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 April 3, 2005
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
THE HERSHEY COMPANY100 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 — 183,490,499 shares, as of April 22, 2005. Class B Common Stock, $1 par value — 60,819,526 shares, as of April 22, 2005.
Exhibit Index – Page 18
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The accompanying notes are an integral part of these consolidated financial statements.
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1. BASIS OF PRESENTATION
2. EMPLOYEE STOCK OPTIONS AND OTHER STOCK-BASED EMPLOYEE COMPENSATION PLANS
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3. INTEREST EXPENSE
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4. EARNINGS PER SHARE
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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6. COMPREHENSIVE INCOME
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7. INVENTORIES
8. SHORT-TERM DEBT
9. LONG-TERM DEBT
10. FINANCIAL INSTRUMENTS
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11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
12. SHARE REPURCHASES
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13. PENDING ACCOUNTING PRONOUNCEMENTS
14. SUBSEQUENT EVENT
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Net sales for the first quarter of 2005 increased $113.3 million, or 11%, from 2004. The Mauna Loa and Grupo Lorena acquisitions contributed incremental sales of $29.0 million, or approximately 3% of the increase from 2004. Approximately three quarters of the organic sales growth of 8% resulted from unit volume growth, primarily reflecting the introduction of new products and improved performance by the Company’s international businesses, particularly in Canada and Mexico. Additionally, a portion of the organic sales volume increase resulted from a buy-in prior to the effective date of selling price increases. The remainder of the sales increase resulted from a more efficient rate of promotional spending and lower returns, discounts and allowances as a percentage of sales.
Cost of sales for the quarter increased $69.5 million, or 11%, from 2004 to 2005. The cost increase was primarily caused by the higher sales volume and higher raw material costs, principally associated with increased prices for cocoa and dairy products. Gross margin increased slightly from 38.2% in 2004 to 38.3% in 2005. The margin expansion reflected improved price realization, primarily from reduced promotional spending as a percentage of sales, as well as selling price increases and a lower rate of returns, discounts and allowances. These margin improvements were substantially offset by higher raw material costs and a less favorable product mix, primarily associated with the lower margin Mauna Loa and Grupo Lorena businesses.
Selling, marketing and administrative expenses for the first quarter of 2005 increased 10% from the comparable period in 2004, primarily reflecting increased employee compensation costs, incremental expenses related to the business acquisitions and higher advertising expense. Selling, marketing and administrative expenses as a percentage of sales, declined from 20.1% in 2004 to 20.0% in 2005.
Net interest expense in the first quarter of 2005 was $4.6 million higher than the comparable period of 2004, primarily reflecting higher short-term interest expense and decreased capitalized interest. The increase in short-term interest expense was primarily associated with commercial paper borrowings for repurchases of Common Stock and the 2004 business acquisitions.
The effective income tax rate for the first quarter of 2005 was 36.6% compared with 36.4% for the first quarter of 2004, reflecting the best estimates of the expected effective income tax rates for the full-years.
Net income for the first quarter increased $11.1 million, or 10%, from 2004 to 2005, and net income per share-diluted increased $.06, or 15%. The increase was primarily attributable to increased income from operations and the impact of lower weighted-average shares outstanding resulting from share repurchases.
Historically, the Company’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 first quarter of 2005, the Company’s cash and cash equivalents decreased by $36.8 million. Cash provided from operations, short-term borrowings, cash received from stock options exercises and cash on hand at the beginning of the period was sufficient to fund incentive plan transactions reflecting the repurchase of Common Stock issued for stock options exercises and benefits plans of $223.5 million, dividend payments of $52.8 million, the repurchase of the Company’s Common Stock for $44.2 million under the 2002 stock repurchase program, and capital expenditures and capitalized software expenditures of $32.2 million. Cash used by changes in other assets and liabilities was $63.5 million for the first quarter of 2005 compared with $55.3 million for the same period of 2004. The increase from the prior year primarily reflected contributions to the Company’s pension plans in 2005 and decreases in liabilities associated with marketing programs, partially offset by a reduction in the use of cash from commodity transactions.
Income taxes paid of $15.3 million during the first quarter of 2005 decreased from $28.4 million for the comparable period of 2004. The payment of estimated income taxes in 2005 was reduced significantly as a result of deductions for pension plan contributions.
The ratio of current assets to current liabilities decreased to 0.8:1 as of April 3, 2005 from 0.9:1 as of December 31, 2004. The Company’s capitalization ratio (total short-term and long-term debt as a percent of stockholders’ equity, short-term and long-term debt) was 59% as of April 3, 2005 and 55% as of December 31, 2004. The higher capitalization ratio in 2005 primarily reflected the impact of additional short-term borrowings.
In November 2004, the Company entered into a five-year credit agreement with banks, financial institutions and other institutional lenders. The credit agreement established an unsecured revolving credit facility under which the Company may
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borrow up to $900 million with the option to increase borrowings by an additional $600 million with the concurrence of the lenders. Funds borrowed may be used for general corporate purposes, including commercial paper backstop and business acquisitions.
In April 2005, the Company’s Board of Directors approved a share repurchase program authorizing the repurchase of up to $250 million of the Company’s Common Stock in the open market, or through privately negotiated transactions. Acquired shares of the Common Stock will be held as Treasury Stock.
The nature of the Company’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 Company 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 Company’s 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; successful resolution of upcoming labor contract negotiations; and the Company’s ability to implement improvements to and reduce costs associated with the Company’s supply chain.
The potential net loss in fair value of foreign exchange forward contracts and options and interest rate swap agreements of ten percent resulting from a hypothetical near-term adverse change in market rates was $.6 million as of December 31, 2004 and $.5 million as of April 3, 2005. 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 decreased from $6.3 million as of December 31, 2004, to $2.6 million as of April 3, 2005. 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 Company’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 Company’s reports filed under the Exchange Act is accumulated and communicated to management, including the Company’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 Company conducted an evaluation of the effectiveness of the design and operation of the Company’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 Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective. There has been no change during the most recent fiscal quarter in the Company’s internal control over financial reporting identified in connection with the evaluation that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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(1) The Company’s Board of Directors approved a share repurchase program authorizing the repurchase of up to $500 million of the Company’s Common Stock in December 2002.
The Hershey Company’s Annual Meeting of Stockholders was held on April 19, 2005. The following directors were elected by the holders of Common Stock and Class B Common Stock, voting together without regard to class:
The following directors were elected by the holders of the Common Stock voting as a class:
Holders of the Common Stock and the Class B Common Stock voting together ratified the appointment of KPMG LLP as the independent auditors for 2005. Stockholders cast 769,012,009 votes FOR the appointment, 3,255,390 votes AGAINST the appointment and ABSTAINED from casting 528,455 votes on the appointment of independent auditors.
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Holders of the Common Stock and the Class B Common Stock, each voting separately as a class and voting together without regard to class, approved the amendment to the Company’s Restated Certificate of Incorporation, as amended (“Certificate”), to increase the number of authorized shares of Common Stock from 450,000,000 shares to 900,000,000 shares and Class B Common Stock from 75,000,000 shares to 150,000,000 shares. Holders of the Common Stock voting separately as a class cast 103,998,775 votes FOR the amendment, 61,208,548 votes AGAINST the amendment and ABSTAINED from casting 884,969 votes on the amendment to the Certificate to increase the number of authorized shares of Common Stock. Holders of the Class B Common Stock voting separately as a class cast 606,697,660 votes FOR the amendment, 0 votes AGAINST the amendment and ABSTAINED from casting 0 votes on the amendment to the Certificate to increase the number of authorized shares of Class B Common Stock. Holders of the Common Stock and the Class B Common Stock voting together cast 710,696,435 votes FOR the amendment, 61,208,548 votes AGAINST the amendment, and ABSTAINED from casting 884,969 votes on the amendment to the Certificate to increase the number of authorized shares of Common Stock and Class B Common Stock.
Holders of the Common Stock and the Class B Common Stock voting together approved the amendment to the Certificate to change the Company’s name to The Hershey Company. Stockholders cast 769,540,889 votes FOR the amendment, 2,588,835 votes AGAINST the amendment and ABSTAINED from casting 666,128 votes on the amendment to the Certificate to change the Company’s name.
No other matters were submitted for stockholder action.
The following items are attached and incorporated herein by reference:
The Company's Restated Certificate of Incorporation, as amended by the Stockholders on April 19, 2005, is attached hereto as Exhibit 3 and incorporated herein by reference.
The following item is furnished with this report:
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SIGNATURES
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.
THE HERSHEY COMPANY(Registrant)
Date: May 11, 2005
By: /s/David J. West David J. West Senior Vice President, Chief Financial Officer
By: /s/David W. Tacka David W. Tacka Vice President, Chief Accounting Officer
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EXHIBIT INDEX
The Company's Restated Certificate of Incorporation, as amended by the Stockholders on April 19, 2005
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