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 JUNE 29, 1997
------------------------------------------------
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 - 122,308,819 shares, as of July 30, 1997. Class B
Common Stock, $1 par value - 30,470,908 shares, as of July 30, 1997.
Exhibit Index - Page 12
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
---------- ----------
NET SALES $ 905,729 $ 796,343
--------- ---------
COSTS AND EXPENSES:
Cost of sales 530,318 469,798
Selling, marketing and administrative 276,260 247,395
--------- ---------
Total costs and expenses 806,578 717,193
--------- ---------
INCOME BEFORE INTEREST AND INCOME TAXES 99,151 79,150
Interest expense, net 15,851 10,958
--------- ---------
INCOME BEFORE INCOME TAXES 83,300 68,192
Provision for income taxes 32,736 27,345
--------- ---------
NET INCOME $ 50,564 $ 40,847
========= =========
NET INCOME PER SHARE $ .33 $ .26
========= =========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .2000 $ .1800
========= =========
Class B Common Stock $ .1800 $ .1625
========= =========
AVERAGE SHARES OUTSTANDING 152,779 154,288
========= =========
The accompanying notes are an integral part of these statements.
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
----------- ----------
NET SALES $ 1,908,198 $ 1,727,857
----------- -----------
COSTS AND EXPENSES:
Cost of sales 1,119,600 1,019,546
Selling, marketing and administrative 560,264 517,747
----------- -----------
Total costs and expenses 1,679,864 1,537,293
----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 228,334 190,564
Interest expense, net 31,533 23,182
----------- -----------
INCOME BEFORE INCOME TAXES 196,801 167,382
Provision for income taxes 77,343 67,120
----------- -----------
NET INCOME $ 119,458 $ 100,262
=========== ===========
NET INCOME PER SHARE $ .78 $ .65
=========== ===========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .4000 $ .3600
=========== ===========
Class B Common Stock $ .3600 $ .3250
=========== ===========
AVERAGE SHARES OUTSTANDING 152,808 154,458
=========== ===========
The accompanying notes are an integral part of these statements.
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 29, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS OF DOLLARS)
ASSETS 1997 1996
----------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 26,439 $ 61,422
Accounts receivable - trade 214,030 294,606
Inventories 666,888 474,978
Deferred income taxes 97,386 94,464
Prepaid expenses and other 53,606 60,759
----------- -----------
Total current assets 1,058,349 986,229
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST 2,527,118 2,422,702
Less - accumulated depreciation and amortization (892,553) (820,807)
----------- -----------
Net property, plant and equipment 1,634,565 1,601,895
----------- -----------
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS 557,907 565,962
OTHER ASSETS 44,391 30,710
----------- -----------
Total assets $ 3,295,212 $ 3,184,796
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 145,272 $ 134,213
Accrued liabilities 381,359 357,828
Accrued income taxes --- 10,254
Short-term debt 295,073 299,469
Current portion of long-term debt 40,506 15,510
----------- -----------
Total current liabilities 862,210 817,274
LONG-TERM DEBT 629,842 655,289
OTHER LONG-TERM LIABILITIES 335,204 327,209
DEFERRED INCOME TAXES 263,560 224,003
----------- -----------
Total liabilities 2,090,816 2,023,775
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, shares issued:
none in 1997 and 1996 --- ---
Common Stock, shares issued:
149,479,964 in 1997 and 149,471,964 in 1996 149,480 149,472
Class B Common Stock, shares issued:
30,470,908 in 1997 and 30,478,908 in 1996 30,470 30,478
Additional paid-in capital 36,875 42,432
Cumulative foreign currency translation adjustments (34,783) (32,875)
Unearned ESOP compensation (30,338) (31,935)
Retained earnings 1,822,706 1,763,144
Treasury-Common Stock shares at cost:
27,180,826 in 1997 and 27,009,316 in 1996 (770,014) (759,695)
----------- -----------
Total stockholders' equity 1,204,396 1,161,021
----------- -----------
Total liabilities and stockholders' equity $ 3,295,212 $ 3,184,796
=========== ===========
The accompanying notes are an integral part of these balance sheets.
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
FOR THE SIX MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
----------- ---------
CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES
Net Income $ 119,458 $ 100,262
Adjustments to Reconcile Net Income to Net Cash
Provided from Operations:
Depreciation and amortization 76,397 65,820
Deferred income taxes 7,349 8,661
Changes in assets and liabilities, net of
effects from business
acquisitions and divestitures:
Accounts receivable - trade 78,322 142,614
Inventories (194,901) (145,632)
Accounts payable 11,307 (17,116)
Other assets and liabilities 27,294 (25,783)
Other, net 2,145 694
--------- ---------
Net Cash Flows Provided from Operating Activities 127,371 129,520
--------- ---------
CASH FLOWS PROVIDED FROM (USED BY) INVESTING ACTIVITIES
Capital additions (85,365) (70,240)
Proceeds from divestitures --- 27,472
Other, net 10,749 5,744
--------- ---------
Net Cash Flows (Used by) Investing Activities (74,616) (37,024)
---------- ---------
CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES
Net (decrease) increase in short-term debt (154,396) 15,123
Long-term borrowings 150,000 ---
Repayment of long-term debt (93) (1,426)
Cash dividends paid (59,897) (54,557)
Exercise of stock options 8,879 10,767
Incentive plan transactions (24,577) (21,688)
Repurchase of Common Stock (7,654) (24,833)
---------- ---------
Net Cash Flows (Used by) Financing Activities (87,738) (76,614)
---------- ---------
Increase (decrease) in Cash and Cash Equivalents (34,983) 15,882
Cash and Cash Equivalents, beginning of period 61,422 32,346
--------- ---------
Cash and Cash Equivalents, end of period $ 26,439 $ 48,228
========= =========
-------------------------------------------------------------------
Interest Paid $ 29,109 $ 25,033
========= =========
Income Taxes Paid $ 84,050 $ 71,035
========= =========
The accompanying notes are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Corporation and its subsidiaries after elimination of
intercompany accounts and transactions. These statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and year-to-date
period ended June 29, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. For
more information, refer to the consolidated financial statements and
footnotes included in the Corporation's 1996 Annual Report on Form 10-K.
2. INTEREST EXPENSE
Interest expense, net consisted of the following:
FOR THE SIX MONTHS ENDED
------------------------
JUNE 29, 1997 JUNE 30, 1996
------------- -------------
(IN THOUSANDS OF DOLLARS)
Interest expense $ 33,619 $ 26,807
Interest income (1,644) (2,155)
Capitalized interest (442) (1,470)
-------- --------
Interest expense, net $ 31,533 $ 23,182
======== ========
3. STOCK SPLIT
In August 1996, the Corporation's Board of Directors declared a
two-for-one split of the 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. NET INCOME PER SHARE
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 each period. A total of 171,510 shares of Common Stock was
repurchased during the first six months of 1997 under the share
repurchase program begun in 1996. A total of 27,180,826 shares were held
as Treasury Stock as of June 29, 1997.
5. INVENTORIES
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:
JUNE 29, 1997 DECEMBER 31, 1996
------------- -----------------
(IN THOUSANDS OF DOLLARS)
Raw materials $ 314,867 $ 204,419
Goods in process 40,270 31,444
Finished goods 409,248 316,726
--------- ---------
Inventories at FIFO 764,385 552,589
Adjustment to LIFO (97,497) (77,611)
--------- -------
Total inventories $ 666,888 $ 474,978
========= =========
6. ACQUISITIONS AND DIVESTITURES
In January 1996, the Corporation completed the sale of the assets of
Hershey Canada Inc.'s PLANTERS nut and LIFE SAVERS and BREATH SAVERS
hard candy, and BEECH-NUT cough drops businesses to Johnvince Foods
group and Beta Brands Inc., respectively.
In December 1996, the Corporation acquired from an affiliate of
Huhtamaki Oy (Huhtamaki), Huhtamaki's Leaf North America (Leaf)
confectionery operations and sold to Huhtamaki the outstanding shares of
Gubor Holding GmbH (Gubor) and Sperlari, S.r.l. (Sperlari). For further
information, refer to the Corporation's 1996 Annual Report on Form 10-K.
7. LONG-TERM DEBT
In March 1997, the Corporation issued $150 million of 6.95% Notes due
2007 (Notes) under the November 1993 Form S-3 Registration Statement.
Proceeds from the debt issuance were used to repay a portion of the
commercial paper borrowings associated with the Leaf acquisition. As of
June 29, 1997 and December 31, 1996, $150.0 million and $300.0 million,
respectively, of commercial paper borrowings were reclassified as
long-term debt in accordance with the Corporation's intent and ability
to refinance such obligations on a long-term basis.
8. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt
approximated fair value as of June 29, 1997, 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
June 29, 1997, based upon quoted market prices, as of those dates, for
the same or similar debt issues.
As of June 29, 1997, the Corporation had foreign exchange forward
contracts maturing in 1997 and 1998 to purchase $18.5 million in foreign
currency, primarily British sterling, Swiss francs and German marks, and
to sell $20.9 million in foreign currency, primarily Japanese yen and
Canadian dollars, at contracted forward rates.
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. As of June 29, 1997, the fair value
of foreign exchange forward 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, from time to time, enters into interest rate
swap agreements to effectively convert a portion of its floating rate
debt to fixed rate debt. As of June 29, 1997 and June 30, 1996, the
Corporation had agreements outstanding with an aggregate notional amount
of $250.0 million and $200.0 million with maturities through 1999 and
1997, respectively. As of June 29, 1997 and June 30, 1996, interest
rates payable were at weighted average fixed rates of 6.1% and 5.6%,
respectively, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS - SECOND QUARTER 1997 VS. SECOND QUARTER 1996
- -------------------------------------------------------------------
Consolidated net sales for the second quarter rose from $796.3 million in 1996
to $905.7 million in 1997, an increase of 14% from the prior year. The higher
sales primarily reflected incremental sales from the Leaf acquisition, increased
sales of existing domestic confectionery brands and the introduction of new
confectionery products. These increases were offset somewhat by lower sales
resulting from the divestitures of the Gubor and Sperlari businesses in December
1996.
The consolidated gross margin increased from 41.0% in 1996 to 41.4% in 1997. The
increase reflected lower costs for certain major raw materials, particularly
flour and milk, and increased manufacturing efficiencies. These favorable
effects were partially offset by the lower margin associated with the Leaf
business. Selling, marketing and administrative expenses increased by 12%, as a
result of incremental expenses associated with the acquired Leaf operations and
increased marketing expenses associated with the introduction of new products.
These higher expenses were offset somewhat by decreases related to the
divestiture of Gubor and Sperlari.
Net interest expense in the second quarter of 1997 was $4.9 million above the
comparable period of 1996 primarily as a result of increased borrowings
associated with the Leaf acquisition.
The second quarter effective income tax rate decreased from 40.1% in 1996 to
39.3% in 1997 primarily due to changes in the geographic mix of the
Corporation's income.
RESULTS OF OPERATIONS - FIRST SIX MONTHS 1997 VS. FIRST SIX MONTHS 1996
- -----------------------------------------------------------------------
Consolidated net sales for the first six months of 1997 increased by $180.3
million or 10% primarily as a result of the incremental sales from the Leaf
acquisition, the introduction of new confectionery products and increased sales
of core confectionery items. These increases were offset somewhat by lower sales
resulting from the divestiture of the Gubor and Sperlari businesses and a
decline in sales of pasta and grocery products.
The consolidated gross margin increased from 41.0% in 1996 to 41.3% in 1997. The
increase was primarily the result of lower costs for certain major raw
materials, primarily flour and milk. The impact of raw material cost decreases
was partially offset by the lower margin associated with the Leaf business.
Selling, marketing and administrative expenses increased by 8%, as a result of
incremental expenses associated with the Leaf business and increased marketing
expenses associated with the introduction of new products, partially offset by
decreases resulting from the Gubor and Sperlari divestitures.
Net interest expense was $8.4 million above prior year, primarily as a result of
increased borrowings associated with the Leaf acquisition and higher short-term
borrowing rates.
The effective income tax rate decreased from 40.1% in 1996 to 39.3% in 1997
primarily due to changes in the geographic mix of the Corporation's income.
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 six months of 1997, the Corporation's cash and cash
equivalents decreased by $35.0 million. Cash and cash equivalents on hand at the
beginning of the period and cash provided from operations and long-term
borrowings was sufficient to repay $154.4 million of short-term borrowings,
finance capital additions of $85.4 million and pay cash dividends of $59.9
million.
The ratio of current assets to current liabilities was 1.2:1 as of June 29, 1997
and December 31, 1996. 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 44% as of June 29, 1997, and 46% as of December 31, 1996.
As of June 29, 1997, the Corporation maintained committed credit facility
agreements with a syndicate of banks in the amount of $600 million which could
be borrowed directly or used to support the issuance of commercial paper. The
Corporation has options to increase the credit facility by $1.0 billion with the
concurrence of the banks. As of June 29, 1997, and June 30, 1996, the
Corporation also had lines of credit with domestic and international commercial
banks in the amount of approximately $20 million and $100 million, respectively.
In March 1997, the Corporation issued $150 million of Notes under a November
1993 Registration Statement. As of June 29, 1997, $150 million of debt
securities remained available for issuance under the Registration Statement.
Proceeds from any offering of the $150 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.
As of June 29, 1997, the Corporation's principal capital commitments included
manufacturing capacity expansion and modernization. The Corporation anticipates
that capital expenditures will be in the range of $175 million to $225 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.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
- -----------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standards No. 128, Earnings Per share (FAS 128). FAS 128
specifies the computation, presentation, and disclosure requirements for
earnings per share and is effective for periods ending after December 15, 1997.
Adoption of this accounting standard is not expected to have a material effect
on the earnings per share computations of the Corporation.
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 six months ended June 29, 1997 and June 30, 1996.
Exhibit 27 - Financial Data Schedule for the period ended June 29, 1997
(required for electronic filing only).
b) REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K were filed during the three-month period ended
June 29, 1997.
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 AUGUST 4, 1997 /S/ WILLIAM F. CHRIST
-------------- -----------------------------
William F. Christ
Senior Vice President,
Chief Financial Officer
and Treasurer
Date AUGUST 4, 1997 /S/ DAVID W. TACKA
-------------- ----------------------------
David W. Tacka
Corporate Controller and
Chief Accounting Officer
EXHIBIT INDEX
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 - Financial Data Schedule for the period
ended June 29, 1997 (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 SIX MONTHS ENDED
JUNE 29, JUNE 30,
1997 1996
----------- -------
EARNINGS:
Income before income taxes $ 196,801 $ 167,382
Add (deduct):
Interest on indebtedness 33,176 25,337
Portion of rents representative of the
interest factor (a) 5,972 4,161
Amortization of debt expense 152 116
Amortization of capitalized interest 1,757 1,664
---------- ----------
Earnings as adjusted $ 237,858 $ 198,660
========== ==========
FIXED CHARGES:
Interest on indebtedness $ 33,176 $ 25,337
Portion of rents representative of the
interest factor (a) 5,972 4,161
Amortization of debt expense 152 116
Capitalized interest 442 1,470
---------- ----------
Total fixed charges $ 39,742 $ 31,084
========== ==========
RATIO OF EARNINGS TO FIXED CHARGES 5.99 6.39
========== ==========
NOTE:
(a) Portion of rents representative of the interest factor consists of one-third of rental
expense for operating leases.
5
1,000
6-MOS
DEC-31-1997
JUN-29-1997
26,439
0
214,030
0
666,888
1,058,349
2,527,118
892,553
3,295,212
862,210
629,842
0
0
179,950
1,024,446
3,295,212
1,908,198
1,908,198
1,119,600
1,679,864
0
0
31,533
196,801
77,343
119,458
0
0
0
119,458
.78
0
BALANCE IS NET OF RESERVES FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS.
