The Hershey Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone fourth-quarter report; quarterly figures below are unaudited. Hershey is a branded confectionery and snacks company operating in approximately 85 countries. North America accounts for about 89% of consolidated sales.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $7,986.3 million | $7,791.1 million | +2.5% |
| Gross profit / margin | $3,622.5 million / 45.4% | $3,575.3 million / 45.9% | Margin down 0.5 percentage points |
| Operating profit / margin | $1,596.0 million / 20.0% | $1,623.7 million / 20.8% | Profit down 1.7% |
| Net income attributable to Hershey | $1,149.7 million | $1,177.6 million | Down 2.4% |
| Diluted EPS, common stock | $5.46 | $5.58 | Down 2.2% |
| Cash from operating activities | $1,763.9 million | $1,600.0 million | Up $164.0 million |
Sales growth reflected 1.7% favorable price realization, a 1.0% net contribution from acquisitions and divestitures, and 0.1% volume growth, partly offset by 0.3% unfavorable foreign exchange. Cost of sales rose 3.5%, faster than sales, amid higher freight and logistics and plant costs and an unfavorable year-over-year commodity-derivative mark-to-market effect. Supply-chain productivity, pricing and mix partly offset these pressures.
North America sales grew 2.6% and segment income, a company-defined measure excluding specified corporate and unusual items, increased 5.2% to $2,125.9 million. International and Other sales rose 1.7% to $904.5 million; segment income increased to $95.7 million from $73.8 million, supported by margin initiatives and growth in several markets.
Fourth quarter: Sales were $2,068.1 million versus $1,987.9 million in Q4 2018. Net income attributable to Hershey was $207.2 million versus $336.8 million, and diluted common EPS was $0.98 versus $1.60. The filing attributes the annual earnings decline in part to higher impairment charges and SM&A; the $100.1 million Krave impairment was recorded in Q4.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $493.3 million, down from $588.0 million. Total debt was approximately $4.3 billion, versus $4.5 billion a year earlier.
- Operating cash flow was $1,763.9 million. Investing activities used $780.5 million, including $402.2 million for ONE Brands and $318.2 million of capital additions. Financing activities used $1,081.5 million, including $610.3 million of dividends and $527.2 million of share repurchases.
- Available capacity under the $1.5 billion revolving credit facility was $1.5 billion; the company also reported $358 million available under other bank lines. Hershey said it was in covenant compliance and believed liquidity was adequate for foreseeable needs.
- Common-stock dividends paid were $2.990 per share for 2019, up 8.5% from 2018. Approximately $410 million remained under the $500 million repurchase authorization at year-end.
Material changes and unusual items
- Completed the $402.2 million ONE Brands acquisition in September 2019, expanding the portfolio into low-sugar, high-protein bars. Acquisition-related intangible-asset valuations and goodwill were preliminary at year-end.
- Recorded $112.5 million of long-lived and intangible-asset impairment charges, including $100.1 million related primarily to Krave customer relationships and trademarks after performance fell below expectations. No goodwill impairment was recorded.
- Gross margin and operating margin declined year over year. Annual operating profit and net income also fell despite higher sales and operating cash flow.
- Issued $1.0 billion of notes in October 2019, with maturities from 2024 to 2049; proceeds were used in part to repay short-term borrowings. Short-term debt and the current portion of long-term debt together were $735.7 million at year-end.
- The company adopted lease accounting requirements in 2019, recording operating lease right-of-use assets and liabilities; it reported no material effect on net income or cash flows.
Outlook, commentary and risks
- Management forecast 2020 capital expenditures of approximately $475 million to $525 million, mainly for supply-chain capacity, fulfillment, data and technology projects. The filing does not provide a clear 2020 sales or earnings guidance figure.
- Hershey was monitoring the novel coronavirus outbreak in China as of the filing date; management said the financial and business effects were unknown and expected at that time to be limited to its China business.
- Strategy emphasizes U.S. confectionery leadership, capturing additional snacking occasions, digital commerce, innovation, cost discipline and profitable growth in selected international markets. Management expects advertising and related marketing expense to grow roughly in line with sales.
- Key risks include volatile commodity and energy costs, the ability to pass cost increases through without losing volume, intense competition and changing consumer preferences, and dependence on McLane Company, which represented about 30% of 2019 sales.
- Other disclosed risks include manufacturing or supply-chain disruption, international and currency exposure, cyber and information-system incidents, execution of acquisitions and cost-saving programs, and implementation of the multi-year ERP system. Certain labor agreements covering about 74% of union-represented employees were scheduled for negotiation in 2020.
- Ordinary-course legal proceedings were not expected by management to have a material effect. The auditor issued unqualified opinions on the financial statements and internal controls; the control assessment excluded acquired ONE Brands, which represented 5.1% of year-end assets and 0.3% of 2019 sales.
Important facts for investors to verify
- Whether 2020 pricing, volume and cost trends support recovery in gross margin after the 2019 decline.
- Krave’s subsequent performance and whether further impairments or portfolio actions occur.
- ONE Brands’ realized growth, integration progress and final purchase-price allocation.
- Execution, returns and funding of the planned $475–$525 million capital program, alongside dividends, repurchases and debt maturities.
- Actual financial and operating effects of the China outbreak, commodity volatility, customer concentration and ERP implementation.
- Developments in tax contingencies, the remaining held-for-sale disposal group, and 2020 labor negotiations.