The Hershey Company — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended April 5, 2015, compared with the three months ended March 30, 2014. Hershey’s North America segment generated more than 85% of revenue. Management cautions that seasonal effects mean quarterly results may not indicate full-year performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $1,937.8 million | $1,871.8 million | +3.5% |
| Gross profit / margin | $900.8 million / 46.5% | $871.5 million / 46.6% | Margin down 10 bps |
| EBIT / EBIT margin | $394.0 million / 20.3% | $403.6 million / 21.6% | EBIT down 2.4%; margin down 130 bps |
| Net income | $244.7 million | $252.5 million | Down 3.1% |
| Diluted EPS, common stock | $1.10 | $1.11 | Down 0.9% |
| Operating cash flow | $256.4 million | $203.8 million | Up $52.6 million |
Revenue growth reflected 3.8% favorable net price realization and a 1.6% net benefit from acquisitions and divestitures, partly offset by 1.1% unfavorable foreign exchange and an approximately 0.8% volume decline. Higher commodity and other input costs, unfavorable mix, and pension costs offset pricing and productivity benefits. Selling, marketing and administrative expense rose 8.4%; advertising and consumer marketing expense increased 7.7%.
Segments: North America sales increased 2.9% to $1.707 billion, with segment income up 2.9% to $554.3 million and margin steady at 32.5%. International and Other sales increased 8.5% to $230.8 million, but segment income turned to a $21.8 million loss from $6.6 million income. China sales excluding Shanghai Golden Monkey fell 47%; management cited weak consumer confidence and slower category growth. U.S. retail takeaway increased 4.6% and market share rose 0.2 percentage points; excluding Easter timing, takeaway increased 3.1%.
Cash, liquidity and debt
Cash and cash equivalents were $305.7 million at April 5, 2015, down from $374.9 million at year-end; short-term investments were $99.5 million. Cash and short-term investments together declined $66.8 million from December 31, 2014. Operating activities provided $256.4 million; investing activities used $249.1 million, including $219.0 million for Krave; financing activities used $76.5 million, including $306.7 million of share repurchases and $114.4 million of dividends.
Short-term debt was $649.1 million, current long-term debt $250.8 million, and long-term debt $1.560 billion. Short-term debt increased from $384.7 million at year-end, principally reflecting commercial paper and other borrowings. Hershey reported $320.8 million of commercial paper outstanding and a $1.0 billion revolving credit facility expiring in November 2019; it was in compliance with facility covenants. Management said liquidity was sufficient. Approximately half of cash and short-term investments was held outside the U.S. and intended to remain permanently invested abroad.
Material developments, outlook and risks
- Hershey completed its acquisition of KRAVE Pure Foods in March for $220.3 million cash, subject to working-capital adjustment. Additional consideration of up to $20 million may be payable based on sales and gross-margin targets; estimated fair value of $16.8 million was accrued. The preliminary allocation included $147.3 million of goodwill and $112.0 million of trademarks.
- The Mauna Loa divestiture closed in Q1, generating approximately $32.4 million net proceeds and an additional $2.7 million loss. Q1 also included a $10.0 million gain on sale of a non-core trademark and $5.1 million of charges associated with realignment initiatives.
- Full-year 2015 net sales growth guidance was 4.5%–5.5%, including a 2.5% net benefit from acquisitions and divestitures and a 1.5% unfavorable foreign-exchange impact. Excluding those effects, expected growth was 3.5%–4.5%, reduced from the prior 4%–6% estimate mainly because of weaker China growth.
- Management expected 2015 gross-margin expansion of 155–165 basis points, increased from prior guidance. Reported diluted EPS guidance was $4.17–$4.28, implying 10%–13% growth; adjusted diluted EPS guidance was $4.30–$4.38, with adjusted growth expected at 8%–10%. Management expected marketing investment to grow faster than sales and cited core brands and innovation as growth drivers.
- Risks highlighted include commodity and energy costs and supply, pricing elasticity, competition, product safety, supply-chain disruption, integration of acquisitions, foreign-exchange exposure, and international-market weakness. The U.S. direct-purchaser antitrust case remained on appeal; other dismissed claims could be reinstated if the appeal reverses the judgment. Management did not expect the matter to materially affect financial position or liquidity, but said a fine, settlement or judgment could materially affect results or cash flows in the period recognized or paid.
Important facts for investors to verify
- Whether sales and margin guidance is achievable given weaker China performance, pricing-related volume elasticity, and input-cost inflation.
- Krave integration, the final purchase-price allocation, and whether contingent-payment targets are met; also the expected completion and funding of the Bauducco noncontrolling-interest purchase.
- Debt and liquidity trends after the acquisition, repurchases and dividends, including the use of commercial paper and cash held overseas.
- Realized gross-margin expansion and the effects of commodity hedges, foreign exchange, and higher marketing and route-to-market spending.
- Developments in the pending antitrust appeal and any resulting financial or reputational exposure.