HERSHEY FOODS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OPERATING RESULTS
The Corporation achieved increased sales in 1995 and 1994. Net sales during
this two-year period increased at a compound annual rate of 3%, primarily
reflecting volume growth from the introduction of new confectionery and
grocery products and from foreign acquisitions, and price increases
principally in the Corporation's pasta and foreign businesses. These increases
were partially offset by lower sales resulting from the divestiture of
Overspecht B.V. (OZF Jamin) in the second quarter of 1995 and, in 1994,
reduced demand for existing domestic confectionery brands and the
discontinuance of the Corporation's refrigerated pudding line.
Hershey Chocolate U.S.A. increased the wholesale price of its standard bar
line and king size bars by approximately eleven percent in December 1995.
These products represented approximately 25% of the Corporation's 1995 sales.
Price increases were intended to offset higher costs for raw materials and
packaging, together with the cumulative impact of inflation on other costs
since the last standard bar price increase nearly five years ago. Hershey
Pasta Group implemented selected price increases in late 1993, early 1994 and
late 1995 in an effort to recover substantial increases in semolina costs. The
price increases have not been sufficient to recover the full impact of the
higher semolina costs, partly due to competition from subsidized pasta imports
into the United States.
Income, excluding the net after-tax effect of restructuring activities
recorded in 1995 and the 1993 net cumulative effect of accounting changes and
the after-tax Freia Marabou a.s (Freia) gain, increased at a compound annual
rate of 4% during the two-year period. This increase was a result of the
growth in sales, partially offset by a lower gross profit margin and higher
selling, marketing and administrative expenses.
The following acquisitions and divestitures occurred during the period:
. December 1995--The acquisition of Henry Heide, Incorporated (Henry
Heide), a confectionery company which manufactures a variety of non-
chocolate confectionery products including JUJYFRUITS candies and
WUNDERBEANS jellybeans.
. December 1995--The Corporation entered into definitive agreements to sell
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 completed in January 1996 as part of
a restructuring program announced by the Corporation in late 1994.
. June 1995--The sale of the outstanding shares of OZF Jamin to a
management buyout group at OZF Jamin as part of the restructuring
program. OZF Jamin was purchased by the Corporation in October 1993.
. September 1993--The acquisition of the Italian confectionery business of
Heinz Italia S.p.A. (Sperlari). Sperlari is a leader in the Italian non-
chocolate confectionery market and manufactures and distributes a wide
range of confectionery products, including nougat and sugar candies.
Products are marketed primarily under the SPERLARI, DONDI and
SCARAMELLINI brands.
. March 1993--The acquisition of certain assets of the Ideal Macaroni and
Weiss Noodle companies (Ideal/Mrs. Weiss) in Cleveland, Ohio.
The Corporation's net sales, net income and cash flows are affected by the
timing of business acquisitions, new product introductions, promotional
activities, price increases and a seasonal sales bias toward the second half
of the year. These factors, from time to time, cause fluctuations in net sales
and net income versus the comparable quarterly periods of prior years.
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NET SALES
Net sales rose $84.4 million or 2% in 1995 and $118.0 million or 3% in 1994.
The increase in 1995 was due to incremental sales from new confectionery and
grocery products, volume growth from existing domestic and foreign
confectionery brands and pasta products, and selected selling price increases,
principally in the Corporation's foreign 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 increase in 1994 was due to volume
growth from new products and businesses acquired in late 1993, offset
substantially by lower sales caused by reduced demand for existing
confectionery and grocery brands. Sales of the Corporation's Canadian and
Mexican businesses were lower in 1994 due to volume declines resulting from
adverse economic conditions and the impact of currency exchange rates.
COSTS AND EXPENSES
Cost of sales as a percent of net sales increased from 57.2% in 1993 to
58.2% in 1994, but declined to 57.6% in 1995. The increase in gross margin in
1995 was primarily the result of manufacturing efficiency improvements,
selling price increases in the Corporation's foreign businesses and the
favorable impact of the OZF Jamin divestiture. These increases were partially
offset by higher costs for certain major raw materials and packaging, along
with inflation in labor and overhead costs. The decrease in gross margin in
1994 was primarily the result of higher costs for certain major raw materials,
particularly semolina, higher expenses for depreciation, and lower margins
associated with the foreign businesses, partially offset by lower costs
resulting from manufacturing efficiency improvements, and pasta selling price
increases.
Selling, marketing and administrative costs increased by 2% in 1995
primarily due to increased advertising for existing confectionery brands and
the introduction of new products, partially offset by reduced promotion and
administrative expenses. Selling, marketing and administrative costs decreased
slightly in 1994 primarily due to reduced levels of promotion and advertising
expenses for existing confectionery brands, largely offset by increased
promotion and advertising expenses related to the introduction of new products
and higher selling and administrative expenses associated with the 1993
business acquisitions.
RESTRUCTURING ACTIVITIES
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) following a comprehensive review of domestic and foreign operations
designed to enhance performance of operating assets by lowering operating and
administrative costs, eliminating underperforming assets and streamlining the
overall decision-making process.
As of December 31, 1995, $81.8 million of restructuring reserves had been
utilized and $16.7 million had been reversed to reflect revisions and changes
in estimates to the original restructuring program. The remaining $7.6 million
of accrued restructuring reserves will be utilized in early 1996 as the final
aspects of the restructuring program are completed, and annual savings of
approximately $18.0 million are expected to be realized thereafter.
During the third quarter of 1995, a pre-tax restructuring charge of $16.6
million was recorded in connection with a 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
impact of this charge was more than offset by the partial reversal of 1994
accrued restructuring reserves, resulting in an
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increase to income before income taxes of $.2 million and an increase to net
income of $2.0 million as the tax benefit associated with the 1995 charge more
than offset the tax provision associated with the reversal of 1994
restructuring reserves.
GAIN ON SALE OF INVESTMENT INTEREST
In March 1993, the Corporation recorded a pre-tax gain of $80.6 million on
the sale of its 18.6% investment interest in Freia which had the effect of
increasing net income by $40.6 million.
INTEREST EXPENSE, NET
Net interest expense increased $9.5 million in 1995 primarily as a result of
higher short-term interest expense. Short-term interest expense increased due
to higher borrowing rates and increased borrowings associated with the
purchase of approximately 9.0 million shares of the Corporation's Common Stock
from the Hershey Trust Company, as Trustee for the benefit of Milton Hershey
School (Milton Hershey School Trust).
Net interest expense increased $8.4 million in 1994 as higher short-term
interest expense, reduced capitalized interest and lower interest income were
only partially offset by lower fixed interest expense. Short-term interest
expense was above prior year as a result of higher borrowing levels related to
a share repurchase program and the 1993 acquisitions, and increased short-term
borrowing rates. Fixed interest expense was less than prior year due to the
retirement of long-term debt in 1993.
PROVISION FOR INCOME TAXES
The Corporation's effective income tax rate was 39.5%, 44.7%, and 41.8% in
1995, 1994 and 1993, respectively. The lower rate in 1995 compared to 1994 was
primarily due to the impact of restructuring activities. The increase in 1994
compared to 1993 was principally a result of the relatively low foreign income
tax benefit associated with the restructuring charge.
NET CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Effective January 1, 1993, the Corporation adopted Statements of Financial
Accounting Standards No. 106 "Employers' Accounting for Post-retirement
Benefits Other Than Pensions" and No. 109 "Accounting for Income Taxes" by
means of catch-up adjustments. The net charge associated with these changes in
accounting had the effect of decreasing net income by approximately $103.9
million, or $1.16 per share.
NET INCOME
Net income increased by 53% in 1995. Excluding the net after-tax effects of
the 1995 and 1994 restructuring activities, income increased $15.5 million or
6%. Net income increased $7.8 million or 3% in 1994, excluding the after-tax
effect of the 1994 restructuring charge, and the 1993 after-tax gain on the
sale of the Freia investment and the catch-up adjustments for accounting
changes. Income as a percent of net sales, after excluding the net after-tax
effects of restructuring activities in 1995 and 1994 and the 1993 net
cumulative effect of accounting changes and the after-tax Freia gain, was 7.6%
in 1995, 7.3% in 1994 and 7.4% in 1993.
FINANCIAL POSITION
The Corporation's financial position remained strong during 1995. The
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 December
31, 1995, and 25% as of December 31, 1994. The ratio of current assets to
current liabilities was 1.1:1 as of December 31, 1995, and 1.2:1 as of
December 31, 1994. The decrease
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in the current ratio and the increase in the capitalization ratio resulted
primarily from short-term borrowings and the issuance of long-term debt to
finance the purchase of Common Stock from the Milton Hershey School Trust.
ASSETS
Total assets decreased $60.4 million or 2% as of December 31, 1995,
primarily as a result of decreases in current assets, property, plant and
equipment, and intangibles resulting from business acquisitions, offset
somewhat by an increase in other assets.
Current assets decreased by $26.3 million reflecting lower inventories and
current deferred income taxes, offset somewhat by an increase in other current
assets. The decrease in inventories was primarily related to decreases in raw
material inventories. Current deferred income taxes decreased as a result of
the realization in 1995 of the income tax benefit associated with the
restructuring charge recorded in 1994. The increase in other current assets
related to receivables associated with the sale of the Planters and Life
Savers businesses and commodity transactions.
The $32.4 million net decrease in property, plant and equipment reflected
the divestiture of certain businesses and assets, and depreciation expense of
$119.4 million, partially offset by capital additions of $140.6 million.
The decrease in intangibles resulting from business acquisitions was
primarily associated with the sale of the Planters and Life Savers businesses
and the amortization of intangibles, partially offset by an increase related
to the acquisition of Henry Heide. The increase in other assets was primarily
associated with employee retirement plans.
LIABILITIES
Total liabilities increased by $297.8 million or 21% as of December 31,
1995, primarily due to increases in current liabilities and long-term debt.
Current liabilities increased by $68.1 million principally as a result of
higher short-term debt and accrued liabilities, offset somewhat by a decrease
in accrued restructuring reserves. Short-term debt increased as a result of
borrowings associated with the purchase of Common Stock from the Milton
Hershey School Trust. The increase in accrued liabilities principally
reflected increases in liabilities associated with employee retirement plans
as a result of the voluntary retirement program. The decrease in accrued
restructuring reserves reflected the utilization and partial reversal of
reserves related to the 1994 restructuring program.
The increase in long-term debt reflected the issuance of $200 million of
6.7% Notes due 2005 (Notes) in the fourth quarter of 1995. The proceeds from
issuance of the Notes were used to repay domestic commercial paper borrowings
associated with the purchase of Common Stock from the Milton Hershey School
Trust.
STOCKHOLDERS' EQUITY
Total stockholders' equity declined by 25% in 1995, primarily due to the
repurchase of Common Stock. Total stockholders' equity has increased at a
compound annual rate of 4% over the past ten years.
CAPITAL STRUCTURE
The Corporation has two classes of stock outstanding, Common Stock and Class
B Common Stock (Class B Stock). Holders of the Common Stock and the Class B
Stock generally vote together without
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regard to class on matters submitted to stockholders, including the election
of directors, with the Common Stock having one vote per share and the Class B
Stock having ten votes per share. However, the Common Stock, voting separately
as a class, is entitled to elect one-sixth of the Board of Directors. With
respect to dividend rights, the Common Stock is entitled to cash dividends 10%
higher than those declared and paid on the Class B Stock.
LIQUIDITY
Historically, the Corporation's major source of financing has been cash
generated from operations. The Corporation's income and, consequently, cash
provided from operations during the year are affected by seasonal sales
patterns, the timing of new product introductions, business acquisitions and
price increases. Chocolate, confectionery and grocery seasonal and holiday-
related sales have typically been highest during the third and fourth quarters
of the year, representing the principal seasonal effect. Generally, seasonal
working capital needs peak during the summer months and have been met by
issuing commercial paper.
Over the past three years, cash requirements for share repurchases, capital
additions, dividend payments and several business acquisitions exceeded cash
provided from operating activities and the cash from the sale of the
Corporation's investment interest in Freia by $209.0 million. Total debt,
including debt assumed, increased during the period by $233.1 million. Cash
and cash equivalents increased by $8.2 million during the period.
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. As of December 31,
1995, the Corporation's principal capital commitments included manufacturing
capacity expansion and modernization.
A portion of the $259.7 million gross proceeds from the sale of the
Corporation's Freia investment interest was used for the early repayment of
long-term debt in 1993.
In 1993, the Corporation's Board of Directors approved a share repurchase
program to acquire from time to time, through open market or privately
negotiated transactions, up to $200 million of Common Stock. A total of
3,923,780 shares of Common Stock has been repurchased for approximately $197.7
million under the program, of which 264,000 shares were retired and the
remaining 3,659,780 shares were held as Treasury Stock as of December 31,
1995.
In August 1995, the Corporation purchased an additional 9,049,773 shares of
its Common Stock to be held as Treasury Stock from the Milton Hershey School
Trust for $500.0 million. In connection with the share repurchase program
begun in 1993, a total of 2,000,000 shares were also acquired from the Milton
Hershey School Trust in 1993 for approximately $103.1 million. As of December
31, 1995, a total of 12,709,553 shares were held as Treasury Stock.
In February 1996, the Corporation's Board of Directors approved an
additional share repurchase program to acquire from time to time, through open
market or privately negotiated transactions, up to $200 million of Common
Stock.
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 December 31, 1995, $300 million of debt securities
remained available for issuance under the November 1993 Registration
Statement. Proceeds from any offering of the $300 million of debt securities
available under the shelf registration may be used for general corporate
requirements including, reducing existing commercial
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paper borrowings, financing capital additions and funding future business
acquisitions and working capital requirements.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation entered into interest rate swap agreements to
effectively convert a portion of its floating rate debt to fixed rate debt. As
of December 31, 1995, the Corporation had agreements outstanding with an
aggregate notional amount of $200.0 million, with maturities through 1997. Any
interest rate differential on interest rate swaps is recognized as an
adjustment to interest expense over the term of the agreement. The
Corporation's risk related to swap agreements is limited to the cost of
replacing such agreements at current market rates.
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 December 31, 1995, 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. Lines of credit
previously maintained by the Corporation were significantly reduced when the
credit facility agreements became effective.
CASH FLOW ACTIVITIES
Cash provided from operating activities totaled $1.2 billion during the past
three years. Over this period, depreciation and amortization have increased as
a result of continuing investment in capital additions and business
acquisitions. Cash requirements for accounts receivable and inventories have
tended to fluctuate during the three-year period based on sales during
December and inventory management practices. The change in cash required for
or provided from other assets and liabilities between the years was primarily
related to commodities transactions and the timing of payments for accrued
liabilities, including income taxes, and in 1995 and 1994, restructuring
expenses.
Investing activities included capital additions, several business
acquisitions, and the sale of an 18.6% investment interest in Freia in 1993.
The income tax effects associated with the 1995 and 1994 restructuring
activities and income taxes paid in 1993 on the Freia gain were included in
operating activities. Capital additions during the past three years included
the purchase of manufacturing equipment and expansion and modernization of
existing facilities. Businesses acquired during the past three years included
Henry Heide in 1995 and OZF Jamin, Sperlari and Ideal/Mrs. Weiss in 1993. OZF
Jamin was sold in 1995 as part of the Corporation's restructuring program.
Cash used for business acquisitions represented the purchase price paid and
consisted of the current assets, property, plant and equipment, and
intangibles acquired, net of liabilities assumed.
Financing activities included debt borrowings and repayments, payment of
dividends, the exercise of stock options, incentive plan transactions and the
repurchase of Common Stock. During the past three years, short-term borrowings
in the form of commercial paper or bank borrowings were used to fund seasonal
working capital requirements, business acquisitions, a share repurchase
program and the purchase of Common Stock from the Milton Hershey School Trust.
A portion of the proceeds received from the sale of the Freia investment was
used to repay long-term debt in 1993. The proceeds from the issuance of $200
million of Notes in October 1995 were used to reduce short-term borrowings.
During the past three years, a total of 12,973,553 shares of Common Stock has
been repurchased for approximately $697.7 million.
COMMODITY PRICE RISK MANAGEMENT
The Corporation's most significant raw materials include cocoa, sugar, milk,
peanuts, flour and almonds. The Corporation attempts to minimize the effect of
price fluctuations related to the purchase
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of these raw materials primarily through forward purchasing to cover future
manufacturing requirements, generally for periods from 3 to 24 months. With
regard to cocoa, sugar and corn sweeteners, price risks are also managed by
entering into futures and options contracts. At the present time, similar
futures and options contracts are not available for use in pricing the
Corporation's other major raw materials. Futures contracts are used in
combination with forward purchasing of cocoa, sugar and corn sweetener
requirements, principally to take advantage of market fluctuations which
provide more favorable pricing opportunities and to increase diversity or
flexibility in sourcing these raw materials. The Corporation's commodity
procurement practices are intended to reduce the risk of future price
increases, but also may potentially limit the ability to benefit from possible
price decreases.
The cost of cocoa beans and the prices for the related commodity futures
contracts historically have been subject to wide fluctuations attributable to
a variety of factors, including the effect of weather on crop yield, other
imbalances between supply and demand, currency exchange rates and speculative
influences. Cocoa prices rose from 1992 to 1994 due to cocoa demand exceeding
production. During 1995, prices for cocoa futures were relatively stable as a
result of good West African crop development and yield. During 1996, any
problems with the development of the West African crop to be harvested
beginning in the fall, could result in demand again exceeding production,
leading to possible cocoa futures price increases. The Corporation's costs
during 1996 will not necessarily reflect market price fluctuations because of
its forward purchasing practices, premiums and discounts reflective of
relative values, varying delivery times, and supply and demand for specific
varieties and grades of cocoa beans.
The major raw material used in the manufacture of pasta products is semolina
milled from durum wheat. The Corporation purchases semolina from commercial
mills and is also engaged in a custom milling agreement to obtain sufficient
quantities of semolina. In 1995, the Corporation's semolina costs per pound
remained at historically high levels. The exceptionally high costs resulted
from short supplies of durum wheat caused by a poor harvest of the North
American crop in 1993 and 1994, combined with U.S. Government tariffs on
imports of Canadian wheat. The tariff agreement expired as scheduled in 1995,
but prices remained at historically high levels due to a continued worldwide
shortage of durum wheat.
Generally, the Corporation has been able to offset the effects of increases
in the cost of its major raw materials, particularly cocoa beans, through
selling price increases or reductions in product weights. Conversely, declines
in the cost of major raw materials have served as a source of funds to enhance
consumer value through increases in product weights, respond to competitive
activity, develop new products and markets, and offset rising costs of other
raw materials and expenses.
MARKET PRICES AND DIVIDENDS
Cash dividends paid on the Corporation's Common Stock and Class B Stock were
$110.1 million in 1995 and $107.0 million in 1994. The annual dividend rate on
the Common Stock is $1.44 per share, an increase of 11% over the 1994 rate of
$1.30 per share. The 1995 dividend represented the 21st consecutive year of
Common Stock dividend increases.
On February 6, 1996, the Corporation's Board of Directors declared a
quarterly dividend of $.36 per share of Common Stock payable on March 15,
1996, to stockholders of record as of February 23, 1996. It is the
Corporation's 265th consecutive Common Stock dividend. A quarterly dividend of
$.325 per share of Class B Stock also was declared.
Hershey Foods Corporation's Common Stock is listed and traded principally on
the New York Stock Exchange (NYSE) under the ticker symbol "HSY."
Approximately 30.5 million shares of the Corporation's Common Stock were
traded during 1995. The Class B Stock is not publicly traded.
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The closing price of the Common Stock on December 31, 1995, was $65. There
were 38,480 stockholders of record of the Common Stock and the Class B Stock
as of December 31, 1995.
The following table shows the dividends paid per share of Common Stock and
Class B Stock and the price range of the Common Stock for each quarter of the
past two years:
DIVIDENDS PAID COMMON STOCK
PER SHARE PRICE RANGE*
-------------- ---------------
COMMON CLASS B
STOCK STOCK HIGH LOW
------ ------- ------- -------
1995
1st Quarter $ .325 $ .2950 $52 3/8 $48
2nd Quarter .325 .2950 55 7/8 50 1/8
3rd Quarter .360 .3250 64 7/8 53 5/8
4th Quarter .360 .3250 67 7/8 59
------ -------
Total $1.370 $1.2400
====== =======
1994
1st Quarter $ .300 $ .2725 $53 1/2 $45 3/4
2nd Quarter .300 .2725 46 3/4 41 5/8
3rd Quarter .325 .2950 48 41 1/8
4th Quarter .325 .2950 49 5/8 44 1/2
------ -------
Total $1.250 $1.1350
====== =======
- --------
* NYSE-Composite Quotations for Common Stock by calendar quarter.
RETURN MEASURES
OPERATING RETURN ON AVERAGE STOCKHOLDERS' EQUITY
The Corporation's operating return on average stockholders' equity was 22.2%
in 1995. Over the most recent five-year period, the return has ranged from
17.0% in 1991 to 22.2% in 1995. For the purpose of calculating operating
return on average stockholders' equity, earnings is defined as net income,
excluding the catch-up adjustments for accounting changes and the after-tax
gain on the sale of the investment in Freia in 1993, and the after-tax
restructuring activities in 1994 and 1995.
OPERATING RETURN ON AVERAGE INVESTED CAPITAL
The Corporation's operating return on average invested capital was 17.1% in
1995. Over the most recent five-year period, the return has ranged from 13.8%
in 1991 to 17.1% in 1995. Average invested capital consists of the annual
average of beginning and ending balances of long-term debt, deferred income
taxes and stockholders' equity. For the purpose of calculating operating
return on average invested capital, earnings is defined as net income,
excluding the sale of the investment in Freia, the catch-up adjustments for
accounting changes, the after-tax restructuring activities in 1994 and 1995,
and the after-tax effect of interest on long-term debt.
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HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ---------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS EXCEPT PER SHARE
AMOUNTS
NET SALES $3,690,667 $3,606,271 $3,488,249
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales 2,126,274 2,097,556 1,995,502
Selling, marketing and administrative 1,053,758 1,034,115 1,035,519
---------- ---------- ----------
Total costs and expenses 3,180,032 3,131,671 3,031,021
---------- ---------- ----------
RESTRUCTURING CREDIT (CHARGE) 151 (106,105) --
GAIN ON SALE OF INVESTMENT INTEREST -- -- 80,642
---------- ---------- ----------
INCOME BEFORE INTEREST, INCOME TAXES AND
ACCOUNTING CHANGES 510,786 368,495 537,870
Interest expense, net 44,833 35,357 26,995
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND ACCOUNTING
CHANGES 465,953 333,138 510,875
Provision for income taxes 184,034 148,919 213,642
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES 281,919 184,219 297,233
Net cumulative effect of accounting changes -- -- (103,908)
---------- ---------- ----------
NET INCOME $ 281,919 $ 184,219 $ 193,325
========== ========== ==========
INCOME PER SHARE:
Before accounting changes $ 3.40 $ 2.12 $ 3.31
Net cumulative effect of accounting changes -- -- (1.16)
---------- ---------- ----------
Net income $ 3.40 $ 2.12 $ 2.15
========== ========== ==========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ 1.370 $ 1.250 $ 1.140
Class B Common Stock 1.240 1.135 1.035
The notes to consolidated financial statements are an integral part of these
statements.
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HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 1994
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 32,346 $ 26,738
Accounts receivable--trade 326,024 331,670
Inventories 397,570 445,702
Deferred income taxes 84,785 105,948
Prepaid expenses and other 81,598 38,608
---------- ----------
Total current assets 922,323 948,666
PROPERTY, PLANT AND EQUIPMENT, NET 1,436,009 1,468,397
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS 428,714 453,582
OTHER ASSETS 43,577 20,336
---------- ----------
Total assets $2,830,623 $2,890,981
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 127,067 $ 115,428
Accrued liabilities 300,549 265,283
Accrued restructuring reserves 7,574 82,055
Accrued income taxes 15,514 8,718
Short-term debt 413,268 316,783
Current portion of long-term debt 383 7,954
---------- ----------
Total current liabilities 864,355 796,221
LONG-TERM DEBT 357,034 157,227
OTHER LONG-TERM LIABILITIES 333,814 303,056
DEFERRED INCOME TAXES 192,461 193,377
---------- ----------
Total liabilities 1,747,664 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 47,732 49,880
Cumulative foreign currency translation adjustments (29,240) (24,537)
Unearned ESOP compensation (35,128) (38,321)
Retained earnings 1,694,696 1,522,867
Treasury--Common Stock shares, at cost: 12,709,553 in
1995 and 3,187,139 in 1994 (685,076) (158,711)
---------- ----------
Total stockholders' equity 1,082,959 1,441,100
---------- ----------
Total liabilities and stockholders' equity $2,830,623 $2,890,981
========== ==========
The notes to consolidated financial statements are an integral part of these
balance sheets.
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HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
CASH FLOWS PROVIDED FROM (USED BY)
OPERATING ACTIVITIES
Net income $ 281,919 $ 184,219 $ 193,325
Adjustments to reconcile net income to net
cash provided from operations:
Net cumulative effect of accounting changes -- -- 103,908
Depreciation and amortization 133,884 129,041 113,064
Deferred income taxes 26,380 (2,328) 11,047
Restructuring (credit) charge (151) 106,105 --
Gain on sale of investment interest -- -- (80,642)
Changes in assets and liabilities, net of
effects from business acquisitions and
divestitures:
Accounts receivable--trade 1,666 (36,696) (100,957)
Inventories 28,147 7,740 32,347
Accounts payable 14,767 (10,230) (12,809)
Other assets and liabilities (11,297) (58,146) 111,358
Other, net 19,614 20,032 9,399
--------- --------- ---------
Net Cash Provided from Operating Activities 494,929 339,737 380,040
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
INVESTING ACTIVITIES
Capital additions (140,626) (138,711) (211,621)
Business acquisitions (12,500) -- (164,787)
Sale of investment interest -- -- 259,718
Other, net 8,720 (4,492) (717)
--------- --------- ---------
Net Cash (Used by) Investing Activities (144,406) (143,203) (117,407)
--------- --------- ---------
CASH FLOWS PROVIDED FROM (USED BY)
FINANCING ACTIVITIES
Net increase (decrease) in short-term debt 103,530 (20,503) 67,485
Long-term borrowings 202,448 102 1,130
Repayment of long-term debt (7,887) (14,413) (104,792)
Cash dividends paid (110,090) (106,961) (100,499)
Exercise of stock options 15,106 3,494 2,574
Incentive plan transactions (21,903) (7,726) (4,903)
Repurchase of Common Stock (526,119) (39,748) (131,783)
--------- --------- ---------
Net Cash (Used by) Financing Activities (344,915) (185,755) (270,788)
--------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents 5,608 10,779 (8,155)
Cash and Cash Equivalents as of January 1 26,738 15,959 24,114
--------- --------- ---------
Cash and Cash Equivalents as of December 31 $ 32,346 $ 26,738 $ 15,959
========= ========= =========
Interest Paid $ 43,731 $ 36,803 $ 32,073
Income Taxes Paid 148,629 177,876 171,586
The notes to consolidated financial statements are an integral part of these
statements.
A-11
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CUMULATIVE
FOREIGN
CLASS B ADDITIONAL CURRENCY UNEARNED TREASURY TOTAL
PREFERRED COMMON COMMON PAID-IN TRANSLATION ESOP RETAINED COMMON STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL ADJUSTMENTS COMPENSATION EARNINGS STOCK EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS OF
DOLLARS
BALANCE AS OF JANUARY
1, 1993 $ -- $74,929 $15,257 $52,129 $ 2,484 $(44,708) $1,365,188 $ -- $1,465,279
Net income 193,325 193,325
Dividends:
Common Stock, $1.140
per share (84,711) (84,711)
Class B Common
Stock, $1.035 per
share (15,788) (15,788)
Foreign currency
translation
adjustments (16,389) (16,389)
Conversion of Class B
Common Stock into
Common Stock 4 (4) --
Incentive plan
transactions (195) (195)
Exercise of stock
options (1,074) (1,074)
Employee stock
ownership trust
transactions 487 3,193 3,680
Repurchase of Common
Stock (264) (151) (12,405) (118,963) (131,783)
----- ------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1993 -- 74,669 15,253 51,196 (13,905) (41,515) 1,445,609 (118,963) 1,412,344
Net income 184,219 184,219
Dividends:
Common Stock, $1.250
per share (89,660) (89,660)
Class B Common
Stock, $1.135 per
share (17,301) (17,301)
Foreign currency
translation
adjustments (10,632) (10,632)
Conversion of Class B
Common Stock into
Common Stock 10 (10) --
Incentive plan
transactions (1,264) (1,264)
Exercise of stock
options (548) (548)
Employee stock
ownership trust
transactions 496 3,194 3,690
Repurchase of Common
Stock (39,748) (39,748)
----- ------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1994 -- 74,679 15,243 49,880 (24,537) (38,321) 1,522,867 (158,711) 1,441,100
Net income 281,919 281,919
Dividends:
Common Stock, $1.370
per share (91,190) (91,190)
Class B Common
Stock, $1.240 per
share (18,900) (18,900)
Foreign currency
translation
adjustments (4,703) (4,703)
Conversion of Class B
Common Stock into
Common Stock 2 (2) --
Incentive plan
transactions (180) (180)
Exercise of stock
options 53 (2,456) (246) (2,649)
Employee stock
ownership trust
transactions 488 3,193 3,681
Repurchase of Common
Stock (526,119) (526,119)
----- ------- ------- ------- -------- -------- ---------- --------- ----------
BALANCE AS OF
DECEMBER 31, 1995 $ -- $74,734 $15,241 $47,732 $(29,240) $(35,128) $1,694,696 $(685,076) $1,082,959
===== ======= ======= ======= ======== ======== ========== ========= ==========
The notes to consolidated financial statements are an integral part of these
statements.
A-12
HERSHEY FOODS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies employed by the Corporation are discussed
below and in other notes to the consolidated financial statements. Certain
reclassifications have been made to prior year amounts to conform to the 1995
presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiaries after elimination of intercompany accounts
and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates,
particularly for accounts receivable and certain current and long-term
liabilities.
CASH EQUIVALENTS
All highly liquid debt instruments purchased with a maturity of three months
or less are classified as cash equivalents.
COMMODITIES FUTURES AND OPTIONS CONTRACTS
In connection with the purchasing of cocoa, sugar and corn sweeteners for
anticipated manufacturing requirements, the Corporation enters into
commodities futures and options contracts as deemed appropriate to reduce the
effect of price fluctuations. In accordance with Statement of Financial
Accounting Standards No. 80 "Accounting for Futures Contracts," these futures
and options contracts are accounted for as hedges and, accordingly, gains and
losses are deferred and recognized in cost of sales as part of the product
cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of buildings,
machinery and equipment is computed using the straight-line method over the
estimated useful lives.
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Intangible assets resulting from business acquisitions principally consist
of the excess of the acquisition cost over the fair value of the net assets of
businesses acquired (goodwill). Goodwill is amortized on a straight-line basis
over 40 years. Other intangible assets are amortized on a straight-line basis
over the estimated useful lives. The Corporation periodically evaluates
whether events or circumstances have occurred indicating that the carrying
amount of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Corporation uses an estimate
of the acquired business' undiscounted future cash flows compared to the
related carrying amount of net assets, including goodwill, to determine if an
impairment loss should be recognized.
Accumulated amortization of intangible assets resulting from business
acquisitions was $101.5 million and $86.7 million as of December 31, 1995 and
1994, respectively.
A-13
FOREIGN CURRENCY TRANSLATION
Results of operations for foreign entities are translated using the average
exchange rates during the period. For foreign entities, assets and liabilities
are translated to U.S. dollars using the exchange rates in effect at the
balance sheet date. Resulting translation adjustments are recorded in a
separate component of stockholders' equity, "Cumulative Foreign Currency
Translation Adjustments."
FOREIGN EXCHANGE CONTRACTS
The Corporation enters into foreign exchange forward and options contracts
to hedge transactions primarily related to firm commitments to purchase
equipment, certain raw materials and finished goods denominated in foreign
currencies, and to hedge payment of intercompany transactions with its non-
domestic subsidiaries. These contracts reduce currency risk from exchange rate
movements. Gains and losses are deferred and accounted for as part of the
underlying transactions. In entering into these contracts the Corporation has
assumed the risk which might arise from the possible inability of
counterparties to meet the terms of their contracts. The Corporation does not
expect any losses as a result of counterparty defaults.
LICENSE AGREEMENTS
The Corporation has entered into license agreements under which it has
access to certain trademarks and proprietary technology, and manufactures
and/or markets and distributes certain products. The rights under these
agreements are extendable on a long-term basis at the Corporation's option
subject to certain conditions, including minimum sales levels, which the
Corporation has met. License fees and royalties, payable under the terms of
the agreements, are expensed as incurred.
RESEARCH AND DEVELOPMENT
The Corporation expenses research and development costs as incurred.
Research and development expense was $26.2 million, $26.3 million and $26.2
million in 1995, 1994 and 1993, respectively.
ADVERTISING
The Corporation expenses advertising costs as incurred. Advertising expense
was $159.2 million, $120.6 million and $130.0 million in 1995, 1994 and 1993,
respectively. Prepaid advertising as of December 31, 1995 and 1994 was $3.0
million and $8.5 million, respectively.
2. ACQUISITIONS AND DIVESTITURES
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 headquarters and
manufacturing facility are located in New Brunswick, N.J., where it
manufactures a variety of non-chocolate confectionery products including
JUJYFRUITS candies and WUNDERBEANS jellybeans.
In September 1993, the Corporation completed the acquisition of the Italian
confectionery business of Heinz Italia S.p.A. (Sperlari) for approximately
$130.0 million. Sperlari is a leader in the Italian non-chocolate
confectionery market and manufactures and distributes a wide range of
confectionery products, including nougat and sugar candies. Products are
marketed primarily under the SPERLARI, DONDI and SCARAMELLINI brands.
In March 1993, the Corporation acquired certain assets of the Ideal Macaroni
and Weiss Noodle companies for approximately $14.6 million.
A-14
In accordance with the purchase method of accounting, the purchase prices of
the acquisitions summarized above were allocated to the underlying assets and
liabilities at the date of acquisition based on their estimated respective
fair values, which may be revised at a later date. Total liabilities assumed,
including debt, were $10.6 million in 1995 and $54.0 million in 1993. Results
subsequent to the dates of acquisition are included in the consolidated
financial statements. Had the results of these acquisitions been included in
consolidated results for the entire length of each period presented, the
effect would not have been material.
In December 1995, the Corporation entered into definitive agreements to sell
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 completed in January 1996, as part of a restructuring
program announced by the Corporation in late 1994.
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 Corporation's restructuring program. The Corporation purchased the
outstanding shares of OZF Jamin in October 1993 for approximately $20.2
million. OZF Jamin manufactures chocolate and non-chocolate confectionery
products, cookies, biscuits and ice cream for distribution primarily to
customers in the Netherlands and Belgium.
3. RESTRUCTURING ACTIVITIES
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 foreign 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 charge of $106.1 million resulted in an after-tax charge of $80.2 million
or $.92 per share in 1994.
The charge included $34.3 million of severance and termination benefits for
the elimination of approximately 500 positions in the manufacturing, technical
and administrative areas at both domestic and foreign operations. The charge
also included anticipated losses on disposals of certain businesses of $39.1
million, product line discontinuations of $17.5 million and the consolidation
of operations and disposal of machinery and equipment of $15.2 million.
As of December 31, 1995, $81.8 million of restructuring reserves had been
utilized and $16.7 million had been reversed to reflect revisions and changes
in estimates to the original restructuring program. The remaining $7.6 million
of accrued restructuring reserves will be utilized in early 1996 as the final
aspects of the restructuring program are completed. Operating cash flows were
used to fund cash requirements which represented approximately 25% of the
total reserves utilized. The non-cash portion of restructuring reserve
utilization was associated primarily with the divestiture of foreign
businesses and the discontinuation of certain product lines.
During the third quarter of 1995, a pre-tax restructuring charge of $16.6
million was recorded in connection with a 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
impact of this charge was more than offset by the partial reversal of 1994
accrued restructuring reserves resulting in an increase to income before
income taxes of $.2 million and an increase to net income of $2.0 million, as
the tax benefit associated with the 1995 charge more than offset the tax
provision associated with the reversal of 1994 restructuring reserves.
A-15
4. GAIN ON SALE OF INVESTMENT INTEREST
In March 1993, the Corporation recorded a pre-tax gain of $80.6 million on
the sale of its 18.6% investment interest in Freia Marabou a.s. This gain had
the effect of increasing net income by $40.6 million. Gross proceeds from the
sale amounted to $259.7 million.
5. RENTAL AND LEASE COMMITMENTS
Rent expense was $24.9 million, $25.7 million and $24.5 million for 1995,
1994 and 1993, respectively. Rent expense pertains to all operating leases,
which were principally related to certain administrative buildings,
distribution facilities and transportation equipment. Future minimum rental
payments under non-cancellable operating leases with a remaining term in
excess of one year as of December 31, 1995, were: 1996, $12.6 million; 1997,
$11.6 million; 1998, $10.8 million; 1999, $12.7 million; 2000, $12.6 million;
2001 and beyond, $80.7 million.
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 December 31, 1995 and 1994, 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
December 31, 1995 and 1994, based upon quoted market prices for the same or
similar debt issues.
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.
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 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. To finance premiums paid on such options, from time to time the
Corporation may also write offsetting options at exercise prices which limit
but do not eliminate the effect of purchased options and forward contracts as
a hedge. As of December 31, 1995 and 1994, the Corporation had purchased
foreign exchange options of $11.5 million and $11.6 million, respectively, and
written foreign exchange options of $8.9 million and $10.9 million as of
December 31, 1995 and 1994, respectively, principally related to British
sterling.
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 December 31, 1995
and 1994, 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.
As of December 31, 1994, the Corporation had foreign exchange forward
contracts maturing in 1995 and 1996 to purchase $35.7 million in foreign
currency, primarily British sterling and Canadian dollars, and to sell $7.5
million in foreign currency, primarily Japanese yen, at contracted forward
rates.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation entered into interest rate swap agreements to
effectively convert a portion of its floating rate debt to fixed rate debt. As
of December 31, 1995, the Corporation had agreements outstanding with an
aggregate notional amount of $200.0 million with maturities through 1997. As
of December 31, 1995,
A-16
interest rates payable were at a weighted average fixed rate of 5.6% and
interest rates receivable were floating based on 30-day commercial paper
composite rates. Any interest rate differential on interest rate swaps is
recognized as an adjustment to interest expense over the term of the
agreement. The Corporation's risk related to swap agreements is limited to the
cost of replacing such agreements at current market rates.
7. INTEREST EXPENSE
Interest expense, net consisted of the following:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ----------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Long-term debt and lease obligations $20,949 $19,103 $23,016
Short-term debt 28,576 21,155 11,854
Capitalized interest (1,957) (3,009) (4,646)
------- ------- -------
Interest expense, gross 47,568 37,249 30,224
Interest income (2,735) (1,892) (3,229)
------- ------- -------
Interest expense, net $44,833 $35,357 $26,995
======= ======= =======
8. SHORT-TERM DEBT
Generally, the Corporation's short-term borrowings are in the form of
commercial paper or bank loans with an original maturity of three months or
less. 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 December 31, 1995, with options to increase borrowings by $1.0
billion with the concurrence of the banks. Of the total committed credit
facility, $200 million is for a renewable 364-day term and $400 million is
effective for a five-year term. The credit facilities may be used to fund
general corporate requirements, to support commercial paper borrowings and, in
certain instances, to finance future business acquisitions. As of December 31,
1994, the Corporation maintained lines of credit arrangements with domestic
and international commercial banks, under which it could borrow in various
currencies up to $516 million, at the lending banks' prime commercial interest
rates or lower. These lines of credit were reduced by the Corporation to
approximately $97.7 million when the credit facility agreements became
effective. The Corporation had combined domestic commercial paper borrowings
and short-term foreign bank loans against its credit facilities and lines of
credit of $413.3 million as of December 31, 1995, and $316.8 million against
its lines of credit as of December 31, 1994. The weighted average interest
rates on short-term borrowings outstanding as of December 31, 1995 and 1994
were 5.7% and 6.0%, respectively.
The credit facilities and lines of credit were supported by commitment fee
arrangements. The average fee was approximately .06% per annum of the
commitment. The Corporation is in compliance with all covenants included in
the credit facility agreements. There were no significant compensating balance
agreements which legally restricted these funds.
As a result of maintaining a consolidated cash management system, the
Corporation maintains overdraft positions at certain banks. Such overdrafts,
which were included in accounts payable, were $24.8 million and $23.0 million
as of December 31, 1995 and 1994, respectively.
A-17
9. LONG-TERM DEBT
Long-term debt consisted of the following:
DECEMBER 31, 1995 1994
- ----------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Medium-term Notes, 8.45% to 9.92%, due 1995-1998 $ 40,400 $ 45,400
6.7% Notes due 2005 200,000 --
8.8% Debentures due 2021 100,000 100,000
Other obligations, net of unamortized debt discount 17,017 19,781
-------- --------
Total long-term debt 357,417 165,181
Less--current portion 383 7,954
-------- --------
Long-term portion $357,034 $157,227
======== ========
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.
Aggregate annual maturities during the next five years are: 1996, $.4
million; 1997, $15.6 million; 1998, $25.2 million; 1999, $.2 million; and
2000, $2.2 million. The Corporation's debt is principally unsecured and of
equal priority. None of the debt is convertible into stock of the Corporation.
The Corporation is in compliance with all covenants included in the related
debt agreements.
10. INCOME TAXES
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (FAS No. 109),
which requires the use of the liability method of accounting for deferred
income taxes. This change in accounting as of January 1, 1993, which was
recorded as a catch-up adjustment, increased 1993 net income by $8.2 million
or $.09 per share.
Income before income taxes and accounting changes was as follows:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Domestic $452,084 $411,089 $417,226
Foreign 13,869 (77,951) 13,007
Gain on sale of investment interest -- -- 80,642
-------- -------- --------
Income before income taxes and accounting changes $465,953 $333,138 $510,875
======== ======== ========
The provision for income taxes excluding the FAS No. 109 catch-up adjustment
in 1993, was as follows:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ----------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Current:
Federal $135,034 $126,234 $141,541
State 22,620 24,712 37,358
Foreign -- 301 23,696
-------- -------- --------
Current provision for income taxes 157,654 151,247 202,595
-------- -------- --------
Deferred:
Federal 12,455 6,221 2,949
State 8,198 2,652 1,764
Foreign 5,727 (11,201) 6,334
-------- -------- --------
Deferred provision for income taxes 26,380 (2,328) 11,047
-------- -------- --------
Total provision for income taxes $184,034 $148,919 $213,642
======== ======== ========
The 1994 Foreign deferred income tax benefit was associated primarily with
the restructuring charge recorded in the fourth quarter of that year.
A-18
The tax effects of the significant temporary differences which comprised the
deferred tax assets and liabilities were as follows:
DECEMBER 31, 1995 1994
- ----------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Deferred tax assets:
Post-retirement benefit obligations $ 85,907 $ 85,530
Accrued expenses and other reserves 78,506 75,949
Net operating loss carryforwards, net of valuation
allowances of $25,544 in 1995 and $7,860 in 1994 7,298 7,913
Accrued trade promotion reserves 16,389 14,926
Restructuring reserves 3,352 19,598
Other 24,517 30,830
-------- --------
Total deferred tax assets 215,969 234,746
-------- --------
Deferred tax liabilities:
Depreciation 239,389 231,035
Other 84,256 91,140
-------- --------
Total deferred tax liabilities 323,645 322,175
-------- --------
Net deferred tax liabilities $107,676 $ 87,429
======== ========
Included in:
Current deferred tax assets, net $ 84,785 $105,948
Non-current deferred tax liabilities, net 192,461 193,377
-------- --------
Net deferred tax liabilities $107,676 $ 87,429
======== ========
As of December 31, 1995, the Corporation had $67.4 million of operating loss
carryforwards available to reduce the future taxable income of certain foreign
subsidiaries. Loss carryforwards of $24.0 million must be utilized within the
next ten years and $43.4 million can be utilized over an indefinite period.
The following table reconciles the Federal statutory income tax rate with
the Corporation's effective income tax rate:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (reduction) resulting from:
State income taxes, net of Federal income tax benefits 4.6 6.0 6.2
Restructuring (credit) charge for which no tax benefit was
provided (.3) 4.5 --
Non-deductible acquisition costs .6 .8 .6
Other, net (.4) (1.6) --
---- ---- ----
Effective income tax rate 39.5% 44.7% 41.8%
==== ==== ====
11. RETIREMENT PLANS
The Corporation and its subsidiaries sponsor several defined benefit
retirement plans covering substantially all employees. Plans covering most
domestic salaried and hourly employees provide retirement benefits based on
individual account balances which are increased annually by pay-related and
interest credits. Plans covering certain non-domestic employees provide
retirement benefits based on career average pay, final pay, or final average
pay as defined within the provisions of the individual
A-19
plans. The Corporation also participates in several multi-employer retirement
plans which provide defined benefits to employees covered under certain
collective bargaining agreements.
The Corporation's policy is to fund domestic pension liabilities in
accordance with the minimum and maximum limits imposed by the Employee
Retirement Income Security Act of 1974 and Federal income tax laws,
respectively. Non-domestic pension liabilities are funded in accordance with
applicable local laws and regulations. Plan assets are invested in a broadly
diversified portfolio consisting primarily of domestic and international
common stocks and fixed income securities.
Pension expense included the following components:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- -----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Service cost $ 25,311 $ 30,077 $ 27,835
Interest cost on projected benefit obligations 32,531 28,351 26,423
Investment (return) loss on plan assets (71,578) 8,288 (46,232)
Net amortization and deferral 40,823 (40,550) 18,519
-------- -------- --------
Corporate sponsored plans 27,087 26,166 26,545
Multi-employer plans 361 374 612
Other 615 622 678
-------- -------- --------
Total pension expense $ 28,063 $ 27,162 $ 27,835
======== ======== ========
The funded status and amounts recognized in the consolidated balance sheets
for the retirement plans were as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------- -----------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDED BENEFITS EXCEEDED BENEFITS
ACCUMULATED EXCEEDED ACCUMULATED EXCEEDED
BENEFITS ASSETS BENEFITS ASSETS
- -------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Actuarial present value of:
Vested benefit obligations $17,241 $417,027 $310,061 $33,272
======= ======== ======== =======
Accumulated benefit
obligations $17,833 $447,792 $330,161 $39,966
======= ======== ======== =======
Actuarial present value of
projected benefit obligations $27,005 $476,439 $367,656 $43,250
Plan assets at fair value 19,765 389,064 341,373 1,748
------- -------- -------- -------
Plan assets less than
projected benefit obligations 7,240 87,375 26,283 41,502
Net gain (loss) unrecognized
at date of transition 525 (818) 1,711 (2,198)
Prior service cost and
amendments not yet recognized
in earnings (1,159) (28,701) (19,620) (1,744)
Unrecognized net loss from
past experience different
than that assumed (3,615) (3,660) (9,711) (455)
Minimum liability adjustment -- 21,678 -- 4,031
------- -------- -------- -------
Pension liability (prepaid
pension expense) $ 2,991 $ 75,874 $ (1,337) $41,136
======= ======== ======== =======
The projected benefit obligations for the plans were determined principally
using discount rates of 7.25% as of December 31, 1995, and 8.5% as of December
31, 1994. For both 1995 and 1994 the assumed long-term rate of return on plan
assets was 9.5%. The assumed long-term compensation increase rate for 1995 and
1994 was primarily 4.8%.
A-20
In the third quarter of 1995, the Corporation offered a voluntary retirement
program to domestic eligible employees age 55 and over. The voluntary
retirement program gave eligible salaried employees an opportunity to retire
with enhanced retirement benefits. The pre-tax impact on pension expense of
the 1995 charge was $13.0 million or $7.7 million after tax. This amount has
not been included in the disclosure of pension expense by component.
12. POST-RETIREMENT BENEFITS
The Corporation and its subsidiaries provide certain health care and life
insurance benefits for retired employees subject to pre-defined limits.
Substantially all of the Corporation's domestic employees become eligible for
these benefits at retirement with a pre-defined benefit being available at an
early retirement date. The post-retirement medical benefit is contributory for
pre-Medicare retirees and for most post-Medicare retirees retiring on or after
February 1, 1993. Retiree contributions are based upon a combination of years
of service and age at retirement. The post-retirement life insurance benefit
is non-contributory.
Effective January 1, 1993, the Corporation adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Post-retirement
Benefits Other Than Pensions" (FAS No. 106) which requires that the cost of
post-retirement benefits be accrued during employees' working careers. The
Corporation elected to adopt FAS No. 106 by means of a catch-up adjustment.
This change in accounting as of January 1, 1993, had the effect of decreasing
net income by $112.2 million, or $1.25 per share, after a deferred tax benefit
of $76.3 million.
Prior to 1993, the Corporation expensed such benefits as paid. Expense
recognized under FAS No. 106 during 1993 incrementally reduced net income by
$5.9 million.
Net post-retirement benefit costs consisted of the following components:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- --------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Service cost $ 3,262 $ 3,642 $ 3,997
Interest cost on projected benefit obligations 12,918 13,334 12,897
Amortization (2,322) (1,028) (280)
------- ------- -------
Total $13,858 $15,948 $16,614
======= ======= =======
Obligations are unfunded and the actuarial present values of accumulated
post-retirement benefit obligations recognized in the consolidated balance
sheets were as follows:
DECEMBER 31, 1995 1994
- ----------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Retirees $ 78,090 $ 92,051
Fully eligible active plan participants 24,686 26,030
Other active plan participants 57,448 49,338
-------- --------
Total 160,224 167,419
Plan amendments 31,377 19,224
Unrecognized net gain from past experience different than
that assumed 20,892 20,285
-------- --------
Accrued post-retirement benefits $212,493 $206,928
======== ========
The accumulated post-retirement benefit obligations were determined
principally using discount rates of 7.25% and 8.5% as of December 31, 1995 and
1994, respectively. The assumed average health care cost trend rate used in
measuring the accumulated post-retirement benefit obligation as of December
31, 1995, was 6% which was also the ultimate trend rate. As of December 31,
1994, this rate
A-21
was 12%, gradually declining to approximately 7% by 2003. A one percentage
point increase in the average health care cost trend rate for each year would
increase the accumulated post-retirement benefit obligations as of December
31, 1995 and 1994, by $22.2 million and $23.5 million, respectively, and would
increase the sum of the net service and interest cost components of net post-
retirement benefit costs for 1995 and 1994 by $2.4 million and $2.8 million,
respectively.
The pre-tax impact on post-retirement benefits expense and liabilities of
the 1995 charge for the voluntary retirement program was $.4 million or $.2
million after tax. This amount has not been included in the disclosure of net
post-retirement benefit costs by component.
As part of its long-range financing plans, the Corporation, in 1989,
implemented a corporate-owned life insurance program covering most of its
domestic employees. After paying employee death benefits, proceeds from this
program will be available for general corporate purposes and may be used to
offset future employee benefits costs, including retiree medical benefits. The
Corporation's investment in corporate-owned life insurance policies was
recorded net of policy loans in other assets, and interest accrued on the
policy loans was included in accrued liabilities as of December 31, 1995 and
1994. Net life insurance expense, including interest expense, was included in
selling, marketing and administrative expenses.
13. EMPLOYEE STOCK OWNERSHIP TRUST
The Corporation's employee stock ownership trust (ESOP) serves as the
primary vehicle for contributions to its existing employee savings and stock
investment plan for participating domestic salaried and hourly employees. The
ESOP was funded by a 15-year 7.75% loan of $47.9 million from the Corporation.
During 1995 and 1994, the ESOP received a combination of dividends on
unallocated shares and contributions from the Corporation equal to the amount
required to meet its principal and interest payments under the loan.
Simultaneously, the ESOP allocated to participants 79,588 shares of Common
Stock each year. As of December 31, 1995, the ESOP held 285,757 of allocated
shares and 875,464 of unallocated shares. All ESOP shares are considered
outstanding for income per share computations.
The Corporation recognized net compensation expense equal to the shares
allocated multiplied by the original cost of $40 1/8 per share less dividends
received by the ESOP on unallocated shares. Compensation expense related to
the ESOP for 1995, 1994 and 1993 was $1.9 million, $1.7 million and $2.0
million, respectively. Dividends paid on unallocated ESOP shares were $1.2
million in 1995, 1994 and 1993. The unearned ESOP compensation balance in
stockholders' equity represented deferred compensation expense to be
recognized by the Corporation in future years as additional shares are
allocated to participants.
14. CAPITAL STOCK AND NET INCOME PER SHARE
As of December 31, 1995, the Corporation had 530,000,000 authorized shares
of capital stock. Of this total, 450,000,000 shares were designated as Common
Stock, 75,000,000 shares as Class B Common Stock (Class B Stock), and
5,000,000 shares as Preferred Stock, each class having a par value of one
dollar per share. As of December 31, 1995, a combined total of 89,975,436
shares of both classes of common stock had been issued of which 77,265,883
shares were outstanding. No shares of the Preferred Stock were issued or
outstanding during the three-year period ended December 31, 1995.
Holders of the Common Stock and the Class B Stock generally vote together
without regard to class on matters submitted to stockholders, including the
election of directors, with the Common Stock having one vote per share and the
Class B Stock having ten votes per share. However, the Common Stock, voting
separately as a class, is entitled to elect one-sixth of the Board of
Directors. With respect
A-22
to dividend rights, the Common Stock is entitled to cash dividends 10% higher
than those declared and paid on the Class B Stock.
Class B Stock can be converted into Common Stock on a share-for-share basis
at any time. During 1995, 1994 and 1993, a total of 1,525 shares, 10,300
shares and 4,000 shares, respectively, of Class B Stock were converted into
Common Stock.
Hershey Trust Company, as Trustee for the benefit of Milton Hershey School
(Milton Hershey School Trust), as institutional fiduciary for estates and
trusts unrelated to Milton Hershey School, and as direct owner of investment
shares, held a total of 12,300,979 shares of the Common Stock, and as Trustee
for the benefit of Milton Hershey School, held 15,153,003 shares of the Class
B Stock as of December 31, 1995, and was entitled to cast approximately 76% of
the total votes of both classes of the Corporation's common stock. The Milton
Hershey School Trust must approve the issuance of shares of Common Stock or
any other action which would result in the Milton Hershey School Trust not
continuing to have voting control of the Corporation.
In 1993, the Corporation's Board of Directors approved a share repurchase
program to acquire from time to time, through open market or privately
negotiated transactions, up to $200 million of Common Stock. A total of
3,923,780 shares of Common Stock had been acquired for approximately $197.7
million under the program, of which 264,000 shares were retired and the
remaining 3,659,780 shares were held as Treasury Stock as of December 31,
1995.
In August 1995, the Corporation purchased an additional 9,049,773 shares of
its Common Stock to be held as Treasury Stock from the Milton Hershey School
Trust for $500.0 million. In connection with the share repurchase program
begun in 1993, a total of 2,000,000 shares were also acquired from the Milton
Hershey School Trust in 1993 for approximately $103.1 million. As of December
31, 1995, a total of 12,709,553 shares were held as Treasury Stock.
Net income per share has been computed based on the weighted average number
of shares of the Common Stock and the Class B Stock outstanding during the
year. Average shares outstanding were 82,843,541 for 1995, 87,018,626 for 1994
and 89,757,135 for 1993.
15. INCENTIVE PLAN
The long-term portion of the 1987 Key Employee Incentive Plan, as amended
(Plan), provides for grants or awards to senior executives and key employees
of one or more of the following: performance stock units, non-qualified stock
options (stock options), stock appreciation rights and restricted stock units.
The Plan also provides for the deferral of performance stock unit awards by
participants.
As of December 31, 1995, a total of 133,365 contingent performance stock
units had been granted for potential future distribution, primarily related to
three-year cycles ending December 31, 1995, 1996 and 1997. Deferred
performance stock units and accumulated dividend amounts totaled 211,113
shares as of December 31, 1995.
Stock options are granted at exercise prices of not less than 100% of the
fair market value of a share of Common Stock at the time the option is granted
and are exercisable for periods no longer than ten years from the date of
grant. Each option may be used to purchase one share of Common Stock. No
compensation expense is recognized under the stock options portion of the
Plan.
No stock appreciation rights or restricted stock units were outstanding as
of December 31, 1995. Stock options exercisable as of December 31, 1995 and
1994 were 1,450,900 shares and 1,734,750 shares, respectively.
A-23
Stock option activity was as follows:
SHARES UNDER OPTIONS
-----------------------------
NUMBER OPTION PRICE
OF SHARES PER SHARE
- -------------------------------------------------------------
Outstanding--January 1, 1993 1,716,975 $25 3/8 to 44 3/4
Granted 116,600 $47 to 53
Exercised (82,850) $25 3/8 to 35 3/8
Cancelled (20,300) $44 3/4
---------
Outstanding--December 31, 1993 1,730,425 $25 3/8 to 53
Granted 963,800 $49
Exercised (104,975) $25 3/8 to 44 3/4
Cancelled (55,300) $44 3/4 to 49
---------
Outstanding--December 31, 1994 2,533,950 $25 3/8 to 53
Granted 118,700 $48 3/8
Exercised (421,550) $25 3/8 to 47
Cancelled (13,200) $44 3/4 to 49
---------
Outstanding--December 31, 1995 2,217,900 $25 3/8 to 53
=========
16. SUPPLEMENTAL BALANCE SHEET INFORMATION
ACCOUNTS RECEIVABLE--TRADE
In the normal course of business, the Corporation extends credit to
customers which satisfy pre-defined credit criteria. The Corporation believes
that it has little concentration of credit risk due to the diversity of its
customer base. Receivables, as shown on the consolidated balance sheets, were
net of allowances and anticipated discounts of $14.8 million and $14.0 million
as of December 31, 1995 and 1994, respectively.
INVENTORIES
The Corporation values the majority of its inventories under the last-in,
first-out (LIFO) method and the remaining inventories at the lower of first-
in, first-out (FIFO) cost or market. LIFO cost of inventories valued using the
LIFO method was $282.0 million and $318.5 million as of December 31, 1995 and
1994, respectively, and all inventories were stated at amounts that did not
exceed realizable values. Total inventories were as follows:
DECEMBER 31, 1995 1994
-----------------------------------------
IN THOUSANDS OF
DOLLARS
Raw materials $189,371 $234,317
Goods in process 28,201 28,680
Finished goods 249,106 247,272
-------- --------
Inventories at FIFO 466,678 510,269
Adjustment to LIFO (69,108) (64,567)
-------- --------
Total inventories $397,570 $445,702
======== ========
A-24
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment balances included construction in progress of
$119.5 million and $76.9 million as of December 31, 1995 and 1994,
respectively. Major classes of property, plant and equipment were as follows:
DECEMBER 31, 1995 1994
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Land $ 35,385 $ 50,678
Buildings 471,663 467,950
Machinery and equipment 1,683,338 1,604,901
---------- ----------
Property, plant and equipment, gross 2,190,386 2,123,529
Accumulated depreciation (754,377) (655,132)
---------- ----------
Property, plant and equipment, net $1,436,009 $1,468,397
========== ==========
ACCRUED LIABILITIES
Accrued liabilities were as follows:
DECEMBER 31, 1995 1994
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Payroll and other compensation $ 97,710 $ 67,155
Advertising and promotion 87,368 81,561
Other 115,471 116,567
---------- ----------
Total accrued liabilities $ 300,549 $ 265,283
========== ==========
OTHER LONG-TERM LIABILITIES
Other long-term liabilities were as follows:
DECEMBER 31, 1995 1994
--------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Accrued post-retirement benefits $ 204,044 $ 198,251
Other 129,770 104,805
---------- ----------
Total other long-term liabilities $ 333,814 $ 303,056
========== ==========
A-25
17. SEGMENT INFORMATION
The Corporation operates in a single consumer foods line of business,
encompassing the domestic and foreign manufacture, distribution and sale of
chocolate, confectionery, grocery and pasta products. The Corporation's
principal operations and markets are located in the United States.
Operations in Canada and Europe represent the majority of the Corporation's
foreign business. Historically, transfers of product between geographic areas
have not been significant. In 1995 and 1994, sales to Wal-Mart Stores, Inc. and
Subsidiaries amounted to approximately 11% and 10% of total net sales,
respectively. Net sales, income before interest, income taxes and accounting
changes, and identifiable assets by geographic segment were as follows:
FOR THE YEARS ENDED DECEMBER 31, 1995 1994 1993
- ------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
Net sales:
Domestic $3,218,935 $3,124,155 $3,080,329
Foreign 471,732 482,116 407,920
---------- ---------- ----------
Total $3,690,667 $3,606,271 $3,488,249
========== ========== ==========
Income (loss) before interest, income taxes
and accounting changes:
Domestic $ 499,161 $ 446,585 $ 446,565
Foreign 11,625 (78,090) 10,663
Gain on sale of investment interest -- -- 80,642
---------- ---------- ----------
Total $ 510,786 $ 368,495 $ 537,870
========== ========== ==========
Identifiable assets as of December 31:
Domestic $2,336,078 $2,338,184 $2,281,766
Foreign 494,545 552,797 573,325
---------- ---------- ----------
Total $2,830,623 $2,890,981 $2,855,091
========== ========== ==========
18. QUARTERLY DATA (UNAUDITED)
Summary quarterly results were as follows:
YEAR 1995 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------
IN THOUSANDS EXCEPT PER
SHARE AMOUNTS
Net sales $867,446 $722,269 $981,101 $1,119,851
Gross profit 364,085 298,506 408,658 493,144
Net income 60,633 33,323 82,127 105,836(a)
Net income per share(b) .70 .38 1.02 1.37
YEAR 1994 FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------
IN THOUSANDS EXCEPT PER
SHARE AMOUNTS
Net sales $883,890 $675,983 $966,511 $1,079,887
Gross profit 357,162 272,883 404,543 474,127
Net income 53,016 25,325 81,063 24,815(c)
Net income per share .61 .29 .93 .29
- --------
(a) Net income for the fourth quarter and year 1995 included a net after-tax
credit of $2.0 million associated with adjustments to accrued restructuring
reserves. Net income per share was similarly impacted.
(b) Quarterly income per share amounts for 1995 do not total to the annual
amount due to the changes in weighted average shares outstanding during the
year.
(c) Net income for the fourth quarter and year 1994 included an after-tax
restructuring charge of $80.2 million. Net income per share was similarly
impacted.
A-26
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Hershey Foods Corporation is responsible for the financial statements and
other financial information contained in this report. The Corporation believes
that the financial statements have been prepared in conformity with generally
accepted accounting principles appropriate under the circumstances to reflect
in all material respects the substance of applicable events and transactions.
In preparing the financial statements, it is necessary that management make
informed estimates and judgments. The other financial information in this
annual report is consistent with the financial statements.
The Corporation maintains a system of internal accounting controls designed
to provide reasonable assurance that financial records are reliable for
purposes of preparing financial statements and that assets are properly
accounted for and safeguarded. The concept of reasonable assurance is based on
the recognition that the cost of the system must be related to the benefits to
be derived. The Corporation believes its system provides an appropriate
balance in this regard. The Corporation maintains an Internal Audit Department
which reviews the adequacy and tests the application of internal accounting
controls.
The financial statements have been audited by Arthur Andersen LLP,
independent public accountants, whose appointment was ratified by stockholder
vote at the stockholders' meeting held on April 24, 1995. Their report
expresses an opinion that the Corporation's financial statements are fairly
stated in conformity with generally accepted accounting principles, and they
have indicated to us that their examination was performed in accordance with
generally accepted auditing standards which are designed to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.
The Audit Committee of the Board of Directors of the Corporation, consisting
solely of non-management directors, meets regularly with the independent
public accountants, internal auditors and management to discuss, among other
things, the audit scopes and results. Arthur Andersen LLP and the internal
auditors both have full and free access to the Audit Committee, with and
without the presence of management.
A-27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of Hershey Foods Corporation:
We have audited the accompanying consolidated balance sheets of Hershey
Foods Corporation (a Delaware Corporation) and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, appearing on pages A-9 through A-26. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hershey Foods Corporation
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Notes 10 and 12 to the consolidated financial statements,
effective January 1, 1993, the Corporation changed its methods of accounting
for income taxes and post-retirement benefits other than pensions.
/s/ Arthur Andersen
New York, New York
January 25, 1996
A-28
HERSHEY FOODS CORPORATION
ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
ALL DOLLAR AND SHARE AMOUNTS IN THOUSANDS EXCEPT
MARKET PRICE AND PER SHARE STATISTICS
10-YEAR
COMPOUND
GROWTH RATE 1995 1994 1993
----------- ---------- ------------- -------------
SUMMARY OF
OPERATIONS(a)
Net Sales 9.2% $3,690,667 3,606,271 3,488,249
---------- ------------- -------------
Cost of Sales 8.0% $2,126,274 2,097,556 1,995,502
Selling, Marketing and
Administrative 11.8% $1,053,758 1,034,115 1,035,519
Restructuring Credit,
(Charge) and Gain,
Net $ 151 (106,105) --
Gain on Sale of
Investment Interest $ -- -- 80,642
Interest Expense, Net 15.9% $ 44,833 35,357 26,995
Income Taxes 7.2% $ 184,034 148,919 213,642
---------- ------------- -------------
Income from Continuing
Operations Before
Accounting Changes 11.3% $ 281,919 184,219 297,233
Net Cumulative Effect
of Accounting Changes $ -- -- (103,908)
Discontinued
Operations $ -- -- --
---------- ------------- -------------
Net Income 9.6% $ 281,919 184,219 193,325
========== ============= =============
Income Per Share:
From Continuing
Operations Before
Accounting
Changes(b) 12.7% $ 3.40(g) 2.12(h) 3.31(i)
Net Cumulative Effect
of Accounting Changes $ -- -- (1.16)
Net Income(b) 11.1% $ 3.40(g) 2.12(h) 2.15(i)
Weighted Average
Shares Outstanding(b) 82,844 87,019 89,757
Dividends Paid on
Common Stock 9.3% $ 91,190 89,660 84,711
Per Share(b) 11.2% $ 1.370 1.250 1.140
Dividends Paid on
Class B Common Stock 11.2% $ 18,900 17,301 15,788
Per Share(b) 11.2% $ 1.240 1.135 1.035
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net
Sales 7.6% 7.3%(c) 7.4%(d)
Depreciation 15.5% $ 119,438 114,821 100,124
Advertising 7.5% $ 159,200 120,629 130,009
Promotion 14.3% $ 402,454 419,164 444,546
Payroll 7.6% $ 461,928 472,997 469,564
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 8.6% $ 140,626 138,711 211,621
Total Assets 9.8% $2,830,623 2,890,981 2,855,091
Long-term Portion of
Debt 15.2% $ 357,034 157,227 165,757
Stockholders' Equity 4.1% $1,082,959 1,441,100 1,412,344
Net Book Value Per
Share(b) 6.1% $ 14.02 16.61 16.12
Operating Return on
Average Stockholders'
Equity 22.2% 18.5% 17.8%
Operating Return on
Average Invested
Capital 17.1% 15.6% 15.0%
Full-time Employees 13,300 14,000 14,300
STOCKHOLDERS' DATA
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end(b) 77,266 86,735 87,613
Market Price of Common
Stock at Year-end(b) 14.3% $ 65 48 3/8 49
Range During Year(b) $67 7/8-48 53 1/2-41 1/8 55 7/8-43 1/2
- --------
See Notes to the Eleven-Year Consolidated Financial Summary on page A-31.
A-29
1992 1991 1990 1989 1988 1987
------------ ------------ ------------ ------------ ------------ ------------
SUMMARY OF
OPERATIONS(a)
Net Sales 3,219,805 2,899,165 2,715,609 2,420,988 2,168,048 1,863,816
------------ ------------ ------------ ------------ ------------ ------------
Cost of Sales 1,833,388 1,694,404 1,588,360 1,455,612 1,326,458 1,149,663
Selling, Marketing and
Administrative 958,189 814,459 776,668 655,040 575,515 468,062
Restructuring Credit,
(Charge) and Gain,
Net -- -- 35,540 -- -- --
Gain on Sale of
Investment Interest -- -- -- -- -- --
Interest Expense, Net 27,240 26,845 24,603 20,414 29,954 22,413
Income Taxes 158,390 143,929 145,636 118,868 91,615 99,604
------------- ------------- ------------- ------------- ------------- -------------
Income from Continuing
Operations Before
Accounting Changes 242,598 219,528 215,882 171,054 144,506 124,074
Net Cumulative Effect
of Accounting Changes -- -- -- -- -- --
Discontinued
Operations -- -- -- -- 69,443 24,097
------------- ------------- ------------- ------------- ------------- -------------
Net Income 242,598 219,528 215,882 171,054 213,949 148,171
============= ============= ============= ============= ============= =============
Income Per Share:
From Continuing
Operations Before
Accounting
Changes(b) 2.69 2.43 2.39(j) 1.90 1.60 1.38
Net Cumulative Effect
of Accounting Changes -- -- -- -- -- --
Net Income(b) 2.69 2.43 2.39(j) 1.90 2.37 1.64
Weighted Average
Shares Outstanding(b) 90,186 90,186 90,186 90,186 90,186 90,186
Dividends Paid on
Common Stock 77,174 70,426 74,161(e) 55,431 49,433 43,436
Per Share(b) 1.030 .940 .990(e) .740 .660 .580
Dividends Paid on
Class B Common Stock 14,270 12,975 13,596(e) 10,161 9,097 8,031
Per Share(b) .935 .850 .890(e) .665 .595 .525
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net
Sales 7.5% 7.6% 7.2%(f) 7.1% 6.7% 6.7%
Depreciation 84,434 72,735 61,725 54,543 43,721 35,397
Advertising 137,631 117,049 146,297 121,182 99,082 97,033
Promotion 398,577 325,465 315,242 256,237 230,187 171,162
Payroll 433,162 398,661 372,780 340,129 298,483 263,529
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 249,795 226,071 179,408 162,032 101,682 68,504
Total Assets 2,672,909 2,341,822 2,078,828 1,814,101 1,764,665 1,544,354
Long-term Portion of
Debt 174,273 282,933 273,442 216,108 233,025 280,900
Stockholders' Equity 1,465,279 1,335,251 1,243,537 1,117,050 1,005,866 832,410
Net Book Value Per
Share(b) 16.25 14.81 13.79 12.39 11.15 9.23
Operating Return on
Average Stockholders'
Equity 17.3% 17.0% 16.6% 16.1% 17.5% 19.0%
Operating Return on
Average Invested
Capital 14.4% 13.8% 13.4% 13.2% 13.3% 13.5%
Full-time Employees 13,700 14,000 12,700 11,800 12,100 10,540
STOCKHOLDERS' DATA
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end(b) 90,186 90,186 90,186 90,186 90,186 90,186
Market Price of Common
Stock at Year-end(b) 47 44 3/8 37 1/2 35 7/8 26 24 1/2
Range During Year(b) 48 3/8-38 1/4 44 1/2-35 1/8 39 5/8-28 1/4 36 7/8-24 3/4 28 5/8-21 7/8 37 3/4-20 3/4
1986 1985
---------- ----------
SUMMARY OF
OPERATIONS(a)
Net Sales 1,635,486 1,526,584
---------- ----------
Cost of Sales 1,032,061 982,370
Selling, Marketing and
Administrative 387,227 345,299
Restructuring Credit,
(Charge) and Gain,
Net -- --
Gain on Sale of
Investment Interest -- --
Interest Expense, Net 8,061 10,240
Income Taxes 100,931 91,910
---------- -----------
Income from Continuing
Operations Before
Accounting Changes 107,206 96,765
Net Cumulative Effect
of Accounting Changes -- --
Discontinued
Operations 25,558 15,462
--------- -----------
Net Income 132,764 112,227
========= ===========
Income Per Share:
From Continuing
Operations Before
Accounting
Changes(b) 1.15 1.03
Net Cumulative Effect
of Accounting Changes -- --
Net Income(b) 1.42 1.19
Weighted Average
Shares Outstanding(b) 93,508 94,011
Dividends Paid on
Common Stock 40,930 37,386
Per Share(b) .520 .475
Dividends Paid on
Class B Common Stock 7,216 6,556
Per Share(b) .472 .428
Income from Continuing
Operations Before
Accounting Changes as
a Percent of Net
Sales 6.6% 6.3%
Depreciation 31,254 28,348
Advertising 83,600 77,135
Promotion 122,508 105,401
Payroll 238,742 222,267
YEAR-END POSITION AND
STATISTICS(a)
Capital Additions 74,452 61,361
Total Assets 1,262,332 1,116,074
Long-term Portion of
Debt 185,676 86,986
Stockholders' Equity 727,941 727,899
Net Book Value Per
Share(b) 8.07 7.74
Operating Return on
Average Stockholders'
Equity 18.2% 17.2%
Operating Return on
Average Invested
Capital 13.5% 13.5%
Full-time Employees 10,210 10,380
STOCKHOLDERS' DATA
Outstanding Shares of
Common Stock and
Class B Common Stock
at Year-end(b) 90,186 94,011
Market Price of Common
Stock at Year-end(b) 24 5/8 17 1/8
Range During Year(b) 30-15 1/2 18 3/8-11 5/8
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NOTES TO THE ELEVEN-YEAR CONSOLIDATED FINANCIAL SUMMARY
(a) All amounts for years prior to 1988 have been restated for discontinued
operations, where applicable. Operating Return on Average Stockholders'
Equity and Operating Return on Average Invested Capital have been computed
using Net Income, excluding the 1988 gain and 1985 loss on disposal
included in Discontinued Operations, the 1993 Net Cumulative Effect of
Accounting Changes, and the after-tax impacts of the 1990 Restructuring
Gain, Net, the 1993 Gain on Sale of the Investment Interest in Freia
Marabou a.s (Freia), the 1994 Restructuring Charge and the net 1995
Restructuring Credit.
(b) All shares and per share amounts have been adjusted for the three-for-one
stock split effective September 15, 1986.
(c) Calculated percent excludes the 1994 Restructuring Charge. Including the
charge, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 5.1%.
(d) Calculated percent excludes the Gain on Sale of Investment Interest in
Freia. Including the gain, Income from Continuing Operations Before
Accounting Changes as a Percent of Net Sales was 8.5%.
(e) Amounts included a special dividend for 1990 of $11.2 million or $.15 per
share of Common Stock and $2.1 million or $.135 per share of Class B
Common Stock.
(f) Calculated percent excludes the 1990 Restructuring Gain, Net. Including
the gain, Income from Continuing Operations Before Accounting Changes as a
Percent of Net Sales was 7.9%.
(g) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1995 included a net $.02 per share credit
associated with adjustments to accrued restructuring reserves. Excluding
the impact of this net credit, Income Per Share from Continuing Operations
Before Accounting Changes and Net Income Per Share would have been $3.38.
(h) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1994 included a $.92 per share restructuring
charge. Excluding the impact of this charge, Income Per Share from
Continuing Operations Before Accounting Changes and Net Income Per Share
would have been $3.04.
(i) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1993 included a $.45 per share gain on the sale
of the investment interest in Freia. Excluding the impact of this gain,
Income Per Share from Continuing Operations Before Accounting Changes
would have been $2.86.
(j) Income Per Share from Continuing Operations Before Accounting Changes and
Net Income Per Share for 1990 included a $.22 per share Restructuring
Gain, Net. Excluding the impact of this gain, Income Per Share from
Continuing Operations Before Accounting Changes and Net Income Per Share
would have been $2.17.
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