The Hershey Company — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Unless noted, financial amounts are U.S. dollars.
Business context
Hershey is a global confectionery company, with its largest operations in North America, and reports as one segment. It sells products in approximately 70 countries. Sales are typically seasonal, with higher sales in the third and fourth quarters. McLane Company accounted for approximately 25.5% of 2013 net sales.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $7.146 billion | $6.644 billion |
| Gross profit / gross margin | $3.281 billion / 45.9% | $2.860 billion / 43.0% |
| EBIT / EBIT margin | $1.340 billion / 18.7% | $1.111 billion / 16.7% |
| Net income | $820.5 million | $660.9 million |
| Diluted EPS, Common Stock | $3.61 | $2.89 |
| Cash from operations | $1.188 billion | $1.095 billion |
At year-end 2013, cash and equivalents were $1.119 billion, total assets $5.357 billion, and stockholders’ equity $1.616 billion. Short-term debt was $166.0 million, current long-term debt $0.9 million, and long-term debt $1.795 billion. The current ratio was approximately 1.77. A $1.0 billion revolving credit facility was undrawn; the company reported compliance with its covenants.
Capital additions and capitalized software totaled $350.9 million. Cash dividends paid were $393.8 million. The company used $305.6 million to repurchase shares, principally to replace shares issued under compensation plans. The 2013 Common Stock dividend was $1.81 per share.
Fourth-quarter results and changes versus prior period
Fourth-quarter net sales were $1.956 billion, up approximately 11.7% from $1.751 billion in Q4 2012. Net income was $186.1 million versus $149.9 million, and diluted Common Stock EPS was $0.82 versus $0.66. Quarterly results are unaudited.
For the full year, sales increased 7.6%, primarily from volume growth in the U.S. and key international markets; Brookside products contributed about 1.3 percentage points to sales growth. Gross margin rose 2.9 percentage points, reflecting lower input costs, productivity, favorable mix, and fewer realignment charges, partly offset by supply-chain inflation. SM&A rose 12.8%, including a 21.3% increase in advertising expense. Adjusted EPS increased 14.8% to $3.72; this is a non-GAAP measure and excludes specified items.
Outlook, risks, and unusual items
- 2014 outlook: Management projected net sales growth of 5%–7%; reported gross-margin expansion of about 60 basis points; GAAP diluted EPS of $4.02–$4.11, or growth of 11%–14%; and adjusted diluted EPS of $4.05–$4.13, or growth of 9%–11%. International sales outside the U.S. and Canada were expected to grow toward the upper end of a 15%–20% target.
- Management expected productivity and favorable mix to support margins, but did not expect input-cost deflation. Dairy costs were identified as difficult to hedge. Planned 2014 capital expenditures, including software, were $355–$375 million, including $120–$130 million for the Malaysia plant.
- In December 2013, Hershey agreed to acquire Shanghai Golden Monkey for approximately $584 million, including about $498 million cash and assumption of $86 million net debt. The deal required regulatory approvals; 80% of the purchase price was scheduled for payment in mid-2014 and the balance one year later.
- Antitrust matters remain material to monitor. Hershey Canada pleaded guilty to one price-fixing count and paid an approximately $4.0 million fine in 2013; U.S. civil cases remained pending, with plaintiffs seeking actual and treble damages. Management said these matters were not then expected to materially affect financial position or liquidity, but could materially affect results or cash flows when resolved.
- Other key risks include commodity prices and supply, customer and consumer demand, intense competition, supply-chain disruption, international execution and currency exposure, product safety, and dependence on major customers. Canada tax authorities proposed adjustments; Hershey accrued approximately $70.6 million and recorded a $63.9 million receivable tied to anticipated competent-authority resolution.
- FY2013 included $19.1 million of net business realignment and impairment charges. The Next Century program had accumulated $190.4 million of costs, with no related liability remaining at year-end. The 2013 annual results also included acquisition costs and non-service-related pension expense; adjusted results exclude specified items.
Important facts for investors to verify
- Progress and final terms, approvals, financing, and integration costs for the Shanghai Golden Monkey acquisition.
- Whether 2014 sales, margin, EPS, international-growth, and capital-spending guidance was achieved, including the impact of commodity and dairy costs.
- Developments and potential exposure in the U.S. antitrust litigation and resolution of Canadian and other tax matters.
- McLane concentration, working-capital trends, and the sustainability of cash generation alongside dividends, repurchases, and planned investment.
- Reconciliation of reported GAAP results to management’s adjusted non-GAAP measures and the assumptions underlying those adjustments.