Hasbro, Inc.
HASBRO INC (Form: 10-Q, Received: 11/02/2016 11:45:07)  

 

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 September 25, 2016

[ ]  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, or a smaller reporting company.  See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting 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  [  ]

 

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 October 17, 2016 was 124,787,571.

 


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(Thousands of Dollars Except Share Data)

 

(Unaudited)

 

 

 

 

 

September 25,

 

September 27,

 

December 27,

 

 

 

 

 

2016

 

2015

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

  

Cash and cash equivalents

$

830,372

 

 

551,292

 

 

976,750

 

 

Accounts receivable, less allowance for doubtful accounts of $36,500,

 

 

 

 

 

 

 

 

 

 

 

$16,200 and $14,900

 

1,452,931

 

 

1,390,274

 

 

1,217,850

 

  

Inventories

 

607,701

 

 

447,090

 

 

384,492

 

  

Prepaid expenses and other current assets

 

255,983

 

 

320,895

 

 

286,506

 

  

  

  

Total current assets

 

3,146,987

 

 

2,709,551

 

 

2,865,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation of $383,500,

 

 

 

 

 

 

 

 

 

 

 

$358,100 and $363,600

 

247,231

 

 

219,656

 

 

237,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

  

Goodwill

 

604,700

 

 

592,781

 

 

592,695

 

  

Other intangibles, net, accumulated amortization of $867,300, $832,900

 

 

 

 

 

 

 

 

 

 

 

and $841,300

 

254,637

 

 

289,200

 

 

280,807

 

  

Other

 

701,592

 

 

755,959

 

 

744,090

 

  

 

Total other assets

 

1,560,929

 

 

1,637,940

 

 

1,617,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Total assets

$

4,955,147

 

 

4,567,147

 

 

4,720,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

 

AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

  

Short-term borrowings

$

178,666

 

 

113,970

 

 

164,563

 

 

Current portion of long-term debt

 

349,611

 

 

-

 

 

-

 

  

Accounts payable

 

344,874

 

 

282,772

 

 

241,210

 

  

Accrued liabilities

 

742,568

 

 

642,827

 

 

658,874

 

  

 

Total current liabilities

 

1,615,719

 

 

1,039,569

 

 

1,064,647

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,198,461

 

 

1,546,796

 

 

1,547,115

 

Other liabilities

 

364,378

 

 

396,772

 

 

404,883

 

  

 

Total liabilities

 

3,178,558

 

 

2,983,137

 

 

3,016,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

34,829

 

 

41,173

 

 

40,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

  

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

 

 

 

 

 

 

 

 

 

 

 

 

issued

 

-

 

 

-

 

 

-

 

  

Common stock of $.50 par value. Authorized 600,000,000 shares; issued

 

 

 

 

 

 

 

 

 

 

 

209,694,630 at September 25, 2016, September 27, 2015,

 

 

 

 

 

 

 

 

 

 

 

and December 27, 2015

 

104,847

 

 

104,847

 

 

104,847

 

  

Additional paid-in capital

 

959,859

 

 

863,543

 

 

893,630

 

  

Retained earnings

 

4,019,370

 

 

3,733,995

 

 

3,852,321

 

  

Accumulated other comprehensive loss

 

(203,989)

 

 

(126,185)

 

 

(146,001)

 

  

Treasury stock, at cost; 84,751,773 shares at September 25, 2016; 84,987,076

 

 

 

 

 

 

 

 

 

 

 

shares at September 27, 2015; and 84,899,200 shares at December 27, 2015

 

(3,138,327)

 

 

(3,033,363)

 

 

(3,040,895)

 

  

 

Total shareholders' equity

 

1,741,760

 

 

1,542,837

 

 

1,663,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Total liabilities, redeemable noncontrolling interests and

 

 

 

 

 

 

 

 

 

 

 

 

shareholders' equity

$

4,955,147

 

 

4,567,147

 

 

4,720,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

 


 

 


 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

 

Consolidated Statements of Operations

 

 

(Thousands of Dollars Except Per Share Data)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

 

September 25,

 

September 27,

 

September 25,

 

September 27,

 

 

 

 

2016

 

2015

 

2016

 

2015

Net revenues

 

$

1,679,757

 

 

1,470,997

 

 

3,389,882

 

 

2,982,155

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

658,986

 

 

579,149

 

 

1,270,902

 

 

1,122,283

 

Royalties

 

 

134,294

 

 

113,950

 

 

273,671

 

 

230,108

 

Product development

 

 

70,083

 

 

64,793

 

 

190,918

 

 

174,299

 

Advertising

 

 

154,132

 

 

142,029

 

 

320,948

 

 

288,136

 

Amortization of intangibles

 

 

8,691

 

 

9,031

 

 

26,073

 

 

35,330

 

Program production cost amortization

 

 

6,282

 

 

11,496

 

 

17,501

 

 

29,812

 

Selling, distribution and administration

 

 

285,188

 

 

247,022

 

 

756,978

 

 

668,955

 

 

Total costs and expenses

 

 

1,317,656

 

 

1,167,470

 

 

2,856,991

 

 

2,548,923

Operating profit

 

 

362,101

 

 

303,527

 

 

532,891

 

 

433,232

Non-operating (income) expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

24,305

 

 

24,045

 

 

72,263

 

 

72,816

 

Interest income

 

 

(1,944)

 

 

(672)

 

 

(6,469)

 

 

(2,292)

 

Other (income) expense, net

 

 

(6,584)

 

 

(4,463)

 

 

(5,460)

 

 

(9,870)

 

 

Total non-operating expense, net

 

 

15,777

 

 

18,910

 

 

60,334

 

 

60,654

Earnings before income taxes

 

 

346,324

 

 

284,617

 

 

472,557

 

 

372,578

Income tax expense

 

 

90,162

 

 

78,242

 

 

120,005

 

 

100,100

Net earnings

 

 

256,162

 

 

206,375

 

 

352,552

 

 

272,478

Net loss attributable to noncontrolling interests

 

 

(1,636)

 

 

(1,224)

 

 

(6,103)

 

 

(3,597)

Net earnings attributable to Hasbro, Inc.

 

$

257,798

 

 

207,599

 

 

358,655

 

 

276,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.05

 

 

1.66

 

 

2.86

 

 

2.21

 

Diluted

 

$

2.03

 

 

1.64

 

 

2.82

 

 

2.18

Cash dividends declared per common share

 

$

0.51

 

 

0.46

 

 

1.53

 

 

1.38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 


 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

 

Consolidated Statements of Comprehensive Earnings

 

 

(Thousands of Dollars)

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

 

 

September 25,

 

September 27,

 

September 25,

 

September 27,

 

 

 

 

2016

 

2015

 

2016

 

2015

Net earnings

 

$

256,162

 

 

206,375

 

 

352,552

 

 

272,478

Other comprehensive earnings (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1,483)

 

 

(39,086)

 

 

18,482

 

 

(85,755)

 

Net (losses) gains on cash flow hedging activities,

 

 

 

 

 

 

 

 

 

 

 

 

 

  

net of tax

 

 

(12,960)

 

 

25,948

 

 

(37,004)

 

 

78,576

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

securities, net of tax

 

 

(390)

 

 

(1,231)

 

 

963

 

 

(290)

 

Changes in unrecognized pension and postretirement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amounts, net of tax

 

 

-

 

 

5,194

 

 

-

 

 

5,194

 

Reclassifications to earnings, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains on cash flow hedging activities

 

 

(16,028)

 

 

(12,698)

 

 

(43,952)

 

 

(30,117)

 

 

Unrecognized pension and postretirement amounts

 

 

1,173

 

 

(836)

 

 

3,523

 

 

1,661

Total other comprehensive loss, net of tax

 

 

(29,688)

 

 

(22,709)

 

 

(57,988)

 

 

(30,731)

Comprehensive earnings

 

 

226,474

 

 

183,666

 

 

294,564

 

 

241,747

Comprehensive loss attributable to noncontrolling interests

 

 

(1,636)

 

 

(1,224)

 

 

(6,103)

 

 

(3,597)

Comprehensive earnings attributable to Hasbro, Inc.

 

$

228,110

 

 

184,890

 

 

300,667

 

 

245,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 


 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

(Thousands of Dollars)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

September 25,

 

September 27,

 

 

 

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

  

Net earnings

 

$

352,552

 

 

$272,478

 

  

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

 

 

 

 

 

 

 

  

 

Depreciation of plant and equipment

 

 

89,327

 

 

86,393

 

 

 

Amortization of intangibles

 

 

26,073

 

 

35,330

 

  

 

Program production cost amortization

 

 

17,501

 

 

29,812

 

  

 

Deferred income taxes

 

 

25,091

 

 

(10,236)

 

  

 

Stock-based compensation

 

 

39,673

 

 

33,073

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

  

 

Increase in accounts receivable

 

 

(224,172)

 

 

(382,573)

 

  

 

Increase in inventories

 

 

(214,734)

 

 

(156,221)

 

  

 

(Increase) decrease in prepaid expenses and other current assets

 

 

(4,063)

 

 

39,521

 

  

 

Program production costs

 

 

(36,010)

 

 

(28,222)

 

  

 

Increase in accounts payable and accrued liabilities

 

 

129,661

 

 

165,632

 

  

 

Other

 

 

(47,118)

 

 

(15,429)

 

  

 

 

Net cash provided by operating activities

 

 

153,781

 

 

69,558

 

Cash flows from investing activities:

 

 

 

 

 

 

 

  

 

Additions to property, plant and equipment

 

 

(103,639)

 

 

(97,873)

 

  

 

Investments and acquisitions, net of cash acquired

 

 

(12,436)

 

 

(3,000)

 

 

 

Cash proceeds from dispositions

 

 

-

 

 

18,632

 

  

 

Other

 

 

25,576

 

 

23,447

 

  

 

 

Net cash utilized by investing activities

 

 

(90,499)

 

 

(58,794)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

  

 

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

 

 

14,160

 

 

(138,101)

 

  

 

Purchases of common stock

 

 

(104,273)

 

 

(74,110)

 

  

 

Stock option transactions

 

 

37,515

 

 

33,929

 

  

 

Excess tax benefits from stock-based compensation

 

 

19,712

 

 

9,804

 

  

 

Dividends paid

 

 

(185,265)

 

 

(168,393)

 

  

 

Other

 

 

762

 

 

928

 

  

 

 

Net cash utilized by financing activities

 

 

(217,389)

 

 

(335,943)

 

Effect of exchange rate changes on cash

 

 

7,729

 

 

(16,696)

 

Decrease in cash and cash equivalents

 

 

(146,378)

 

 

(341,875)

 

Cash and cash equivalents at beginning of year

 

 

976,750

 

 

893,167

 

Cash and cash equivalents at end of period

 

$

830,372

 

 

551,292

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information

 

 

 

 

 

 

 

  

Cash paid during the period for:

 

 

 

 

 

 

 

  

 

Interest

 

$

74,700

 

 

78,056

 

  

 

Income taxes

 

$

64,854

 

 

80,833

 

 

 

 

 

 

 

 

 

 

  

 

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 financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of Hasbro, Inc. and all majority-owned subsidiaries ("Hasbro" or the "Company") as of September 25, 2016 and September 27, 2015, 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 September 25, 2016 and September 27, 2015 are each 13-week periods. The nine-month periods ended September 25, 2016 and September 27, 2015 are each 39-week periods.

 

The results of operations for the quarter and nine-month periods ended September 25, 2016 are not necessarily indicative of results to be expected for the full year, nor were those of the comparable 2015 periods representative of those actually experienced for the full year 2015.

 

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 27, 2015 in its Annual Report on Form 10-K, which includes all such information and disclosures and, accordingly, should be read in conjunction with the financial information included herein.

 

The Company's accounting policies are the same as those described in Note 1 to the Company's consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended December 27, 2015.

 

Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation.

 

(2) Earnings Per Share

 

Net earnings per share data for the quarters and nine-month periods ended September 25, 2016 and September 27, 2015 were computed as follows:

 

 


 

 

2016

 

2015

Quarter

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings attributable to Hasbro, Inc.

$

257,798

 

 

257,798

 

 

207,599

 

 

207,599

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

125,500

 

 

125,500

 

 

125,100

 

 

125,100

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

   Options and other share-based awards

 

-

 

 

1,678

 

 

-

 

 

1,817

Equivalent Shares

 

125,500

 

 

127,178

 

 

125,100

 

 

126,917

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Hasbro, Inc. per common share

$

2.05

 

 

2.03

 

 

1.66

 

 

1.64

 

 

2016

 

2015

Nine Months

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings attributable to Hasbro, Inc.

$

358,655

 

 

358,655

 

 

276,075

 

 

276,075

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

125,414

 

 

125,414

 

 

125,016

 

 

125,016

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

     Options and other share-based awards

 

-

 

 

1,642

 

 

-

 

 

1,673

Equivalent Shares

 

125,414

 

 

127,056

 

 

125,016

 

 

126,689

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Hasbro, Inc. per common share

$

2.86

 

 

2.82

 

 

2.21

 

 

2.18

 

For the quarter ended September 25, 2016, options and restricted stock units totaling 492 were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive.  No options and restricted stock units were excluded from the calculation of diluted earnings per share for the quarter ended September 27, 2015. For the nine-month periods ended September 25, 2016 and September 27, 2015, options and restricted stock units totaling 492 and 261, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive.

 

(3) Other Comprehensive Earnings (Loss)

  

 

Components of other comprehensive earnings (loss) are presented within the consolidated statements of comprehensive earnings. The following table presents the related tax effects on changes in other comprehensive earnings (loss) for the quarter and nine-month periods ended September 25, 2016 and September 27, 2015.

 

  

 

 


 

 

 

Quarter Ended

 

Nine Months Ended

 

 

September 25,

 

September 27,

 

September 25,

 

September 27,

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive earnings (loss), tax effect:

 

 

 

 

 

 

 

 

 

 

 

Tax benefit (expense) on cash flow hedging activities

$

1,420

 

 

(7,400)

 

 

9,423

 

 

(11,362)

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

 

221

 

 

700

 

 

(547)

 

 

164

Tax expense on changes in unrecognized pension and

 

 

 

 

 

 

 

 

 

 

 

 

postretirement amounts

 

-

 

 

(660)

 

 

-

 

 

(660)

Reclassifications to earnings, tax effect:

 

 

 

 

 

 

 

 

 

 

 

 

Tax expense on cash flow hedging activities

 

2,456

 

 

1,487

 

 

5,274

 

 

2,537

 

Tax (benefit) expense on unrecognized pension and

 

 

 

 

 

 

 

 

 

 

 

  

postretirement amounts

 

(666)

 

 

338

 

 

(1,999)

 

 

(942)

Total tax effect on other comprehensive earnings (loss)

$

3,431

 

 

(5,535)

 

 

12,151

 

 

(10,263)

 

Changes in the components of accumulated other comprehensive loss for the nine months ended September 25, 2016 and September 27, 2015 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

 

Earnings (Loss)

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 27, 2015

$

(102,931)

 

 

79,317

 

 

1,258

 

 

(123,645)

 

 

(146,001)

Current period other comprehensive earnings (loss)

 

3,523

 

 

(80,956)

 

 

963

 

 

18,482

 

 

(57,988)

Balance at September 25, 2016

$

(99,408)

 

 

(1,639)

 

 

2,221

 

 

(105,163)

 

 

(203,989)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 28, 2014

$

(113,092)

 

 

43,689

 

 

1,900

 

 

(27,951)

 

 

(95,454)

Current period other comprehensive earnings (loss)

 

6,855

 

 

48,459

 

 

(290)

 

 

(85,755)

 

 

(30,731)

Balance at September 27, 2015

$

(106,237)

 

 

92,148

 

 

1,610

 

 

(113,706)

 

 

(126,185)

 

At September 25, 2016, the Company had remaining net deferred gains on foreign currency forward contracts, net of tax, of $16,864 in accumulated other comprehensive loss ("AOCE"). These instruments hedge payments related to inventory purchased in the third quarter of 2016 or forecasted to be purchased during the remainder of 2016 and, to a lesser extent, 2017 through 2021, intercompany expenses expected to be paid or received during 2016 and 2017, cash receipts for sales made at the end of the third quarter of 2016 or forecasted to be made in the remainder of 2016 and, to a lesser extent, 2017 through 2018. 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 in 2014, 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 September 25, 2016, deferred losses, net of tax of $18,503 related to these instruments remained in AOCE. For the quarters ended September 25, 2016 and September 27, 2015, previously deferred losses of $450 were reclassified from AOCE to net earnings. For the nine month periods ended September 25, 2016 and September 27, 2015, previously deferred losses of $1,349 were reclassified from AOCE to net earnings.

 

Of the amount included in AOCE at September 25, 2016, the Company expects net gains of approximately $11,699 to be reclassified to the consolidated statements of operations within the next 12 months. However, the amount ultimately realized in earnings is dependent on the fair value of the hedging instruments on the settlement dates.

 


 

 

(4) Financial Instruments

 

The Company's financial instruments include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and certain accrued liabilities. At September 25, 2016, September 27, 2015 and December 27, 2015, the carrying cost of these instruments approximated their fair value. The Company's financial instruments at September 25, 2016, September 27, 2015 and December 27, 2015 also include certain assets and liabilities measured at fair value (see Notes 6 and 8) 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 September 25, 2016, September 27, 2015 and December 27, 2015 are as follows:

 

 

September 25, 2016

 

September 27, 2015

 

December 27, 2015

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

6.35% Notes Due 2040

$

500,000

 

 

611,200

 

 

500,000

 

 

563,400

 

 

500,000

 

 

556,300

6.30% Notes Due 2017

 

350,000

 

 

366,205

 

 

350,000

 

 

379,925

 

 

350,000

 

 

374,045

5.10% Notes Due 2044

 

300,000

 

 

324,450

 

 

300,000

 

 

291,900

 

 

300,000

 

 

286,710

3.15% Notes Due 2021

 

300,000

 

 

310,620

 

 

300,000

 

 

303,990

 

 

300,000

 

 

300,060

6.60% Debentures Due 2028

 

109,895

 

 

132,786

 

 

109,895

 

 

123,225

 

 

109,895

 

 

121,269

Total long-term debt

$

1,559,895

 

 

1,745,261

 

 

1,559,895

 

 

1,662,440

 

 

1,559,895

 

 

1,638,384

Less: Current portion

 

350,000

 

 

366,205

 

 

-

 

 

-

 

 

-

 

  

-

Less: Deferred debt expenses

 

11,434

 

 

-

 

 

13,099

 

 

-

 

 

12,780

 

 

-

Long-term debt

$

1,198,461

 

 

1,379,056

 

 

1,546,796

 

 

1,662,440

 

 

1,547,115

 

 

1,638,384

 

Current portion of long-term debt of $349,611 as shown on the balance sheet represents the $350,000 principal of 6.30% notes less $389 of deferred debt expenses.

 

The fair values of the Company's long-term debt are considered Level 3 fair values (see Note 6 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.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (ASC 835-30), which simplifies the presentation of debt issuance costs. ASU 2015-03 requires debt issuance costs related to long-term debt to be presented in the balance sheet as a reduction to the carrying amount of the related debt liability, consistent with the presentation of discounts. The Company adopted ASU 2015-03 at December 27, 2015 and deferred debt expenses are presented as a reduction of long-term debt. Deferred debt expenses of $13,099 have been reclassified from other assets in the consolidated balance sheet for September 27, 2015, to reflect this change in accounting principle.

  

 

(5) 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.

 

The Company is no longer subject to U.S. federal income tax examinations for years before 2012.  The Company’s claims for refunds for 2012 and 2013 U.S. federal income tax returns are currently under exam. With few exceptions, the Company is no longer subject to U.S. state or local and non-U.S. income tax examinations by tax authorities in its major jurisdictions for years before 2009. The Company is currently under income tax examination in several U.S. state and local and non-U.S. jurisdictions.

 


 

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes , which simplifies the presentation of deferred income taxes by removing the requirement to bifurcate deferred income tax assets and liabilities between current and non-current. The Company adopted ASU 2015-17 as of December 27, 2015 and deferred income tax assets and liabilities are presented as non-current in the consolidated balance sheets. This adoption was applied retrospectively and $68,565 has been reclassified from prepaid expenses and other current assets to other assets and $10,927 has been reclassified from accrued liabilities to other liabilities in the consolidated balance sheet as of September 27, 2015.

 

(6) 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 September 25, 2016, September 27, 2015 and December 27, 2015, these investments totaled $23,490, $22,834 and $22,539, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The Company recorded net gains of $440 and $922 on these investments in other (income) expense, net for the quarter and nine-months ended September 25, 2016, respectively, related to the change in fair value of such instruments.  For the quarter and nine-month periods ended September 27, 2015 the Company recorded net losses of $176 and $246, respectively, in other (income) expense, net, related to the change in fair value of such instruments.

 

 


 

At September 25, 2016, September 27, 2015 and December 27, 2015, the Company had the following assets and liabilities measured at fair value (excluding assets for which the fair value is measured using net asset value per share) in its consolidated balance sheets:

 

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)

September 25, 2016

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

4,986

 

 

4,986

 

 

-

 

 

-

Derivatives

 

39,115

 

 

-

 

 

39,115

 

 

-

Total assets

$

44,101

 

 

4,986

 

 

39,115

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

19,390

 

 

-

 

 

19,390

 

 

-

Option agreement

 

27,460

 

 

-

 

 

-

 

 

27,460

Total liabilities

$

46,850

 

 

-

 

 

19,390

 

 

27,460

 

 

 

 

 

 

 

 

 

 

 

 

September 27, 2015

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

4,029

 

 

4,029

 

 

-

 

 

-

Derivatives

 

119,123

 

 

-

 

 

119,123

 

 

-

Total assets

$

123,152

 

 

4,029

 

 

119,123

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

605

 

 

-

 

 

605

 

 

-

Option agreement