The Hershey Company — Q1 2011 Form 10-Q
Business context and period. The filing reports unaudited results for the three months ended April 3, 2011, compared with the three months ended April 4, 2010. Hershey cautions that its seasonal business makes quarterly results potentially unrepresentative of full-year performance.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $1,564.2 million | $1,407.8 million | +11.1% |
| Gross profit / margin | $656.2 million / 41.9% | $593.9 million / 42.2% | Profit +10.5%; margin -0.3 pts |
| Operating income (EBIT) / margin | $276.6 million / 17.7% | $253.3 million / 18.0% | +9.2%; margin -0.3 pts |
| Net income | $160.1 million | $147.4 million | +8.6% |
| Diluted EPS, Common Stock | $0.70 | $0.64 | +9.4% |
| Operating cash flow | $159.4 million | $181.2 million | Down $21.8 million |
Sales growth reflected approximately 10% higher volume across most businesses, including new products, seasonal timing, customer buying patterns ahead of price increases, and about 1% contribution from foreign currency. Consumer takeaway rose 3.7% (6.7% excluding Easter effects), while measured-channel market share increased 0.5 points.
Input costs and higher volume increased cost of sales; productivity and lower supply-chain costs partly offset the pressure. Excluding business realignment charges, gross margin improved 0.2 points year over year. Advertising expense rose approximately 31% in the quarter. The effective tax rate was 36.5%, versus 35.8%, primarily due to tax contingencies related to ongoing audits.
Cash, debt and liquidity
- Cash and equivalents were $752.3 million at April 3, 2011, down $132.4 million from year-end 2010. Operating cash flow was $159.4 million; investing cash outflow was $87.2 million and financing cash outflow was $204.6 million.
- Capital additions and capitalized software were $81.6 million; approximate operating cash flow less these expenditures was $77.8 million.
- Total debt was approximately $1.83 billion, including short-term debt and current maturities; long-term debt carrying value, including current portion, was $1.80 billion. Cash exceeded short-term debt but was below total debt.
- Current assets were $1.95 billion and current liabilities $1.29 billion; the company reported a 1.5:1 current ratio. Its $1.1 billion revolving credit agreement, with a possible additional $400 million subject to lender consent, expires in December 2012. Hershey reported compliance with its covenants and no commercial-paper borrowings during the quarter.
- Share repurchases were $192.9 million and dividends paid were $76.6 million. In April, the board authorized an additional $250 million share-repurchase program.
Material changes, outlook and risks
- Hershey announced a weighted-average U.S., Puerto Rico and export price increase of about 9.7% in March. Management did not expect material 2011 benefit; seasonal net price realization was expected beginning around Easter 2012.
- Full-year 2011 net sales growth was expected near the top of the company’s 3%–5% long-term objective. Adjusted diluted EPS growth was expected near the top of the 6%–8% long-term objective. Projected 2011 diluted EPS was $2.54–$2.63 on a GAAP basis and $2.70–$2.76 excluding business realignment and impairment charges.
- Management expected 2011 Project Next Century charges of $45–$55 million, or $0.13–$0.16 per diluted share. Estimated total program charges and implementation costs remained $140–$170 million. Planned program capital expenditures were approximately $180–$190 million.
- Project Next Century transitions production from the 19 East Chocolate Avenue facility to an expanded West Hershey facility, with an expected reduction of approximately 500–600 jobs. First-quarter charges included $6.9 million in cost of sales, $1.0 million in selling, marketing and administrative expense, and $0.9 million of plant-closure and employee-separation costs; total pre-tax program-related charges were reported as $9.7 million.
- Management described the 2011 cost environment as elevated and commodity markets as volatile. Key disclosed risks include raw-material and energy costs and availability, price elasticity and price realization, product safety, competition, supply-chain execution, international operations, acquisitions and joint ventures, pension costs, and execution or savings shortfalls in Project Next Century. The company also noted ongoing U.S. and Canadian tax audits, but did not expect potential adjustments to significantly affect its financial position or results.
Important facts for investors to verify
- Whether price increases translate into net pricing and earnings as expected from Easter 2012, without materially weakening volumes.
- Whether commodity inflation, productivity savings, advertising investment and margin trends develop consistently with management’s outlook.
- Actual Project Next Century charges, capital spending, job reductions, timing and realized supply-chain savings.
- Cash conversion and working-capital trends: first-quarter operating cash flow declined year over year, partly due to working capital and higher receivables.
- Progress on the tax audits and any material change to the expected tax rate or contingencies.