The Hershey Company — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where disclosed. Hershey is a global confectionery and snack company, with North America generating about 88% of consolidated sales.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $7.440 billion | $7.387 billion | +0.7%; +1.4% excluding foreign exchange |
| Gross profit / margin | $3.158 billion / 42.4% | $3.383 billion / 45.8% | Margin down 340 basis points |
| Operating profit / margin | $1.206 billion / 16.2% | $1.038 billion / 14.0% | Profit +16.2%; comparison affected by 2015 impairment charges |
| Net income | $720.0 million | $513.0 million | +40.4% |
| Diluted EPS | $3.34 | $2.32 | +44.0% |
| Operating cash flow | $983.5 million | $1.214 billion | Down $231.0 million |
| Capital expenditures | $269.5 million | $356.8 million | Down; Malaysia plant construction was completed early in 2016 |
| Cash and equivalents at year-end | $297.0 million | $346.5 million | Down $49.5 million |
| Total debt at year-end | About $3.0 billion | About $2.4 billion | Increased, mainly reflecting financing associated with the barkTHINS acquisition |
Reported 2016 results include $163.2 million of unallocated commodity-derivative mark-to-market losses, $107.6 million of business realignment costs and a $26.7 million gain from settlement of the SGM purchase liability. Adjusted diluted EPS was $4.41, up 7.0% from $4.12 in 2015; adjusted net income rose 4.3% to $948.5 million. Adjusted measures are non-GAAP and exclude specified items.
Fourth quarter: Net sales were $1.970 billion versus $1.909 billion in Q4 2015. Net income was $116.9 million versus $227.9 million. Quarterly diluted EPS was $0.55 versus $1.04. The filing’s quarterly table reports these figures; it does not provide a separate Q4 adjusted-results comparison in the cited data.
Business and period comparison
- North America sales increased 1.0% to $6.533 billion; segment income declined 1.6% to $2.041 billion, with margin falling from 32.1% to 31.2%. Higher trade promotions and supply-chain costs weighed on results.
- International and Other sales declined 1.2% to $907.2 million as reported, but grew 3.2% on a constant-currency basis. The segment loss narrowed from $98.1 million to $29.1 million; China performance benefited from lower trade expense and returns, while India sales were affected by discontinuing edible-oil products.
- Sales growth reflected higher North America volumes and acquisitions, partly offset by a 0.7% foreign-exchange headwind. The company reported 0.8% volume growth and a 0.6% net acquisition/divestiture benefit.
- Gross margin pressure reflected derivative mark-to-market losses and incremental depreciation related to realignment activities, as well as promotional spending and supply-chain costs. Excluding specified items, adjusted gross margin declined 40 basis points.
- Reported net income and EPS comparisons benefited substantially from 2015’s $280.8 million goodwill and intangible impairment charge, primarily related to SGM. The 2016 increase should therefore be distinguished from adjusted growth.
Cash, debt, and capital allocation
- Operating cash flow fell to $983.5 million. Management cited, among other items, an $87 million interest-rate-swap settlement and higher cash payments on commodity futures as factors affecting the year-over-year comparison.
- At year-end, current assets were $1.817 billion and current liabilities were $1.909 billion. Cash was $297.0 million; short-term debt was $632.5 million.
- Hershey issued $500 million of 2.30% notes due 2026 and $300 million of 3.375% notes due 2046 in 2016, and repaid $500 million of maturing debt. It reported $526 million of available capacity under its $1.0 billion revolving facility and $345.4 million under other credit lines; it was in compliance with covenants.
- Dividends paid totaled $499.5 million, up from $476.1 million. Share repurchases totaled $592.6 million, including $420.2 million under authorized programs; about $100 million remained under the January 2016 authorization.
- Approximately two-thirds of year-end cash was held outside the United States and intended to be permanently reinvested abroad.
Outlook, management commentary, and risks
- For 2017, management expected net sales growth of approximately 2%–3%, including a 0.5% net acquisition benefit and a 0.25% foreign-exchange headwind. It forecast GAAP diluted EPS of $4.54–$4.65 and adjusted diluted EPS of $4.72–$4.81, representing expected adjusted EPS growth of about 7%–9%.
- Management expected 2017 capital expenditures of approximately $270–$290 million. The Operational Optimization Program was expected to deliver annual savings of about $52 million by 2018, with approximately $37 million of additional cash costs over the next two years.
- Growth priorities included Cookie Layer Crunch, barkTHINS distribution, Reese’s Crunchers and Krave meat snacks. Management cited a challenging consumer-packaged-goods environment, slower U.S. confectionery category growth, a shorter Easter season and customer merchandising strategies.
- Key risks include volatile commodity and energy prices, supply or manufacturing disruptions, intense competition and changing consumer preferences, reliance on McLane (about 25% of 2016 sales), foreign-exchange and international-market exposure, and execution of acquisitions and restructuring. Management also identified product safety, cybersecurity, regulatory, tax, pension and talent risks.
- The filing reported ordinary-course legal proceedings not expected by management to have a material effect. It also disclosed asbestos at certain facilities but said the company could not estimate a related asset-retirement obligation. Management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether underlying sales, volumes and margins support growth once promotional spending, currency effects and non-GAAP adjustments are separated.
- The timing and financial impact of the $163.2 million commodity-derivative losses, including the expected reclassification of derivative losses into segment results.
- Progress, cash costs and realized savings from the Operational Optimization Program, and whether the targeted $52 million annual savings are achieved.
- International and Other segment profitability, particularly China and India performance, and the assumptions supporting international growth plans.
- Debt levels, cash generation, share repurchases and dividends in light of acquisition spending and cash held overseas.
- The assumptions and exclusions behind 2017 guidance, including foreign exchange, acquisitions, commodity mark-to-market effects and the expected tax-rate benefit.