Derivative Financial Instruments

9 Months Ended

Sep. 28, 2014

Derivative Financial Instruments (Thousands of Dollars) [Abstract]

Derivative Financial Instruments

(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.