The Hershey Company — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone Q4 filing; quarterly results are unaudited. Hershey is a global confectionery and snacks company, with North America contributing 87.6% of 2015 sales.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $7.387 billion | $7.422 billion |
| Gross profit / margin | $3.383 billion / 45.8% | $3.336 billion / 45.0% |
| Operating profit / margin | $1.038 billion / 14.0% | $1.392 billion / 18.8% |
| Net income | $513.0 million | $846.9 million |
| Diluted EPS | $2.32 | $3.77 |
| Operating cash flow | $1.214 billion | $844.4 million |
| Capital expenditures | $329.7 million | $345.9 million |
| Cash and cash equivalents at year-end | $346.5 million | $374.9 million |
| Total debt at year-end | Approximately $2.4 billion | Approximately $2.2 billion |
Full-year net sales fell 0.5%; excluding unfavorable foreign exchange, sales increased 1.1%. Volume declined 3.4%, offset by favorable net price realization of 3.5% and a 1.0% net benefit from acquisitions and divestitures. The reported net income and EPS declines reflected large impairment and restructuring charges. On a non-GAAP basis, net income rose 1.5% to $909.7 million and diluted EPS rose 3.5% to $4.12. Reported gross margin improved 80 basis points; non-GAAP gross margin was 46.0%.
Q4 2015: Net sales were $1.909 billion and net income was $227.9 million, compared with $2.010 billion and $202.5 million, respectively, in Q4 2014.
Segments and material changes
- North America: Sales increased 1.8% to $6.468 billion; segment income increased 8.2% to $2.074 billion and margin rose to 32.1%. Pricing and supply-chain productivity offset lower volumes and input-cost pressure.
- International and Other: Sales fell 14.1% to $918.5 million and the segment recorded a $98.1 million loss, versus $40.0 million income in 2014. Results were pressured by China sales declines, foreign exchange and SGM integration costs.
- Hershey recorded $280.8 million of non-cash goodwill impairment, principally related to Shanghai Golden Monkey (SGM) and China operations. SGM’s performance and acquired receivables/distributor networks fell short of expectations.
- A June 2015 productivity initiative reduced headcount by approximately 300 positions and generated $105.8 million of 2015 charges. Total program costs were estimated at approximately $120 million, with most remaining costs expected in the first three quarters of 2016.
- 2015 acquisitions included KRAVE Pure Foods for approximately $220 million cash consideration; Hershey also acquired the remaining 49% of Hershey do Brasil. It completed the purchase of SGM’s remaining 20% on February 3, 2016, after revising the price to approximately $36 million.
Cash, debt and capital allocation
Operating cash flow increased $370 million year over year, supported by working-capital movements, commodity-hedging cash effects and tax-payment timing. Investing activities used $477.3 million, including $218.7 million for Krave; financing activities used $755.2 million. The company paid $476.1 million in dividends and repurchased $582.6 million of shares during 2015. It had approximately $20 million remaining under its 2015 repurchase authorization and approved a further $500 million authorization in January 2016.
Year-end current assets were $1.849 billion and current liabilities were $2.218 billion. Hershey reported $1.0 billion available under its revolving credit facility, with no borrowings outstanding under that facility, and was in compliance with its covenants. Approximately half of year-end cash was held by foreign subsidiaries and intended to remain invested abroad. Debt due within one year included approximately $500 million of long-term debt maturities.
Outlook, risks and unusual items
- For 2016, management projected sales growth of approximately 3%, excluding foreign exchange, with currency estimated to reduce growth by about 1%. Gross margin was expected to approximate 2015 levels.
- Management projected 2016 adjusted diluted EPS of $4.36–$4.38, approximately 6% growth; projected GAAP diluted EPS was $4.18–$4.23. Long-term targets were 3–5% annual sales growth excluding currency and 6–8% non-GAAP diluted EPS growth.
- Management cited changing U.S. shopping habits, e-commerce, competitive activity, broader snacking choices and volatile international markets—particularly China—as headwinds. U.S. confectionery retail takeaway grew 2.4%, while market share declined 10 basis points to 31.3%.
- Key exposures include commodity prices and supply, foreign exchange, product safety and recalls, customer concentration, acquisition integration, international growth, supply-chain disruption and cybersecurity. McLane accounted for approximately 26% of 2015 sales; McLane and Walmart represented approximately 19% and 14% of year-end receivables, respectively.
- Control weakness: Management and KPMG reported ineffective internal control over financial reporting at year-end due to a material weakness in cocoa-derivative hedge-accounting controls. The filing states the resulting financial-statement error was immaterial. Hershey stopped designating commodity derivatives for hedge accounting beginning January 1, 2016; the auditor nevertheless issued an adverse opinion on internal control effectiveness.
- Other notable costs included a $28.3 million loss on early debt extinguishment and a $39.5 million write-down of tax-credit partnership investments. The filing reported no material pending legal proceedings beyond ordinary routine litigation.
Investor verification priorities
- Track China sales, SGM integration and the assumptions underlying the impairment and remaining goodwill valuations.
- Review 2016 sales and adjusted-EPS guidance against reported results, including the company’s non-GAAP adjustments.
- Confirm remediation and continuing controls over commodity derivatives after the hedge-accounting policy change.
- Assess near-term debt maturities, cash availability, foreign cash restrictions, dividends and the additional repurchase authorization.
- Monitor customer concentration, U.S. volume and market share, and commodity and currency effects.