Income Taxes

12 Months Ended

Dec. 31, 2017

(10) Income Taxes

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

The Tax Act also puts in place new tax laws that will apply prospectively, which include, but are not limited to (i) reducing the U.S. federal corporate tax rate from 35 to 21 percent; (ii) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (iii) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (iv) creating a new limitation on deductible interest expense; and (v) imposing limitations on the deductibility of certain executive compensation.

U.S. GAAP requires the impact of tax legislation to be recorded in the period of enactment. Therefore, in connection with our initial analysis of the impact of the Tax Act, we recorded a provisional tax expense of $316,423 in the period ended December 31, 2017. This expense consists of $271,605 for the deemed repatriation tax and $44,818 of expense primarily due to the remeasurement of deferred taxes associated with the corporate rate reduction. The Company expects to utilize $90,300 of existing tax credits to reduce the $271,605 U.S. federal tax liability due to the deemed repatriation tax, which will result in $181,305 to be paid over eight years. This liability was included as a component of other liabilities as of December 31, 2017.

Staff Accounting Bulletin (SAB) 118 establishes 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.

Other than the tax on global intangible low taxed income (GILTI) discussed below, the Company was able to make reasonable estimates of the impact of the Tax Act and have recorded provisional amounts for the deemed repatriation tax, the remeasurement of deferred taxes, and our reassessment of permanently reinvested earnings and valuation allowances. These estimates may be impacted as we further analyze available tax accounting methods and elections, earnings and profits computations, state tax conformity to federal tax changes and guidance issued by standard-setting bodies that provide interpretative guidance of the Tax Act.

See Note 22, “Subsequent Event,” for disclosure of additional tax guidance related to the Tax Act.

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

	2017		2016		2015

United States	$	168,370		146,013		155,120
International		617,780		546,476		448,795
Total earnings before income taxes	$	786,150		692,489		603,915

Income taxes attributable to earnings before income taxes are:

	2017		2016		2015
Current
United States	$	202,374		78,958		101,591
State and local		2,926		3,208		3,352
International		72,138		77,834		71,054
		277,438		160,000		175,997

Deferred
United States		105,174		11,989		(13,771)
State and local		1,658		411		(472)
International		5,273		(13,062)		(4,711)
		112,105		(662)		(18,954)

Total income taxes	$	389,543		159,338		157,043

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

	2017		2016		2015

Statutory income tax rate		35.0%		35.0%		35.0%
State and local income taxes, net		0.3		0.3		0.3
Tax on international earnings		(23.0)		(15.8)		(15.6)
Change in unrecognized tax benefits		1.0		1.7		4.3
Share-based compensation		(4.1)		—		—
Tax Cuts and Jobs Act of 2017		39.4		—		—
Other, net		1.0		1.8		2.0
		49.6%		23.0%		26.0%

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 31, 2017 and December 25, 2016 are:

	2017		2016
Deferred tax assets:
Accounts receivable	$	31,424		32,277
Inventories		11,198		17,913
Loss and credit carryforwards		36,821		29,752
Operating expenses		15,961		48,024
Pension		8,372		35,255
Other compensation		36,856		66,220
Postretirement benefits		8,497		12,525
Interest rate hedge		6,012		10,286
Tax sharing agreement		5,514		17,339
Other		17,046		25,513
Gross deferred tax assets		177,701		295,104
Valuation allowance		(32,851)		(24,065)
Net deferred tax assets		144,850		271,039

Deferred tax liabilities:
Depreciation and amortization of long-lived assets		29,226		49,484
Equity method investment		12,829		7,056
Other		11,018		7,634
Deferred tax liabilities		53,073		64,174

Net deferred income taxes	$	91,777		206,865

At December 31, 2017 and December 25, 2016, the Company’s net deferred income taxes are recorded in the consolidated balance sheets as follows:

	2017		2016

Other assets		97,870		212,317
Other liabilities		(6,093)		(5,452)
Net deferred income taxes	$	91,777		206,865

The Company has a valuation allowance for certain deferred tax assets at December 31, 2017 of $32,851, which is an increase of $8,786 from $24,065 at December 25, 2016. 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 2018.

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 we are currently analyzing our global working capital and cash requirements. However, tax reform gives more companies flexibility to manage cash globally. We have recorded $1,657 of non-US local country withholding taxes as part of the provisional repatriation tax amount, which will be incurred due to certain future cash distributions. 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.

The Tax Act contains a new law that requires a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations, also known as the tax on global intangible low taxed income (GILTI), beginning in 2018. The FASB has provided that companies subject to GILTI have the option to account for the GILTI tax as a period cost if and when incurred, or to recognize deferred taxes for temporary differences, including outside basis differences, expected to reverse as GILTI. Due to the complexity of the new GILTI rules, we are continuing to evaluate this provision of the Tax Act. We have not recorded any provisional amounts as of December 31, 2017 nor have we made an accounting policy choice of including taxable income related to GILTI as either a current period tax expense or factoring such amounts into our measurement of deferred taxes.

A reconciliation of unrecognized tax benefits, excluding potential interest and penalties, for the fiscal years ended December 31, 2017, December 25, 2016, and December 27, 2015 is as follows:

	2017		2016		2015

Balance at beginning of year	$	80,388		63,549		35,416
Gross increases in prior period tax positions		2,518		2,727		491
Gross decreases in prior period tax positions		(28,653)		(3,103)		(1,773)
Gross increases in current period tax positions		34,056		34,155		32,547
Decreases related to settlements with tax authorities		(1,375)		(11,662)		(355)
Decreases from the expiration of statute of limitations		(2,690)		(5,278)		(2,777)
Balance at end of year	$	84,244		80,388		63,549

Unrecognized tax benefits as of December 31, 2017, December 25, 2016 and December 27, 2015, were $84,244, $80,388, and $63,549, respectively. If recognized, these tax benefits would have affected our income tax provision for fiscal years 2017, 2016, and 2015, by approximately $77,000, $70,000, and $59,000, respectively.

During 2017, 2016, and 2015 the Company recognized $2,431, $2,135, and $1,422, respectively, of potential interest and penalties, which are included as a component of income taxes in the accompanying consolidated statements of operations. At December 31, 2017, December 25, 2016, and December 27, 2015, the Company had accrued potential interest and penalties of $5,157, $3,966, and $4,778, 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.

The Company believes it is reasonably possible that a decrease of up to $2,800 in unrecognized tax benefits may be necessary within the coming year as a result of a lapse of statute of limitations.