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HASBRO INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q, including the following section entitled Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements expressing management's current expectations, goals, objectives and similar matters. These forward-looking statements may include statements concerning the Company's product and entertainment plans, anticipated product and entertainment performance, business opportunities, plans and strategies, financial goals, cost savings and efficiency enhancing initiatives and expectations for achieving the Company's financial goals and other objectives. See Item 1A, in Part II of this report and Item 1A, in Part I of the Annual Report on Form 10-K for the year ended December 29, 2013, for a discussion of factors which may cause the Company's actual results or experience to differ materially from that anticipated in these forward-looking statements. The Company undertakes no obligation to revise the forward-looking statements in this report after the date of the filing. EXECUTIVE SUMMARY Hasbro, Inc. ("Hasbro" or the "Company") is a branded-play company dedicated to fulfilling the fundamental need for play for children and families through creative expression of the Company's world class brand portfolio. From toys and games, to television programming, motion pictures, digital gaming and a comprehensive licensing program, Hasbro executes its brand blueprint in all of its operations. At the center of this blueprint, Hasbro re-imagines, re-invents and re-ignites its owned and controlled brands and imagines, invents and ignites new brands, through toy and game innovation, immersive entertainment offerings, including television programming and motion pictures, and a broad range of licensed products, ranging from traditional to high-tech and digital, under well-known brand names structured within the Company's brand architecture and offering consumers the ability to experience these brands in all areas of their lives. To accomplish these objectives, Hasbro offers consumers the ability to experience its branded play through innovative toys and games, digital media, lifestyle licensing, publishing and entertainment, including television programming and motion pictures. The Company's focus remains on growing its owned and controlled brands, developing new and innovative products which respond to market insights, offering entertainment experiences which allow consumers to experience the Company's brands across multiple forms and formats and optimizing efficiencies within the Company to increase operating margins and maintain a strong balance sheet. Hasbro earns revenues and generates cash primarily through the sale of a broad variety of toy and game products and distribution of television programming based on the Company's properties, as well as through the out-licensing of rights for use of its properties in connection with complementary products, including digital media and games and lifestyle products, offered by third parties, or in certain situations, toy products where Hasbro considers the out-licensing of brands to be more effective. The Company's brand architecture includes franchise brands, key partner brands, challenger brands, gaming mega brands and new brands. The Company's franchise and challenger brands represent Company-owned brands or brands which if not entirely owned, are broadly controlled by the Company, and have been successful over the long term. Franchise brands are the Company's most significant owned or controlled brands which it believes have the ability to deliver significant revenue over the long-term. Challenger brands are brands which have not yet achieved franchise brand status, but have the potential to do so with investment and time. The Company's franchise brands are LITTLEST PET SHOP, MAGIC: THE GATHERING, MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and TRANSFORMERS, while challenger brands include BABY ALIVE, FURBY, FURREAL FRIENDS and PLAYSKOOL. Hasbro has a large portfolio of owned and controlled brands, which can be introduced in new forms and formats over time. These brands may also be further extended by pairing a licensed concept with an owned or controlled brand. By focusing on these brands, Hasbro is working to build a more consistent revenue stream and basis for future growth, and to leverage profitability. During 2013, net revenues from the Company's franchise brands increased by 15% and totaled 44% of total consolidated net revenues. This trend continued in the second quarter and first six months of 2014 as the Company's franchise brands grew approximately 36% and 27%, respectively, compared to the second quarter and first six months of 2013. The Company's innovative product offerings encompass a broad variety of toys including boys' action figures, vehicles and play sets, girls' toys, electronic toys, plush products, preschool toys and infant products, electronic interactive products, creative play and toy-related specialty products. Games offerings include action battling, board, off-the-board, digital, card, electronic, trading card and role-playing games. While Hasbro believes it has built a more sustainable revenue base by developing and maintaining its owned or controlled brands and avoiding reliance on licensed entertainment properties, it continues to opportunistically enter into or leverage existing strategic licenses which complement its brands and key strengths and allow the Company to offer innovative products based on movie, television, music and other entertainment properties owned by third parties. The Company's primary licenses include agreements with Marvel Characters B.V. ("Marvel") for characters in the Marvel Universe, including SPIDER-MAN and the AVENGERS; Lucas Licensing Ltd. ("Lucas"), related to the STAR WARS brand; Sesame Workshop, related to the SESAME STREET characters; and Rovio Entertainment Ltd. related to the ANGRY BIRDS brand. Both Marvel and Lucas are owned by The Walt Disney Company ("Disney"). In 2013, Hasbro and Disney amended both the Marvel and Lucas agreements which extended the term of the license for Marvel characters through 2020 and provides additional guaranteed royalty payments with respect to both MARVEL and STAR WARS products in anticipation of expected future motion pictures and other related entertainment through 2020. Sales of MARVEL and STAR WARS products can vary based on the popularity of theatrical and television entertainment in any given year. In 2013 the Company's offerings included products related to several MARVEL properties backed by entertainment, including products based on the theatrical motion picture releases of IRON MAN 3 in May 2013 and THOR: THE DARK WORLD in November 2013. During the first two quarters of 2014, the Company released products related to two theatrical releases based on MARVEL properties, CAPTAIN AMERICA: THE WINTER SOLDIER in April 2014 and THE AMAZING SPIDER-MAN 2 in May 2014 and will market products related to a third planned theatrical release, GUARDIANS OF THE GALAXY, in August 2014. Hasbro also expects to have sales related to the introduction of all new television entertainment based on the STAR WARS brand, STAR WARS REBELS, in the second half of 2014. In addition to offering products based on licensed entertainment properties, the Company offers products which are licensed from outside inventors. The Company seeks to build all-encompassing brand experiences and drive product-related revenues by increasing the visibility of its brands through entertainment such as motion pictures and television programming. Since 2007, the Company has had a number of motion pictures based on its brands released by major motion picture studios, including four motion pictures based on its TRANSFORMERS brand, one of which, TRANSFORMERS: AGE OF EXTINCTION, was released in June 2014 by Paramount Pictures, two motion pictures based on its G.I. JOE brand, including G.I. JOE: RETALIATION released in March 2013, and a major motion picture based on its gaming mega brand, BATTLESHIP. In October 2014, Universal Pictures is scheduled to release a motion picture based on the OUIJA brand. The Company has motion picture projects based on other brands in development for potential release in future years. In addition to using motion pictures to provide entertainment experiences for its brands, the Company has an internal wholly-owned production studio, Hasbro Studios, which is responsible for the creation and development of television programming based primarily on Hasbro's brands. This programming is currently aired in markets throughout the world. The Company is also a 50% partner in a joint venture with Discovery Communications, Inc. ("Discovery") which runs Hub Television Network, LLC ("Hub Network"), a cable television network in the United States dedicated to high-quality children's and family entertainment and educational programming. Programming on Hub Network includes content based on Hasbro's brands as well as programming developed by third parties. Hasbro Studios programming is distributed domestically to Hub Network, internationally to broadcasters and cable networks, and on various digital platforms including Netflix and iTunes. The Company's television initiatives support its strategy of growing its brands well beyond traditional toys and games and providing entertainment experiences for consumers of all ages in many forms or formats. Hasbro's strategic blueprint and brand architecture also focus on extending its brands further into digital media and gaming, including through the licensing of the Company's properties to a number of partners who develop and offer digital games and other gaming experiences based on those brands. One example of these digital gaming relationships is the Company's agreement with Electronic Arts Inc. ("EA") under which EA has the rights to develop eight of Hasbro's best-selling gaming brands for mobile platforms globally. Similarly, Hasbro has an agreement with Activision under which Activision offers digital games based on the TRANSFORMERS brand, as well as agreements with other third-party digital gaming companies, including DeNA and GameLoft. In 2013, Hasbro acquired a 70% majority stake in Backflip Studios, LLC ("Backflip"), a mobile game developer based in Boulder, Colorado. Backflip's product offerings include games for tablets and mobile devices including DRAGONVALE, NINJUMP and PAPER TOSS. In 2014 and beyond, Backflip intends to focus on its existing product lines and launch new games, including those based on Hasbro brands. New game brands released during the second quarter of 2014 include DWARVEN DEN and PLUNDERNAUTS. The Company also seeks to express its brands through its lifestyle licensing business. Under its lifestyle licensing programs, Hasbro enters into relationships with a broad spectrum of apparel, food, bedding, publishing and other lifestyle products companies for the global marketing and distribution of licensed products based on the Company's brands. These relationships further broaden and amplify the consumer's ability to experience the Company's brands. As Hasbro seeks to grow its business in entertainment, licensing and digital gaming, the Company will continue to evaluate strategic alliances and acquisitions, like Backflip, which may complement its current product offerings, allow it entry into an area which is adjacent or complementary to the toy and game business, or allow it to further develop awareness of its brands and expand the ability of consumers to experience its brands in different forms and formats. During the fourth quarter of 2012 the Company announced a multi-year cost savings initiative in which it targeted achieving aggregate annual cost reductions in its underlying business of $100,000 by 2015. This plan included an approximate 10% workforce reduction, facility consolidations and process improvements which reduce redundancy and increase efficiencies. During 2012 and 2013, the Company incurred aggregate restructuring and related pension charges of $79,748 as well as product-related charges of $19,736 associated with this plan. For the full year 2013, the Company recognized gross cost savings, before restructuring charges, from these actions of approximately $50,000. These savings are prior to other costs which have or are anticipated to increase in 2014 and future years, such as compensation costs and other investments in certain components of the business. The Company's business is highly seasonal with a significant amount of revenues occurring in the second half of the year. In 2013, 2012 and 2011, the second half of the year accounted for 65%, 64% and 63% of the Company's annual net revenues, respectively. The Company expects this trend to continue with variation depending on the number, timing and popularity of theatrical movie releases in any given year. Hasbro sells its products both within the United States and throughout international markets. In recent years, the Company's International segment net revenues have experienced growth as the Company has sought to increase its global presence. Net revenues from the Company's International segment represented 46%, 44% and 43% of total net revenues in 2013, 2012 and 2011, respectively. The Company has driven international growth by opportunistically opening offices in certain markets, primarily emerging markets, to develop this greater global presence. The Company believes emerging markets offer greater opportunity for revenue growth than developed economies which have faced challenging economic environments in recent years. In 2013 and 2012, net revenues from emerging markets increased by 25% and 16%, respectively, representing more than 10% of consolidated net revenues in these years. During the second quarter and first six months of 2014, net revenues from emerging markets increased approximately 30% and 23%, respectively, compared to the same periods in 2013. The Company's business is separated into three principal business segments: U.S. and Canada, International and Entertainment and Licensing. The U.S. and Canada segment markets and sells both toy and game products primarily in the United States and Canada. The International segment consists of the Company's European, Asia Pacific and Latin American toy and game marketing and sales operations. The Company's Entertainment and Licensing segment includes the Company's lifestyle licensing, digital licensing and gaming, movie and television entertainment operations. In addition to these three primary segments, the Company's world-wide manufacturing and product sourcing operations are managed through its Global Operations segment. The Company is committed to returning excess cash to its shareholders through share repurchases and dividends. As part of this initiative, from 2005 to 2013, the Company's Board of Directors (the "Board") adopted seven successive share repurchase authorizations with a cumulative authorized repurchase amount of $3,325,000. The seventh authorization was approved in August 2013 for $500,000. At June 29, 2014, the Company had $308,108 remaining under this authorization. During the quarter and six-month periods ended June 29, 2014, the Company spent $136,280 and $216,793 to repurchase approximately 2,520 and 4,001 shares of common stock in the open market, respectively. During the three years ended 2013, the Company spent $625,554 to repurchase 15,424 shares in the open market. The Company has no obligation to repurchase shares under the authorization, and the timing, actual number, and value of the shares that are repurchased will depend on a number of factors, including the price of the Company's stock. The Company may suspend or discontinue the program at any time. The Company intends to, at its discretion, opportunistically repurchase shares in the future subject to market conditions, the Company's other potential uses of cash and the Company's levels of cash generation. In addition to the share repurchase program, the Company also seeks to return cash to its shareholders through the payment of quarterly dividends. In February 2014 the Board increased the Company's quarterly dividend rate, effective for the dividend paid in May 2014, to $0.43 per share, an 8% increase from the prior quarterly dividend rate of $0.40 per share. This was the tenth dividend increase in the previous eleven years. During that period, the Company has increased its quarterly cash dividend from $0.03 to $0.43 per share. SUMMARY OF FINANCIAL PERFORMANCE The components of the results of operations, stated as a percent of net revenues, are illustrated below for the quarter and six-month periods ended June 29, 2014 and June 30, 2013. Quarter Ended Six Months Ended June 29, 2014 June 30, 2013 June 29, 2014 June 30, 2013 Net revenues 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Cost of sales 38.6 39.2 38.4 39.7 Royalties 8.5 6.6 8.0 7.0 Product development 6.2 6.2 6.6 6.6 Advertising 9.9 9.6 9.9 9.9 Amortization of intangibles 1.4 1.6 1.7 1.7 Program production cost amortization 0.8 1.3 0.8 1.1 Selling, distribution and administration 24.6 25.8 26.5 28.1 Operating profit 10.0 9.7 8.4 5.9 Interest expense 2.7 2.9 3.0 3.2 Interest income (0.2 ) (0.2 ) (0.2 ) (0.2 ) Other (income) expense, net (0.4 ) 0.3 (0.4 ) 0.5 Earnings before income taxes 7.8 6.7 6.0 2.4 Income tax expense 3.8 1.9 1.7 0.3 Net earnings 4.0 4.8 4.3 2.1 Net loss attributable to noncontrolling interests (0.1 ) 0.0 (0.1 ) 0.0 Net earnings attributable to Hasbro, Inc. 4.0 % 4.8 % 4.3 % 2.1 % RESULTS OF OPERATIONS The quarter and six-month periods ended June 29, 2014 and June 30, 2013 were each 13-week and 26-week periods, respectively. Net earnings, including the impact of noncontrolling interests in Backflip, were $32,820 and $64,334 for the quarter and six months ended June 29, 2014. Net earnings attributable to Hasbro, Inc. for the quarter and six months ended June 29, 2014 were $33,475 and $65,562, respectively, compared to $36,480 and $29,809 for the respective periods of 2013. Diluted earnings per share attributable to Hasbro, Inc. for the quarter and six months ended June 29, 2014 were $0.26 and $0.50, respectively, compared to $0.28 and $0.23 for the respective periods of 2013. Net earnings for the second quarter and first six months of 2014 include net unfavorable tax adjustments of $13,846, or $0.10 per diluted share, and $366, respectively. Year-to-date, an unfavorable tax adjustment related to a proposed resolution of outstanding tax matters during the second quarter of 2014 more than offset a favorable settlement of certain open tax years during the first quarter of 2014. Net earnings for the quarter and six months ended June 30, 2013 includes unfavorable impacts, net of tax, of $1,790, or $0.01 per share, and $20,567, or $0.16 per share, respectively, related to the multi-year cost savings initiative announced during the fourth quarter of 2012. During the third quarter of 2013, the Company acquired a 70% majority interest in Backflip Studios, LLC ("Backflip"). The Company is consolidating the financial results of Backflip in its consolidated financial statements and, accordingly, reported revenues, costs and expenses, assets and liabilities, and cash flows include 100% of Backflip, with the 30% noncontrolling interests share reported as net loss attributable to noncontrolling interests in the consolidated statements of operations and redeemable noncontrolling interests on the consolidated balance sheets. The results of operations for the quarter and six-month periods ended June 29, 2014 include the operations of Backflip whereas the respective periods of 2013 do not. The operations of Backflip are reported in the Entertainment and Licensing segment. Consolidated net revenues for the quarter ended June 29, 2014 increased approximately 8% to $829,262 from $766,342 for the quarter ended June 30, 2013 and were negatively impacted by foreign currency translation of approximately $1,200 for the quarter ended June 29, 2014 as a result of the stronger U.S. dollar in 2014 compared to 2013. For the six months ended June 29, 2014, consolidated net revenues increased 6% to $1,508,715 from $1,430,036 for the six months ended June 30, 2013 and were negatively impacted by foreign currency translation of approximately $7,200 as a result of the stronger U.S. dollar in 2014 compared to 2013. The Company's focus on franchise brands contributed to the overall growth of consolidated net revenues, with franchise brands growing approximately 36% and 27% in the second quarter and first six months of 2014 compared to 2013. Five of the seven franchise brands experienced growth in the quarter and six-month periods, including MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and TRANSFORMERS. The following table presents net revenues by product category for the quarter and six-month periods ended June 29, 2014 and June 30, 2013. Quarter Ended Six Months Ended % % June 29, 2014 June 30, 2013 Change June 29, 2014 June 30, 2013 Change Boys $ 335,798 253,684 32 % 583,573 496,480 18 % Games 225,702 255,409 -12 % 446,228 486,324 -8 % Girls 163,817 149,419 10 % 302,517 264,193 15 % Preschool 103,945 107,830 -4 % 176,397 183,039 -4 % Net revenues $ 829,262 766,342 1,508,715 1,430,036 BOYS: Net revenues in the boys' category increased 32% and 18% in the second quarter and first six months of 2014, respectively compared to 2013. Both the second quarter and first six months of 2014 benefited from shipments related to three theatrical releases whereas the second quarter and first six months of 2013 only benefited from shipments related to one theatrical release. Growth in 2014 resulted from higher net revenues from TRANSFORMERS products related to the June 2014 theatrical release of TRANSFORMERS: AGE OF EXTINCTION as well as higher net revenues from MARVEL products related to two theatrical releases, CAPTAIN AMERICA: THE WINTER SOLIDER in April 2014 and THE AMAZING SPIDER-MAN 2 in May 2014. The second quarter and first six months of 2013 included shipments of MARVEL products related to one theatrical release, IRON MAN 3, in May 2013. Shipments of MARVEL products also increased in the second quarter and first half of 2014 due to the introduction of MARVEL SUPER HERO MASHERS products. These higher net revenues were slightly offset by expected lower sales of BEYBLADE and STAR WARS products in the second quarter and first six months of 2014. Lastly, net revenues from NERF products were up year-to-date in 2014, however, decreased slightly in the second quarter of 2014. GAMES: Net revenues from the games category decreased 12% and 8% in the second quarter and first six months of 2014, respectively, compared to 2013. For the quarter and six months, higher net revenues from MONOPOLY products were more than offset by lower net revenues from other games, particularly TWISTER and DUEL MASTERS products. Net revenues from MAGIC: THE GATHERING products were flat in 2014 year-to-date, however, decreased slightly in the second quarter primarily due to the timing and type of releases in 2014 compared to 2013. Games category net revenues in the second quarter and first six months of 2014 also includes mobile gaming revenue from Backflip digital gaming properties as a result of its third quarter 2013 acquisition. GIRLS: Net revenues in the girls' category increased 10% and 15% in the second quarter and first six months of 2014, respectively, compared to 2013. Higher net revenues from franchise brands, specifically MY LITTLE PONY and NERF, contributed to the category's growth in both the quarter and six months. Net revenues from MY LITTLE PONY products have continued momentum with support from the successful television program, MY LITTLE PONY: FRIENDSHIP IS MAGIC, as well as the third quarter 2013 introduction of MY LITTLE PONY EQUESTRIA GIRLS products. The Company also successfully launched NERF REBELLE, a line of action performance products, during the second half of 2013 and the product line's success continued into the second quarter and first six months of 2014. The girls' category also benefited slightly from the launch of PLAY-DOH DOH VINCI products late in the second quarter of 2014. These higher net revenues were partially offset by lower net revenues from LITTLEST PET SHOP and FURBY products in both the quarter and six months ended June 29, 2014. PRESCHOOL: Net revenues from the preschool category declined 4% in both the quarter and six months ended June 29, 2014 compared to the quarter and six months ended June 30, 2013. Growth in net revenues from PLAY-DOH and TRANSFORMERS products was more than offset by lower net revenues from various other preschool brands, including PLAYSKOOL and TONKA. Operating profit for the quarter ended June 29, 2014 increased 11% to $82,564, or 10.0% of net revenues, from $74,088, or 9.7% of net revenues, for the quarter ended June 30, 2013. Absent the impact of restructuring and related pension charges of $2,462, operating profit for the quarter ended June 30, 2013 was $76,550, or 10.0% of net revenues. Foreign currency translation did not have a material impact on consolidated operating profit in the second quarter of 2014. The impact of higher net revenues, partially offset by higher costs and expenses, contributed to growth in operating profit in the second quarter of 2014. Excluding the impact of 2013 restructuring and related pension charges, the operating margin was flat in 2014 compared to 2013, and included an unfavorable revenue mix which was offset by lower expense levels as a percentage of net revenues. Operating profit for the six months ended June 29, 2014 increased 49% to $126,012, or 8.4% of net revenues, compared to $84,715, or 5.9% of net revenues, for the six months ended June 30, 2013. Operating profit in 2013 included restructuring and related pension charges of $31,388. Absent these charges, operating profit increased 9% in 2014 from $116,103, or 8.1% of net revenues, for the six months ended June 30, 2013. Foreign currency translation did not have a material impact on consolidated operating profit in the first six months of 2014. Excluding the 2013 restructuring and related pension charges, the increase in operating profit and operating profit margin was primarily due to the impact of higher net revenues, partially offset by increased expense levels. Most of the Company's revenues and operating profit are derived from its three principal business segments: the U.S. and Canada segment, the International segment and the Entertainment and Licensing segment, which are discussed in detail below. The following table presents net external revenues and operating profit data for the Company's three principal segments for the quarter and six-month periods ended June 29, 2014 and June 30, 2013. Quarter Ended Six Months Ended June 29, 2014 June 30, 2013 % Change June 29, 2014 June 30, 2013 % Change Net Revenues U.S. and Canada segment $ 383,001 389,243 -2 % 720,700 731,302 -1 % International segment 396,849 340,176 17 % 702,324 629,989 11 % Entertainment and Licensing segment 47,663 35,336 35 % 82,537 66,110 25 % Operating Profit U.S. and Canada segment $ 46,928 59,004 -20 % 82,691 96,747 -15 % International segment 29,232 14,793 98 % 31,646 10,288 208 % Entertainment and Licensing segment 14,645 3,712 295 % 20,627 8,997 129 % U.S. AND CANADA SEGMENT The U.S. and Canada segment net revenues for the quarter ended June 29, 2014 decreased 2% to $383,001 from $389,243 for the quarter ended June 30, 2013. Net revenues for the first half of 2014 were $720,700 compared to $731,302 for the first half of 2013. Currency translation negatively impacted net revenues by approximately $700 and $1,900 in the quarter and six-month periods ended June 29, 2014. In both the quarter and six months of 2014 compared to 2013, growth in the boys' and girls' categories was more than offset by declines in the games and preschool categories. In the boys' category, higher net revenues from TRANSFORMERS and MARVEL products for the second quarter and first half of 2014 were partially offset by lower net sales of BEYBLADE and STAR WARS products. Net revenues from NERF products were down in the quarter ended June 29, 2014 but grew in the six months ended June 29, 2014 compared to 2013. In the games category, increased net revenues from MONOPOLY products in both the quarter and six-month periods ended June 29, 2014 were more than offset by lower revenues from TWISTER, DUEL MASTERS, MAGIC: THE GATHERING and certain other game brands. In the girls' category, higher net revenues from franchise brands, particularly MY LITTLE PONY, NERF and PLAY-DOH, in the second quarter and first six months of 2014 were partially offset by lower net revenues from FURBY and FURREAL FRIENDS products. Net revenues from LITTLEST PET SHOP products declined year-to-date, however, experienced modest growth in the second quarter of 2014 compared to 2013. In the preschool category, higher net revenues from TRANSFORMERS products in the quarter and six months ended June 29, 2014 were more than offset by lower net revenues from PLAYSKOOL, SESAME STREET, MARVEL and STAR WARS products. U.S. and Canada segment operating profit for the quarter ended June 29, 2014 decreased to $46,928, or 12.3% of segment net revenues, from $59,004, or 15.2% of segment net revenues, for the quarter ended June 30, 2013. U.S. and Canada segment operating profit for the six months ended June 29, 2014 decreased to $82,691, or 11.5% of segment net revenues, from $96,747, or 13.2% of segment net revenues, for the six months ended June 30, 2013. The impact of lower net revenues, unfavorable product mix, and increased expenses, primarily related to investments in MAGIC: THE GATHERING, were the primary reasons for the decline in operating profit and operating profit margin in both the quarter and six month periods ended June 29, 2014 compared to 2013. INTERNATIONAL SEGMENT International segment net revenues increased 17% to $396,849 for the quarter ended June 29, 2014 from $340,176 for the quarter ended June 30, 2013. International segment net revenues for the second quarter of 2014 were negatively impacted by currency translation of approximately $600 as a result of the stronger U.S. dollar in 2014 compared to 2013. International segment net revenues increased 11% to $702,324 for the six months ended June 29, 2014 from $629,989 for the six months ended June 30, 2013. International segment net revenues for the first half of 2014 were negatively impacted by currency translation of approximately $5,400 as a result of the stronger U.S. dollar in 2014 compared to 2013. Absent the impact of foreign currency translation, International segment net revenues grew approximately 12% in the first half of 2014 compared to 2013. The following table presents net revenues by geographic region for the Company's International segment for the quarter and six-month periods ended June 29, 2014 and June 30, 2013. Quarter Ended Six Months Ended % June 29, 2014 June 30, 2013 Change June 29, 2014 June 30, 2013 % Change Europe $ 216,268 185,860 16 % 423,810 378,449 12 % Latin America 97,019 82,816 17 % 150,303 128,529 17 % Asia Pacific 83,562 71,500 17 % 128,211 123,011 4 % Net revenues $ 396,849 340,176 702,324 629,989 International segment net revenues grew across all regions in both the quarter and six months ended June 29, 2014. Absent the impact of foreign exchange, net revenues from the European, Latin American and Asia Pacific regions grew approximately 14%, 22% and 18%, respectively, in the second quarter of 2014 and approximately 10%, 24% and 6%, respectively, in the first six months of 2014. Net revenues in emerging markets, which includes but is not limited to Russia, Brazil, China and Korea, increased 30% and 23% in the second quarter and first six months of 2014, respectively, compared to 2013. In both the quarter and six month periods of 2014, growth in the boys, girls and preschool categories were partially offset by declines in the games category. Higher net revenues from TRANSFORMERS, MARVEL and ANGRY BIRDS products in the second quarter of 2014 contributed to growth in the boys category which was slightly offset by lower net revenues from NERF and BEYBLADE products while higher net revenues from TRANSFORMERS, MARVEL, NERF and ANGRY BIRDS products in the first half of 2014 were partially offset by lower net revenues from BEYBLADE products. In the girls category, higher net revenues from MY LITTLE PONY, NERF and PLAY-DOH products in the second quarter and first half of 2014 compared to 2013 were partially offset by lower net revenues from LITTLEST PET SHOP and FURBY products. In the games category, higher net revenues from the franchise brands, MAGIC: THE GATHERING and MONOPOLY, as well as higher net revenues from OPERATION products in the quarter and six months ended June 29, 2014 were more than offset by lower net revenues from various other games brands. In the preschool category, higher net revenues from franchise brands, specifically PLAY-DOH and TRANSFORMERS, as well as higher net revenues from key partner brands ANGRY BIRDS and MARVEL, in the quarter and six months ended June 29, 2014 were only partially offset by lower net revenues from TONKA products. Net revenues from PLAYSKOOL products were down in the six months ended June 29, 2014, but grew slightly in the quarter. International segment operating profit increased to $29,232, or 7.4% of segment net revenues, for the quarter ended June 29, 2014 from $14,793, or 4.3% of segment net revenues, for the quarter ended June 30, 2013. International segment operating profit increased to $31,646, or 4.5% of segment net revenues, for the six months ended June 29, 2014, from $10,288, or 1.6% of net revenues, for the six months ended June 30, 2013. Foreign currency translation did not have a material impact on the segment's operating profit in both the quarter and six months ended June 29, 2014. Higher net revenues contributed to higher operating profit and operating profit margin in the second quarter and first six months of 2014 compared to 2013 as a result of improved leverage of fixed overhead expenses. ENTERTAINMENT AND LICENSING SEGMENT Entertainment and Licensing segment net revenues for the quarter ended June 29, 2014 increased 35% to $47,663 from $35,336 for the quarter ended June 30, 2013. Entertainment and Licensing segment net revenues for the six months ended June 29, 2014 increased 25% to $82,537 from $66,110 for the six months ended June 30, 2013. Higher net revenues from lifestyle licensing and digital gaming, as well as revenue contribution from Backflip, drove growth in both the quarter and six months of 2014 compared to 2013. Entertainment and Licensing segment operating profit increased to $14,645, or 30.7% of segment net revenues, for the quarter ended June 29, 2014 from $3,712, or 10.5% of segment net revenues, for the quarter ended June 30, 2013. Entertainment and Licensing segment operating profit increased to $20,627, or 25.0% of segment net revenues, for the six months ended June 29, 2014 from $8,997, or 13.6% of segment net revenues for the six months ended June 30, 2013. Operating profit in the first half of 2013 included restructuring charges of $1,729. The increase in operating profit and operating margin is primarily due to the profit impact of higher net revenues from lifestyle licensing and digital gaming and lower program production cost amortization, partially offset by operating losses from Backflip, which includes amortization expense. OTHER SEGMENTS AND CORPORATE AND ELIMINATIONS Global Operations segment operating profit of $1,810 for the quarter ended June 29, 2014 compared to an operating loss of $4,357 for the quarter ended June 30, 2013. Segment operating profit of $66 in the first six months of 2014 compared to an operating loss of $13,940 for the six months ended June 30, 2013. The improvement in operating results is primarily due to improvements made in owned manufacturing facilities and expense reductions associated with restructuring activities. The operating loss in Corporate and eliminations for the second quarter of 2014 totaled $10,051 compared to operating profit of $936 for the second quarter of 2013. Operating loss for the first six months of 2014 of $9,018 compared to an operating loss of $17,377 for the first six months of 2013. Operating profit (loss) for the second quarter and first six months of 2013 included restructuring and related pension charges of $2,462 and $29,659, respectively. Absent these charges, operating profit in Corporate and Eliminations for the second quarter and first six months of 2013 was $3,398 and $12,282, respectively. The Company's costs and expenses, stated as percentages of net revenues, are illustrated below for the quarter and six-month periods ended June 29, 2014 and June 30, 2013. Quarter Ended Six Months Ended June 29, 2014 June 30, 2013 June 29, 2014 June 30, 2013 Cost of sales 38.6 % 39.2 % 38.4 % 39.7 % Royalties 8.5 6.6 8.0 7.0 Product development 6.2 6.2 6.6 6.6 Advertising 9.9 9.6 9.9 9.9 Amortization of intangibles 1.4 1.6 1.7 1.7 Program production cost amortization 0.8 1.3 0.8 1.1 Selling, distribution and administration 24.6 25.8 26.5 28.1 Operating expenses for the quarter and six-month periods ended June 30, 2013 include costs associated with a multi-year cost savings initiative announced during the fourth quarter of 2012, which targeted achieving an aggregate $100,000 in underlying annual savings by the end of 2015, prior to the other costs which have, or are anticipated to, increase in 2014 as well as in future years. These expenses were included in the consolidated statement of operations as follows: Quarter Ended Six Months Ended June 30, June 30, 2013 2013 Cost of sales $ - 8,493 Product development - 3,515 Selling, distribution and administration 2,462 19,380 Total $ 2,462 31,388 Cost of sales increased in dollars but decreased as a percent of net revenues to $320,336 or 38.6% of net revenues, for the quarter ended June 29, 2014 from $300,570, or 39.2% of net revenues, for the quarter ended June 30, 2013. For the six months ended June 29, 2014, cost of sales was $578,881, or 38.4% of net revenues, compared to $568,142, or 39.7% of net revenues, for the six months ended June 30, 2013. Absent restructuring charges above, cost of sales as a percentage of net revenues was 39.1% for the first six months of 2013. While higher cost of sales for the second quarter and first six months of 2014 primarily reflect higher net revenues compared to 2013, the decrease as a percentage of net revenues, absent restructuring charges, reflects higher net revenues from entertainment properties in 2014 compared to 2013. Royalty-bearing products generally carry higher pricing and, therefore, have a lower cost of sales as a percentage of net revenues. The second quarter and first six months of 2014 also included a benefit from realized costs savings. Royalty expense for the quarter ended June 29, 2014 was $70,533, or 8.5% of net revenues, compared to $50,229, or 6.6% of net revenues, for the quarter ended June 30, 2013. Royalty expense for the six months ended June 29, 2014 increased to $120,114, or 8.0% of net revenues, from $99,621, or 7.0% of net revenues. Fluctuations in royalty expense are generally related to the volume of entertainment-driven products sold in a given period, especially if there is a major motion picture release. During the second quarter and first six months of 2014, the Company benefited from shipments of TRANSFORMERS products related to the major motion picture release of TRANSFORMERS: AGE OF EXTINCTION as well as shipments of MARVEL products related to two major motion picture releases, CAPTAIN AMERICA: THE WINTER SOLDIER and THE AMAZING SPIDER-MAN 2. The second quarter and first six months of 2013 only benefited from shipments of MARVEL products related to one major motion picture release, IRON MAN 3. Product development expense for the quarter ended June 29, 2014 was $51,707, or 6.2% of net revenues, compared to $47,904, or 6.2% of net revenues, for the quarter ended June 30, 2013. Product development expense for the six months ended June 29, 2014 increased in dollars to $98,964 from $95,089 for the six months ended June 30, 2013 but was consistent as a percentage of net revenues at 6.6% in both periods. Absent restructuring charges, product development expense for the first six months of 2013 was $91,574, or 6.4% of net revenues. Higher product development expenses in 2014 compared to 2013 reflect the acquisition of Backflip in the third quarter of 2013 as well as increased investment in the MAGIC: THE GATHERING brand, partially offset by realized cost savings. Advertising expense for the quarter ended June 29, 2014 was $81,693, or 9.9% of net revenues, compared to $73,657, or 9.6% of net revenues, for the quarter ended June 30, 2013. Advertising expense for the six months ended June 29, 2014 was $148,952, or 9.9% of net revenues, compared to $140,791, or 9.9% of net revenues. Higher net revenues resulted in higher advertising expense for the second quarter and first six months of 2014 compared to 2013. Advertising expense for the first six months of 2014 and 2013 were consistent as a percentage of net revenues. Amortization of intangibles was consistent at $11,892, or 1.4% of net revenues, for the quarter ended June 29, 2014 compared to $12,037, or 1.6% of net revenues, for the quarter ended June 30, 2013. Amortization of intangibles increased to $25,294, or 1.7% of net revenues, in the first six months of 2014 from $23,453, or 1.7% of net revenues, in the first six months of 2013. Amortization in the second quarter and first half of 2014 includes amortization expense of $1,643 and $4,418, respectively, related to certain intangibles acquired with the acquisition of Backflip in the third quarter of 2013. Absent amortization of intangibles related to Backflip, the Company's amortization in the quarter and six month periods decreased approximately 15% and 11%, respectively, related to the impact of intangible assets which were fully amortized during 2013. Program production cost amortization decreased in the second quarter and first six months of 2014 to $6,710 and $11,368, or 0.8% of net revenues, respectively, from $10,309, or 1.3% of net revenues, and $16,032, or 1.1% of net revenues, in the second quarter and first six months of 2013, respectively. Program production costs are capitalized as incurred and amortized using the individual-film-forecast method. The decrease in the quarter and six months of 2014 compared to 2013 reflects the programming mix being amortized and the related actual and projected net revenues. For the quarter ended June 29, 2014, the Company's selling, distribution and administration expenses increased in dollars but decreased as a percent of net revenues to $203,827, or 24.6% of net revenues, from $197,548, or 25.8% of net revenues, for the quarter ended June 30, 2013. Selling, distribution and administration expenses for the second quarter of 2013 included partial pension settlement charges of $2,462. Absent these charges, selling, distribution and administration expenses increased 4% in 2014 from $195,086, or 25.5% of net revenues, for the quarter ended June 30, 2013. For the six months ended June 29, 2014, the Company's selling, distribution and administration expenses decreased to $399,130, or 26.5% of net revenues, from $402,193, or 28.1% of net revenues, for the six months ended June 30, 2013. Selling, distribution and administration expense for the first six months of 2013 included restructuring and related pension charges of $19,380. Absent these charges, selling, distribution and administration expenses increased 4% in 2014 from $382,813, or 26.7% of net revenues. The increase in both the quarter and six-month periods, excluding restructuring charges, reflects higher compensation, depreciation and investments, including in MAGIC: THE GATHERING and Backflip, partially offset by cost savings. NON-OPERATING (INCOME) EXPENSE Interest expense for the second quarter and first six months of 2014 was $22,802 and $45,230, respectively compared to $22,225 and $45,204 for the comparable and respective periods of 2013. Interest income for the second quarter and first six months of 2014 decreased as a result of lower cash balances and totaled $1,165 and $2,491 compared to $1,432 and $2,913 for the quarter and six-month periods ended June 30, 2013. Other income, net of $3,590 for the quarter ended June 29, 2014 compared to other expense, net of $2,219 for the quarter ended June 30, 2013. Other (income) expense, net includes the Company's 50% share in the earnings of Hub Network. Earnings from Hub Network of $2,263 in the second quarter of 2014 compared to $131 in the second quarter of 2013. Foreign exchange gains of approximately $1,100 in the second quarter of 2014 compared to losses of approximately $3,000 in the second quarter of 2013. Other income, net of $7,239 for the first six months of 2014 compared to other expense, net of $7,841 for the first six months of 2013. Earnings from Hub Network of $3,599 in the first half of 2014 compared to losses of $933 in the first half of 2013. Foreign exchange gains of approximately $200 in the first half of 2014 compared to losses of approximately $5,900 in the respective period of 2013. Other income, net in the first six months of 2014 also includes gains of $3,400 on the sale of an internet domain name. INCOME TAXES Income taxes totaled $31,697 on pre-tax earnings of $64,517 in the second quarter of 2014 compared to income taxes of $14,596 on pre-tax earnings of $51,076 in the second quarter of 2013. For the six month period, income taxes totaled $26,178 on pre-tax earnings of $90,512 in 2014 compared to income taxes of $4,774 on pre-tax earnings of $34,583 in 2013. Both periods, as well as the full year 2013, are impacted by certain discrete tax events including the accrual of potential interest and penalties on certain tax positions. During the first six months of 2014, unfavorable discrete tax adjustments were a net expense of $1,921 compared to a net benefit of $4,667 in the first six months of 2013. The unfavorable discrete tax adjustment for the first six months of 2014 includes an expense related to additional reserves for certain tax positions offset by a benefit in the first quarter related to the effective settlement of certain open tax years in the United States. Absent discrete items, the adjusted tax rate for the first six months of 2014 and 2013 were 26.8% and 27.3%, respectively. The increase in the adjusted rate to 26.8% for the six months ended June 29, 2014 from the full year 2013 adjusted rate 25.8% is primarily due to the tax impact of higher expected operating profits in jurisdictions with higher statutory tax rates. OTHER INFORMATION Historically, the Company's revenue pattern has shown the second half of the year to be more significant to its overall business than the first half. The Company expects that this concentration will continue, particularly as more of its business has shifted to larger customers with order patterns concentrated in the second half of the year. The concentration of sales in the second half of the year increases the risk of (a) underproduction of popular items, (b) overproduction of less popular items, and (c) failure to achieve compressed shipping schedules. The toy and game business is characterized by customer order patterns which vary from year to year largely because of differences each year in the degree of consumer acceptance of product lines, product availability, marketing strategies and inventory policies of retailers, the dates of theatrical releases of major motion pictures for which the Company has product licenses, and changes in overall economic conditions. As a result, comparisons of the Company's unshipped orders on any date with those at the same date in a prior year are not necessarily indicative of the Company's expected sales for that year. Moreover, quick response inventory management practices result in fewer orders being placed significantly in advance of shipment and more orders being placed for immediate delivery. Although the Company may receive orders from customers in advance, it is a general industry practice that these orders are subject to amendment or cancellation by customers prior to shipment and, as such, the Company does not believe that these unshipped orders, at any given date, are indicative of future sales. In May 2014, the Financial Accounting Standards Board ("FASB"), in cooperation with the International Accounting Standards Board ("IASB"), issued ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). This ASU supersedes the revenue recognition requirements in Accounting Standards Codification 605 - Revenue Recognition and most industry-specific guidance throughout the Codification. This new guidance provides a five-step model for analyzing contracts and transactions to determine when, how and if revenue is recognized. Revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. The Company is evaluating the requirements of ASU 2014-09 and its potential impact on the Company's financial statements. LIQUIDITY AND CAPITAL RESOURCES The Company has historically generated a significant amount of cash from operations. In 2013 the Company funded its operations and liquidity needs primarily through cash flows from operations, and, when needed, using borrowings under its available lines of credit and commercial paper program. During the first half of 2014, the Company continued to fund its working capital needs primarily through cash flows from operations and, when needed, lines of credit. The Company believes that the funds available to it, including cash expected to be generated from operations and funds available through its available lines of credit and commercial paper program, are adequate to meet its working capital needs for the remainder of 2014. However, unexpected events or circumstances such as material operating losses or increased capital or other expenditures may reduce or eliminate the availability of external financial resources. In addition, significant disruptions to credit markets may also reduce or eliminate the availability of external financial resources. Although management believes the risk of nonperformance by the counterparties to the Company's financial facilities is not significant, in times of severe economic downturn in the credit markets it is possible that one or more sources of external financing may be unable or unwilling to provide funding to the Company. In May 2014, the Company issued $600,000 in long-term debt which consists of $300,000 in Notes Due in 2021 which bear interest at a rate of 3.15% and $300,000 in Notes Due in 2044 which bear interest at a rate of 5.10% (collectively, the "Notes"). The Company may redeem the Notes at its option at the greater of the principal amount of the Notes or the present value of the remaining scheduled payments using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase. The proceeds from the issuance of the Notes was used, primarily, to repay $425,000 aggregate principal amount of the 6.125% Notes Due 2014 upon maturity, including accrued and unpaid interest. The remaining net proceeds are being utilized for general corporate and working capital purposes. As of June 29, 2014 the Company's cash and cash equivalents totaled $586,151, a substantial portion of which is held outside of the United States. Deferred income taxes have not been provided on the majority of undistributed earnings of international subsidiaries as such earnings are indefinitely reinvested by the Company. Accordingly, such international cash balances are not available to fund cash requirements in the United States unless the Company changes its reinvestment policy. The Company currently has sufficient sources of cash in the United States to fund cash requirements without the need to repatriate any funds. If the Company changes its policy of permanently reinvesting international earnings, it would be required to accrue for any additional income taxes representing the difference between the tax rates in the United States and the applicable tax jurisdiction of the international subsidiaries. If the Company repatriated the funds from its international subsidiaries, it would then be required to pay the additional U.S. income tax. The majority of the Company's cash and cash equivalents held outside of the United States as of June 29, 2014 is denominated in the U.S. dollar. Because of the seasonality in the Company's cash flow, management believes that on an interim basis, rather than discussing only its cash flows, a better understanding of its liquidity and capital resources can be obtained through a discussion of the various balance sheet categories as well. Also, as several of the major categories, including cash and cash equivalents, accounts receivable, inventories and short-term borrowings, fluctuate significantly from quarter to quarter, again due to the seasonality of its business, management believes that a comparison to the comparable period in the prior year is generally more meaningful than a comparison to the prior quarter or prior year-end. At June 29, 2014, cash and cash equivalents, net of short-term borrowings, decreased to $576,963 from $829,427 at June 30, 2013. Net cash provided by operating activities in the first half of 2014 was $109,270 compared to $298,136 in the first half of 2013. Lower net cash provided by operating activities reflects a payment of $58,040 resulting from the settlement of an arbitration award, higher royalty advances, and increased working capital. Accounts receivable increased approximately 15% to $738,899 at June 29, 2014 from $640,503 at June 30, 2013. The accounts receivable balance at June 29, 2014 includes an increase of approximately $4,700 resulting from a weaker U.S. dollar at June 29, 2014 compared to June 30, 2013. Absent the impact of foreign currency translation, the increase in accounts receivable reflects higher net revenues for the quarter ended June 29, 2014 compared to the quarter ended June 30, 2013 as well as higher days sales outstanding, which increased to 80 days at June 29, 2014 compared to 75 days at June 30, 2013. This increase reflects both the timing of collections and increased revenues in international markets which have longer payment terms. Inventories increased approximately 37% to $492,822 at June 29, 2014 from $359,969 at June 30, 2013. The inventory balance at June 29, 2014 includes an increase of approximately $5,100 resulting from a weaker U.S. dollar at June 29, 2014 compared to June 30, 2013. The increase is primarily in international markets, including emerging markets in support of continued expectations for growth in these markets. A portion of the increase was also due to potential labor disputes and related delays at the shipping port the Company utilizes in California. Prepaid expenses and other current assets increased 13% to $386,333 at June 29, 2014 from $343,385 at June 30, 2013. The prepaid and other current assets balance at June 29, 2014 included an increase of approximately $4,500 resulting from a weaker U.S. dollar at June 29, 2014 compared to June 30, 2013. Higher prepaid expenses and other current assets primarily relate to increases in royalty advances related to the MARVEL and STAR WARS licenses. Prepaid expenses and other current assets in 2014 also reflect higher short-term and other investments. These increases were partially offset by lower income-based tax receivables and outstanding foreign exchange contracts. Accounts payable and accrued liabilities increased 7% to $715,504 at June 29, 2014 from $671,346 at June 30, 2013. Accounts payable and accrued liabilities at June 29, 2014 includes an increase of approximately $8,700 resulting from a weaker U.S. dollar at June 29, 2014 compared to June 30, 2013. Higher accounts payable, accrued royalties, specifically related to TRANSFORMERS movie-related products, accrued advertising, foreign exchange contracts and accrued salaries and bonuses were only partially offset by lower accrued restructuring resulting from scheduled payments. Goodwill and other intangible assets, net increased to $945,025 at June 29, 2014 from $867,979 at June 30, 2013. Goodwill increased from $474,773 at June 30, 2013 to $594,320 at June 29, 2014, reflecting the Company's acquisition of a majority interest in Backflip during the third quarter of 2013. Other intangible assets decreased from $393,206 at June 30, 2013 to $350,705 at June 29, 2014. Increases in other intangible assets resulting from the acquisition of a majority interest in Backflip during the third quarter of 2013 were more than offset by amortization expense, including write-offs of certain intangibles during the fourth quarter of 2013. Other assets in 2014 increased approximately 7% to $752,484 at June 29, 2014 from $706,344 at June 30, 2013. Increased long-term royalty advances relating to the STAR WARS and MARVEL licenses as well as Hub Network were offset by lower television programming and long-term receivables. Other liabilities decreased 23% to $357,766 at June 29, 2014 from $465,656 at June 30, 2013. The decrease is primarily the result of lower liabilities related to defined benefit pension and post-retirement medical plans as well as lower accruals for uncertain income tax positions at June 29, 2014 compared to June 30, 2013. Net cash utilized by investing activities was $52,664 in the first half of 2014 compared to $49,096 in 2013. Additions to property, plant and equipment were $51,636 in 2014 compared to $53,555 in 2013. The utilization in 2014 includes approximately $4,400 of cash invested in short-term investments partially offset by cash proceeds of $3,400 related to the sale of an internet domain name. Net cash utilized by financing activities was $154,147 in the first half of 2014 compared to $67,139 in the first half of 2013. The 2014 cash provided reflects net proceeds of $559,986 from the issuance of $600,000 in long-term notes in May 2014; these net proceeds include a payment of $33,306 for the termination of forward-starting interest rate swap contracts associated with this expected issuance of debt as well as $6,708 in debt issuance costs. The majority of the proceeds from this issuance were used to repay $425,000 of long-term notes due May 2014. Cash payments related to purchases of the Company's common stock were $213,935 in the first half of 2014 compared to $55,932 in 2013. At June 29, 2014, the Company had $308,108 remaining available under its current share repurchase authorization approved by the Board of Directors. Dividends paid in the first half of 2014 totaled $108,097 compared to $52,125 in the first half of 2013. There were no dividends paid in the first quarter of 2013 as the payment historically made in February was accelerated and paid in December 2012. The remaining increase in dividends reflects the higher dividend rate paid on the May 2014 dividend. Proceeds from short-term borrowings of $1,430 in the first half of 2014 compared to repayments of short-term borrowings of $31,147 in the first half of 2013. The Company has an agreement with a group of banks for a commercial paper program (the "Program"). Under the Program, at the request of the Company and subject to market conditions, the banks may either purchase from the Company, or arrange for the sale by the Company, of unsecured commercial paper notes. Under the Program the Company may issue notes from time to time up to an aggregate principal amount outstanding at any given time of $700,000. The maturities of these notes will vary but may not exceed 397 days. The notes will be sold under customary terms in the commercial paper market and will be issued at a discount or par, or alternatively, will be sold at par and will bear varying interest rates based on a fixed or floating rate basis. The interest rates will vary based on market conditions and the ratings assigned to the notes by the credit rating agencies at the time of issuance. Subject to market conditions, the Company intends to utilize the Program as its primary short-term borrowing facility and does not intend to sell unsecured commercial paper notes in excess of the available amount under the revolving credit agreement, discussed below. If, for any reason, the Company is unable to access the commercial paper market, the Company intends to use the revolving credit agreement to meet the Company's short-term liquidity needs. At June 29, 2014 the Company had no borrowings outstanding related to the Program. The Company has a revolving credit agreement (the "Agreement"), which provides it with a $700,000 committed borrowing facility. The Agreement contains certain financial covenants setting forth leverage and coverage requirements, and certain other limitations typical of an investment grade facility, including with respect to liens, mergers and incurrence of indebtedness. The Company was in compliance with all covenants as of and for the quarter ended June 29, 2014. The Company had no borrowings outstanding under its committed revolving credit facility at June 29, 2014. However, the Company had letters of credit outstanding under this facility as of June 29, 2014 of approximately $1,000. Amounts available and unused under the committed line as of June 29, 2014 were approximately $699,000. The Company also has other uncommitted lines from various banks, of which approximately $30,900 was utilized at June 29, 2014. Of the amount utilized under the uncommitted lines, approximately $9,200 and $21,700 represent outstanding borrowings and letters of credit, respectively. The Company has principal amounts of long-term debt at June 29, 2014 of $1,559,895 due at varying times from 2017 through 2044. Of this long-term debt, $600,000 represents the aggregate issuance of long-term debt in May 2014 which consists of $300,000 of 3.15% Notes Due 2021 and $300,000 of 5.10% Notes Due 2044. The Company also had letters of credit and other similar instruments of approximately $206,960 and purchase commitments of $492,729 outstanding at June 29, 2014. Letters of credit and similar instruments include approximately $184,260 related to the defense of tax assessments in Mexico. These assessments relate to transfer pricing that the Company is defending. In the interest of resolving these open disputes and to provide for a mutually agreeable framework in future years, the Company is party to discussions with the Mexican tax authorities to determine if a settlement related to these assessments may be reached. Other contractual obligations and commercial commitments, as detailed in the Company's Annual Report on Form 10-K for the year ended December 29, 2013, did not materially change outside of payments made in the normal course of business and as otherwise set forth in this report. The table of contractual obligations and commercial commitments, as detailed in the Company's Annual Report on Form 10-K for the year ended December 29, 2013, does not include certain tax liabilities recorded related to uncertain tax positions. These liabilities were $84,314 at June 29, 2014, and are included as a component of other liabilities in the accompanying consolidated balance sheets. The Company believes that cash from operations, and, if necessary, its committed line of credit and other borrowing facilities, will allow the Company to meet these and other obligations listed. CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. As such, management is required to make certain estimates, judgments and assumptions that it believes are reasonable based on the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company's reported financial results include sales allowances, program production costs, recoverability of goodwill and intangible assets, recoverability of royalty advances and commitments, pension costs and obligations and income taxes. These critical accounting policies are the same as those detailed in the Annual Report on Form 10-K for the year ended December 29, 2013. FINANCIAL RISK MANAGEMENT The Company is exposed to market risks attributable to fluctuations in foreign currency exchange rates, primarily as the result of sourcing products priced in U.S. dollars, Hong Kong dollars and Euros while marketing those products in more than twenty currencies. Results of operations may be affected primarily by changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound sterling, Swiss franc, Canadian dollar, Brazilian real, Russian ruble and Mexican peso and, to a lesser extent, other currencies in European, Latin American and Asia Pacific countries. To manage this exposure, the Company has hedged a portion of its forecasted foreign currency transactions for fiscal years 2014 through 2016 using foreign exchange forward contracts. The Company is also exposed to foreign currency risk with respect to its net cash and cash equivalents or short-term borrowing positions in currencies other than the U.S. dollar. The Company believes, however, that the on-going risk on the net exposure should not be material to its financial condition. In addition, the Company's revenues and costs have been, and will likely continue to be, affected by changes in foreign currency rates. A significant change in foreign exchange rates can materially impact the Company's revenues and earnings due to translation of foreign-denominated revenues and expenses. The Company does not hedge against translation impacts of foreign exchange. From time to time, affiliates of the Company may make or receive intercompany loans in currencies other than their functional currency. The Company manages this exposure at the time the loan is made by using foreign exchange contracts. Other than as set forth above, the Company does not hedge foreign currency exposures. The Company reflects all forward contracts at their fair value as an asset or liability on the consolidated balance sheets. The Company does not speculate in foreign currency exchange contracts. At June 29, 2014, these contracts had net unrealized losses of $15,598, of which $174 are recorded in prepaid expenses and other current assets, $359 are recorded in other assets, $14,514 are recorded in accrued liabilities and $1,617 are recorded in other liabilities. Included in accumulated other comprehensive loss at June 29, 2014 are deferred losses, net of tax, of $12,544, related to these derivatives. At June 29, 2014, the Company had fixed rate long-term debt of $1,559,895. Of this long-term debt, $600,000 represents the aggregate issuance of long-term debt in May 2014 which consists of $300,000 of 3.15% Notes Due 2021 and $300,000 of 5.10% Notes Due 2044. During the fourth quarter of 2013 and first quarter of 2014, the Company entered into forward-starting interest rate swap agreements with a total notional value of $500,000 to hedge the anticipated underlying U.S. Treasury interest rate associated with the May 2014 debt issuance. These interest rate swaps were matched with this debt issuance and were designated and effective as hedges of the change in future interest payments. At the date of debt issuance, the Company terminated these interest rate swap agreements and their fair value, $33,306 at the date of issuance, was recorded to accumulated other comprehensive loss and will be amortized through the consolidated statements of operations using an effective interest rate method over the life of the related debt. Included in accumulated other comprehensive loss at June 29, 2014 are deferred losses, net of tax, of $21,085 related to these derivatives. -------------------------------------------------------------------------------- |