Hershey Foods Corporation 1998 Annual Report (10-K) Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 1998. Hershey Foods Corporation is a major manufacturer and distributor of chocolate and non-chocolate confectionery and grocery products in North America. The company operates under more than 50 brands, including HERSHEY'S, REESE'S, KIT KAT, and JOLLY RANCHER. In January 1999, the company completed the sale of a 94% majority interest in its U.S. pasta business to New World Pasta, LLC, retaining a 6% minority stake.
Key Financial Metrics
The specific consolidated financial statements (Net Sales, Net Income, Cash Flow, Debt totals) are incorporated by reference from the Proxy Statement and are not explicitly detailed in the text of this filing. However, the following financial data points are provided:
- Market Value: Aggregate market value of voting stock held by non-affiliates was approximately $5.94 billion (Common Stock) and $8.7 million (Class B) as of March 1, 1999.
- Share Count: 109,262,899 shares of Common Stock and 30,446,908 shares of Class B Common Stock outstanding as of March 1, 1999.
- Customer Concentration: Sales to Wal-Mart Stores, Inc. and Subsidiaries represented approximately 14% of total net sales in 1998.
- Allowance for Doubtful Accounts: The balance for Accounts Receivable - Trade reserves was $19,941,000 at year-end 1998.
- Debt Instruments: The company holds various long-term debt instruments including 6.7% Notes due 2005, 6.95% Notes due 2007 and 2012, 8.8% Debentures due 2021, and 7.2% Debentures due 2027.
Material Changes and Operational Highlights
- Divestiture: Sale of the U.S. pasta business (brands include Ronzoni, San Giorgio, Mrs. Weiss) in January 1999, resulting in a reduction of approximately 930 employees.
- Raw Material Costs: Cocoa futures prices averaged 72.7 cents per pound in 1998, up from 70.0 cents in 1997. Dairy prices reached historic highs in 1998 due to poor weather and strong demand. Sugar prices remained stable between $0.28 and $0.35 per pound.
- IT Investment: As of December 31, 1998, the company had incurred $62.1 million in capitalized software/hardware and $6.9 million in expenses for an enterprise-wide integrated information system. Total commitments are expected to reach $110 million.
Outlook, Risks, and Contingencies
- Year 2000 Compliance: Remediation of IT and non-IT systems was approximately 60% complete as of December 31, 1998. Total remediation costs are estimated between $6.0 million and $8.0 million. The company expects completion by the third quarter of 1999 but notes potential adverse financial consequences if major partners fail to remediate.
- Legal Proceedings: In January 1999, the IRS issued a Notice of Proposed Deficiency for tax years 1989-1996 regarding the disallowance of interest expense deductions associated with the Corporate Owned Life Insurance (COLI) program. Hershey intends to vigorously defend its position.
- Commodity Risk: The company utilizes forward purchasing and futures contracts to manage price risks for cocoa, sugar, corn sweeteners, natural gas, and dairy products. These practices reduce the risk of price increases but may limit benefits from price decreases.
- Seasonality: Sales are typically highest in the third and fourth quarters due to seasonal and holiday demand.
Investor Verification Checklist
- Verify the full Consolidated Financial Statements (Net Sales, Net Income, Cash Flow) in the Proxy Statement Appendix A, as they are incorporated by reference and not listed in this text.
- Review the impact of the U.S. pasta business divestiture on 1999 comparative financial results.
- Monitor the status of the IRS COLI tax dispute and potential financial impact of the proposed deficiency.
- Assess the progress of Year 2000 remediation for the company and its major suppliers/customers to evaluate operational risk.
- Track raw material price trends (cocoa, sugar, dairy) and the effectiveness of the company's hedging strategies in maintaining margins.