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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 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 CORPORATION (Exact name of registrant as specified in its charter) Delaware 23-0691590 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 100 Crystal A Drive Hershey, Pennsylvania 17033 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717) 534-6799 (Former name, former address and former fiscal year, if changed since last report) 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 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 - 61,992,904 shares, as of April 29, 1996. Class B Common Stock, $1 par value - 15,241,454 shares, as of April 29, 1996. Exhibit Index - Page 13 Page 2 HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars except per share amounts) For the Three Months Ended March 31, April 2, 1996 1995 Net Sales $931,514 $867,446 Costs and Expenses: Cost of sales 549,748 503,361 Selling, marketing and administrative 270,352 253,548 Total costs and expenses 820,100 756,909 Income before Interest and Income Taxes 111,414 110,537 Interest expense, net 12,224 9,144 Income before Income Taxes 99,190 101,393 Provision for income taxes 39,775 40,760 Net Income $ 59,415 $ 60,633 Net Income per Share $ .77 $ .70 Cash Dividends Paid per Share of Common Stock $ .3600 $ .3250 Cash Dividends Paid per Share of Class B Common Stock $ .3250 $ .2950 The accompanying notes are an integral part of these statements. Page 3 HERSHEY FOODS CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS MARCH 31, 1996 AND DECEMBER 31, 1995 (in thousands of dollars) ASSETS 1996 1995 Current Assets: Cash and cash equivalents $ 59,936 $ 32,346 Accounts receivable - trade 239,172 326,024 Inventories 447,256 397,570 Deferred income taxes 85,376 84,785 Prepaid expenses and other 63,203 81,598 Total current assets 894,943 922,323 Property, Plant and Equipment, at cost 2,228,561 2,190,386 Less - accumulated depreciation and amortization (791,200) (754,377) Net property, plant and equipment 1,437,361 1,436,009 Intangibles Resulting from Business Acquisitions 425,961 428,714 Other Assets 40,574 43,577 Total assets $2,798,839 $2,830,623 LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 121,877 $ 127,067 Accrued liabilities 269,751 308,123 Accrued income taxes 36,673 15,514 Short-term debt 371,118 413,268 Current portion of long-term debt 1,882 383 Total current liabilities 801,301 864,355 Long-term Debt 354,184 357,034 Other Long-term Liabilities 334,126 333,814 Deferred Income Taxes 198,282 192,461 Total liabilities 1,687,893 1,747,664 Stockholders' Equity: Preferred Stock, shares issued: none in 1996 and 1995 - - Common Stock, shares issued: 74,733,982 in 1996 and 1995 74,734 74,734 Class B Common Stock, shares issued: 15,241,454 in 1996 and 1995 15,241 15,241 Additional paid-in capital 43,342 47,732 Cumulative foreign currency translation adjustments (27,985) (29,240) Unearned ESOP compensation (34,330) (35,128) Retained earnings 1,726,804 1,694,696 Treasury-Common Stock shares at cost: 12,709,928 in 1996 and 12,709,553 in 1995 (686,860) (685,076) Total stockholders' equity 1,110,946 1,082,959 Total liabilities and stockholders' equity $2,798,839 $2,830,623 The accompanying notes are an integral part of these balance sheets. Page 4 HERSHEY FOODS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands of dollars) For the Three Months Ended March 31, April 2, 1996 1995 Cash Flows Provided from Operating Activities $122,063 $ 84,038 Cash Flows Provided from (Used by) Investing Activities Capital additions (36,017) (32,962) Proceeds from divestitures 15,852 - Other, net 2,872 (4,732) Net Cash Flows (Used by) Investing Activities (17,293) (37,694) Cash Flows Provided from (Used by) Financing Activities Net (decrease) increase in short-term debt (42,150) (12,741) Long-term borrowings - 333 Repayment of long-term debt (1,311) (5,418) Cash dividends paid (27,307) (27,732) Exercise of stock options 9,578 2,269 Incentive plan transactions (13,707) (3,553) Repurchase of Common Stock (2,283) (1,221) Net Cash Flows Provided from (Used by) Financing Activities (77,180) (48,063) Increase (Decrease) in Cash and Cash Equivalents 27,590 (1,719) Cash and Cash Equivalents, beginning of period 32,346 26,738 Cash and Cash Equivalents, end of period $ 59,936 $ 25,019 Interest Paid $ 9,441 $ 9,086 Income Taxes Paid $ 10,023 $ 8,037 The accompanying notes are an integral part of these statements. Page 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The accompanying unaudited consolidated condensed financial statements include the accounts of the Corporation and its subsidiaries after elimination of intercompany accounts and transactions. These statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the information contained herein. All such adjustments were of a normal and recurring nature. Certain reclassifications have been made to prior year amounts to conform to the 1995 presentations. 2. Interest expense, net consisted of the following: For the Three Months Ended March 31, 1996 April 2, 1995 (in thousands of dollars) Interest expense $13,871 $10,184 Interest income (892) (746) Capitalized interest (755) (294) Interest expense, net $12,224 $ 9,144 3. Income per share has been computed based on the weighted average number of shares of the Common Stock and the Class B Common Stock outstanding during the period. Average shares outstanding during the first quarter were 77,313,574 in 1996 and 86,728,387 in 1995. There were no shares of Preferred Stock outstanding during the periods presented. A total of 3,956,930 shares of Common Stock have been repurchased under a share repurchase program begun in 1993, thereby completing the $200 million program as of March 31, 1996. Of the total shares repurchased, 264,000 shares were retired, 32,775 shares were reissued in connection with the exercise of stock options and 3,660,155 shares were held as Treasury Stock as of March 31, 1996. In addition, in August 1995, the Corporation purchased 9,049,773 shares of its Common Stock from Hershey Trust Company, as Trustee for the benefit of Milton Hershey School. A total of 12,709,928 shares were held as Treasury Stock as of March 31, 1996. In February 1996, the Corporation's Board of Directors approved an additional share repurchase program to acquire from time to time, through open market or privately negotiated transactions, up to $200 million of Common Stock. The repurchase of shares under this program began in April 1996. 4. The majority of inventories are valued under the last-in, first-out (LIFO) method. The remaining inventories are stated at the lower of first-in, first-out (FIFO) cost or market. Inventories were as follows: March 31, 1996 December 31, 1995 (in thousands of dollars) Raw materials $245,890 $189,371 Goods in process 30,872 28,201 Finished goods 248,299 249,106 Inventories at FIFO 525,061 466,678 Adjustment to LIFO (77,805) (69,108) Total inventories $447,256 $397,570 Page 6 5. In the fourth quarter of 1994, the Corporation recorded a pre-tax restructuring charge of $106.1 million following a comprehensive review of domestic and international operations designed to enhance performance of operating assets by lowering operating and administrative costs, eliminating underperforming assets and streamlining the overall decision-making process. As of March 31, 1996, $85.1 million of restructuring reserves had been utilized and $16.7 million had been reversed to reflect revisions and changes in estimates to the original restructuring program. Remaining accrued restructuring reserves will be utilized during 1996 as the final aspects of the restructuring program are completed. Operating cash flows were used to fund cash requirements which represented approximately 25% of the total reserves utilized. The non-cash portion of restructuring reserve utilization was associated primarily with the divestiture of foreign businesses and the discontinuation of certain product lines. 6. In June 1995, the Corporation completed the sale of the outstanding shares of Overspecht B.V. (OZF Jamin) to a management buyout group at OZF Jamin, as part of the restructuring program announced by the Corporation in late 1994. The Corporation purchased the outstanding shares of OZF Jamin in October 1993 for approximately $20.2 million. 7. In January 1996, the Corporation completed the sale of the assets of Hershey Canada, Inc.'s PLANTERS nut (Planters) and LIFE SAVERS and BREATH SAVERS hard candy, and BEECH-NUT cough drop (Life Savers) businesses to Johnvince Foods Group and Beta Brands Inc., respectively. Both transactions were part of the Corporation's restructuring program. 8. In December 1995, the Corporation completed the acquisition of the outstanding shares of the confectionery company Henry Heide, Incorporated (Henry Heide), for approximately $12.5 million. Henry Heide's manufacturing facility is located in New Brunswick, N.J., where it manufactures a variety of non-chocolate confectionery products including JUJYFRUITS candies and WUNDERBEANS jellybeans. The acquisition has been accounted for as a purchase and, accordingly, results subsequent to the date of acquisition are included in the consolidated financial statements. Had the results of the Henry Heide acquisition been included in consolidated results for the full corresponding three-month period of 1995, the effect would not have been material. 9. In October 1995, the Corporation issued $200 million of 6.7% Notes due 2005 (Notes) under Form S-3 Registration Statements which were declared effective in June 1990 and November 1993. The proceeds from issuance of the Notes were used to reduce short-term borrowings. 10. The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair value as of March 31, 1996 and December 31, 1995, because of the relatively short maturity of these instruments. The carrying value of long-term debt, including the current portion, also approximated fair value as of March 31, 1996 and December 31, 1995, based upon quoted market prices, as of those dates, for the same or similar debt issues. Page 7 As of March 31, 1996, the Corporation had foreign exchange forward contracts maturing in 1996 and 1997 to purchase $24.0 million in foreign currency, primarily British sterling, German marks, and Irish punt, and to sell $13.5 million in foreign currency, primarily Canadian dollars and Japanese yen, at contracted forward rates. As of December 31, 1995, the Corporation had foreign exchange forward contracts maturing in 1996 and 1997 to purchase $54.7 million in foreign currency, primarily Canadian dollars, British sterling and Swiss francs, and to sell $26.4 million in foreign currency, primarily Italian lira, Canadian dollars and Japanese yen, at contracted forward rates. Additionally, as of December 31, 1995, the Corporation had purchased foreign exchange options of $11.5 million and written foreign exchange options of $8.9 million, principally related to British sterling. Such options expired or were settled in the first quarter of 1996. The fair value of foreign exchange forward contracts is estimated by obtaining quotes for future contracts with similar terms, adjusted where necessary for maturity differences, and the fair value of foreign exchange options is estimated using active market quotations. As of March 31, 1996 and December 31, 1995, the fair value of foreign exchange forward and options contracts approximated carrying value. The Corporation does not hold or issue financial instruments for trading purposes. In order to minimize its financing costs and to manage interest rate exposure, the Corporation entered into interest rate swap agreements in the fourth quarter of 1995 to effectively convert a portion of its floating rate debt to fixed rate debt. As of March 31, 1996, the Corporation had agreements outstanding with an aggregate notional amount of $200.0 million with maturities through 1997. As of March 31, 1996, interest rates payable were at a weighted average fixed rate of 5.6% and interest rates receivable were floating based on 30- day commercial paper composite rates. Any interest rate differential on interest rate swaps is recognized as an adjustment to interest expense over the term of the agreement. The Corporation's risk related to swap agreements is limited to the cost of replacing such agreements at current market rates. 11. Reference is made to the Registrant's 1995 Annual Report on Form 10-K for more detailed financial statements and footnotes. Page 8 Management's Discussion and Analysis Results of Operations - First Quarter 1996 vs. First Quarter 1995 Consolidated net sales for the first quarter rose from $867.4 million in 1995 to $931.3 million in 1996, an increase of 7% from the prior year. The higher sales primarily reflected sales volume increases for existing confectionery and grocery brands, incremental sales from new domestic confectionery and grocery products, confectionery selling price increases in the United States and incremental sales from the acquisition of Henry Heide. These increases were offset somewhat by lower sales resulting from the divestitures of OZF Jamin in the second quarter of 1995 and the Planters and Life Savers businesses in January 1996. The consolidated gross margin decreased from 42.0% in 1995 to 41.0% in 1996. The decrease was primarily the result of higher costs for certain major raw materials and increased manufacturing costs primarily attributable to production start-up and manufacturing of new products, along with adverse weather conditions. These cost increases were partially offset by confectionery price increases and the favorable impact of the OZF Jamin divestiture. Selling, marketing and administrative expenses increased by 7%, due to increased advertising and promotion expenses reflecting sales volume increases and activities related to the anticipated introduction of new products. Net interest expense in the first quarter of 1996 was $3.1 million above the comparable period of 1995 primarily as a result of higher fixed interest expense. The increase in fixed interest was due to the issuance of $200 million of 6.7% Notes due 2005 (Notes) in October 1995. The proceeds from the issuance of the Notes were used to reduce short-term borrowings required to fund capital additions, payment of cash dividends, share repurchases and working capital requirements. The first quarter effective income tax rate decreased from 40.2% in 1995 to 40.1% in 1996. Financial Condition 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, generally have been met by issuing commercial paper. During the first three months of 1996, the Corporation's cash and cash equivalents increased by $27.6 million. Cash provided from operations was sufficient to finance capital additions of $36.0 million, pay cash dividends of $27.3 million and reduce short-term borrowings by $42.2 million. The increase in cash provided from operations primarily reflected favorable changes in working capital balances. The ratio of current assets to current liabilities was 1.1:1 as of March 31, 1996 and December 31, 1995. 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 40% as of March 31, 1996, and 42% as of December 31, 1995. As of April 2, 1995 the Corporation had lines of credit with domestic and international commercial banks in the amount of approximately $525 million which could be borrowed directly or used to support the Page 9 issuance of commercial paper. In December 1995, the Corporation entered into committed credit facility agreements with a syndicate of banks under which it could borrow up to $600 million as of March 31, 1996, with options to increase borrowings by $1.0 billion with the concurrence of the banks. Of the total committed credit facility, $200 million is for a renewable 364-day term and $400 million is effective for a five- year term. The credit facilities may be used to fund general corporate requirements, to support commercial paper borrowings and, in certain instances, to finance future business acquisitions. As of March 31, 1996, the Corporation also had lines of credit with domestic and international commercial banks in the amount of approximately $100 million which could be borrowed directly or used to support the issuance of commercial paper. In October 1995, The Corporation issued $200 million of Notes under Form S-3 Registration Statements which were declared effective in June 1990 and November 1993. As of March 31, 1996, $300 million of debt securities remained available for issuance under the November 1993 Registration Statement. Proceeds from any offering of the $300 million of debt securities available under the shelf registration may be used for general corporate requirements including, reducing existing commercial paper borrowings, financing capital additions, and funding future business acquisitions and working capital requirements. In the fourth quarter of 1995, the Corporation entered into interest rate swap agreements to effectively convert a portion of its floating rate debt to fixed rate debt. As of March 31, 1996, the Corporation had agreements outstanding with an aggregate notional amount of $200.0 million, with maturities through 1997. Any interest rate differential on interest rate swaps is recognized as an adjustment to interest expense over the term of the agreement. As of March 31, 1996, the Corporation's principal capital commitments included manufacturing capacity expansion and modernization. The Corporation anticipates that capital expenditures will be in the range of $125 million to $175 million per annum during the next several years as a result of continued modernization of existing facilities and capacity expansion to support new products and line extensions. Page 10 Part II Items 1 through 3 and 5 have been omitted as not applicable. Item 4 - Submission of Matters to a Vote of Security Holders Hershey Foods Corporation's Annual Meeting of Stockholders was held on April 30, 1996. The following directors were elected by the holders of Common Stock and Class B Common Stock, voting together without regard to class: Name Votes For Votes Withheld William H. Alexander 206,432,666 590,703 Robert H. Campbell 206,546,435 476,934 C. McCollister Evarts 206,386,384 636,985 Thomas C. Graham 206,559,499 463,870 Bonnie Guiton Hill 206,519,378 503,991 John C. Jamison 206,554,269 469,100 John M. Pietruski 206,570,622 452,747 Joseph P. Viviano 206,506,220 517,149 Kenneth L. Wolfe 206,527,201 496,168 The following directors were elected by the holders of the Common Stock voting as a class: Name Votes For Votes Withheld Mackey J. McDonald 55,005,300 486,359 Vincent A. Sarni 55,034,851 456,808 Holders of the Common Stock and the Class B Common Stock voting together approved the appointment of Arthur Andersen LLP as the independent public accountants for 1996. Stockholders cast 206,687,791 votes FOR the appointment, 188,613 votes AGAINST the appointment and ABSTAINED from casting 146,965 votes on the appointment of accountants. No other matters were submitted for stockholder action. Item 6 - Exhibits and Reports on Form 8-K a) Exhibits The following items are attached and incorporated herein by reference: Exhibit 12 - Statement showing computation of ratio of earnings to fixed charges for the quarters ended March 31, 1996 and April 2, 1995. Exhibit 27 - Financial Data Schedule for the period ended March 31, 1996 (required for electronic filing only). Page 11 b) Reports on Form 8-K A report on Form 8-K was filed January 29, 1996, announcing that the Corporation entered into committed credit facilities with a syndicate of banks under which it could borrow up to $600 million with options to increase borrowings by $1.0 billion with the concurrence of the banks. A report on Form 8-K was filed February 9, 1996, announcing that the Corporation's Board of Directors approved a share repurchase program to repurchase up to $200 million of the Corporation's Common Stock. Page 12 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. HERSHEY FOODS CORPORATION (Registrant) Date: May 8, 1996 /s/ William F. Christ William F. Christ Senior Vice President and Chief Financial Officer Date: May 8, 1996 /s/ David W. Tacka David W. Tacka Corporate Controller and Chief Accounting Officer Page 13 EXHIBIT INDEX Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges Exhibit 27 - Financial Data Schedule for the period ended March 31, 1996 (required for electronic filing only)
EXHIBIT 12 HERSHEY FOODS CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (in thousands of dollars except for ratios) (Unaudited) For the Three Months Ended March 31, April 2, 1996 1995 Earnings: Income before income taxes $ 99,190 $101,393 Add (deduct): Interest on indebtedness 13,116 9,890 Portion of rents representative of the interest factor(a) 1,870 1,919 Amortization of debt expense 56 14 Amortization of capitalized interest 832 786 Earnings as adjusted $115,064 $114,002 Fixed Charges: Interest on indebtedness $ 13,116 $ 9,890 Portion of rents representative of the interest factor(a) 1,870 1,919 Amortization of debt expense 56 14 Capitalized interest 755 294 Total fixed charges $ 15,797 $ 12,117 Ratio of earnings to fixed charges 7.28 9.41 NOTE: (a) Portion of rents representative of the interest factor consists of one- third of rental expense for operating leases.