The Hershey Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 30, 2014, compared with the three months ended March 31, 2013. Dollar amounts below are in millions, except per-share data. Hershey cautions that quarterly results may not indicate full-year results because of seasonality.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1,871.8 | $1,827.4 | +2.4% |
| Gross profit / gross margin | $871.5 / 46.6% | $849.3 / 46.5% | Margin +10 bps |
| EBIT / EBIT margin | $403.6 / 21.6% | $391.8 / 21.4% | EBIT +3.0%; margin +20 bps |
| Net income | $252.5 | $241.9 | +4.4% |
| Diluted EPS, Common Stock | $1.11 | $1.06 | +4.7% |
| Net cash from operations | $203.8 | $293.2 | Down $89.4 |
Gross margin improved slightly as productivity and operating leverage were largely offset by higher commodity and supply-chain costs, unfavorable mix, and obsolescence. Lower advertising and marketing spending and fewer realignment charges supported EBIT margin. Net interest expense declined to $21.3 million from $23.6 million; the effective tax rate was 34.0%, versus 34.3%.
Cash, debt and liquidity
- Cash and cash equivalents were $1,006.1 million at March 30, 2014, down from $1,118.5 million at year-end 2013.
- Debt comprised $182.0 million of short-term debt, $1.0 million of current long-term debt, and $1,793.5 million of long-term debt. The company reported no commercial-paper borrowings at quarter-end.
- Hershey had a $1.0 billion unsecured revolving credit facility expiring in November 2018 and was in compliance with its covenants.
- Operating cash flow was lower year over year, mainly reflecting working-capital timing, lower cash generated by other assets and liabilities, and higher income-tax payments. Capital additions were $73.5 million; cash dividends were $105.3 million; and cash used for share repurchases was $271.5 million.
Material changes and notable items
- Sales rose 3.3% on volume, partly offset by 0.8% unfavorable foreign-exchange effects and 0.1% unfavorable price realization. Sales outside the United States and Canada fell 2.4%, with weakness in Latin America offsetting growth in China and India.
- Consumer takeaway in measured U.S. channels fell 3.0% and market share declined 0.1 percentage point. Hershey said later Easter timing affected comparisons; excluding Easter-related seasonal activity, retail takeaway was slightly higher.
- Hershey acquired an additional 5.9% interest in Lotte Shanghai Food Company (LSFC), increasing ownership from 44.1% to 50%, and amended its agreement to obtain operational control. It began consolidating LSFC and recorded an approximately $4.0 million gain. Purchase accounting remained preliminary.
- The anticipated Shanghai Golden Monkey acquisition had not closed. First-quarter selling and administrative expense included $13.0 million of costs related to capping the U.S.-dollar acquisition price; the filing also reported acquisition transaction costs, partly offset by the LSFC gain.
- Business realignment charges were $2.9 million, versus $6.8 million in the prior-year quarter, primarily related to the Next Century program.
Outlook, risks and contingencies
- Management maintained 2014 net-sales growth guidance of 5%–7%, including foreign-exchange effects, and expected sales to accelerate during the rest of the year. Planned launches included York Minis, Hershey’s Spreads, Ice Breakers Cool Blasts Chews and Brookside Crunchy Clusters.
- Management expected reported gross-margin expansion of about 30 basis points and adjusted expansion of about 20 basis points. Dairy-market volatility was identified as a margin headwind.
- Full-year GAAP diluted EPS guidance was $3.99–$4.08; adjusted diluted EPS guidance was $4.05–$4.13, excluding specified items and Shanghai Golden Monkey operating results. The company expected the Shanghai Golden Monkey acquisition to be slightly accretive to adjusted 2014 results after closing, excluding integration and transition costs, subject to approvals and other conditions.
- Key risks cited include commodity and energy costs and supply availability, pricing elasticity, product demand and competition, manufacturing or supply-chain disruption, acquisition execution, international-market performance, regulatory changes, and product quality or safety.
- In the U.S. chocolate antitrust litigation, the court granted summary judgment for Hershey in direct-purchaser cases; other plaintiff groups dismissed their cases with prejudice, subject to possible reinstatement if the decision were reversed. The court entered judgment closing the case April 17, 2014; an appeal deadline for direct purchasers was May 19, 2014. Hershey said potential consequences were not then expected to materially affect financial position or liquidity, but could affect results and cash flows if a fine, settlement or judgment were accrued or paid.
- Canadian antitrust civil cases had been settled; Hershey Canada pleaded guilty to one price-fixing count in 2013 and paid an approximately $4.0 million fine. Canadian tax authorities had proposed adjustments; Hershey recorded about $74.3 million of related tax, interest and penalties and a $66.7 million non-current receivable for anticipated competent-authority resolution.
Investor facts to verify
- Whether sales growth and the planned new-product launches delivered the expected second-half acceleration, particularly given Latin American softness and Easter-related comparisons.
- Whether commodity costs, especially dairy, and foreign exchange affected full-year gross-margin and EPS guidance.
- Whether Shanghai Golden Monkey closed on the expected timetable, and the final acquisition accounting, integration costs and contribution to adjusted earnings.
- Developments in the U.S. antitrust appeal and tax-audit matters, including whether any exposure or reserve estimates changed.
- Whether operating cash flow recovered as seasonal working capital normalized, while monitoring dividends, repurchases and total debt.