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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 September 29, 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 - 123,079,748 shares, as of October 28, 1996. Class B Common Stock, $1 par value - 30,478,908 shares, as of October 28, 1996. Exhibit Index - Page 14 Page 2 HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars except per share amounts) For the Three Months Ended September 29, October 1, 1996 1995 Net Sales $1,072,336 $981,101 Costs and Expenses: Cost of sales 613,974 572,443 Selling, marketing and administrative 287,526 261,710 Total costs and expenses 901,500 834,153 Income before Interest and Income Taxes 170,836 146,948 Interest expense, net 13,457 13,424 Income before Income Taxes 157,379 133,524 Provision for income taxes 63,109 51,397 Net Income $ 94,270 $ 82,127 Net Income per Share $ .61 $ .51 Cash Dividends Paid per Share of Common Stock $ .2000 $ .1800 Cash Dividends Paid per Share of Class B Common Stock $ .1800 $ .1625 The accompanying notes are an integral part of these statements. Page 3 HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands of dollars except per share amounts) For the Nine Months Ended September 29, October 1, 1996 1995 Net Sales $2,800,193 $2,570,816 Costs and Expenses: Cost of sales 1,633,520 1,499,567 Selling, marketing and administrative 805,273 750,975 Total costs and expenses 2,438,793 2,250,542 Income before Interest and Income Taxes 361,400 320,274 Interest expense, net 36,639 30,417 Income before Income Taxes 324,761 289,857 Provision for income taxes 130,229 113,774 Net Income $ 194,532 $ 176,083 Net Income per Share $ 1.26 $ 1.04 Cash Dividends Paid per Share of Common Stock $ .5600 $ .5050 Cash Dividends Paid per Share of Class B Common Stock $ .5050 $ .4575 The accompanying notes are an integral part of these statements. Page 4 HERSHEY FOODS CORPORATION CONSOLIDATED CONDENSED BALANCE SHEETS SEPTEMBER 29, 1996 AND DECEMBER 31, 1995 (in thousands of dollars) ASSETS 1996 1995 Current Assets: Cash and cash equivalents $ 59,964 $ 32,346 Accounts receivable - trade 384,245 326,024 Inventories 491,761 397,570 Deferred income taxes 78,270 84,785 Prepaid expenses and other 39,936 81,598 Total current assets 1,054,176 922,323 Property, Plant and Equipment, at cost 2,281,448 2,190,386 Less - accumulated depreciation and amortization (831,207) (754,377) Net property, plant and equipment 1,450,241 1,436,009 Intangibles Resulting from Business Acquisitions 421,485 428,714 Other Assets 40,814 43,577 Total assets $2,966,716 $2,830,623 LIABILITIES & STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 128,362 $ 127,067 Accrued liabilities 291,612 308,123 Accrued income taxes 29,194 15,514 Short-term debt 465,198 413,268 Current portion of long-term debt 16,609 383 Total current liabilities 930,975 864,355 Long-term Debt 338,752 357,034 Other Long-term Liabilities 343,589 333,814 Deferred Income Taxes 203,647 192,461 Total liabilities 1,816,963 1,747,664 Stockholders' Equity: Preferred Stock, shares issued: none in 1996 and 1995 - - Common Stock, shares issued: 149,471,964 in 1996 and 74,733,982 on a pre-split basis in 1995 149,471 74,734 Class B Common Stock, shares issued: 30,478,908 in 1996 and 15,241,454 on a pre-split basis in 1995 30,479 15,241 Additional paid-in capital 41,498 47,732 Cumulative foreign currency translation adjustments (26,016) (29,240) Unearned ESOP compensation (32,733) (35,128) Retained earnings 1,714,555 1,694,696 Treasury-Common Stock shares at cost: 26,369,316 in 1996 and 12,709,553 on a pre-split basis in 1995 (727,501) (685,076) Total stockholders' equity 1,149,753 1,082,959 Total liabilities and stockholders' equity $2,966,716 $2,830,623 The accompanying notes are an integral part of these balance sheets. Page 5 HERSHEY FOODS CORPORATION CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (in thousands of dollars) For the Nine Months Ended September 29, October 1, 1996 1995 Cash Flows Provided from Operating Activities $189,748 $182,453 Cash Flows Provided from (Used by) Investing Activities Capital additions (108,493) (114,263) Proceeds from divestiture 27,499 - Other, net 7,476 (258) Net Cash Flows Used by Investing Activities (73,518) (114,521) Cash Flows Provided from (Used by) Financing Activities Net increase in short-term debt 51,930 541,978 Long-term borrowings - 410 Repayment of long-term debt (1,984) (6,494) Cash dividends paid (84,698) (82,804) Exercise of stock options 17,733 12,087 Incentive plan transactions (35,850) (17,057) Repurchase of Common Stock (35,743) (515,516) Net Cash Flows Used by Financing Activities (88,612) (67,396) Increase in Cash and Cash Equivalents 27,618 536 Cash and Cash Equivalents, beginning of period 32,346 26,738 Cash and Cash Equivalents, end of period $ 59,964 $ 27,274 Interest Paid $ 36,261 $ 29,149 Income Taxes Paid $ 94,351 $ 74,078 The accompanying notes are an integral part of these statements. Page 6 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. 2. Interest expense, net consisted of the following: For the Nine Months Ended September 29, 1996 October 1, 1995 (in thousands of dollars) Interest expense $41,073 $33,857 Interest income (2,944) (2,090) Capitalized interest (1,490) (1,350) Interest expense, net $36,639 $30,417 3. In August 1996, the Board of Directors declared a two-for-one split of the Corporation's Common Stock and Class B Common Stock effective September 13, 1996 to stockholders of record August 23, 1996. The split was effected as a stock dividend by distributing one additional share for each share held. Unless otherwise indicated, all shares and per share information have been restated to reflect the stock split. 4. 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 third quarter and nine months ended September 29, 1996 were 153,712,298 and 154,209,159 respectively, and were 161,261,218 and 169,346,386 for the respective periods in 1995. There were no shares of Preferred Stock outstanding during the periods presented. A total of 8,797,770 shares of Common Stock have been repurchased under share repurchase programs which began in 1993. Of the total shares repurchased, 528,000 shares were retired and the remainder were held as Treasury Stock as of September 29, 1996. In addition, in August 1995, the Corporation purchased 18,099,546 shares (9,049,773 shares on a pre-split basis) of its Common Stock from Hershey Trust Company, as Trustee for the benefit of Milton Hershey School. A total of 26,369,316 shares were held as Treasury Stock as of September 29, 1996. 5. 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: September 29, 1996 December 31, 1995 (in thousands of dollars) Raw materials $207,641 $189,371 Goods in process 37,226 28,201 Finished goods 330,066 249,106 Inventories at FIFO 574,933 466,678 Adjustment to LIFO (83,172) (69,108) Total inventories $491,761 $397,570 Page 7 6. 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. The restructuring program was essentially complete as of June 30, 1996. 7. 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. 8. 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. 9. 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 nine-month period of 1995, the effect would not have been material. 10. 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. Page 8 11. The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair value as of September 29, 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 September 29, 1996 and December 31, 1995, based upon quoted market prices, as of those dates, for the same or similar debt issues. As of September 29, 1996, the Corporation had foreign exchange forward contracts maturing in 1996 and 1997 to purchase $23.8 million in foreign currency, primarily British sterling and German marks, and to sell $28.6 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 September 29, 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 September 29, 1996, the Corporation had agreements outstanding with an aggregate notional amount of $200.0 million with maturities through 1997. As of September 29, 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 during the period. The Corporation's risk related to swap agreements is limited to the cost of replacing such agreements at current market rates. 12. Reference is made to the Registrant's 1995 Annual Report on Form 10-K for more detailed financial statements and footnotes. Page 9 Management's Discussion and Analysis Results of Operations - Third Quarter 1996 vs. Third Quarter 1995 Consolidated net sales for the third quarter rose from $981.1 million in 1995 to $1,072.3 million in 1996, an increase of 9% from the prior year. The higher sales primarily reflected incremental sales from new confectionery and grocery products, confectionery selling price increases in the United States, increased sales volume for existing international and domestic confectionery brands and incremental sales from the acquisition of Henry Heide. These increases were offset somewhat by lower sales resulting from the divestiture of Hershey Canada Inc.'s Planters and Life Savers businesses in January 1996. The consolidated gross margin increased from 41.7% in 1995 to 42.7% in 1996. The increase was primarily the result of confectionery price increases, increased manufacturing efficiencies and improved profitability related to new product introductions and certain international businesses. These favorable variances were partially offset by higher costs for certain major raw materials, primarily cocoa beans and milk. Selling, marketing and administrative expenses increased by 10%, due to increased advertising and promotion expenses principally associated with the introduction of new products, offset somewhat by reduced spending for existing brands, and higher selling expenses related primarily to international sales volume increases. Net interest expense in the third quarter of 1996 was in line with the comparable period of 1995 as higher fixed interest expense was offset by reduced short-term interest expense. The higher fixed interest expense related to the issuance in October 1995 of $200 million of 6.7% Notes due 2005 (Notes). 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 third quarter effective income tax rate increased from 38.5% in 1995 to 40.1% in 1996. The lower rate in 1995 was due primarily to the tax benefit associated with the partial reversal of 1994 accrued restructuring reserves related to foreign entities and the 1995 restructuring charge for a voluntary retirement program recorded in the third quarter of last year. Results of Operations - First Nine Months 1996 vs. First Nine Months 1995 Consolidated net sales for the first nine months of 1996 increased by $229.4 million or 9% as a result of incremental sales from new confectionery and grocery products, confectionery selling price increases in the United States, increased confectionery sales volume primarily in various international markets, and incremental sales from the acquisition of Henry Heide. These increases were offset somewhat as a result of the divestitures of OZF Jamin in the second quarter of 1995 and Hershey Canada Inc.'s Planters and Life Savers businesses in January 1996. The consolidated gross margin remained at 41.7% in 1995 and 1996. Confectionery price increases, improved profitability associated with the introduction of new products and the favorable impact of Page 10 the OZF Jamin divestiture were offset by higher costs for certain major raw materials, primarily cocoa beans, milk, and durum semolina and increased manufacturing costs attributable to production start-up and manufacturing of new products, and adverse weather conditions in the first quarter. Selling, marketing and administrative expenses increased by 7%, primarily due to increased advertising and promotion expenses associated with the introduction of new products and higher selling expenses primarily related to international sales volume increases and new product introductions. Net interest expense was $6.2 million above prior year, primarily reflecting higher fixed interest expense resulting from the issuance of $200 million of Notes in October 1995. The effective income tax rate increased from 39.3% in 1995 to 40.1% in 1996. The lower rate in 1995 was due primarily to the tax benefit associated with the reversal of 1994 accrued restructuring reserves related to foreign entities and the 1995 restructuring charge for a voluntary retirement program in the third quarter of 1995. 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 nine months of 1996, the Corporation's cash and cash equivalents increased by $27.6 million. Cash provided from operations, the divestiture of Hershey Canada Inc.'s Planters and Life Savers businesses and short-term borrowings was sufficient to finance capital additions of $108.5 million, pay cash dividends of $84.7 million and fund share repurchases of $35.7 million. The ratio of current assets to current liabilities was 1.1:1 as of September 29, 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 42% as of September 29, 1996 and December 31, 1995. 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 September 29, 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. In addition, as of September 29, 1996 and October 1, 1995, the Corporation had lines of credit with domestic and international commercial banks in the amount of approximately $100 million and $1.0 billion, respectively, 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 September 29, 1996, $300 million of debt securities remained available for issuance under Page 11 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 September 29, 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 during the period. As of September 29, 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 $150 million to $225 million per annum during the next several years as a result of capacity expansion to support new products and line extensions and continued modernization of existing facilities. Subsequent Event In October 1996, the Corporation announced that it had reached preliminary agreements with Huhtamaki Oy, the international foods company based in Finland, to acquire Huhtamaki's Leaf North America confectionery operations for a purchase price of US $440 million plus a royalty for the license of Leaf's North American confectionery brands from Huhtamaki. Correspondingly, Huhtamaki will acquire the Corporation's European confectionery interests, the German praline manufacturer Gubor and the Italian sugar confectionery company Sperlari, for a purchase price of US $110 million. The transaction is expected to be completed by year-end, subject to approval by both companies' boards and by appropriate regulatory authorities. Page 12 Part II Items 1 through 5 have been omitted as not applicable. 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 nine months ended September 29, 1996 and October 1, 1995. Exhibit 27 - Financial Data Schedule for the period ended September 29, 1996 (required for electronic filing only). b) Reports on Form 8-K A report on Form 8-K was filed October 23, 1996, announcing that the Corporation had reached a preliminary agreement with Huhtamaki Oy, the international foods company based in Finland, to acquire its Leaf North America confectionery operations and to sell to Huhtamaki the Corporation's European confectionery operations. Page 13 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 November 6, 1996 /s/ William F. Christ William F. Christ Senior Vice President and Chief Financial Officer Date November 6, 1996 /s/ David W. Tacka David W. Tacka Corporate Controller and Chief Accounting Officer Page 14 EXHIBIT INDEX Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges Exhibit 27 - Financial Data Schedule for the period ended September 29, 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 Nine Months Ended September 29, October 1, 1996 1995 Earnings: Income before income taxes $324,761 $289,857 Add (deduct): Interest on indebtedness 39,583 32,507 Portion of rents representative of the interest factor(a) 6,454 6,223 Amortization of debt expense 175 41 Amortization of capitalized interest 2,491 2,369 Earnings as adjusted $373,464 $330,997 Fixed Charges: Interest on indebtedness $ 39,583 $ 32,507 Portion of rents representative of the interest factor(a) 6,454 6,223 Amortization of debt expense 175 41 Capitalized interest 1,490 1,350 Total fixed charges $ 47,702 $ 40,121 Ratio of earnings to fixed charges 7.83 8.25 NOTE: (a) Portion of rents representative of the interest factor consists of one- third of rental expense for operating leases.