The Hershey Company: FY2017 Form 10-K
Business context and reporting period
Hershey’s fiscal year ended December 31, 2017; the filing also provides unaudited fourth-quarter results. The company sells confectionery and snack products in about 80 countries. North America generated 88.1% of 2017 revenue; International and Other generated 11.9%.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $7.515 billion | $7.440 billion |
| Gross margin, reported | 45.8% | 42.4% |
| Operating profit / margin, reported | $1.275 billion / 17.0% | $1.206 billion / 16.2% |
| Net income attributable to Hershey | $783.0 million | $720.0 million |
| Diluted EPS | $3.66 | $3.34 |
| Operating cash flow | $1.250 billion | $1.013 billion |
| Cash and equivalents, year-end | $380.2 million | $297.0 million |
| Total debt, approximately | $2.9 billion | $3.0 billion |
Reported sales rose 1.0% (0.8% excluding foreign exchange). Reported gross margin increased 340 basis points, while adjusted gross margin was 45.6%, unchanged year over year. Adjusted diluted EPS was $4.76, up 7.9%; this non-GAAP measure excludes specified items and should be considered alongside GAAP results.
Fourth-quarter 2017 sales were $1.940 billion versus $1.970 billion in fourth-quarter 2016. Quarterly net income attributable to Hershey was $181.1 million versus $116.9 million, and diluted EPS was $0.85 versus $0.55.
Operating cash flow funded investment, dividends and repurchases. Capital additions were $257.7 million; cash dividends totaled $526.3 million and share repurchases $300.3 million. Year-end current assets were $2.002 billion and current liabilities $2.077 billion. Hershey reported $551 million available on its $1.0 billion revolving facility and $329 million available under other bank lines; it was compliant with credit covenants.
Material changes versus the prior year
- Sales growth reflected favorable price realization of 0.7%, acquisitions of 0.3% and foreign exchange of 0.2%, partly offset by a 0.2% volume decline. North America sales increased 1.3%; International and Other sales declined 1.4%.
- International and Other returned to segment income of $11.5 million from a $29.1 million loss, helped by lower promotional spending and China cost reductions. China weakness remained a drag on segment sales.
- Reported profit benefited from lower commodity costs, favorable year-over-year derivative mark-to-market effects and productivity savings. These were partly offset by higher freight and warehousing costs and unfavorable manufacturing variances.
- The company recorded $208.7 million of long-lived asset impairment charges, primarily related to China operations and assets associated with the SGM acquisition. It also recorded $69.4 million of business realignment costs.
- U.S. tax reform resulted in a provisional $32.5 million net tax charge. Other expense included a $66.2 million write-down of investments in tax-credit partnerships.
Outlook, management commentary, risks and unusual items
- Management said 2017 advanced efforts to strengthen core confection brands, expand snacking and improve margins. It did not provide a clear 2018 company-wide sales or EPS forecast in the supplied filing text.
- The Margin for Growth program is expected to incur $375 million to $425 million of pretax charges through 2019, including $150 million to $175 million in cash costs. Management expects annual ongoing savings of about $150 million to $175 million and a workforce reduction of approximately 15%.
- 2018 capital expenditures were expected to be approximately $330 million to $350 million. The January 2018 Amplify acquisition was expected to contribute $375 million to $385 million in 2018 post-acquisition sales. It cost approximately $908 million for shares plus approximately $607 million to repay Amplify debt, funded by borrowings.
- Key risks include commodity-cost and supply volatility, intense competition and changing consumer preferences, reliance on McLane (29% of 2017 sales), manufacturing or supply-chain disruption, international-market weakness, cybersecurity and ERP implementation risks, and execution of restructuring and acquisitions.
- U.S. tax-reform accounting amounts were provisional and could be refined. Ordinary-course legal claims were not expected by management to have a material effect. The company reported effective internal control over financial reporting and unqualified audit opinions.
Investor facts to verify
- Reconcile GAAP earnings with adjusted EPS and assess how much reported margin improvement depended on commodity derivative timing, impairments and restructuring exclusions.
- Track whether the Margin for Growth program delivers its projected savings, while monitoring total charges, cash costs and workforce impacts.
- Assess the Amplify acquisition’s financing, integration, realized sales and profitability against management’s stated expectations.
- Monitor International and Other, particularly China, and the concentration of sales through McLane.
- Review liquidity, debt maturities and cash held overseas; approximately 75% of year-end cash was held by non-U.S. subsidiaries and intended for reinvestment abroad.