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 October 4, 1998
-------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-183
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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
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(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 - 112,701,727 shares, as of November 2, 1998. Class B
Common Stock, $1 par value - 30,447,908 shares, as of November 2, 1998.
Exhibit Index - Page 19
1
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
For the Three Months Ended
--------------------------
October 4, September 28,
1998 1997
----------- -----------
Net Sales $ 1,217,237 $ 1,151,610
----------- -----------
Costs and Expenses:
Cost of sales 706,605 672,604
Selling, marketing and administrative 311,658 292,593
----------- -----------
Total costs and expenses 1,018,263 965,197
----------- -----------
Income before Interest and Income Taxes 198,974 186,413
Interest expense, net 22,691 20,558
----------- -----------
Income before Income Taxes 176,283 165,855
Provision for income taxes 68,750 65,182
----------- -----------
Net Income $ 107,533 $ 100,673
=========== ===========
Net Income Per Share - Basic $ .75 $ .68
=========== ===========
Net Income Per Share - Diluted $ .74 $ .67
=========== ===========
Average Shares Outstanding - Basic 143,438 147,454
=========== ===========
Average Shares Outstanding - Diluted 145,434 149,416
=========== ===========
Cash Dividends Paid per Share:
Common Stock $ .2400 $ .2200
=========== ===========
Class B Common Stock $ .2175 $ .2000
=========== ===========
The accompanying notes are an integral part of these statements.
2
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
For the Nine Months Ended
-------------------------
October 4, September 28,
1998 1997
----------- -----------
Net Sales $ 3,195,712 $ 3,059,808
----------- -----------
Costs and Expenses:
Cost of sales 1,881,660 1,792,204
Selling, marketing and administrative 869,337 852,857
----------- -----------
Total costs and expenses 2,750,997 2,645,061
----------- -----------
Income before Interest and Income Taxes 444,715 414,747
Interest expense, net 66,141 52,091
----------- -----------
Income before Income Taxes 378,574 362,656
Provision for income taxes 147,643 142,525
----------- -----------
Net Income $ 230,931 $ 220,131
=========== ===========
Net Income Per Share - Basic $ 1.61 $ 1.46
=========== ===========
Net Income Per Share - Diluted $ 1.59 $ 1.44
=========== ===========
Average Shares Outstanding - Basic 143,440 151,230
=========== ===========
Average Shares Outstanding - Diluted 145,564 153,063
=========== ===========
Cash Dividends Paid per Share:
Common Stock $ .6800 $ .6200
=========== ===========
Class B Common Stock $ .6175 $ .5600
=========== ===========
The accompanying notes are an integral part of these statements.
3
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
OCTOBER 4, 1998 AND DECEMBER 31, 1997
(in thousands of dollars)
ASSETS 1998 1997
----------- -----------
Current Assets:
Cash and cash equivalents $ 40,163 $ 54,237
Accounts receivable - trade 433,995 360,831
Inventories 572,944 505,525
Deferred income taxes 87,796 84,024
Prepaid expenses and other 77,578 30,197
----------- -----------
Total current assets 1,212,476 1,034,814
----------- -----------
Property, Plant and Equipment, at cost 2,665,537 2,587,230
Less - accumulated depreciation and amortization (1,019,574) (938,993)
----------- -----------
Net property, plant and equipment 1,645,963 1,648,237
----------- -----------
Intangibles Resulting from Business Acquisitions 534,074 551,849
Other Assets 82,636 56,336
----------- -----------
Total assets $ 3,475,149 $ 3,291,236
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 134,295 $ 146,932
Accrued liabilities 288,581 371,545
Accrued income taxes 95,395 19,692
Short-term debt 328,843 232,451
Current portion of long-term debt 111 25,095
----------- -----------
Total current liabilities 847,225 795,715
Long-term Debt 1,029,117 1,029,136
Other Long-term Liabilities 357,296 346,500
Deferred Income Taxes 274,471 267,079
----------- -----------
Total liabilities 2,508,109 2,438,430
----------- -----------
Stockholders' Equity:
Preferred Stock, shares issued:
none in 1998 and 1997 --- ---
Common Stock, shares issued:
149,502,964 in 1998 and 149,484,964 in 1997 149,503 149,485
Class B Common Stock, shares issued:
30,447,908 in 1998 and 30,465,908 in 1997 30,447 30,465
Additional paid-in capital 29,037 33,852
Unearned ESOP compensation (26,346) (28,741)
Retained earnings 2,113,395 1,977,849
Treasury-Common Stock shares at cost:
36,841,187 in 1998 and 37,018,566 in 1997 (1,266,021) (1,267,861)
Accumulated other comprehensive income (62,975) (42,243)
----------- -----------
Total stockholders' equity 967,040 852,806
----------- -----------
Total liabilities and stockholders' equity $ 3,475,149 $ 3,291,236
=========== ===========
The accompanying notes are an integral part of these balance sheets.
4
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Nine Months Ended
-------------------------
October 4, September 28,
1998 1997
---------- ------------
Cash Flows Provided from (Used by) Operating Activities
Net Income $ 230,931 $ 220,131
Adjustments to Reconcile Net Income to Net Cash
Provided from Operations:
Depreciation and amortization 116,544 114,173
Deferred income taxes 3,620 13,419
Changes in assets and liabilities, net of effects
from business acquisitions and divestitures:
Accounts receivable - trade (73,164) (144,638)
Inventories (67,419) (133,530)
Accounts payable (12,637) (1,418)
Other assets and liabilities (30,163) 85,671
Other, net 48 2,293
--------- ---------
Net Cash Flows Provided from Operating Activities 167,760 156,101
--------- ---------
Cash Flows Provided from (Used by) Investing Activities
Capital additions (117,511) (133,821)
Capitalized software additions (29,709) (17,321)
Other, net 5,858 12,785
--------- ---------
Net Cash Flows (Used by) Investing Activities (141,362) (138,357)
--------- ---------
Cash Flows Provided from (Used by) Financing Activities
Net increase in short-term debt 96,392 72,481
Long-term borrowings --- 550,000
Repayment of long-term debt (25,139) (15,540)
Cash dividends paid (95,385) (90,718)
Exercise of stock options 15,992 10,614
Incentive plan transactions (22,458) (27,394)
Repurchase of Common Stock (9,874) (507,654)
--------- ---------
Net Cash Flows (Used by) Financing Activities (40,472) (8,211)
--------- ---------
(Decrease) Increase in Cash and Cash Equivalents (14,074) 9,533
Cash and Cash Equivalents, beginning of period 54,237 61,422
--------- ---------
Cash and Cash Equivalents, end of period $ 40,163 $ 70,955
========= =========
------------------------------------------------------------------
Interest Paid $ 80,700 $ 45,183
========= =========
Income Taxes Paid $ 57,743 $ 114,089
========= =========
The accompanying notes are an integral part of these statements.
5
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Class B Additional Unearned Treasury Other Total
Preferred Common Common Paid-in ESOP Retained Common Comprehensive Stockholders'
Stock Stock Stock Capital Compensation Earnings Stock Income Equity
- ------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars
Balance as of
December 31, 1997 $--- $149,485 $30,465 $33,852 $(28,741) $1,977,849 $(1,267,861) $(42,243) $852,806
--------
Comprehensive income
Net income 75,433 75,433
Other comprehensive
income:
Foreign currency
translation
adjustments (575) (575)
--------
Comprehensive income 74,858
--------
Dividends:
Common Stock, $.22
per share (24,769) (24,769)
Class B Common Stock,
$.20 per share (6,091) (6,091)
Conversion of Class B
Common Stock
into Common Stock 12 (12) ---
Incentive plan
transactions (1,033) (1,033)
Exercise of stock
options (5,902) 14,265 8,363
Employee stock
ownership trust
transactions 129 798 927
---- ------- ------ ------ ------ --------- --------- ------ -------
Balance as of
April 5, 1998 --- 149,497 30,453 27,046 (27,943) 2,022,422 (1,253,596) (42,818) 905,061
--------
Comprehensive income
Net income 47,965 47,965
Other comprehensive
income:
Foreign currency
translation
adjustments (7,216) (7,216)
------
Comprehensive income 40,749
------
Dividends:
Common Stock, $.22
per share (24,789) (24,789)
Class B Common Stock,
$.20 per share (6,091) (6,091)
Exercise of stock
options 1,250 (5,545) (4,295)
Employee stock
ownership trust
transactions 125 799 924
---- -------- ----- ------ ------ -------- -------- ------ -------
Balance as of
July 5, 1998 --- 149,497 30,453 28,421 (27,144) 2,039,507 (1,259,141) (50,034) 911,559
--------
Comprehensive income
Net income 107,533 107,533
Other comprehensive
income:
Foreign currency
translation
adjustments (12,941) (12,941)
-------
Comprehensive income 94,592
------
Dividends:
Common Stock, $.24
per share (27,021) (27,021)
Class B Common Stock,
$.2175 per share (6,624) (6,624)
Conversion of Class B
Common Stock
into Common Stock 6 (6) ---
Exercise of stock
options 495 2,994 3,489
Employee stock
ownership trust
transactions 121 798 919
Repurchase of
Common Stock (9,874) (9,874)
---- -------- ------- ------- -------- ---------- ---------- -------- --------
Balance as of
October 4, 1998 $--- $149,503 $30,447 $29,037 $(26,346) $2,113,395 $(1,266,021) $(62,975) $967,040
==== ======== ======= ======= ======== ========== =========== ======== ========
The accompanying notes are an integral part of these statements.
6
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. Certain reclassifications have been made to prior year
amounts to conform to the 1998 presentation. Operating results for the
three months and year-to-date ended October 4, 1998, are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1998. For more information, refer to the consolidated
financial statements and footnotes included in the Corporation's 1997
Annual Report on Form 10-K.
2. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FAS No. 130). Under FAS No. 130, standards are
established for reporting and display of comprehensive income and its
components in financial statements. Comprehensive income is reported
in the Consolidated Statements of Stockholder's Equity. Other
comprehensive income represents foreign currency translation
adjustments.
3. INTEREST EXPENSE
Interest expense, net consisted of the following:
For the Nine Months Ended
-------------------------
October 4, 1998 September 28, 1997
--------------- ------------------
(in thousands of dollars)
Interest expense $ 70,238 $ 55,809
Interest income (2,302) (2,262)
Capitalized interest (1,795) (1,456)
-------- --------
Interest expense, net $ 66,141 $ 52,091
======== ========
7
4. NET INCOME PER SHARE
A total of 36,841,187 shares were held as Treasury Stock as of October
4, 1998.
In accordance with Financial Accounting Standards No. 128 "Earnings Per
Share", Basic and Diluted Earnings per Share are computed based on the
weighted average number of shares of the Common Stock and the Class B
Stock outstanding as follows:
For the Three Months Ended Income Shares Per-Share
October 4, 1998 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------
In thousands of dollars except shares
and per share amounts
Net Income per Share - Basic
- ----------------------------
Net income $ 107,533 143,438,495 $.75
====
Effect of Dilutive Securities
- -----------------------------
Stock options - 1,900,602
Performance stock units - 87,958
Restricted stock units - 7,397
---------- -------------
Net Income per Share - Diluted
- ------------------------------
Net income and assumed conversions $ 107,533 145,434,452 $.74
========== ============= ====
For the Three Months Ended Income Shares Per-Share
September 28, 1997 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------
In thousands of dollars except shares
and per share amounts
Net Income per Share - Basic
- ----------------------------
Net income $ 100,673 147,454,003 $.68
====
Effect of Dilutive Securities
- -----------------------------
Stock options - 1,842,340
Performance stock units - 114,829
Restricted stock units - 4,532
---------- -------------
Net Income per Share - Diluted
- ------------------------------
Net income and assumed conversions $ 100,673 149,415,704 $.67
========== ============= ====
8
For the Nine Months Ended Income Shares Per-Share
October 4, 1998 (Numerator) (Denominator) Amount
- -------------------------------------------------------------------------------------------
In thousands of dollars except shares
and per share amounts
Net Income per Share - Basic
- ----------------------------
Net income $ 230,931 143,440,288 $1.61
=====
Effect of Dilutive Securities
- -----------------------------
Stock options - 2,028,319
Performance stock units - 88,219
Restricted stock units - 7,419
---------- -------------
Net Income per Share - Diluted
- ------------------------------
Net income and assumed conversions $ 230,931 145,564,245 $1.59
========== ============= =====
For the Nine Months Ended Income Shares Per-Share
September 28, 1997 (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------
In thousands of dollars except shares
and per share amounts
Net Income per Share - Basic
- ----------------------------
Net income $ 220,131 151,230,300 $1.46
=====
Effect of Dilutive Securities
- -----------------------------
Stock options - 1,714,359
Performance stock units - 114,095
Restricted stock units - 4,303
---------- -------------
Net Income per Share - Diluted
Net income and assumed conversions $ 220,131 153,063,057 $1.44
========== ============= =====
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:
October 4, 1998 December 31, 1997
--------------- -----------------
(in thousands of dollars)
Raw materials $ 203,803 $ 223,702
Goods in process 40,765 36,015
Finished goods 435,123 334,639
--------- ---------
Inventories at FIFO 679,691 594,356
Adjustment to LIFO (106,747) (88,831)
--------- ---------
Total inventories $ 572,944 $ 505,525
========= =========
9
6. LONG-TERM DEBT
In March 1997, the Corporation issued $150 million of 6.95% Notes due
2007 (6.95% 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 acquisition of
the Leaf North America confectionery operations (Leaf) in December 1996.
In August 1997, the Corporation filed another Form S-3 Registration
Statement under which it could offer, on a delayed or continuous basis,
up to $500 million of additional debt securities. Also in August 1997,
the Corporation issued $150 million of 6.95% Notes due 2012 (Notes) and
$250 million of 7.2% Debentures due 2027 (Debentures) under the November
1993 and August 1997 Registration Statements. Proceeds from the debt
issuance were used to repay short-term borrowings associated with the
purchase of Common Stock from the Hershey Trust Company, as Trustee for
the benefit of Milton Hershey School (Milton Hershey School Trust). As
of October 4, 1998, $250 million of debt securities remained available
for issuance under the August 1997 Registration Statement. As of October
4, 1998 and December 31, 1997, $150.0 million 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.
7. FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt,
including $150.0 million of commercial paper borrowings reclassified as
long-term debt, approximated fair value as of October 4, 1998 and
December 31, 1997, because of the relatively short maturity of these
instruments. The carrying value of long-term debt, including the current
portion, was $879.1 million as of October 4, 1998, compared to a fair
value of $999.0 million, based on quoted market prices for the same or
similar debt issues.
As of October 4, 1998, the Corporation had foreign exchange forward
contracts maturing in 1998 and 1999 to purchase $23.3 million in foreign
currency, primarily British sterling and Dutch gilders, and to sell
$11.1 million in foreign currency, primarily Japanese yen and Canadian
dollars, at contracted forward rates.
To hedge foreign currency exposure related to anticipated transactions
associated with the purchase of certain raw materials and finished
goods, generally covering 3 to 24 months, the Corporation, from time to
time, also purchases foreign exchange options which permit, but do not
require, the Corporation to exchange foreign currencies at a future date
with another party at a contracted exchange rate. As of December 31,
1997, the Corporation had purchased foreign exchange options of $3.6
million, related to Swiss francs. These options matured in early 1998
and no foreign exchange options were outstanding as of October 4, 1998.
10
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 October 4, 1998, the fair
value of foreign exchange forward contracts approximated the contract
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 October 4, 1998, the Corporation had
agreements outstanding with an aggregate notional amount of $75.0
million, with maturities through 1999. As of October 4, 1998, interest
rates payable were at a weighted average fixed rate of 6.3%, and the
interest rate receivable was floating based on the 30-day commercial
paper composite rate which was 5.6% as of October 4, 1998. Any interest
rate differential on interest rate swaps is recognized as an adjustment
to interest expense over the term of each agreement. As of October 4,
1998, the fair value of interest rate swap agreements approximated the
contract value. The Corporation's risk related to swap agreements is
limited to the cost of replacing such agreements at prevailing market
rates.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS No. 133). FAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. FAS No. 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
FAS No. 133 is effective for fiscal years beginning after June 15, 1999,
but may be implemented as of the beginning of any fiscal quarter after
issuance. Retroactive application is not permitted. FAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997. Changes in accounting
methods will be required for derivative instruments utilized by the
Corporation to hedge commodity price, foreign currency exchange rate and
interest rate risks. Such derivatives include, but are not limited to,
commodity futures and options contracts, foreign exchange forward and
options contracts and interest rate swaps.
The Corporation anticipates the adoption of FAS No. 133 as of January 1,
2000, and is presently analyzing methods for implementing and complying
with this complex pronouncement. As of October 4, 1998, the Corporation
had not quantified the impact of adopting FAS No. 133. However, the
implementation of FAS No. 133 could increase volatility in earnings and
other comprehensive income.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS - THIRD QUARTER 1998 VS. THIRD QUARTER 1997
- -----------------------------------------------------------------
Consolidated net sales for the third quarter increased from $1,151.6 million in
1997 to $1,217.2 million in 1998, an increase of 6% from the prior year. The
higher sales primarily reflected incremental sales from the introduction of new
confectionery products and higher sales of core confectionery and grocery
products. These increases were offset somewhat by the impact of currency
exchange rates in the Canadian and Mexican markets, lower sales of core pasta
products and sales declines in international markets, particularly Asia.
The consolidated gross margin increased from 41.6% in 1997 to 42.0% in 1998. The
increase was primarily due to manufacturing efficiencies and the impact of
reduced costs associated with aged and obsolete inventories of seasonal products
and products sold in conjunction with special theme promotions. These increases
were partially offset by higher costs for certain major raw materials, primarily
milk and cocoa. Selling, marketing and administrative expenses increased by 7%,
primarily reflecting higher marketing expenses for existing products and
increased spending associated with the introduction of new products.
Net interest expense in the third quarter of 1998 was $2.1 million above the
comparable period of 1997 primarily as a result of increased borrowings
associated with the purchase of Common Stock from the Milton Hershey School
Trust, offset somewhat by lower interest expense reflecting reduced average
short-term borrowings.
The third quarter effective income tax rate decreased from 39.3% in 1997 to
39.0% in 1998 primarily as a result of changes in the mix of the Corporation's
income among various tax jurisdictions.
RESULTS OF OPERATIONS - FIRST NINE MONTHS 1998 VS. FIRST NINE MONTHS 1997
- -------------------------------------------------------------------------
Consolidated net sales for the first nine months of 1998 increased by $135.9
million or 4% primarily as a result of incremental sales from the introduction
of new confectionery products and increased sales of core confectionery and
grocery products. These increases were offset somewhat by a decline in sales in
the Corporation's Asian and Russian markets and the impact of currency exchange
rates in the Canadian and Mexican markets.
The consolidated gross margin decreased from 41.4% in 1997 to 41.1% in 1998. The
decrease was primarily due to lower profitability resulting from higher costs
for certain major raw materials, primarily milk and cocoa, labor and overhead,
in addition to the mix of non-chocolate and chocolate confectionery items sold
in 1998 compared to 1997. These cost increases were partially offset by improved
manufacturing efficiencies associated primarily with production of the acquired
Leaf brands and lower costs for packaging and certain minor raw materials.
Selling, marketing and administrative expenses were 2% higher than 1997, as
higher marketing expenses associated with the introduction of new products were
partially offset by reduced marketing expenses for existing brands and lower
selling expenses in international markets.
12
Net interest expense was $14.1 million above prior year, primarily as a result
of increased borrowings associated with the purchase of Common Stock from the
Milton Hershey School Trust, partially offset by lower interest expense
reflecting reduced average short-term borrowings.
The effective income tax rate decreased from 39.3% in 1997 to 39.0% in 1998
primarily due to changes in the mix of the Corporation's income among various
tax jurisdictions.
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 1998, the Corporation's cash and cash
equivalents decreased by $14.1 million. Cash and cash equivalents on hand at the
beginning of the period, cash provided from operations and short-term borrowings
were sufficient to finance capital and capitalized software additions of $147.2
million, pay cash dividends of $95.4 million and to repay $25.1 million of
long-term debt.
The ratio of current assets to current liabilities was 1.4:1 as of October 4,
1998, and 1.3:1 as of December 31, 1997. 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 58% as of October 4, 1998, and 60% as of
December 31, 1997.
As of October 4, 1998, the Corporation maintained a committed credit facility
agreement 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 the option to increase the credit facility by $1.0 billion with
the concurrence of the banks. The Corporation also had lines of credit with
domestic and international commercial banks in the amount of approximately $20
million as of October 4, 1998 and December 31, 1997.
In March 1997, the Corporation issued $150 million of 6.95% Notes under a
November 1993 Registration Statement. In August 1997, the Corporation issued
$150 million of Notes and $250 million of Debentures under the November 1993 and
August 1997 Registration Statements. As of October 4, 1998, $250 million of debt
securities remained available for issuance under the August 1997 Registration
Statement. Proceeds from any offering of the $250 million of debt securities
available under the shelf registration may be used for general corporate
requirements, which include reducing existing commercial paper borrowings,
financing capital additions, and funding future business acquisitions and
working capital requirements.
As of October 4, 1998, the Corporation's principal capital commitments included
manufacturing capacity expansion and modernization. The Corporation anticipates
that capital expenditures will be in the range of $165 million to $200 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.
13
The potential loss in fair value of foreign exchange forward contracts and
interest rate swaps resulting from a hypothetical near-term adverse change in
market rates of ten percent was not material as of October 4, 1998. 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
declined from $9.6 million as of December 31, 1997, to $7.6 million as of
October 4, 1998. Market risk represents 10% of the estimated average fair value
of net commodity positions at four dates prior to the end of each period. The
decrease in average market risk was primarily related to changes in the excess
of futures contracts held over unpriced physical forward contracts in 1998
compared to 1997.
YEAR 2000 ISSUES
- ----------------
Year 2000 issues associated with information systems relate to the way dates are
recorded and computed in many computer systems. These year 2000 issues could
have an impact upon the Corporation's information technology (IT) and non-IT
systems. Non-IT systems include embedded technology such as microcontrollers
which are integral to the operation of most machinery and equipment.
Additionally, year 2000 issues could have a similar impact on the Corporation's
major business partners, including both customers and suppliers. While it is not
currently possible to estimate the total impact of a failure of either the
Corporation or its major business partners or suppliers to complete their year
2000 remediation in a timely manner, the Corporation has determined that it
could suffer significant adverse financial consequences as a result of such
failure.
Awareness of year 2000 issues regarding major business applications software and
other significant IT systems began in 1990. A formal program to assess and
address year 2000 issues associated with IT systems was established in late
1995. The Corporation expects that remediation of these systems will be
essentially completed by the third quarter of 1999. In early 1998, a team was
established with representatives from all major functional areas of the
Corporation which assumed overall responsibility for ensuring that remediation
of both IT and non-IT systems will be completed in time to prevent material
adverse consequences to the Corporation's business, operations or financial
condition.
In late 1996, the Corporation approved a project to implement an enterprise-wide
integrated information system to improve process efficiencies in all of the
major functional areas of the Corporation which is expected to enable the
Corporation to provide better service to its customers. This system will replace
most of the transaction systems and applications supporting operations of the
Corporation. The system is year 2000 compliant and will address year 2000 issues
for approximately 80% of the Corporation's business applications software. As of
October 4, 1998, configuration of this system was approximately 60% complete,
with full implementation expected by the third quarter of 1999. Total
commitments for this system are expected to be in the range of $80 million to
$90 million which will be financed with cash provided from operations and
short-term borrowings. As of October 4, 1998, approximately $48.8 million of
capitalized software and hardware and $5.5 million of expenses have been
incurred for this project.
14
The Corporation's mainframe, network and desktop hardware and software have
recently been upgraded and are substantially year 2000 compliant. The
Corporation is in the process of remediating year 2000 compliance issues
associated with legacy information systems not being replaced by the integrated
information system project, including process, automation and factory management
systems, as well as non-IT systems. As of October 4, 1998, remediation of IT
systems was approximately 75% complete and approximately 85% of non-IT systems
were determined to be year 2000 compliant or have been remediated. The total
cost to complete remediation of IT and non-IT systems is expected to be in the
range of $6.0 million to $8.0 million.
The Corporation is also in the process of assessing year 2000 remediation issues
relating to its major third party business partners. All of the Corporation's
major customers have been contacted regarding year 2000 issues related to
electronic data interchange (EDI). As of October 4, 1998, no major customer or
supplier remediation issues have been identified which would significantly
impact EDI transactions. The Corporation is also in the process of contacting
its major suppliers of ingredients, packaging, facilities and logistics services
with regard to year 2000 issues. Because of the uncertainties associated with
assessing the ability of major business partners to complete the remediation of
their systems in time to prevent operational difficulties, the Corporation will
continue to contact and/or visit major customers and suppliers to gain
assurances that no significant adverse consequences will result due to their
failure to complete remediation of their systems.
Year 2000 remediation, conversion, validation and implementation is continuing
and, at the present time, it is expected that remediation to both the
Corporation's IT and non-IT systems and those of major business partners will be
completed in time to prevent material adverse consequences to the Corporation's
business, operations or financial condition. However, contingency plans will be
developed as needed and, to the extent possible, for any potential systems
failures resulting from year 2000 issues.
STOCKHOLDER PROPOSALS AND NOMINATIONS
- -------------------------------------
The 1999 Annual Meeting of Stockholders will be held on April 27, 1999. To be
eligible for inclusion in the Corporation's Proxy Statement for the 1999 Annual
Meeting of Stockholders, stockholder proposals must be received by the
Corporation by November 16, 1998.
In accordance with the Corporation's By-Laws, stockholders (other than those
holding 25% of the outstanding votes entitled to be cast) who do not submit
proposals for inclusion in the Proxy Statement but who intend to present a
proposal, nomination for director or other business for consideration at any
meeting of stockholders, including any Annual Meeting, are required to notify
the Secretary of the Corporation of their proposal or nomination and provide
other information in advance of such meeting. Stockholders interested in making
proposals at the 1999 Annual Meeting should submit their name and address, their
shareholdings, a brief description of the proposal, and any financial or other
interest they have in such proposal to the Corporation no later than February
27, 1999.
15
In addition, the Corporation's By-Laws require that a stockholder wishing to
make a nomination for director at the 1999 Annual Meeting, who does not submit
the nomination for inclusion in the Proxy Statement for such meeting, must
submit the following information to the Corporation no later than February 27,
1999: name and address, a representation that the stockholder is a holder of
record and intends to attend such meeting, a description of any arrangement
between the stockholder and the individual planned to be nominated, the
nominee's name, address and biographical information, and the consent of the
nominee.
All notices for stockholder proposals and director nominations should be sent to
the attention of the Secretary of the Corporation at 100 Crystal A Drive,
Hershey, Pennsylvania 17033-0810.
SUBSEQUENT EVENT
- ----------------
On November 9, 1998, the Corporation announced that it is exploring the possible
sale of its U.S. Pasta business and that Goldman, Sachs & Co. has been engaged
to assist in this process.
SAFE HARBOR STATEMENT
- ---------------------
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 which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Forward looking statements
contained in this document include, but are not limited to Year 2000 issues
(particularly with regard to the Corporation's business partners and suppliers),
the impact of the use of derivative instruments, the amount of future capital
expenditures and the possible uses of proceeds from any future borrowings under
the Corporation's currently effective credit facility or August 1997
Registration Statement. Factors which could cause results to differ include, but
are not limited to: changes in the confectionery and pasta business environment,
including actions of competitors and changes in consumer preferences; changes in
governmental laws and regulations, including income taxes; market demand for new
and existing products; and raw material pricing.
16
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 October 4, 1998 and September 28,
1997.
Exhibit 27 - Financial Data Schedule for the period ended October 4,
1998 (required for electronic filing only).
Exhibit 99 - Press release announcing that the Corporation is exploring
the possible sale of its U.S. Pasta business and that Goldman, Sachs &
Co. has been engaged to assist in this process.
b) REPORTS ON FORM 8-K
-------------------
A report on Form 8-K was filed July 10, 1998 announcing that the
Corporation's earnings for the second quarter of 1998 may be below
market expectations.
17
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 12, 1998 /s/ William F. Christ
----------------- ------------------------------
William F. Christ
Senior Vice President,
Chief Financial Officer
and Treasurer
Date November 12, 1998 /s/ David W. Tacka
----------------- ------------------------------
David W. Tacka
Corporate Controller and
Chief Accounting Officer
18
EXHIBIT INDEX
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule for the period ended October 4, 1998
(required for electronic filing only)
Exhibit 99 - Press release announcing that the Corporation is exploring
the possible sale of its U.S. Pasta business and that Goldman,
Sachs & Co. has been engaged to assist in this process.
19
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
-------------------------
October 4, September 28,
1998 1997
---------- ------------
Earnings:
Income before income taxes $ 378,574 $ 362,656
Add (deduct):
Interest on indebtedness 68,443 54,353
Portion of rents representative of the
interest factor (a) 9,265 8,733
Amortization of debt expense 340 257
Amortization of capitalized interest 2,652 2,618
---------- ----------
Earnings as adjusted $ 459,274 $ 428,617
========== ==========
Fixed Charges:
Interest on indebtedness $ 68,443 $ 54,353
Portion of rents representative of the
interest factor (a) 9,265 8,733
Amortization of debt expense 340 257
Capitalized interest 1,795 1,456
---------- ----------
Total fixed charges $ 79,843 $ 64,799
========== ==========
Ratio of earnings to fixed charges 5.75 6.61
========== ==========
NOTE:
(a) Portion of rents representative of the interest factor consists of
one-third of rental expense for operating leases.
5
1,000
9-MOS
DEC-31-1998
OCT-04-1998
40,163
0
433,995
0
572,944
1,212,476
2,665,537
1,019,574
3,475,149
847,225
1,029,117
0
0
179,950
787,090
3,475,149
3,195,712
3,195,712
1,881,660
2,750,997
0
0
66,141
378,574
147,643
230,931
0
0
0
230,931
1.61
1.59
BALANCE IS NET OF RESERVES FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS.
[LOGO OF HERSHEY FOODS CORPORATION APPEARS HERE]
HERSHEY FOODS NEWS
FOR IMMEDIATE RELEASE CONTACT: John C. Long
(717) 534-7631
November 9, 1998
EXHIBIT 99
Hershey Foods Exploring Sale of U.S. Pasta Business
Hershey, Pa. -- Hershey Foods Corporation announced today that it is exploring
the possible sale of its U.S. pasta business and that Goldman, Sachs & Co. has
been engaged to assist in this process.
Hershey, through its Hershey Pasta and Grocery Group, holds the number-one share
position in the U.S. branded dry pasta category. Its eight regional brands
include American Beauty, Ideal by San Giorgio, Light 'n Fluffy, P&R, Mrs. Weiss,
Ronzoni, San Giorgio and Skinner pasta. In 1997, combined sales for Hershey's
pasta business were $400 million.
"Hershey Foods has been involved in the pasta business since 1966 and today
enjoys the leadership position in the U.S. branded dry pasta category. Over the
years, this business has provided profitable growth and good cash flow for the
corporation. After a thorough review of our strategic direction, we believe that
we can generate a better return for our shareholders by focusing resources on
our confectionery and related grocery and foodservice businesses," said Kenneth
L. Wolfe, Chairman and Chief Executive Officer of Hershey Foods.
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