Hasbro
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HASBRO : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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11/08/2017 | 10:09 pm


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
25, 2016
("2016 Form 10-K"), 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. Unless otherwise specifically indicated, all dollar or share
amounts herein are expressed in millions of dollars or shares, except for per
share amounts.



EXECUTIVE SUMMARY






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Hasbro, Inc. ("Hasbro" or the "Company") is a global play and entertainment
company committed to Creating the World's Best Play Experiences. The Company
strives to do this through deep consumer engagement and the application of
consumer insights, the use of immersive storytelling to build brands, product
innovation and development of global business reach. Hasbro applies these
principles to leverage its owned and controlled brands, including Franchise
Brands LITTLEST PET SHOP, MAGIC: THE GATHERING, MONOPOLY, MY LITTLE PONY, NERF,
PLAY-DOH and TRANSFORMERS, as well as Partner Brands. From toys and games to
television, movies, digital gaming and a comprehensive consumer products
licensing program, Hasbro fulfills the fundamental need for play and connection
for children and families around the world. The Company's wholly-owned Hasbro
Studios
and its film label, Allspark Pictures, create entertainment brand-driven
storytelling across mediums, including television, film, digital and more.



These elements are executed globally in alignment with Hasbro's strategic plan,
its brand blueprint. 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 and motion pictures, digital gaming and a broad
range of consumer products. Hasbro generates revenue and earns cash by
developing, marketing and selling products based on global brands in a broad
variety of consumer goods categories and distribution of television programming
and motion pictures based on the Company's properties, as well as through the
out-licensing of rights for third parties to use its properties in connection
with products, including digital media and games and lifestyle products. Hasbro
also leverages its competencies to develop and market products based on
well-known licensed partners' brands including, but not limited to, BEYBLADE,
DISNEY PRINCESS and DISNEY FROZEN, DISNEY'S DESCENDANTS, MARVEL, SESAME STREET,
STAR WARS, and DREAMWORKS' TROLLS. MARVEL, STAR WARS, DISNEY PRINCESS, DISNEY
FROZEN and DISNEY'S DECENDANTS are owned by The Walt Disney Company.



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 and South American toy and game marketing and sales
operations. The Company's Entertainment and Licensing segment includes the
Company's consumer products licensing, digital licensing and gaming, and movie
and television entertainment operations. In addition to these three primary
segments, the Company's product sourcing operations are managed through its
Global Operations segment.



The impact of changes in foreign currency exchange rates used to translate the
consolidated statements of operations is quantified by translating the current
period revenues at the prior period exchange rates and comparing this amount to
the prior period reported revenues. The Company believes that the presentation
of the impact of changes in exchange rates, which are beyond the Company's
control, is helpful to an investor's understanding of the performance of the
underlying business.




Third quarter 2017 highlights:




· Third quarter net revenues grew 7% to $1,791.5 million from $1,679.8
million
in the third quarter of 2016, driven by increases in the U.S. and
Canada, International and Entertainment and Licensing segments of 7%, 7%, and
4%, respectively. The growth in International segment net revenues included a
favorable $27.9 million in foreign currency translation.

· Net revenues from Franchise Brands, Hasbro Gaming and Emerging Brands
categories increased 7%, 22% and 9%, respectively, during the third quarter of
2017 compared to the third quarter of 2016, while Partner Brands category net
revenues were down 2% for the quarter.

· Operating profit was essentially flat in the third quarter of 2017
compared to the third quarter of 2016 and net earnings attributable to Hasbro,
Inc.
increased 3% to $265.6 million or $2.09 per diluted share in the third
quarter of 2017 compared to $257.8 million or $2.03 per diluted share in the
third quarter of 2016.


· Third quarter 2017 operating profit was negatively impacted by the
Toys"R"Us bankruptcy as a result of incremental bad debt expense recorded during
the third quarter of 2017.



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First nine months 2017 highlights:




· Net revenues increased 7% to $3,613.7 million in first nine months of
2017 compared to $3,389.9 the first nine months of 2016, driven by increases in
the U.S. and Canada, International and Entertainment and Licensing segments of
8%, 5% and 8%, respectively. The growth in International segment net revenues
included a favorable $33.3 million in foreign currency translation.

· Franchise Brands category net revenues for the nine months ended October
1, 2017
increased 10%, Hasbro Gaming net revenues grew 20%, Emerging Brands net
revenues grew 6% while Partner Brands category net revenues declined 5% during
the first nine months of 2017 compared to the same period in 2016.

· Operating profit grew 1% to $539.3 million in the first nine months of
2017 compared to $532.9 million in the first nine months of 2016 and net
earnings attributable to Hasbro, Inc. increased 12% to $401.9 million or $3.16
per diluted share in the first nine months of 2017 compared to $358.7 million or
$2.82 per diluted share in the first nine months of 2016.


The above variances for the quarter and nine month periods are discussed in
further detail below.



As of December 2016, the Company owned a 70% majority stake in Backflip Studios,
LLC
("Backflip"), a mobile game developer, and in January 2017, the Company
increased its ownership to 100% making it a wholly owned subsidiary.



Amounts Returned to Shareholders




The Company is committed to returning excess cash to its shareholders through
quarterly dividends and share repurchases. Hasbro increased the quarterly
dividend rate from $0.51 per share to $0.57 per share effective for the dividend
paid in May 2017. In addition to the dividend, the Company returns cash through
its share repurchase program. As part of this initiative, from 2005 to 2015, the
Company's Board of Directors (the "Board") adopted eight successive share
repurchase authorizations with a cumulative authorized repurchase amount of
$3,825 million. The eighth authorization was approved in February 2015 for $500
million
. During the first nine months of 2017, Hasbro repurchased approximately
1.2 million shares at a total cost of $111.5 million and at an average price of
$95.21 per share. At October 1, 2017, the Company had $216.5 million remaining
under this authorization. Share repurchases are subject to market conditions,
the availability of funds and other uses of funds.





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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
October 1, 2017 and September 25, 2016.






Quarter Ended Nine Months Ended
October 1, September 25, October 1, September 25,
2017 2016 2017 2016
Net revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 40.8 39.2 38.9 37.5
Royalties 7.8 8.0 7.8 8.1
Product development 3.8 4.2 5.3 5.6
Advertising 9.4 9.2 9.5 9.5
Amortization of intangibles 0.4 0.5 0.6 0.8
Program production cost amortization 0.3 0.4 0.4 0.5
Selling, distribution and administration 17.4 17.0 22.5 22.3
Operating profit 20.1 21.6 14.9 15.7
Interest expense 1.4 1.4 2.0 2.1
Interest income (0.3) (0.1) (0.4) (0.2)
Other (income) expense, net (0.5) (0.4) (0.7) (0.2)
Earnings before income taxes 19.5 20.6 14.0 13.9
Income tax expense 4.7 5.4 2.9 3.5
Net earnings 14.8 15.2 11.1 10.4
Net loss attributable to noncontrolling interests - (0.1) - (0.2)
Net earnings attributable to Hasbro, Inc. 14.8% 15.3% 11.1% 10.6%





RESULTS OF OPERATIONS - CONSOLIDATED






Third Quarter of 2017



The quarters ended October 1, 2017 and September 25, 2016 were each 13-week
periods. Net earnings and net earnings attributable to Hasbro, Inc. both
increased to $265.6 million for the third quarter of 2017, from $256.2 million
and $257.8 million, respectively, for the comparable period of 2016. Diluted
earnings per share increased to $2.09 in the third quarter of 2017 from $2.03 in
the third quarter of 2016. Net earnings during the third quarter of 2017
included a $0.04 per diluted share benefit due to the adoption of Accounting
Standards Update No. 2016-09 in 2017, as discussed in Note 1 to the consolidated
financial statements.



Consolidated net revenues for the third quarter of 2017 increased 7% compared to
the third quarter of 2016 and included a favorable impact from foreign currency
translation of $29.6 million as a result of strengthening currencies in the
European, Latin American and Asia Pacific markets in 2017 compared to 2016.





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The following table presents net revenues by brand portfolio for the quarters
ended October 1, 2017 and September 25, 2016.








Quarter Ended
October 1, September 25, %
2017 2016 Change
Franchise brands $ 827.3 773.4 7 %
Partner brands 485.7 493.7 -2 %
Hasbro gaming 280.1 229.9 22 %
Emerging brands 198.4 182.8 9 %
Total $ 1,791.5 1,679.8 7 %




FRANCHISE BRANDS: Net revenues in the Franchise Brands category increased 7% in
the third quarter of 2017 compared to the third quarter of 2016, driven by
higher net revenues from NERF, TRANSFORMERS, MY LITTLE PONY and MONOPOLY
products. Net revenues from MY LITTLE PONY products benefited ahead of the
October 2017 theatrical release of MY LITTLE PONY: THE MOVIE. These increases
were partially offset by lower third quarter 2017 net revenues from MAGIC: THE
GATHERING products as a result of the timing of releases in 2017 compared to
2016.



PARTNER BRANDS: Net revenues from the Partner Brands category decreased 2% in
the third quarter of 2017 compared to the third quarter of 2016. Revenue growth
from BEYBLADE, STAR WARS, DISNEY'S DESCENDANTS and SESAME STREET products were
more than offset by declines in net revenues from YO-KAI WATCH products and
DREAMWORKS' TROLLS products. DREAMWORKS' TROLLS products were supported in 2016
by the theatrical release of the DREAMWORKS' TROLLS motion picture.



HASBRO GAMING: Net revenues in the Hasbro Gaming category increased 22% in the
third quarter of 2017 compared to 2016. Higher net revenues from social gaming
products, such as SPEAKOUT and FANTASTIC GYMNASTICS, as well as classic games,
such as LIFE and CLUE, drove revenue growth in the third quarter of 2017.



Net revenues for Hasbro's total gaming category, including the Hasbro Gaming
portfolio as reported above and all other gaming revenue, most notably MAGIC:
THE GATHERING and MONOPOLY, which are included in the Franchise Brands
portfolio, totaled $424.8 million for the third quarter of 2017, up 4%, versus
$409.5 million in the third quarter 2016.



EMERGING BRANDS: Net revenues from the Emerging Brands category increased 9%
during the third quarter of 2017 compared to the same period in 2016. Higher net
revenues from BABY ALIVE and FURREAL FRIENDS products were partially offset by
lower net revenues from FURBY products.



Operating profit for the third quarter of 2017 was essentially flat at $360.9
million
, or 20.1% of net revenues compared to $362.1 million, or 21.6% of net
revenues, for the third quarter of 2016. Operating profit was negatively
impacted from incremental bad debt expense associated with the bankruptcy filing
by Toys"R"Us during the third quarter of 2017. Excluding this incremental bad
debt expense, operating profit would have increased, driven by higher net
revenues, partially offset by higher cost of sales and higher advertising
expense. Foreign currency translation did not have a significant impact on
operating profit results in the third quarter of 2017, as compared to the third
quarter of 2016.






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First Nine Months of 2017




The nine-month period ended October 1, 2017 was a 40-week period while the
nine-month period ended September 25, 2016 was a 39-week period. Net earnings
and net earnings attributable to Hasbro, Inc. both increased to $401.9 million
for the first nine months of 2017, compared to $352.6 million and $358.7
million
, respectively, for the first nine months of 2016. Diluted earnings per
share increased to $3.16 in 2017 from $2.82 in 2016. Net earnings for the nine
month period ended October 1, 2017 included a $0.16 per diluted share benefit
due to the adoption of Accounting Standards Update No. 2016-09 during 2017.




For the first nine months of 2017, consolidated net revenues increased 7%
compared to the first nine months of 2016 including a favorable variance of
$34.9 million as a result of foreign currency translation due to strengthening
currencies in the European, Latin American and Asia Pacific markets in 2017
compared to 2016.



The following table presents net revenues by product category for the first nine
months of 2017 and 2016.








Nine Months Ended
October 1, September 25, %
2017 2016 Change
Franchise brands $ 1,803.8 1,642.1 10 %
Partner brands 928.7 979.1 -5 %
Hasbro gaming 549.7 456.5 20 %
Emerging brands 331.5 312.3 6 %
Net revenues $ 3,613.7 3,390.0 7 %




FRANCHISE BRANDS: Net revenues in the Franchise Brands category increased 10% in
the first nine months of 2017 compared to 2016. Higher net revenues from
TRANSFORMERS, NERF and MONOPOLY products and, to a lesser extent, MY LITTLE PONY
products, contributed to growth in the first nine months of 2017. TRANSFORMERS
products benefited from the June 2017 theatrical release of TRANSFORMERS: THE
LAST KNIGHT. These increases were partially offset by lower net revenues from
MAGIC: THE GATHERING products, as well as lower net revenues from PLAY-DOH
products.



PARTNER BRANDS: Net revenues from the Partner Brands category declined 5% during
the first nine months of 2017 compared to 2016 due to lower net revenues from
STAR WARS products partially due to the timing of the 2017 theatrical release of
STAR WARS: THE LAST JEDI expected in the fourth quarter of 2017, as compared to
the timing of the 2016 theatrical release of ROGUE ONE: A STAR WARS STORY, in
addition to lower net revenues from YO-KAI WATCH, DISNEY FROZEN and MARVEL
products. These declines were partially offset by higher net revenue
contributions from BEYBLADE and DREAMWORKS' TROLLS products as well as increased
net revenues from Hasbro's line of DISNEY PRINCESS products in the first nine
months of 2017 compared to the same period in 2016.



HASBRO GAMING: Net revenues in the Hasbro Gaming category increased 20% in the
first nine months of 2017 compared to the first nine months of 2016. Increased
net revenues from social gaming products, as well as higher net sales of
DUNGEONS & DRAGONS products, were marginally offset by lower net revenues from
PIE FACE as well as certain other Hasbro Gaming products.



Net revenues for Hasbro's total gaming category, including the Hasbro Gaming
portfolio as reported above and all other gaming revenue, most notably from
MAGIC: THE GATHERING and MONOPOLY products, which are included in the Franchise
Brands portfolio, totaled $951.4 million in the first nine months of 2017, up
10%, versus $868.4 million in the first nine months of 2016.



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EMERGING BRANDS: Net revenues from the Emerging Brands category increased 6%
for the first nine months of 2017 compared to the first nine months of
2016. Higher net revenues from BABY ALIVE and FURREAL FRIENDS products were
partially offset by lower net revenues from FURBY products.






Operating profit for the first nine months of 2017 increased slightly to $539.3
million
, or 14.9% of net revenues, from $532.9 million, or 15.7% of net
revenues, for the first nine months of 2016. The operating profit increase was
driven by higher net revenues mostly offset by higher cost of sales and
operating expenses including higher sales & marketing costs, higher advertising
costs and higher royalty expenses.





SEGMENT RESULTS



Most of the Company's net 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. The results
of these operations are discussed in detail below.



Third Quarter of 2017



The following table presents net revenues and operating profit data for the
Company's three principal segments for the quarters ended October 1, 2017 and
September 25, 2016.



Quarter Ended
October 1, September 25, %
2017 2016 Change
Net Revenues
U.S. and Canada segment $ 993.8 932.8 7 %
International segment 739.2 690.7 7 %
Entertainment and Licensing segment 58.4 56.1 4 %

Operating Profit
U.S. and Canada segment $ 217.3 228.0 -5 %
International segment 132.0 133.1 -1 %
Entertainment and Licensing segment 16.9 14.1 20 %




U.S. and Canada Segment

The U.S. and Canada segment net revenues for the third quarter of 2017 increased
7% compared to the third quarter of 2016. Foreign currency translation did not
have a significant impact on this segment's net revenues. In the third quarter
of 2017, revenues grew in all product categories including Franchise Brands,
Partner Brands, Hasbro Gaming and Emerging Brands categories.





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The Franchise Brands category benefited from higher net revenues from NERF,
MONOPOLY, TRANSFORMERS and MY LITTLE PONY products, which were partially offset
by lower net revenues from MAGIC: THE GATHERING and PLAY-DOH products. In the
Partner Brands category, higher net revenues from STAR WARS, BEYBLADE and
DISNEY'S DESCENDANTS products were offset by lower net revenues from the
Company's DISNEY PRINCESS products as well as DREAMWORKS' TROLLS and YO-KAI
WATCH
products. In the Hasbro Gaming category, higher net revenues from social
gaming products and DUNGEONS & DRAGONS were partially offset by decreased net
revenues from PIE FACE products. In the Emerging Brands category increased net
revenues from BABY ALIVE and FURREAL FRIENDS products were partially offset by
lower net revenues from FURBY products.



U.S. and Canada segment operating profit decreased 5% for the quarter ended
October 1, 2017 to $217.3 million, or 21.9% of segment net revenues, compared to
$228.0 million, or 24.4% of segment net revenues, for the quarter ended
September 25, 2016. The decline in operating profit was due to a shift in
product mix as a result of lower sales of higher margin products such as MAGIC:
THE GATHERING, as well as increased bad debt expense related to the bankruptcy
filing of Toys"R"Us.



International Segment



International segment net revenues increased 7% to $739.2 million for the
quarter ended October 1, 2017 from $690.7 million for the quarter ended
September 25, 2016. The following table presents net revenues by geographic
region for the Company's International segment for the quarters ended October 1,
2017
and September 25, 2016.






Quarter Ended
October 1, September 25, %
2017 2016 Change
Europe $ 467.7 452.8 3 %
Latin America 174.5 155.0 13 %
Asia Pacific 97.0 82.9 17 %
Net revenues $ 739.2 690.7 7 %




The increase in International segment net revenues included a $27.9 million
benefit from the impact of foreign currency translation primarily related to the
Company's European region, and, to a lesser extent, Latin American and Asia
Pacific
regions during the third quarter of 2017 compared to the third quarter
of 2016. Net revenues from the Franchise Brands and Hasbro Gaming categories
grew, while net revenues from the Partner Brands and Emerging Brands categories
declined compared to the same period in 2016. The Franchise Brands category
benefitted from higher net revenues from NERF, TRANSFORMERS, MY LITTLE PONY, and
MONOPOLY products which were partially offset by lower revenues from MAGIC: THE
GATHERING products. Partner Brands category net revenues decreased due to lower
net revenues from YO-KAI WATCH, DREAMWORKS' TROLLS and DISNEY FROZEN products
which were partially offset by higher net revenues from BEYBLADE products. In
the Hasbro Gaming category, higher net revenues were driven by increases from
social gaming products, including PIE FACE products. In the Emerging Brands
category, higher net revenues from BABY ALIVE products were more than offset by
lower net revenues from FURBY products.

International segment operating profit declined $1.1 million or 1% to $132.0
million
or 17.9% of segment net revenues for the quarter ended October 1, 2017
from $133.1 million, or 19.3% of segment net revenues, for the quarter ended
September 25, 2016. The decrease in operating profit is the result of a shift in
product mix and higher expense levels in the third quarter of 2017, as compared
to the third quarter of 2016.




Entertainment and Licensing Segment




Entertainment and Licensing segment net revenues increased 4% for the quarter
ended October 1, 2017 to $58.4 million compared to $56.1 million for the quarter
ended September 25, 2016. Higher consumer product and entertainment revenues
drove growth during the third quarter of 2017.





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Entertainment and Licensing segment operating profit increased 20% to $16.9
million
, or 28.9% of external segment net revenues, for the quarter ended
October 1, 2017 from $14.1 million, or 25.1% of segment net revenues, for the
quarter ended September 25, 2016. Overall, the increase in Entertainment and
Licensing segment operating profit and operating profit margin was primarily due
to increased revenues, as well as, reduced intangible amortization as the
Backflip property rights were fully amortized in the second quarter of 2017.



Global Operations

The Global Operations segment operating profit of $11.5 million for the quarter
ended October 1, 2017 compared to an operating profit of $24.9 million for the
quarter ended September 25, 2016. The decline in operating results is
attributable to cost of sales increases and higher operating expenses in 2017.



Corporate and Eliminations

The operating loss in Corporate and eliminations totaled $16.7 million for the
third quarter of 2017 compared to a loss of $38.0 million for the third quarter
of 2016.



First Nine Months of 2017



The following table presents net revenues and operating profit data for the
Company's three principal segments for each of the nine months ended October 1,
2017
and September 25, 2016.



Nine Months Ended
October 1, September 25, %
2017 2016 Change
Net Revenues
U.S. and Canada segment $ 1,939.8 1,802.4 8 %
International segment 1,511.1 1,436.9 5 %
Entertainment and Licensing segment 162.7 150.5 8 %

Operating Profit
U.S. and Canada segment $ 363.6 364.3 0 %
International segment 149.4 165.6 -10 %
Entertainment and Licensing segment 39.6 33.4 19 %




U.S. and Canada Segment

The U.S. and Canada segment net revenues for the nine months ended October 1,
2017
increased 8% compared to 2016. Foreign currency translation did not have a
significant impact on this segment's net revenues. In the first nine months of
2017, revenues from the Franchise Brands, Hasbro Gaming and Emerging Brands
categories grew while net revenues from the Partner Brands category were
essentially flat.



The Franchise Brands category benefited from higher net revenues from NERF,
TRANSFORMERS and MONOPOLY products which were partially offset by lower net
revenues from MAGIC: THE GATHERING and PLAY-DOH products. In the Partner Brands
category, higher net revenues from BEYBLADE, DREAMWORKS' TROLLS and MARVEL were
more than offset by lower net revenues from STAR WARS and YO-KAI WATCH products.
In the Hasbro Gaming category, higher net revenues from social gaming products,
as well as higher net sales of DUNGEONS & DRAGONS products, were partially
offset by decreased net revenues from PIE FACE products. In the Emerging Brands
category increased net revenues from BABY ALIVE and FURREAL FRIEND products were
partially offset by lower net revenues from FURBY products.





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U.S. and Canada segment operating profit for the nine months ended October 1,
2017
was essentially flat at $363.6 million, or 18.7% of segment net revenues,
compared to $364.3 million, or 20.2% of segment net revenues, for the nine
months ended September 25, 2016. Lower operating profit margin reflects a shift
in product mix as a result of lower sales of higher margin products such as
MAGIC: THE GATHERING, as well as an overall increase in expenses including the
incremental bad debt expense related to the bankruptcy filing of Toys"R"Us.




International Segment




International segment net revenues increased 5% to $1,511.1 million for the nine
months ended October 1, 2017 from $1,436.9 million for the nine months ended
September 25, 2016. The following table presents net revenues by geographic
region for the Company's International segment for the nine-month periods ended
October 1, 2017 and September 25, 2016.



Nine Months Ended
October 1, September 25, %
2017 2016 Change
Europe $ 921.5 905.1 2 %
Latin America 339.1 307.9 10 %
Asia Pacific 250.5 223.9 12 %
Net revenues $ 1,511.1 1,436.9 5 %




In the first nine months of 2017 compared to the first nine months of 2016,
international segment net revenues were positively impacted by $33.3 million
from foreign currency translation variances related to the Company's European
region and, to a lesser extent, Latin American and Asia Pacific regions. Absent
the impact of foreign exchange, segment net revenues increased $40.9 million or
3% during the first nine months of 2017. Net revenues from the Franchise Brands
and Hasbro Gaming categories grew during the first nine months of 2017, while
net revenues from the Partner Brands and Emerging Brands categories declined
compared to the same period in 2016. The Franchise Brands category benefitted
from higher net revenues from TRANSFORMERS, NERF, MONOPOLY and MY LITTLE PONY
products. These increases were partially offset by net revenue decreases from
PLAY-DOH and MAGIC: THE GATHERING products. Partner Brands category net
revenues decreased due to lower net revenues from STAR WARS, MARVEL and YO-KAI
WATCH
products, partially offset by higher net revenues from BEYBLADE products.
In the Hasbro Gaming category, higher net revenues were driven by social gaming
products, as well as PIE FACE products. In the Emerging Brands category, lower
net revenues from FURBY and core PLAYSKOOL products, were partially offset by
higher net revenues from FURREAL FRIENDS, HANAZUKI and BABY ALIVE products.

International segment operating profit decreased to $149.4 million, or 9.9% of
segment net revenues, for the nine months ended October 1, 2017 from $165.6
million
, or 11.5% of segment net revenues, for the nine months ended September
25, 2016
. The decrease in operating profit is due to a shift in product mix and
increased expense levels.




Entertainment and Licensing Segment




Entertainment and Licensing segment net revenues for the nine months ended
October 1, 2017 increased 8% to $162.7 million from $150.5 million for the nine
months ended September 25, 2016. Growth in revenues was due primarily to higher
consumer products and entertainment revenues compared to the same period in
2016.



Entertainment and Licensing segment operating profit increased to $39.6 million,
or 24.3% of net revenues, for the nine months ended October 1, 2017 from $33.4
million
, or 22.2% of segment net revenues, for the nine months ended September
25, 2016
. Overall, the increase in Entertainment and Licensing segment
operating profit and operating profit margin reflects the higher revenues noted
above and lower intangible amortization expense partially offset by higher
administration costs associated with building the consumer products team
globally.






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Global Operations




The Global Operations segment operating profit of $4.7 million for the first
nine months of 2017 compares to operating profit of $25.4 million for the first
nine months of 2016. The decline is primarily due to increased cost of sales in
2017 due to product mix as well as increased operating expenses in 2017.




Corporate and Eliminations



Operating loss in Corporate and Eliminations for the first nine months of 2017
was $18.1 million, compared to $55.8 million for the first nine months of 2016.






OPERATING COSTS AND EXPENSES



Third Quarter of 2017

The Company's costs and expenses, stated as percentages of net revenues, are
illustrated below for the quarters ended October 1, 2017 and September 25, 2016.



Quarter Ended
October 1, September 25,
2017 2016
Cost of sales 40.8 % 39.2 %
Royalties 7.8 8.0
Product development 3.8 4.2
Advertising 9.4 9.2
Amortization of intangibles 0.4 0.5
Program production cost amortization 0.3 0.4
Selling, distribution and administration 17.4 17.0




Cost of sales increased 11% from $659.0 million, or 39.2% of net revenues, for
the quarter ended September 25, 2016 to $730.7 million, or 40.8% of net revenues
for the quarter ended October 1, 2017. Costs of sales increased in dollars
primarily due to higher sales volumes compared to the third quarter of 2016. As
a percent of net revenues, the cost of sales increase was driven by a shift in
product mix in the third quarter of 2017 compared to the third quarter of 2016.



Royalty expense for the quarter ended October 1, 2017 was $139.2 million, or
7.8% of net revenues, compared to $134.3 million, or 8.0% of net revenues, for
the quarter ended September 25, 2016. 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. The favorable
decline in royalty expense as a percentage of net revenues in the third quarter
of 2017 was driven by lower Partner Brand revenues partially offset by sales
from products related to the June 2017 theatrical release of TRANSFORMERS: THE
LAST KNIGHT.



Product development expense for the quarter ended October 1, 2017 was $67.4
million
, or 3.8% of net revenues, compared to $70.1 million, or 4.2% of net
revenues, for the quarter ended September 25, 2016. The favorable decline in
product development expense in the third quarter of 2017 was driven by lower
levels of spending at Backflip, as compared to the third quarter of 2016.



Advertising expense for the quarter ended October 1, 2017 was $168.9 million, or
9.4% of revenues, compared to $154.1 million, or 9.2% of net revenues, for the
quarter ended September 25, 2016. The higher spend in advertising expense was
consistent with the increases in net revenues.





--------------------------------------------------------------------------------


Amortization of intangibles was $6.5 million, or 0.4% of net revenues for the
quarter ended October 1, 2017 compared to $8.7 million, or 0.5% of net revenues,
for the quarter ended September 25, 2016. The decrease reflects the full
amortization of property rights related to Backflip during the second quarter of
2017.



Program production cost amortization decreased to $5.4 million or 0.3% of net
revenues, for the quarter ended October 1, 2017 from $6.3 million, or 0.4% of
net revenues, for the quarter ended September 25, 2016. Program production costs
are capitalized as incurred and amortized using the individual-film-forecast
method. As a percent of net revenues, program production cost amortization is
consistent period over period.



For the quarter ended October 1, 2017, the Company's selling, distribution and
administration expenses increased to $312.5 million, or 17.4% of net revenues,
from $285.2 million, or 17.0% of net revenues, for the quarter ended September
25, 2016
. This increase was primarily driven by the higher bad debt expense
related to the bankruptcy filing by Toys"R"Us, as well as higher marketing and
sales costs consistent with the increase in net revenues and higher depreciation
costs within administration costs.




First Nine Months of 2017




The Company's costs and expenses, stated as percentages of net revenues, are
illustrated below for the nine-month periods ended October 1, 2017 and September
25, 2016
.



Nine Months Ended
October 1, September 25,
2017 2016
Cost of sales 38.9 % 37.5 %
Royalties 7.8 8.1
Product development 5.3 5.6
Advertising 9.5 9.5
Amortization of intangibles 0.6 0.8
Program production cost amortization 0.4 0.5
Selling, distribution and administration 22.5 22.3




Cost of sales for the nine months ended October 1, 2017 increased to $1,405.0
million
, or 38.9% of net revenues, from $1,270.9 million, or 37.5% of net
revenues, for the nine months ended September 25, 2016. Costs of sales increased
in dollars primarily due to higher net revenues compared to the first nine
months of 2016. As a percent of net revenues, the cost of sales increase was
driven by a shift in product mix such as declines in higher margin products like
MAGIC: THE GATHERING in the nine months ended October 1, 2017 compared to the
same period in 2016.



Royalty expense for the nine months ended October 1, 2017 was $282.8 million, or
7.8% of net revenues, compared to $273.7 million, or 8.1% of net revenues, for
the nine months ended September 25, 2016. 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. The favorable
decline in royalty expense as a percentage of net revenues in the first nine
months of 2017 was driven by declines in net revenues from Partner Brands
partially offset by sales from products related to the June 2017 theatrical
release of TRANSFORMERS: THE LAST KNIGHT.



Product development expense for the nine months ended October 1, 2017 was
essentially flat at $192.8 million, or 5.3% of net revenues, from $190.9
million
, or 5.6% of net revenues for the nine months ended September 25, 2016.
Product development expenditures reflect the Company's continued investment in
innovation and anticipated growth across our brand portfolio. As a percent of
net revenues, the decrease in product development costs reflects lower expenses
related to Backflip in 2017.



--------------------------------------------------------------------------------




Advertising expense for the nine months ended October 1, 2017 was $342.2
million
, or 9.5% of net revenues, compared to $320.9 million, or 9.5% of net
revenues, for the nine months ended September 25, 2016. The higher spend in
advertising expense was consistent with the increases in net revenues.



Amortization of intangibles was $22.3 million, or 0.6% of net revenues, for the
nine months ended October 1, 2017 compared to $26.1 million, or 0.8% of net
revenues, in the first nine months of 2016. The decrease reflects the full
amortization of property rights related to Backflip during the first half of
2017.



Program production cost amortization decreased in the first nine months of 2017
to $16.2 million, or 0.4% of net revenues, from $17.5 million, or 0.5% of net
revenues, in the first nine months of 2016. Program production costs are
capitalized as incurred and amortized using the individual-film-forecast
method. The decrease during the first nine months of 2017 primarily reflects
lower television programing revenues in 2017.



For the nine months ended October 1, 2017, the Company's selling, distribution
and administration expenses increased to $813.3 million or 22.5% of net revenues
from $757.0 million or 22.3% of net revenues for the nine months ended September
26, 2016
. These higher costs reflect the incremental expense associated with
the extra week included in the first nine months of 2017, expenditures related
to ongoing information technology initiatives, as well as increases in marketing
and sales costs reflecting the higher revenues in 2017 compared to the same
period in 2016.




NON-OPERATING (INCOME) EXPENSE






Interest expense for the third quarter and first nine months of 2017 totaled
$25.1 million and $73.8 million, respectively, compared to $24.3 million and
$72.3 million for the comparable and respective periods of 2016. In the third
quarter of 2017, the Company refinanced $350 million of 6.3% notes that matured
in September 2017 by issuing $500 million of 3.5% notes.



Interest income was $5.4 million and $16.0 million for the third quarter and
first nine months of 2017, respectively, compared to $1.9 million and $6.5
million
in the third quarter and first nine months of 2016. The increase
reflects higher invested cash balances and higher average interest rates in 2017
compared to 2016.



Other income, net of $8.6 million for the quarter ended October 1, 2017,
compared to other income, net of $6.6 million for the quarter ended September
25, 2016
. Other income, net of $26.0 million for the nine-month period ended
October 1, 2017, compared to other income, net of $5.5 million for same period
in 2016. The increase in the third quarter is primarily due to increased
investment income in the third quarter of 2017 compared to the third quarter of
2016. In the first nine months of 2017, the increase in other income, net
relates primarily to foreign exchange gains as compared to foreign exchange
losses during the same period in 2016.



INCOME TAXES






--------------------------------------------------------------------------------


Income taxes totaled $84.3 million on pre-tax earnings of $349.8 million in the
third quarter of 2017 compared to income taxes of $90.2 million on pre-tax
earnings of $346.3 million in the third quarter of 2016. For the nine-month
period, income taxes totaled $105.7 million on pre-tax earnings of $507.6
million
in 2017 compared to income taxes of $120.0 million on pre-tax earnings
of $472.6 million in 2016. Both nine-month periods, as well as the full year
2016, were impacted by discrete tax events including the accrual of potential
interest and penalties on uncertain tax positions. During the first nine months
of 2017, favorable discrete tax adjustments were a net benefit of $15.6 million
compared to a net benefit of $3.3 million in the first nine months of 2016. The
favorable discrete tax adjustments for the first nine months of 2017 primarily
relate to excess tax benefits on share-based payments (resulting from the
adoption of ASU No. 2016-09, as discussed in Note 1 to the consolidated
financial statements in Part I, Item 1). Absent discrete items, the adjusted
tax rates for the first nine months of 2017 and 2016 were 23.9% and 26.1%,
respectively. The adjusted rate of 23.9% for the nine months ended October 1,
2017
is comparable to the full year 2016 adjusted rate of 24.5%.



OTHER INFORMATION




Business Seasonality and Shipments




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 around the holiday season. 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 sells products, 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 the 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.




Accounting Pronouncement Updates



--------------------------------------------------------------------------------





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 an
entity expects to be entitled in exchange for those goods or services. ASU
2014-09 also requires enhanced qualitative and quantitative revenue related
disclosures. ASU 2014-09 may be adopted on a full retrospective basis and
applied to all prior periods presented, or on a modified retrospective basis
through a cumulative adjustment recorded to opening retained earnings in the
year of initial application. This ASU is effective for fiscal years beginning
after December 15, 2017, and for interim periods within those fiscal years.


The



Company's revenue is primarily generated from the sale of finished product to
customers. Revenue is recognized at the point of time when ownership, risks,
and rewards transfer. These transactions are generally not impacted by the new
standard. The Company does however offer certain types of variable payments to
these customers such as pricing allowances, rebates, coupons and collaborative
marketing arrangements. These types of payments are defined as variable
consideration under ASU 2014-09. The Company has substantially completed
evaluating the quantitative impact related to ASU 2014-09. Based on the
analysis performed to date, the Company does not expect revenue recognition from
the sale of finished product to our customers, which is the majority of our
revenues, to change. We expect that within our Entertainment and Licensing
business, the timing of revenue recognition for minimum guarantees that we
receive from licensees will change under ASU 2014-09, but we do not expect the
impact to be material. No other areas of our business will be materially
impacted by the new standard. The Company is currently in the process of
evaluating the impact of ASU 2014-09 on internal controls and disclosures. The
Company expects to adopt ASU 2014-09 on January 1, 2018 using the modified
retrospective basis.



In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02),
which will require lessees to recognize a right-of-use asset and a lease
liability for virtually all leases. The liability will be based on the present
value of lease payments and the asset will be based on the liability. For income
statement purposes, a dual model was retained requiring leases to be either
classified as operating or finance. Operating leases will result in
straight-line expense while finance leases will result in a front-loaded expense
pattern. Additional quantitative and qualitative disclosures will be required.
ASU 2016-02 is required for public companies for fiscal years beginning after
December 15, 2018 and must be adopted using a modified retrospective transition.
The Company is evaluating the requirements of ASU 2016-02 and its potential
impact on the Company's consolidated financial statements. The Company has a
significant number of leases globally, primarily for property and office
equipment, and is in the process of identifying and evaluating these leases in
relation to the requirements of ASU 2016-02. For each of these leases, the term
will be evaluated, including extension and renewal options as well as the lease
payments associated with the leases. The Company does not expect that its
results of operations will be materially impacted by this standard. The Company
expects to record assets and liabilities on its consolidated balance sheets upon
adoption of this standard, which may be material. The adoption of this standard
will not have an impact on the Company's cash flows.





--------------------------------------------------------------------------------


In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based
Payment Accounting, which amends ASC Topic 718, Compensation - Stock
Compensation. The ASU includes provisions intended to simplify various aspects
related to how share-based payments are accounted for and presented in the
financial statements including (1) a requirement to prospectively record all of
the tax effects related to share-based payments at settlement (or expiration)
through the income statement; (2) a requirement that all tax-related cash flows
resulting from share-based payments be reported as operating activities on the
statement of cash flows; (3) the removal of the requirement to withhold shares
upon settlement of an award at the minimum statutory withholding requirement;
(4) a requirement that all cash payments made to taxing authorities on the
employees' behalf for withheld shares shall be presented as financing activities
in the statements of cash flows; and (5) entities will be permitted to make an
accounting policy election for the impact of forfeitures on the recognition of
expense for share-based payment awards choosing either to estimate forfeitures
as required today or recognize forfeitures as they occur. ASU 2016-09 was
effective for public companies for annual reporting periods beginning after
December 15, 2016, and interim periods within that reporting period. The Company
adopted ASU 2016-09 in the first quarter of 2017. The impact of the adoption
resulted in the following:

† The Company recorded excess tax benefits related to share-based payment
awards of $5.0 million and $20.5 million as part of income tax expense for the
quarter and nine months ended October 1, 2017, respectively.

† In accordance with the standard, for the nine months ended October 1,
2017
, the Company classified excess tax benefits related to share-based employee
awards of $20.5 million as part of operating activities in the consolidated
statements of cash flows. These amounts were previously recorded as cash inflows
from financing activities. To keep the statements of cash flows comparable, the
Company elected to apply this portion of the standard retrospectively and
restate its statement of cash flows for the third quarter of 2016 as allowed by
the standard. Excess tax benefits of $19.7 million for the nine-month period
ended September 25, 2016, previously shown as financing activities were
reclassified with other income tax cash flows as operating activities.

† In accordance with the standard, the Company now classifies cash outflows
for employee taxes paid related to shares withheld from share-based payment
awards as financing activities in the consolidated statements of cash flows. For
the nine months ended October 1, 2017, these payments amount to $32.0 million.
Prior to adoption of ASU 2016-09, these cash flows were included as operating
activities. This change is required to be applied on a retrospective basis and
as a result, the Company has restated the consolidated statement of cash flows
for the nine-month period ended September 25, 2016 by reclassifying payments of
$21.9 million to financing activities from operating activities.

† The Company elected to change its policy on accounting for forfeitures,
from estimating the number of stock-based awards expected to vest, to accounting
for forfeitures as they occur. This election resulted in a one-time share based
payment expense, net of tax, of $0.7 million which was recorded directly to
retained earnings during the first quarter of 2017. Based upon the Company's
history of forfeitures, it is not expected that this election will have a
material impact on its consolidated financial statements going forward however,
as any impact will be based on future forfeitures, the actual impact could
differ from the Company's expectation.



In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of
Inventory (ASU 2015-11), which replaces the concept of market price with the
single measurement of net realizable value. ASU 2015-11 was effective for public
companies for fiscal years beginning after December 15, 2016 and interim periods
within fiscal years beginning after December 15, 2017. The adoption of this
standard did not have a material impact on the Company's results or consolidated
financial statements.






--------------------------------------------------------------------------------


In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (ASC 230) -
Classification of Certain Cash Receipts and Cash Payments. The new guidance is
intended to reduce diversity in practice across all industries, in how certain
transactions are classified in the statement of cash flows. ASU 2016-15 is
effective for public companies for fiscal years beginning after December 15,
2017
. The Company has evaluated the requirements of ASU 2016-15 and does not
presently believe that the adoption of the new standard will have a material
impact on the Company's results or consolidated financial statements.



In October 2016, the FASB issued Accounting Standards Update No. 2016-16 (ASU
2016-16), Accounting for Income Taxes: Intra-Entity Transfers of Assets Other
Than Inventory. For public companies, this standard is effective for annual
reporting periods beginning after December 15, 2017, and early adoption is
permitted. The standard requires that the income tax impact of intra-entity
sales and transfers of property, except for inventory, be recognized when the
transfer occurs requiring any deferred taxes not yet recognized on intra-entity
transfers to be recorded to retained earnings. The Company has evaluated the
standard, and does not expect that it will not have a material impact on our
consolidated financial statements.




Recently Issued Accounting Pronouncements




In January 2017, the FASB issued Accounting Standards Update No. 2017- 04 (ASU
2017-04), Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. The standard eliminates the requirement to measure the
implied fair value of goodwill by assigning the fair value of a reporting unit
to all assets and liabilities within that unit ("the Step 2 test") from the
goodwill impairment test. Instead, if the carrying amount of a reporting unit
exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess, limited by the amount of goodwill in that reporting unit. For
public companies, this standard is effective and must be applied to annual or
any interim goodwill impairment tests beginning after December 15, 2019. Early
adoption is permitted. The Company is currently evaluating the standard, but
expects that it will not have a material impact on our consolidated financial
statements.



In March 2017, the FASB issued Accounting Standards Update No. 2017-07 (ASU
2017-07), Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost. The standard requires companies to
present the service cost component of net benefit cost in the income statement
line items where they report compensation cost. Companies will present all other
components of net benefit cost outside operating income, if this subtotal is
presented. For public companies, this standard is effective for annual reporting
periods beginning after December 15, 2017, and early adoption is permitted. The
Company is currently evaluating the standard, but expects that it will not have
a material impact on our consolidated financial statements.



In August 2017, the FASB issued Accounting Standards Update No. 2017-12 (ASU
2017-12), Derivatives and Hedging (Topic 815): Targeted Improvements to
Accounting for Hedging Activities.The amendments expand and refine hedge
accounting for both nonfinancial and financial risk components and align the
recognition and presentation of the effects of the hedging instrument and the
underlying hedged item in the financial statements. The impact of the standard
includes elimination of the requirement to separately measure and recognize
hedge ineffectiveness and requires the presentation of fair value adjustments to
hedging instruments to be included in the same income statement line as the
hedged item. For public companies, this standard is effective for annual
reporting periods beginning after December 15, 2018, and early adoption is
permitted. The Company is currently evaluating the standard and its impact on
our consolidated financial statements.






LIQUIDITY AND CAPITAL RESOURCES






The Company has historically generated a significant amount of cash from
operations. In the first nine months of 2017 and 2016 the Company funded its
operations and liquidity needs primarily through cash flows from operations,
and, when needed, used borrowings under its available lines of credit and
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 2017 and 2018. 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 September 2017, the Company issued $500.0 million in principal amount of
Notes Due 2027 that bear interest at a rate of 3.50%. Net proceeds of the Notes
offering, after deduction of the underwriting discount and debt issuance
expenses, totaled approximately $493.9 million. 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 plus 25 basis points. In addition, on or after
June 15, 2027, the Company may redeem at its option, any portion of the Notes at
a redemption price equal to 100% of the principal amount of the notes to be
redeemed. The proceeds from the issuance of the Notes were used, primarily, to
repay $350 million aggregate principal amount of the 6.30% Notes Due 2017 upon
maturity, including accrued and unpaid interest. The remaining net proceeds
were utilized for general corporate and working capital purposes.



As of October 1, 2017, the Company's cash and cash equivalents totaled $1,244.8
million
, substantially all 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 deemed to be
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
indefinitely reinvesting international earnings, it would be required to accrue
for any additional income taxes representing the difference between the tax
rates in the United States and the applicable tax jurisdiction of the
international subsidiaries. If the Company repatriated the funds from its
international subsidiaries, it would then be required to pay the additional U.S.
income tax. The majority of the Company's cash and cash equivalents held outside
of the United States as of October 1, 2017 are denominated in the U.S. dollar.



Because of the seasonality in the Company's cash flow, management believes that
on an interim basis, rather than discussing only its cash flows, a better
understanding of its liquidity and capital resources can be obtained through a
discussion of the various balance sheet categories as well. Also, as several of
the major categories, including cash and cash equivalents, accounts receivable,
inventories and short-term borrowings, fluctuate significantly from quarter to
quarter, again due to the seasonality of its business, management believes that
a comparison to the comparable period in the prior year is generally more
meaningful than a comparison to the prior quarter or prior year-end.



At October 1, 2017, cash and cash equivalents, net of short-term borrowings,
increased to $1,055.8 million from $651.7 million at September 25, 2016. Net
cash provided by operating activities in the first nine months of 2017 was
$201.8 million compared to $195.4 million in the first nine months of 2016.


For



the fiscal year ended December 25, 2016, net cash provided by operating
activities was $817.3 million. Net cash provided by operating activities in the
first nine months of 2017 and 2016 include pension contributions of $26.6
million
and $64.8 million, respectively.






Accounts receivable increased 14% to $1,655.8 million at October 1, 2017,
compared to $1,452.9 million at September 25, 2016. The increase reflects the 7%
increase in revenues in the third quarter of 2017 as compared to the third
quarter 2016 and the mix of revenues including growth in markets with longer
collection terms. Days sales outstanding increased from 78 days at September 25,
2016
to 83 days at October 1, 2017, also reflecting the timing of revenues in
the quarter as well as growth in revenues with longer terms in 2017 compared to
2016.






--------------------------------------------------------------------------------



Inventories increased 4% to $629.1 million at October 1, 2017 from $607.7
million
at September 25, 2016. Absent foreign exchange, inventories are
essentially flat with the prior year.






Prepaid expenses and other current assets decreased 9% to $232.6 million at
October 1, 2017 from $256.0 million at September 25, 2016. The decrease was
primarily related to lower unrealized gains on foreign exchange contracts and
lower royalties partially offset by higher prepaid non-income related taxes,
primarily value-added taxes.



Goodwill and other intangible assets, net, decreased to $796.5 million at
October 1, 2017 from $859.3 million at September 25, 2016. The decrease was due
to a non-cash goodwill impairment charge of $32.9 million related to Backflip
taken in the fourth quarter of 2016 in addition to amortization of intangible
assets over the last twelve months.



Other assets increased approximately 3% to $722.1 million at October 1, 2017
from $701.6 million at September 25, 2016. The increase was primarily related to
the increased deferred tax asset balances, higher capitalized movie and
television production costs, net of related production rebates, as well as
higher accounts receivable related to long-term multi-year programming
distribution agreements. These increases were partially offset by payments
received in relation to a long-term note receivable related to the sale of the
Company's manufacturing operations in August 2015, lower long-term royalty
advances and decreases in the value of long-term foreign exchange contracts.



Accounts payable and accrued liabilities increased 19% to $1,295.7 million at
October 1, 2017 from $1,087.4 million at September 25, 2016. The increase was
primarily due to higher accounts payable balances in the Company's Global
Operations business reflecting longer payment terms, higher accrued income tax
and other tax balances and increases to dividend accruals due to a higher
dividend rate. These increases were partially offset by lower royalty balances
in 2017 as well as lower accrued advertising at October 1, 2017.



Other liabilities increased 13% to $410.4 million at October 1, 2017 from $364.4
million
at September 25, 2016. The increase in 2017 compared to 2016 reflects
increases in uncertain tax position reserves and higher balances related to
deferred rent expenses.



Net cash utilized by investing activities was $97.0 million in the nine months
of 2017 compared to $90.5 million in the first nine months of 2016. Additions to
property, plant and equipment were $102.5 million in the first nine months of
2017 compared to $103.6 million in the first nine months of 2016. Net investing
activity for 2016 included a $19.8 million return of capital from the Discovery
Family Channel joint venture. The joint venture has since achieved sufficient
earnings for the distributions to be treated as dividends and as a result, the
2017 distributions totaling $20.2 million were included in other operating
activities. Cash utilized by investing activity for the nine months ended
September 25, 2016 includes a cash payment of $12.4 million related to the
purchase price, net of cash acquired, for Boulder Studios, which was acquired in
July 2016.






--------------------------------------------------------------------------------


Net cash utilized by financing activities was $161.3 million in the first nine
months of 2017 compared to $259.0 million in the first nine months of 2016.
Financing activities in 2017 include proceeds of $493.9 million from the
issuance of $500.0 million in long-term notes in September 2017, net of $6.1
million
of debt issuance costs, offset by the repayment of $350.0 million of
long-term notes due September 2017. Cash payments related to purchases of the
Company's common stock were $112.2 million in the first nine months of 2017
compared to $104.3 million in the first nine months of 2016. At October 1, 2017,
the Company had $216.5 million remaining available under its current share
repurchase authorization approved by the Board of Directors. Dividends paid in
the first nine months of 2017 totaled $206.0 million compared to $185.3 million
in the first nine months of 2016 reflecting the higher dividend rate commencing
with the May 2017 dividend. Net proceeds from short-term borrowings were $15.7
million
in the first nine months of 2017 compared to net proceeds of $14.2
million
in the first nine months of 2016. Financing activities in the first
nine months of 2017 and 2016 include payments of $32.0 million and $21.9
million
, respectively, relating to tax payments made to tax authorities for
which shares were withheld from employees' share-based payment awards.



The Company has an agreement with a group of banks for a commercial paper
program (the "Program"). Under the Program, at the request of the Company and
subject to market conditions, the banks may either purchase from the Company, or
arrange for the sale by the Company, of unsecured commercial paper notes. Under
the Program the Company may issue notes from time to time up to an aggregate
principal amount outstanding at any given time of $700.0 million. The maturities
of these notes will vary but may not exceed 397 days. The notes will be sold
under customary terms in the commercial paper market and will be issued at a
discount or par, or alternatively, will be sold at par and will bear varying
interest rates based on a fixed or floating rate basis. The interest rates will
vary based on market conditions and the ratings assigned to the notes by the
credit rating agencies at the time of issuance. Subject to market conditions,
the Company intends to utilize the Program as its primary short-term borrowing
facility and does not intend to sell unsecured commercial paper notes in excess
of the available amount under the revolving credit agreement discussed below.
If, for any reason, the Company is unable to access the commercial paper market,
the Company intends to use the revolving credit agreement to meet the Company's
short-term liquidity needs. At October 1, 2017 the Company had borrowings of
approximately $175.1 million outstanding related to the Program.



The Company has a revolving credit agreement (the "Agreement"), which provides
it with a $1,000.0 million committed borrowing facility. The Agreement contains
certain financial covenants setting forth leverage and coverage requirements,
and certain other limitations typical of an investment grade facility, including
with respect to liens, mergers and incurrence of indebtedness. Prior to
September 2017, the Agreement provided for a $700.0 million revolving credit
facility. During the third quarter of 2017 and pursuant to the Agreement, the
Company proposed and the Lenders agreed to increase the committed borrowing
facility from $700.0 million to $1,000.0 million. The Company was in compliance
with all covenants as of and for the quarter ended October 1, 2017. The Company
had no borrowings outstanding under its committed revolving credit facility at
October 1, 2017. However, the Company had letters of credit outstanding under
this facility as of October 1, 2017 of approximately $1.1 million. Amounts
available and unused under the committed line, less outstanding balances under
the commercial paper program, as of October 1, 2017 were approximately $823.7
million
. The Company also has other uncommitted lines from various banks, of
which approximately $57.8 million was utilized at October 1, 2017, including
$48.4 million of outstanding letters of credit and $9.4 million of outstanding
borrowings.



The Company has principal amounts of long-term debt at October 1, 2017 of
$1,709.9 million, due at varying times from 2021 through 2044. Of this long-term
debt, $500.0 million represents the 3.50% Notes Due 2027 that were issued in
September 2017. The Company also had letters of credit of approximately $49.5
million
and purchase commitments of approximately $434.7 million outstanding at
October 1, 2017.



Future payments on long-term debt and future interest payments on long-term debt
included as part of the Company's contractual obligations and commercial
commitments in its 2016 Form 10-K, were impacted by the issuance of $500.0
million
of 3.50% notes due 2027, in the third quarter, and the related interest
obligations, as detailed below.





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Payments due by Fiscal Year
2017 2018 2019 2020 2021 Thereafter Total
Long-term debt $ 350.0 - - - 300.0 1,409.9 2,059.9
Interest payments on long-term debt 85.8 81.3 81.3 81.3 76.5 1,087.4 1,493.6




The remainder of the contractual obligation and commercial commitments did not
materially change outside of payments made in the normal course of business and
as otherwise set forth in this report. The table of contractual obligations and
commercial commitments, as detailed in the Company's 2016 Form 10-K, does not
include certain tax liabilities recorded related to uncertain tax positions.
These liabilities were $115.4 million at October 1, 2017, and are included as a
component of other liabilities in the accompanying consolidated balance sheets.



The Company believes that cash from operations, and, if necessary, its committed
line of credit and other borrowing facilities, will allow the Company to meet
its obligations over the next twelve months.




CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES






The Company prepares its consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. As
such, management is required to make certain estimates, judgments and
assumptions that it believes are reasonable based on the information available.
These estimates and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses for the periods presented. The significant accounting
policies which management believes are the most critical to aid in fully
understanding and evaluating the Company's reported financial results include
sales allowances, program production costs, recoverability of goodwill and
intangible assets, recoverability of royalty advances and commitments, pension
costs and obligations and income taxes. These critical accounting policies are
the same as those detailed in the 2016 Form 10-K.





FINANCIAL RISK MANAGEMENT



The Company is exposed to market risks attributable to fluctuations in foreign
currency exchange rates, primarily as the result of sourcing products priced in
U.S. dollars, Hong Kong dollars and Euros while marketing those products in more
than twenty currencies. Results of operations may be affected primarily by
changes in the value of the U.S. dollar, Hong Kong dollar, Euro, British pound
sterling, Brazilian real, Russian ruble and Mexican peso and, to a lesser
extent, other currencies in, Latin American and Asia Pacific countries.



To manage this exposure, the Company has hedged a portion of its forecasted
foreign currency transactions for fiscal years 2017 through 2022 using foreign
exchange forward contracts. The Company is also exposed to foreign currency risk
with respect to its net cash and cash equivalents or short-term borrowing
positions in currencies other than the U.S. dollar. The Company believes,
however, that the on-going risk on the net exposure should not be material to
its financial condition. In addition, the Company's revenues and costs have
been, and will likely continue to be, affected by changes in foreign currency
rates. A significant change in foreign exchange rates can materially impact the
Company's revenues and earnings due to translation of foreign-denominated
revenues and expenses. The Company does not hedge against translation impacts of
foreign exchange. From time to time, affiliates of the Company may make or
receive intercompany loans in currencies other than their functional currency.
The Company manages this exposure at the time the loan is made by using foreign
exchange contracts. Other than as set forth above, the Company does not hedge
foreign currency exposures.






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The Company reflects all forward contracts at their fair value as an asset or
liability on the consolidated balance sheets. The Company does not speculate in
foreign currency exchange contracts. At October 1, 2017, these contracts had net
unrealized losses of $10.6 million, of which $3.5 million of unrealized gains
are recorded in prepaid expenses and other current assets, $8.5 million of
unrealized gains are recorded in other assets, $15.6 million of unrealized
losses are recorded in accrued liabilities and $7.0 million of unrealized losses
are recorded in other liabilities. Included in accumulated other comprehensive
loss at October 1, 2017 are deferred losses, net of tax, of $17.5 million,
related to these derivatives.



At October 1, 2017, the Company had fixed rate long-term debt of $1,709.9
million
. Of this long-term debt, $600 million represents the aggregate issuance
of long-term debt in May 2014 which consists of $300 million of 3.15% Notes Due
2021 and $300 million of 5.10% Notes Due 2044. Prior to the May 2014 debt
issuance, the Company entered into forward-starting interest rate swap
agreements with a total notional value of $500 million to hedge the anticipated
underlying U.S. Treasury interest rate. These interest rate swaps were matched
with this debt issuance and were designated and effective as hedges of the
change in future interest payments. At the date of debt issuance, the Company
terminated these interest rate swap agreements and their fair value at the date
of issuance was recorded in accumulated other comprehensive loss and is being
amortized through the consolidated statements of operations using an effective
interest rate method over the life of the related debt. Included in accumulated
other comprehensive loss at October 1, 2017 are deferred losses, net of tax, of
$17.3 million related to these derivatives.

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