Business Context and Reporting Period
Company: Hershey Foods Corporation (Hershey)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2002
Filing Date: March 26, 2003
Hershey is engaged in the manufacture, distribution, and sale of confectionery and grocery products. The company operates primarily in the United States, Canada, and Mexico, with global marketing in over 90 countries. In June 2002, Hershey completed a business realignment by selling a group of non-chocolate confectionery brands (including Heide, Jujyfruits, and Wunderbeans) to Farley's & Sathers Candy Company for $12.0 million in cash.
Key Financial Metrics
Note: Specific consolidated financial statement values (Net Sales, Net Income, Cash Flow, Debt totals) are incorporated by reference to the Annual Report to Stockholders (Exhibit 13) and are not explicitly detailed in the text of this 10-K filing.
- Revenue: Specific net sales figures for 2002 are not provided in the text; data is referenced in the Annual Report to Stockholders.
- Profitability: Operating profit margins on confectionery products are generally greater than those on grocery products. Specific margin percentages are not listed in the text.
- Debt Instruments: The company holds various long-term debt instruments, including 6.7% Notes due 2005, 6.95% Notes due 2007 and 2012, 8.8% Debentures due 2021, and 7.2% Debentures due 2027.
- Liquidity & Cash Flow: Cash flows related to margin requirements for futures contracts were significant in 2002 due to market volatility but were not material to total working capital requirements. The company contributed $150 million from free cash flow to domestic pension plans in December 2002.
- Market Capitalization: As of February 27, 2003, the aggregate market value of voting stock held by non-affiliates was approximately $5.81 billion for Common Stock and $7.6 million for Class B Common Stock.
Material Changes and Operational Highlights
- Asset Divestiture: Sold non-chocolate confectionery brands for $12.0 million in cash in June 2002.
- Raw Material Costs: Cocoa futures prices rose sharply in 2002 (Annual Average: 76.9 cents/lb) due to civil unrest in the Ivory Coast. The company expects cocoa costs to increase substantially in 2004.
- Price Increases: Implemented a wholesale price increase effective January 1, 2003. The standard size increase was approximately 11%, translating to an approximate 3% increase over the entire domestic product line.
- Customer Concentration: Sales to Wal-Mart Stores, Inc. and subsidiaries accounted for approximately 21% of total net sales in 2002.
- Workforce: Total employees were approximately 15,400 (13,700 full-time, 1,700 part-time) as of December 31, 2002. A voluntary workforce reduction of approximately 500 full-time employees occurred in 2002.
- Strike Resolution: A strike at two principal plants in Hershey, Pennsylvania, began April 26, 2002, and ended June 6, 2002. Management stated the work stoppage did not have a material impact on 2002 results.
Outlook, Risks, and Management Commentary
- Cost Management: To offset rising raw material costs (specifically cocoa in 2004), the company plans to utilize price increases, product weight changes, improved sales mix, and supply chain cost reductions.
- Commodity Hedging: The company uses forward purchasing and futures contracts to manage price risks for cocoa, sugar, corn sweeteners, natural gas, fuel oil, and dairy products. While this reduces risk, it may limit the ability to benefit from price decreases.
- Pension Expense: In February 2003, the company announced that 2003 pension expense was expected to be $12 million higher than previously disclosed.
- Legal Proceedings: Settled a long-standing IRS dispute regarding Corporate Owned Life Insurance (COLI) interest expense deductions. The settlement, effective October 1, 2001, resulted in the surrender of all insurance policies and resolved all federal and state tax aspects of the program.
- Stock Repurchase: In December 2002, the Board authorized the acquisition of up to $500 million of Common Stock.
Investor Verification Checklist
- Financial Statements: Verify exact Net Sales, Net Income, and Cash Flow figures in the Annual Report to Stockholders (Exhibit 13), as they are not explicitly listed in the 10-K text.
- Cocoa Price Exposure: Assess the impact of the projected substantial increase in cocoa costs for 2004 on future margins.
- Pension Liability: Review the updated 2003 pension expense guidance ($12 million increase) and the funded status of the plans following the $150 million contribution.
- Customer Concentration: Monitor the 21% sales concentration with Wal-Mart and the potential impact of pricing power or volume changes with this key customer.
- Debt Maturity Profile: Review the specific principal amounts and maturity dates of the various notes and debentures listed in the exhibits to assess refinancing risks.