UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-183
HERSHEY FOODS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 23-0691590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Crystal A Drive
Hershey, Pennsylvania 17033
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 534-6799
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $1 par value - 61,992,904 shares, as of April 29, 1996.
Class B Common Stock, $1 par value - 15,241,454 shares, as of April 29,
1996.
Exhibit Index - Page 13
Page 2
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
For the Three Months Ended
March 31, April 2,
1996 1995
Net Sales $931,514 $867,446
Costs and Expenses:
Cost of sales 549,748 503,361
Selling, marketing and administrative 270,352 253,548
Total costs and expenses 820,100 756,909
Income before Interest and Income Taxes 111,414 110,537
Interest expense, net 12,224 9,144
Income before Income Taxes 99,190 101,393
Provision for income taxes 39,775 40,760
Net Income $ 59,415 $ 60,633
Net Income per Share $ .77 $ .70
Cash Dividends Paid per Share of Common Stock $ .3600 $ .3250
Cash Dividends Paid per Share of Class B
Common Stock $ .3250 $ .2950
The accompanying notes are an integral part of these statements.
Page 3
HERSHEY FOODS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(in thousands of dollars)
ASSETS 1996 1995
Current Assets:
Cash and cash equivalents $ 59,936 $ 32,346
Accounts receivable - trade 239,172 326,024
Inventories 447,256 397,570
Deferred income taxes 85,376 84,785
Prepaid expenses and other 63,203 81,598
Total current assets 894,943 922,323
Property, Plant and Equipment, at cost 2,228,561 2,190,386
Less - accumulated depreciation and
amortization (791,200) (754,377)
Net property, plant and equipment 1,437,361 1,436,009
Intangibles Resulting from Business
Acquisitions 425,961 428,714
Other Assets 40,574 43,577
Total assets $2,798,839 $2,830,623
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 121,877 $ 127,067
Accrued liabilities 269,751 308,123
Accrued income taxes 36,673 15,514
Short-term debt 371,118 413,268
Current portion of long-term debt 1,882 383
Total current liabilities 801,301 864,355
Long-term Debt 354,184 357,034
Other Long-term Liabilities 334,126 333,814
Deferred Income Taxes 198,282 192,461
Total liabilities 1,687,893 1,747,664
Stockholders' Equity:
Preferred Stock, shares issued:
none in 1996 and 1995 - -
Common Stock, shares issued:
74,733,982 in 1996 and 1995 74,734 74,734
Class B Common Stock, shares issued:
15,241,454 in 1996 and 1995 15,241 15,241
Additional paid-in capital 43,342 47,732
Cumulative foreign currency translation
adjustments (27,985) (29,240)
Unearned ESOP compensation (34,330) (35,128)
Retained earnings 1,726,804 1,694,696
Treasury-Common Stock shares at cost:
12,709,928 in 1996 and 12,709,553
in 1995 (686,860) (685,076)
Total stockholders' equity 1,110,946 1,082,959
Total liabilities and stockholders'
equity $2,798,839 $2,830,623
The accompanying notes are an integral part of these balance sheets.
Page 4
HERSHEY FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Three Months Ended
March 31, April 2,
1996 1995
Cash Flows Provided from Operating Activities $122,063 $ 84,038
Cash Flows Provided from (Used by)
Investing Activities
Capital additions (36,017) (32,962)
Proceeds from divestitures 15,852 -
Other, net 2,872 (4,732)
Net Cash Flows (Used by) Investing Activities (17,293) (37,694)
Cash Flows Provided from (Used by)
Financing Activities
Net (decrease) increase in short-term debt (42,150) (12,741)
Long-term borrowings - 333
Repayment of long-term debt (1,311) (5,418)
Cash dividends paid (27,307) (27,732)
Exercise of stock options 9,578 2,269
Incentive plan transactions (13,707) (3,553)
Repurchase of Common Stock (2,283) (1,221)
Net Cash Flows Provided from (Used by)
Financing Activities (77,180) (48,063)
Increase (Decrease) in Cash and Cash Equivalents 27,590 (1,719)
Cash and Cash Equivalents, beginning of period 32,346 26,738
Cash and Cash Equivalents, end of period $ 59,936 $ 25,019
Interest Paid $ 9,441 $ 9,086
Income Taxes Paid $ 10,023 $ 8,037
The accompanying notes are an integral part of these statements.
Page 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated condensed financial
statements include the accounts of the Corporation and its
subsidiaries after elimination of intercompany accounts and
transactions. These statements reflect all adjustments which are,
in the opinion of management, necessary for a fair presentation of
the information contained herein. All such adjustments were of a
normal and recurring nature. Certain reclassifications have been
made to prior year amounts to conform to the 1995 presentations.
2. Interest expense, net consisted of the following:
For the Three Months Ended
March 31, 1996 April 2, 1995
(in thousands of dollars)
Interest expense $13,871 $10,184
Interest income (892) (746)
Capitalized interest (755) (294)
Interest expense, net $12,224 $ 9,144
3. Income per share has been computed based on the weighted average
number of shares of the Common Stock and the Class B Common Stock
outstanding during the period. Average shares outstanding during the
first quarter were 77,313,574 in 1996 and 86,728,387 in 1995. There
were no shares of Preferred Stock outstanding during the periods
presented.
A total of 3,956,930 shares of Common Stock have been repurchased
under a share repurchase program begun in 1993, thereby completing
the $200 million program as of March 31, 1996. Of the total shares
repurchased, 264,000 shares were retired, 32,775 shares were reissued
in connection with the exercise of stock options and 3,660,155 shares
were held as Treasury Stock as of March 31, 1996. In addition, in
August 1995, the Corporation purchased 9,049,773 shares of its Common
Stock from Hershey Trust Company, as Trustee for the benefit of
Milton Hershey School. A total of 12,709,928 shares were held as
Treasury Stock as of March 31, 1996.
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. The repurchase of shares under this program
began in April 1996.
4. The majority of inventories are valued under the last-in, first-out
(LIFO) method. The remaining inventories are stated at the lower of
first-in, first-out (FIFO) cost or market. Inventories were as
follows:
March 31, 1996 December 31, 1995
(in thousands of dollars)
Raw materials $245,890 $189,371
Goods in process 30,872 28,201
Finished goods 248,299 249,106
Inventories at FIFO 525,061 466,678
Adjustment to LIFO (77,805) (69,108)
Total inventories $447,256 $397,570
Page 6
5. In the fourth quarter of 1994, the Corporation recorded a pre-tax
restructuring charge of $106.1 million following a comprehensive
review of domestic and international operations designed to enhance
performance of operating assets by lowering operating and
administrative costs, eliminating underperforming assets and
streamlining the overall decision-making process.
As of March 31, 1996, $85.1 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. Remaining accrued restructuring reserves will be utilized
during 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.
6. In June 1995, the Corporation completed the sale of the outstanding
shares of Overspecht B.V. (OZF Jamin) to a management buyout group
at OZF Jamin, as part of the restructuring program announced by the
Corporation in late 1994. The Corporation purchased the outstanding
shares of OZF Jamin in October 1993 for approximately $20.2 million.
7. In January 1996, the Corporation completed the sale of the assets of
Hershey Canada, Inc.'s PLANTERS nut (Planters) and LIFE SAVERS and
BREATH SAVERS hard candy, and BEECH-NUT cough drop (Life Savers)
businesses to Johnvince Foods Group and Beta Brands Inc.,
respectively. Both transactions were part of the Corporation's
restructuring program.
8. In December 1995, the Corporation completed the acquisition of the
outstanding shares of the confectionery company Henry Heide,
Incorporated (Henry Heide), for approximately $12.5 million. Henry
Heide's manufacturing facility is located in New Brunswick, N.J.,
where it manufactures a variety of non-chocolate confectionery
products including JUJYFRUITS candies and WUNDERBEANS jellybeans.
The acquisition has been accounted for as a purchase and,
accordingly, results subsequent to the date of acquisition are
included in the consolidated financial statements. Had the results
of the Henry Heide acquisition been included in consolidated results
for the full corresponding three-month period of 1995, the effect
would not have been material.
9. 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.
10. The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term
debt approximated fair value as of March 31, 1996 and December 31,
1995, because of the relatively short maturity of these instruments.
The carrying value of long-term debt, including the current portion,
also approximated fair value as of March 31, 1996 and December 31,
1995, based upon quoted market prices, as of those dates, for the
same or similar debt issues.
Page 7
As of March 31, 1996, the Corporation had foreign exchange forward
contracts maturing in 1996 and 1997 to purchase $24.0 million in
foreign currency, primarily British sterling, German marks, and Irish
punt, and to sell $13.5 million in foreign currency, primarily
Canadian dollars and Japanese yen, at contracted forward rates.
As of December 31, 1995, the Corporation had foreign exchange forward
contracts maturing in 1996 and 1997 to purchase $54.7 million in
foreign currency, primarily Canadian dollars, British sterling and
Swiss francs, and to sell $26.4 million in foreign currency,
primarily Italian lira, Canadian dollars and Japanese yen, at
contracted forward rates. Additionally, as of December 31, 1995, the
Corporation had purchased foreign exchange options of $11.5 million
and written foreign exchange options of $8.9 million, principally
related to British sterling. Such options expired or were settled
in the first quarter of 1996.
The fair value of foreign exchange forward contracts is estimated by
obtaining quotes for future contracts with similar terms, adjusted
where necessary for maturity differences, and the fair value of
foreign exchange options is estimated using active market quotations.
As of March 31, 1996 and December 31, 1995, the fair value of foreign
exchange forward and options contracts approximated carrying value.
The Corporation does not hold or issue financial instruments for
trading purposes.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation entered into interest rate swap agreements
in the fourth quarter of 1995 to effectively convert a portion of its
floating rate debt to fixed rate debt. As of March 31, 1996, the
Corporation had agreements outstanding with an aggregate notional
amount of $200.0 million with maturities through 1997. As of March
31, 1996, interest rates payable were at a weighted average fixed
rate of 5.6% and interest rates receivable were floating based on 30-
day commercial paper composite rates. Any interest rate differential
on interest rate swaps is recognized as an adjustment to interest
expense 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.
11. Reference is made to the Registrant's 1995 Annual Report on Form 10-K
for more detailed financial statements and footnotes.
Page 8
Management's Discussion and Analysis
Results of Operations - First Quarter 1996 vs. First Quarter 1995
Consolidated net sales for the first quarter rose from $867.4
million in 1995 to $931.3 million in 1996, an increase of 7% from
the prior year. The higher sales primarily reflected sales volume
increases for existing confectionery and grocery brands,
incremental sales from new domestic confectionery and grocery
products, confectionery selling price increases in the United
States and incremental sales from the acquisition of Henry Heide.
These increases were offset somewhat by lower sales resulting from
the divestitures of OZF Jamin in the second quarter of 1995 and the
Planters and Life Savers businesses in January 1996.
The consolidated gross margin decreased from 42.0% in 1995 to 41.0%
in 1996. The decrease was primarily the result of higher costs for
certain major raw materials and increased manufacturing costs
primarily attributable to production start-up and manufacturing of
new products, along with adverse weather conditions. These cost
increases were partially offset by confectionery price increases
and the favorable impact of the OZF Jamin divestiture. Selling,
marketing and administrative expenses increased by 7%, due to
increased advertising and promotion expenses reflecting sales
volume increases and activities related to the anticipated
introduction of new products.
Net interest expense in the first quarter of 1996 was $3.1 million
above the comparable period of 1995 primarily as a result of higher
fixed interest expense. The increase in fixed interest was due to
the issuance of $200 million of 6.7% Notes due 2005 (Notes) in
October 1995. The proceeds from the issuance of the Notes were
used to reduce short-term borrowings required to fund capital
additions, payment of cash dividends, share repurchases and working
capital requirements.
The first quarter effective income tax rate decreased from 40.2% in
1995 to 40.1% in 1996.
Financial Condition
Historically, the Corporation's major source of financing has been
cash generated from operations. Domestic seasonal working capital
needs, which typically peak during the summer, generally have been
met by issuing commercial paper. During the first three months of
1996, the Corporation's cash and cash equivalents increased by
$27.6 million. Cash provided from operations was sufficient to
finance capital additions of $36.0 million, pay cash dividends of
$27.3 million and reduce short-term borrowings by $42.2 million.
The increase in cash provided from operations primarily reflected
favorable changes in working capital balances.
The ratio of current assets to current liabilities was 1.1:1 as of
March 31, 1996 and December 31, 1995. The Corporation's
capitalization ratio (total short-term and long-term debt as a
percent of stockholders' equity, short-term and long-term debt) was
40% as of March 31, 1996, and 42% as of December 31, 1995. As of
April 2, 1995 the Corporation had lines of credit with domestic and
international commercial banks in the amount of approximately $525
million which could be borrowed directly or used to support the
Page 9
issuance of commercial paper.
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 March 31, 1996, with options to
increase borrowings by $1.0 billion with the concurrence of the
banks. Of the total committed credit facility, $200 million is for
a renewable 364-day term and $400 million is effective for a five-
year term. The credit facilities may be used to fund general
corporate requirements, to support commercial paper borrowings and,
in certain instances, to finance future business acquisitions. As
of March 31, 1996, the Corporation also had lines of credit with
domestic and international commercial banks in the amount of
approximately $100 million which could be borrowed directly or used
to support the issuance of commercial paper.
In October 1995, The Corporation issued $200 million of Notes under
Form S-3 Registration Statements which were declared effective in
June 1990 and November 1993. As of March 31, 1996, $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 paper borrowings, financing
capital additions, and funding future business acquisitions and
working capital requirements.
In the fourth quarter of 1995, the Corporation entered into
interest rate swap agreements to effectively convert a portion of
its floating rate debt to fixed rate debt. As of March 31, 1996,
the Corporation had agreements outstanding with an aggregate
notional amount of $200.0 million, with maturities through 1997.
Any interest rate differential on interest rate swaps is recognized
as an adjustment to interest expense over the term of the
agreement.
As of March 31, 1996, the Corporation's principal capital
commitments included manufacturing capacity expansion and
modernization. The Corporation anticipates that capital
expenditures will be in the range of $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.
Page 10
Part II
Items 1 through 3 and 5 have been omitted as not applicable.
Item 4 - Submission of Matters to a Vote of Security Holders
Hershey Foods Corporation's Annual Meeting of Stockholders was held
on April 30, 1996. The following directors were elected by the
holders of Common Stock and Class B Common Stock, voting together
without regard to class:
Name Votes For Votes Withheld
William H. Alexander 206,432,666 590,703
Robert H. Campbell 206,546,435 476,934
C. McCollister Evarts 206,386,384 636,985
Thomas C. Graham 206,559,499 463,870
Bonnie Guiton Hill 206,519,378 503,991
John C. Jamison 206,554,269 469,100
John M. Pietruski 206,570,622 452,747
Joseph P. Viviano 206,506,220 517,149
Kenneth L. Wolfe 206,527,201 496,168
The following directors were elected by the holders of the Common
Stock voting as a class:
Name Votes For Votes Withheld
Mackey J. McDonald 55,005,300 486,359
Vincent A. Sarni 55,034,851 456,808
Holders of the Common Stock and the Class B Common Stock voting
together approved the appointment of Arthur Andersen LLP as the
independent public accountants for 1996. Stockholders cast
206,687,791 votes FOR the appointment, 188,613 votes AGAINST the
appointment and ABSTAINED from casting 146,965 votes on the
appointment of accountants.
No other matters were submitted for stockholder action.
Item 6 - Exhibits and Reports on Form 8-K
a) Exhibits
The following items are attached and incorporated herein by
reference:
Exhibit 12 - Statement showing computation of ratio of
earnings to fixed charges for the quarters ended March 31,
1996 and April 2, 1995.
Exhibit 27 - Financial Data Schedule for the period ended
March 31, 1996 (required for electronic filing only).
Page 11
b) Reports on Form 8-K
A report on Form 8-K was filed January 29, 1996, announcing
that the Corporation entered into committed credit facilities
with a syndicate of banks under which it could borrow up to
$600 million with options to increase borrowings by $1.0
billion with the concurrence of the banks.
A report on Form 8-K was filed February 9, 1996, announcing
that the Corporation's Board of Directors approved a share
repurchase program to repurchase up to $200 million of the
Corporation's Common Stock.
Page 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHEY FOODS CORPORATION
(Registrant)
Date: May 8, 1996 /s/ William F. Christ
William F. Christ
Senior Vice President and
Chief Financial Officer
Date: May 8, 1996 /s/ David W. Tacka
David W. Tacka
Corporate Controller and
Chief Accounting Officer
Page 13
EXHIBIT INDEX
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 - Financial Data Schedule for the period
ended March 31, 1996 (required for electronic
filing only)