Hasbro, Inc.
HASBRO INC (Form: 10-Q, Received: 05/10/2017 16:29:00)  

 

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 April 2, 2017

[ ]  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 April 24, 2017 was 125,003,385.

 


 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

(Thousands of Dollars Except Share Data)

 

(Unaudited)

 

 

 

 

 

April 2,

 

March 27,

 

December 25,

 

 

 

 

 

2017

 

2016

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

  

Cash and cash equivalents

$

1,463,081

 

 

1,095,880

 

 

1,282,285

 

 

Accounts receivable, less allowance for doubtful accounts of $13,200,

 

 

 

 

 

 

 

 

 

 

 

$31,100 and $16,800

 

676,945

 

 

670,663

 

 

1,319,963

 

  

Inventories

 

416,232

 

 

461,734

 

 

387,675

 

  

Prepaid expenses and other current assets

 

243,475

 

 

295,806

 

 

237,684

 

  

  

  

Total current assets

 

2,799,733

 

 

2,524,083

 

 

3,227,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation of $392,900,

 

 

 

 

 

 

 

 

 

 

 

$365,600 and $383,700

 

270,023

 

 

241,253

 

 

267,398

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

 

  

Goodwill

 

570,937

 

 

592,793

 

 

570,555

 

  

Other intangibles, net, accumulated amortization of $883,900, $850,000

 

 

 

 

 

 

 

 

 

 

 

and $876,000

 

238,069

 

 

272,116

 

 

245,949

 

  

Other

 

767,108

 

 

734,450

 

 

779,857

 

  

 

Total other assets

 

1,576,114

 

 

1,599,359

 

 

1,596,361

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Total assets

$

4,645,870

 

 

4,364,695

 

 

5,091,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS

 

 

 

 

 

 

 

 

 

 

AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

  

Short-term borrowings

$

65,294

 

 

89,000

 

 

172,582

 

 

Current portion of long-term debt

 

349,814

 

 

-

 

 

349,713

 

  

Accounts payable

 

241,214

 

 

176,665

 

 

319,525

 

  

Accrued liabilities

 

545,492

 

 

502,708

 

 

776,039

 

  

 

Total current liabilities

 

1,201,814

 

 

768,373

 

 

1,617,859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

1,198,896

 

 

1,547,434

 

 

1,198,679

 

Other liabilities

 

393,516

 

 

402,346

 

 

389,388

 

  

 

Total liabilities

 

2,794,226

 

 

2,718,153

 

 

3,205,926

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable noncontrolling interests

 

-

 

 

39,152

 

 

22,704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 April 2, 2017, March 27, 2016,

 

 

 

 

 

 

 

 

 

 

 

and December 25, 2016

 

104,847

 

 

104,847

 

 

104,847

 

  

Additional paid-in capital

 

1,008,737

 

 

906,211

 

 

985,418

 

  

Retained earnings

 

4,145,469

 

 

3,837,372

 

 

4,148,722

 

  

Accumulated other comprehensive loss

 

(197,171)

 

 

(164,353)

 

 

(194,570)

 

  

Treasury stock, at cost; 84,685,145 shares at April 2, 2017; 84,829,514

 

 

 

 

 

 

 

 

 

 

 

shares at March 27, 2016; and 85,207,677 shares at December 25, 2016

 

(3,210,238)

 

 

(3,076,687)

 

 

(3,181,681)

 

  

 

Total shareholders' equity

 

1,851,644

 

 

1,607,390

 

 

1,862,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

Total liabilities, redeemable noncontrolling interests and

 

 

 

 

 

 

 

 

 

 

 

 

shareholders' equity

$

4,645,870

 

 

4,364,695

 

 

5,091,366

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

April 2,

 

March 27,

 

 

 

 

 

2017

 

2016

 

Net revenues

 

$

849,663

 

 

831,180

 

Costs and expenses:

 

 

 

 

 

 

 

  

Cost of sales

 

 

306,082

 

 

290,240

 

  

Royalties

 

 

64,380

 

 

69,969

 

  

Product development

 

 

62,586

 

 

57,164

 

  

Advertising

 

 

80,936

 

 

79,859

 

  

Amortization of intangibles

 

 

7,881

 

 

8,691

 

  

Program production cost amortization

 

 

5,570

 

 

6,186

 

  

Selling, distribution and administration

 

 

243,885

 

 

233,155

 

  

  

Total costs and expenses

 

 

771,320

 

 

745,264

 

Operating profit

 

 

78,343

 

 

85,916

 

Non-operating (income) expense:

 

 

 

 

 

 

 

  

Interest expense

 

 

24,456

 

 

24,044

 

  

Interest income

 

 

(5,564)

 

 

(2,213)

 

  

Other (income) expense, net

 

 

(11,386)

 

 

4,872

 

  

 

Total non-operating expense, net

 

 

7,506

 

 

26,703

 

Earnings before income taxes

 

 

70,837

 

 

59,213

 

Income tax expense

 

 

2,238

 

 

12,242

 

Net earnings

 

 

68,599

 

 

46,971

 

Net loss attributable to noncontrolling interests

 

 

-

 

 

(1,780)

 

Net earnings attributable to Hasbro, Inc.

 

$

68,599

 

 

48,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

  

Basic

 

$

0.55

 

 

0.39

 

  

Diluted

 

$

0.54

 

 

0.38

 

Cash dividends declared per common share

 

$

0.57

 

 

0.51

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

 


 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Earnings

 

(Thousands of Dollars)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter Ended

 

 

 

 

 

April 2,

 

March 27,

 

 

 

 

 

2017

 

2016

 

Net earnings

 

$

68,599

 

 

46,971

 

Other comprehensive earnings (loss):

 

 

 

 

 

 

 

  

Foreign currency translation adjustments

 

 

24,673

 

 

12,140

 

  

Net losses on cash flow hedging activities, net of tax

 

 

(23,317)

 

 

(15,786)

 

  

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

 

 

 

 

 

 

 

  

  

net of tax

 

 

(31)

 

 

1,680

 

  

Reclassifications to earnings, net of tax:

 

 

 

 

 

 

 

  

 

Net gains on cash flow hedging activities

 

 

(5,374)

 

 

(17,561)

 

  

 

Unrecognized pension and postretirement amounts

 

 

1,448

 

 

1,175

 

Total other comprehensive loss, net of tax

 

 

(2,601)

 

 

(18,352)

 

Comprehensive earnings

 

 

65,998

 

 

28,619

 

Comprehensive loss attributable to noncontrolling interests

 

 

-

 

 

(1,780)

 

Comprehensive earnings attributable to Hasbro, Inc.

 

$

65,998

 

 

30,399

 

 

 

 

 

 

 

 

 

 

 

See accompanying condensed notes to consolidated financial statements.

 

 


 

HASBRO, INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

(Thousands of Dollars)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

April 2,

 

March 27,

 

 

 

 

 

 

2017

 

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

  

Net earnings

 

$

68,599

 

 

46,971

 

  

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

 

 

 

 

 

 

 

  

 

Depreciation of plant and equipment

 

 

27,702

 

 

25,126

 

 

 

Amortization of intangibles

 

 

7,881

 

 

8,691

 

  

 

Program production cost amortization

 

 

5,570

 

 

6,186

 

  

 

Deferred income taxes

 

 

13,428

 

 

9,466

 

  

 

Stock-based compensation

 

 

10,844

 

 

11,973

 

Change in operating assets and liabilities net of acquired and disposed balances:

 

 

 

 

 

 

 

  

 

Decrease in accounts receivable

 

 

660,253

 

 

547,154

 

  

 

Increase in inventories

 

 

(21,377)

 

 

(73,238)

 

  

 

Increase in prepaid expenses and other current assets

 

 

(7,200)

 

 

(32,032)

 

  

 

Program production costs

 

 

(11,738)

 

 

(11,619)

 

  

 

Decrease in accounts payable and accrued liabilities

 

 

(342,533)

 

 

(218,471)

 

  

 

Other

 

 

499

 

 

(6,928)

 

  

 

 

Net cash provided by operating activities

 

 

411,928

 

 

313,279

 

Cash flows from investing activities:

 

 

 

 

 

 

 

  

 

Additions to property, plant and equipment

 

 

(30,243)

 

 

(31,218)

 

  

 

Other

 

 

(781)

 

 

3,626

 

  

 

 

Net cash utilized by investing activities

 

 

(31,024)

 

 

(27,592)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

  

 

Net repayments of other short-term borrowings

 

 

(107,336)

 

 

(75,526)

 

  

 

Purchases of common stock

 

 

(19,312)

 

 

(33,710)

 

  

 

Stock-based compensation transactions

 

 

9,743

 

 

8,153

 

  

 

Dividends paid

 

 

(63,404)

 

 

(57,406)

 

 

 

Payments related to tax withholding for share-based compensation

 

 

(31,391)

 

 

(13,600)

 

  

 

Other

 

 

-

 

 

762

 

  

 

 

Net cash utilized by financing activities

 

 

(211,700)

 

 

(171,327)

 

Effect of exchange rate changes on cash

 

 

11,592

 

 

4,770

 

Increase in cash and cash equivalents

 

 

180,796

 

 

119,130

 

Cash and cash equivalents at beginning of year

 

 

1,282,285

 

 

976,750

 

Cash and cash equivalents at end of period

 

$

1,463,081

 

 

1,095,880

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental information

 

 

 

 

 

 

 

  

Cash paid during the period for:

 

 

 

 

 

 

 

  

 

Interest

 

$

31,446

 

 

31,066

 

  

 

Income taxes

 

$

31,571

 

 

34,332

 

 

 

 

 

 

 

 

 

 

  

 

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 April 2, 2017 and March 27, 2016, 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 quarter ended April 2, 2017 was a 14-week period. The quarter ended March 27, 2016 was a 13-week period.

 

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 2016 period representative of those actually experienced for the full year 2016.

 

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 25, 2016 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 25, 2016 with the exception of the accounting policy related to stock compensation.  During the first quarter of 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting. The ASU includes provisions intended to simplify how share-based payments are accounted for and presented in the financial statements including:

·            Prospectively, the requirement to record all of the tax effects related to share-based payments at settlement through the income statement.  During the first quarter of 2017, excess tax benefits of $13,994 were recorded to income tax expense.  

·            A requirement that all tax-related cash flows resulting from share-based payments be reported as operating activities on the statement of cash flows.  Previously, these amounts were reported as a cash inflow from financing activities.  The Company elected to apply this requirement of the standard retrospectively.  Accordingly, the cash flow statement for the quarter ended March 27, 2016 has been restated to include $ 6,056 of cash flows from excess tax benefits, previously included as financing activities, in operating activities with other income tax cash flows.  For the first quarter of 2017 excess tax benefits of $ 13,994 were reported as operating activities.

·            A requirement that all cash payments made to taxing authorities on the employees’ behalf for withheld shares shall be presented as financing activities in the statements of cash flows.  Prior to adoption of ASU 2016-09, these cash flows were included as operating activities. This change was required to be applied on a retrospective basis and as a result, the Company has restated the consolidated statement of cash flows for the quarter ended March 27, 2016. This change resulted in payments of $ 13,600 for the quarter ended March 27, 2016 being included in financing activities.  For the first quarter of 2017, such payments amounted to $ 31,391 .

 


 

·            Entities are permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards choosing either to estimate forfeitures as previously required or recognize forfeitures as they occur. The Company elected to change its method of accounting for forfeitures from estimating the number of stock-based awards expected to vest, to accounting for forfeitures as they occur which resulted in a one-time charge, net of tax, of $0.7 million to retained earnings. Based upon the Company’s history of forfeitures, it is not expected that this election will have a material impact on its financial statements going forward however, as any impact will be based on future forfeitures, the actual impact could differ from the Company’s expectation.

 

Through 2016, the Company had one investment with a redeemable noncontrolling interest which was the Company’s 70 % majority interest in Backflip Studios, LLC (“Backflip”). During the first quarter of 2017, the Company acquired the remaining 30 % of Backflip for no additional consideration, making it a wholly-owned subsidiary of the Company.  

 

(2) Earnings Per Share

 

Net earnings per share data for the quarters ended April 2, 2017 and March 27, 2016 were computed as follows:

 

 

2017

 

2016

Quarter

Basic

 

Diluted

 

Basic

 

Diluted

Net earnings attributable to Hasbro, Inc.

$

68,599

 

 

68,599

 

 

48,751

 

 

48,751

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding

 

125,182

 

 

125,182

 

 

125,266

 

 

125,266

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

   Options and other share-based awards

 

-

 

 

2,047

 

 

-

 

 

1,682

Equivalent Shares

 

125,182

 

 

127,229

 

 

125,266

 

 

126,948

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to Hasbro, Inc. per common share

$

0.55

 

 

0.54

 

 

0.39

 

 

0.38

 

For the quarters ended April 2, 2017 and March 27, 2016, options and restricted stock units totaling 638 and 492, 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 quarters ended April 2, 2017 and March 27, 2016.

 

 

 

Quarter Ended

 

 

April 2,

 

March 27,

 

 

2017

 

2016

 

 

 

 

 

 

 

Other comprehensive earnings (loss), tax effect:

 

 

 

 

 

Tax benefit on cash flow hedging activities

$

5,310

 

 

3,256

Tax benefit (expense) on unrealized holding gains

 

18

 

 

(953)

Reclassifications to earnings, tax effect:

 

 

 

 

 

 

Tax (benefit) expense on cash flow hedging activities

 

(369)

 

 

1,749

 

Tax benefit on unrecognized pension and postretirement

 

 

 

 

 

  

amounts reclassified to the consolidated statements of operations

 

(822)

 

 

(667)

Total tax effect on other comprehensive earnings

$

4,137

 

 

3,385

 

 


 

Changes in the components of accumulated other comprehensive loss for the quarters ended April 2, 2017 and March 27, 2016 are as follows:

  

 

 

 

 

 

 

 

Unrealized

 

 

 

 

 

 

 

 

 

 

 

 

 

Holding

 

 

 

 

 

 

 

 

 

 

 

 

 

(Losses)

 

 

 

 

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)

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 25, 2016

$

(118,401)

 

 

51,085

 

 

1,424

 

 

(128,678)

 

 

(194,570)

Current period other comprehensive earnings (loss)

 

1,448

 

 

(28,691)

 

 

(31)

 

 

24,673

 

 

(2,601)

Balance at April 2, 2017

$

(116,953)

 

 

22,394

 

 

1,393

 

 

(104,005)

 

 

(197,171)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 27, 2015

$

(102,931)

 

 

79,317

 

 

1,258

 

 

(123,645)

 

 

(146,001)

Current period other comprehensive earnings (loss)

 

1,175

 

 

(33,347)

 

 

1,680

 

 

12,140

 

 

(18,352)

Balance at March 27, 2016

$

(101,756)

 

 

45,970

 

 

2,938

 

 

(111,505)

 

 

(164,353)

 

At April 2, 2017, the Company had remaining net deferred gains on foreign currency forward contracts, net of tax, of $40,301 in accumulated other comprehensive loss ("AOCE"). These instruments hedge payments related to inventory purchased in the first quarter of 2017 or forecasted to be purchased during the remainder of 2017 and, to a lesser extent, 2018 through 2021, intercompany expenses expected to be paid or received during 2017 and 2018, cash receipts for sales made at the end of the first quarter of 2017 or forecasted to be made in the remainder of 2017 and, to a lesser extent, 2018 through 2019. 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 April 2, 2017, deferred losses, net of tax of $17,907 related to these instruments remained in AOCE. For the quarters ended April 2, 2017 and March 27, 2016, losses of $484 and $450, respectively, were reclassified from AOCE to net earnings. 

 

Of the amount included in AOCE at April 2, 2017, the Company expects net gains of approximately $5,555 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 April 2, 2017, March 27, 2016 and December 25, 2016, the carrying cost of these instruments approximated their fair value. The Company's financial instruments at April 2, 2017, March 27, 2016 and December 25, 2016 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 April 2, 2017, March 27, 2016 and December 25, 2016 are as follows:

 

 


 

 

April 2, 2017

 

March 27, 2016

 

December 25, 2016

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Cost

 

Value

 

Cost

 

Value

 

Cost

 

Value

6.35% Notes Due 2040

$

500,000

 

 

597,150

 

 

500,000

 

 

560,900

 

 

500,000

 

 

584,850

6.30% Notes Due 2017

 

350,000

 

 

357,385

 

 

350,000

 

 

370,965

 

 

350,000

 

 

361,900

5.10% Notes Due 2044

 

300,000

 

 

306,570

 

 

300,000

 

 

287,610

 

 

300,000

 

 

297,600

3.15% Notes Due 2021

 

300,000

 

 

305,490

 

 

300,000

 

 

302,880

 

 

300,000

 

 

300,450

6.60% Debentures Due 2028

 

109,895

 

 

125,390

 

 

109,895

 

 

122,456

 

 

109,895

 

 

123,984

Total long-term debt

$

1,559,895

 

 

1,691,985

 

 

1,559,895

 

 

1,644,811

 

 

1,559,895

 

 

1,668,784

Less: Current portion

 

350,000

 

 

357,385

 

 

-

 

 

-

 

 

350,000

 

  

361,900

Less: Deferred debt expenses

 

10,999

 

 

-

 

 

12,461

 

 

-

 

 

11,216

 

 

-

Long-term debt

$

1,198,896

 

 

1,334,600

 

 

1,547,434

 

 

1,644,811

 

 

1,198,679

 

 

1,306,884

 

Current portion of long-term debt at April 2, 2017 and December 25, 2016 of $ 349,814 and $ 349,713 , respectively, as shown on the consolidated balance sheet represents the $350,000 principal of 6.30% notes less $ 186 and $ 287 , respectively, 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.

  

 

(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. 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            

 

(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 April 2, 2017, March 27, 2016 and December 25, 2016, these investments totaled $23,603, $22,665 and $23,571, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The Company recorded net gains of $631 and $83 on these investments in other (income) expense, net for the quarters ended April 2, 2017 and March 27, 2016, respectively, related to the change in fair value of such instruments. 

 

 


 

At April 2, 2017, March 27, 2016 and December 25, 2016, 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)

April 2, 2017

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

3,687

 

 

3,687

 

 

-

 

 

-

Derivatives

 

56,017

 

 

-

 

 

56,017

 

 

-

Total assets

$

59,704

 

 

3,687

 

 

56,017

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

20,595

 

 

-

 

 

20,595

 

 

-

Option agreement

 

28,710

 

 

-

 

 

-

 

 

28,710

Total liabilities

$

49,305

 

 

-

 

 

20,595

 

 

28,710

 

 

 

 

 

 

 

 

 

 

 

 

March 27, 2016

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

6,109

 

 

6,109

 

 

-

 

 

-

Derivatives

 

69,720

 

 

-

 

 

69,720

 

 

-

Total assets

$

75,829

 

 

6,109

 

 

69,720

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

3,932

 

 

-

 

 

3,932

 

 

-

Option agreement

 

27,920

 

 

-

 

 

-

 

 

27,920

Total liabilities

$

31,852

 

 

-

 

 

3,932

 

 

27,920

 

 

 

 

 

 

 

 

 

 

 

 

December 25, 2016

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

$

3,736

 

 

3,736

 

 

-

 

 

-

Derivatives

 

87,894

 

 

-

 

 

87,894

 

 

-

Total assets

$

91,630

 

 

3,736

 

 

87,894

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Derivatives

$

11,309

 

 

-

 

 

11,309

 

 

-

Option agreement

 

28,770

 

 

-

 

 

-

 

 

28,770

Total Liabilities

$

40,079

 

 

-

 

 

11,309

 

 

28,770

 

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

 

 


 

The Company's derivatives consist of foreign currency forward contracts. The Company used current forward rates of the respective foreign currencies to measure the fair value of these contracts. The option agreement included in other liabilities at April 2, 2017, March 27, 2016 and December 25, 2016, 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 April 2, 2017.

 

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):

 

 

2017

 

2016

Balance at beginning of year

$

(28,770)

 

 

(28,360)

Gain from change in fair value

 

60

 

 

440

Balance at end of first quarter

$

(28,710)

 

 

(27,920)

 

In addition to the above, the Company has three investments for which the fair value is measured using net asset value per share. At April 2, 2017, March 27, 2016 and December 25, 2016, these investments had fair values of $23,603, $22,665 and $23,571, 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.

 

(7) 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 April 2, 2017 and March 27, 2016 are as follows:

 

 

Quarter Ended

 

Pension

 

Postretirement

 

April 2,

 

March 27,

 

April 2,

 

March 27,

 

2017

 

2016

 

2017

 

2016

Service cost

$

952

 

 

998

 

 

172

 

 

132

Interest cost

 

4,725

 

 

4,606

 

 

295

 

 

294

Expected return on assets

 

(6,281)

 

 

(5,507)

 

 

-

 

 

-

Net amortization and deferrals

 

2,694

 

 

2,132

 

 

-

 

 

-

Net periodic benefit cost

$

2,090

 

 

2,229

 

 

467

 

 

426

 

During the three months ended April 2, 2017, the Company made cash contributions to its defined benefit pension plans of approximately $700 in the aggregate. The Company expects to contribute approximately $27,900 during the remainder of fiscal 2017.

 

 


 

(8) 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 2017 through 2021.

 

At April 2, 2017, March 27, 2016 and December 25, 2016, the notional amounts and fair values of the Company's foreign currency forward contracts designated as cash flow hedging instruments were as follows:

  

 

April 2, 2017

 

March 27, 2016

 

December 25, 2016

 

Notional

 

Fair

 

Notional

 

Fair

 

Notional

 

Fair

Hedged transaction

Amount

 

Value

 

Amount

 

Value

 

Amount

 

Value

Inventory purchases

$

974,235

 

 

35,711

 

 

1,277,977

 

 

69,748

 

 

945,728

 

 

60,520

Sales

 

423,828

 

 

1,083

 

 

82,072

 

 

258

 

 

290,181

 

 

9,775

Royalties and Other

 

324,008

 

 

(1,345)

 

 

270,207

 

 

(4,077)

 

 

198,849

 

 

1,633

Total

$

1,722,071

 

 

35,449

 

 

1,630,256

 

 

65,929

 

 

1,434,758

 

 

71,928

 

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 April 2, 2017, March 27, 2016 and December 25, 2016 as follows:

 

 


 

 

April 2,

 

March 27,

 

December 25,

 

2017

 

2016

 

2016

Prepaid expenses and other current assets

 

 

 

 

 

 

 

 

Unrealized gains

$

23,241

 

 

53,774

 

 

34,265

Unrealized losses

 

(3,204)

 

 

(6,890)

 

 

(2,075)

Net unrealized gain

$

20,037

 

 

46,884

 

 

32,190

 

 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

 

 

Unrealized gains

$

39,032

 

 

26,454

 

 

51,839

Unrealized losses

 

(3,052)

 

 

(3,618)

 

 

(792)

Net unrealized gains

$

35,980

 

 

22,836

 

 

51,047

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

Unrealized gains

$

9,041