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 March 31, 2019

or

[ ]  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 every Interactive Data File required to be submitted 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 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 [  ]

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 April 22, 2019 was 125,854,116.

 

 


 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(Thousands of Dollars Except Share Data)

 

(Unaudited)

 

 

 

 

March 31,

 

April 1,

 

December 30,

 

 

 

 

2019

 

2018

 

2018

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

  

Cash and cash equivalents

$

1,196,634

 

 

1,598,944

 

 

1,182,371

 

Accounts receivable, less allowance for doubtful accounts of $12,100

 

 

 

 

 

 

 

 

 

 

$94,300 and $9,100

 

638,417

 

 

612,698

 

 

1,188,052

  

Inventories

 

491,751

 

 

517,439

 

 

443,383

  

Prepaid expenses and other current assets

 

305,056

 

 

292,756

 

 

268,698

  

  

  

Total current assets

 

2,631,858

 

 

3,021,837

 

 

3,082,504

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation of $484,200

 

 

 

 

 

 

 

 

 

 

$436,600 and $462,700

 

395,624

 

 

262,418

 

 

256,473

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

  

Goodwill

 

485,528

 

 

573,574

 

 

485,881

  

Other intangible assets, net of accumulated amortization of $747,800

 

 

 

 

 

 

 

 

 

 

 $911,300 and $721,700

 

682,063

 

 

210,904

 

 

693,842

  

Other

 

739,700

 

 

660,339

 

 

744,288

  

 

Total other assets

 

1,907,291

 

 

1,444,817

 

 

1,924,011

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Total assets

$

4,934,773

 

 

4,729,072

 

 

5,262,988

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

  

Short-term borrowings

$

13,409

 

 

21,611

 

 

9,740

  

Accounts payable

 

234,262

 

 

256,433

 

 

333,521

  

Accrued liabilities

 

701,054

 

 

574,482

 

 

931,063

  

 

Total current liabilities

 

948,725

 

 

852,526

 

 

1,274,324

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,695,462

 

 

1,693,977

 

 

1,695,092

Other liabilities

 

636,055

 

 

611,210

 

 

539,086

  

 

Total liabilities

 

3,280,242

 

 

3,157,713

 

 

3,508,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2019, April 1, 2018,

 

 

 

 

 

 

 

 

 

 

and December 30, 2018

 

104,847

 

 

104,847

 

 

104,847

  

Additional paid-in capital

 

1,269,230

 

 

1,053,368

 

 

1,275,059

  

Retained earnings

 

4,125,686

 

 

4,090,637

 

 

4,184,374

  

Accumulated other comprehensive loss

 

(282,339)

 

 

(292,395)

 

 

(294,514)

  

Treasury stock, at cost; 83,830,809 shares at March 31, 2019; 84,706,373

 

 

 

 

 

 

 

 

 

 

shares at April 1, 2018; and 83,565,598 shares at December 30, 2018

 

(3,562,893)

 

 

(3,385,098)

 

 

(3,515,280)

  

 

Total shareholders' equity

 

1,654,531

 

 

1,571,359

 

 

1,754,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

4,934,773

 

 

4,729,072

 

 

5,262,988

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

March 31,

 

April 1,

 

 

 

 

2019

 

2018

Net revenues

 

$

732,510

 

 

716,341

Costs and expenses:

 

 

 

 

 

 

  

Cost of sales

 

 

259,987

 

 

255,187

  

Royalties

 

 

59,888

 

 

69,652

  

Product development

 

 

56,260

 

 

57,384

  

Advertising

 

 

76,604

 

 

68,016

  

Amortization of intangibles

 

 

11,816

 

 

6,478

  

Program production cost amortization

 

 

6,575

 

 

12,034

  

Selling, distribution and administration

 

 

225,253

 

 

328,009

  

  

Total costs and expenses

 

 

696,383

 

 

796,760

Operating profit (loss)

 

 

36,127

 

 

(80,419)

Non-operating (income) expense:

 

 

 

 

 

 

  

Interest expense

 

 

22,314

 

 

22,809

  

Interest income

 

 

(7,682)

 

 

(6,248)

  

Other income, net

 

 

(8,100)

 

 

(8,592)

  

 

Total non-operating expense, net

 

 

6,532

 

 

7,969

Earnings (loss) before income taxes

 

 

29,595

 

 

(88,388)

Income tax expense

 

 

2,868

 

 

24,104

Net earnings (loss)

 

$

26,727

 

 

(112,492)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share:

 

 

 

 

 

  

Basic

 

$

0.21

 

 

(0.90)

  

Diluted

 

$

0.21

 

 

(0.90)

Cash dividends declared per common share

 

$

0.68

 

 

0.63

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 


 

 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Earnings (Loss)

 

(Thousands of Dollars)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

March 31,

 

April 1,

 

 

 

 

2019

 

2018

Net earnings (loss)

 

$

26,727

 

 

(112,492)

Other comprehensive earnings (loss):

 

 

 

 

 

 

  

Foreign currency translation adjustments

 

 

6,993

 

 

12,829

  

Unrealized holding gains (losses) on available-for-sale securities,

 

 

265

 

 

(143)

  

  

net of tax

 

 

 

 

 

 

  

Net gains (losses) on cash flow hedging activities, net of tax

 

 

6,592

 

 

(25,270)

 

Changes in unrecognized pension amounts, net of tax

 

 

-

 

 

(26,058)

  

Reclassifications to earnings (loss), net of tax:

 

 

 

 

 

 

  

 

Net (gains) losses on cash flow hedging activities

 

 

(2,814)

 

 

5,355

  

 

Amortization of unrecognized pension and postretirement amounts

 

 

1,139

 

 

1,820

Total other comprehensive earnings (loss), net of tax

 

 

12,175

 

 

(31,467)

Comprehensive earnings (loss)

 

$

38,902

 

 

(143,959)

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 


 

  

HASBRO, INC. AND SUBSIDIARIES

  

Consolidated Statements of Cash Flows

  

(Thousands of Dollars)

  

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

April 1,

 

 

 

 

 

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

 

  

Net earnings (loss)

 

$

26,727

 

 

(112,492)

  

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

 

  

 

Depreciation of plant and equipment

 

 

27,028

 

 

26,221

 

 

Amortization of intangibles

 

 

11,816

 

 

6,478

  

 

Program production cost amortization

 

 

6,575

 

 

12,034

  

 

Deferred income taxes

 

 

11,795

 

 

(16,437)

  

 

Stock-based compensation

 

 

5,285

 

 

10,291

 

 

Other non-cash items

 

 

(3,503)

 

 

(4,971)

Change in operating assets and liabilities net of acquired balances:

 

 

 

 

 

 

  

 

Decrease in accounts receivable

 

 

558,888

 

 

808,367

  

 

Increase in inventories

 

 

(50,109)

 

 

(76,516)

  

 

Increase in prepaid expenses and other current assets

 

 

(33,934)

 

 

(78,540)

  

 

Program production costs

 

 

(17,728)

 

 

(11,398)

  

 

Decrease in accounts payable and accrued liabilities

 

 

(273,955)

 

 

(297,669)

 

 

Net deemed repatriation tax

 

 

-

 

 

75,805

  

 

Other

 

 

(4,391)

 

 

(23,434)

  

 

 

Net cash provided by operating activities

 

 

264,494

 

 

317,739

Cash flows from investing activities:

 

 

 

 

 

 

  

 

Additions to property, plant and equipment

 

 

(25,201)

 

 

(28,235)

  

 

Other

 

 

(1,800)

 

 

2,007

  

 

 

Net cash utilized by investing activities

 

 

(27,001)

 

 

(26,228)

Cash flows from financing activities:

 

 

 

 

 

 

  

 

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

 

 

3,419

 

 

(133,698)

  

 

Purchases of common stock

 

 

(47,479)

 

 

(38,126)

  

 

Stock-based compensation transactions

 

 

2,335

 

 

19,518

  

 

Dividends paid

 

 

(79,274)

 

 

(70,781)

 

 

Payments related to tax withholding for share-based compensation

 

 

(11,880)

 

 

(52,637)

 

 

Deferred acquisition payments

 

 

(87,500)

 

 

-

  

 

 

Net cash utilized by financing activities

 

 

(220,379)

 

 

(275,724)

Effect of exchange rate changes on cash

 

 

(2,851)

 

 

1,923

Increase in cash and cash equivalents

 

 

14,263

 

 

17,710

Cash and cash equivalents at beginning of year

 

 

1,182,371

 

 

1,581,234

Cash and cash equivalents at end of period

 

$

1,196,634

 

 

1,598,944

 

 

 

 

 

 

 

 

 

 

Supplemental information

 

 

 

 

 

 

  

Cash paid during the period for:

 

 

 

 

 

 

  

 

Interest

 

$

28,576

 

 

28,699

  

 

Income taxes

 

$

13,019

 

 

42,481

 

 

 

 

 

 

 

 

 

  

See accompanying condensed notes to consolidated financial statements.

 

 

 

 

 

 

 


 

 

HASBRO, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

(Thousands of Dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

 

 

Total

 

 

 

 

 

 

Common

 

Additional

 

Retained

 

 Comprehensive  

 

Treasury

 

Shareholders'

 

 

 

 

 

 

Stock

 

Paid-in Capital

 

Earnings

 

Loss

 

Stock

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

$

104,847

 

 

1,050,605

 

 

4,260,222

 

 

(239,425)

 

 

(3,346,292)

 

$

1,829,957

 

 

 

 

Net earnings (loss)

 

-

 

 

-

 

 

(112,492)

 

 

-

 

 

-

 

 

(112,492)

 

 

 

 

Impact of adoption of ASU 2018-02

 

-

 

 

-

 

 

21,503

 

 

(21,503)

 

 

-

 

 

-

 

 

 

 

Other comprehensive loss

 

-

 

 

-

 

 

-

 

 

(31,467)

 

 

-

 

 

(31,467)

 

 

 

 

Stock-based compensation transactions

 

-

 

 

(7,528)

 

 

-

 

 

-

 

 

(15)

 

 

(7,543)

 

 

 

 

Purchases of common stock

 

-

 

 

-

 

 

-

 

 

-

 

 

(38,791)

 

 

(38,791)

 

 

 

 

Stock-based compensation expense

 

-

 

 

10,291

 

 

-

 

 

-

 

 

-

 

 

10,291

 

 

 

 

Dividends declared

 

-

 

 

-

 

 

(78,596)

 

 

-

 

 

-

 

 

(78,596)

 

 

 

Balance, April 1, 2018

$

104,847

 

 

1,053,368

 

 

4,090,637

 

 

(292,395)

 

 

(3,385,098)

 

$

1,571,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 30, 2018

$

104,847

 

 

1,275,059

 

 

4,184,374

 

 

(294,514)

 

 

(3,515,280)

 

$

1,754,486

 

 

 

 

Net earnings

 

-

 

 

-

 

 

26,727

 

 

-

 

 

-

 

 

26,727

 

 

 

 

Other comprehensive earnings

 

-

 

 

-

 

 

-

 

 

12,175

 

 

-

 

 

12,175

 

 

 

 

Stock-based compensation transactions

 

-

 

 

(11,114)

 

 

-

 

 

-

 

 

1,569

 

 

(9,545)

 

 

 

 

Purchases of common stock

 

-

 

 

-

 

 

-

 

 

-

 

 

(49,182)

 

 

(49,182)

 

 

 

 

Stock-based compensation expense

 

-

 

 

5,285

 

 

-

 

 

-

 

 

-

 

 

5,285

 

 

 

 

Dividends declared

 

-

 

 

-

 

 

(85,415)

 

 

-

 

 

-

 

 

(85,415)

 

 

 

Balance, March 31, 2019

$

104,847

 

 

1,269,230

 

 

4,125,686

 

 

(282,339)

 

 

(3,562,893)

 

$

1,654,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying 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 March 31, 2019 and April 1, 2018, and the results of its operations and cash flows and shareholder’s equity 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 March 31, 2019 and April 1, 2018 were each 13-week periods.

 

The results of operations for the quarter are not necessarily indicative of results to be expected for the full year, nor were those of the comparable 2018 period representative of those actually experienced for the full year 2018.

 

These condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).  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 with the SEC audited consolidated financial statements for the fiscal year ended December 30, 2018 in its Annual Report on Form 10-K (“2018 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 2018 Form 10-K with the exception of the accounting policies related to leases and derivatives and hedging.

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842), which requires lessees to recognize a right-of-use asset and a lease liability for virtually all leases. The liability is based on the present value of lease payments and the asset is based on the liability. For income statement purposes, a dual model was retained requiring leases to be either classified as operating or finance. Operating leases result in straight-line expense while finance leases result in a front-loaded expense pattern. Certain other quantitative and qualitative disclosures are also required. ASU 2016-02 is required for public companies for fiscal years beginning after December 15, 2018. ASU 2016-02 as originally issued required modified retrospective adoption. In July 2018, the FASB issued ASU 2018-11, which provides an alternative transition method in addition to the existing method by allowing entities to apply ASU 2016-02 as of the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted ASU-2016-02 on December 31, 2018 using the retrospective basis as provided in ASU 2018-11. No cumulative effect was recorded to retained earnings. The Company also elected certain practical expedients as provided under the standard. These included (i) the election not to reassess whether contracts existing at the adoption date contain a lease under the new definition of a lease under the standard; (ii) the election not to reassess the lease classification for existing leases as of the adoption date; (iii) the election not to reassess whether previously capitalized initial direct costs would qualify for capitalization under the standard; (iv) the election to use hindsight in determining the relevant lease terms for use in the capitalization of the lease liability; and (v) the election to use hindsight in reviewing the right-of-use assets for impairment. For all leases, the terms were evaluated, including extension and renewal options as well as the lease payments associated with the leases. As a result of the adoption of the standard, in the first quarter of 2019, the Company recorded right-of-use assets of $121,230 and lease liabilities of $139,520. The Company’s results of operations were not impacted by this standard. The adoption of this standard did not have an impact on the Company’s cash flows. For further details, see Note 10.

 


 

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 non-financial 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 adopted ASU 2017-12 in the first quarter of 2019 and the adoption of this standard did not have a material impact on the Company’s results or consolidated financial statements.

 

 

Recently Issued Accounting Pronouncements

In March 2019, the FASB issued Accounting Standards Update No. 2019-02 (ASU 2019-02) Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350) - Improvements to Accounting for Costs of Films and License Agreements for Program Materials. The amendments in this update align cost capitalization of episodic television series production costs with that of film production cost capitalization. In addition, this update addresses impairment testing procedures with regard to film groups, when a film or license agreement is expected to be monetized with other films and/or license agreements.  The intention of this update is to align accounting treatment with changes in production and distribution models within the entertainment industry and to provide increased transparency of information provided to users of financial statements about produced and licensed content.  For public companies, this standard is effective for annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the standard and the impact, if any, to its 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.

Contract Assets and Liabilities

Within our Entertainment, Licensing and Digital 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.  In addition, the Company may receive payments from its digital gaming business in advance of the recognition of the revenues. The Company defers revenues on these advanced payments until its performance obligation is satisfied.  The aggregate deferred revenues are recorded as liabilities and were $47,678, $7,940, and $50,759 as of March 31, 2019, April 1, 2018, and December 30, 2018, respectively, and the changes in deferred revenues are not material to the Company’s consolidated statement of operations for the quarters ended March 31, 2019 and April 1, 2018, respectively. 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 March 31, 2019 and April 1, 2018, these contract assets were not material to the Company’s consolidated balance sheets.

 


 

Disaggregation of revenues

The Company disaggregates its revenues from contracts with customers by segment: US and Canada, International, Entertainment, Licensing and Digital, 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 12, Segment Reporting, for further information. 

 

(3) Earnings (Loss) Per Share

 

Net earnings (loss) per share data for the quarters ended March 31, 2019 and April 1, 2018 were computed as follows:

 

 

2019

 

2018

Quarter

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings (loss)

$

26,727

 

 

26,727

 

 

(112,492)

 

 

(112,492)

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

126,287

 

 

126,287

 

 

125,073

 

 

125,073

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

   Options and other share-based awards

 

-

 

 

529

 

 

-

 

 

-

Equivalent Shares

 

126,287

 

 

126,816

 

 

125,073

 

 

125,073

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share

$

0.21

 

 

0.21

 

 

(0.90)

 

 

(0.90)

 

For the quarters ended March 31, 2019 and April 1, 2018, options and restricted stock units totaling 1,693 and 3,191, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been anti-dilutive. Of the 2018 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.            

 

(4) 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 quarters ended March 31, 2019 and April 1, 2018.

 

 

 

Quarter Ended

 

 

March 31,

 

April 1,

 

 

2019

 

2018

 

 

 

 

 

 

 

Other comprehensive earnings (loss), tax effect:

 

 

 

 

 

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

$

(77)

 

 

41

Tax (expense) benefit on cash flow hedging activities

 

(3)

 

 

5,980

Tax benefit on changes in unrecognized pension amounts

 

-

 

 

7,565

Reclassifications to earnings, tax effect:

 

 

 

 

 

 

Tax expense (benefit) on cash flow hedging activities

 

346

 

 

(794)

 

Tax benefit on unrecognized pension and postretirement

 

 

 

 

 

  

amounts reclassified to the consolidated statements of operations

 

(331)

 

 

(528)

Total tax effect on other comprehensive earnings (loss)

$

(65)

 

 

12,264

 

 


 

Changes in the components of accumulated other comprehensive earnings (loss) for the three months ended March 31, 2019 and April 1, 2018 are as follows:

  

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

Holding

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

 

 

 

Total

 

 

 

 

Gains

 

(Losses) on

 

Foreign

 

Accumulated

 

Pension and

 

(Losses) on

 

Available-

 

Currency

 

Other

 

Postretirement

 

Derivative

 

for-Sale

 

Translation

 

Comprehensive

 

Amounts

 

Instruments

 

Securities

 

Adjustments

 

Loss

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 30, 2018

$

(143,134)

 

 

1,549

 

 

(744)

 

 

(152,185)

 

 

(294,514)

Current period other comprehensive earnings (loss)

 

1,139

 

 

3,778

 

 

265

 

 

6,993

 

 

12,175

Balance at March 31, 2019

$

(141,995)

 

 

5,327

 

 

(479)

 

 

(145,192)

 

 

(282,339)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

Gains (Losses) on Derivative Instruments

 

At March 31, 2019, the Company had remaining net deferred gains on foreign currency forward contracts, net of tax, of $24,290 in accumulated other comprehensive loss ("AOCE"). These instruments hedge payments related to inventory purchased in the first quarter of 2019 or forecasted to be purchased during the remainder of 2019 through 2022, intercompany expenses expected to be paid or received during 2019, television and movie production costs paid in 2019, and cash receipts for sales made at the end of the first quarter of 2019 or forecasted to be made in the remainder of 2019 and, to a lesser extent, 2020 through 2021. These amounts will be reclassified into the consolidated statements of operations upon the sale of the related inventory or recognition of the related sales 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 March 31, 2019, deferred losses, net of tax of $18,963 related to these instruments remained in AOCE. For the quarters ended March 31, 2019 and April 1, 2018, losses of $450, were reclassified from AOCE to net earnings. 

 

Of the amount included in AOCE at March 31, 2019, the Company expects net gains of approximately $16,761 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.

 

(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 March 31, 2019, April 1, 2018 and December 30, 2018, the carrying cost of these instruments approximated their fair value. The Company's financial instruments at March 31, 2019, April 1, 2018 and December 30, 2018 also include certain assets and liabilities measured at fair value (see Notes 7 and 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 March 31, 2019, April 1, 2018 and December 30, 2018 are as follows:

 

 


 

 

March 31, 2019

 

April 1, 2018

 

December 30, 2018

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

6.35% Notes Due 2040

$

500,000

 

 

548,200

 

 

500,000

 

 

585,400

 

 

500,000

 

 

535,000

3.50% Notes Due 2027

 

500,000

 

 

479,450

 

 

500,000

 

 

468,000

 

 

500,000

 

 

457,350

5.10% Notes Due 2044

 

300,000

 

 

285,990

 

 

300,000

 

 

299,460

 

 

300,000

 

 

272,640

3.15% Notes Due 2021

 

300,000

 

 

301,440

 

 

300,000

 

 

300,480

 

 

300,000

 

 

297,600

6.60% Debentures Due 2028

 

109,895

 

 

129,445

 

 

109,895

 

 

128,006

 

 

109,895

 

 

123,346

Total long-term debt

$

1,709,895

 

 

1,744,525

 

 

1,709,895

 

 

1,781,346

 

 

1,709,895

 

 

1,685,936

Less: Deferred debt expenses

 

14,433

 

 

-

 

 

15,918

 

 

-

 

 

14,803

 

 

-

Long-term debt

$

1,695,462

 

 

1,744,525

 

 

1,693,977

 

 

1,781,346

 

 

1,695,092

 

 

1,685,936

 

         

The fair values of the Company's long-term debt are considered Level 3 fair values (see Note 7 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.

  

 

(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 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.

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.       

 

(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 March 31, 2019, April 1, 2018 and December 30, 2018, these investments totaled $24,188, $24,584 and $23,913, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The Company recorded net gains of $550 and $448 on these investments in other income, net for the quarters ended March 31, 2019 and April 1, 2018, respectively, related to the change in fair value of such instruments. 

 

 


 

At March 31, 2019, April 1, 2018 and December 30, 2018, 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)

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

975

 

 

975

 

 

-

 

 

-

Derivatives

 

32,296

 

 

-

 

 

32,296

 

 

-

Total assets

$

33,271

 

 

975

 

 

32,296

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

45

 

 

-

 

 

45

 

 

-

Option agreement

 

23,144

 

 

-

 

 

-

 

 

23,144

Total liabilities

$

23,189

 

 

-

 

 

45

 

 

23,144

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2018

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

2,941

 

 

2,941

 

 

-

 

 

-

Derivatives

 

2,960

 

 

-

 

 

2,960

 

 

-

Total assets

$

5,901

 

 

2,941

 

 

2,960

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

39,428

 

 

-

 

 

39,428

 

 

-

Option agreement

 

23,665

 

 

-

 

 

-

 

 

23,665

Total liabilities

$

63,093

 

 

-

 

 

39,428

 

 

23,665

 

 

 

 

 

 

 

 

 

 

 

 

December 30, 2018

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

914

 

 

914

 

 

-

 

 

-

Derivatives

 

26,076

 

 

-

 

 

26,076

 

 

-

Total assets

$

26,990

 

 

914

 

 

26,076

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

1,610

 

 

-

 

 

1,610

 

 

-

Option agreement

 

23,440

 

 

-

 

 

-

 

 

23,440

Total Liabilities

$

25,050

 

 

-

 

 

1,610

 

 

23,440

 

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 and zero-cost collar options. 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 March 31, 2019, April 1, 2018 and December 30, 2018, 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 three-month period ended March 31, 2019.

 

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):

 

 

2019

 

2018

Balance at beginning of year

$

(23,440)

 

 

(23,980)

Gain from change in fair value

 

296

 

 

315

Balance at end of first quarter

$

(23,144)

 

 

(23,665)

 

In addition to the above, the Company has three investments for which the fair value is measured using net asset value per share. At March 31, 2019, April 1, 2018 and December 30, 2018, these investments had fair values of $24,188, $24,584 and $23,913, 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.

 

(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 quarters ended March 31, 2019 and April 1, 2018 are as follows:

 

 

Quarter Ended

 

Pension

 

Postretirement

 

March 31,

 

April 1,

 

March 31,

 

April 1,

 

2019

 

2018

 

2019

 

2018

Service cost

$

1,037

 

 

685

 

 

178

 

 

188

Interest cost

 

2,205

 

 

4,016

 

 

316

 

 

292

Expected return on assets

 

(2,038)

 

 

(5,205)

 

 

-

 

 

-

Net amortization and deferrals

 

1,698

 

 

2,977

 

 

5

 

 

42

Net periodic benefit cost

$

2,902

 

 

2,473

 

 

499

 

 

522

 

During the three months ended March 31, 2019, the Company made cash contributions of $230 to its defined benefit pension plans. During fiscal 2019, the Company expects to make cash contributions to its defined benefit pension plans of approximately $1,600 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 in the third quarter of 2019.  The decision to terminate the Plan follows the 2015 decision to freeze benefits being accrued covering 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. Upon settlement of the pension liability, which is expected to occur in the second quarter of 2019, the Company will reclassify the related pension losses currently recorded to accumulated other comprehensive loss, to the consolidated statements of operations. As of March 31, 2019, the Company had unrecognized losses related to the Plan of $141,578. The Company will recognize this loss upon termination of the Plan, adjusted for the total required payout to plan participants which will be determined based on employee elections and market conditions present at the time of termination.

 

In connection with the decision to terminate the Plan, the Company remeasured the projected benefit obligation in the first quarter of 2018 based on the expected Plan termination costs. This remeasurement utilized a discount rate of 3.2% compared to the discount rate of 3.7% utilized in the December 31, 2017 measurement and resulted in an increase in the projected benefit obligation of $35,192 with offsetting amounts recorded to accumulated other comprehensive losses and deferred taxes.

  

 

(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 2019 through 2022.

 

At March 31, 2019, April 1, 2018 and December 30, 2018, the notional amounts and fair values of the Company's foreign currency forward contracts designated as cash flow hedging instruments were as follows:

  

 

March 31, 2019

 

April 1, 2018

 

December 30, 2018

 

Notional

 

Fair

 

Notional

 

Fair

 

Notional

 

Fair

Hedged transaction

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

Inventory purchases

$

486,999

 

 

21,649

 

 

718,925

 

 

(31,453)

 

 

468,305

 

 

15,089

Sales

 

263,221

 

 

8,358

 

 

375,441

 

 

7,323

 

 

298,194

 

 

11,232

Royalties and Other

 

26,422

 

 

190

 

 

178,896

 

 

(11,602)

 

 

26,341

 

 

(304)

Total

$

776,642

 

 

30,197

 

 

1,273,262

 

 

(35,732)

 

 

792,840

 

 

26,017

 

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 March 31, 2019, April 1, 2018 and December 30, 2018 as follows:

 

 


 

 

March 31,

 

April 1,

 

December 30,

 

2019

 

2018

 

2018

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

Unrealized gains

$

22,737

 

 

458

 

 

21,718

Unrealized losses

 

(2,008)

 

 

(405)

 

 

(972)

Net unrealized gains

$

20,729

 

 

53

 

 

20,746

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

Unrealized gains

$

9,752

 

 

5,996

 

 

6,173

Unrealized losses

 

(239)

 

 

(3,089)

 

 

(843)

Net unrealized gains

$

9,513

 

 

2,907

 

 

5,330

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

Unrealized gains

$

-

 

 

8,218

 

 

77

Unrealized losses

 

(45)

 

 

(30,826)

 

 

(136)

Net unrealized losses

$

(45)

 

 

(22,608)

 

 

(59)