Hershey Foods Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 28, 2003, and the nine-month period ended on the same date. Hershey Foods Corporation is a leading manufacturer of confectionery products. The filing includes unaudited consolidated financial statements and management's discussion and analysis of results of operations and financial condition.
Key Financial Metrics
| Metric | Three Months Ended 9/28/03 | Nine Months Ended 9/28/03 |
|---|---|---|
| Net Sales | $1,191.0 million | $2,993.3 million |
| Net Income | $143.6 million | $312.6 million |
| Diluted EPS | $1.09 | $2.36 |
| Gross Margin | 39.2% | 38.6% |
| Operating Cash Flow | Filing text does not provide a clear value for the quarter | $88.7 million |
| Cash and Equivalents | $29.8 million (End of period) | $29.8 million (End of period) |
| Short-Term Debt | $231.0 million | $231.0 million |
| Long-Term Debt | $966.3 million | $966.3 million |
| Current Ratio | 1.6:1 | 1.6:1 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.4% in the third quarter and 1% for the nine months compared to 2002. Growth was driven by a January 2003 price increase, new product introductions, and volume gains in Canada, partially offset by lower export sales to Asia and the rationalization of under-performing brands.
- Profitability: Net income rose 17% in the quarter and 14% for the nine months. Diluted EPS increased 22% and 19%, respectively. Gross margins expanded due to price increases and lower supply chain costs, offset by higher promotional allowances.
- Expense Management: Selling, marketing, and administrative expenses decreased 3% year-over-year, largely due to a one-time $17.3 million charge in 2002 related to the exploration of a sale of the corporation.
- Liquidity: Cash and cash equivalents decreased by $267.9 million over the nine months, primarily due to share repurchases ($299.3 million), capital expenditures ($143.9 million), and pension contributions ($112.6 million).
Guidance, Outlook, and Unusual Items
- Accounting Change: The company adopted FASB Interpretation No. 46, consolidating three off-balance sheet special purpose entities (SPEs) for warehouse leases. This resulted in a one-time after-tax charge of $7.4 million ($0.06 per share) and increased long-term debt by $115.5 million.
- Business Realignment: In July 2003, the company announced initiatives to streamline the supply chain and realign sales. A total net charge of approximately $18.8 million is expected for 2003. To date, a net pre-tax charge of $5.3 million has been recorded for the nine months, including a $8.3 million gain from the sale of gum brands to Farley's and Sathers Candy Company.
- Share Repurchases: The company repurchased 4.5 million shares for $299.3 million under a $500 million program. Approximately $200.7 million remains available.
- Risks: Management highlights risks related to raw material costs, consumer response to price increases, pension cost factors, and the ability to successfully implement realignment initiatives.
Investor Verification Checklist
- Accounting Impact: Verify the long-term impact of the FASB Interpretation No. 46 adoption on future depreciation and interest expenses.
- Realignment Costs: Monitor the remaining $13.5 million of expected 2003 realignment charges to be recognized in the fourth quarter.
- Liquidity Position: Assess the sustainability of the current cash position ($29.8 million) given the high level of short-term debt ($231.0 million) and upcoming seasonal working capital needs.
- Dividend Policy: Note the increase in cash dividends paid per share for both Common and Class B stock compared to the prior year.
- Commodity Hedging: Review the exposure to commodity price fluctuations, as market risk for net commodity positions increased to $5.8 million.