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 1, 1995
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 - 62,172,779 shares, as of October 30, 1995.
Class B Common Stock, $1 par value - 15,241,454 shares, as of
October 30, 1995.
Exhibit Index - Page 16
Page 2 HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
For the Three Months Ended
October 1, October 2,
1995 1994
Net Sales $981,101 $966,511
Costs and Expenses:
Cost of sales 572,443 561,968
Selling, marketing and administrative 261,710 259,578
Total costs and expenses 834,153 821,546
Income before Interest and Income Taxes 146,948 144,965
Interest expense, net 13,424 10,309
Income before Income Taxes 133,524 134,656
Provision for income taxes 51,397 53,593
Net Income $ 82,127 $ 81,063
Net Income per Share $ 1.02 $ .93
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 STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
For the Nine Months Ended
October 1, October 2,
1995 1994
Net Sales $2,570,816 $2,526,384
Costs and Expenses:
Cost of sales 1,499,567 1,491,796
Selling, marketing and administrative 750,975 743,460
Total costs and expenses 2,250,542 2,235,256
Income before Interest and Income Taxes 320,274 291,128
Interest expense, net 30,417 26,338
Income before Income Taxes 289,857 264,790
Provision for income taxes 113,774 105,386
Net Income $ 176,083 $ 159,404
Net Income per Share $ 2.08 $ 1.83
Cash Dividends Paid per Share of Common Stock $ 1.010 $ .9250
Cash Dividends Paid per Share of Class B
Common Stock $ .9150 $ .8400
The accompanying notes are an integral part of these statements.
Page 4
HERSHEY FOODS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
OCTOBER 1, 1995 AND DECEMBER 31, 1994
(in thousands of dollars)
ASSETS 1995 1994
Current Assets:
Cash and cash equivalents $ 27,274 $ 26,738
Accounts receivable - trade 355,651 331,670
Inventories 525,627 445,702
Deferred income taxes 91,156 105,948
Prepaid expenses and other 54,559 38,608
Total current assets 1,054,267 948,666
Property, Plant and Equipment, at cost 2,198,680 2,123,529
Less - accumulated depreciation and
amortization (736,383) (655,132)
Net property, plant and equipment 1,462,297 1,468,397
Intangibles Resulting from Business
Acquisitions 447,962 453,582
Other Assets 24,391 20,336
Total assets $2,988,917 $2,890,981
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 119,664 $ 115,428
Accrued liabilities 270,698 265,283
Accrued restructuring reserves 40,125 82,055
Accrued income taxes 26,222 8,718
Short-term debt 849,161 316,783
Current portion of long-term debt 1,564 7,954
Total current liabilities 1,307,434 796,221
Long-term Debt 154,005 157,227
Other Long-term Liabilities 313,640 303,056
Deferred Income Taxes 191,190 193,377
Total liabilities 1,966,269 1,449,881
Stockholders' Equity:
Preferred Stock, shares issued:
none in 1995 and 1994
Common Stock, shares issued:
74,733,982 in 1995 and 74,679,357
in 1994 74,734 74,679
Class B Common Stock, shares issued:
15,241,454 in 1995 and 15,242,979
in 1994 15,241 15,243
Additional paid-in capital 48,580 49,880
Cumulative foreign currency translation
adjustments (21,900) (24,537)
Unearned ESOP compensation (35,926) (38,321)
Retained earnings 1,616,146 1,522,867
Treasury-Common Stock shares at cost:
12,535,703 in 1995 and 3,187,139
in 1994 (674,227) (158,711)
Total stockholders' equity 1,022,648 1,441,100
Total liabilities and stockholders'
equity $2,988,917 $2,890,981
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
October 1, October 2,
1995 1994
Cash Flows Provided from Operating Activities $182,453 $ 71,073
Cash Flows Provided from (Used by) Investing
Activities
Capital additions (114,263) (109,216)
Other, net (258) 4,344
Net Cash Flows Used by Investing Activities (114,521) (104,872)
Cash Flows Provided from (Used by) Financing
Activities
Net increase in short-term debt 541,978 188,700
Long-term borrowings 410 102
Repayment of long-term debt (6,494) (14,119)
Cash dividends paid (82,804) (79,248)
Exercise of stock options 12,087 2,709
Incentive plan transactions (17,057) (6,813)
Repurchase of Common Stock (515,516) (38,836)
Net Cash Flows (Used by) Provided from Financing
Activities (67,396) 52,495
Increase (Decrease) in Cash and Cash Equivalents 536 18,696
Cash and Cash Equivalents, beginning of period 26,738 15,959
Cash and Cash Equivalents, end of period $ 27,274 $ 34,655
Interest Paid $ 29,149 $ 26,558
Income Taxes Paid $ 74,078 $ 99,991
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. 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 Nine Months Ended
October 1, 1995 October 2, 1994
(in thousands of dollars)
Interest expense $33,857 $30,019
Interest income (2,090) (1,154)
Capitalized interest (1,350) (2,527)
Interest expense, net $30,417 $26,338
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 third quarter
and nine months ended October 1, 1995 were 80,630,609 and 84,673,193,
respectively, and were 86,807,945 and 87,108,115 for the respective
periods in 1994. There were no shares of Preferred Stock outstanding
during the periods presented.
A total of 3,749,930 shares of Common Stock have been repurchased under
a share repurchase program begun in 1993 of which 3,485,930 shares were
held as Treasury Stock as of October 1, 1995. In addition, on August 4,
1995, the Corporation purchased 9,049,733 shares of its Common Stock
from Hershey Trust Company, as Trustee for Milton Hershey School. A
total of 12,535,703 shares were held as Treasury Stock as of October 1,
1995.
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:
October 1, 1995 December 31, 1994
(in thousands of dollars)
Raw materials $252,533 $234,317
Goods in process 33,007 28,680
Finished goods 318,753 247,272
Inventories at FIFO 604,293 510,269
Adjustment to LIFO (78,666) (64,567)
Total inventories $525,627 $445,702
5. Restructuring Charges
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,
Page 7
eliminating underperforming assets and streamlining the overall
decision-making process. The charge of $106.1 million resulted in an
after-tax charge of $80.2 million or $.92 per share in 1994.
The restructuring charge and its subsequent utilization are summarized
below by category (in thousands of dollars):
Total Utilized Utilized Reversed Remaining
Charge in 1994 in 1995 in 1995 Reserve
Employee severance
benefits $ 34,269 $ (4,239) $ (9,905) $ (8,565) $11,560
Loss on disposal of
businesses 39,100 (653) (14,808) - 23,639
Product line
discontinuations 17,533 (15,166) (788) (700) 879
Consolidation of
operations and
disposal of
machinery
and equipment 15,203 (3,992) (2,964) (4,200) 4,047
Total $106,105 $(24,050) $(28,465) $(13,465) $40,125
In June 1995, the Corporation completed the sale of Overspecht B.V.
(OZF/Jamin) to a management buyout group at OZF/Jamin. During the first
nine months of 1995, net non-cash charges to accrued restructuring
reserves were $15.0 million, related primarily to the divestiture of
OZF/Jamin. Operating cash flows will be used to fund any severance or
other cash items.
The Corporation anticipates that the remaining reserve is adequate to
cover the cost of restructuring activities to be completed during 1995.
The $13.5 million of 1994 accrued restructuring reserves reversed during
the period was primarily the result of revisions and changes in
estimates relating to the restructuring plan.
During the third quarter, a pre-tax restructuring charge of $16.6
million was recorded associated with the Voluntary Retirement Program
announced by the Corporation in August 1995. The charge was primarily
related to the funding of retirement benefits for eligible employees who
elected early retirement. This cash charge will be funded from
operating cash flows. The after-tax impact of this charge was offset by
the partial reversal of 1994 accrued restructuring reserves.
6. 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 October 1, 1995 because of the relatively
short maturity of these instruments. The carrying value of long-term
debt, including the current portion, approximated fair value as of
October 1, 1995, based upon quoted market prices for the same or similar
debt issues.
As of October 1, 1995, the Corporation had foreign exchange forward
contracts maturing primarily in 1995 and 1996 to purchase $26.1 million
in foreign currency, principally British sterling, German marks, and
Irish punts, and to sell $20.8 million in foreign currency, primarily
Canadian dollars and Japanese yen, at contracted forward rates.
Page 8
Additionally, the Corporation had purchased foreign exchange options of
$11.6 million and written foreign exchange options of $10.9 million,
principally related to British sterling. As of October 1, 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.
7. Reference is made to the Registrant's 1994 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 1995 vs. Third Quarter 1994
Consolidated net sales for the third quarter rose from $966.5
million in 1994 to $981.1 million in 1995, an increase of 2%. The
higher sales primarily reflected incremental sales of new
confectionery and grocery products and volume growth from existing
confectionery brands in the United States, Canada and Europe and
from pasta products. These increases were offset somewhat by lower
sales resulting from the divestiture of Overspecht B.V. (OZF/Jamin)
in the second quarter of 1995 and the discontinuance of the
Corporation's refrigerated pudding line in late 1994.
The consolidated gross margin decreased from 41.9% in 1994 to 41.7%
in 1995. The decrease was primarily the result of higher prices
for certain major raw materials and packaging partially offset by
the favorable impact of the divestiture of the lower margin
OZF/Jamin business and manufacturing efficiency improvements.
Selling, marketing and administrative expenses increased by 1%, due
to increased advertising for existing confectionery brands offset
partially by a decrease in promotion and administrative expenses.
Net interest expense in the third quarter of 1995 was $3.1 million
above the comparable period of 1994 due to higher short-term
interest expense offset slightly by lower fixed interest expense.
The increase in short-term interest expense reflected higher
borrowing rates and increased borrowings associated with the
purchase of Common Stock from Hershey Trust Company (Hershey
Trust), as Trustee for Milton Hershey School, while fixed interest
expense was less than prior year as a result of reduced long-term
borrowings.
The third quarter effective income tax rate decreased from 39.8% in
1994 to 38.5% in 1995. The lower rate in 1995 was due to a tax
benefit resulting from the 1995 restructuring charge for the
Voluntary Retirement Program which more than offset the tax effect
associated with the partial reversal of 1994 accrued restructuring
reserves.
Results of Operations - First Nine Months 1995 vs. First Nine Months 1994
Consolidated net sales for the first nine months of 1995 increased
by $44.4 million or 2% over the comparable period of 1994. The
higher sales reflected incremental sales from new confectionery and
grocery products, the introduction of confectionery brands in new
international markets, volume growth from existing confectionery
and pasta brands and selected selling price increases principally
in the Corporation's international businesses. These increases
were partially offset by lower sales resulting from the divestiture
of OZF/Jamin in the second quarter of 1995 and the discontinuance
of the Corporation's refrigerated pudding line in late 1994.
The consolidated gross margin increased from 41.0% in 1994 to 41.7%
in 1995. The increase was primarily the result of manufacturing
efficiency improvements, selling price increases, and the favorable
impact of the OZF/Jamin divestiture. These increases were
partially offset by higher prices for certain major raw materials
and packaging. Selling, marketing and administrative expenses
Page 10
increased by 1% due to increased advertising for existing
confectionery brands, partly offset by reduced promotion and
administrative expenses.
Net interest expense was $4.1 million above prior year as higher
short-term interest expense resulting from higher borrowing rates
and reduced capitalized interest reflecting lower levels of
spending on projects qualifying for interest capitalization were
only partially offset by lower fixed interest expense and higher
interest income. Fixed interest expense was less than prior year
due to reduced long-term borrowings, while investment income
exceeded prior year as a result of an increase in average
investment income rates and higher investment balances.
The effective income tax rate decreased from 39.8% in 1994 to 39.3%
in 1995. The lower rate in 1995 reflected a tax benefit resulting
from the 1995 restructuring charge which more than offset the tax
effect associated with the partial reversal of 1994 accrued
restructuring reserves.
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
1995, the Corporation's cash and cash equivalents increased by $.5
million. Cash provided from operations and short-term borrowings
was sufficient to fund share repurchases of $515.5 million, finance
capital additions of $114.3 million, pay cash dividends of $82.8
million and repay long-term debt of $6.5 million. The increase in
cash generated from operations primarily reflected favorable
changes in working capital balances and higher income in 1995
versus 1994.
The ratio of current assets to current liabilities was .8:1 and
1.2:1 as of October 1, 1995 and December 31, 1994, respectively.
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 50% as of October 1, 1995, and 25% as of
December 31, 1994. The decrease in the current ratio and the
increase in the capitalization ratio resulted primarily from short-
term borrowings during the third quarter to finance the purchase of
Common Stock from the Hershey Trust. As of October 1, 1995 the
Corporation had lines of credit with domestic and international
commercial banks in the amount of approximately $1.0 billion which
could be borrowed directly or used to support the issuance of
commercial paper.
In the fourth quarter of 1994, the Corporation recorded a pre-tax
restructuring charge of $106.1 million ($80.2 million after-tax or
$.92 per share). In the third quarter of 1995, $13.5 million of
accrued restructuring reserves related to the 1994 restructuring
charge was reversed primarily as a result of revisions and changes
in estimates relating to the restructuring plan. The restructuring
program is expected to be completed in 1995 and result in annual
savings of approximately $15.0 million starting in 1996. Also
during the third quarter, a $16.6 million pre-tax restructuring
charge was recorded associated with a Voluntary Retirement Program
Page 11
announced by the Corporation in August 1995. The charge was
primarily related to the funding of retirement benefits for
eligible employees who elected early retirement. The after-tax
impact of this charge was offset by the partial reversal of 1994
accrued restructuring reserves. This cash charge will be funded
from operating cash flows.
As of October 1, 1995, $100 million of debt securities remained
available for issuance under a Form S-3 Registration Statement
which was declared effective in June 1990 and an additional $400
million of debt securities under a Form S-3 Registration Statement
declared effective in November 1993 (see Subsequent Event).
Proceeds from any offering of the $500 million of debt securities
available under these shelf registrations may be used to reduce
existing commercial paper borrowings, finance capital additions,
and fund a share repurchase program and future business
acquisitions.
As of October 1, 1995, 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.
A total of 3,749,930 shares of Common Stock have been repurchased
for approximately $187.0 million under a share repurchase program
begun in 1993. As of October 1, 1995, 3,485,930 of these shares
were held as Treasury Stock. On August 4, 1995, the Corporation
purchased an additional 9,049,773 shares of its Common Stock from
the Hershey Trust for $500.0 million. As of October 1, 1995, a
total of 12,535,703 shares were held as Treasury Stock.
Hershey Trust has advised the Corporation that it sold the shares
to further diversify its investment holdings. Hershey Trust also
indicated that it intends to maintain voting control of the
Corporation. Hershey Trust, which had 77.1% of the voting power of
both classes of common stock prior to the transaction, had 76.1%
following the transaction.
Subsequent Event
On September 27, 1995, the Corporation entered into an Underwriting
Agreement with Goldman, Sachs & Co., Merrill Lynch & Co. and
Merrill Lynch, Pierce, Fenner and Smith Incorporated with respect
to the issuance by the Corporation of certain debt securities. The
Corporation also entered into a Pricing Agreement concerning the
issuance and sale of $200 million aggregate principal amount of
6.70% Notes due October 1, 2005 (Notes). Information concerning
the Notes and related matters is set forth in the Corporation's
Prospectus dated December 3, 1993, and in a Prospectus Supplement
which was filed with the Securities and Exchange Commission on
October 2, 1995. The issuance of $200 million of Notes was
completed on October 2, 1995 and the proceeds were used to reduce
short-term borrowings.
As of October 2, 1995, $300 million of debt securities remained
Page 12
available for issuance under a Form S-3 Registration Statement
which was declared effective in November 1993.
Page 13
Part II
Items 1 through 4 have been omitted as not applicable.
Item 5 - Other Information
On September 27, 1995, the Corporation entered into an Underwriting
Agreement with Goldman, Sachs & Co., Merrill Lynch & Co. and
Merrill Lynch, Pierce, Fenner and Smith Incorporated with respect
to the issuance by the Corporation of certain debt securities. The
Corporation also entered into a Pricing Agreement concerning the
issuance and sale of $200 million aggregate principal amount of
6.70% Notes due October 1, 2005 (Notes). Information concerning
the Notes and related matters is set forth in the Corporation's
Prospectus dated December 3, 1993, and in a Prospectus Supplement
which was filed with the Securities and Exchange Commission on
October 2, 1995. The issuance of $200 million of Notes was
completed on October 2, 1995 and the proceeds were used to reduce
short-term borrowings.
As of October 2, 1995, $300 million of debt securities remained
available for issuance under a Form S-3 Registration Statement
which was declared effective in November 1993.
In the third quarter of 1995, the Corporation offered a Voluntary
Retirement Program to eligible employees. The program gave
eligible employees an opportunity to retire with enhanced
retirement benefits. A pre-tax restructuring charge of $16.6
million was recorded to cover the anticipated costs of the program.
This charge was partially offset by a $13.5 million reversal of
1994 accrued restructuring reserves which was primarily the result
of revisions and changes in estimates relating to the restructuring
plan. The after-tax impact of the 1995 charge was offset by the
partial reversal of 1994 accrued restructuring reserves.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
The following are attached and incorporated herein by
reference:
Exhibit 3 - Restated By-laws of Hershey Foods Corporation as
amended and restated on October 3, 1995.
Exhibit 12 - Statement showing computation of ratio of
earnings to fixed charges for the nine months ended October 1,
1995 and October 2, 1994.
Exhibit 27 - Financial Data Schedule for the period ended
October 1, 1995 (required for electronic filing only).
Exhibit 99 - Press release announcing that Hershey Foods
Corporation had purchased 9,049,773 shares of its Common Stock
from Hershey Trust Company, as Trustee under the deed of trust
with Milton S. Hershey and Catherine S. Hershey for benefit of
Milton Hershey School.
Page 14
b) Reports on Form 8-K
A report on Form 8-K was filed August 4, 1995, announcing the
purchase of 9,049,773 shares of its Common Stock from Hershey
Trust Company, as Trustee under the deed of trust with Milton
S. Hershey and Catherine S. Hershey for benefit of Milton
Hershey School.
A report on Form 8-K was filed October 2, 1995, announcing that the
Corporation entered into an Underwriting Agreement and a Pricing
Agreement with respect to the issuance and sale by the
Corporation of $200 million of debt securities.
Page 15
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 9, 1995 /s/ William F. Christ
William F. Christ
Senior Vice President and
Chief Financial Officer
Date November 9, 1995 /s/ R. Montgomery Garrabrant
R. Montgomery Garrabrant
Corporate Controller and
Chief Accounting Officer
Page 16
EXHIBIT INDEX
Exhibit 3 - Amended and restated By-laws of Hershey Foods Corporation
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule for the period ended October 1, 1995
(required for electronic filing only)
Exhibit 99 - Press release announcing the purchase by Hershey Foods
Corporation of 9,049,773 shares of it's Common Stock from
the Hershey Trust Company