HERSHEY CO — Interim / Quarterly Report 2001

Aug 8, 2001

10-Q 1 secondqtr01_10q.htm FORM 10-Q - PERIOD ENDING JULY 1, 2001 coverpage_10q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2001

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 100 Crystal A Drive Hershey, PA 17033 Registrant's telephone number: 717-534-6799

State of Incorporation Delaware IRS Employer Identification No. 23-0691590

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 - 105,251,808 shares, as of July 31, 2001. Class B Common Stock, $1 par value - 30,435,308 shares, as of July 31, 2001

Exhibit Index - Page 18

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PART I - FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts) For the Three Months Ended -------------------------- July 1, July 2, 2001 2000 ------- ------- Net Sales $ 898,859 $ 836,204 ------------ ------------ Costs and Expenses: Cost of sales 516,638 502,070 Selling, marketing and administrative 282,670 250,722 ------------ ------------ Total costs and expenses 799,308 752,792 ------------ ------------ Income before Interest and Income Taxes 99,551 83,412 Interest expense, net 16,927 17,843 ------------ ------------ Income before Income Taxes 82,624 65,569 Provision for income taxes 30,185 25,573 ------------ ------------ Net Income $ 52,439 $ 39,996 ============ ============ Net Income Per Share-Basic $ .38 $ .29 ============ ============ Net Income Per Share-Diluted $ .38 $ .29 ============ ============ Average Shares Outstanding-Basic 136,410 137,415 ============ ============ Average Shares Outstanding-Diluted 137,820 138,532 ============ ============ Cash Dividends Paid per Share: Common Stock $ .2800 $ .260 ============ ============ Class B Common Stock $ .2525 $ .235 ============ ============ The accompanying notes are an integral part of these statements.

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HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts) For the Six Months Ended ------------------------ July 1, July 2, 2001 2000 ------ ------ Net Sales $ 1,979,140 $ 1,829,319 ------------ ------------ Costs and Expenses: Cost of sales 1,154,144 1,107,167 Selling, marketing and administrative 581,289 504,522 ------------ ------------ Total costs and expenses 1,735,433 1,611,689 ------------ ------------ Income before Interest and Income Taxes 243,707 217,630 Interest expense, net 34,224 35,373 ------------ ------------ Income before Income Taxes 209,483 182,257 Provision for income taxes 78,138 71,081 ------------ ------------ Net Income $ 131,345 $ 111,176 ============ ============ Net Income Per Share-Basic $ .96 $ .81 ============ ============ Net Income Per Share-Diluted $ .95 $ .80 ============ ============ Average Shares Outstanding-Basic 136,580 137,930 ============ ============ Average Shares Outstanding-Diluted 138,034 138,870 ============ ============ Cash Dividends Paid per Share: Common Stock $ .560 $ .52 ============ ============ Class B Common Stock $ .505 $ .47 ============ ============ The accompanying notes are an integral part of these statements.

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HERSHEY FOODS CORPORATION CONSOLIDATED BALANCE SHEETS JULY 1, 2001 AND DECEMBER 31, 2000 (in thousands of dollars) ASSETS 2001 2000 ------ ------ Current Assets: Cash and cash equivalents $ 21,071 $ 31,969 Accounts receivable - trade 256,517 379,680 Inventories 798,308 605,173 Deferred income taxes 85,480 76,136 Prepaid expenses and other 83,939 202,390 ------------- -------------- Total current assets 1,245,315 1,295,348 ------------- -------------- Property, Plant and Equipment, at cost 2,836,230 2,764,845 Less-accumulated depreciation and amortization (1,252,184) (1,179,457) ------------- -------------- Net property, plant and equipment 1,584,046 1,585,388 ------------- -------------- Intangibles Resulting from Business Acquisitions, net 466,938 474,448 Other Assets 131,200 92,580 ------------- -------------- Total assets $ 3,427,499 $ 3,447,764 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 155,866 $ 149,232 Accrued liabilities 303,622 358,067 Accrued income taxes 16,729 1,479 Short-term debt 277,843 257,594 Current portion of long-term debt 840 529 ------------- -------------- Total current liabilities 754,900 766,901 Long-term Debt 877,415 877,654 Other Long-term Liabilities 326,560 327,674 Deferred Income Taxes 300,717 300,499 ------------- -------------- Total liabilities 2,259,592 2,272,728 ------------- -------------- Stockholders' Equity: Preferred Stock, shares issued: none in 2001 and 2000 --- --- Common Stock, shares issued: 149,510,814 in 2001 and 149,509,014 in 2000 149,510 149,508 Class B Common Stock, shares issued: 30,440,058 in 2001 and 30,441,858 in 2000 30,440 30,442 Additional paid-in capital 7,045 13,124 Unearned ESOP compensation (17,564) (19,161) Retained earnings 2,759,736 2,702,927 Treasury-Common Stock shares at cost: 44,257,631 in 2001 and 43,669,284 in 2000 (1,683,682) (1,645,088) Accumulated other comprehensive loss (77,578) (56,716) ------------- -------------- Total stockholders' equity 1,167,907 1,175,036 ------------- -------------- Total liabilities and stockholders' equity $ 3,427,499 $ 3,447,764 ============= ============== The accompanying notes are an integral part of these balance sheets.

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HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) For the Six Months Ended ------------------------ July 1, July 2, 2001 2000 ------- ------- Cash Flows Provided from (Used by) Operating Activities Net Income $ 131,345 $ 111,176 Adjustments to Reconcile Net Income to Net Cash Provided from Operations: Depreciation and amortization 94,204 86,897 Deferred income taxes 3,263 (13,276) Changes in assets and liabilities: Accounts receivable - trade 123,163 91,469 Inventories (210,235) (128,409) Accounts payable 6,634 (4,468) Other assets and liabilities 39,867 (72,209) ------------ ------------- Net Cash Flows Provided from Operating Activities 188,241 71,180 ------------ ------------- Cash Flows Provided from (Used by) Investing Activities Capital additions (78,586) (61,989) Capitalized software additions (3,085) (2,974) Other, net (6,163) (4,508) ------------ ------------- Net Cash Flows (Used by) Investing Activities (87,834) (69,471) ------------ ------------- Cash Flows Provided from (Used by) Financing Activities Net increase in short-term debt 20,249 68,230 Long-term borrowings 354 102 Repayment of long-term debt (359) (2,345) Cash dividends paid (74,536) (70,118) Exercise of stock options 18,844 4,708 Incentive plan transactions (46,256) (12,049) Repurchase of Common Stock (29,601) (73,115) ------------ ------------- Net Cash Flows (Used by) Financing Activities (111,305) (84,587) ------------ ------------- (Decrease) in Cash and Cash Equivalents (10,898) (82,878) Cash and Cash Equivalents, beginning of period 31,969 118,078 ------------ ------------- Cash and Cash Equivalents, end of period $ 21,071 $ 35,200 ============ ============= Interest Paid $ 35,998 $ 38,081 ============ ============= Income Taxes Paid $ 50,999 $ 137,596 ============ ============= The accompanying notes are an integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Six Months Ended ------------------------ July 1, 2001 July 2, 2000 ------------ ------------ (in thousands of dollars) Interest expense $ 36,633 $ 37,908 Interest income (1,559) (2,534) Capitalized interest (850) (1) ---------- ---------- Interest expense, net $ 34,224 $ 35,373 ========== ==========

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Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations - Second Quarter 2001 vs. Second Quarter 2000 Consolidated net sales for the second quarter increased from $836.2 million in 2000 to $898.9 million in 2001, an increase of 7% from the prior year. The higher sales primarily reflected incremental sales from the newly acquired mint and gum business, increased international exports, and incremental sales from the introduction of new confectionery products. These incremental sales were offset partially by a decline in sales of base confectionery and grocery products in the United States which resulted principally from: lower sales of standard bars; a stock keeping unit (SKU) rationalization initiative begun in 2000, whereby the Corporation has discontinued selling many of its less profitable products; and a reduction of inventories by the Corporation's customers. The incremental sales were also offset in part by higher returns, discounts, and allowances and the impact of unfavorable foreign currency exchange rates. The consolidated gross margin increased from 40.0% in 2000 to 42.5% in 2001. The increase in gross margin primarily reflected decreased costs for freight, distribution and warehousing, and lower costs for certain major raw materials, primarily cocoa, as well as decreased costs for the disposal of aged inventory and obsolete packaging. The profitability of the mint and gum business also contributed to the higher gross margin in 2001. The impact of these items was partially offset by higher manufacturing costs and returns, discounts, and allowances, both of which were higher as a percentage of sales compared to the prior year. Selling, marketing and administrative expenses increased by 13% in 2001, primarily reflecting selling, marketing and administrative expenditures for the mint and gum business, increased administrative expenses primarily reflecting higher staffing levels to support sales activity in North American and international businesses, and increased marketing expenditures associated with the introduction of new confectionery products. Net interest expense in the second quarter of 2001 was $.9 million less than the comparable period of 2000, primarily reflecting a decrease in short-term interest expense due to a decrease in the average short-term borrowing rates and reduced average short-term borrowings. Net income for the second quarter was $52.4 million compared to $40.0 million for the second quarter of 2000, and net income per share - diluted was $.38 per share compared to $.29 per share in the prior year. Results of Operations - First Six Months 2001 vs. First Six Months 2000 Consolidated net sales for the first six months increased from $1,829.3 million in 2000 to $1,979.1 million in 2001, an increase of 8% from the prior year. The higher sales primarily reflected incremental sales from the newly acquired mint and gum business and from the introduction of new confectionery products, as well as increased international exports. These incremental sales were offset partially by a decline in sales of base confectionery and grocery products in the United States which resulted principally from: lower sales of standard bars; the SKU rationalization initiative; and a reduction of inventories by the Corporation's customers. The incremental sales were also offset, in part, by the impact of unfavorable foreign currency exchange rates. The consolidated gross margin increased from 39.5% in 2000 to 41.7% in 2001. The increase in gross margin primarily reflected decreased costs for freight, distribution and warehousing, and certain major raw materials, primarily cocoa, as well as decreased costs for the disposal of aged inventory and obsolete packaging. These increases in gross margin were partially offset by the impact of manufacturing costs, which were higher as a percentage of sales compared to the prior year. Selling, marketing and administrative expenses increased by 15% in 2001, primarily reflecting selling, marketing and administrative expenditures for the mint and gum business, increased administrative expenses primarily reflecting higher staffing levels to support sales activity in North American and international businesses, and increased marketing expenditures associated with the introduction of new confectionery products as well as base confectionery and grocery brands. Selling, marketing and administrative costs in 2000 included a one-time gain of $7.3 million arising from the sale of certain corporate aircraft. Net interest expense in the first six months of 2001 was $1.1 million less than the comparable period of 2000, primarily reflecting a decrease in short-term interest expense due to a decrease in average short-term borrowing rates and reduced average short-term borrowings. Net income for the six months was $131.3 million compared to $111.2 million in 2000, and net income per share - diluted was $.95 per share compared to $.80 per share in the prior year. Prior year net income included an after-tax gain of $4.5 million, or $.03 per share - diluted, on the sale of certain corporate aircraft.

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Liquidity and Capital Resources

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 months, generally have been met by issuing commercial paper. During the first six months of 2001, the Corporation’s cash and cash equivalents decreased by $10.9 million. Cash provided from operating activities was sufficient to fund a $75.0 million contribution to the Corporation’s domestic pension plans, finance capital additions and capitalized software additions of $81.7 million, pay cash dividends of $74.5 million and finance the repurchase of $29.6 million of the Corporation’s Common Stock. Changes in cash flows provided from (used by) inventories and other assets and liabilities exclude the impact of adjustments required by the adoption of SFAS No. 133. Cash provided from other assets and liabilities of $39.9 million primarily reflected commodities transactions and the contribution to the Corporation’s domestic pension plans.

The ratio of current assets to current liabilities was 1.6:1 as of July 1, 2001, and 1.7:1 as of December 31, 2000. The Corporation’s capitalization ratio (total short-term and long-term debt as a percent of stockholders’ equity, short-term and long-term debt) was 50% as of July 1, 2001, and 49% as of December 31, 2000.

Subsequent Event

In July 2001, the Corporation’s Brazilian subsidiary, Hershey do Brasil, acquired the chocolate and confectionery business of Visagis, which had 2000 sales of approximately $20 million.

Included in the acquisition are the IO-IO brand of hazelnut créme items and the chocolate and confectionery products sold under the Visconti brand. Also included in the purchase are a manufacturing plant and confectionery equipment in Sao Roque, Brazil.

Safe Harbor Statement

The nature of the Corporation’s operations and the environment in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Corporation notes the following factors which, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential,” among others. Factors which could cause results to differ include, but are not limited to: changes in the confectionery and grocery business environment, including actions of competitors and changes in consumer preferences; changes in governmental laws and regulations, including taxes; market demand for new and existing products; changes in raw material and other costs; and the Corporation’s ability to implement improvements and to reduce costs associated with the Corporation’s distribution operations.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk The potential loss in fair value of foreign exchange forward contracts and interest rate swap agreements resulting from a hypothetical near-term adverse change in market rates of ten percent was not material as of July 1, 2001. The market risk resulting from a hypothetical adverse market price movement of ten percent associated with the estimated average fair value of net commodity positions decreased from $3.0 million as of December 31, 2000, to ($.8) million as of July 1, 2001. Market risk represents 10% of the estimated average fair value of net commodity positions at four dates prior to the end of each period.

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PART II - OTHER INFORMATION

Items 2, 3 and 4 have been omitted as not applicable.

Item 1 - Legal Proceedings

The Corporation received Notices of Proposed Deficiency (Notices) from the Internal Revenue Service (IRS) related to the years 1989 through 1998. The Notices pertained to the Corporate Owned Life Insurance (COLI) program which was implemented by the Corporation in 1989. The IRS disallowed the interest expense deductions associated with the underlying life insurance policies. The total deficiency for years 1989 through 1996 of $61.2 million, inclusive of interest, was paid to the IRS in September 2000 to eliminate further accruing of interest. Assessments for federal taxes and interest for 1997 and 1998 totaled $7.4 million. The Corporation is not subject to any further assessments for federal taxes and interest, but may be subject to additional assessments for state taxes and interest for 1989 through 1998. The Corporation believes that it has fully complied with tax law as it relates to its COLI program, has filed for the refund of amounts paid and will continue to seek favorable resolution of this matter. The Corporation has no other material pending legal proceedings, other than ordinary routine litigation incidental to its business.

Item 5 - Other Information

In July 2001, the Corporation’s Brazilian subsidiary, Hershey do Brasil, acquired the chocolate and confectionery business of Visagis, which had 2000 sales of approximately $20 million.

Included in the acquisition are the IO-IO brand of hazelnut créme items and the chocolate and confectionery products sold under the Visconti brand. Also included in the purchase are a manufacturing plant and confectionery equipment in Sao Roque, Brazil.

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 six months ended July 1, 2001 and July 2, 2000.

Exhibit 99 - Press release announcing that in July 2001, the Corporation's Brazilian subsidiary, Hershey do Brasil, acquired the chocolate and confectionery business of Visagis.

b) Reports on Form 8-K

No reports on Form 8-K were filed during the three-month period ended July 1, 2001.

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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 August 8, 2001 /s/ Frank Cerminara Frank Cerminara Senior Vice President and Chief Financial Officer Date August 8, 2001 /s/ David W. Tacka David W. Tacka Vice President, Corporate Controller and Chief Accounting Officer

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EXHIBIT INDEX

Exhibit 12 Computation of Ratio of Earnings to Fixed Charges

Exhibit 99 Press release announcing that in July 2001, the Corporation's Brazilian subsidiary, Hershey do Brasil, acquired the chocolate and confectionery business of Visagis.

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