing segment net revenues increased 21%. International segment net revenues included a favorable $19.5 million in foreign currency translation.

·           Net revenues declined in all product categories including Franchise Brands, Partner Brands, Hasbro Gaming and Emerging Brands by 19%, 6%, 22% and 6%, respectively, during the first quarter of 2018 compared to the first quarter of 2017.

·           Operating loss was $80.4 million in the first quarter of 2018 compared to operating profit of $78.3 million in first quarter of 2017.

·           First quarter 2018 operating profit was negatively impacted by after-tax expenses of $77.1 million related to the Toys“R”Us liquidation and severance associated with the reorganization of the Company’s commercial organization . See “Recent Events” below for further discussion.

·           The net loss of $112.5 million, or $0.90 per diluted share, in the first quarter of 2018 compared to net earnings of $68.6 million, or $0.54 per diluted share, in the first quarter of 2017.

·           In addition to the one-time expenses described above, the net loss for the first quarter of 2018 included additional income tax expense of $47.8 million related to additional guidance issued on U.S. tax reform. See “Recent 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.

 

Third quarter 2017 highlights:Recent Events

·           Third quarter net revenues grew 7% to $1,791.5 million from $1,679.8 million inToys“R”Us

During the thirdfirst quarter of 2016, driven by increases2018, Toys“R”Us went into liquidation in the U.S. and Canada, International and Entertainment and Licensing segmentsthe U.K.. As a result, the Company recorded lower revenues in part due to the loss of 7%, 7%, and 4%, respectively. The growth in International segment net revenues included a favorable $27.9 million in foreign currency translation.

·           Net revenues from Franchise Brands, Hasbro Gaming and Emerging Brands categories increased 7%, 22% and 9%, respectively, during the third quarter of 2017 compared to the third quarter of 2016, while Partner Brands category net revenues were down 2% for the quarter.

·           Operating profit was essentially flatToys“R”Us in the third quarter of 2017 compared to the third quarter of 2016U.S. and net earnings attributable to Hasbro, Inc. increased 3% to $265.6 million or $2.09 per diluted share in the third quarter of 2017 compared to $257.8 million or $2.03 per diluted share in the third quarter of 2016.

·           Third quarter 2017 operating profit was negatively impacted by the Toys“R”Us bankruptcyEurope, as a result of incrementalthe 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 recorded duringof $59.1 million, accelerated royalty expense of $7 million and other charges of $4.3 million.

Commercial Reorganization

In the thirdfirst quarter of 2017.

First nine months 2017 highlights:

·           Net revenues increased 7% to $3,613.7 million in first nine months of 2017 compared to $3,389.9 the first nine months of 2016, driven by increases in the U.S. and Canada, International and Entertainment and Licensing segments of 8%, 5% and 8%, respectively.  The growth in International segment net revenues included a favorable $33.3 million in foreign currency translation.

·           Franchise Brands category net revenues for the nine months ended October 1, 2017 increased 10%, Hasbro Gaming net revenues grew 20%, Emerging Brands net revenues grew 6% while Partner Brands category net revenues declined 5% during the first nine months of 2017 compared to the same period in 2016.

·           Operating profit grew 1% to $539.3 million in the first nine months of 2017 compared to $532.9 million in the first nine months of 2016 and net earnings attributable to Hasbro, Inc. increased 12% to $401.9 million or $3.16 per diluted share in the first nine months of 2017 compared to $358.7 million or $2.82 per diluted share in the first nine months of 2016.

The above variances for the quarter and nine month periods are discussed in further detail below.

As of December 2016,2018, the Company owned a 70% majority stakerecorded 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 Backflip Studios, LLC (“Backflip”), a mobile game developer,developing an omni-channel retail presence, and in January2018 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. For the first quarter of 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 which reversed certain discrete benefits recorded in 2017 as well as increased its ownership to 100% making it a wholly owned subsidiary.our provisional deemed repatriation tax liability.

 

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 $0.51$0.57 per share to $0.57$0.63 per share effective for the dividend to be paid in May 2017.2018.  In addition to the dividend, the Company returns cash through its share repurchase program. As part of this initiative, from 2005 to 2015, the Company's Board of Directors (the "Board") adopted eight successive share repurchase authorizations with a cumulative authorized repurchase amount of $3,825 million. The eighth authorization was approved in February 2015 for $500 million. During the first nine monthsquarter of 2017,2018, Hasbro repurchased approximately 1.20.4 million shares at a total cost of $111.5$38.8 million and at an average price of $95.21$90.81 per share. At OctoberAs of April 1, 2017,2018, the Company had $216.5$139.2 million remaining under this authorization. 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 quarterquarters ended April 1, 2018 and nine-month periods ended October 1, 2017 and September 25, 2016.April 2, 2017.

 

Quarter Ended

 

Nine Months Ended

Quarter Ended

October 1,

 

September 25,

 

October 1,

 

September 25,

April 1,

 

April 2,

2017

 

2016

 

2017

 

2016

2018

 

2017

Net revenues

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

100.0

%

 

 

100.0

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

40.8

 

 

39.2

 

 

38.9

 

 

37.5

 

35.6

 

 

 

36.0

 

Royalties

 

7.8

 

 

8.0

 

 

7.8

 

 

8.1

 

9.7

 

 

 

7.6

 

Product development

 

3.8

 

 

4.2

 

 

5.3

 

 

5.6

 

8.0

 

 

 

7.4

 

Advertising

 

9.4

 

 

9.2

 

 

9.5

 

 

9.5

 

9.5

 

 

 

9.5

 

Amortization of intangibles

 

0.4

 

 

0.5

 

 

0.6

 

 

0.8

 

0.9

 

 

 

0.9

 

Program production cost amortization

 

0.3

 

 

0.4

 

 

0.4

 

 

0.5

 

1.7

 

 

 

0.7

 

Selling, distribution and administration

 

17.4

 

 

17.0

 

 

22.5

 

 

22.3

 

45.8

 

 

 

28.7

 

Operating profit

 

20.1

 

 

21.6

 

 

14.9

 

 

15.7

Operating profit (loss)

 

(11.2)

 

 

 

9.2

 

Interest expense

 

1.4

 

 

1.4

 

 

2.0

 

 

2.1

 

3.2

 

 

 

2.9

 

Interest income

 

(0.3)

 

 

(0.1)

 

 

(0.4)

 

 

(0.2)

 

(0.9)

 

 

 

(0.7)

 

Other (income) expense, net

 

(0.5)

 

 

(0.4)

 

 

(0.7)

 

 

(0.2)

Earnings before income taxes

 

19.5

 

 

20.6

 

 

14.0

 

 

13.9

Other income, net

 

(1.2)

 

 

 

(1.3)

 

Earnings (loss) before income taxes

 

(12.3)

 

 

 

8.3

 

Income tax expense

 

4.7

 

 

5.4

 

 

2.9

 

 

3.5

 

3.4

 

 

 

0.3

 

Net earnings

 

14.8

 

 

15.2

 

 

11.1

 

 

10.4

Net loss attributable to noncontrolling interests

 

-

 

 

(0.1)

 

 

-

 

 

(0.2)

Net earnings attributable to Hasbro, Inc.

 

14.8%

 

 

15.3%

 

 

11.1%

 

 

10.6%

Net earnings (loss)

 

(15.7)

%

 

 

8.1

%

 

RESULTS OF OPERATIONS – CONSOLIDATED

 

Third QuarterThe quarter ended April 1, 2018 was a 13-week period while the quarter ended April 2, 2017 was a 14-week period. The net loss for the first quarter of 2017

The quarters ended October 1, 2017 and September 25, 2016 were each 13-week periods. Net earnings and2018 was $112.5 million compared to net earnings attributable to Hasbro, Inc. both increased to $265.6of $68.6 million for the thirdfirst quarter of 2017, from $256.2 million and $257.8 million, respectively,2017.  Diluted loss per share for the comparable periodfirst quarter of 2016.  Diluted2018 was $0.90, down from diluted earnings per share increased to $2.09of $0.54 in the thirdfirst quarter of 2017 from $2.03 in2017. The net loss for the third quarter ended April 1, 2018 includes incremental bad debt expense and other costs, net of 2016. Net earnings during the third quartertax, of 2017 included a $0.04$61.4 million, or $0.49 per diluted share, benefit duerelated 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 $47.8 million, or $0.38 per diluted share, related to U.S. tax reform and additional guidance issued in the adoptionfirst quarter of Accounting Standards Update No. 2016-09 in 2017, as discussed in Note 1 to the consolidated financial statements.2018.

 

Consolidated net revenues for the thirdfirst quarter of 2017 increased 7%2018 decreased 16% compared to the thirdfirst quarter of 20162017 and included a favorable impact from foreign currency translation of $29.6$20.7 million as a result of strengthening currencies in the European, Latin American and Asia Pacific markets in 20172018 compared to 2016.2017.

 

 

 

The following table presents net revenues by brand portfolio for the quarters ended OctoberApril 1, 20172018 and September 25, 2016.April 2, 2017.

 

  

 

Quarter Ended

 

October 1,

 

September 25,

 

%

 

2017

 

2016

 

Change

Franchise brands

$

827.3

 

 

773.4

 

7

%

Partner brands

 

485.7

 

 

493.7

 

-2

%

Hasbro gaming

 

280.1

 

 

229.9

 

22

%

Emerging brands

 

198.4

 

 

182.8

 

9

%

Total

$

1,791.5

 

 

1,679.8

 

7

%

 

Quarter Ended

 

April 1,

 

April 2,

 

%

 

2018

 

2017

 

Change

Franchise Brands

$

361.7

 

 

449.2

 

-19

%

Partner Brands

 

200.6

 

 

213.0

 

-6

%

Hasbro Gaming

 

105.2

 

 

135.8

 

-22

%

Emerging Brands

 

48.8

 

 

51.7

 

-6

%

Total

$

716.3

 

 

849.7

 

-16

%

 

Franchise and Emerging Brands net revenues for the first 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 category increased 7%portfolio decreased 19% in the thirdfirst quarter of 20172018 compared to the thirdfirst quarter of 2016, driven by higher net2017. Increased revenues from NERF, TRANSFORMERS, MY LITTLE PONY and MONOPOLY products. Net revenues from MY LITTLE PONY products benefited ahead of the October 2017 theatrical release of MY LITTLE PONY: THE MOVIE. These increases were partiallymore than offset by lower thirddeclines in all other Franchise Brands during the first quarter 2017 net revenues from MAGIC: THE GATHERING products as a result of the timing of releases in 2017 compared to 2016.2018.

 

PARTNER BRANDS: Net revenues from the Partner Brands categoryportfolio decreased 2%6% in the thirdfirst quarter of 20172018 compared to the thirdfirst quarter of 2016.2017.  Revenue growth from MARVEL and BEYBLADE STAR WARS, DISNEY’S DESCENDANTS and SESAME STREET products, werewas more than offset by declines in net revenues from DISNEY PRINCESS, DREAMWORKS’ TROLLS and YO-KAI WATCH products and DREAMWORKS’ TROLLS products.  DREAMWORKS’ TROLLS products were supported in 2016 by the theatrical release of the DREAMWORKS’ TROLLS motion picture. other Partner Brand revenues.

 

HASBRO GAMING: Net revenues in the Hasbro Gaming category increasedportfolio decreased 22% in the thirdfirst quarter of 20172018 compared to 2016.the first quarter of 2017.  Higher net revenues from new social gaming products,games, such as SPEAKOUT and FANTASTIC GYMNASTICS,DON’T STEP IN IT, as well as classicother games, such as LIFEDUNGEONS & DRAGONS and CLUE, drove revenue growthJENGA were more than offset by declines in PIE FACE, SPEAK OUT and certain other Hasbro Gaming products in the thirdfirst quarter of 2017.2018.

 

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 $424.8$203.5 million for the thirdfirst quarter of 2017, up 4%2018, down 20%, versus $409.5$253.3 million in the thirdfirst quarter 2016.2017. 

 

EMERGING BRANDS: Net revenues from the Emerging Brands category increased 9%portfolio decreased 6% during the thirdfirst quarter of 20172018 compared to the same period in 2016. Higher2017. Net sales from the introduction of the Company’s line of STRETCH ARMSTRONG products and higher net revenues from BABY ALIVE andof LITTLEST PET SHOP products were more than offset by declines in FURREAL FRIENDS products were partially offset by lower net revenues from FURBY products.and certain other Emerging Brands products during the first quarter of 2018.

  

Operating profitloss for the thirdfirst quarter of 20172018 was essentially flat at $360.9$80.4 million or 20.1% of net revenues compared to $362.1operating profit of $78.3 million or 21.6% of net revenues, for the thirdfirst quarter of 2016.2017. Operating profit was negatively impacted fromby the loss of revenues and incremental bad debt expense associated with the bankruptcy filing by 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 and higher programming amortization costs during the thirdfirst quarter of 2017.  Excluding this incremental bad debt expense, operating profit would have increased, driven by higher net revenues,2018.  These negative impacts were partially offset by higher cost of saleslower advertising and higher advertising expense.intangible asset amortization costs. Foreign currency translation did not have a significant impact on operating profit results in the thirdfirst quarter of 2017, as compared to the third quarter of 2016.

2018.

 

 

First Nine Months of 2017

The nine-month period ended October 1, 2017 was a 40-week period while the nine-month period ended September 25, 2016 was a 39-week period. Net earnings and net earnings attributable to Hasbro, Inc. both increased to $401.9 million for the first nine months of 2017, compared to $352.6 million and $358.7 million, respectively, for the first nine months of 2016. Diluted earnings per share increased to $3.16 in 2017 from $2.82 in 2016.  Net earnings for the nine month period ended October 1, 2017 included a $0.16 per diluted share benefit due to the adoption of Accounting Standards Update No. 2016-09 during 2017.  

For the first nine months of 2017, consolidated net revenues increased 7% compared to the first nine months of 2016 including a favorable variance of $34.9 million as a result of foreign currency translation due to strengthening currencies in the European, Latin American and Asia Pacific markets in 2017 compared to 2016.

The following table presents net revenues by product category for the first nine months of 2017 and 2016.

 

Nine Months Ended

 

October 1,

 

September 25,

 

%

 

2017

 

2016

 

Change

Franchise brands

$

1,803.8

 

 

1,642.1

 

10

%

Partner brands

 

928.7

 

 

979.1

 

-5

%

Hasbro gaming

 

549.7

 

 

456.5

 

20

%

Emerging brands

 

331.5

 

 

312.3

 

6

%

Net revenues

$

3,613.7

 

 

3,390.0

 

7

%

FRANCHISE BRANDS: Net revenues in the Franchise Brands category increased 10% in the first nine months of 2017 compared to 2016.  Higher net revenues from TRANSFORMERS, NERF and MONOPOLY products and, to a lesser extent, MY LITTLE PONY products, contributed to growth in the first nine months of 2017.  TRANSFORMERS products benefited from the June 2017 theatrical release of TRANSFORMERS: THE LAST KNIGHT. These increases were partially offset by lower net revenues from MAGIC: THE GATHERING products, as well as lower net revenues from PLAY-DOH products.

PARTNER BRANDS: Net revenues from the Partner Brands category declined 5% during the first nine months of 2017 compared to 2016 due to lower net revenues from STAR WARS products partially due to the timing of the 2017 theatrical release of STAR WARS: THE LAST JEDI expected in the fourth quarter of 2017, as compared to the timing of the 2016 theatrical release of ROGUE ONE: A STAR WARS STORY, in addition to lower net revenues from YO-KAI WATCH, DISNEY FROZEN and MARVEL products.  These declines were partially offset by higher net revenue contributions from BEYBLADE and DREAMWORKS’ TROLLS products as well as increased net revenues from Hasbro’s line of DISNEY PRINCESS products in the first nine months of 2017 compared to the same period in 2016.

HASBRO GAMING: Net revenues in the Hasbro Gaming category increased 20% in the first nine months of 2017 compared to the first nine months of 2016.  Increased net revenues from social gaming products, as well as higher net sales of DUNGEONS & DRAGONS products, were marginally offset by lower net revenues from PIE FACE as well as 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, totaled $951.4 million in the first nine months of 2017, up 10%, versus $868.4 million in the first nine months of 2016.

EMERGING BRANDS: Net revenues from theEmerging Brands category increased 6% for the first nine months of 2017 compared to the first nine months of 2016.Higher net revenues from BABY ALIVE and FURREAL FRIENDS products were partially offset by lower net revenues from FURBY products.

Operating profit for the first nine months of 2017 increased slightly to $539.3 million, or 14.9% of net revenues, from $532.9 million, or 15.7% of net revenues, for the first nine months of 2016. The operating profit increase was driven by higher net revenues mostly offset by higher cost of sales and operating expenses including higher sales & marketing costs, higher advertising costs and higher royalty expenses.

  

 

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.

 

Third Quarter of 2017

The following table presents net external revenues and operating profit data for the Company's three principal segments for the quarters ended OctoberApril 1, 20172018 and September 25, 2016.April 2, 2017.

 

Quarter Ended

Quarter Ended

October 1,

 

September 25,

 

%

April 1,

 

April 2,

 

%

2017

 

2016

 

Change

2018

 

2017

 

Change

Net Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. and Canada segment

$

993.8

 

 

932.8

 

7

%

$

364.3

 

$

451.6

 

-19

%

International segment

 

739.2

 

 

690.7

 

7

%

 

287.9

 

 

345.3

 

-17

%

Entertainment and Licensing segment

 

58.4

 

 

56.1

 

4

%

 

64.0

 

 

52.7

 

21

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

 

 

 

 

 

 

Operating Profit (Loss)

 

 

 

 

 

 

 

 

U.S. and Canada segment

$

217.3

 

 

228.0

 

-5

%

$

(23.4)

 

$

64.8

 

(i)

  

International segment

 

132.0

 

 

133.1

 

-1

%

 

(56.1)

 

 

0.5

 

(i)

  

Entertainment and Licensing segment

 

16.9

 

 

14.1

 

20

%

 

13.9

 

 

11.3

 

23

%

(i) Variance is greater than 100%

 

 

 

 

 

 

 

 

 

U.S. and Canada Segment

The U.S. and Canada segment net revenues for the thirdfirst quarter of 2017 increased 7%2018 decreased 19% compared to the thirdfirst quarter of 2016.2017.  Foreign currency translation did not have a significant impact on this segment's net revenues. In the thirdfirst quarter of 2017,2018, net revenues grewdeclined in all product categories includingthe Franchise Brands, Partner Brands, Hasbro Gaming and Emerging Brands categories.product categories while Partner Brands net revenues increased slightly.

 

TheIn the Franchise Brands category benefited from higherportfolio increases in net revenues from NERF, MONOPOLY, TRANSFORMERS and MY LITTLE PONY and MONOPOLY products which were partiallymore than offset by lower net revenues from NERF, MAGIC: THE GATHERING, BABY ALIVE, PLAY-DOH and PLAY-DOHTRANSFORMERS products.  In the Partner Brands category,portfolio, higher net revenues from MARVEL, BEYBLADE, STAR WARS, BEYBLADE and DISNEY’S DESCENDANTS products were more than offset by lower net revenues from the Company’s DISNEY PRINCESS products as well as DREAMWORKS’ TROLLS and YO-KAI WATCH products. In the Hasbro Gaming category,portfolio, higher net revenues from social gaming products and DUNGEONS & DRAGONS products and new social games, including DON’T STEP IN IT, were partiallymore than offset by decreased net revenues from PIE FACE, SPEAK OUT and certain other Hasbro Gaming products. In the Emerging Brands category increasedportfolio, decreased net revenues from BABY ALIVE and FURREAL FRIENDS products and certain other Emerging Brands were partially offset by lower net revenues from FURBYthe introduction of the Company’s line of STRETCH ARMSTRONG content and products.

 

U.S. and Canada segment operating profit decreased 5%loss for the first quarter ended October 1, 2017 to $217.3of 2018 was $23.4 million, or 21.9% of segment net revenues, compared to $228.0segment operating profit of $64.8 million, or 24.4% of segment net revenues, for the first quarter ended September 25, 2016.of 2017. The operating loss for the first quarter of 2018 included expenses of $52.3 million related to the Toys“R”Us liquidation in the U.S. The remaining decline in operating profit was due to a shift in product mix as a result ofthe lower sales of higher margin products such as MAGIC: THE GATHERING, as well as increased bad debthigher freight expense relateddue to new trucking regulations in the bankruptcy filingU.S. during the first quarter of Toys“R”Us.2018.

  

International Segment

International segment net revenues increased 7%declined 17% to $739.2$287.9 million for the quarter ended OctoberApril 1, 20172018 from $690.7$345.3 million for the quarter ended September 25, 2016.April 2, 2017. The following table presents net revenues by geographic region for the Company's International segment for the quarters ended OctoberApril 1, 20172018 and September 25, 2016.April 2, 2017.

 

Quarter Ended

Quarter Ended

October 1,

 

September 25,

 

%

April 1,

 

April 2,

 

%

2017

 

2016

 

Change

2018

 

2017

 

Change

Europe

$

467.7

 

 

452.8

 

3

%

$

155.5

 

 

216.1

 

-28

%

Latin America

 

174.5

 

 

155.0

 

13

%

 

66.0

 

 

64.8

 

2

%

Asia Pacific

 

97.0

 

 

82.9

 

17

%

 

66.4

 

 

64.4

 

3

%

Net revenues

$

739.2

 

 

690.7

 

7

%

$

287.9

 

 

345.3

 

-17

%

 

The increasevariance in International segment net revenues includedincludes a $27.9favorable benefit of $19.5 million benefit from the impact of foreign currency translation, primarily related to the Company’s European region, and, to a lesser extent, Asia Pacific and Latin American and Asia Pacific regions during the thirdfirst quarter of 20172018 compared to the thirdfirst quarter of 2016.  Net2017.  International segment net revenues fromdeclined during the first quarter of 2018 in all brand portfolios including Franchise Brands, andPartner Brands, Hasbro Gaming categories grew, while net revenues from the Partner Brands and Emerging Brands categories declined compared to the same period in 2016.2017.  The decrease in Franchise Brands category benefitted fromportfolio net revenues reflects a decrease of all Franchise Brands.  In the Partner Brands portfolio, higher net revenues from NERF, TRANSFORMERS, MY LITTLE PONY,MARVEL and MONOPOLY products which were partially offset by lower revenues from MAGIC: THE GATHERING products.  Partner Brands category net revenues decreased due to lower net revenues from YO-KAI WATCH, DREAMWORKS’ TROLLS and DISNEY FROZEN products which were partially offset by higher net revenues from BEYBLADE products. In the Hasbro Gaming category, higher net revenues were driven by increases from social gaming products, including PIE FACE products. In the Emerging Brands category, higher net revenues from BABY ALIVE products were more than offset by lower net revenues from the Company’s line of DISNEY PRINCESS and DREAMWORKS’ TROLLS products as well as lower net revenues from STAR WARS, YO-KAI WATCH, and DISNEY FROZEN products.  In the Hasbro Gaming portfolio, lower net revenues from PIE FACE and other Hasbro Gaming products were partially offset by higher net revenues from JENGA products. In the Emerging Brands portfolio, the declines were primarily driven by not having comparable sales of FURBY products.in the first quarter of 2018.

International segment operating profit declined $1.1loss was $56.1 million or 1% to $132.0 million or 17.9% of segment net revenues for the first quarter ended October 1, 2017of 2018 from $133.1operating profit of $0.5 million or 19.3% of segment net revenues, for the first quarter ended September 25, 2016.of 2017. The operating loss for the first quarter of 2018 includes $11.2 million of expenses related to the Toys“R”Us liquidation in the United Kingdom and uncertainty over the other Toys“R”Us operations in Europe. The remaining decrease in operating profit is the result of a shift inwas driven by lower product mixsales and highernon-Toys“R”Us related bad debt expense levels in the thirdfirst quarter of 2017, as compared to the third quarter of 2016.2018.

 

Entertainment and Licensing Segment

Entertainment and Licensing segment net revenues increased 4%21% for the first quarter ended October 1, 2017of 2018 to $58.4$64.0 million compared to $56.1$52.7 million for the first quarter ended September 25, 2016.of 2017. Higher revenues from consumer productproducts and entertainment revenuesdigital game licensing, and to a lesser extent, the impact of the adoption of ASU 2014-09, Revenue from Contracts with Customers (ASC-606), drove growth during the thirdfirst quarter of 2017.2018.

 

Entertainment and Licensing segment operating profit increased 20% to $16.9$13.9 million, or 28.9% of external segment net revenues, for the quarter ended October 1, 2017 from $14.1 million, or 25.1%21.7% of segment net revenues, for the quarter ended September 25, 2016.April 1, 2018 from $11.3 million, or 21.5% of segment net revenues, for the quarter ended April 2, 2017. Overall, the increase in Entertainment and Licensing segment operating profit and operating profit margin was primarily due to increased revenues as well as, reduced intangiblenoted above, partially offset by higher programing amortization as the Backflip property rights were fully amortizedcosts related to MY LITTLE PONY: THE MOVIE in the secondfirst quarter of 2017.2018.

 

Global Operations

The Global Operations segment operating profit of $11.5$2.2 million for the quarter ended OctoberApril 1, 20172018 compared to an operating profit of $24.9$0.8 million for the quarter ended September 25, 2016.April 2, 2017.  The declineincrease in operating results is primarily attributable to lower cost of sales increases and higher operating expensesin the first quarter of 2018 compared to the same period in 2017.

 

Corporate and Eliminations

The operating loss in Corporate and eliminations totaled $16.7 million for the third quarter of 2017 compared to a loss of $38.0 million for the third quarter of 2016.

First Nine Months of 2017

The following table presents net revenues and operating profit data for the Company's three principal segments for each of the nine months ended October 1, 2017 and September 25, 2016.

 

Nine Months Ended

 

October 1,

 

September 25,

 

%

 

2017

 

2016

 

Change

Net Revenues

 

 

 

 

 

 

 

 

U.S. and Canada segment

$

1,939.8

 

 

1,802.4

 

8

%

International segment

 

1,511.1

 

 

1,436.9

 

5

%

Entertainment and Licensing segment

 

162.7

 

 

150.5

 

8

%

 

 

 

 

 

 

 

 

 

Operating Profit

 

 

 

 

 

 

 

 

U.S. and Canada segment

$

363.6

 

 

364.3

 

0

%

International segment

 

149.4

 

 

165.6

 

-10

%

Entertainment and Licensing segment

 

39.6

 

 

33.4

 

19

%

U.S. and Canada Segment

The U.S. and Canada segment net revenues for the nine months ended October 1, 2017 increased 8% compared to 2016.  Foreign currency translation did not have a significant impact on this segment’s net revenues. In the first nine months of 2017, revenues from the Franchise Brands, Hasbro Gaming and Emerging Brands categories grew while net revenues from the Partner Brands category were essentially flat.

The Franchise Brands category benefited from higher net revenues from NERF, TRANSFORMERS and MONOPOLY products which were partially offset by lower net revenues from MAGIC: THE GATHERING and PLAY-DOH products.  In the Partner Brands category, higher net revenues from BEYBLADE, DREAMWORKS’ TROLLS and MARVEL were more than offset by lower net revenues from STAR WARS and YO-KAI WATCH products. In the Hasbro Gaming category, higher net revenues from social gaming products, as well as higher net sales of DUNGEONS & DRAGONS products, were partially offset by decreased net revenues from PIE FACE products. In the Emerging Brands category increased net revenues from BABY ALIVE and FURREAL FRIEND products were partially offset by lower net revenues from FURBY products.

U.S. and Canada segment operating profit for the nine months ended October 1, 2017 was essentially flat at $363.6 million, or 18.7% of segment net revenues, compared to $364.3 million, or 20.2% of segment net revenues, for the nine months ended September 25, 2016. Lower operating profit margin reflects a shift in product mix as a result of lower sales of higher margin products such as MAGIC: THE GATHERING, as well as an overall increase in expenses including the incremental bad debt expense related to the bankruptcy filing of Toys“R”Us.

International Segment

International segment net revenues increased 5% to $1,511.1 million for the nine months ended October 1, 2017 from $1,436.9 million for the nine months ended September 25, 2016.  The following table presents net revenues by geographic region for the Company's International segment for the nine-month periods ended October 1, 2017 and September 25, 2016.

 

Nine Months Ended

 

October 1,

 

September 25,

 

%

 

2017

 

2016

 

Change

Europe

$

921.5

 

 

905.1

 

2

%

Latin America

 

339.1

 

 

307.9

 

10

%

Asia Pacific

 

250.5

 

 

223.9

 

12

%

Net revenues

$

1,511.1

 

 

1,436.9

 

5

%

In the first nine months of 2017 compared to the first nine months of 2016, international segment net revenues were positively impacted by $33.3 million from foreign currency translation variances related to the Company’s European region and, to a lesser extent, Latin American and Asia Pacific regions.  Absent the impact of foreign exchange, segment net revenues increased $40.9 million or 3% during the first nine months of 2017.  Net revenues from the Franchise Brands and Hasbro Gaming categories grew during the first nine months of 2017, while net revenues from the Partner Brands and Emerging Brands categories declined compared to the same period in 2016.  The Franchise Brands category benefitted from higher net revenues from TRANSFORMERS, NERF, MONOPOLY and MY LITTLE PONY products. These increases were partially offset by net revenue decreases from PLAY-DOH and MAGIC: THE GATHERING products.  Partner Brands category net revenues decreased due to lower net revenues from STAR WARS, MARVEL and YO-KAI WATCH products, partially offset by higher net revenues from BEYBLADE products.  In the Hasbro Gaming category, higher net revenues were driven by social gaming products, as well as PIE FACE products. In the Emerging Brands category, lower net revenues from FURBY and core PLAYSKOOL products, were partially offset by higher net revenues from FURREAL FRIENDS, HANAZUKI and BABY ALIVE products.

International segment operating profit decreased to $149.4 million, or 9.9% of segment net revenues, for the nine months ended October 1, 2017 from $165.6 million, or 11.5% of segment net revenues, for the nine months ended September 25, 2016.  The decrease in operating profit is due to a shift in product mix and increased expense levels.

Entertainment and Licensing Segment

Entertainment and Licensing segment net revenues for the nine months ended October 1, 2017 increased 8% to $162.7 million from $150.5 million for the nine months ended September 25, 2016.  Growth in revenues was due primarily to higher consumer products and entertainment revenues compared to the same period in 2016.

Entertainment and Licensing segment operating profit increased to $39.6 million, or 24.3% of net revenues, for the nine months ended October 1, 2017 from $33.4 million, or 22.2% of segment net revenues, for the nine months ended September 25, 2016.  Overall, the increase in Entertainment and Licensing segment operating profit and operating profit margin reflects the higher revenues noted above and lower intangible amortization expense partially offset by higher administration costs associated with building the consumer products team globally.

Global Operations

The Global Operations segment operating profit of $4.7$17.0 million for the first nine monthsquarter of 2017 compares2018 compared to an operating profit of $25.4$0.9 million for the first nine monthsquarter of 2016. The decline is primarily due to increased cost of sales2017. Included in 2017 due to product mix as well as increased operating expenses in 2017.

the Corporate and Eliminations

Operatingeliminations operating loss in Corporatethe first quarter of 2018 was $7 million of expenses associated with Toys“R”Us and Eliminations$17.3 million of severance for the first nine monthsreorganization of 2017 was $18.1 million, compared to $55.8 million for the first nine months of 2016.Company’s commercial organization.

 

OPERATING COSTS AND EXPENSES

 

Third Quarter of 2017

The Company's costs and expenses, stated as percentages of net revenues, are illustrated below for the quarters ended OctoberApril 1, 20172018 and September 25, 2016.April 2, 2017.

 

Quarter Ended

 

Quarter Ended

 

October 1,

 

 

September 25,

 

April 1,

 

 

April 2,

 

2017

 

 

2016

 

2018

 

 

2017

 

Cost of sales

40.8

%

 

39.2

%

35.6

%

 

36.0

%

Royalties

7.8

 

 

8.0

 

9.7

 

 

7.6

 

Product development

3.8

 

 

4.2

 

8.0

 

 

7.4

 

Advertising

9.4

 

 

9.2

 

9.5

 

 

9.5

 

Amortization of intangibles

0.4

 

 

0.5

 

0.9

 

 

0.9

 

Program production cost amortization

0.3

 

 

0.4

 

1.7

 

 

0.7

 

Selling, distribution and administration

17.4

 

 

17.0

 

45.8

 

 

28.7

 

 

Cost of sales increased 11%decreased 17% from $659.0$306.1 million, or 39.2%36.0% of net revenues, for the first quarter ended September 25, 2016of 2017 to $730.7$255.2 million, or 40.8%35.6% of net revenues for the first quarter ended October 1, 2017.of 2018.  Costs of sales increaseddecreased in dollars primarily due to higherlower sales volumes compared to the thirdfirst quarter of 2016.2017. As a percent of net revenues, the cost of sales increasedecrease was driven by a shift in product mix, inmore favorable profit margins on closeout sales as well as increased Entertainment and Licensing revenues which generate higher margins, partially offset by higher sales allowances and obsolescence charges as a result of the third quarter of 2017 compared to the third quarter of 2016.Toys“R”Us liquidations.

 

Royalty expense for the first quarter ended October 1, 2017of 2018 was $139.2$69.7 million, or 7.8%9.7% of net revenues, compared to $134.3$64.4 million, or 8.0%7.6% of net revenues, for the first quarter ended September 25, 2016.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. The favorable declineIn the first quarter of 2018, the increase in royalty expense was driven primarily by accelerated royalty charges incurred as a percentageresult of net revenues in the third quarterloss of 2017 was driven by lower Partner Brand revenues partially offset by sales from products related to the June 2017 theatrical release of TRANSFORMERS: THE LAST KNIGHT. Toys“R”Us product sales. 

 

Product development expense for the first quarter ended October 1, 2017of 2018 was $67.4$57.4 million, or 3.8%8.0% of net revenues, compared to $70.1$62.6 million, or 4.2%7.4% of net revenues, for the first quarter ended September 25, 2016.of 2017.  The favorable decline in product development expense in the third quarter of 2017 was driven by lower levelsthe capitalization of spending at Backflip,certain costs of the digital version of MAGIC: THE GATHERING in 2018 as it has reached the later stages of its development and approaches its launch date, as compared to comparable costs that were expensed in 2017 based on the third quarterfact that the game was in its earlier stages of 2016.development.

  

Advertising expense for the first quarter ended October 1, 2017of 2018 was $168.9$68.0 million, or 9.4%9.5% of revenues, compared to $154.1$80.9 million, or 9.2%9.5% of net revenues, for the first quarter ended September 25, 2016.of 2017.  The higherlower spend in advertising expense was primarily due to lower revenues in the first quarter of 2018.  Advertising expense was consistent with the increases inas a percent of net revenues.

 

Amortization of intangibles was $6.5 million, or 0.4%0.9% of net revenues for the first quarter ended October 1, 2017of 2018 compared to $8.7$7.9 million, or 0.5%0.9% of net revenues, for the first quarter ended September 25, 2016.of 2017.  The decrease reflects the full amortization of property rights related to Backflip during the second quarter of 2017.

Program production cost amortization decreased to $5.4 million or 0.3% of net revenues, for the quarter ended October 1, 2017 from $6.3 million, or 0.4% of net revenues, for the quarter ended September 25, 2016. Program production costs are capitalized as incurred and amortized using the individual-film-forecast method. As a percent of net revenues, program production cost amortization is consistent period over period.

For the quarter ended October 1, 2017, the Company's selling, distribution and administration expenses increased to $312.5 million, or 17.4% of net revenues, from $285.2 million, or 17.0% of net revenues, for the quarter ended September 25, 2016. This increase was primarily driven by the higher bad debt expense related to the bankruptcy filing by Toys“R”Us, as well as higher marketing and sales costs consistent with the increase in net revenues and higher depreciation costs within administration costs.

First Nine Months of 2017

The Company's costs and expenses, stated as percentages of net revenues, are illustrated below for the nine-month periods ended October 1, 2017 and September 25, 2016.

 

Nine Months Ended

 

 

October 1,

 

 

September 25,

 

 

2017

 

 

2016

 

Cost of sales

38.9

%

 

37.5

%

Royalties

7.8

 

 

8.1

 

Product development

5.3

 

 

5.6

 

Advertising

9.5

 

 

9.5

 

Amortization of intangibles

0.6

 

 

0.8

 

Program production cost amortization

0.4

 

 

0.5

 

Selling, distribution and administration

22.5

 

 

22.3

 

Cost of sales for the nine months ended October 1, 2017 increased to $1,405.0 million, or 38.9% of net revenues, from $1,270.9 million, or 37.5% of net revenues, for the nine months ended September 25, 2016. Costs of sales increased in dollars primarily due to higher net revenues compared to the first nine months of 2016. As a percent of net revenues, the cost of sales increase was driven by a shift in product mix such as declines in higher margin products like MAGIC: THE GATHERING in the nine months ended October 1, 2017 compared to the same period in 2016.

Royalty expense for the nine months ended October 1, 2017 was $282.8 million, or 7.8% of net revenues, compared to $273.7 million, or 8.1% of net revenues, for the nine months ended September 25, 2016. 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. The favorable decline in royalty expense as a percentage of net revenues in the first nine months of 2017 was driven by declines in net revenues from Partner Brands partially offset by sales from products related to the June 2017 theatrical release of TRANSFORMERS: THE LAST KNIGHT. 

Product development expense for the nine months ended October 1, 2017 was essentially flat at $192.8 million, or 5.3% of net revenues, from $190.9 million, or 5.6% of net revenues for the nine months ended September 25, 2016. Product development expenditures reflect the Company’s continued investment in innovation and anticipated growth across our brand portfolio.  As a percent of net revenues, the decrease in product development costs reflects lower expenses related to Backflip in 2017.

 

 

 

Advertising expense for the nine months ended October 1, 2017 was $342.2Program production cost amortization increased to $12.0 million or 9.5% of net revenues, compared to $320.9 million, or 9.5%1.7% of net revenues, for the nine months ended September 25, 2016.  The higher spend in advertising expense was consistent with the increases in net revenues.

Amortizationfirst quarter of intangibles was $22.32018 from $5.6 million, or 0.6%0.7% of net revenues, for the nine months ended October 1, 2017 compared to $26.1 million, or 0.8%first quarter of net revenues, in the first nine months of 2016. The decrease reflects the full amortization of property rights related to Backflip during the first half of 2017.

Program production cost amortization decreased in the first nine months of 2017 to $16.2 million, or 0.4% of net revenues, from $17.5 million, or 0.5% of net revenues, in the first nine months of 2016. Program production costs are capitalized as incurred and amortized using the individual-film-forecast method.  The decrease duringincrease 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 costs as a result of higher programming revenues in the first nine monthsquarter of 2017 primarily reflects lower television programing revenues in 2017.2018.

 

For the nine monthsquarter ended OctoberApril 1, 2017,2018, the Company's selling, distribution and administration expenses increased to $813.3$328.0 million, or 22.5%45.8% of net revenues, from $757.0$243.9 million, or 22.3%28.7% of net revenues, for the nine monthsquarter ended September 26, 2016.April 2, 2017. This increase was 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. 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. These increases were partially offset by higher costs reflect the incremental expense associated with the extra week includedlevels in the first nine monthsquarter of 2017 expenditures related to ongoing information technology initiatives, as well as increases in marketing and sales costs reflecting the higher revenues in 2017 compareddue to the same periodadditional week in 2016.the quarter.

 

NON-OPERATING (INCOME) EXPENSE

 

Interest expense forin the thirdfirst quarter and first nine months of 20172018 totaled $25.1$22.8 million and $73.8 million, respectively, compared to $24.3 million and $72.3$24.5 million for the comparable and respective periods of 2016. In the third quarterperiod of 2017 the Company refinanced $350 millionreflecting lower levels of 6.3% notes that maturedborrowing in September 2017 by issuing $500 million of 3.5% notes.2018 compared to 2017.

 

Interest income was $5.4 million and $16.0 million for the third quarter and first nine months of 2017, respectively, compared to $1.9 million and $6.5$6.2 million in the thirdfirst quarter andof 2018 compared to $5.6 million in the first nine monthsquarter of 2016. The increase reflects higher2017. Higher invested cash balances and higher average interest rates in 20172018 compared to 2016.2017 contributed to the increase.

 

Other income, net of $8.6$(8.6) million for the first quarter ended October 1, 2017,of 2018 compared to other income, net of $6.6$(11.4) million for the quarter ended September 25, 2016.  Other income, net of $26.0 million for the nine-month period ended October 1, 2017, compared to other income, net of $5.5 million for same period in 2016.  The increase in the thirdfirst quarter isof 2017.  The decrease in the first quarter was primarily due to increased investment income in the third quarter of 2017 compared to the third quarter of 2016.  In the first nine months of 2017, the increase in other income, net relates primarily tolower foreign exchange gains asin 2018 compared to foreign exchange losses during2017, partially offset by higher earnings from the same periodCompany’s joint venture with Discovery in 2016.2018.

 

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 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.  For the first quarter of 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 which reversed certain discrete benefits recorded in 2017 as well as increased our provisional deemed repatriation tax liability.

 

 

 

Income taxestax expense totaled $84.3$24.1 million on pre-tax loss of $88.4 million in the first quarter compared to income tax expense of $2.2 million on pre-tax earnings of $349.8$70.8 million in the thirdfirst quarter of 2017 compared to income taxes of $90.2 million on pre-tax earnings of $346.3 million in the third quarter of 2016. For the nine-month period, income taxes totaled $105.7 million on pre-tax earnings of $507.6 million in 2017 compared to income taxes of $120.0 million on pre-tax earnings of $472.6 million in 2016.2017. Both nine-month periods as well as the full year 2016, were impacted by discrete tax events including the accrual of potential interest and penalties on uncertain tax positions. During the first nine monthsquarter of 2017, favorable2018, unfavorable discrete tax adjustments were a net benefitexpense of $15.6$34.9 million compared to a net benefit of $3.3$15.4 million in the first nine monthsquarter of 2016.2017. The favorableunfavorable discrete tax adjustments for the first nine monthsquarter of 20172018 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 (resulting from the adoption of ASU No. 2016-09, as discussed in Note 1 to the consolidated financial statements in Part I, Item 1).payments.  Absent discrete items, the adjusted tax ratesrate for the first nine monthsquarters of 2018 and 2017 were 16.5% and 2016 were 23.9% and 26.1%24.9%, respectively. The decrease in the adjusted tax rate of 23.9%16.5% for the nine months ended October 1, 2017first quarter of 2018 is comparableprimarily due to the full year 2016 adjusted ratetax impact of 24.5%.the lower U.S. corporate tax rate.

 

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

 

In May 2014,On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”), in cooperation with the International Accounting Standards Board (“IASB”), issued ASU No. 2014-09, Codification Topic 606, Revenue from Contracts with Customers (ASC 606). This ASU606 or the New Revenue Standard) using the modified retrospective method. ASC 606 supersedes the revenue recognition requirements in Accounting Standards CodificationASC 605 – Revenue Recognition and most industry-specific guidance throughout the Codification. This new guidancein 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.  ASU 2014-09 also requires enhanced qualitative and quantitative revenue related disclosures.  ASU 2014-09 may be adopted on a full retrospective basis and appliedThe cumulative impact of the adoption of the New Revenue Standard was not material to all prior periods presented, or on a modified retrospective basis through a cumulative adjustment recorded to opening retained earnings in the year of initial application.  This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years.  The Company’s revenue is primarily generated from the sale of finished product to customers.  Revenue is recognized at the point of time when ownership, risks, and rewards transfer.  These transactions are generally not impacted by the new standard.  The Company does however offer certain types of variable payments to these customers such as pricing allowances, rebates, coupons and collaborative marketing arrangements.  These types of payments are defined as variable consideration under ASU 2014-09.  The Company has substantially completed evaluating the quantitative impact related to ASU 2014-09.  Based on the analysis performed to date, the Company doestherefore the Company did not expect revenuerecord 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 our customers, which is the majority of ourthe 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 change.  We expect that within ourthe sale of finished product to its customers.  Within the Company’s Entertainment and Licensing business,segment, the timing of revenue recognition for minimum guarantees that we receivethe 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 change under ASU 2014-09, but we do not expectbe 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 material.recorded in the fourth quarter and more revenues will be recorded within the first, second, and third quarters. No other areas of ourthe Company’s business will bewere materially impacted by the new standard.  The Company is currently in the processNew Revenue Standard. Refer to Note 2 of evaluating the impact of ASU 2014-09 on internal controls and disclosures.  The Company expects to adopt ASU 2014-09 on January 1, 2018 using the modified retrospective basis. 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 and must be adopted using a modified retrospective transition. The Company is evaluatinghas evaluated the requirements of ASU 2016-02 and is continuing to assess its potential impact on the Company’s consolidated financial statements. The Company has a significant number of leases globally, primarily for property and office equipment, and is in the process of identifying and evaluating these leases  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. The Company is in the process of evaluating which of these 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.  The Company expects to record assets and liabilities on its consolidated balance sheets upon adoption of this standard, which may be material.  The adoption of this standard will not have an impact on the Company’s cash flows.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation – Stock Compensation. The ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements including (1) a requirement to prospectively record all of the tax effects related to share-based payments at settlement (or expiration) through the income statement; (2) a requirement that all tax-related cash flows resulting from share-based payments be reported as operating activities on the statement of cash flows; (3) the removal of the requirement to withhold shares upon settlement of an award at the minimum statutory withholding requirement; (4) a requirement that all cash payments made to taxing authorities on the employees’ behalf for withheld shares shall be presented as financing activities in the statements of cash flows; and (5) entities will be permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards choosing either to estimate forfeitures as required today or recognize forfeitures as they occur. ASU 2016-09 was effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. The Company adopted ASU 2016-09 in the first quarter of 2017. The impact of the adoption resulted in the following:

·The Company recorded excess tax benefits related to share-based payment awards of $5.0 million and $20.5 million as part of income tax expense for the quarter and nine months ended October 1, 2017, respectively.

·In accordance with the standard, for the nine months ended October 1, 2017, the Company classified excess tax benefits related to share-based employee awards of $20.5 million as part of operating activities in the consolidated statements of cash flows. These amounts were previously recorded as cash inflows from financing activities.  To keep the statements of cash flows comparable, the Company elected to apply this portion of the standard retrospectively and restate its statement of cash flows for the third quarter of 2016 as allowed by the standard. Excess tax benefits of $19.7 million for the nine-month period ended September 25, 2016, previously shown as financing activities were reclassified with other income tax cash flows as operating activities.

·In accordance with the standard, the Company now classifies cash outflows for employee taxes paid related to shares withheld from share-based payment awards as financing activities in the consolidated statements of cash flows. For the nine months ended October 1, 2017, these payments amount to $32.0 million. Prior to adoption of ASU 2016-09, these cash flows were included as operating activities. This change is required to be applied on a retrospective basis and as a result, the Company has restated the consolidated statement of cash flows for the nine-month period ended September 25, 2016 by reclassifying payments of $21.9 million to financing activities from operating activities.

·The Company elected to change its policy on accounting for forfeitures, from estimating the number of stock-based awards expected to vest, to accounting for forfeitures as they occur.  This election resulted in a one-time share based payment expense, net of tax, of $0.7 million which was recorded directly to retained earnings during the first quarter of 2017. Based upon the Company’s history of forfeitures, it is not expected that this election will have a material impact on its consolidated financial statements going forward however, as any impact will be based on future forfeitures, the actual impact could differ from the Company’s expectation.

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

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice across all industries, in how certain transactions are classified in the statement of cash flows. ASU 2016-15 iswas effective for public companies for fiscal years beginning after December 15, 2017. The Company has evaluated the requirements of ASU 2016-15adopted this standard in 2018 and does not presently believe that the adoption of the newthis standard willdid not have a materialan impact on the Company’s results or consolidated financial statements.statement of cash flows for the quarters ended April 1, 2018 and April 2, 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 iswas effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The standard requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs requiring any deferred taxes not yet recognized on intra-entity transfers to be recorded to retained earnings. The Company has evaluatedadopted 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 does not expect that it willearly adoption is 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 ourthe Company’s results or consolidated financial statements.statements in the first quarter of 2018.

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

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company has historically generated a significant amount of cash from operations. In the first nine monthsquarter of 20172018 and 20162017 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 2017 and 2018. 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 OctoberApril 1, 2017,2018, the Company's cash and cash equivalents totaled $1,244.8$1,598.9 million, substantially all of which is held outside of the United States. DeferredPrior to 2017, deferred income taxes havehad not been provided on the majority of undistributed earnings of international subsidiaries as such earnings are deemed to bewere indefinitely reinvested by the Company. Accordingly, such international cash balances arewere not available to fund cash requirements in the United States unless the Company changeswas to change its reinvestment policy. The Company currently has maintained sufficient sources of cash in the United States to fund cash requirements without the need to repatriate any funds. IfOn December 22, 2017, the CompanyTax Cuts and Jobs Act was signed into law which provides significant changes its policyto the U.S. tax system including the elimination of indefinitely reinvesting internationalthe ability to defer U.S. income tax on unrepatriated earnings it wouldby imposing a one-time mandatory deemed repatriation tax on undistributed foreign earnings, estimated to be required to accrue for any additional income taxes representing the difference between the tax rates$288.5 million as of April 1, 2018. As a result, in the United States andfuture, the applicable tax jurisdiction of the international subsidiaries. If the Company repatriated the funds from its international subsidiaries, it would thenrelated earnings in foreign jurisdictions will be required to pay the additional U.S. income tax.made available with greater investment flexibility. The majority of the Company'sCompany’s cash and cash equivalents held outside of the United States as of OctoberApril 1, 2017 are2018 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, again 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.

 

At October 1, 2017, cash and cash equivalents, net of short-term borrowings, increasedThe table below outlines key financial information pertaining to $1,055.8 million from $651.7 million at September 25, 2016. Net cash provided by operating activities inour consolidated balance sheets including the first nine months of 2017 was $201.8 million compared to $195.4 million in the first nine months of 2016.  For the fiscal year ended December 25, 2016, net cash provided by operating activities was $817.3 million. Net cash provided by operating activities in the first nine months of 2017 and 2016 include pension contributions of $26.6 million and $64.8 million, respectively.quarter-over-quarter changes.

 

Quarter Ended

 

April 1,

 

April 2,

 

%

 

2018

 

2017

 

Change

Cash and cash equivalents

$

1,598.9

 

 

1,463.1

 

9

%

Accounts receivable, net

 

612.7

 

 

676.9

 

-10

%

Inventories

 

517.4

 

 

416.2

 

24

%

Prepaid expenses and other current assets

 

292.8

 

 

243.5

 

20

%

Other assets

 

1,444.8

 

 

1,576.1

 

-8

%

Accounts payable and accrued liabilities

 

830.9

 

 

786.7

 

6

%

Other liabilities

 

611.2

 

 

393.5

 

55

%

 

Accounts receivable increased 14%decreased 10% to $1,655.8$612.7 million at OctoberApril 1, 2017,2018, compared to $1,452.9$676.9 million at September 25, 2016.April 2, 2017. The decrease reflects an increase reflectsfrom foreign exchange translation of $11.9 million and a decrease resulting from the 7% increase16% decrease in net revenues in the thirdfirst quarter of 20172018 as compared to the thirdfirst quarter 2016 and the mix of revenues including growth in markets with longer collection terms.2017. The balance at April 1, 2018 includes a $77.0 million allowance for doubtful accounts related to Toys“R”Us.  Days sales outstanding increased fromof 78 at April 1, 2018 was consistent with 78 days at September 25, 2016 to 83 days at October 1, 2017, also reflecting the timing of revenues in the quarter as well as growth in revenues with longer terms in 2017 compared to 2016.April 2, 2017.

 

 

 

Inventories increased 4%24% to $629.1$517.4 million at OctoberApril 1, 20172018 from $607.7$416.2 million at September 25, 2016. AbsentApril 2, 2017. The increase includes an increase of $23.8 million from the impact of foreign exchange, inventories are essentially flat withexchange. The remaining increase is primarily related to sales declines in the prior year.first quarter of 2018.

 

Prepaid expenses and other current assets decreased 9%increased 20% to $232.6$292.8 million at OctoberApril 1, 20172018 from $256.0$243.5 million at September 25, 2016.April 2, 2017. The decreaseincrease was primarily related to higher prepaid royalties, higher prepaid income taxes primarily due to reduced earnings in the first quarter of 2018 and higher prepaid non-income related taxes, primarily value-added taxes.  These increases were partially offset by lower unrealized gains on foreign exchange contracts and lower royalties partially offset by higher prepaid non-income related taxes, primarily value-added taxes.as a result of a weaker U.S. dollar in the first quarter of 2018.

 

Goodwill and other intangible assets, net, decreased to $796.5$784.5 million at OctoberApril 1, 20172018 from $859.3$809.0 million at September 25, 2016.April 2, 2017. The decrease was due to a non-cash goodwill impairment charge of $32.9 million related to Backflip taken in the fourth quarter of 2016 in addition to amortization of intangible assets over the last twelve months.

 

Other assets increaseddecreased approximately 3%14% to $722.1$660.3 million at OctoberApril 1, 20172018 from $701.6$767.1 million at September 25, 2016.April 2, 2017. The increasedecrease was primarily related to the increasedlower 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, decreases in the value of long-term foreign exchange contracts, lower long-term royalty advances and the settlement of a long-term note receivable in the fourth quarter of 2017.  These decreases were partially offset by higher capitalized movie and television production costs, net of related production rebates as well as higher accounts receivable related to long-term multi-year programming distribution agreements. These increases were partially offset by payments received in relation to a long-term note receivable related to the sale of the Company’s manufacturing operations in August 2015, lower long-term royalty advances and decreases in the value of long-term foreign exchange contracts.2018.

 

Accounts payable and accrued liabilities increased 19%6% to $1,295.7$830.9 million at OctoberApril 1, 20172018 from $1,087.4$786.7 million at September 25, 2016. TheApril 2, 2017. Contributing to the increase was primarily due towere severance charges accrued during the first quarter of 2018, higher accounts payable balances in the Company’s Global Operations business, reflecting longer payment terms, higher accrued income tax balances related to the current portion of the repatriation tax, increased liability for foreign currency forward contracts as result of strengthening foreign currencies and other tax balances and increases to dividend accrualshigher accrued dividends due to a higher dividend rate.rate in 2018.  These increases were partially offset by lower royalty balances in 20172018 due to declines in in Partner Brand sales as well as lower accrued advertising at OctoberApril 1, 2017.2018.

  

Other liabilities increased 13%55% to $410.4$611.2 million at OctoberApril 1, 20172018 from $364.4$393.5 million at September 25, 2016.April 2, 2017. The increase is primarily due to the $264.1 million estimated long-term portion of the repatriation tax liability. This increase is partially offset by a decrease in the Company’s pension liabilities due to a $50.0 million contribution in 2017 offset by an increase due to the remeasurement of the U.S. pension liability as a result of the Company’s decision in the first quarter of 2018 to terminate the plan.

Cash Flow

Net cash provided by operating activities in the first quarter of 2018 was $317.7 million compared to 2016$411.9 million in the first quarter of 2017.  The reduction in cash flow from operations reflects increaseslower earnings in uncertain tax position reserves and higher balances relatedthe first quarter of 2018 as compared to deferred rent expenses.the first quarter of 2017. 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 $97.0 million in the nine months of 2017 compared to $90.5$26.2 million in the first nine monthsquarter of 2016.2018 compared to $31.0 million in the first quarter of 2017. Additions to property, plant and equipment were $102.5$28.2 million in the first nine monthsquarter of 20172018 compared to $103.6$30.2 million in the first nine monthsquarter of 2016. Net investing activity for 2016 included a $19.8 million return of capital from the Discovery Family Channel joint venture. The joint venture has since achieved sufficient earnings for the distributions to be treated as dividends and as a result, the 2017 distributions totaling $20.2 million were included in other operating activities. Cash utilized by investing activity for the nine months ended September 25, 2016 includes a cash payment of $12.4 million related to the purchase price, net of cash acquired, for Boulder Studios, which was acquired in July 2016.2017.

 

 

 

Net cash utilized by financing activities was $161.3$275.7 million in the first nine monthsquarter of 20172018 compared to $259.0$211.7 million in the first nine monthsquarter of 2016.  Financing activities in 2017 include proceeds of $493.9 million from the issuance of $500.0 million in long-term notes in September 2017, net of $6.1 million of debt issuance costs, offset by the repayment of $350.0 million of long-term notes due September 2017.  Cash payments related to purchases of the Company's common stock were $112.2$38.1 million in the first nine monthsquarter of 20172018 compared to $104.3$19.3 million in the first nine monthsquarter of 2016.2017. At OctoberApril 1, 2017,2018, the Company had $216.5$139.2 million remaining available under its current share repurchase authorization approved by the Board of Directors. Dividends paid in the first nine monthsquarter of 20172018 totaled $206.0$70.8 million compared to $185.3$63.4 million in the first nine monthsquarter of 20162017 reflecting thea higher dividend rate commencing withon the MayFebruary 2018 dividend compared to the February 2017 dividend. Net proceeds fromrepayments of short-term borrowings were $15.7$133.7 million in the first nine monthsquarter of 20172018 compared to net proceedsrepayments of $14.2$107.3 million in the first nine monthsquarter of 2016.2017.  Financing activities in the first nine monthsquarter of 20172018 and 20162017 include payments of $32.0$52.6 million and $21.9$31.4 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 $700.0$1,000.0 million. The maturities of thesethe notes willmay vary but may not exceed 397 days.  The notes will beare sold under customary terms in the commercial paper market and will beare issued at a discount or par, or alternatively, will be sold at par and will bear varying interest rates based on a fixed or floating rate basis.  The interest rates will vary based on market conditions and the ratings assigned to the notes by the credit rating agencies at the time of issuance.  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 OctoberApril 1, 20172018, the Company had no outstanding borrowings of approximately $175.1 million outstanding 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 OctoberApril 1, 2017.2018. The Company had no borrowings outstanding under its committed revolving credit facility at OctoberApril 1, 2017.2018. However, the Company had letters of credit outstanding under this facility as of OctoberApril 1, 20172018 of approximately $1.1 million. Amounts available and unused under the committed line, less outstanding balances under the commercial paper program, as of OctoberApril 1, 20172018 were approximately $823.7$998.9 million. The Company also has other uncommitted lines from various banks, of which approximately $57.8$64.5 million was utilized at OctoberApril 1, 2017,2018, including $48.4$42.9 million of outstanding letters of credit and $9.4$21.6 million of outstanding borrowings.

 

The Company has principal amounts of long-term debt at OctoberApril 1, 20172018 of $1,709.9 million, due at varying times from 2021 through 2044. Of this long-term debt, $500.0 million represents the 3.50% Notes Due 2027 that were issued in September 2017. The Company also had letters of credit of approximately $49.5$43.5 million and purchase commitments of approximately $434.7$393.9 million outstanding at OctoberApril 1, 2017.2018.

 

Future payments on long-term debt and future interest payments on long-term debt included as part of the Company’sOther contractual obligations and commercial commitments, as detailed in its 2016the Company's Annual Report on Form 10-K were impacted byfor the issuance of $500.0 million of 3.50% notes due 2027, in the third quarter, and the related interest obligations, as detailed below.

 

 

 

 

 

 

 

Payments due by Fiscal Year

 

 

 

 

 

 

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

Thereafter

 

 

Total

 

Long-term debt

$

350.0

 

 

-

 

 

-

 

 

-

 

 

300.0

 

 

1,409.9

 

 

2,059.9

 

Interest payments on long-term debt

 

85.8

 

 

81.3

 

 

81.3

 

 

81.3

 

 

76.5

 

 

1,087.4

 

 

1,493.6

 

The remainder of the contractual obligation and commercial commitmentsyear 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 2016Annual 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 $115.4$77.6 million at OctoberApril 1, 2017,2018, 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 sales allowances, program production costs, recoverability of goodwill and intangible assets, recoverability of royalty advances and commitments, pension costs and obligations and income taxes. These critical accounting policies are the same as those detailed in the 20162017 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 20172018 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 OctoberApril 1, 2017,2018, these contracts had net unrealized losses of $10.6$36.5 million, of which $3.5$0.1 million of unrealized gains are recorded in prepaid expenses and other current assets, $8.5$2.9 million of unrealized gains are recorded in other assets, $15.6$23.4 million of unrealized losses are recorded in accrued liabilities and $7.0$16.1 million of unrealized losses are recorded in other liabilities. Included in accumulated other comprehensive loss at OctoberApril 1, 20172018 are deferred losses, net of tax, of $17.5$36.0 million, related to these derivatives.

 

At OctoberApril 1, 2017,2018, 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 OctoberApril 1, 20172018 are deferred losses, net of tax, of $17.3$20.4 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 OctoberApril 1, 2017.2018. 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 OctoberApril 1, 20172018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

PART II.  OTHER INFORMATION

Item 1.

Legal Proceedings.

 

The Company is currently party to certain legal proceedings, none of which it believes to be material to its business or financial condition.

 

Item 1A.

Risk Factors.

This Quarterly Report on Form 10-Q contains "forward-looking statements," within the meaning of the Private Securities Litigation Reform Act of 1995, concerning management's 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 and strategies, financial and business goals, expectations for achieving the Company's goals and objectives, cost savings and efficiency enhancing initiatives and other objectives and anticipated uses of cash and may be identified by the use of forward-looking words or phrases such as "anticipate," "believe," "could," "expect," "intend," "look forward," "may," "planned," "potential," "should," "will," and "would" or any variations of words with similar meanings. These forward-looking statements are inherently subject to known and unknown risks and uncertainties.

 

The Company's actual results or experience may differ materially from those expected or anticipated in the forward-looking statements. The Company has included, under Item 1A. of its Annual Report on Form 10-K, for the year ended December 25, 201631, 2017 (the "Annual Report"), a discussion of factors which may impact these forward-looking statements. In furtherance, and not in limitation, of the more detailed discussion set forth in the Annual Report, specific factors that might cause such a difference include, but are not limited to:

 

·           the Company’s ability to successfully grow its franchise and key partner brands, which constitute a substantial majority of the Company’s total revenues;

·           the Company's ability to successfully re-imagine, re-invent and re-ignite its existing brands, products and product lines, including through the use of immersive entertainment experiences, to keep them fresh and relevant and to maintain and further their success;

·           the Company's ability to successfully design, develop, produce, introduce, market and sell innovative new brands, products and product lines which achieve and sustain interest from retailers and consumers and keep pace with changes in consumer preferences and technology;

·           the Company's ability to offer products that (i) expand consumer demand for its product offerings and do not significantly compete with the Company's other existing product offerings and (ii) consumers want to purchase and select over competitors' products;

·           successful brand and/or product introductions from competitors that capture market share and sales from the Company;

·           the Company's ability to source and ship products in a timely and cost-effective manner and customers' and consumers' acceptance and purchase of those products in quantities and at prices that will be sufficient to profitably recover the Company's costs for developing, marketing and selling those products;

·           recessions, other economic downturns, challenging economic conditions or economic uncertainty affecting one or more of the Company's significant markets including, without limitation, the United Kingdom and Brazil, which can negatively impact the financial health of the Company's customers and consumers, and which can result in lower employment levels, lower consumer disposable income and lower consumer spending, including lower spending on purchases of the Company's products;

·           currency fluctuations, including movements in foreign exchange rates, which can lower the Company's net revenues and earnings, and significantly impact the Company's costs;

·           other economic and public health conditions or regulatory changes in the markets in which the Company and its customers and suppliers operate, which could create delays or increase the Company's costs, such as higher commodity prices, labor costs or higher transportation costs, or outbreaks of diseases;

·           delays, increased costs, lack of consumer acceptance or other difficulties associated with the development and offering of our or our partners' entertainment and media initiatives related to products offered by the Company;

·           the risk that the market appeal of the Company's licensed products will be less than expected or that sales revenue generated by these products will be insufficient to cover the minimum guaranteed royalties or other commitments;

·           the concentration of the Company's retail customers, potentially increasing the negative impact to the Company of difficulties experienced by any of the Company's retail customers or changes in their purchasing or selling patterns;

·           the impact of the bankruptcy filing by Toys “R” Us in the United States and Canada, and the subsequent liquidation of the Toys“R”Us business in the U.S., including lost sales and bad debt expense;

·           the ability of Toys “R” Us to successfully re-emerge from bankruptcy in Canada;

·           the liquidation of Toys“R”Us in the United Kingdom, including lost sales and bad debt expense;

·           uncertainty as to the future of the Toys“R”Us business elsewhere in the world;

·           the Company's ability to generate sales during the second half of the year, particularly during the relatively brief holiday shopping season, which is the period in which the Company derives a substantial portion of its revenues and earnings;

·           the inventory policies of the Company's retail and e-commerce customers, including potential decisions to lower their inventories, even if it results in lost sales, as well as the concentration of the Company's revenues in the second half of the year, which coupled with reliance by retailers on quick response inventory management techniques, increases the risk of underproduction of popular items, overproduction of less popular items and failure to achieve compressed shipping schedules;

·           work stoppages or disruptions which may impact the Company's ability to manufacture or deliver products in a timely and cost-effective manner;

·           concentration of manufacturing of the substantial majority of the Company's products by third party vendors in the People's Republic of China and the associated impact to the Company of social, economic or public health conditions and other factors affecting China, the movement of people and products into and out of China, the cost of producing products in China and the cost of exporting them to the Company's other markets or affecting the exchange rates for the Chinese Renminbi, including, without limitation, the impact of tariffs or other trade restrictions being imposed upon goods manufactured in China;China and exported to other markets;

·           consumer interest in and acceptance of programming and entertainment created by Hasbro Studios and/or Allspark Pictures, as well as products related to such programming and entertainment;

·           the ability to develop and distribute compelling entertainment, including television, motion pictures and digital content, based on our brands, in a timely and financially profitable manner, and the success of that entertainment in driving consumer interest in and engagement with our brands;

·           the ability of the Company to hire and retain key officers and employees who are critical to the Company's success;

·           the costs of complying with product safety and consumer protection requirements worldwide, including the risk that greater regulation in the future may increase such costs, may require changes in the Company's products and/or may impact the Company's ability to sell some products in particular markets in the absence of making changes to such products;

·           the risk that one of the Company's third-party manufacturers will not comply with applicable labor, consumer protection, product safety or other laws or regulations, or with aspects of the Company's Global Business Ethics Principles, and that such noncompliance will not be promptly detected, either of which could cause damage to the Company's reputation, harm sales of its products, result in product recalls and potentially create other liabilities for the Company;

·           an adverse change in purchasing policies or promotional programs or the bankruptcy or other economic difficulties or lack of success of one or more of the Company's significant retailers comprising its relatively concentrated retail customer base, which could negatively impact the Company's revenues or bad debt exposure;

·           the impact of the bankruptcy filing by Toys “R” Us in the United States and Canada, including lost sales and bad debt expense;

·           the ability of Toys “R” Us to successfully re-emerge from bankruptcy;

·           the risk the Company will lose rights to a significant licensed property or properties, which will harm the Company's revenues and earnings;

·           the risk that the Company may face product recalls or product liability suits relating to products it manufactures or distributes which may have significant direct costs to the Company and which may also harm the reputation of the Company and its products, potentially harming future product sales;

·           the impact of competition on revenues, margins and other aspects of the Company's business, including the ability to offer Company products which consumers choose to buy instead of competitor’s products, the ability to secure, maintain and renew popular licenses and the ability to attract and retain employees;

·           the risk that anticipated benefits of acquisitions or investments may not occur or be delayed or reduced in their realization;

·           the risk that any litigation or arbitration disputes or government and regulatory investigations could entail significant resources and expense and result in significant fines or other harm to the Company's business or reputation;

·           the Company's ability to maintain or obtain external financing on terms acceptable to it in order to meet working capital needs;

·           the risk that one or more of the counterparties to the Company's financing arrangements may experience financial difficulties or otherwise be unable or unwilling to allow the Company to access financing under such arrangements;

·           unforeseen circumstances, such as severe softness in or collapse of the retail and/or banking environment that may result in a significant decline in revenues and operating results of the Company, thereby causing the Company to be in non-compliance with its debt covenants and the Company being unable to utilize borrowings under its revolving credit facility, a circumstance likely to occur when operating shortfalls would result in the Company being in the greatest need of such supplementary borrowings;

·           market conditions, third party actions or approvals, the impact of competition and other factors that could delay or increase the cost of implementation of the Company's programs, or alter the Company's actions and reduce actual results;

·           the risk that the Company may be subject to governmental penalties, fines, sanctions or additional taxes for failure to comply with applicable laws or regulations in any of the markets in which it operates, or that governmental regulations or requirements will require changes in the manner in which the companyCompany does business and/or increase the costs of doing business;

·           failure to operate our information systems and implement new technology effectively, as well as maintain the systems and processes designed to protect our electronic data;

·           the risk that the Company's reported goodwill may become impaired, requiring the Company to take a charge against its income;

·           changes in foreign exchange rates and other potential regulations, increased costs and/or economic uncertainty associated with the United Kingdom (“UK”) vote to leave the European Union (“EU”), commonly referred to as Brexit, may harm our sales and the profitability of our business in the UK and the EU; or

·           other risks and uncertainties as are or may be detailed from time to time in the Company's public announcements and filings with the SEC, such as filings on Forms 8-K, 10-Q and 10-K.

 

The Company undertakes no obligation to revise the forward-looking statements contained in this Quarterly Report on Form 10-Q to reflect events or circumstances occurring after the date of the filing of this report.

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Repurchases Made in the Quarter (in whole dollars and number of shares)

 

 

 

 

 

 

 

 

 

 

 

(d)

 

 

 

 

 

 

 

 

 

 

Maximum 

 

 

 

 

 

 

 

 

 

 

Number (or

 

 

 

 

 

 

 

(c) Total

 

Approximate

 

 

 

 

 

 

 

Number of

 

Dollar 

 

 

 

 

 

 

 

Shares (or

 

Value) of

 

 

 

 

 

 

 

Units)

 

Shares (or

 

 

 

 

 

 

 

Purchased

 

Units) that

 

(a) Total

 

(b)

 

as Part of

 

May Yet Be 

 

Number of

 

Average

 

Publicly

 

Purchased

 

Shares (or

 

Price Paid

 

Announced

 

Under the

Period

Units)

 

per Share

 

Plans or

 

Plans or

 

Purchased

 

(or Unit)

 

Programs

 

Programs

July 2017

 

 

 

 

 

 

 

 

 

 

 

7/3/17 – 7/30/17

  

85,200

 

$

105.75

 

 

85,200

 

$

300,349,525

August 2017

 

 

 

 

 

 

 

 

 

 

 

7/31/17 – 9/3/17

 

499,600

 

$

98.76

 

 

499,600

 

$

251,008,986

September 2017

 

 

 

 

 

 

 

 

 

 

 

9/4/17 – 10/1/17

 

362,500

 

$

95.29

 

 

362,500

 

$

216,466,165

Total

 

947,300

 

$

98.06

 

 

947,300

 

$

216,466,165

 

 

 

 

 

 

 

 

 

 

(d)

 

 

 

 

 

 

 

 

 

 

Maximum 

 

 

 

 

 

 

 

 

 

 

Number (or

 

 

 

 

 

 

 

(c) Total

 

Approximate

 

 

 

 

 

 

 

Number of

 

Dollar 

 

 

 

 

 

 

 

Shares (or

 

Value) of

 

 

 

 

 

 

 

Units)

 

Shares (or

 

 

 

 

 

 

 

Purchased

 

Units) that

 

(a) Total

 

(b)

 

as Part of

 

May Yet Be 

 

Number of

 

Average

 

Publicly

 

Purchased

 

Shares (or

 

Price Paid

 

Announced

 

Under the

Period

Units)

 

per Share

 

Plans or

 

Plans or

 

Purchased

 

(or Unit)

 

Programs

 

Programs

January 2018

 

 

 

 

 

 

 

 

 

 

 

1/1/18 – 1/28/18

  

272,026

 

$

91.88

 

 

272,026

 

$

152,971,686

February 2018

 

 

 

 

 

 

 

 

 

 

 

1/29/18 – 3/4/18

 

13,800

 

$

95.02

 

 

13,800

 

$

151,660,476

March 2018

 

 

 

 

 

 

 

 

 

 

 

3/5/18 – 4/1/18

 

141,235

 

$

88.34

 

 

141,235

 

$

139,183,482

Total

 

427,061

 

$

90.81

 

 

427,061

 

$

139,183,482

 

In February 2015, the Company announced that its Board of Directors authorized the repurchase of an additional $500 million of common stock. Purchases of the Company's common stock may be made from time to time, subject to market conditions. These shares may be repurchased in the open market or through privately negotiated transactions. The Company has no obligation to repurchase shares under this authorization, and the timing, actual number, and value of the shares that are repurchased will depend on a number of factors, including the price of the Company's stock and the Company’s generation of, and uses for, cash. The Company may suspend or discontinue the program at any time and there is no expiration date.

  

 

Item 3.

Defaults Upon Senior Securities.

None.

 

Item 4.

Mine Safety Disclosures.

Not applicable.

 

Item 5.

Other Information.

None.

 

Item 6.

Exhibits.

 

3.1      Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

 

3.2      Amendment to Articles of Incorporation, dated June 28, 2000. (Incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

 

 

 

3.3      Amendment to Articles of Incorporation, dated May 19, 2003.  (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended June 29, 2003, File No. 1-6682.)

 

3.4      Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 1-6682.)

 

3.5      Amendment to Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated August 6, 2014, File No. 1-6682.)

 

3.6      Amendment to Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 5, 2015, File No. 1-6682.)

 

3.7      Amendment to Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated December 10, 2015, File No. 1-6682.)

 

3.8      Certificate of Designations of Series C Junior Participating Preference Stock of Hasbro, Inc. dated June 29, 1999. (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

 

3.9      Certificate of Vote(s) authorizing a decrease of class or series of any class of shares. (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No 1-6682.)

 

4.1      Indenture, dated as of July 17, 1998, by and between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to Citibank, N.A. as Trustee. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 14, 1998, File No. 1-6682.)

 

4.2      Indenture, dated as of March 15, 2000, by and between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4(b)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 26, 1999, File No. 1-6682.)

 

4.3      First Supplemental Indenture, dated as of September 17, 2007, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed September 17, 2007, File No. 1-6682.)

 

4.4      Second Supplemental Indenture, dated as of May 13, 2009, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed May 13, 2009, File No. 1-6682.)

 

4.5      Third Supplemental Indenture, dated as of March 11, 2010, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York.  (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed March 11, 2010, File No. 1-6682.)

 

4.6      Fourth Supplemental Indenture, dated May 13, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York.  (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed May 13, 2014, file No. 1-6682.)

 

 

 

4.7      Fifth Supplemental Indenture, dated September 13, 2017, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York.  (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed September 13, 2017, file No. 1-6682.)

 

10.1    Increase Supplement added asForm of August 24, 2017, by and among2018 Stock Option Agreement under the Hasbro, Inc., Restated 2003 Stock Incentive Performance Plan.  (Applicable for John Frascotti, Deb Thomas, Steve Davis and Wiebe Tinga.)

10.2    Form of 2018 Stock Option Agreement under the Hasbro, SA, BankInc. Restated 2003 Stock Incentive Performance Plan for Brian Goldner.

10.3    Form of America, N.A.,2018 Contingent Stock Performance Award under the Hasbro, Inc. Restated 2003 Stock Incentive Performance Plan.  (Applicable for John Frascotti, Deb Thomas, Steve Davis and Wiebe Tinga.)

10.4    Form of 2018 Contingent Stock Performance Award under the lenders party thereto. (Incorporated by reference to Exhibit 10.1 toHasbro, Inc. Restated 2003 Stock Incentive Performance Plan for Brian Goldner.

10.5    Form of 2018 Restricted Stock Unit Award under the Company’s Current Report on Hasbro, Inc. Restated 2003 Stock Incentive Performance Plan.  (Applicable for John Frascotti, Deb Thomas, Steve Davis and Wiebe Tinga.).

10.6    Form 8-K filed on August 28, 2017, file No. 1-6682.of 2018 Non-Competition, Non-Solicitation and Confidentiality Agreement.  (Applicable for John Frascotti, Deb Thomas and Wiebe Tinga.)

31.1    Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 

31.2    Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 

32.1*  Certification of the Chief Executive Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.

 

32.2*  Certification of the Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.

 

101.INS        XBRL Instance Document

 

101.SCH      XBRL Taxonomy Extension Schema Document

 

101.CAL      XBRL Taxonomy Extension Calculation Linkbase Document

 

101.LAB      XBRL Taxonomy Extension Labels Linkbase Document

 

101.PRE       XBRL Taxonomy Extension Presentation Linkbase Document

 

101.DEF       XBRL Taxonomy Extension Definition Linkbase Document

            * Furnished herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 HASBRO, INC.

 

 (Registrant)

 

Date: November 8, 2017May 2, 2018

By:  /s/ Deborah Thomas

 

Deborah Thomas

 

 

 

Executive Vice President and

 

Chief Financial Officer

 

(Duly Authorized Officer and

 

Principal Financial Officer)

Exhibit Index

Exhibit

No.

Exhibits

3.1

Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

3.2

Amendment to Articles of Incorporation, dated June 28, 2000. (Incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

3.3

Amendment to Articles of Incorporation, dated May 19, 2003.  (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended June 29, 2003, File No. 1-6682.)

3.4

Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2006, File No. 1-6682.)

3.5

Amendment to Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K dated August 6, 2014, File No. 1-6682)

3.6

Amendment to Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 5, 2015, File No. 1-6682.)

3.7

Amendment to Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated December 10, 2015, File No. 1-6682.)

3.8

Certificate of Designations of Series C Junior Participating Preference Stock of Hasbro, Inc. dated June 29, 1999. (Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No. 1-6682.)

3.9

Certificate of Vote(s) authorizing a decrease of class or series of any class of shares. (Incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended July 2, 2000, File No 1-6682.)

4.1

Indenture, dated as of July 17, 1998, by and between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to Citibank, N.A. as Trustee. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 14, 1998, File No. 1-6682.)

4.2

Indenture, dated as of March 15, 2000, by and between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4(b)(i) to the Company's Annual Report on Form 10-K for the year ended December 26, 1999, File No. 1-6682.)

4.3

First Supplemental Indenture, dated as of September 17, 2007, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed September 17, 2007, File No. 1-6682.)

4.4

Second Supplemental Indenture, dated as of May 13, 2009, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed May 13, 2009, File No. 1-6682.)

4.5

Third Supplemental Indenture, dated as of March 11, 2010, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York.  (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed March 11, 2010, File No. 1-6682.)

4.6

Fourth Supplemental Indenture, dated May 13, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York.  (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed May 13, 2014, file No. 1-6682.)

4.7

Fifth Supplemental Indenture, dated September 13, 2017, between the Company and The Bank of New York Mellon Trust Company, N.A. as successor Trustee to the Bank of Nova Scotia Trust Company of New York.  (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed September 13, 2017, file No. 1-6682.)

10.1

Increase Supplement added as of August 24, 2017, by and among Hasbro, Inc., Hasbro SA, Bank of America, N.A., and the lenders party thereto. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 28, 2017, file No. 1-6682.)

31.1

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

31.2

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.

 32.1*

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.

 32.2*

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

* Furnished herewith.