UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.   20549
_________________

FORM 10-Q
______________
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2014
¨  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 R 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 R 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  R
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  R

The number of shares of Common Stock, par value $.50 per share, outstanding as of October 20, 2014 was 125,682,285.




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.


HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of Dollars Except Share Data)
(Unaudited)
 
 
September 28, 2014
   
September 29, 2013
   
December 29, 2013
 
ASSETS
 
   
   
 
Current assets
 
   
   
 
Cash and cash equivalents
 
$
452,184
     
588,668
     
682,449
 
Accounts receivable, less allowance for doubtful accounts of $21,100, $22,200 and $19,000
   
1,314,022
     
1,215,289
     
1,093,620
 
Inventories
   
499,150
     
447,113
     
348,794
 
Prepaid expenses and other current assets
   
380,833
     
346,215
     
355,594
 
Total current assets
   
2,646,189
     
2,597,285
     
2,480,457
 
 
                       
Property, plant and equipment, less accumulated depreciation of $513,700, $497,100 and $500,500
   
228,019
     
231,199
     
236,263
 
 
                       
Other assets
                       
Goodwill
   
593,719
     
594,208
     
594,321
 
Other intangibles, net, accumulated amortization of $782,900, $704,300 and $744,800
   
337,894
     
414,033
     
375,999
 
Other
   
702,981
     
753,420
     
715,227
 
Total other assets
   
1,634,594
     
1,761,661
     
1,685,547
 
 
                       
Total assets
 
$
4,508,802
     
4,590,145
     
4,402,267
 

HASBRO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(Thousands of Dollars Except Share Data)
(Unaudited)

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY
 
September 28, 2014
   
September 29, 2013
   
December 29, 2013
 
Current liabilities
 
   
   
 
Short-term borrowings
 
$
78,023
     
212,926
     
8,332
 
Current portion of long-term debt
   
-
     
430,424
     
428,390
 
Accounts payable
   
284,023
     
263,086
     
198,799
 
Accrued liabilities
   
651,982
     
742,443
     
727,759
 
Total current liabilities
   
1,014,028
     
1,648,879
     
1,363,280
 
 
                       
Long-term debt
   
1,559,895
     
959,895
     
959,895
 
Other liabilities
   
392,366
     
410,672
     
351,304
 
Total liabilities
   
2,966,289
     
3,019,446
     
2,674,479
 
 
                       
Redeemable noncontrolling interests
   
43,949
     
47,269
     
45,445
 
 
                       
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
   
104,847
     
104,847
     
104,847
 
Additional paid-in capital
   
786,329
     
709,005
     
734,181
 
Retained earnings
   
3,513,546
     
3,354,820
     
3,432,176
 
Accumulated other comprehensive loss
   
(36,805
)
   
(78,723
)
   
(34,135
)
Treasury stock, at cost; 83,535,298 shares at September 28, 2014; 79,855,578 shares at September 29, 2013; and 78,640,228 shares at December 29, 2013
   
(2,869,353
)
   
(2,566,519
)
   
(2,554,726
)
Total shareholders' equity
   
1,498,564
     
1,523,430
     
1,682,343
 
 
                       
Total liabilities, redeemable noncontrolling interests and shareholders' equity
 
$
4,508,802
     
4,590,145
     
4,402,267
 

See accompanying condensed notes to consolidated financial statements.




HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Thousands of Dollars Except Per Share Data)
(Unaudited)

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
Net revenues
 
$
1,469,899
     
1,370,348
     
2,978,614
     
2,800,384
 
Costs and expenses:
                               
Cost of sales
   
602,766
     
568,582
     
1,181,647
     
1,136,724
 
Royalties
   
94,352
     
143,947
     
214,466
     
243,568
 
Product development
   
58,220
     
59,366
     
157,184
     
154,455
 
Advertising
   
147,492
     
136,487
     
296,444
     
277,278
 
Amortization of intangibles
   
12,809
     
14,224
     
38,103
     
37,677
 
Program production cost amortization
   
24,374
     
17,991
     
35,742
     
34,023
 
Selling, distribution and administration
   
244,072
     
231,045
     
643,202
     
633,238
 
Total costs and expenses
   
1,184,085
     
1,171,642
     
2,566,788
     
2,516,963
 
Operating profit
   
285,814
     
198,706
     
411,826
     
283,421
 
Non-operating (income) expense:
                               
Interest expense
   
24,710
     
41,194
     
69,940
     
86,398
 
Interest income
   
(745
)
   
(1,326
)
   
(3,236
)
   
(4,239
)
Other expense, net
   
17,795
     
2,925
     
10,556
     
10,766
 
Total non-operating expense, net
   
41,760
     
42,793
     
77,260
     
92,925
 
Earnings before income taxes
   
244,054
     
155,913
     
334,566
     
190,496
 
Income tax expense
   
63,899
     
30,070
     
90,077
     
34,844
 
Net earnings
   
180,155
     
125,843
     
244,489
     
155,652
 
Net loss attributable to noncontrolling interests
   
(302
)
   
(731
)
   
(1,530
)
   
(731
)
Net earnings attributable to Hasbro, Inc.
 
$
180,457
     
126,574
     
246,019
     
156,383
 
 
                               
 
                               
Net earnings attributable to Hasbro, Inc. per common share:
                               
Basic
 
$
1.42
     
0.97
     
1.90
     
1.20
 
Diluted
 
$
1.40
     
0.96
     
1.88
     
1.19
 
Cash dividends declared per common share
 
$
0.43
     
0.40
     
1.29
     
1.20
 

See accompanying condensed notes to consolidated financial statements.



HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
(Thousands of Dollars)
(Unaudited)

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
Net earnings
 
$
180,155
     
125,843
     
244,489
     
155,652
 
Other comprehensive earnings (loss):
                               
Foreign currency translation adjustments
   
(35,682
)
   
12,993
     
(31,640
)
   
(8,880
)
Net gains (losses) on cash flow hedging activities, net of tax
   
44,368
     
(12,580
)
   
16,528
     
(198
)
Unrealized holding (losses) gains on available-for-sale securities, net of tax
   
(143
)
   
-
     
3,382
     
-
 
Reclassifications to earnings, net of tax:
                               
Net losses (gains) on cash flow hedging activities
   
5,886
     
(3,589
)
   
7,410
     
(4,629
)
Unrecognized pension and postretirement amounts
   
550
     
2,319
     
1,650
     
7,291
 
Total other comprehensive earnings (loss), net of tax
   
14,979
     
(857
)
   
(2,670
)
   
(6,416
)
Comprehensive earnings
   
195,134
     
124,986
     
241,819
     
149,236
 
Comprehensive loss attributable to noncontrolling interests
   
(302
)
   
(731
)
   
(1,530
)
   
(731
)
Comprehensive earnings attributable to Hasbro, Inc.
 
$
195,436
     
125,717
     
243,349
     
149,967
 

See accompanying condensed notes to consolidated financial statements.


HASBRO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)

 
 
Nine Months Ended
 
 
 
September 28, 2014
   
September 29, 2013
 
Cash flows from operating activities:
 
   
 
Net earnings
 
$
244,489
     
155,652
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation of plant and equipment
   
82,536
     
75,526
 
Amortization of intangibles
   
38,103
     
37,677
 
Program production cost amortization
   
35,742
     
34,023
 
Deferred income taxes
   
(38,930
)
   
604
 
Stock-based compensation
   
26,869
     
20,599
 
Change in operating assets and liabilities:
               
Increase in accounts receivable
   
(274,182
)
   
(203,159
)
Increase in inventories
   
(172,496
)
   
(133,738
)
Decrease (increase) in prepaid expenses and other current assets
   
37,037
     
(20,672
)
Program production costs
   
(26,393
)
   
(31,520
)
Increase in accounts payable and accrued liabilities
   
51,305
     
222,695
 
Other, including long-term royalty advances
   
22,746
     
(110,370
)
Net cash provided by operating activities
   
26,826
     
47,317
 
Cash flows from investing activities:
               
Additions to property, plant and equipment
   
(78,255
)
   
(78,246
)
Investments and acquisitions, net of cash acquired
   
-
     
(109,955
)
        Proceeds from partial sale of equity interest in joint venture
   
64,400
     
-
 
        Other
   
4,009
     
3,121
 
Net cash utilized by investing activities
   
(9,846
)
   
(185,080
)
Cash flows from financing activities:
               
Net proceeds from borrowings with maturity greater than three months
   
559,986
     
-
 
Repayments of borrowings with maturity greater than three months
   
(425,000
)
   
-
 
Net proceeds from (repayments of) other short-term borrowings
   
71,172
     
(11,235
)
Purchases of common stock
   
(338,184
)
   
(86,972
)
Stock option transactions
   
43,447
     
74,400
 
Excess tax benefits from stock-based compensation
   
8,507
     
12,772
 
Dividends paid
   
(162,789
)
   
(104,164
)
Net cash utilized by financing activities
   
(242,861
)
   
(115,199
)
Effect of exchange rate changes on cash
   
(4,384
)
   
(8,071
)
Decrease in cash and cash equivalents
   
(230,265
)
   
(261,033
)
Cash and cash equivalents at beginning of year
   
682,449
     
849,701
 
Cash and cash equivalents at end of period
 
$
452,184
     
588,668
 
 
               
Supplemental information
               
Cash paid during the period for:
               
Interest
 
$
80,384
     
76,700
 
Income taxes
 
$
65,286
     
50,548
 

See accompanying condensed notes to consolidated financial statements.


HASBRO, INC. AND SUBSIDIARIES
Condensed Notes to Consolidated Financial Statements
(Thousands of Dollars and Shares Except Per Share Data)
(Unaudited)


(1) Basis of Presentation

In the opinion of management, the accompanying unaudited interim financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of Hasbro, Inc. and all majority-owned subsidiaries ("Hasbro" or the "Company") as of September 28, 2014 and September 29, 2013, and the results of its operations and cash flows for the periods then ended in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results could differ from those estimates.

The quarters ended September 28, 2014 and September 29, 2013 are each 13-week periods.  The nine-month periods ended September 28, 2014 and September 29, 2013 are each 39-week periods.

The results of operations for the quarter and nine-month periods ended September 28, 2014 are not necessarily indicative of results to be expected for the full year, nor were those of the comparable 2013 periods representative of those actually experienced for the full year 2013.

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 29, 2013 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 29, 2013.

Substantially all of the Company's inventories consist of finished goods.

(2) Earnings Per Share

Net earnings per share data for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013 were computed as follows:

 
 
2014
   
2013
 
Quarter
 
Basic
   
Diluted
   
Basic
   
Diluted
 
Net earnings attributable to Hasbro, Inc.
 
$
180,457
     
180,457
     
126,574
     
126,574
 
 
                               
Average shares outstanding
   
127,293
     
127,293
     
130,253
     
130,253
 
Effect of dilutive securities:
                               
Options and other share-based awards
   
-
     
1,410
     
-
     
1,592
 
Equivalent Shares
   
127,293
     
128,703
     
130,253
     
131,845
 
 
                               
Net earnings attributable to Hasbro, Inc. per common share
 
$
1.42
     
1.40
     
0.97
     
0.96
 

 
 
2014
   
2013
 
Nine Months
 
Basic
   
Diluted
   
Basic
   
Diluted
 
Net earnings attributable to Hasbro, Inc.
 
$
246,019
     
246,019
     
156,383
     
156,383
 
 
                               
Average shares outstanding
   
129,302
     
129,302
     
129,972
     
129,972
 
Effect of dilutive securities:
                               
Options and other share-based awards
   
-
     
1,487
     
-
     
1,601
 
Equivalent Shares
   
129,302
     
130,789
     
129,972
     
131,573
 
 
                               
Net earnings attributable to Hasbro, Inc. per common share
 
$
1.90
     
1.88
     
1.20
     
1.19
 


For the quarters ended September 28, 2014 and September 29, 2013, options and restricted stock units totaling 675 and 775, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive. For the nine-month periods ended September 28, 2014 and September 29, 2013, options and restricted stock units totaling 675 and 1,266, respectively, were excluded from the calculation of diluted earnings per share because to include them would have been antidilutive.

(3) Other Comprehensive Earnings (Loss)

Components of other comprehensive earnings (loss) are presented within the consolidated statements of comprehensive earnings. The following table presents the related tax effects on changes in other comprehensive earnings (loss) for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013.

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
 
 
   
   
   
 
Other comprehensive earnings (loss), tax effect:
 
   
   
   
 
Tax (expense) benefit on cash flow hedging activities
 
$
(2,924
)
   
2,548
     
11,987
     
(424
)
Tax benefit (expense) on unrealized holding gains
   
80
     
-
     
(1,919
)
   
-
 
Reclassifications to earnings, tax effect:
                               
   Tax (benefit) expense on cash flow hedging activities
   
(2,129
)
   
861
     
(2,471
)
   
1,280
 
   Tax benefit on unrecognized pension and postretirement amounts reclassified to the consolidated statements of operations
   
(312
)
   
(712
)
   
(936
)
   
(2,136
)
 
                               
Total tax effect on other comprehensive (loss) earnings
 
$
(5,285
)
   
2,697
     
6,661
     
(1,280
)




Changes in the components of accumulated other comprehensive loss for the nine months ended September 28, 2014 and September 29, 2013 are as follows:

 
 
Pension and Postretirement Amounts
   
Gains (Losses) on Derivative Instruments
   
Unrealized Holding Gains on Available-for-Sale Securities
   
Foreign Currency Translation Adjustments
   
Total Accumulated Other Comprehensive Loss
 
2014
 
   
   
   
   
 
Balance at December 29, 2013
 
$
(64,841
)
   
(7,313
)
   
-
     
38,019
     
(34,135
)
Current period other comprehensive earnings (loss)
   
1,650
     
23,938
     
3,382
     
(31,640
)
   
(2,670
)
Balance at September 28, 2014
 
$
(63,191
)
   
16,625
     
3,382
     
6,379
     
(36,805
)
 
                                       
2013
                                       
Balance at December 30, 2012
 
$
(120,422
)
   
(1,008
)
   
-
     
49,123
     
(72,307
)
Current period other comprehensive earnings (loss)
   
7,291
     
(4,827
)
   
-
     
(8,880
)
   
(6,416
)
Balance at September 29, 2013
 
$
(113,131
)
   
(5,835
)
   
-
     
40,243
     
(78,723
)

At September 28, 2014, the Company had remaining net deferred gains on hedging instruments, net of tax, of $16,625 in accumulated other comprehensive loss ("AOCE"). These instruments hedge payments related to inventory purchased in the third quarter of 2014 or forecasted to be purchased during 2014, 2015 and 2016, intercompany expenses expected to be paid or received during 2014 and 2015, cash receipts for sales made at the end of the third quarter of 2014 or forecasted to be made in the remainder of 2014 and interest payments related to long-term notes due 2021 and 2044.  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.  Of the amount included in AOCE at September 28, 2014, the Company expects approximately $13,453 to be reclassified to the consolidated statements of operations within the next 12 months. However, the amount ultimately realized in earnings is dependent on the fair value of the hedging instruments on the settlement dates.

(4) Financial Instruments

The Company's financial instruments include cash and cash equivalents, accounts receivable, short-term borrowings, accounts payable and certain accrued liabilities. At September 28, 2014, September 29, 2013 and December 29, 2013, the carrying cost of these instruments approximated their fair value. The Company's financial instruments at September 28, 2014, September 29, 2013 and December 29, 2013 also include certain assets and liabilities measured at fair value (see Notes 6 and 8) as well as long-term borrowings. The carrying costs and fair values of the Company's long-term borrowings as of September 28, 2014, September 29, 2013 and December 29, 2013 are as follows:

 
 
September 28, 2014
   
September 29, 2013
   
December 29, 2013
 
 
 
Carrying
Cost
   
Fair
Value
   
Carrying
Cost
   
Fair
Value
   
Carrying
Cost
   
Fair
Value
 
6.35% Notes Due 2040
 
$
500,000
     
602,050
     
500,000
     
535,000
     
500,000
     
532,750
 
6.30% Notes Due 2017
   
350,000
     
392,595
     
350,000
     
402,500
     
350,000
     
400,050
 
5.10% Notes Due 2044
   
300,000
     
310,500
     
-
     
-
     
-
     
-
 
3.15% Notes Due 2021
   
300,000
     
302,130
     
-
     
-
     
-
     
-
 
6.60% Debentures Due 2028
   
109,895
     
125,764
     
109,895
     
121,983
     
109,895
     
118,566
 
6.125% Notes Due 2014
   
-
     
-
     
430,424
     
437,750
     
428,390
     
435,838
 
Total long-term debt
   
1,559,895
     
1,733,039
     
1,390,319
     
1,497,233
     
1,388,285
     
1,487,204
 
Less: Current portion
   
-
     
-
     
430,424
     
437,750
     
428,390
     
435,838
 
Long-term debt excluding current portion
 
$
1,559,895
     
1,733,039
     
959,895
     
1,059,483
     
959,895
     
1,051,366
 



In May 2014, the Company issued $600,000 in long-term debt which consists of $300,000 of 3.15% Notes Due in 2021 and $300,000 of 5.10% Notes Due in 2044 (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 discounted using the effective interest rate on applicable U.S. Treasury bills at the time of repurchase.  Prior to the issuance of the Notes, the Company held forward-starting interest rate swap contracts to hedge the variability in the anticipated underlying U.S. Treasury interest rate associated with the expected issuance of the Notes.  At the date of issuance, these contracts were terminated and the Company paid $33,306, the fair value of the contracts on that date, to settle. Of this amount, $6,373 relates to 3.15% Notes Due 2021 and $26,933 relates to 5.10% Notes Due 2044, which has been deferred in AOCE and will be amortized to interest expense over the life of the respective Notes using the effective interest rate method.  The proceeds from the Notes have been presented net of the payment for these contracts in the consolidated statements of cash flows.

The carrying cost of the 6.125% Notes Due 2014 included principal amounts of $425,000 as well as fair value adjustments of $5,424, and $3,390 at September 29, 2013 and December 29, 2013, respectively, related to interest rate swaps. The interest rate swaps were terminated in November 2012 and the fair value adjustments at September 29, 2013 and December 29, 2013 represented the unamortized portions of the fair value of the interest rate swaps at the date of termination. At September 29, 2013 and December 29, 2013, the principal amount and fair value adjustment associated with the 6.125% Notes Due 2014 totaling $425,000 were included in the current portion of long-term debt. All other carrying costs represent principal amounts and were included in long-term debt excluding the current portion at September 28, 2014, September 29, 2013 and December 29, 2013. The total principal amount of long-term debt, including the current portion, was $1,559,895 at September 28, 2014 and $1,384,895 at both September 29, 2013 and December 29, 2013.

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 U.S. Internal Revenue Service completed an examination related to the 2008 and 2009 U.S. federal income tax returns in 2013. During the first quarter of 2014, as a result of amending tax years 2010 through 2012 and making similar adjustments identified in the completion of the 2008 and 2009 examinations, the Company recognized $12,159 of previously accrued unrecognized tax benefits including the reversal of related accrued interest, primarily related to the deductibility of certain expenses, as well as the tax treatment of certain subsidiary and other transactions. Of this amount, $324 was recorded as a reduction of deferred tax assets and the remainder as a reduction to income tax expense. The total income tax benefit resulting from the amended returns, including other adjustments, totaled $13,480 during the first quarter of 2014.

The Company is no longer subject to U.S. federal income tax examinations for years before 2013. With few exceptions, the Company is no longer subject to U.S. state or local and non-U.S. income tax examinations by tax authorities in its major jurisdictions for years before 2006. The Company is currently under income tax examination in several U.S. state and local and non-U.S. jurisdictions.

In connection with the Mexican tax examinations for the years 2000 to 2007 and 2009, the Company has received tax assessments totaling approximately $295,530 (at September 28, 2014 exchange rates), which include interest, penalties and inflation updates, related to transfer pricing which the Company is vigorously defending. In order to continue the process of defending its position, the Company was required to guarantee the amount of the assessments for the years 2000 to 2004, as is usual and customary in Mexico with respect to these matters. Accordingly, as of September 28, 2014, bonds totaling approximately $173,120 (at September 28, 2014 exchange rates) have been provided to the Mexican government related to the 2000 to 2004 assessments, allowing the Company to defend its positions. The Company is not currently required to guarantee the amounts of the 2005 through 2007 and 2009 assessments as they are in, or plan to be challenged in, administrative proceedings. The Company expects to be successful in sustaining its position with respect to these assessments as well as similar positions that may be taken by the Mexican tax authorities for 2008 and periods subsequent to 2009 if these disputes continue through litigation and/or administrative processes. However, 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 the two parties can reach an agreed settlement of these issues. The Company expects that any such settlement would require some payment by the Company with respect to the prior years' under assessment as well as include a mutually agreed methodology for dealing with these transfer pricing issues in future years. As of September 28, 2014, the Company's liabilities for unrecognized tax benefits reflects the settlement offer the Company most recently made to the Mexican tax authorities related to the outstanding assessments and potential claims with respect to 2008 and completed periods subsequent to 2009 that are still subject to audit.

At September 28, 2014, the Company has liabilities for unrecognized tax benefits of $105,945 which are included as a component of other liabilities in the consolidated balance sheet.  During 2014, the Company increased these liabilities by $33,295 to reflect the impact of a proposed resolution of certain tax matters. The Company believes it is reasonably possible that it may make approximately $66,400 of tax payments and reduce its liability for uncertain tax benefits within the next 12 months related to the resolution of an uncertain tax position.

(6) Fair Value of Financial Instruments

The Company measures certain financial instruments at fair value. The fair value hierarchy consists of three levels: Level 1 fair values are based on quoted market prices in active markets for identical assets or liabilities that the entity has the ability to access; Level 2 fair values are those based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities; and Level 3 fair values are based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Accounting standards permit entities to measure many financial instruments and certain other items at fair value and establish presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities. The Company has elected the fair value option for certain available-for-sale investments. At September 28, 2014, September 29, 2013 and December 29, 2013, these investments totaled $24,292, $23,452 and $28,048, respectively, and are included in prepaid expenses and other current assets in the consolidated balance sheets. The Company recorded net gains and interest income of $247 and $2,487 on these investments in other (income) expense, net for the quarter and nine-months ended September 28, 2014, respectively, related to the change in fair value of such instruments. For the quarter and nine-month periods ended September 29, 2013 the Company recorded net losses of $176 and $166, respectively, in other (income) expense, net, related to the change in fair value of such instruments.

At December 29, 2013 the Company also held forward-starting interest rate swap agreements to hedge the variability of the anticipated underlying U.S. Treasury interest rate associated with the expected issuance of May 2014 long-term debt.  See Notes 4 and 8 for further discussion. At September 28, 2014, the Company had an option agreement related to its investment in a joint venture. See Note 10 for further discussion.

At September 28, 2014, September 29, 2013 and December 29, 2013, the Company had the following assets and liabilities measured at fair value in its consolidated balance sheets:

 
 
   
Fair Value Measurements Using:
 
 
 
Fair
Value
   
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
September 28, 2014
 
   
   
   
 
Assets:
 
   
   
   
 
Available-for-sale securities
 
$
31,097
     
6,805
     
18,632
     
5,660
 
Derivatives
   
41,475
     
-
     
41,475
     
-
 
Total assets
 
$
72,572
     
6,805
     
60,107
     
5,660
 
 
                               
Liabilities:
                               
Derivatives
 
$
3,426
     
-
     
3,426
     
-
 
Option agreement
   
25,590
     
-
     
-
     
25,590
 
Total liabilities
 
$
29,016
     
-
     
3,426
     
25,590
 
 
                               
September 29, 2013
                               
Assets:
                               
Available-for-sale securities
 
$
23,460
     
8
     
18,050
     
5,402
 
Derivatives
   
3,311
     
-
     
2,321
     
990
 
Total assets
 
$
26,771
     
8
     
20,371
     
6,392
 
 
                               
Liabilities:
                               
Derivatives
 
$
8,324
     
-
     
8,324
     
-
 
 
                               
 
                               
 
                               
December 29, 2013
                               
Assets:
                               
Available-for-sale securities
 
$
28,048
     
-
     
22,564
     
5,484
 
Derivatives
   
4,627
     
-
     
4,627
     
-
 
Total assets
 
$
32,675
     
-
     
27,191
     
5,484
 
 
                               
Liabilities:
                               
Derivatives
 
$
12,330
     
-
     
12,330
     
-
 


Available-for-sale securities include equity securities of one company quoted on an active public market as well as certain investments valued at net asset values quoted on private markets that are not active. These net asset values are predominantly based on underlying investments which are traded on an active market; investments are redeemable within 45 days. At December 29, 2013 the Company also held an available-for-sale investment in Brazil similar to a repurchase agreement; this investment was valued at the principal plus any interest accrued on the instrument. Lastly, the Company holds an available-for-sale investment which invests in hedge funds which contain financial instruments that are valued using certain estimates which are considered unobservable in that they reflect the investment manager's own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believes that these estimates are the best information available for use in the fair value of this investment. The Company's derivatives consist primarily of foreign currency forward contracts. At December 29, 2013, the Company also had forward-starting interest rate swap contracts related to the anticipated issuance of the Notes Due 2021 and 2044. The Company uses current forward rates of the respective foreign currencies and U.S. treasury interest rates to measure the fair value of these contracts. The option agreement included in other liabilities at September 28, 2014 is valued using an option pricing model based on the fair value of the related investment. At September 29, 2013, the Company also had derivative instruments consisting of warrants to purchase common stock of an unrelated company. The Company used the Black-Scholes model to value these warrants. One of the inputs used in both the option pricing and Black-Scholes models, volatility, is considered an unobservable input in that it reflected the Company's own assumptions about the inputs that market participants would use in pricing the asset or liability. The Company believed that this is the best information available for use in the fair value measurement. There were no changes in these valuation techniques during 2014.

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):

 
 
2014
   
2013
 
Balance at beginning of year
 
$
5,484
     
7,618
 
Gain (loss) from change in fair value
   
176
     
(1,226
)
Issuance of option agreement
   
(25,590
)
   
-
 
Balance at end of third quarter
 
$
(19,930
)
   
6,392
 


(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 quarter and nine-month periods ended September 28, 2014 and September 29, 2013 are as follows:

 
 
Quarter Ended
 
 
 
Pension
   
Postretirement
 
 
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
Service cost
 
$
921
     
1,549
     
137
     
188
 
Interest cost
   
4,953
     
4,849
     
332
     
345
 
Expected return on assets
   
(5,469
)
   
(5,600
)
   
-
     
-
 
Net amortization and deferrals
   
1,210
     
2,418
     
(114
)
   
(65
)
Curtailment/settlement losses
   
-
     
1,064
     
-
     
-
 
Net periodic benefit cost
 
$
1,615
     
4,280
     
355
     
468
 

 
 
Nine Months Ended
 
 
 
Pension
   
Postretirement
 
 
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
Service cost
 
$
2,861
     
4,559
     
412
     
563
 
Interest cost
   
15,064
     
14,447
     
997
     
1,035
 
Expected return on assets
   
(16,587
)
   
(16,691
)
   
-
     
-
 
Net amortization and deferrals
   
3,713
     
7,206
     
(341
)
   
(195
)
Curtailment/settlement losses
   
-
     
6,485
     
-
     
-
 
Net periodic benefit cost
 
$
5,051
     
16,006
     
1,068
     
1,403
 

During the first three quarters of fiscal 2014, the Company made cash contributions to its defined benefit pension plans of approximately $5,900 in the aggregate. The Company expects to contribute approximately $1,000 during the remainder of fiscal 2014.

(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. Further, at December 29, 2013, and through the debt issuance date in May 2014, Hasbro used forward-starting interest rate swap agreements to hedge anticipated interest payments related to the May 2014 debt issuance. 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.

In 2013, the Company also had warrants to purchase common stock of an unrelated company that constituted and were accounted for as derivatives. For additional information related to these warrants see Note 6.

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 2014, 2015 and 2016.

At September 28, 2014, September 29, 2013 and December 29, 2013, the notional amounts and fair values of the Company's foreign currency forward contracts designated as cash flow hedging instruments were as follows:

 
 
September 28, 2014
   
September 29, 2013
   
December 29, 2013
 
 
Hedged transaction
 
Notional Amount
   
Fair
Value
   
Notional
Amount
   
Fair
Value
   
Notional
Amount
   
Fair
Value
 
Inventory purchases
 
$
716,028
     
45,501
     
525,911
     
(6,114
)
   
577,138
     
(7,493
)
Intercompany royalty transactions
   
1,693
     
(1,493
)
   
174,974
     
(2,258
)
   
4,948
     
(2,774
)
Sales
   
195,364
     
(6,484
)
   
232,709
     
497
     
171,393
     
(1,965
)
Other
   
27,549
     
(499
)
   
27,148
     
1,000
     
46,563
     
302
 
Total
 
$
940,634
     
37,025
     
960,742
     
(6,875
)
   
800,042
     
(11,930
)


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 September 28, 2014, September 29, 2013 and December 29, 2013 as follows:

 
 
September 28, 2014
   
September 29, 2013
   
December 29, 2013
 
Prepaid expenses and other current assets
 
   
   
 
Unrealized gains
 
$
24,242
     
2,923
     
1,088
 
Unrealized losses
   
(6,356
)
   
(1,572
)
   
(702
)
Net unrealized gain
 
$
17,886
     
1,351
     
386
 
 
                       
Other assets
                       
Unrealized gains
 
$
23,127
     
109
     
-
 
Unrealized losses
   
(964
)
   
(11
)
   
-
 
Net unrealized gains
 
$
22,163
     
98
     
-
 
 
                       
Accrued liabilities
                       
Unrealized gains
 
$
2,519
     
3,023
     
3,425
 
Unrealized losses
   
(5,539
)
   
(8,652
)
   
(13,671
)
Net unrealized loss
 
$
(3,020
)
   
(5,629
)
   
(10,246
)
 
                       
Other liabilities
                       
Unrealized gains
 
$
22
     
191
     
-
 
Unrealized losses
   
(26
)
   
(2,886
)
   
(2,070
)
Net unrealized loss
 
$
(4
)
   
(2,695
)
   
(2,070
)
 
                       

Net gains (losses) on cash flow hedging activities have been reclassified from other comprehensive earnings (loss) to net earnings for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013 as follows:

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
Statements of Operations Classification
 
   
   
   
 
Cost of sales
 
$
(3,165
)
   
1,614
     
(3,363
)
   
1,650
 
Royalties
   
(923
)
   
(303
)
   
(1,533
)
   
(347
)
Sales
   
(3,477
)
   
2,906
     
(4,340
)
   
4,441
 
Net realized (losses) gains
 
$
(7,565
)
   
4,217
     
(9,236
)
   
5,744
 

In addition, net gains of $62 were reclassified to earnings as a result of hedge ineffectiveness for the nine-month period ended September 28, 2014, and net gains of $233 and $165 were reclassified to earnings as a result of hedge ineffectiveness for the quarter and nine-month periods ended September 29, 2013, respectively.

During the fourth quarter of 2013, the Company entered into forward-starting interest rate swap agreements to hedge the variability of the anticipated underlying U.S. Treasury interest rate associated with the expected issuance of long-term debt to repay the 6.125% Notes Due 2014 with a principal amount of $425,000. These derivative instruments were designated and effective as cash flow hedges. At December 29, 2013, the total notional amounts of the Company's forward-starting interest rate swap agreements was $300,000. Unrealized gains of $3,172 were recorded to the consolidated balance sheets as of December 29, 2013. During  the first quarter of 2014, the notional amounts of the Company's forward-starting interest rate swap agreements were increased to $500,000. The instruments were settled on the date of the issuance of the related debt and the deferred loss of $33,306 is being amortized to interest expense over the life of the debt using the effective interest rate method. For the quarter and nine months ended September 28, 2014, the Company amortized $450 and $707, respectively, related to these contracts which is included in interest expense.

Undesignated Hedges

The Company also enters into foreign currency forward contracts to minimize the impact of changes in the fair value of intercompany loans due to foreign currency changes. Due to the nature of the derivative contracts involved, the Company does not use hedge accounting for these contracts.  At September 28, 2014, September 29, 2013 and December 29, 2013 the total notional amounts of the Company's undesignated derivative instruments were $413,065, $257,325 and $294,888, respectively.

At September 28, 2014, September 29, 2013 and December 29, 2013, the fair values of the Company's undesignated derivative financial instruments were recorded in the consolidated balance sheets as follows:

 
 
September 28, 2014
   
September 29, 2013
   
December 29, 2013
 
Prepaid expenses and other current assets
 
   
   
 
Unrealized gains
 
$
4,876
     
1,761
     
-
 
Unrealized losses
   
(3,450
)
   
(1,107
)
   
-
 
Net unrealized gain
   
1,426
     
654
     
-
 
 
                       
Other assets
                       
Unrealized gains
   
-
     
298
     
1,069
 
Unrealized losses
   
-
     
(80
)
   
-
 
Net unrealized gain
   
-
     
218
     
1,069
 
 
                       
Accrued liabilities
                       
Unrealized gains
   
-
     
-
     
478
 
Unrealized losses
   
-
     
-
     
(492
)
Net unrealized loss
   
-
     
-
     
(14
)
 
                       
Other liabilities
                       
Unrealized gains
   
303
     
-
     
-
 
Unrealized losses
   
(705
)
   
-
     
-
 
Unrealized loss
   
(402
)
   
-
     
-
 
 
                       
Total unrealized gain, net
 
$
1,024
     
872
     
1,055
 

The Company recorded net losses (gains) of $20,050 and $19,988 on these instruments to other (income) expense, net for the quarter and nine-month periods ended September 28, 2014, respectively, and $(2,467) and $(2,557) on these instruments to other (income) expense, net for the quarter and nine-month periods ended September 29, 2013, respectively, relating to the change in fair value of such derivatives, substantially offsetting gains and losses from the change in fair value of intercompany loans to which the contracts relate.

For additional information related to the Company's derivative financial instruments see Notes 4 and 6.

 
(9) Acquisitions

On July 8, 2013, the Company acquired a majority interest in Backflip Studios, LLC ("Backflip"), a mobile game developer based in Boulder, Colorado.  The Company paid $112,000 in cash to acquire a 70% interest in Backflip. The Company is consolidating the financial statements of Backflip and reporting the 30% redeemable noncontrolling interests as a separate line in the consolidated balance sheets and statements of operations.

Based on a valuation of approximately $160,000, the Company allocated approximately $6,000 to net tangible assets, $35,000 to identifiable intangible assets, $119,000 to goodwill, and $48,000 to redeemable noncontrolling interests. The valuation was based on an income approach which utilizes discounted future cash flows expected to be generated from the acquired business. Identifiable intangible assets include property rights which are being amortized over the projected revenue curve over a period of four years. The carrying value and amortization curve of these intangible assets are based on cash flows associated with game titles released and planned to be released as of the date of acquisition. Actual results achieved from these acquired game titles may impact the carrying value of these intangibles or the timing of amortization expense. Goodwill reflects the value to the Company from leveraging Backflip's expertise in developing and marketing mobile digital games, including the continued expansion of its own brands in this arena. Goodwill will be tested for impairment at least annually during the fourth quarter of the Company's fiscal year, unless an event occurs or circumstances change that indicate that the carrying value may not be recoverable.

The 30% redeemable noncontrolling interests has been presented in the consolidated balance sheets as temporary equity between liabilities and shareholders' equity. This presentation is required because the Company has the obligation to purchase the remaining 30% of Backflip in the future contingent on the achievement by Backflip of certain predetermined financial performance metrics. The Company does not know the ultimate timing that these predetermined financial metrics may be met and, thereby, cannot currently estimate the purchase price of the remaining 30%.

Actual and pro forma results have not been disclosed because they are not material to the consolidated financial statements.  The balance of the redeemable noncontrolling interests was $43,949 at September 28, 2014, $47,269 at September 29, 2013 and $45,445 at December 29, 2013. Net loss attributable to noncontrolling interests for the quarter and nine-months ended September 28, 2014 was $302 and $1,530, respectively compared to a net loss of $731 for both the quarter and nine months ended September 29, 2013.

(10) Equity Method Investment

The Company owns an interest in a joint venture, Hub Television Networks, LLC (the "Network"), with Discovery Communications, Inc. ("Discovery"). The Network was established to create a cable television network in the United States dedicated to high-quality children's and family entertainment. On September 23, 2014, the Company and Discovery amended their relationship with respect to the Network. Prior to the amendments each of the Company and Discovery owned a 50% equity interest in the Network. Pursuant to these amendments Discovery has increased its equity interest in the Network to 60%, and the Company retains a 40% equity interest in the Network. The change in equity interests was accomplished partly through a redemption of interests owned by the Company and partly through the purchase of interests by Discovery from the Company. In connection with this reduction in its equity ownership the Company was paid a cash purchase price of $64,400 by Discovery. In connection with amendments, the Company and Discovery also entered into an option agreement related to the Company's remaining 40% ownership in the Network and also modified the terms of a license agreement between the Company and the Network.  As a result of the reduction in the Company's ownership in the Network, the Company also received a benefit from a reduction in amounts due to Discovery under an existing tax sharing agreement. In connection with the restructuring of the Company's investment in the Network, the quarter and nine-month periods ended September 28, 2014 include a net expense of $11,566, primarily related to a charge resulting from an option agreement and the Company's share of severance charges recognized by the Network, partially offset by a gain from the reduction of amounts due to Discovery under a tax sharing agreement.

The Company and Discovery entered into an option agreement that allows either Discovery to call or Hasbro to put the Company's remaining 40%, exercisable during the one-year period following December 31, 2021.  The exercise price of the option agreement is 80% of the then fair market value of the Network, subject to a fair market value floor.  The Company recorded a charge in other expense, net for the third quarter and nine months of 2014, related to the fair market value of the option agreement totaling $25,590.  This amount is included as a component of other liabilities as of September 28, 2014.

During the quarter and nine months ended September 28, 2014, the Company's share in the earnings of the Network, excluding the amounts included in the charge described above, were $1,892 and $5,491, respectively, compared to losses of $91 and $1,024 for the quarter and nine months ended September 29, 2013. As of September 28, 2014, September 29, 2013 and December 29, 2013, the Company's investment in the Network totaled $258,295, $329,722 and $321,876, respectively. The Company monitors the valuation of its investment in the Network primarily based on a discounted cash flow model. The underlying cash flows are based on long-term financial plans for the Network, which include projections for growth in revenues and profitability. Should the Network not achieve its profitability and growth targets, the carrying value of the Company's investment may become impaired.


(11) Segment Reporting

Hasbro is a worldwide leader in children's and family leisure time products and services with a broad portfolio of brands and entertainment properties across toys, games, licensed products ranging from traditional to high-tech and digital, and film and television entertainment. The Company's segments are (i) U.S. and Canada, (ii) International, (iii) Entertainment and Licensing, and (iv) Global Operations.

The U.S. and Canada segment includes the marketing and selling of boys' action figures, vehicles and play sets, girls' toys, electronic toys and games, plush products, preschool toys and infant products, electronic interactive products, toy-related specialty products, traditional board games and puzzles and trading card and role-playing games primarily within the United States and Canada. Within the International segment, the Company markets and sells both toy and game products in markets outside of the U.S. and Canada, primarily in the European, Asia Pacific, and Latin American regions. The Company's Entertainment and Licensing segment includes the Company's lifestyle licensing, digital gaming, movie and television entertainment operations. The Global Operations segment is responsible for manufacturing and sourcing finished products for the Company's U.S. and Canada and International segments.

Segment performance is measured at the operating profit level. Included in Corporate and eliminations are certain corporate expenses, including substantially all costs incurred related to the 2013 business restructurings, the elimination of intersegment transactions and certain assets benefiting more than one segment. Intersegment sales and transfers are reflected in management reports at amounts approximating cost. Certain shared costs, including global development and marketing expenses and corporate administration, are allocated to segments based upon expenses and foreign exchange rates fixed at the beginning of the year, with adjustments to actual expenses and foreign exchange rates included in Corporate and eliminations. The accounting policies of the segments are the same as those referenced in note 1.

Results shown for the quarter and nine months are not necessarily representative of those which may be expected for the full year 2014, nor were those of the comparable 2013 periods representative of those actually experienced for the full year 2013. Similarly, such results are not necessarily those which would be achieved were each segment an unaffiliated business enterprise.

Information by segment and a reconciliation to reported amounts for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013 are as follows.

 
 
Quarter Ended
 
 
 
September 28, 2014
   
September 29, 2013
 
Net revenues
 
External
   
Affiliate
   
External
   
Affiliate
 
U.S. and Canada
 
$
764,268
     
2,388
     
735,619
     
1,290
 
International
   
649,284
     
78
     
582,676
     
55
 
Entertainment and Licensing
   
53,378
     
7,362
     
48,637
     
6,806
 
Global Operations (a)
   
2,969
     
593,435
     
3,416
     
591,867
 
Corporate and Eliminations
   
-
     
(603,263
)
   
-
     
(600,018
)
 
 
$
1,469,899
     
-
     
1,370,348
     
-
 

 
 
Nine Months Ended
 
 
 
September 28, 2014
   
September 29, 2013
 
Net revenues
 
External
   
Affiliate
   
External
   
Affiliate
 
U.S. and Canada
 
$
1,484,968
     
5,065
     
1,466,921
     
3,384
 
International
   
1,351,608
     
170
     
1,212,665
     
280
 
Entertainment and Licensing
   
135,915
     
14,100
     
114,747
     
12,328
 
Global Operations (a)
   
6,123
     
1,200,303
     
6,051
     
1,097,852
 
Corporate and Eliminations
   
-
     
(1,219,638
)
   
-
     
(1,113,844
)
 
 
$
2,978,614
     
-
     
2,800,384
     
-
 

 
 
Quarter Ended
   
Nine Months Ended
 
Operating profit (loss)
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
U.S. and Canada
 
$
169,850
     
146,991
     
252,541
     
243,738
 
International
   
116,451
     
105,663
     
148,097
     
115,951
 
Entertainment and Licensing
   
493
     
7,625
     
21,120
     
16,622
 
Global Operations (a)
   
15,704
     
17,578
     
15,770
     
3,638
 
Corporate and Eliminations (b)
   
(16,684
)
   
(79,151
)
   
(25,702
)
   
(96,528
)
 
 
$
285,814
     
198,706
     
411,826
     
283,421
 



Total assets
 
September 28, 2014
   
September 29, 2013
   
December 29, 2013
 
U.S. and Canada
 
$
3,380,207
     
6,564,121
     
3,066,301
 
International
   
2,394,325
     
2,290,130
     
2,233,115
 
Entertainment and Licensing
   
754,575
     
1,383,554
     
691,795
 
Global Operations
   
2,293,319
     
2,755,595
     
2,172,816
 
Corporate and Eliminations (b)
   
(4,313,624
)
   
(8,403,255
)
   
(3,761,760
)
 
 
$
4,508,802
     
4,590,145
     
4,402,267
 

(a) The Global Operations segment derives substantially all of its revenues, and thus its operating results, from intersegment activities.

(b) Certain long-term assets, including property, plant and equipment, goodwill and other intangibles, which benefit multiple operating segments, are included in Corporate and eliminations. Allocations of certain expenses related to these assets to the individual operating segments are done at the beginning of the year based on budgeted amounts. Any differences between actual and budgeted amounts are reflected in Corporate and eliminations. Corporate and eliminations also includes the elimination of inter-company balance sheet amounts. During 2013, certain inter-company balances were settled between each of the U.S. and Canada segment, Entertainment and Licensing segment and Corporate and eliminations. This reduced the amount of reported total assets of the U.S. and Canada and Entertainment and Licensing segments and increased the amount reported in Corporate and eliminations at September 28, 2014 and December 29, 2013 compared to September 29, 2013.

The following table represents consolidated International segment net revenues by major geographic region for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013.

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
Europe
 
$
403,602
     
376,648
     
827,412
     
755,097
 
Latin America
   
163,163
     
131,914
     
313,466
     
260,443
 
Asia Pacific
   
82,519
     
74,114
     
210,730
     
197,125
 
Net revenues
 
$
649,284
     
582,676
     
1,351,608
     
1,212,665
 

The following table presents consolidated net revenues by class of principal products for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013.

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
September 28, 2014
   
September 29, 2013
   
September 28, 2014
   
September 29, 2013
 
Boys
 
$
478,509
     
392,014
     
1,062,082
     
888,494
 
Games
   
395,221
     
387,450
     
841,449
     
873,774
 
Girls
   
407,718
     
388,696
     
710,235
     
652,889
 
Preschool
   
188,451
     
202,188
     
364,848
     
385,227
 
Net revenues
 
$
1,469,899
     
1,370,348
     
2,978,614
     
2,800,384
 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 third quarter and first nine months of 2014 as the Company's franchise brands grew approximately 36% and 31%, respectively, compared to the third quarter and first nine 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 September 2014, the Company's strategic partnership with Disney expanded to include product offerings, specifically small and fashion dolls, based on the DISNEY PRINCESS and FROZEN brands, commencing in 2016. 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 three quarters of 2014, the Company released products related to three theatrical releases based on MARVEL properties, CAPTAIN AMERICA: THE WINTER SOLDIER in April 2014, THE AMAZING SPIDER-MAN 2 in May 2014 and GUARDIANS OF THE GALAXY in August 2014. Hasbro also commenced shipments of product related to the fourth quarter 2014 introduction of all new television entertainment based on the STAR WARS brand, STAR WARS REBELS. 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 released 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 on Hasbro's brands. This programming is currently aired in markets throughout the world. Hasbro Studios programming is distributed primarily to Hub Television Network, LLC, formally known as Hub Network and, as of October 13, 2014, is now the Discovery Family Channel (the "Network"), in the United States. Internationally, Hasbro Studios also distributes to various broadcasters and cable networks. Lastly Hasbro Studios programming is distributed on various digital platforms globally, including Netflix and iTunes. Beginning in 2015, Hasbro Studios will begin distributing certain programming domestically to other outlets, including Cartoon Network. 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.

The Network is the Company's joint venture with Discovery Communications, Inc. ("Discovery") and is a cable television network in the United States dedicated to high-quality children's and family entertainment and educational programming. Programming on the Network includes content based on Hasbro's brands as well as programming developed by third parties. Prior to September 2014, the Company and Discovery each owned a 50% equity interest in the Network. In September 2014, Hasbro and Discovery amended their relationship with respect to the Network, reducing Hasbro's equity interest from 50% to 40%.

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 2014 include DWARVEN DEN, PLUNDERNAUTS and SPELLFALL. Backflip also introduced two games under Hasbro brands, including NERFHOOPS and TWISTER TAP.

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, acquisitions, and investments 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 third quarter and first nine months of 2014, net revenues from emerging markets increased approximately 29% and 26%, 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 September 28, 2014, the Company had $183,649 remaining under this authorization. During the quarter and nine-month periods ended September 28, 2014, the Company spent $124,506 and $341,300 to repurchase approximately 2,368 and 6,369 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 nine-month periods ended September 28, 2014 and September 29, 2013.

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
Sept. 28, 2014
   
Sept. 29, 2013
   
Sept. 28, 2014
   
Sept. 29, 2013
 
Net revenues
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Costs and expenses:
                               
Cost of sales
   
41.0
     
41.5
     
39.7
     
40.6
 
Royalties
   
6.4
     
10.5
     
7.2
     
8.8
 
Product development
   
4.0
     
4.3
     
5.3
     
5.5
 
Advertising
   
10.0
     
10.0
     
10.0
     
9.9
 
Amortization of intangibles
   
0.9
     
1.0
     
1.3
     
1.3
 
Program production cost amortization
   
1.7
     
1.3
     
1.2
     
1.2
 
Selling, distribution and administration
   
16.6
     
16.9
     
21.6
     
22.6
 
Operating profit
   
19.4
     
14.5
     
13.8
     
10.1
 
Interest expense
   
1.7
     
3.0
     
2.3
     
3.0
 
Interest income
   
(0.0
)
   
(0.1
)
   
(0.1
)
   
(0.1
)
Other (income) expense, net
   
1.2
     
0.2
     
0.3
     
0.4
 
Earnings before income taxes
   
16.6
     
11.4
     
11.2
     
6.8
 
Income tax expense
   
4.3
     
2.2
     
3.0
     
1.2
 
Net earnings
   
12.3
     
9.2
     
8.2
     
5.6
 
Net loss attributable to noncontrolling interests
   
(0.0
)
   
(0.0
)
   
(0.1
)
   
(0.0
)
Net earnings attributable to Hasbro, Inc.
   
12.3
%
   
9.2
%
   
8.3
%
   
5.6
%



RESULTS OF OPERATIONS

The quarter and nine-month periods ended September 28, 2014 and September 29, 2013 were each 13-week and 39-week periods, respectively. Net earnings, including the impact of noncontrolling interests in Backflip, were $180,155 and $244,489 in the quarter and nine months ended September 28, 2014, respectively, compared to $125,843 and $155,652 for the respective periods in 2013. Net earnings attributable to Hasbro, Inc. for the quarter and nine months ended September 28, 2014 were $180,457 and $246,019, respectively, compared to $126,574 and $156,383 for the respective periods of 2013. Diluted earnings per share attributable to Hasbro, Inc. for the quarter and nine months ended September 28, 2014 were $1.40 and $1.88, respectively, compared to $0.96 and $1.19 for the respective periods of 2013.

Net earnings for the third quarter and first nine months of 2014 include adjustments, net of tax, of $7,379, or $0.06 per diluted share, for each period related to the restructuring of the Company's equity interest in Hub Network. Net earnings for the quarter and nine months ended September 29, 2013 includes unfavorable impacts, net of tax, of $66,447, or $0.50 per diluted share, for each period resulting from an adverse arbitration award related to a license agreement with an inventor as well as a favorable tax adjustment of $23,637, or $0.18 per diluted share. The third quarter and first nine months of 2013 also include adjustments, net of tax, of $3,126, or $0.03 per share, and $23,693, or $0.18 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 nine-month periods ended September 28, 2014 include the operations of Backflip. The quarter and nine months ended September 29, 2013 only include the operations of Backflip from the date of acquisition. The operations of Backflip are reported in the Entertainment and Licensing segment.

Consolidated net revenues for the quarter ended September 28, 2014 increased approximately 7% to $1,469,899 from $1,370,348 for the quarter ended September 29, 2013 and were negatively impacted by foreign currency translation of approximately $10,800 for the quarter ended September 28, 2014 as a result of the stronger U.S. dollar in 2014 compared to 2013. For the nine months ended September 28, 2014, consolidated net revenues increased 6% to $2,978,614 from $2,800,384 for the nine months ended September 29, 2013 and were negatively impacted by foreign currency translation of approximately $18,000 as a result of the stronger U.S. dollar in 2014 compared to 2013. Absent the impact of currency translation, net revenues grew 8% and 7% in the third quarter and first nine months of 2014, respectively, 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 31% in the third quarter and first nine months of 2014, respectively, compared to 2013. All seven franchise brands grew during the third quarter of 2014, while six of the seven franchise brands experienced growth in the year-to-date period, including MAGIC: THE GATHERING, MONOPOLY, MY LITTLE PONY, NERF, PLAY-DOH and TRANSFORMERS.

The following table presents net revenues by product category for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013.

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
Sept. 28, 2014
   
Sept. 29, 2013
   
%
Change
   
Sept. 28, 2014
   
Sept. 29, 2013
   
%
Change
 
Boys
 
$
478,509
     
392,014
     
22
%
   
1,062,082
     
888,494
     
20
%
Games
   
395,221
     
387,450
     
2
%
   
841,449
     
873,774
     
-4
%
Girls
   
407,718
     
388,696
     
5
%
   
710,235
     
652,889
     
9
%
Preschool
   
188,451
     
202,188
     
-7
%
   
364,848
     
385,227
     
-5
%
Net revenues
 
$
1,469,899
     
1,370,348
             
2,978,614
     
2,800,384
         


BOYS: Net revenues in the boys' category increased 22% and 20% in the third quarter and first nine months of 2014, respectively, compared to 2013. Both the third quarter and first nine months of 2014 benefited from shipments related to four theatrical releases whereas the third quarter and first nine 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 three theatrical releases, CAPTAIN AMERICA: THE WINTER SOLIDER in April 2014, THE AMAZING SPIDER-MAN 2 in May 2014 and GUARDIANS OF THE GALAXY in August 2014. The third quarter and first nine months of 2013 included shipments of MARVEL products related to one theatrical release, IRON MAN 3, in May 2013. Higher net revenues from NERF products in the quarter and year-to-date periods, also contributed to the category's growth. These higher net revenues were slightly offset by expected lower net revenues from BEYBLADE and G.I. JOE products in the third quarter and first nine months of 2014.

GAMES: Net revenues from the games category grew 2% in the third quarter of 2014, but decreased 4% in the first nine months of 2014 compared to 2013. In the quarter, higher net revenues from MONOPOLY, MAGIC: THE GATHERING, SIMON, DUNGEONS AND DRAGONS and OPERATION products were only partially offset by lower net revenues from other games brands, particularly BOP IT!, DUEL MASTERS and JENGA. In the first nine months of 2014, higher net revenues from MONOPOLY, MAGIC: THE GATHERING, SIMON, DUNGEONS AND DRAGONS, ELEFUN & FRIENDS and OPERATION products were more than offset by lower net revenues from other games brands, particularly BOP IT!, DUEL MASTERS, JENGA and TWISTER. Games category net revenues in the third quarter and first nine 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 5% and 9% in the third quarter and first nine months of 2014, respectively, compared to 2013. Higher net revenues from franchise brands, specifically MY LITTLE PONY, NERF and PLAY-DOH, contributed to the category's growth in both the quarter and nine 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 third quarter and first nine months of 2014. The girls' category also benefited from the launch of PLAY-DOH DOHVINCI products, a line of arts and crafts toys, late in the second quarter of 2014. These higher net revenues were partially offset by lower net revenues from FURBY products in both the quarter and nine months ended September 28, 2014. Lastly, growth from the franchise brand LITTLEST PET SHOP, which was re-imagined and re-launched during the third quarter of 2014, as well as the challenger brand FURREAL FRIENDS, reflecting the shipment of feature items ahead of the holiday season, in 2014 compared to 2013, also contributed to overall category growth during these periods.

PRESCHOOL: Net revenues from the preschool category declined 7% and 5% in the quarter and nine months ended September 28, 2014, respectively, compared to the quarter and nine months ended September 29, 2013.  Growth in net revenues from PLAY-DOH and TRANSFORMERS products was more than offset by lower net revenues from various other preschool brands, particularly PLAYSKOOL and SESAME STREET.

Operating profit for the quarter ended September 28, 2014 increased 44% to $285,814, or 19.4% of net revenues, from $198,706, or 14.5% of net revenues, for the quarter ended September 29, 2013. Operating profit in the third quarter of 2014 includes a benefit of $1,328 related to the restructuring of the Company's investment in Hub Network while operating profit in the third quarter of 2013 included a charge of $57,164 reflecting an adverse arbitration award related to a license agreement as well as restructuring and related partial pension settlement charges of $4,093. Absent the impact of these items, operating profit grew 9% to $284,486, or 19.4% of net revenues, in third quarter of 2014 from $259,963, or 19.0% of net revenues, in 2013. Foreign currency translation negatively impacted operating profit by approximately $2,900 in the third quarter of 2014. Excluding the items described above, higher net revenues, partially offset by higher costs and expenses, contributed to growth in operating profit in the third quarter of 2014. These higher net revenues allowed better leverage of operating expenses leading to improved operating margin in 2014 compared to 2013.

Operating profit for the nine months ended September 28, 2014 increased 45% to $411,826, or 13.8% of net revenues, compared to $283,421, or 10.1% of net revenues, for the nine months ended September 29, 2013. Operating profit in 2014 includes a benefit of $1,328 related to the restructuring of the Company's investment in Hub Network while operating profit in 2013 included an adverse arbitration award related to a license agreement and restructuring and related pension charges of $57,164 and $35,481, respectively. Absent these items, operating profit increased 9% to $410,498, or 13.8% of net revenues, in 2014 from $376,066, or 13.4% of net revenues, for the nine months ended September 29, 2013. Foreign currency translation negatively impacted operating profit by approximately $3,800 in the first nine months of 2014. Excluding the items described above, improved operating profit and operating profit margin in the first nine months of 2014 compared to 2013 reflect higher net revenues which resulted in better leverage of operating expenses.

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 nine-month periods ended September 28, 2014 and September 29, 2013.

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
Sept. 28, 2014
   
Sept. 29, 2013
   
% Change
   
Sept. 28, 2014
   
Sept. 29, 2013
   
% Change
 
Net Revenues
 
   
   
   
   
   
 
U.S. and Canada segment
 
$
764,268
     
735,619
     
4
%
   
1,484,968
     
1,466,921
     
1
%
International segment
   
649,284
     
582,676
     
11
%
   
1,351,608
     
1,212,665
     
11
%
Entertainment and Licensing segment
   
53,378
     
48,637
     
10
%
   
135,915
     
114,747
     
18
%
 
                                               
Operating Profit
                                               
U.S. and Canada segment
 
$
169,850
     
146,991
     
16
%
   
252,541
     
243,738
     
4
%
International segment
   
116,451
     
105,663
     
10
%
   
148,097
     
115,951
     
28
%
Entertainment and Licensing segment
   
493
     
7,625
     
-94
%
   
21,120
     
16,622
     
27
%


U.S. AND CANADA SEGMENT

The U.S. and Canada segment net revenues for the quarter ended September 28, 2014 increased 4% to $764,268 from $735,619 for the quarter ended September 29, 2013. Net revenues for the first nine months of 2014 grew 1% to $1,484,968 from $1,466,921 for the first nine months of 2013. Currency translation negatively impacted net revenues by approximately $1,100 and $3,000 in the quarter and nine-month periods ended September 28, 2014, respectively. In the third quarter of 2014, growth in the boys' and games categories were partially offset by lower net revenues from the girls' and preschool categories. In the first nine months of 2014, lower net revenues from the girls', games and preschool categories were more than offset by growth in the boys' category.

In the boys' category, higher net revenues from NERF, TRANSFORMERS, MARVEL and STAR WARS products for the third quarter and first nine months of 2014 were partially offset by lower net sales of BEYBLADE products. The games category benefited from higher net revenues from MONOPOLY, MAGIC: THE GATHERING, DUNGEONS AND DRAGONS, SIMON, CONNECT 4 and OPERATION products in both the quarter and nine-month periods ended September 28, 2014. Although these higher net revenues more than offset lower net revenues from other games brands, including BOB IT!, JENGA, STAR WARS, and DUEL MASTERS, in the quarter ending September 28, 2014, they could not overcome declines from these other game brands in the first nine months of 2014.  Lower net revenues from TWISTER products also contributed to the category's decline in the nine-month period. In the girls' category, higher net revenues from franchise brands, specifically LITTLEST PET SHOP, MY LITTLE PONY, NERF and PLAY-DOH, in the third quarter and first nine months of 2014 were more than offset by lower net revenues from FURBY and BABY ALIVE products. Net revenues from FURREAL FRIENDS also grew during the third quarter and first nine months of 2014 compared to 2013. In the preschool category, higher net revenues from PLAY-DOH and TRANSFORMERS products in the quarter and nine months ended September 28, 2014 compared to 2013 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 September 28, 2014 increased 16% to $169,850, or 22.2% of segment net revenues, from $146,991, or 20.0% of segment net revenues, for the quarter ended September 29, 2013. U.S. and Canada segment operating profit for the nine months ended September 28, 2014 increased 4% to $252,541, or 17.0% of segment net revenues, from $243,738, or 16.6% of segment net revenues, for the nine months ended September 29, 2013. Operating profit growth in the third quarter and first nine months of 2014 reflects higher net revenues and favorable product mix partially offset by increased expenses. Increased operating profit margin in the third quarter and first nine months of 2014 reflects improved expense leverage resulting from those higher net revenues as well as benefits from the Company's cost savings initiative.

INTERNATIONAL SEGMENT
International segment net revenues increased 11% in the third quarter and first nine months of 2014 to $649,284 and $1,351,608, respectively, from $582,676 and $1,212,665 for the comparable periods of 2013. International segment net revenues for the third quarter and first nine months of 2014 were negatively impacted by currency translation of approximately $9,700 and $15,100 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 13% in both the third quarter and first nine months of 2014 compared to 2013. The following table presents net revenues by geographic region for the Company's International segment for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013.

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
Sept. 28, 2014
   
Sept. 29, 2013
   
%
Change
   
Sept. 28, 2014
   
Sept. 29, 2013
   
% Change
 
Europe
 
$
403,602
     
376,648
     
7
%
   
827,412
     
755,097
     
10
%
Latin America
   
163,163
     
131,914
     
24
%
   
313,466
     
260,443
     
20
%
Asia Pacific
   
82,519
     
74,114
     
11
%
   
210,730
     
197,125
     
7
%
Net revenues
 
$
649,284
     
582,676
             
1,351,608
     
1,212,665
         

International segment net revenues grew across all regions in both the quarter and nine months ended September 28, 2014. Absent the impact of currency translation, net revenues from the European region grew 10% in both the quarter and nine months ended September 28, 2014. Currency translation did not have a material impact on net revenues from the Latin American and Asia Pacific regions in the third quarter of 2014; however, in the first nine months of 2014, net revenues from these regions grew approximately 24% and 8%, respectively, absent currency translation. Net revenues in emerging markets, which includes but is not limited to Russia, Brazil and China, increased 29% and 26% in the third quarter and first nine months of 2014, respectively, compared to 2013.

In both the quarter and nine 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 NERF, TRANSFORMERS, MARVEL and, to a lesser extent, ANGRY BIRDS products in the third quarter and first nine months of 2014 contributed to growth in the boys category which was slightly offset by lower sales of BEYBLADE products. In the girls category, higher net revenues from MY LITTLE PONY, NERF and PLAY-DOH products in the third quarter and first nine months 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, 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, in the quarter and nine months ended September 28, 2014 were only partially offset by lower net revenues from PLAYSKOOL and TONKA products.

International segment operating profit increased 10% to $116,451 for the quarter ended September 28, 2014 from $105,663 for the quarter ended September 29, 2013; however, operating profit margin decreased from 18.1% of segment net revenues in the third quarter of 2013 to 17.9% of segment net revenues in the third quarter of 2014. International segment operating profit increased 28% to $148,097, or 11.0% of segment net revenues, for the nine months ended September 28, 2014, from $115,951, or 9.6% of segment net revenues, for the nine months ended September 29, 2013. Foreign currency translation negatively impacted segment operating profit by approximately $3,900 in each the third quarter and first nine months of 2014. In the quarter and nine months, higher net revenues, partially offset by higher operating expenses, contributed to improved operating profit. Less favorable product mix during the quarter resulted in a lower operating profit margin compared to the third quarter of 2013.

ENTERTAINMENT AND LICENSING SEGMENT
Entertainment and Licensing segment net revenues for the quarter ended September 28, 2014 increased 10% to $53,378 from $48,637 for the quarter ended September 29, 2013. Entertainment and Licensing segment net revenues for the nine months ended September 28, 2014 increased 18% to $135,915 from $114,747 for the nine months ended September 29, 2013. Higher net revenues from lifestyle licensing, as well as revenue contribution from Backflip, drove growth in both the quarter and nine months of 2014 compared to 2013.

Entertainment and Licensing segment operating profit decreased to $493 for the quarter ended September 28, 2014 from $7,625 for the quarter ended September 29, 2013. The reduction in operating profit in 2014 compared to 2013 reflects accelerated amortization for certain programming, primarily related to KAIJUDO, reflecting revised estimates of future revenues, as well as lower revenue related to television programing distribution.  Partially offsetting this was higher operating profit from increased revenues from lifestyle licensing. Entertainment and Licensing segment operating profit increased to $21,120 for the nine months ended September 28, 2014 from $16,622 for the nine months ended September 29, 2013. Operating profit in the first nine months of 2013 included restructuring charges of $1,729. The increase in operating profit in the first nine months of 2014 compared to 2013 reflects the profit impact from higher net revenues from lifestyle licensing partially offset by the impact of Backflip, which was acquired in the third quarter of 2013.

OTHER SEGMENTS AND CORPORATE AND ELIMINATIONS
Global Operations segment operating profit of $15,704 for the quarter ended September 28, 2014 compared to an operating profit of $17,578 for the quarter ended September 29, 2013. Segment operating profit of $15,770 in the first nine months of 2014 compared to an operating profit of $3,638 for the nine months ended September 29, 2013.

The operating loss in Corporate and eliminations for the third quarter of 2014 totaled $16,684 compared to operating loss of $79,151 for the third quarter of 2013. Operating loss for the first nine months of 2014 of $25,702 compared to an operating loss of $96,528 for the first nine months of 2013. Operating loss for each the third quarter and first nine months of 2013 included charges of $57,164 related to an adverse arbitration award related to a license agreement as well as restructuring and related pension charges of $4,093 and $33,752, respectively. Absent these charges, operating loss in Corporate and Eliminations for the third quarter and first nine months of 2013 was $17,894 and $5,612, respectively. Lastly, the operating loss in the quarter and nine months of 2013 include a third quarter charge related to the write-off of early film development costs associated with films that had not yet been moved to production.


The Company's costs and expenses, stated as percentages of net revenues, are illustrated below for the quarter and nine-month periods ended September 28, 2014 and September 29, 2013.

 
 
Quarter Ended
   
Nine Months Ended
 
 
 
Sept. 28, 2014
   
Sept. 29, 2013
   
Sept. 28, 2014
   
Sept. 29, 2013
 
Cost of sales
   
41.0
%
   
41.5
%
   
39.7
%
   
40.6
%
Royalties
   
6.4
     
10.5
     
7.2
     
8.8
 
Product development
   
4.0
     
4.3
     
5.3
     
5.5
 
Advertising
   
10.0
     
10.0
     
10.0
     
9.9
 
Amortization of intangibles
   
0.9
     
1.0
     
1.3
     
1.3
 
Program production cost amortization
   
1.7
     
1.3
     
1.2
     
1.2
 
Selling, distribution and administration
   
16.6
     
16.9
     
21.6
     
22.6
 

Operating expenses for the quarter and nine-month periods ended September 29, 2013 include charges of $57,164 related to an adverse arbitration award relating to a license agreement which was recorded to royalties. In addition, operating expenses for the quarter and nine months ended September 29, 2013 include charges 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
   
Nine Months Ended
 
 
 
Sept. 29,
2013
   
Sept. 29, 2013
 
Cost of sales
 
$
-
     
8,493
 
Product development
   
-
     
3,515
 
Selling, distribution and administration
   
4,093
     
23,473
 
Total
 
$
4,093
     
35,481
 

In the third quarter of 2014, cost of sales increased in dollars but decreased as a percent of net revenues to $602,766, or 41.0% of net revenues, from $568,582, or 41.5% of net revenues, for the quarter ended September 29, 2013.  For the nine months ended September 28, 2014, cost of sales was $1,181,647, or 39.7% of net revenues, compared to $1,136,724, or 40.6% of net revenues, for the nine months ended September 29, 2013. Absent restructuring charges above, cost of sales as a percentage of net revenues was 40.3% for the first nine months of 2013. While higher cost of sales for the third quarter and first nine 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 third quarter and first nine months of 2014 also included a benefit from realized costs savings.

Royalty expense for the quarter ended September 28, 2014 decreased to $94,352, or 6.4% of net revenues, compared to $143,947, or 10.5% of net revenues, for the quarter ended September 29, 2013. Royalty expense for the nine months ended September 28, 2014 decreased to $214,466, or 7.2% of net revenues, from $243,568, or 8.8% of net revenues. Royalty expense for the quarter and nine months ended September 28, 2014 includes a benefit of $2,328 related to the restructuring of the Company's investment in Hub Network while royalty expense for the quarter and nine months ended September 29, 2013 included charges of $57,164 resulting from an adverse arbitration award related to a license agreement. Absent these charges, royalty expense increased to $96,680, or 6.6% of net revenues, and $216,794, or 7.3% of net revenues, in the quarter and nine-month periods of 2014, respectively, from $86,783, or 6.3% of net revenues, and $186,404, or 6.7% of net revenues, for the quarter and nine months ended September 29, 2013, respectively. 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 third quarter and first nine 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 three major motion picture releases, CAPTAIN AMERICA: THE WINTER SOLDIER, THE AMAZING SPIDER-MAN 2 and GUARDIANS OF THE GALAXY. In 2013, sales only benefited from shipments of MARVEL products related to one major motion picture release, IRON MAN 3.

Product development expense for the quarter and nine-month period ended September 28, 2014 was $58,220, or 4.0% of net revenues, and $157,184, or 5.3% of net revenues, respectively, compared to $59,366, or 4.3% of net revenues, and $154,455, or 5.5% of net revenues, for the respective periods in 2013. Absent restructuring charges, product development expense for the first nine months of 2013 was $150,940, or 5.4% of net revenues. Product development expense for the quarter and nine-month periods ended September 29, 2013 included the write-off of early film development costs associated with motion pictures which have not yet been moved into production. Absent these charges, higher product development expenses in 2014 compared to 2013 reflects increased investments in development, including the MAGIC: THE GATHERING brand.

Advertising expense for the quarter ended September 28, 2014 was $147,492, or 10.0% of net revenues, compared to $136,487, or 10.0% of net revenues, for the quarter ended September 29, 2013. Advertising expense for the nine months ended September 28, 2014 increased to $296,444, or 10.0% of net revenues, from $277,278, or 9.9% of net revenues, for the comparable period in 2013. Higher net revenues resulted in higher advertising expense for the third quarter and first nine months of 2014 compared to 2013. Advertising expense for the third quarter and first nine months of 2014 and 2013 were consistent as a percentage of net revenues.

Amortization of intangibles decreased to $12,809, or 0.9% of net revenues, for the quarter ended September 28, 2014 compared to $14,224, or 1.0% of net revenues, for the quarter ended September 29, 2013. Amortization of intangibles increased to $38,103, or 1.3% of net revenues, in the first nine months of 2014 from $37,677, or 1.3% of net revenues, in the first nine months of 2013. Increases in amortization related to Backflip were more than offset by lower amortization of the Company's other intangibles reflecting the impact of intangible assets which were fully amortized during 2013.

Program production cost amortization increased in the third quarter and first nine months of 2014 to $24,374, or 1.7% of net revenues, and $35,742, or 1.2% of net revenues, respectively, from $17,991, or 1.3% of net revenues, and $34,023, or 1.2% of net revenues, in the respective periods of 2013. Program production costs are capitalized as incurred and amortized using the individual-film-forecast method. The increase in the third quarter of 2014 compared to 2013 reflects accelerated amortization for certain programming resulting from revised estimates of future revenues, primarily related to KAIJUDO, and, to a lesser extent, the programming mix being amortized and the related actual and projected net revenues.

For the quarter ended September 28, 2014, the Company's selling, distribution and administration expenses increased in dollars but decreased as a percent of net revenues to $244,072, or 16.6% of net revenues, from $231,045, or 16.9% of net revenues, for the quarter ended September 29, 2013. Selling, distribution and administration expenses for the third quarters of 2014 and 2013 include $1,000 in charges related to the restructuring of the Company's investment in Hub Network and restructuring and related pension charges of $4,093, respectively. Absent these charges, selling, distribution and administration expenses increased 7% in 2014 to $243,072, or 16.5% of net revenues, from $226,952, or 16.6% of net revenues, for the quarter ended September 29, 2013. For the nine months ended September 28, 2014, the Company's selling, distribution and administration expenses increased in dollars but decreased as a percent of net revenues to $643,202, or 21.6% of net revenues from $633,238, or 22.6% of net revenues, for the nine months ended September 29, 2013. Selling, distribution and administration expense for the first nine months of 2014 and 2013 include $1,000 in charges related to the restructuring of the Company's investment in Hub Network and restructuring and related pension charges of $23,473, respectively. Absent these charges, selling, distribution and administration expenses increased 5% to $642,202, or 21.6% of net revenues, in 2014 from $609,765, or 21.8% of net revenues. The increase in both the quarter and nine-month periods, excluding restructuring charges, reflects higher compensation, depreciation and investments, including in MAGIC: THE GATHERING, emerging markets and Backflip, partially offset by cost savings.

NON-OPERATING (INCOME) EXPENSE

Interest expense for the third quarter and first nine months of 2014 was $24,710 and $69,940, respectively, compared to $41,194 and $86,398 for the comparable and respective periods of 2013. Charges of $18,382 related to interest on unpaid royalties resulting from an adverse arbitration award related to a license agreement were included in interest expense for the third quarter and first nine months of 2013. Absent these charges, interest expense for the third quarter and first nine months of 2013 was $22,812 and $68,016, respectively.

Interest income for the third quarter and first nine months of 2014 decreased as a result of lower cash balances and totaled $745 and $3,236 compared to $1,326 and $4,239 for the quarter and nine-month periods ended September 29, 2013.

Other expense, net of $17,795 for the quarter ended September 28, 2014 compared to $2,925 for the quarter ended September 29, 2013. Other expense, net of $10,556 for the first nine months of 2014 compared to $10,766 for the first nine months of 2013.  Both the third quarter and first nine months of 2014 includes a net loss of $12,894 related to the restructuring of the Company's investment in Hub Network.  This net loss was primarily comprised of costs associated with an option agreement entered into between Hasbro and Discovery and Hasbro's share of severance costs recorded by the Network, partially offset by a gain resulting from the reduction of amounts due to Discovery under a tax sharing agreement. The Company expects that the Network may incur additional restructuring charges in the fourth quarter of 2014. Other (income) expense, net also includes the Company's share in the income (losses) of Hub Network. Excluding the impact of the restructuring of the Company's investment described above, income from Hub Network of $1,892 and $5,491 in the third quarter and first nine months of 2014, respectively, compared to losses of $91 and $1,024 in the comparable periods in 2013. Foreign exchange losses of approximately $6,200 in the third quarter of 2014 compared to gains of approximately $500 in the third quarter of 2013. Foreign exchange losses of approximately $6,100 in the first nine months of 2014 compared to approximately $5,400 in the respective period of 2013. Other expense, net in the first nine months of 2014 also includes gains of $3,400 on the sale of an internet domain name.

INCOME TAXES

Income taxes totaled $63,899 on pre-tax earnings of $244,054 in the third quarter of 2014 compared to income taxes of $30,070 on pre-tax earnings of $155,913 in the third quarter of 2013.  For the nine month period, income taxes totaled $90,077 on pre-tax earnings of $334,566 in 2014 compared to income taxes of $34,844 on pre-tax earnings of $190,496 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 nine months of 2014, favorable discrete tax adjustments were a net benefit of $2,532 compared to a net benefit of $26,752 in the first nine months of 2013. The favorable discrete tax adjustment for the first nine 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 nine months of 2014 and 2013 were 27.8% and 26.5%, respectively. The increase in the adjusted rate to 27.8% for the nine months ended September 28, 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, primarily the United States.

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 nine months of 2014, the Company continued to fund its working capital needs primarily through cash flows from operations and, when needed, lines of credit and the Company's commercial paper program. 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 were used, primarily, to repay $425,000 in 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 September 28, 2014 the Company's cash and cash equivalents totaled $452,184, 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. Substantially all of the Company's cash and cash equivalents held outside of the United States as of September 28, 2014 is denominated in the U.S. dollar.

Because of the seasonality in the Company's cash