Business context and reporting period
The Hershey Company’s fiscal 2009 Form 10-K covers the year ended December 31, 2009; it is an annual filing, not a standalone fourth-quarter report. Hershey is a branded confectionery and snacks company, with one reportable segment and operations in about 50 countries. U.S. sales accounted for most revenue; sales outside the U.S. were 14.3% of consolidated sales.
Key financial metrics
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net sales | $5.299 billion | $5.133 billion |
| Gross profit / margin | $2.053 billion / 38.7% | $1.758 billion / 34.2% |
| Operating income (EBIT) / margin | $761.6 million / 14.4% | $589.9 million / 11.5% |
| Net income | $436.0 million | $311.4 million |
| Diluted EPS, Common Stock | $1.90 | $1.36 |
| Operating cash flow | $1.066 billion | $519.6 million |
| Capital additions and software | $145.5 million | $283.0 million |
| Cash and cash equivalents at year-end | $253.6 million | $37.1 million |
| Total debt, including current portion | $1.542 billion | $2.008 billion |
Fourth-quarter 2009 sales were $1.407 billion, versus $1.377 billion a year earlier; net income was $126.8 million versus $82.2 million, and diluted Common Stock EPS was $0.55 versus $0.36. Hershey paid $263.4 million in dividends during 2009; the annual Common Stock dividend was $1.19 per share.
Material changes versus prior year
- Annual sales rose 3.2%, mainly from price realization and reduced promotional allowances; lower volume, primarily in the U.S., partly offset the increase. Foreign exchange reduced sales by about 1.0%.
- GAAP net income rose 40.0% and diluted EPS rose 39.7%. Adjusted diluted EPS, excluding specified realignment and impairment items, increased 15.4% to $2.17 from $1.88.
- Gross margin improved 4.5 percentage points. Price realization and supply-chain productivity helped, while input costs and pension expense weighed on results. Lower realignment charges contributed about 1.4 percentage points of the margin increase.
- SM&A expense increased 12.6% to $1.209 billion, including advertising expense of $241.2 million, up about 50%. The company attributed the increase to advertising, selling and administrative costs, pension and incentive compensation, and acquisition/divestiture evaluation costs.
- Operating cash flow more than doubled. Working-capital changes contributed $157.8 million, while changes in other assets and liabilities contributed $293.3 million; the filing cites hedging activity and related tax effects among the drivers.
- Year-end short-term debt fell to $24.1 million from $483.1 million, largely reflecting repayment of commercial paper. Long-term debt was broadly stable at $1.503 billion. Current assets were $1.385 billion and current liabilities $910.6 million.
Outlook, commentary, risks and unusual items
- For 2010, management expected net sales growth of 3%–5% and adjusted diluted EPS growth of 6%–8%, its stated long-term objectives. It forecast advertising investment up 25%–30% and modestly enhanced margins, supported by productivity and price realization.
- Management described the economic environment as likely to remain challenging, with elevated cost levels and volatile commodity markets; cocoa futures were near 30-year highs in 2009. Forward buying and hedging mitigate, but do not eliminate, commodity cost exposure.
- The global supply-chain transformation program was essentially complete at year-end. Cumulative pre-tax charges and non-recurring implementation costs were $629.1 million. Further non-cash pension settlement losses of $12 million–$18 million were possible in 2010; sale proceeds for three closed facilities could also produce additional charges or credits.
- A 2009 LIFO inventory liquidation reduced cost of sales by $12.7 million. This and lower realignment charges are important context when assessing reported margin and earnings improvement.
- Legal exposure includes a Canadian Competition Bureau investigation, a U.S. Department of Justice inquiry, and about 91 U.S. and 14 Canadian civil antitrust suits related to alleged confectionery pricing practices. Management said it did not expect a material adverse effect, but outcomes are uncertain.
- McLane Company accounted for approximately 27% of 2009 net sales and 22.5% of year-end accounts receivable, creating customer and receivables concentration. Other key risks include consumer demand and price elasticity, product safety/recalls, supply disruptions, international-market execution, pension assumptions, and regulatory changes.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls as of year-end.
Important facts for investors to verify
- Whether price increases and reduced promotions can sustain sales and margins without materially worsening volume or market share.
- The durability and composition of 2009 operating cash flow, particularly the contribution from changes in other assets and liabilities and working capital.
- Commodity-cost exposure and hedge coverage, including the effect of cocoa and other input prices as contracts roll forward.
- Potential 2010 pension settlement costs and proceeds or impairments from the remaining closed facilities.
- Developments in the antitrust investigations and litigation, and any change to management’s assessment of potential financial impact.
- McLane concentration, including customer credit exposure and the effect of any disruption in its distribution relationship.
- Progress against 2010 sales, adjusted EPS, advertising, capital spending, and margin expectations.