The Hershey Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with the three months ended April 1, 2012. Results are unaudited. Hershey notes that its business is seasonal and first-quarter results may not indicate full-year performance.
Financial performance
- Revenue: Net sales were $1.827 billion, up 5.5%. Growth reflected 5.3% higher volume and 0.5% net price realization, partly offset by a 0.3% foreign-exchange headwind.
- Profit and margins: Gross profit was $849.3 million, up 14.3%; gross margin rose to 46.5% from 42.9%. Operating income (EBIT) was $391.8 million, up 17.1%, with EBIT margin of 21.4% versus 19.3%. Net income was $241.9 million, up 21.8%. Diluted EPS for Common Stock was $1.06, up 21.8% from $0.87.
- Costs and tax: Selling, marketing and administrative expense increased 11.1% to $450.7 million; advertising expense rose 21.7%. The effective tax rate declined to 34.3% from 36.0%. Net interest expense was $23.6 million, slightly lower year over year.
- Cash flow: Operating cash flow was $293.2 million versus $275.8 million. Investing activities used $93.3 million, primarily for $90.6 million of capital additions. Financing activities used $198.1 million, including $204.0 million of share repurchases and $91.6 million of dividends. Cash increased $1.8 million to $730.1 million.
- Liquidity and debt: Current assets were $2.180 billion and current liabilities $1.492 billion; the current ratio was 1.5 versus 1.4 at year-end 2012. Short-term debt was $100.6 million, current long-term debt $252.9 million, and long-term debt $1.540 billion. Hershey reported no commercial paper borrowings and compliance with credit agreement covenants. Its capitalization ratio declined to 63% from 65%.
Changes versus the prior-year quarter
- Sales growth was supported by expanded U.S. distribution of Brookside products and new products. Measured consumer takeaway increased 9.4% and market share rose 1.4 points; excluding Easter seasonal sales, takeaway increased 8.6%.
- Lower input costs, supply-chain productivity, favorable mix, and price realization supported margin expansion; supply-chain inflation partly offset those benefits.
- Business realignment and impairment charges were $7.0 million pretax, compared with $23.6 million. Q1 2013 charges primarily related to demolition of a former manufacturing facility under the Next Century program.
- SM&A rose due mainly to marketing, employee-related expense, legal fees, and incentive compensation. The prior-year period included the $172.9 million Brookside acquisition; there were no business acquisitions in Q1 2013.
Outlook, risks, and unusual items
- Management maintained its 2013 net sales growth outlook of 5%–7%, including foreign-exchange effects. It expected reported gross margin to increase 260–280 basis points and adjusted gross margin to expand 190–210 basis points.
- Projected 2013 diluted EPS was $3.52–$3.58 on a GAAP basis and $3.61–$3.65 adjusted; adjusted EPS growth was expected to be about 12%. The company expected advertising expense to rise approximately 20% and planned increased investment in brands, go-to-market capabilities, and international initiatives.
- Management cited raw-material and energy costs and availability, pricing and volume sensitivity, consumer demand, competition, supply-chain disruption, international operations, and execution of acquisitions and joint ventures among key risks. The filing also identifies a government investigation into alleged confectionery-industry pricing practices and related U.S. civil antitrust lawsuits as potential risks.
- The IRS began audits of U.S. tax returns for 2009–2011 during Q1. Hershey said it did not anticipate potential tax adjustments would significantly affect financial position or results; it expected about $6.6 million of unrecognized tax benefits to be reduced within 12 months.
- Hershey expected $10–$15 million of 2013 Next Century charges. It also disclosed approximately $12.3 million after tax of net cash-flow-hedge losses expected to be reclassified into earnings over the next 12 months, primarily related to commodity contracts.
Important facts for investors to verify
- Whether sales, market-share gains, and Brookside distribution expansion persist beyond the seasonal first quarter.
- Whether forecast margin expansion and EPS growth are achieved after planned higher advertising and other investment.
- How commodity costs, supply-chain inflation, foreign exchange, and hedging affect future gross margins and cash flows.
- Developments in the confectionery pricing investigation and civil antitrust litigation, and any resulting financial or reputational exposure.
- Debt maturities, capital spending, dividends, and share repurchases relative to operating cash generation.