HSY

Business Context and Reporting Period

Company: Hershey Foods Corporation (Hershey Co)

Filing Type: Form 10-Q (Quarterly Report)

Reporting Period: Three and six months ended July 2, 2000

Business Overview: The registrant is engaged in the manufacture and sale of confectionery and grocery products. The reporting period includes the second quarter of fiscal year 2000.

Key Financial Metrics

All figures in thousands of dollars unless otherwise noted.

Material Changes vs. Prior Period

• Quarterly Sales: Decreased 2% to $836.2 million from $853.2 million in Q2 1999. The decline was driven by lower sales of core confectionery and grocery products, partially offset by new product introductions. Q2 1999 included approximately $25 million in sales shifted from Q3 due to an advance purchase program.
• Quarterly Net Income: Decreased to $40.0 million from $50.1 million in Q2 1999.
• Six-Month Sales: Increased 2% to $1.83 billion from $1.80 billion in the first six months of 1999. This increase reflects growth in North American core products and the absence of the pasta business divested in January 1999.
• Six-Month Net Income: Decreased significantly to $111.2 million from $274.7 million in the first six months of 1999. The prior year included a one-time after-tax gain of $165.0 million from the sale of the pasta business.
• Cost Structure: Gross margin for the six months decreased from 40.2% to 39.5%. This was impacted by higher transportation and warehousing costs, offset by lower raw material costs (cocoa) and lower returns/discounts.

Outlook, Risks, and Management Commentary

• Liquidity and Capital: Cash and cash equivalents decreased by $82.9 million during the first six months of 2000. The company utilized cash to repurchase $73.1 million of common stock and pay $70.1 million in dividends. A committed credit facility of $500 million remains available.
• Capital Expenditures: Anticipated annual capital expenditures are in the range of $150 million to $170 million for the next several years to support modernization and capacity expansion.
• Share Repurchases: Under a program approved in October 1999, the company repurchased 1.1 million shares in the first six months of 2000. Approximately $151.3 million remains available for repurchases.
• Accounting Changes: The company anticipates adopting SFAS No. 133 (Derivatives and Hedging) on January 1, 2001. This is not expected to have a material impact on results of operations, though net deferred losses on derivatives of approximately $39.6 million (after tax) would be reported in accumulated other comprehensive loss.
• Risks and Contingencies:
  • IRS Dispute: The company is contesting an IRS Notice of Proposed Deficiency regarding its Corporate Owned Life Insurance (COLI) program for years 1989-1996. The proposed assessment, including interest, is approximately $62.5 million as of July 2, 2000.
  • Operational Risks: Risks include the ability to remedy problems and avoid increased costs related to customer service and warehousing systems implemented in late 1999, and the timely completion of new warehousing facilities.

Investor Verification Checklist

• Verify the impact of the $165 million one-time gain in 1999 on year-over-year net income comparisons.
• Monitor the resolution of the IRS COLI dispute and potential additional assessments for 1997-1998.
• Assess the effectiveness of new warehousing and distribution centers in reducing transportation and handling costs.
• Review the execution of the share repurchase program and the remaining $151.3 million authorization.
• Track the adoption of SFAS No. 133 in 2001 and its effect on the balance sheet classification of derivative instruments.