The Hershey Company — FY 2011 Form 10-K
Business context and period: Hershey reported for the fiscal year ended December 31, 2011; the filing was signed February 17, 2012. The company manufactures and sells confectionery, pantry, gum and mint products, primarily in North America, and reports as one segment. International markets represented 15.6% of sales. Results below are annual unless marked fourth quarter.
Financial performance
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $6.081 billion | $5.671 billion | +7.2% |
| Gross profit / margin | $2.532 billion / 41.6% | $2.415 billion / 42.6% | Margin down 1.0 percentage point |
| EBIT / margin | $1.055 billion / 17.4% | $905 million / 16.0% | EBIT +16.5% |
| Net income | $629 million | $510 million | +23.4% |
| Diluted EPS, common stock | $2.74 | $2.21 | +24.0% |
| Cash from operations | $581 million | $901 million | Down $321 million |
Management’s adjusted, non-GAAP results were $1.087 billion EBIT, $649 million net income and $2.82 diluted EPS in 2011, versus $1.004 billion, $588 million and $2.55 in 2010. These exclude specified realignment/impairment items and, for 2011, the trademark-rights sale gain; they are not GAAP measures.
Fourth quarter: Net sales were $1.567 billion, gross profit $631 million and net income $142 million. Diluted EPS was $0.62 for common stock. In fourth-quarter 2010, sales were $1.483 billion, gross profit $619 million, net income $136 million and diluted EPS $0.59.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $694 million; current assets were $2.047 billion and current liabilities $1.174 billion.
- Total reported debt, including short-term borrowings and current maturities, was approximately $1.888 billion, compared with $1.827 billion in 2010. Long-term debt was $1.749 billion. The company had $1.1 billion available under its revolving credit facility and reported covenant compliance.
- Operating cash flow fell to $581 million from $901 million, with higher working-capital use and other asset/liability movements among the cited factors. Capital additions were $324 million; cash dividends were $304 million and common-stock repurchases $385 million.
- Stockholders’ equity was $873 million, down from $938 million. The pension benefit obligation exceeded pension plan assets by $195 million at year-end.
Material changes and management commentary
- Sales growth reflected approximately 3.5% net price realization, 3.4% volume growth and 0.3% favorable currency effects. U.S. sales increased 5.9%; sales outside the U.S. rose 14.5%. U.S. consumer takeaway increased 7.8% and measured market share rose 0.8 percentage point.
- Cost of sales increased 9.0%, driven by higher volume and commodity costs. Productivity and pricing partly offset higher input and supply-chain costs; gross margin declined to 41.6% from 42.6%.
- Net realignment and impairment charges were $49.2 million in 2011 versus $98.6 million in 2010. A $17 million pretax gain from selling certain non-core trademark licensing rights also benefited 2011 results.
- Project Next Century is moving production from the 19 East Chocolate Avenue facility to the expanded West Hershey facility, with transition expected primarily in the second quarter of 2012. Estimated total pretax charges and implementation costs are $150–$160 million; projected annual savings when fully implemented are $65–$80 million.
- In January 2012, Hershey acquired Brookside Foods for C$175 million. Brookside had approximately $90 million in annual sales; acquisition closing and integration costs were expected to affect 2012 EPS by $0.04–$0.05.
Outlook, risks and contingencies
- For 2012, excluding Brookside, management forecast sales growth of approximately 5%–7%, with volume slightly up, and expected advertising expense to increase at a low-double-digit percentage rate.
- 2012 reported diluted EPS guidance was $2.79–$2.89, including expected Next Century charges of $0.16–$0.19 per share and Brookside costs. Adjusted diluted EPS was projected at $3.03–$3.09 including non-service pension expense, or $3.08–$3.14 excluding that expense. Management expected adjusted EPS growth of 9%–11%, adjusted gross-margin improvement of about 75 basis points, and reported gross-margin improvement of about 90 basis points.
- Key risks include volatile commodity and energy costs, supply availability, price increases that may reduce volume, intense competition, product safety and recall exposure, seasonal working-capital needs, international and currency risks, and dependence on major customers. McLane Company represented approximately 22.3% of 2011 sales.
- Government investigations and civil antitrust litigation concerning alleged confectionery-industry pricing practices remain a contingency. Hershey Canada agreed to a C$5.3 million settlement of Canadian civil actions, subject to court approval. The company said it could not determine a reasonably possible loss range for the U.S. lawsuits.
- Management identified pension assumptions and funding, commodity hedging, and execution of Project Next Century as additional areas of uncertainty. The filing reports no material adverse effect expected from the legal proceedings, but outcomes remain uncertain.
Important facts for investors to verify
- Whether pricing actions, new products and market-share gains deliver the forecast 2012 sales and adjusted EPS growth without material volume or margin pressure.
- Actual commodity-cost trends and the timing and effectiveness of price realization, given hedging and forward-purchase commitments.
- Project Next Century’s transition schedule, total charges, capital requirements and realization of the stated annual savings.
- Cash conversion and working-capital developments, including inventories, alongside debt maturities, dividends and repurchases.
- Developments in the Canadian settlement and U.S. antitrust litigation, and the impact of the Brookside acquisition and pension costs on reported results.