Hershey Foods Corporation 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended July 5, 1998, and the six-month period ended on the same date. Hershey Foods Corporation is a Delaware corporation engaged in the confectionery and pasta businesses. As of August 3, 1998, the company had 112,661,777 shares of Common Stock and 30,453,908 shares of Class B Common Stock outstanding.
Key Financial Metrics
| Metric | Q2 1998 | Q2 1997 | YTD 1998 | YTD 1997 |
|---|---|---|---|---|
| Net Sales | $880.4M | $905.7M | $1,978.5M | $1,908.2M |
| Net Income | $48.0M | $50.6M | $123.4M | $119.5M |
| Diluted EPS | $0.33 | $0.33 | $0.85 | $0.77 |
| Gross Margin | 40.6% | 41.4% | 40.6% | 41.3% |
| Operating Cash Flow (YTD) | $109.5M (vs $127.4M YTD 1997) | |||
| Cash & Equivalents | $33.6M (vs $54.2M Dec 31, 1997) | |||
| Total Debt (Short + Long Term) | $1,315.9M | |||
| Current Ratio | 1.4:1 |
Material Changes vs. Prior Period
- Revenue: Q2 net sales decreased 3% year-over-year due to the absence of the "Lost World" movie promotion (replaced by "Godzilla"), softness in Asian and Russian markets, and higher unsalables. YTD sales increased 4% driven by new product introductions and core item growth.
- Profitability: Gross margins declined from 41.4% to 40.6% in Q2. This was caused by the cost of realigning the Russian business, product mix shifts, and higher production costs for promotional items, partially offset by lower raw material costs.
- Expenses: Selling, marketing, and administrative expenses decreased 6% in Q2 due to lower marketing spend on existing products. Net interest expense increased significantly ($4.9M in Q2, $11.9M YTD) due to borrowings used to purchase Common Stock from the Milton Hershey School Trust.
- Liquidity: Cash and cash equivalents decreased by $20.6M YTD, utilized for capital additions ($98.0M), dividends ($61.7M), and debt repayment ($25.1M).
Outlook, Risks, and Management Commentary
- Capital Expenditures: The company anticipates capital expenditures of $175M to $200M annually for the next several years for facility modernization and capacity expansion. An additional $75M to $85M is committed for an enterprise-wide information system.
- Year 2000 Compliance: The company is evaluating manufacturing and legacy systems for Year 2000 compliance. While current remediation costs are not expected to be material, failure by the company or its partners to comply could result in significant adverse financial consequences.
- Accounting Changes: The company notes the upcoming implementation of FAS No. 133 (Derivatives and Hedging), which could increase earnings volatility. The impact has not yet been quantified.
- Market Warning: A Form 8-K filed July 10, 1998, announced that Q2 1998 earnings may be below market expectations.
Investor Verification Checklist
- Verify the impact of the "Godzilla" promotion versus the prior year's "Lost World" promotion on Q2 sales volume.
- Confirm the status and cost of Year 2000 remediation for major suppliers and business partners.
- Monitor the adoption timeline and financial impact of FAS No. 133 on derivative instruments.
- Review the specific drivers of the 0.8% gross margin compression in the context of raw material pricing (milk/cocoa) versus manufacturing efficiencies.
- Assess the sustainability of the 39.0% effective tax rate given changes in income mix across jurisdictions.