The Hershey Company — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended July 5, 2009; comparisons are to the periods ended June 29, 2008. Financial statements are unaudited. Amounts below are in millions of dollars, except per-share data. Hershey cautions that results are seasonal and first-half performance may not indicate full-year results.
Financial performance
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $1,171.2 | $1,105.4 | $2,407.2 | $2,265.8 |
| Gross profit / margin | $453.3 / 38.7% | $382.5 / 34.6% | $893.5 / 37.1% | $759.0 / 33.5% |
| EBIT / margin | $116.7 / 10.0% | $94.1 / 8.5% | $269.6 / 11.2% | $216.5 / 9.6% |
| Net income | $71.3 | $41.5 | $147.2 | $104.7 |
| Diluted EPS, common stock | $0.31 | $0.18 | $0.64 | $0.46 |
| Operating cash flow | Not provided separately | Not provided separately | $446.2 | $320.1 |
Q2 sales rose 5.9% and first-half sales rose 6.2%. For the first six months, cash used in investing was $86.0 million, including $73.8 million of capital additions and capitalized software; cash used in financing was $368.5 million. Cash and cash equivalents ended the period at $28.8 million, down from $37.1 million at year-end 2008.
At July 5, 2009, current assets were $1,178.9 million and current liabilities were $1,001.9 million; the current ratio was 1.2:1, versus 1.1:1 at year-end. Debt comprised $245.4 million of short-term debt, $16.5 million current long-term debt, and $1,504.5 million long-term debt. The company reported a 79% debt capitalization ratio, down from 85%. Its revolving credit facility had a $1.1 billion limit, with an option for another $400 million subject to lender agreement; Hershey reported compliance with covenants.
Changes and management commentary
- Profitability improved primarily on favorable pricing and higher gross margin. The margin benefit was partly offset by higher input and supply-chain costs, selling and administrative expenses, and business realignment charges.
- Management attributed sales growth to price realization, partly offset by lower U.S. unit volumes from pricing elasticity. Foreign exchange reduced sales by approximately 2.1% in Q2 and 2.3% for the first half. Van Houten Singapore added $2.9 million of Q2 sales and $4.0 million for the first half.
- Q2 consumer takeaway increased 28.8%, largely because of Easter timing; excluding seasonal sales, it increased 5.4%. Measured-channel market share increased 0.5 percentage points. First-half takeaway also rose 8.9%, with market share up 0.5 points.
- Business realignment charges were $37.9 million in Q2 and $50.7 million for the first half. First-half net charges associated with the initiatives were $61.7 million, compared with $69.9 million in 2008. Q2 net income was reduced by $26.7 million, or $0.12 per diluted share, by these initiatives.
- The Q2 effective tax rate fell to 24.1% from 41.2%, reflecting resolution of U.S. tax contingencies for 2004–2006. First-half tax rate was 34.0%; management expected approximately 36.0% for full-year 2009 excluding the effect of realignment charges. The lower quarterly rate materially contributed to reported earnings growth.
Outlook, risks and unusual items
- For 2009, management expected net-sales growth within its 3%–5% long-term objective, driven mainly by pricing and brand-building, with foreign exchange a partial offset. Unit volumes were expected to decline because of pricing elasticity.
- Management expected the 2009 commodity-cost basket to rise significantly versus 2008, but by less than its initial $175 million estimate. Pension expense was expected to increase by approximately $70 million. Advertising expense was forecast to rise 40%–45%.
- Hershey expected 2009 diluted EPS growth excluding realignment charges, with adjusted growth slightly above its long-term 6%–8% objective. Full-year realignment and impairment charges were estimated at $85 million–$120 million, or $0.24–$0.33 per diluted share.
- Total pre-tax charges and non-recurring implementation costs for the global supply-chain transformation were estimated at $640 million–$665 million, including expected pension settlement losses. Management cited possible additional pension contributions of $50 million–$100 million, including benefit payments, depending on pension-asset performance.
- Key stated risks include raw-material and energy inflation, pricing-related volume declines, weaker demand or increased competition, product quality and recall exposure, international and currency volatility, pension costs, and the cost, timing, and savings of the supply-chain transformation. Commodity purchasing and hedges may also limit benefits from price declines.
- A $15.1 million receivable related to damages from a 2006 Canadian product recall and temporary plant closure remained recorded; Hershey was in litigation with the ingredient supplier.
- After the quarter, two directors resigned effective August 10, 2009, citing disagreement with transferring certain strategic and oversight responsibilities to a new Finance and Risk Management Committee. Replacement committee chairs were appointed.
Most important facts for investors to verify
- How much of sales and margin growth reflects sustainable pricing and productivity versus temporary factors, including the lower tax rate and reduced realignment costs in particular expense lines.
- Whether volume declines, higher commodity costs, pension expense, and planned advertising investment are consistent with the 2009 outlook and adjusted EPS target.
- Progress and remaining cost exposure for the supply-chain transformation, including pension settlement charges and expected savings.
- Liquidity and debt trends, including seasonal working-capital needs, short-term borrowing, and potential pension contributions.
- Outcome and recoverability of the Canadian recall-related claim, and implications of the board resignations and revised governance structure.