Add
HSY to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| HSY > SEC Filings for HSY > Form 10-K on 20-Feb-2009 | All Recent SEC Filings |
20-Feb-2009
Annual Report
EXECUTIVE OVERVIEW
Our results for the year ended December 31, 2008 were in line with our expectations and reflect the progress we are making toward implementing our major strategic initiatives. Net sales grew at an annual rate of 3.8%. Marketplace performance improved in response to our continued investment in our core brands. We are investing to strengthen our position in the chocolate and confectionery markets in which we compete and build on our marketplace results.
The net sales increase was driven by favorable price realization, improved U.S. marketplace performance for our products, and sales gains from our international businesses, offset somewhat by reduced sales volume in the United States. Incremental sales from the full-year results of Godrej Hershey Ltd. also contributed to the net sales increase, as results for 2007 only included the seven months subsequent to the acquisition of the business. Net income and earnings per share-diluted increased substantially compared with 2007 due to lower costs resulting from our business realignment initiatives.
Non-GAAP Financial Measures-Items Affecting Comparability
Our "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section includes certain measures of financial performance that are
not defined by U.S. generally accepted accounting principles ("GAAP"). For each
of these non-GAAP financial measures, we are providing below (1) the most
directly comparable GAAP measure; (2) a reconciliation of the differences
between the non-GAAP measure and the most directly comparable GAAP measure;
(3) an explanation of why our management believes these non-GAAP measures
provide useful information to investors; and (4) additional purposes for which
we use these non-GAAP measures.
We believe that the disclosure of these non-GAAP measures provides investors with a better comparison of our year-to-year operating results. We exclude the effects of certain items from Income before Interest and Income Taxes ("EBIT"), Net Income and Income per Share-Diluted-Common Stock ("EPS") when we evaluate key measures of our performance internally, and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more balanced view of the underlying dynamics of our business.
Items affecting comparability include the impacts of charges or credits in 2008, 2007, 2006, 2005 and 2003 associated with our business realignment initiatives and a reduction of the income tax provision in 2004 resulting from adjustments to income tax contingency reserves.
For the years ended December 31, 2008 2007
Net Net
EBIT Income EPS EBIT Income EPS
In millions of dollars except per share
amounts
Results in accordance with GAAP $ 589.9 $ 311.4 $ 1.36 $ 458.8 $ 214.2 $ .93
Items affecting comparability:
Business realignment charges included in
cost of sales 77.8 53.4 .23 123.1 80.9 .35
Business realignment charges included in
selling, marketing and administrative
("SM&A") 8.1 4.9 .02 12.6 7.8 .03
Business realignment and impairment charges,
net 94.8 60.8 .27 276.9 178.9 .77
Non-GAAP results excluding items affecting
comparability $ 770.6 $ 430.5 $ 1.88 $ 871.4 $ 481.8 $ 2.08
|
For the years ended December 31, 2006 2005
Net Net
EBIT Income EPS EBIT Income EPS
In millions of dollars except per share
amounts
Results in accordance with GAAP $ 992.6 $ 559.1 $ 2.34 $ 853.6 $ 488.5 $ 1.97
Items affecting comparability:
Business realignment (credits) charges
included in cost of sales (3.2 ) (2.0 ) (.01 ) 22.5 13.4 .05
Business realignment charges included in
SM&A .3 .2 - - - -
Business realignment and impairment
charges, net 14.5 9.3 .04 96.5 60.7 .25
Non-GAAP results excluding items affecting
comparability $ 1,004.2 $ 566.6 $ 2.37 $ 972.6 $ 562.6 $ 2.27
|
For the years ended December 31, 2004 2003
Net Net
EBIT Income EPS EBIT Income EPS
In millions of dollars except per share
amounts
Results in accordance with GAAP $ 876.6 $ 574.6 $ 2.24 $ 767.4 $ 439.2 $ 1.66
Items affecting comparability:
Business realignment charges included in
cost of sales - - - 2.1 1.3 -
Business realignment and impairment
charges, net - - - 23.4 14.2 .05
Gain on sale of business - - - (8.3 ) (5.7 ) (.02 )
Tax provision adjustment - (61.1 ) (.24 ) - - -
Cumulative effect of accounting change - - - - 7.4 .03
Non-GAAP results excluding items
affecting comparability $ 876.6 $ 513.5 $ 2.00 $ 784.6 $ 456.4 $ 1.72
|
Actual Results Excluding Items
Affecting Comparability
Key Annual Performance Measures 2008 2007 2006
Increase in Net Sales 3.8% 0.1% 2.6%
(Decrease) increase in EBIT (11.6)% (13.2)% 3.2%
(Decline) improvement in EBIT Margin in basis
points ("bps") (260)bps (270)bps 10 bps
(Decrease) increase in EPS (9.6)% (12.2)% 4.4%
|
SUMMARY OF OPERATING RESULTS
Analysis of Selected Items from Our Income Statement
Percent Change
Increase (Decrease)
For the years ended December 31, 2008 2007 2006 2008-2007 2007-2006
In millions of dollars except per share amounts
Net Sales $ 5,132.8 $ 4,946.7 $ 4,944.2 3.8 % 0.1 %
Cost of Sales 3,375.1 3,315.1 3,076.7 1.8 7.7
Gross Profit 1,757.7 1,631.6 1,867.5 7.7 (12.6 )
Gross Margin 34.2 % 33.0 % 37.8 %
SM&A Expense 1,073.0 895.9 860.3 19.8 4.1
SM&A Expense as a percent of sales 20.9 % 18.1 % 17.4 %
Business Realignment and Impairment
Charges, Net 94.8 276.9 14.6 (65.8 ) N/A
EBIT 589.9 458.8 992.6 28.6 (53.8 )
EBIT Margin 11.5 % 9.3 % 20.1 %
Interest Expense, Net 97.9 118.6 116.1 (17.5 ) 2.2
Provision for Income Taxes 180.6 126.0 317.4 43.2 (60.3 )
Effective Income Tax Rate 36.7 % 37.1 % 36.2 %
Net Income $ 311.4 $ 214.2 $ 559.1 45.4 (61.7 )
Net Income Per Share-Diluted $ 1.36 $ .93 $ 2.34 46.2 (60.3 )
|
Net Sales
2008 compared with 2007
The increase in net sales was attributable to favorable price realization from list price increases, substantially offset by sales volume decreases primarily in the United States. Increased sales in the United States were primarily attributable to our core brands, particularly Hershey's and Reese's, and incremental sales of new products, primarily Hershey's Bliss. Sales volume increases from our international businesses, particularly in India, China and the Philippines, also contributed to the sales increase, although were offset somewhat by the impact of unfavorable foreign currency exchange rates. Net sales for our Godrej Hershey Ltd. business increased $37.2 million, or 0.8%, in 2008 reflecting incremental sales for the full-year compared with results for 2007 which included only the seven months subsequent to the acquisition of the business.
2007 compared with 2006
Net sales for 2007 were essentially even with 2006. Sales increased for our international businesses, primarily exports to Asia and Latin America, as well as sales in Canada and Mexico. The acquisition of Godrej Hershey Ltd. increased net sales by $46.5 million, or 0.9%, in 2007. Favorable foreign currency exchange rates also had a positive impact on sales. These increases were substantially offset by lower sales volume for existing products in the U.S., reflecting increased competitive activity and reduced retail velocity. Decreased price realization from higher rates of promotional spending and higher allowances for slow-moving products at retail more than offset increases in list prices contributing to the sales decline in the U.S.
Key U.S. Marketplace Metrics
For the 52 weeks ended December 31, 2008 2007 2006 Consumer Takeaway Increase 3.3 % 1.3 % 4.0 % Market Share Decrease (0.2 ) (1.3 ) (0.2 )
Consumer takeaway is provided for channels of distribution accounting for approximately 80% of our U.S. confectionery retail business. These channels of distribution include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores. The change in market share is provided for channels measured by syndicated data which include sales in the food, drug, convenience store and mass merchandiser classes of trade, excluding sales of Wal-Mart Stores, Inc.
Cost of Sales and Gross Margin
2008 compared with 2007
The cost of sales increase compared with 2007 was primarily associated with higher input and energy costs, and the full-year cost of sales for Godrej Hershey Ltd. which in 2007 included cost of sales for only the seven months subsequent to the acquisition of the business. These cost increases were offset partially by favorable supply chain productivity. Lower business realignment charges included in cost of sales in 2008 compared with 2007 also partially offset the cost of sales increases. Business realignment charges of $77.8 million were included in cost of sales in 2008, compared with $123.1 million in the prior year.
Gross margin increased primarily as a result of lower business realignment charges recorded in 2008 compared with 2007. Favorable price realization and improved supply chain productivity also contributed to the increase, but were offset substantially by higher input and energy costs.
2007 compared with 2006
Business realignment charges of $123.1 million were included in cost of sales in 2007, compared with a credit of $3.2 million included in cost of sales in 2006. The remainder of the cost of sales increase was primarily associated with significantly higher input costs, particularly for dairy products and certain other raw materials, and the Godrej Hershey Ltd. business acquired in May 2007, offset somewhat by favorable supply chain productivity.
The gross margin decline was primarily attributable to the impact of business realignment initiatives recorded in 2007 compared with 2006, resulting in a reduction of 2.6 percentage points. The rest of the decline reflected substantially higher costs for raw materials, offset somewhat by improved supply chain productivity. Also contributing to the decrease was lower net price realization due to higher promotional costs.
Selling, Marketing and Administrative
2008 compared with 2007
Selling, marketing and administrative expenses increased primarily as a result of higher costs associated with employee-related expenses, including higher incentive compensation expense, increased levels of retail coverage primarily in the United States and expansion of our international businesses. Higher advertising, marketing research and merchandising expenses also contributed to the increase. Expenses of $8.1 million related to our 2007 business realignment initiatives were included in selling, marketing and administrative expenses in 2008 compared with $12.6 million in 2007.
2007 compared with 2006
Selling, marketing and administrative expenses increased primarily as a result of higher administrative and advertising expenses, partially offset by lower consumer promotional expenses. Project implementation costs related to our 2007 business realignment initiatives contributed $12.6 million to the increase. Higher administrative costs were principally associated with employee-related expenses from the expansion of our international businesses, including the impact of the acquisition of Godrej Hershey Ltd.
Business Realignment Initiatives and Impairment Charges
In February 2007, we announced a comprehensive, three-year supply chain transformation program (the "global supply chain transformation program") and, in December 2007, we recorded impairment and business realignment charges associated with our business in Brazil (together, "the 2007 business realignment initiatives").
When completed, the global supply chain transformation program will greatly enhance our manufacturing, sourcing and customer service capabilities, reduce inventories resulting in improvements in working capital and generate significant resources to invest in our growth initiatives. These initiatives include accelerated marketplace momentum within our core U.S. business, creation of innovative new product platforms to meet customer needs and disciplined global expansion. Under the program, which will be implemented in stages over three years, we will significantly increase manufacturing capacity utilization by reducing the number of production lines by more than one-third, outsource production of low value-added items and construct a flexible, cost-effective production facility in Monterrey, Mexico to meet current and emerging marketplace needs. The program will result in a total net reduction of 1,500 positions across our supply chain over the three-year implementation period.
The original estimated pre-tax cost of the program announced in February 2007 was from $525 million to $575 million over three years. The total included from $475 million to $525 million in business realignment costs and approximately $50 million in project implementation costs. Total costs of $130.0 million were recorded in 2008 and $400.0 million were recorded in 2007 for this program. Excluding possible pension settlement charges in 2009 and 2010, we now expect total charges for the global supply chain transformation program to be at the upper end of the $575 million to $600 million range, reflecting our latest estimates for the cost of the original program and an expansion in scope of the program approved in December 2008. The expansion in the scope of the program will include approximately $25.0 million associated with the closure of two subscale manufacturing facilities of Artisan Confections Company, a wholly-owned subsidiary, and consolidation of the associated production into existing U.S. facilities, along with costs associated with the rationalization of other select portfolio items. The affected facilities are located in Berkeley and San Francisco, California. These additional business realignment charges will be recorded in 2009 and include severance for approximately 150 impacted employees. For more information, see Outlook for Global Supply Chain Transformation Program on page 49.
In 2001, we acquired a small business in Brazil, Hershey do Brasil, that through 2007 had not gained profitable scale or adequate market distribution. In an effort to improve the performance of this business, in January 2008 Hershey do Brasil entered into a cooperative agreement with Pandurata Alimentos LTDA ("Bauducco"), a leading manufacturer of baked goods in Brazil whose primary brand is Bauducco. In the fourth quarter of 2007, we recorded a goodwill impairment charge and approved a business realignment program associated with initiatives to improve distribution and enhance the financial performance of our business in Brazil. Business realignment and impairment charges of $4.9 million were recorded in 2008 and $12.6 million were recorded in 2007.
In July 2005, we announced initiatives intended to advance our value-enhancing strategy (the "2005 business realignment initiatives"). The 2005 business realignment initiatives consisted primarily of U.S. and Canadian Voluntary Workforce Reduction Programs and the closure of the Las Piedras, Puerto Rico plant. Charges (credits) for the 2005 business realignment initiatives were recorded during 2005 and 2006 and the 2005 business realignment initiatives were completed by December 31, 2006.
Charges (credits) associated with business realignment initiatives and impairment recorded during 2008, 2007 and 2006 were as follows:
For the years ended December 31, 2008 2007 2006 In thousands of dollars Cost of sales 2007 business realignment initiatives: Global supply chain transformation program $ 77,767 $ 123,090 $ - 2005 business realignment initiatives - - (1,599 ) Previous business realignment initiatives - - (1,600 ) Total cost of sales 77,767 123,090 (3,199 ) Selling, marketing and administrative 2007 business realignment initiatives: Global supply chain transformation program 8,102 12,623 - 2005 business realignment initiatives - - 266 Total selling, marketing and administrative 8,102 12,623 266 Business realignment and impairment charges, net 2008 impairment of trademarks 45,739 - - 2007 business realignment initiatives: Global supply chain transformation program: Net (gain on sale)/impairment of fixed assets (4,882 ) 47,938 - Plant closure expense 23,415 13,506 - Employee separation costs 11,469 176,463 - Pension settlement loss 12,501 12,075 - Contract termination costs 1,637 14,316 - Brazilian business realignment: Goodwill impairment - 12,260 - Employee separation costs 1,581 310 - Fixed asset impairment charges 754 - - Contract termination and other exit costs 2,587 - - 2005 business realignment initiatives: U.S. voluntary workforce reduction program - - 9,972 U.S. facility rationalization - - 1,567 Streamline international operations (primarily Canada) - - 2,524 Previous business realignment initiatives - - 513 Total business realignment and impairment charges, net 94,801 276,868 14,576 Total net charges associated with business realignment initiatives and impairment $ 180,670 $ 412,581 $ 11,643 |
Global Supply Chain Transformation Program
The 2008 charge of $77.8 million recorded in cost of sales for the global supply chain transformation program related primarily to the accelerated depreciation of fixed assets over a reduced estimated remaining useful life and start-up costs associated with the global supply chain transformation program. The $8.1 million recorded in selling, marketing and administrative expenses related primarily to project administration for the global supply chain transformation program. In determining the costs related to fixed asset impairments, fair value was estimated based on the expected sales proceeds. The $4.9 million of gains on sale of fixed assets resulted from the receipt of proceeds in excess of the carrying value primarily from the sale of a warehousing and distribution facility. The $23.4 million of plant closure expenses for 2008 related primarily to the preparation of plants for sale and production line removal costs.
Certain real estate with a carrying value of $15.8 million was being held for sale as of December 31, 2008. The global supply chain transformation program employee separation costs were related to involuntary terminations at the North American manufacturing facilities which are being closed. The global supply chain transformation program had identified six manufacturing facilities which would be closed. As of December 31, 2008, the facilities located in Dartmouth, Nova Scotia; Montreal, Quebec; and Oakdale, California have been closed and sold. The facilities located in Naugatuck, Connecticut and Smiths Falls, Ontario have been closed and are being held for sale. The facility in Reading, Pennsylvania is being held and used pending closure, following which it will be offered for sale.
The 2007 charge of $123.1 million recorded in cost of sales for the global supply chain transformation program related primarily to the accelerated depreciation of fixed assets over a reduced estimated remaining useful life and costs related to inventory reductions. The $12.6 million recorded in selling, marketing and administrative expenses related primarily to project management and administration. In determining the costs related to fixed asset impairments, fair value was estimated based on the expected sales proceeds. Certain real estate with a carrying value of $40.2 million was being held for sale as of December 31, 2007. Employee separation costs included $79.0 million primarily for involuntary terminations at the six North American manufacturing facilities which are being closed. The employee separation costs also included $97.5 million for charges relating to pension and other post-retirement benefits curtailments and special termination benefits.
2008 Impairment of Trademarks
As a result of our annual impairment tests of intangible assets with useful lives determined to be indefinite, we recorded total impairment charges of $45.7 million in the fourth quarter of 2008. Certain trademarks, primarily the Mauna Loa brand, were determined to be impaired as a result of a decrease in the fair value of the brands resulting from reduced expectations for future sales and cash flows compared with the valuations of these trademarks at the acquisition dates. For more information, refer to pages 46 and 47.
Brazilian Business Realignment
The 2008 Brazilian business realignment charges and the 2007 employee separation costs were related to involuntary terminations and costs associated with office consolidation related to the cooperative agreement with Bauducco. During the fourth quarter of 2007, we completed our annual impairment evaluation of goodwill and other intangible assets. As a result of reduced expectations for future cash flows resulting primarily from lower expected profitability, we determined that the carrying amount of our wholly-owned subsidiary, Hershey do Brasil, exceeded its fair value and recorded a non-cash impairment charge of $12.3 million in December 2007. There was no tax benefit associated with this charge.
2005 Business Realignment Initiatives
The 2006 charges (credits) recorded in cost of sales relating to the 2005 business realignment initiatives included a credit of $1.6 million resulting from higher than expected proceeds from the sale of equipment from the Las Piedras plant. The charge recorded in selling, marketing and administrative expenses in 2006 resulted from accelerated depreciation relating to the termination of an office building lease. The net business realignment charges included $7.3 million for involuntary terminations in 2006.
The 2006 charges (credits) relating to previous business realignment initiatives which began in 2003 and 2001 resulted from the finalization of the sale of certain properties, adjustments to liabilities which had previously been recorded, and the impact of the settlement of litigation in connection with the 2003 business realignment initiatives.
Liabilities Associated with Business Realignment Initiatives
The liability balance as of December 31, 2008 relating to the 2007 business realignment initiatives was $31.0 million for employee separation costs to be paid primarily in 2009. The liability balance as of
December 31, 2007 was $68.4 million, primarily related to employee separation costs. Charges for employee separation and contract termination costs of $12.9 million were recorded in 2008. During 2008 and 2007, we made payments against the liabilities recorded for the 2007 business realignment initiatives of $46.9 million and $13.2 million, respectively, principally related to employee separation and project administration. The liability balance as of December 31, 2008 was reduced by $3.4 million as a result of foreign currency translation adjustments.
Income Before Interest and Income Taxes and EBIT Margin
2008 compared with 2007
. . .
|
|