0000046080-18-000118.txt : 20180801 0000046080-18-000118.hdr.sgml : 20180801 20180801160741 ACCESSION NUMBER: 0000046080-18-000118 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 65 CONFORMED PERIOD OF REPORT: 20180701 FILED AS OF DATE: 20180801 DATE AS OF CHANGE: 20180801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HASBRO INC CENTRAL INDEX KEY: 0000046080 STANDARD INDUSTRIAL CLASSIFICATION: GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES) [3944] IRS NUMBER: 050155090 STATE OF INCORPORATION: RI FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06682 FILM NUMBER: 18984817 BUSINESS ADDRESS: STREET 1: 1027 NEWPORT AVE STREET 2: P O BOX 1059 CITY: PAWTUCKET STATE: RI ZIP: 02861 BUSINESS PHONE: 4014318697 MAIL ADDRESS: STREET 1: 200 NARRAGANSETT PARK DRIVE CITY: PAWTUCKET STATE: RI ZIP: 02862-0200 FORMER COMPANY: FORMER CONFORMED NAME: HASBRO BRADLEY INC DATE OF NAME CHANGE: 19850814 FORMER COMPANY: FORMER CONFORMED NAME: HASBRO INDUSTRIES INC DATE OF NAME CHANGE: 19840917 FORMER COMPANY: FORMER CONFORMED NAME: HASSENFELD BROTHERS INC DATE OF NAME CHANGE: 19720615 10-Q 1 maindocument001.htm QUARTERLY REPORT ON FORM 10-Q DATED JULY 1, 2018  

 

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 July 1, 2018

[ ]  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 July 23, 2018 was 126,938,974.

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(Thousands of Dollars Except Share Data)

 

(Unaudited)

 

 

 

 

July 1,

 

July 2,

 

December 31,

 

 

 

 

2018

 

2017

 

2017

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

  

Cash and cash equivalents

$

1,159,072

 

 

1,433,500

 

 

1,581,234

 

Accounts receivable, less allowance for doubtful accounts of $95,900

 

 

 

 

 

 

 

 

 

 

$15,200 and $31,400

 

739,268

 

 

846,547

 

 

1,405,399

  

Inventories

 

610,248

 

 

557,507

 

 

433,293

  

Prepaid expenses and other current assets

 

319,045

 

 

257,251

 

 

214,000

  

  

  

Total current assets

 

2,827,633

 

 

3,094,805

 

 

3,633,926

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation of $444,500

 

 

 

 

 

 

 

 

 

 

$408,200 and $422,100

 

265,904

 

 

268,973

 

 

259,710

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

  

Goodwill

 

572,488

 

 

572,143

 

 

573,063

  

Other intangible assets, net of accumulated amortization of $915,900,

 

 

 

 

 

 

 

 

 

 

 $891,800 and $904,900

 

741,076

 

 

230,188

 

 

217,382

  

Other

 

706,755

 

 

746,634

 

 

605,902

  

 

Total other assets

 

2,020,319

 

 

1,548,965

 

 

1,396,347

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Total assets

$

5,113,856

 

 

4,912,743

 

 

5,289,983

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

  

Short-term borrowings

$

20,121

 

 

186,863

 

 

154,957

 

Current portion of long-term debt

 

-

 

 

349,916

 

 

-

  

Accounts payable

 

339,861

 

 

368,312

 

 

348,476

  

Accrued liabilities

 

692,462

 

 

567,156

 

 

748,264

  

 

Total current liabilities

 

1,052,444

 

 

1,472,247

 

 

1,251,697

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,694,350

 

 

1,199,114

 

 

1,693,609

Other liabilities

 

600,312

 

 

408,888

 

 

514,720

  

 

Total liabilities

 

3,347,106

 

 

3,080,249

 

 

3,460,026

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

  

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

 

 

 

 

 

 

 

 

 

 

 

issued

 

-

 

 

-

 

 

-

  

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

 

 

 

 

 

 

 

 

 

 

209,694,630 at July 1, 2018, July 2, 2017,

 

 

 

 

 

 

 

 

 

 

and December 31, 2017

 

104,847

 

 

104,847

 

 

104,847

  

Additional paid-in capital

 

1,263,657

 

 

1,021,690

 

 

1,050,605

  

Retained earnings

 

4,070,661

 

 

4,141,903

 

 

4,260,222

  

Accumulated other comprehensive loss

 

(295,076)

 

 

(226,613)

 

 

(239,425)

  

Treasury stock, at cost; 82,370,078 shares at July 1, 2018; 84,615,971

 

 

 

 

 

 

 

 

 

 

shares at July 2, 2017; and 85,244,923 shares at December 31, 2017

 

(3,377,339)

 

 

(3,209,333)

 

 

(3,346,292)

  

 

Total shareholders' equity

 

1,766,750

 

 

1,832,494

 

 

1,829,957

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

5,113,856

 

 

4,912,743

 

 

5,289,983

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Six Months Ended

 

 

 

 

July 1,

 

July 2,

 

July 1,

 

July 2,

 

 

 

 

2018

 

2017

 

2018

 

2017

Net revenues

 

$

904,458

 

 

972,506

 

 

1,620,799

 

 

1,822,169

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

338,306

 

 

368,233

 

 

593,493

 

 

674,315

 

Royalties

 

 

66,045

 

 

79,152

 

 

135,697

 

 

143,532

 

Product development

 

 

59,859

 

 

62,793

 

 

117,243

 

 

125,379

 

Advertising

 

 

87,601

 

 

92,374

 

 

155,617

 

 

173,310

 

Amortization of intangibles

 

 

4,554

 

 

7,881

 

 

11,032

 

 

15,762

 

Program production cost amortization

 

 

7,297

 

 

5,188

 

 

19,331

 

 

10,758

 

Selling, distribution and administration

 

 

253,208

 

 

256,901

 

 

581,217

 

 

500,786

 

 

Total costs and expenses

 

 

816,870

 

 

872,522

 

 

1,613,630

 

 

1,643,842

Operating profit

 

 

87,588

 

 

99,984

 

 

7,169

 

 

178,327

Non-operating (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

22,803

 

 

24,224

 

 

45,612

 

 

48,680

 

Interest income

 

 

(6,308)

 

 

(5,116)

 

 

(12,556)

 

 

(10,680)

 

Other income (expense), net

 

 

2,969

 

 

(6,010)

 

 

(5,623)

 

 

(17,396)

 

 

Total non-operating expense, net

 

 

19,464

 

 

13,098

 

 

27,433

 

 

20,604

Earnings (loss) before income taxes

 

 

68,124

 

 

86,886

 

 

(20,264)

 

 

157,723

Income tax expense

 

 

7,825

 

 

19,163

 

 

31,929

 

 

21,401

Net earnings (loss)

 

$

60,299

 

 

67,723

 

 

(52,193)

 

 

136,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

 

0.54

 

 

(0.42)

 

 

1.09

 

Diluted

 

$

0.48

 

 

0.53

 

 

(0.42)

 

 

1.07

Cash dividends declared per common share

 

$

0.63

 

 

0.57

 

 

1.26

 

 

1.14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

 


 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

 

Consolidated Statements of Comprehensive Earnings (Loss)

 

 

(Thousands of Dollars)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Six Months Ended

 

 

 

 

July 1,

 

July 2,

 

July 1,

 

July 2,

 

 

 

 

2018

 

2017

 

2018

 

2017

Net earnings (loss)

 

$

60,299

 

 

67,723

 

 

(52,193)

 

 

136,322

Other comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(50,627)

 

 

4,139

 

 

(37,798)

 

 

28,812

 

Unrealized holding gains (losses) on available

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-for-sale securities, net of tax

 

 

87

 

 

260

 

 

(56)

 

 

229

 

Net gains (losses) on cash flow hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

  

net of tax

 

 

43,712

 

 

(33,880)

 

 

18,442

 

 

(57,197)

 

 

Changes in unrecognized pension amounts, net of tax

 

 

-

 

 

-

 

 

(26,058)

 

 

-

 

Reclassifications to earnings, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net losses (gains) on cash flow hedging activities

 

 

1,635

 

 

(1,410)

 

 

6,990

 

 

(6,784)

 

 

Amortization of unrecognized pension and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and postretirement amounts

 

 

2,512

 

 

1,449

 

 

4,332

 

 

2,897

Total other comprehensive loss, net of tax

 

 

(2,681)

 

 

(29,442)

 

 

(34,148)

 

 

(32,043)

Comprehensive earnings (loss)

 

$

57,618

 

 

38,281

 

 

(86,341)

 

 

104,279

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 


 

   

HASBRO, INC. AND SUBSIDIARIES

  

Consolidated Statements of Cash Flows

  

(Thousands of Dollars)

  

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

 

 

July 1,

 

July 2,

 

 

 

 

 

2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

 

  

Net earnings (loss)

 

$

(52,193)

 

 

136,322

  

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

 

 

 

 

 

 

  

 

Depreciation of plant and equipment

 

 

62,292

 

 

65,791

 

 

Amortization of intangibles

 

 

11,032

 

 

15,762

  

 

Program production cost amortization

 

 

19,331

 

 

10,758

  

 

Deferred income taxes

 

 

(17,839)

 

 

10,908

  

 

Stock-based compensation

 

 

23,545

 

 

25,132

 

 

Other non-cash items

 

 

(8,442)

 

 

(10,212)

Change in operating assets and liabilities net of acquired balances:

 

 

 

 

 

 

  

 

Decrease in accounts receivable

 

 

657,175

 

 

491,935

  

 

Increase in inventories

 

 

(194,838)

 

 

(157,059)

  

 

Increase in prepaid expenses and other current assets

 

 

(87,863)

 

 

(28,150)

  

 

Program production costs

 

 

(78,020)

 

 

(19,135)

  

 

Decrease in accounts payable and accrued liabilities

 

 

(142,172)

 

 

(208,903)

 

 

Changes in net deemed repatriation tax

 

 

54,622

 

 

-

  

 

Other

 

 

(5,829)

 

 

32,957

  

 

 

Net cash provided by operating activities

 

 

240,801

 

 

366,106

Cash flows from investing activities:

 

 

 

 

 

 

  

 

Additions to property, plant and equipment

 

 

(71,755)

 

 

(66,321)

  

 

Acquisitions

 

 

(155,451)

 

 

-

  

 

Other

 

 

3,384

 

 

(1,465)

  

 

 

Net cash utilized by investing activities

 

 

(223,822)

 

 

(67,786)

Cash flows from financing activities:

 

 

 

 

 

 

  

 

Net (repayments of) proceeds from other short-term borrowings

 

 

(133,582)

 

 

14,258

  

 

Purchases of common stock

 

 

(103,493)

 

 

(18,561)

  

 

Stock-based compensation transactions

 

 

20,108

 

 

9,902

  

 

Dividends paid

 

 

(149,528)

 

 

(134,655)

 

 

Payments related to tax withholding for share-based compensation

 

 

(54,730)

 

 

(31,400)

  

 

 

Net cash utilized by financing activities

 

 

(421,225)

 

 

(160,456)

Effect of exchange rate changes on cash

 

 

(17,916)

 

 

13,351

(Decrease) increase in cash and cash equivalents

 

 

(422,162)

 

 

151,215

Cash and cash equivalents at beginning of year

 

 

1,581,234

 

 

1,282,285

Cash and cash equivalents at end of period

 

$

1,159,072

 

 

1,433,500

 

 

 

 

 

 

 

 

 

 

Supplemental information

 

 

 

 

 

 

  

Cash paid during the period for:

 

 

 

 

 

 

  

 

Interest

 

$

41,200

 

 

43,960

  

 

Income taxes

 

$

72,545

 

 

64,787

 

 

 

 

 

 

 

 

 

  

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 July 1, 2018 and July 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 quarters ended July 1, 2018 and July 2, 2017 were each 13-week periods. The six-month period ended July 1, 2018 was a 26-week period while the six-month period ended July 2, 2017 was a 27-week period.

 

The results of operations for the quarter and six-month periods ended July 1, 2018 are not necessarily indicative of results to be expected for the full year, nor were those of the comparable 2017 periods representative of those actually experienced for the full year 2017. Certain reclassifications have been made to prior year amounts to conform to the current period presentation.

 

These condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations.  The Company filed audited consolidated financial statements for the fiscal year ended December 31, 2017 in its Annual Report on Form 10-K (“2017 Form 10-K”), which includes all such information and disclosures and, accordingly, should be read in conjunction with the financial information included herein.

 

Recently Adopted Accounting Standards

The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements in its 2017 Form 10-K with the exception of the accounting policies related to revenue recognition, reclassification of disproportionate tax effects from accumulated other comprehensive income (“AOCI”) caused by the Tax Cuts and Jobs Act of 2017, the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and Business Combinations, Clarifying the Definition of a Business.

 

On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606 or the “New Revenue Standard”) using the modified retrospective method. ASC 606 supersedes the revenue recognition requirements in ASC 605 – Revenue Recognition and most industry-specific guidance in U.S. GAAP. The New Revenue Standard provides a five-step model for analyzing contracts and transactions to determine when, how, and if revenue is recognized. Revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services.  The cumulative impact of the adoption of the New Revenue Standard was not material to the Company therefore the Company did not record any adjustments to retained earnings. This was determined by analyzing contracts not completed as of January 1, 2018.  The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For further details, see Note 2.

 

 


 

Revenue recognition from the sale of finished product to customers, which is the majority of the Company’s revenues, did not change under the new standard and the Company does not expect material changes in the future as a result of the New Revenue Standard related to the sale of finished product to its customers.  Within the Company’s Entertainment and Licensing segment, the timing of revenue recognition for minimum guarantees that the Company receives from licensees is impacted by the New Revenue Standard.  Prior to the adoption of ASC 606, for licenses of the Company’s brands that are subject to minimum guaranteed license fees, the Company recognized the difference between the minimum guaranteed amount and the actual royalties earned from licensee merchandise sales (“shortfalls”) at the end of the contract period, which was in the fourth quarter for most of the Company’s licensee arrangements. In periods following January 1, 2018, minimum guaranteed amounts will be recognized on a straight-line basis over the license period. While the impact of this change will not be material to the year, it will impact the timing of revenue recognition within the Company’s Entertainment and Licensing segment such that under ASC 606, less revenues will be recorded in the fourth quarter and more revenues will be recorded within the first, second, and third quarters. No other areas of the Company’s business were materially impacted by the New Revenue Standard.

 

In January 2018, the FASB issued Accounting Standards Update No. 2017-01(“ASU 2017-01”),  Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard clarifies the definition of a business with the objective of providing guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. For public companies, this standard is effective for annual reporting periods beginning after December 15, 2017. The Company adopted ASU 2017-01 in the second 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 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 FASB issued Accounting Standards Update No. 2017-07 (ASU 2017-07), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  The standard requires companies to present the service cost component of net benefit cost in the income statement line items where they report compensation cost. Companies will present all other components of net benefit cost outside operating income, if this subtotal is presented. For public companies, this standard was effective for annual reporting periods beginning after December 15, 2017, and early adoption was permitted. The Company adopted this standard in the first quarter of 2018 and the adoption of this standard did not have a material impact on the Company’s results or consolidated financial statements in the first half of 2018.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments. The new guidance is intended to reduce diversity in practice across all industries, in how certain transactions are classified in the statement of cash flows. ASU 2016-15 was effective for public companies for fiscal years beginning after December 15, 2017. The Company adopted this standard in 2018 and the adoption of this standard did not have an impact on the Company’s statement of cash flows for the six-month periods ended July 1, 2018 and July 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 the first quarter of 2018 and the adoption did not have an impact on the Company’s results or consolidated financial statements.  

 

(2) Revenue Recognition

 

Revenue Recognition

 


 

Revenue is recognized when control of the promised goods is transferred to the customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods.  The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.

Toy and Games

The majority of the Company’s revenues are derived from sales of finished products to customers.  Revenues from sales of finished products to customers accounted for 91% and 93% of the Company’s revenues for the six-month periods ended July 1, 2018 and July 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 July 1, 2018 and July 2, 2017 these costs were approximately $42,400 and $37,500, respectively, and for the six-month periods ended July 1, 2018 and July 2, 2017, these costs were approximately $83,900 and $74,100, respectively.  The Company offers various discounts, rebates, allowances, returns, and markdowns to its customers, (collectively, “allowances”), all of which are considered when determining the transaction price.  Certain allowances are fixed and determinable at the time of sale and are recorded at the time of sale as a reduction to revenues.  Other allowances can vary depending on future outcomes such as customer sales volume (“variable consideration”).  The Company estimates the amount of variable consideration using the expected value method.  In estimating the amount of variable consideration using the expected value method, the Company considers various factors including but not limited to: customer terms, historical experience, any expected deviations from historical experience, and existing or expected market conditions.  The Company then records an estimate of variable consideration as a reduction to revenues at the time of sale.  The Company adjusts its estimate of variable consideration at least quarterly or when facts and circumstances used in the estimation process may change.  Historically, adjustments to estimated variable consideration have not been material.

Entertainment and Licensing

 


 

Revenues within the Company’s Entertainment and Licensing segment, which accounted for 8% and 6% of the Company’s revenues for the six-month periods ended July 1, 2018 and July 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 July 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 performance obligations other than delivery of the currency via its platform providers.  The Company controls all aspects of the goods delivered to the consumer.  The third-party platform providers are providing only the service of hosting and administering receipt from the end users.  The Company is the principal in the arrangement and 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 were $41,380, and $10,261 as of July 1, 2018 and December 31, 2017, respectively, and the changes in deferred revenues are not material to the Company’s consolidated statement of operations for the six-months ended July 1, 2018 and July 2, 2017. The Company records contract assets in the case of minimum guarantees that are being recognized ratably over the term of the respective license periods.  At July 1, 2018 and July 2, 2017, these contract assets were not material to the Company’s consolidated balance sheets.

Accounts Receivable and Allowance for Doubtful Accounts

 


 

The Company’s accounts receivable on the consolidated balance sheets as of July 1, 2018, July 2, 2017 and December 31, 2017 are primarily from contracts with customers.  In the six-months ended July 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 six-month period ended July 2, 2017 or the quarters ended on July 1, 2018 and July 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 11, Segment Reporting, for further information.

  

 

(3) Asset Acquisition

 

On June 12, 2018, the Company completed the acquisition of Saban Properties’ Power Rangers and other Entertainment Assets. The Company accounted for the acquisition as an asset acquisition based on the guidance in ASC 805-50-30-3, which uses the cost accumulation and allocation method. As such, the Company included acquisition costs in its calculation of the purchase price to be allocated to the assets acquired.

 

The total purchase price for the assets was $535,850, consisting of the following:

  

 

 

 

 

Cash Consideration:

 

To seller (1)

$

152,000

Held in escrow (2)

 

25,000

Market value of stock issued to seller (3)

 

280,397

Deferred purchase price due in January 2019 (4)

 

75,000

 

 

532,397

Acquisition costs

 

1,973

Other adjustment

 

1,480

Total Purchase Price to be allocated

$

535,850

 

1.             The Company previously paid Saban Brands $22,250 for the Power Rangers master toy license agreement announced in February 2018 and those amounts were credited to, and included above, in the purchase price.

2.             The $25,000 was placed into an escrow account to support customary indemnification obligations of Saban Properties, and is considered restricted cash within cash and cash equivalents on the balance sheet with an offsetting liability included in other current liabilities. One-half of the $25,000 in escrow is scheduled to be released on January 3, 2019, and the remaining half to be released on the one-year anniversary of the closing date, less any claim amounts deducted from the escrow prior to those dates.

3.             The Company issued 3,074,190 shares of Hasbro common stock to Saban Properties, valued at $280,397.

4.             An additional $75,000 will be paid in January 2019 with no contingencies.

 

The total purchase price was allocated on a relative fair value basis as follows:

•              $534,370 was recorded as an intangible asset – Power Rangers IP rights, which will be amortized over a period of 25 years;

•              $7,884 as current assets;

•              $325 as capitalized production costs; and

 


 

•              $6,729 as other current liabilities.

  

 

(4) Earnings (Loss) Per Share

 

Net earnings per share data for the quarters and six-month periods ended July 1, 2018 and July 2, 2017 were computed as follows:

 

 

2018

 

2017

Quarter

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings

$

60,299

 

 

60,299

 

 

67,723

 

 

67,723

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

125,711

 

 

125,711

 

 

125,263

 

 

125,263

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

   Options and other share-based awards

 

-

 

 

624

 

 

-

 

 

2,104

Equivalent Shares

 

125,711

 

 

126,335

 

 

125,263

 

 

127,367

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share

$

0.48

 

 

0.48

 

 

0.54

 

 

0.53

 

 

2018

 

2017

Six Months

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings (loss)

$

(52,193)

 

 

(52,193)

 

 

136,322

 

 

136,322

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

125,392

 

 

125,392

 

 

125,221

 

 

125,221

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

     Options and other share-based awards

 

-

 

 

-

 

 

-

 

 

2,075

Equivalent Shares

 

125,392

 

 

125,392

 

 

125,221

 

 

127,296

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share

$

(0.42)

 

 

(0.42)

 

 

1.09

 

 

1.07

 

For the quarters ended July 1, 2018 and July 2, 2017, options and restricted stock units totaling 1,214 and 453, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive. For the six-month periods ended July 1, 2018 and July 2, 2017, options and restricted stock units totaling 3,127 and 546, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive. Of this amount 1,921 would have been included in the calculation of diluted shares had the Company not had a net loss in the six month period ended July 1, 2018. Assuming that these awards and options were included, under the treasury stock method, they would have resulted in an additional 823 shares being included in the diluted earnings per share calculation for the six month period ended July 1, 2018. 

 

(5) Other Comprehensive Earnings (Loss)

 

Components of other comprehensive earnings (loss) are presented within the consolidated statements of comprehensive earnings (loss). The following table presents the related tax effects on changes in other comprehensive earnings (loss) for the quarter and six-month periods ended July 1, 2018 and July 2, 2017.

 

  

 

 


 

 

 

Quarter Ended

 

Six Months Ended

 

 

July 1,

 

July 2,

 

July 1,

 

July 2,

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings (loss), tax effect:

 

 

 

 

 

 

 

 

 

 

 

Tax (expense) benefit on unrealized holding gains (losses)

$

(25)

 

 

(148)

 

 

16

 

 

(130)

Tax (expense) benefit on cash flow hedging activities

  

(5,669)

 

 

(1,074)

 

 

311

 

 

4,236

Tax benefit on changes in unrecognized pension amounts

 

-

 

 

-

 

 

7,565

 

 

-

Reclassifications to earnings, tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit on cash flow hedging activities

 

(114)

 

 

(640)

 

 

(908)

 

 

(1,009)

 

Tax benefit on unrecognized pension and

 

 

 

 

 

 

 

 

 

 

 

 

postretirement amounts reclassified to the

 

 

 

 

 

 

 

 

 

 

 

  

consolidated statements of operations

 

(729)

 

 

(822)

 

 

(1,257)

 

 

(1,644)

Total tax effect on other comprehensive earnings (loss)

$

(6,537)

 

 

(2,684)

 

 

5,727

 

 

1,453

 

Changes in the components of accumulated other comprehensive earnings (loss) for the six months ended July 1, 2018 and July 2, 2017 are as follows:

  

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

Holding

 

 

 

 

Total

 

 

 

 

Gains

 

Gains on

 

Foreign

 

Accumulated

 

Pension and

 

(Losses) on

 

Available-

 

Currency

 

Other

 

Postretirement

 

Derivative

 

for-Sale

 

Translation

 

Comprehensive

 

Amounts

 

Instruments

 

Securities

 

Adjustments

 

Loss

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

$

(110,971)

 

 

(32,827)

 

 

1,034

 

 

(96,661)

 

 

(239,425)

Adoption of ASU 2018-02

 

(18,065)

 

 

(3,660)

 

 

222

 

 

-

 

 

(21,503)

Current period other comprehensive earnings (loss)

 

(21,726)

 

 

25,432

 

 

(56)

 

 

(37,798)

 

 

(34,148)

Balance at July 1, 2018

$

(150,762)

 

 

(11,055)

 

 

1,200

 

 

(134,459)

 

 

(295,076)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 25, 2016

$

(118,401)

 

 

51,085

 

 

1,424

 

 

(128,678)

 

 

(194,570)

Current period other comprehensive earnings (loss)

 

2,897

 

 

(63,981)

 

 

229

 

 

28,812

 

 

(32,043)

Balance at July 2, 2017

$

(115,504)

 

 

(12,896)

 

 

1,653

 

 

(99,866)

 

 

(226,613)

 

At July 1, 2018, the Company had remaining net deferred gains on foreign currency forward contracts, net of tax, of $8,953 in accumulated other comprehensive loss ("AOCE"). These instruments hedge payments related to inventory purchased in the second quarter of 2018 or forecasted to be purchased during the remainder of 2018 and, to a lesser extent, 2019 through 2022, intercompany expenses expected to be paid or received during 2018 and 2019, television and movie production costs paid in 2018 or expected to be paid in 2018 or 2019 and cash receipts for sales made at the end of the second quarter 2018 or forecasted to be made in the remainder of 2018 and, to a lesser extent, 2019 through 2020. These amounts will be reclassified into the consolidated statements of operations upon the sale of the related inventory or recognition of the related sales or expenses. 

 

In addition to foreign currency forward contracts, the Company entered into hedging contracts on future interest payments related to the long-term notes due 2021 and 2044.  At the date of debt issuance, these contracts were terminated and the fair value on the date of settlement was deferred in AOCE and is being amortized to interest expense over the life of the related notes using the effective interest rate method. At July 1, 2018, deferred losses, net of tax, of $20,008 related to these instruments remained in AOCE. For the quarters ended July 1, 2018 and July 2, 2017, previously deferred losses of $449 and $450 were reclassified from AOCE to net earnings, respectively. For the six-month periods ended July 1, 2018 and July 2, 2017, previously deferred losses of $899 and $934 were reclassified from AOCE to net earnings, respectively.

 

 


 

Of the amount included in AOCE at July 1, 2018, the Company expects net gains of approximately $6,028 to be reclassified to the consolidated statements of operations within the next 12 months. However, the amount ultimately realized in earnings is dependent on the fair value of the hedging instruments on the settlement dates.

 

(6) Financial Instruments

 

The Company's financial instruments include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and certain accrued liabilities. At July 1, 2018, July 2, 2017 and December 31, 2017, the carrying cost of these instruments approximated their fair value. The Company's financial instruments at July 1, 2018, July 2, 2017 and December 31, 2017 also include certain assets and liabilities measured at fair value (see Notes 8 and 10) as well as long-term borrowings. The carrying costs, which are equal to the outstanding principal amounts, and fair values of the Company's long-term borrowings as of July 1, 2018, July 2, 2017 and December 31, 2017 are as follows:

 

 

July 1, 2018

 

July 2, 2017

 

December 31, 2017

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

6.35% Notes Due 2040

$

500,000

 

 

557,250

 

 

500,000

 

 

614,800

 

 

500,000

 

 

601,800

3.50% Notes Due 2027

 

500,000

 

 

464,600

 

 

-

 

 

-

 

 

500,000

 

 

488,300

6.30% Notes Due 2017

 

-

 

 

-

 

 

350,000

 

 

353,115

 

 

-

 

 

-

5.10% Notes Due 2044

 

300,000

 

 

287,730

 

 

300,000

 

 

325,500

 

 

300,000

 

 

313,320

3.15% Notes Due 2021

 

300,000

 

 

297,960

 

 

300,000

 

 

307,230

 

 

300,000

 

 

302,640

6.60% Debentures Due 2028

 

109,895

 

 

127,094

 

 

109,895

 

 

127,940

 

 

109,895

 

 

131,390

Total long-term debt

$

1,709,895

 

 

1,734,634

 

 

1,559,895

 

 

1,728,585

 

 

1,709,895

 

 

1,837,450

Less: Current portion

 

-

 

 

-

 

 

350,000

 

 

353,115

 

 

-

 

  

-

Less: Deferred debt expenses

 

15,545

 

 

-

 

 

10,781

 

 

-

 

 

16,286

 

 

-

Long-term debt

$

1,694,350

 

 

1,734,634

 

 

1,199,114

 

 

1,375,470

 

 

1,693,609

 

 

1,837,450

 

Current portion of long-term debt at July 2, 2017 of $349,916, as shown on the consolidated balance sheet represents the $350,000 principal of 6.30% notes less $84 of deferred debt expenses.

 

The fair values of the Company's long-term debt are considered Level 3 fair values (see Note 8 for further discussion of the fair value hierarchy) and are measured using the discounted future cash flows method. In addition to the debt terms, the valuation methodology includes an assumption of a discount rate that approximates the current yield on a similar debt security. This assumption is considered an unobservable input in that it reflects the Company's own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believes that this is the best information available for use in the fair value measurement.

  

 

(7) Income Taxes

 

The Company and its subsidiaries file income tax returns in the United States and various state and international jurisdictions. In the normal course of business, the Company is regularly audited by U.S. federal, state and local and international tax authorities in various tax jurisdictions.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act made broad and complex changes to the U.S. tax code which impacted 2017 including, but not limited to, reducing the U.S. federal corporate tax rate and requiring a one-time tax on certain unrepatriated earnings of foreign subsidiaries.

 


 

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) established a one-year measurement period to complete the accounting for the ASC 740 income tax effects of the Tax Act.  An entity recognizes the impact of those amounts for which the accounting is complete.  For matters that have not been completed, provisional amounts are recorded to the extent they can be reasonably estimated.  For amounts for which a reasonable estimate cannot be determined, no adjustment is made until such estimate can be completed.  As a result, the Company recorded a one-time tax expense of $47,800 in the first quarter of 2018 which reversed certain discrete benefits recorded in 2017 as well as increased our provisional deemed repatriation tax liability. No adjustments were made to the provisional amounts during the second quarter of 2018.

The Company is no longer subject to U.S. federal income tax examinations for years before 2013. With few exceptions, the Company is no longer subject to U.S. state or local and non-U.S. income tax examinations by tax authorities in its major jurisdictions for years before 2012. The Company is currently under income tax examination in several U.S. state and local and non-U.S. jurisdictions.       

 

(8) Fair Value of Financial Instruments

 

The Company measures certain financial instruments at fair value. The fair value hierarchy consists of three levels: Level 1 fair values are based on quoted market prices in active markets for identical assets or liabilities that the entity has the ability to access; Level 2 fair values are those based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities; and Level 3 fair values are based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Accounting standards permit entities to measure many financial instruments and certain other items at fair value and establish presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities. The Company has elected the fair value option for certain available-for-sale investments. At July 1, 2018, July 2, 2017 and December 31, 2017, these investments totaled $24,219, $23,967 and $24,436, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The Company recorded net (losses) gains of $(342) and $106 on these investments in other (income) expense, net for the quarter and six months ended July 1, 2018, respectively, related to the change in fair value of such instruments.  For the quarter and six-month periods ended July 2, 2017, the Company recorded net gains of $384 and $1,015, respectively, in other (income) expense, net, related to the change in fair value of such instruments.

 

 


 

At July 1, 2018, July 2, 2017 and December 31, 2017, the Company had the following assets and liabilities measured at fair value in its consolidated balance sheets (excluding assets for which the fair value is measured using net asset value per share):

 

Fair Value Measurements Using:

 

 

 

 

Quoted

 

 

 

 

 

 

 

 

 

 

Prices in

 

 

 

 

 

 

 

 

 

 

Active

 

 

 

 

 

 

 

 

 

 

Markets

 

Significant

 

 

 

 

 

 

 

for

 

Other

 

Significant

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Fair

 

Assets

 

Inputs

 

Inputs

 

Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

July 1, 2018

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

3,054

 

 

3,054

 

 

-

 

 

-

Derivatives

 

22,551

 

 

-

 

 

22,551

 

 

-

Total assets

$

25,605

 

 

3,054

 

 

22,551

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

5,191

 

 

-

 

 

5,191

 

 

-

Option agreement

 

23,546

 

 

-

 

 

-

 

 

23,546

Total liabilities

$

28,737

 

 

-

 

 

5,191

 

 

23,546

 

 

 

 

 

 

 

 

 

 

 

 

July 2, 2017

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

4,096

 

 

4,096

 

 

-

 

 

-

Derivatives

 

25,372

 

 

-

 

 

25,372

 

 

-

Total assets

$

29,468

 

 

4,096

 

 

25,372

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

22,244

 

 

-

 

 

22,244

 

 

-

Option agreement

 

28,500

 

 

-

 

 

-

 

 

28,500

Total liabilities

$

50,744

 

 

-

 

 

22,244

 

 

28,500

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

3,126

 

 

3,126

 

 

-

 

 

-

Derivatives

 

12,226

 

 

-

 

 

12,226

 

 

-

Total assets

$

15,352

 

 

3,126

 

 

12,226

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

23,051

 

 

-

 

 

23,051

 

 

-

Option agreement

 

23,980

 

 

-

 

 

-

 

 

23,980

Total Liabilities

$

47,031

 

 

-

 

 

23,051

 

 

23,980

 

Available-for-sale securities include equity securities of one company quoted on an active public market.

 

 


 

The Company's derivatives consist of foreign currency forward contracts. The Company used current forward rates of the respective foreign currencies to measure the fair value of these contracts. The Company’s option agreement relates to an equity method investment in Discovery Family Channel (“Discovery”). The option agreement is included in other liabilities at July 1, 2018, July 2, 2017 and December 31, 2017, and is valued using an option pricing model based on the fair value of the related investment.  Inputs used in the option pricing model include the volatility and fair value of the underlying company which are considered unobservable inputs as they reflect the Company's own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believes that this is the best information available for use in the fair value measurement. There were no changes in these valuation techniques during the six-month period ended July 1, 2018.

 

The following is a reconciliation of the beginning and ending balances of the fair value measurements of the Company's financial instruments which use significant unobservable inputs (Level 3):

 

 

2018

 

2017

Balance at beginning of year

$

(23,980)

 

 

(28,770)

Gain from change in fair value

 

434

 

 

270

Balance at end of second quarter

$

(23,546)

 

 

(28,500)

 

In addition to the above, the Company has three investments for which the fair value is measured using net asset value per share. At July 1, 2018, July 2, 2017 and December 31, 2017, these investments had fair values of $24,219, $23,967 and $24,436, respectively. Two of the investments have net asset values that are predominantly based on underlying investments which are traded on an active market and are redeemable within 45 days. The third investment invests in hedge funds which are generally redeemable on a quarterly basis with 30 – 90 days’ notice.

 

(9) Pension and Postretirement Benefits

 

The components of the net periodic cost of the Company's defined benefit pension and other postretirement plans for the quarter and six-month periods ended July 1, 2018 and July 2, 2017 are as follows:

 

 

Quarter Ended

 

Pension

 

Postretirement

 

July 1,

 

July 2,

 

July 1,

 

July 2,

 

2018

 

2017

 

2018

 

2017

Service cost

$

667

 

 

921

 

 

189

 

 

173

Interest cost

 

3,980

 

 

4,430

 

 

293

 

 

295

Expected return on assets

 

(5,174)

 

 

(5,880)

 

 

-

 

 

-

Net amortization and deferrals

 

2,965

 

 

2,519

 

 

43

 

 

-

Net periodic benefit cost

$

2,438

 

 

1,990

 

 

525

 

 

468

 

 

Six Months Ended

 

Pension

 

Postretirement

 

July 1,

 

July 2,

 

July 1,

 

July 2,

 

2018

 

2017

 

2018

 

2017

Service cost

$

1,352

 

 

1,873

 

 

377

 

 

345

Interest cost

 

7,996

 

 

9,155

 

 

585

 

 

590

Expected return on assets

 

(10,379)

 

 

(12,161)

 

 

-

 

 

-

Net amortization and deferrals

 

5,942

 

 

5,213

 

 

85

 

 

-

Net periodic benefit cost

$

4,911

 

 

4,080

 

 

1,047

 

 

935

 

 


 

During the six months ended July 1, 2018, the Company made cash contributions of $540 to its defined benefit pension plans. During fiscal 2018, the Company expects to make cash contributions to its defined benefit pension plans of approximately $1,300 in the aggregate.

 

In February 2018, the Compensation Committee of the Company’s Board of Directors approved a resolution to terminate the Company’s U.S. defined benefit pension plan (“Plan”).  During the first quarter of 2018 the Company commenced the plan termination process and expects to complete the transfer of the Plan’s assets to a third-party administrator over a period of eighteen months.  The decision to terminate the Plan follows the 2015 decision to freeze benefits being accrued covering non-union employees after the sale of the Company’s manufacturing facility in East Longmeadow, MA. Benefits covering non-union employees were frozen in December 2007.

 

In connection with the decision to terminate the Plan, the Company remeasured the projected benefit obligation based on the expected Plan termination costs. This remeasurement utilized a discount rate of 3.2% compared to the discount rate of 3.7% utilized in the December 31, 2017 measurement and resulted in an increase in the projected benefit obligation of $35,192 with offsetting amounts recorded to accumulated other comprehensive losses and deferred taxes. Upon settlement of the pension liability, the Company will reclassify the related pension losses currently recorded to accumulated other comprehensive loss, to the consolidated statements of operations.

  

 

(10) Derivative Financial Instruments

 

Hasbro uses foreign currency forward contracts to mitigate the impact of currency rate fluctuations on firmly committed and projected future foreign currency transactions. These over-the-counter contracts, which hedge future currency requirements related to purchases of inventory, product sales and other cross-border transactions not denominated in the functional currency of the business unit, are primarily denominated in United States and Hong Kong dollars, and Euros. All contracts are entered into with a number of counterparties, all of which are major financial institutions. The Company believes that a default by a single counterparty would not have a material adverse effect on the financial condition of the Company. Hasbro does not enter into derivative financial instruments for speculative purposes.

 

Cash Flow Hedges

 

The Company uses foreign currency forward contracts to reduce the impact of currency rate fluctuations on firmly committed and projected future foreign currency transactions. All of the Company's designated foreign currency forward contracts are considered to be cash flow hedges. These instruments hedge a portion of the Company's currency requirements associated with anticipated inventory purchases, product sales and other cross-border transactions in 2018 through 2022.

 

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

  

 

July 1, 2018

 

July 2, 2017

 

December 31, 2017

 

Notional

 

Fair

 

Notional

 

Fair

 

Notional

 

Fair

Hedged transaction

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

Inventory purchases

$

647,255

 

 

10,248

 

 

942,896

 

 

259

 

 

756,673

 

 

(13,695)

Sales

 

342,123

 

 

11,291

 

 

618,755

 

 

15,229

 

 

423,315

 

 

16,144

Royalties and Other

 

151,689

 

 

(4,575)

 

 

308,407

 

 

(9,545)

 

 

196,889

 

 

(10,383)

Total

$

1,141,067

 

 

16,964

 

 

1,870,058

 

&