Business Context and Reporting Period
Company: Hershey Foods Corporation (Hershey Co)
Reporting Period: Fiscal year ended December 31, 1999
Business Overview: The Corporation manufactures, distributes, and sells consumer food products, primarily chocolate and non-chocolate confectionery and grocery products. It is a leader in North America with over 50 brands, including HERSHEY'S, REESE'S, and KIT KAT. In January 1999, the Corporation completed the sale of its U.S. pasta business to New World Pasta, LLC, retaining a 6% minority interest.
Key Financial Metrics
Note: Specific consolidated revenue, net income, cash flow, and debt totals are incorporated by reference from the Annual Report to Stockholders (Exhibit 13) and are not explicitly stated in the provided text.
- Market Value: Aggregate market value of voting stock held by non-affiliates was approximately $4.17 billion (Common Stock) and $6.1 million (Class B Common Stock) as of February 28, 2000.
- Shares Outstanding: 107,798,756 shares of Common Stock and 30,443,908 shares of Class B Common Stock as of February 28, 2000.
- Customer Concentration: Sales to Wal-Mart Stores, Inc. and Subsidiaries accounted for approximately 15% of total net sales in 1999.
- Allowance for Doubtful Accounts: The balance for Accounts Receivable - Trade reserves was $16,941,000 at year-end 1999, up from $19,941,000 at the beginning of the period, reflecting increased deductions and past due amounts.
- Debt Instruments: The Corporation 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 Issues
System Implementation Disruptions: During the third quarter of 1999, the Corporation encountered significant problems with the start-up of new business systems for customer service, warehousing, and order fulfillment. These issues resulted in:
- Lost sales and longer turnaround times.
- Significantly increased freight and warehousing costs.
- Higher inventory levels.
- Increased deductions from customer invoices and higher past due accounts receivable.
Raw Material Costs: Cocoa futures prices averaged 48.8 cents per pound in 1999, a decrease from 72.7 cents in 1998. Peanut prices remained near normal levels, while almond prices declined due to a record crop. Milk prices were volatile but dropped to more normal levels from 1998 highs.
Workforce Reduction: Approximately 930 employees (900 full-time, 30 part-time) were reduced in January 1999 following the sale of the pasta business.
Outlook, Risks, and Contingencies
Management Outlook: Improvements to systems led to a significantly improved order fulfillment process in the first quarter of 2000. A new 1.2 million square-foot distribution center is expected to become operational in spring 2000, with full utilization anticipated during the fall 2000 shipping season.
Legal Contingency (IRS): In January 1999, the IRS issued a Notice of Proposed Deficiency regarding the Corporation's Corporate Owned Life Insurance (COLI) program for years 1989-1996. The proposed assessment, including interest, was approximately $60.4 million as of December 31, 1999. The Corporation is vigorously defending its position.
Key Risks:
- Ability to fully remedy system problems and avoid increased costs.
- Restoration of customer service to historical levels.
- Raw material pricing volatility (cocoa, sugar, milk, peanuts).
- Changes in consumer preferences and competitive actions.
Year 2000 Status: The Corporation completed testing and remediation in Q3 1999 with no significant problems encountered in its own systems or with major business partners.
Investor Verification Checklist
- Verify the specific impact of Q3 1999 system failures on full-year 1999 net income and operating margins by reviewing the incorporated Annual Report to Stockholders.
- Confirm the status of the $60.4 million IRS COLI dispute and any subsequent developments post-filing.
- Assess the timeline and cost implications of the new 1.2 million square-foot distribution center.
- Review the detailed breakdown of long-term debt maturities and interest rates in the incorporated financial statements.
- Monitor the recovery of customer service levels and fill rates in the 2000 fiscal year to ensure historical performance is restored.