Income Taxes

12 Months Ended

Dec. 29, 2019

The Tax Cuts and Jobs Act (the “Tax Act”) enacted on December 22, 2017 introduced significant changes to U.S. income tax law. Effective 2018, the Tax Act reduced the U.S. statutory tax rate from 35% to 21% and created new taxes on certain foreign-sourced earnings and certain related-party payments.

Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in our consolidated financial statements as of December 31, 2017. As the Company collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies, the Company made adjustments, over the course of 2018, to the provisional amounts including additional tax expense of $40,650, primarily related to adjustments to the transition tax. The accounting for the tax effects of the Tax Act was completed as of December 30, 2018.

The components of earnings before income taxes, determined by tax jurisdiction, are as follows:



	2019		2018	2017
United States	$	250,453	6,293	168,370
International	343,757		264,109	617,780
Total earnings before income taxes	$	594,210	270,402	786,150

Income taxes attributable to earnings before income taxes are:



	2019			2018		2017
Current
United States	$	41,355		12,805		202,374
State and local	5,528			5,644		2,926
International	41,829			42,613		72,138
	88,712			61,062		277,438
Deferred
United States	(20,139		)	(4,937	)	105,174
State and local	(1,438		)	(471	)	1,658
International	6,621			(5,686	)	5,273
	(14,956		)	(11,094	)	112,105
Total income taxes	$	73,756		49,968		389,543

A reconciliation of the statutory United States federal income tax rate to Hasbro’s effective income tax rate is as follows:



	2019		2018		2017
Statutory income tax rate	21.0	%	21.0	%	35.0	%
State and local income taxes, net	0.5		1.5		0.3
Tax on international earnings	(4.6	)	(11.4	)	(23.0	)
Change in unrecognized tax benefits	0.6		(7.9	)	1.0
Share-based compensation	(0.8	)	(4.0	)	(4.1	)
Tax Cuts and Jobs Act of 2017	—		15.0		39.4
Research and development tax credits	(0.7	)	(1.9	)	(0.5	)
Non-deductible goodwill impairment	—		2.0		—
Gains on integrated hedging instruments	(4.0	)	—		—
Other, net	0.4		4.2		1.5
	12.4	%	18.5	%	49.6	%

The components of deferred income tax expense (benefit) arise from various temporary differences and relate to items included in the consolidated statements of operations as well as items recognized in other comprehensive earnings. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 29, 2019 and December 30, 2018 are:



	2019			2018
Deferred tax assets:
Accounts receivable	$	26,973		29,094
Inventories	10,020			11,958
Loss and credit carryforwards	35,509			105,915
Operating leases	15,378			—
Operating expenses	23,686			21,213
Pension	6,206			11,543
Other compensation	27,633			35,418
Postretirement benefits	7,053			7,894
Interest rate hedge	5,202			5,607
Tax sharing agreement	3,096			4,015
Other	15,122			9,077
Gross deferred tax assets	175,878			241,734
Valuation allowance	(33,260		)	(36,311	)
Net deferred tax assets	142,618			205,423
Deferred tax liabilities:
Depreciation and amortization of long-lived assets	13,361			12,258
Equity method investment	17,674			15,113
Operating leases	11,936			—
Other	9,852			9,885
Deferred tax liabilities	52,823			37,256
Net deferred income taxes	$	89,795		168,167

The most significant amount of the carryforward relates to tax attributes of U.S. state net operating losses and tax credits. At December 29, 2019, the Company has loss and credit carryforwards of $35,509, which is a decrease of $70,406 from $105,915 at December 30, 2018. This decrease is primarily a result of a reclassification to reduce the Company's transition tax liability.

At December 29, 2019 and December 30, 2018, the Company’s net deferred income taxes are recorded in the consolidated balance sheets as follows:



	2019			2018
Other assets	92,401			174,077
Other liabilities	(2,606		)	(5,910	)
Net deferred income taxes	$	89,795		168,167

The Company has a valuation allowance for certain deferred tax assets at December 29, 2019 of $33,260, which is a decrease of $3,051 from $36,311 at December 30, 2018. The valuation allowance pertains to certain U.S. state and international loss and credit carryforwards, some of which have no expiration and others that would expire beginning in 2020.

We previously considered the earnings in our non-U.S. subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. The Tax Act eliminates the deferral of U.S. income tax on these foreign earnings by imposing a transition tax which is a one-time mandatory deemed repatriation tax. As a result we now intend to repatriate substantially all of our accumulated foreign earnings. The Company still has significant cash needs outside the United States and continues to consistently monitor and analyze its global working capital and cash requirements. However, tax reform gives companies more flexibility to manage cash globally. We have recorded $1,657 of foreign withholding and U.S. state income taxes as part of the provisional repatriation tax amount, which will be incurred due to certain future cash distributions. The Company has not finalized the timing of any actual cash distributions or the specific amounts and therefore we could still be subject to some additional foreign withholding taxes and U.S. state taxes. We will record these additional tax effects, if any, in the period that we complete our analysis and are able to make a reasonable estimate.

A reconciliation of unrecognized tax benefits, excluding potential interest and penalties, for the fiscal years ended December 29, 2019, December 30, 2018, and December 31, 2017 is as follows:



	2019			2018		2017
Balance at beginning of year	$	46,074		84,244		80,388
Gross increases in prior period tax positions	2,031			4,449		2,518
Gross decreases in prior period tax positions	—			(55,752	)	(28,653	)
Gross increases in current period tax positions	4,152			16,987		34,056
Decreases related to settlements with tax authorities	(12,037		)	(1,102	)	(1,375	)
Decreases from the expiration of statute of limitations	(3,569		)	(2,752	)	(2,690	)
Balance at end of year	$	36,651		46,074		84,244

Unrecognized tax benefits as of December 29, 2019, December 30, 2018 and December 31, 2017, were $36,651, $46,074, and $84,244, respectively, and are recorded within other liabilities in the Company's consolidated balance sheets. If recognized, these tax benefits would have affected our income tax provision for fiscal years 2019, 2018, and 2017, by approximately $36,000, $45,000, and $77,000, respectively.

During 2019, 2018, and 2017, the Company recognized $1,766, $3,101, and $2,431, respectively, of potential interest and penalties, which are included as a component of income taxes in the accompanying consolidated statements of operations. At December 29, 2019, December 30, 2018, and December 31, 2017, the Company had accrued potential interest and penalties of $5,547, $4,200, and $5,157, respectively.

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. 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.

In May 2019, a public referendum held in Switzerland approved Swiss Federal Act on Tax Reform and AHV Financing (TRAF) proposals previously approved by Swiss Parliament. The Swiss tax reform measures are effective on January 1, 2020. Changes in tax reform include the abolishment of preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level. The enacted changes in Swiss federal tax were not material to the Company’s financial statements. Swiss cantonal tax was enacted in December

2019. Due to the uncertain nature of the cantonal legislation, the Company is still assessing the transitional provision options it may elect; however, the pending legislation is not expected to have a material effect on the Company’s financial statements. We will continue to review TRAF as the Swiss authorities provide additional interpretive guidance on the new law and related transitional methodology.

The Company believes it is reasonably possible that a decrease of approximately $5,000 - $13,000 in gross unrecognized tax benefits may be necessary within the coming year as a result of expected tax return settlements and lapse of statute of limitations.