UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to_______
Commission file number 1-183
HERSHEY FOODS CORPORATION100 Crystal A DriveHershey, PA 17033
Registrant’s telephone number: 717-534-6799
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, $1 par value — 100,186,375 shares, as of July 25, 2003. Class B Common Stock, $1 par value — 30,422,096 shares, as of July 25, 2003.
Exhibit Index – Page 16
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The accompanying notes are an integral part of these statements.
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The accompanying notes are an integral part of these balance sheets.
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1. BASIS OF PRESENTATION
2. EMPLOYEE STOCK OPTIONS AND OTHER STOCK-BASED EMPLOYEE COMPENSATION PLANS
3. BUSINESS REALIGNMENT INITIATIVES
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4. INTEREST EXPENSE
5. NET INCOME PER SHARE
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6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
7. COMPREHENSIVE INCOME
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8. INVENTORIES
9. LONG-TERM DEBT
10. FINANCIAL INSTRUMENTS
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11. SHARE REPURCHASES
12. NEW ACCOUNTING PRONOUNCEMENTS
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Consolidated net sales for the second quarter increased 3.1% from $823.5 million in 2002 to $849.1 million in 2003. The improvement over the prior year primarily reflected increased sales of key confectionery brands related to the impact of a selling price increase effective in January 2003 and the introduction of new products and limited edition items. Lower returns, discounts and allowances and higher sales for the Corporation’s Canadian business also contributed to the sales increase. These favorable results were offset somewhat by increased promotional allowances, primarily to support merchandising programs and new product introductions, and the rationalization of certain under-performing brands and products, including the divestiture of the Heide brands in June 2002.
Second quarter cost of sales increased $5.4 million, or 1%, from 2002 to 2003. Higher manufacturing costs were substantially offset by decreased costs for raw materials, primarily dairy products and peanuts, and lower packaging and supply chain costs. Cost of sales for the second quarter included costs associated with business realignment initiatives of $.1 million and $.6 million in 2003 and 2002, respectively. Business realignment costs in 2003 related to the write-off of certain inventories and in 2002 reflected costs for the relocation of manufacturing equipment. Gross margin increased from 38.1% in 2002 to 39.3% in 2003. The margin expansion reflected the impact of the selling price increase and the decreases in raw material, packaging and supply chain costs. These margin improvements were partially offset by the aforementioned increase in promotional allowances.
Selling, marketing and administrative expenses increased 3% in 2003 versus the second quarter of 2002. The change in these expenses is primarily attributable to increased advertising and packaging development expenses and higher employee benefits costs, offset slightly by reduced administrative expenses.
During the second quarter of 2003, the Corporation recorded $3.9 million of pre-tax charges related to business rationalization and realignment initiatives, consisting of fixed asset impairment charges of $4.2 million and a net gain of $.3 million relating to production line rationalization and the elimination of non-strategic brands and products. Components of the net $2.0 million pre-tax charge for business realignment initiatives recorded in the second quarter of 2002 included a $6.4 million charge relating to pension settlement costs associated with a voluntary work force reduction program (VWRP), partially offset by a $4.4 million favorable adjustment relating to the sale of a group of Hershey’s non-chocolate confectionery candy brands.
Net income for the second quarter increased $8.3 million, or 13%, from 2002 to 2003, and net income per share — diluted of $.54 for the second quarter of 2003 increased $.08, or 17%, compared with the second quarter of 2002. Net income of $71.5 million and $63.1 million for the second quarters of 2003 and 2002, respectively, included total net business realignment charges of $2.5 million and $1.6 million after tax, respectively.
Consolidated net sales for the first six months decreased less than 1% from $1,812.0 million in 2002 to $1,802.3 million in 2003. The decrease in sales primarily resulted from a buy-in associated with the price increase effective in January 2003, and the continued rationalization of certain under-performing products and brands, primarily the divestiture of Heide brands in June 2002 and the discontinuance of the Corporation’s aseptically packaged drink products in the United States in March 2002. Incremental sales from the January 2003 selling price increase were partially offset by higher promotional allowances. Sales were positively impacted by the growth in sales of key confectionery brands reflecting the introduction of new products and limited edition items and increased sales for the Corporation’s Canadian business.
Cost of sales for the first six months decreased $21.8 million, or 2%, from 2002 to 2003. The cost decline was primarily caused by lower sales volume, reduced supply chain costs, and lower costs for raw materials, primarily dairy products and peanuts, and for packaging. Cost of sales for the first six months included costs associated with business realignment initiatives of $.1 million and $.8 million in 2003 and 2002, respectively. Business realignment costs in 2003 related to the write-off of certain inventories and in 2002 reflected costs for the relocation of manufacturing equipment. The consolidated gross margin increased from 37.4% in 2002 to 38.3% in 2003. The margin expansion reflected the impact of the price increase and the aforementioned decreases in raw material, packaging, and supply chain costs. These margin improvements were partially offset by increases in promotional allowances and manufacturing costs.
Selling, marketing and administrative expenses decreased by 2% in the first six months, primarily attributable to reduced advertising and consumer promotion expenses as well as continued savings from the Corporation’s business realignment
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initiatives implemented in 2002. These cost reductions were offset somewhat by increased employee benefits costs, packaging development and marketing research expenses. Additionally, the bad debt reserve was increased by $5.0 million in the first quarter of 2003 as an estimate of probable exposure to the bankruptcy of Fleming Companies, Inc., announced on April 1, 2003. At the present time, the Corporation does not anticipate any material impact on sales for the remainder of the year as a result of this situation.
Net pre-tax business rationalization and realignment charges of $3.9 million recorded in the first half of 2003 were principally associated with asset impairment charges resulting from production line rationalization and the elimination of non-strategic brands and products. Pre-tax charges of $10.7 million recorded in the first half of 2002 were primarily associated with pension settlement costs related to the VWRP.
Net interest expense in the first six months was $1.2 million less than the comparable period of 2002, primarily reflecting lower fixed interest expense and higher interest income.
Net income was $169.0 million in the first six months of 2003 as compared to $150.2 million in 2002. Net income per share-diluted of $1.27 for the six months ended June 29, 2003 was up 17% from $1.09 per share for the same period last year. Net income for the first six months of 2003 and 2002 included net business realignment charges of $2.5 million and $7.3 million after tax, respectively.
Historically, the Corporation’s major source of financing has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, generally have been met by issuing commercial paper. During the second quarter of 2003, the Corporation’s cash and cash equivalents decreased by $279.0 million. Cash and cash equivalents on hand at the beginning of the period, cash provided from operations and short-term borrowings were sufficient to repurchase 3.9 million shares of the Corporation’s Common Stock for $252.2 million, and to fund capital expenditures and capitalized software expenditures of $86.9 million and dividend payments of $84.2 million. Cash used by other assets and liabilities of $166.0 million was principally the result of commodities transactions, prepaid taxes and advertising, as a result of payments made in the first six months of the year. Cash used by other assets and liabilities of $33.3 million in the second quarter of 2002 primarily reflected pension plan contributions, partially offset by commodities transactions. Income taxes paid of $136.1 million during the first six months of 2003 increased from $27.0 million for the comparable period of 2002. The payment of estimated income taxes in 2002 was reduced significantly as a result of deductions for pension plan contributions.
The ratio of current assets to current liabilities was 2.1:1 as of June 29, 2003, and 2.3:1 as of December 31, 2002. The Corporation’s capitalization ratio (total short-term and long-term debt as a percent of stockholders’ equity, short-term and long-term debt) was 43% as of June 29, 2003, and 39% as of December 31, 2002.
In July 2003, the Corporation announced a number of initiatives continuing its value-enhancing strategy, including the introduction of new products and various initiatives to streamline the supply chain. New product introductions include Hershey’s S’mores candy bar incorporating graham crackers, marshmallow and Hershey’s milk chocolate, Swoopschocolate slices in four flavors, packaged in re-sealable on-the-go containers, andReese’s mini pieces in portable tubes, as well as additional Limited EditionReese’s products, all of which are expected to be introduced in the second half of 2003.
Initiatives to streamline the supply chain include divesting or eliminating certain non-strategic brands and products, production line rationalization and realigning the sales organization, all of which are expected to be completed by December 31, 2003. During 2003, the initiatives to streamline the supply chain are expected to result in a net charge of approximately $17.0 million, or $.08 per share-diluted, of which $.02 per share-diluted was recognized in the second quarter. The $17.0 million net charge is expected to consist of employee termination and early retirement costs of $9.8 million, asset impairment and other costs relating to product line rationalization and the discontinuance of certain brands and products of $8.9 million, and a $1.7 million net gain, resulting from the divestiture of certain brands. The total impact of the initiatives will be cash flow positive in 2003 and slightly accretive in 2004 as a result of expected savings of approximately $5.0 million annually.
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The nature of the Corporation’s operations and the environment in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Corporation notes the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential,” among others. Factors which could cause results to differ include, but are not limited to: changes in the confectionery and grocery business environment, including actions of competitors and changes in consumer preferences; customer and consumer response to selling price increases; changes in governmental laws and regulations, including taxes; market demand for new and existing products; changes in raw material and other costs; pension cost factors, such as actuarial assumptions, market performance and employee retirement decisions; adequacy of the Corporation’s bad debt reserve; the Corporation’s ability to implement improvements to and reduce costs associated with the Corporation’s supply chain; and the Corporation’s ability to successfully implement its 2003 rationalization and realignment initiatives.
The potential net loss in fair value of foreign exchange forward contracts and interest rate swap agreements resulting from a hypothetical near-term adverse change in market rates of ten percent decreased from $.4 million as of December 31, 2002, to $.2 million as of June 29, 2003. The market risk resulting from a hypothetical adverse market price movement of ten percent associated with the estimated average fair value of net commodity positions increased from $2.4 million as of December 31, 2002, to $6.5 million as of June 29, 2003. Market risk represents 10% of the estimated average fair value of net commodity positions at four dates prior to the end of each period.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Corporation’s reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Corporation’s reports filed under the Exchange Act is accumulated and communicated to management, including the Corporation’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this quarterly report, the Corporation conducted an evaluation of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures, as required by Rule 13a-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective. There have been no changes in the Corporation’s internal control over financial reporting which could materially affect, or are reasonably likely to materially affect, internal control over financial reporting.
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a) Exhibits
The following items are attached and incorporated herein by reference:
Exhibit 10 – Amended and Restated Executive Benefits Protection Plan (Group 3A).
Exhibit 12 – Statement showing computation of ratio of earnings to fixed charges for the six months ended June 29, 2003 and June 30, 2002.
Exhibit 31.1 – Certification of Richard H. Lenny, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2 – Certification of Frank Cerminara, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
The following item is furnished with this report:
Exhibit 32 — Certification of Richard H. Lenny, Chief Executive Officer, and Frank Cerminara, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b) Reports on Form 8-K
A Current Report on Form 8-K was furnished to the SEC on July 17, 2003, in connection with the Corporation’s announcement of sales and earnings for the second quarter of 2003.
A Current Report on Form 8-K was furnished to the SEC on April 22, 2003, in connection with the Corporation’s announcement that John M. Pietruski had retired from the Corporation’s Board of Directors and Harriet Edelman and Marie J. Toulantis had been elected to the Corporation’s Board of Directors, effective April 22, 2003.
A Current Report on Form 8-K was furnished to the SEC on April 17, 2003, in connection with the Corporation’s announcement of sales and earnings for the first quarter of 2003.
A Current Report on Form 8-K was furnished to the SEC on April 9, 2003, in connection with the Corporation’s announcement that Thomas K. Hernquist was named Senior Vice President, Chief Marketing Officer, effective April 28, 2003.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EXHIBIT INDEX
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