<PAGE>
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 September 29, 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 - 123,079,748 shares, as of October 28, 1996.
Class B Common Stock, $1 par value - 30,478,908 shares, as of October
28, 1996.
Exhibit Index - Page 14
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HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
For the Three Months Ended
September 29, October 1,
1996 1995
Net Sales $1,072,336 $981,101
Costs and Expenses:
Cost of sales 613,974 572,443
Selling, marketing and administrative 287,526 261,710
Total costs and expenses 901,500 834,153
Income before Interest and Income Taxes 170,836 146,948
Interest expense, net 13,457 13,424
Income before Income Taxes 157,379 133,524
Provision for income taxes 63,109 51,397
Net Income $ 94,270 $ 82,127
Net Income per Share $ .61 $ .51
Cash Dividends Paid per Share of Common Stock $ .2000 $ .1800
Cash Dividends Paid per Share of Class B
Common Stock $ .1800 $ .1625
The accompanying notes are an integral part of these statements.
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HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars except per share amounts)
For the Nine Months Ended
September 29, October 1,
1996 1995
Net Sales $2,800,193 $2,570,816
Costs and Expenses:
Cost of sales 1,633,520 1,499,567
Selling, marketing and administrative 805,273 750,975
Total costs and expenses 2,438,793 2,250,542
Income before Interest and Income Taxes 361,400 320,274
Interest expense, net 36,639 30,417
Income before Income Taxes 324,761 289,857
Provision for income taxes 130,229 113,774
Net Income $ 194,532 $ 176,083
Net Income per Share $ 1.26 $ 1.04
Cash Dividends Paid per Share of Common Stock $ .5600 $ .5050
Cash Dividends Paid per Share of Class B
Common Stock $ .5050 $ .4575
The accompanying notes are an integral part of these statements.
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HERSHEY FOODS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 29, 1996 AND DECEMBER 31, 1995
(in thousands of dollars)
ASSETS 1996 1995
Current Assets:
Cash and cash equivalents $ 59,964 $ 32,346
Accounts receivable - trade 384,245 326,024
Inventories 491,761 397,570
Deferred income taxes 78,270 84,785
Prepaid expenses and other 39,936 81,598
Total current assets 1,054,176 922,323
Property, Plant and Equipment, at cost 2,281,448 2,190,386
Less - accumulated depreciation and
amortization (831,207) (754,377)
Net property, plant and equipment 1,450,241 1,436,009
Intangibles Resulting from Business
Acquisitions 421,485 428,714
Other Assets 40,814 43,577
Total assets $2,966,716 $2,830,623
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 128,362 $ 127,067
Accrued liabilities 291,612 308,123
Accrued income taxes 29,194 15,514
Short-term debt 465,198 413,268
Current portion of long-term debt 16,609 383
Total current liabilities 930,975 864,355
Long-term Debt 338,752 357,034
Other Long-term Liabilities 343,589 333,814
Deferred Income Taxes 203,647 192,461
Total liabilities 1,816,963 1,747,664
Stockholders' Equity:
Preferred Stock, shares issued:
none in 1996 and 1995 - -
Common Stock, shares issued:
149,471,964 in 1996 and 74,733,982 on a
pre-split basis in 1995 149,471 74,734
Class B Common Stock, shares issued:
30,478,908 in 1996 and 15,241,454 on a
pre-split basis in 1995 30,479 15,241
Additional paid-in capital 41,498 47,732
Cumulative foreign currency translation
adjustments (26,016) (29,240)
Unearned ESOP compensation (32,733) (35,128)
Retained earnings 1,714,555 1,694,696
Treasury-Common Stock shares at cost:
26,369,316 in 1996 and 12,709,553 on a
pre-split basis in 1995 (727,501) (685,076)
Total stockholders' equity 1,149,753 1,082,959
Total liabilities and stockholders'
equity $2,966,716 $2,830,623
The accompanying notes are an integral part of these balance sheets.
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HERSHEY FOODS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Nine Months Ended
September 29, October 1,
1996 1995
Cash Flows Provided from Operating Activities $189,748 $182,453
Cash Flows Provided from (Used by)
Investing Activities
Capital additions (108,493) (114,263)
Proceeds from divestiture 27,499 -
Other, net 7,476 (258)
Net Cash Flows Used by Investing Activities (73,518) (114,521)
Cash Flows Provided from (Used by)
Financing Activities
Net increase in short-term debt 51,930 541,978
Long-term borrowings - 410
Repayment of long-term debt (1,984) (6,494)
Cash dividends paid (84,698) (82,804)
Exercise of stock options 17,733 12,087
Incentive plan transactions (35,850) (17,057)
Repurchase of Common Stock (35,743) (515,516)
Net Cash Flows Used by Financing Activities (88,612) (67,396)
Increase in Cash and Cash Equivalents 27,618 536
Cash and Cash Equivalents, beginning of period 32,346 26,738
Cash and Cash Equivalents, end of period $ 59,964 $ 27,274
Interest Paid $ 36,261 $ 29,149
Income Taxes Paid $ 94,351 $ 74,078
The accompanying notes are an integral part of these statements.
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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.
2. Interest expense, net consisted of the following:
For the Nine Months Ended
September 29, 1996 October 1, 1995
(in thousands of dollars)
Interest expense $41,073 $33,857
Interest income (2,944) (2,090)
Capitalized interest (1,490) (1,350)
Interest expense, net $36,639 $30,417
3. In August 1996, the Board of Directors declared a two-for-one split
of the Corporation's Common Stock and Class B Common Stock effective
September 13, 1996 to stockholders of record August 23, 1996. The
split was effected as a stock dividend by distributing one additional
share for each share held. Unless otherwise indicated, all shares
and per share information have been restated to reflect the stock
split.
4. Income per share has been computed based on the weighted average
number of shares of the Common Stock and the Class B Common Stock
outstanding during the period. Average shares outstanding during the
third quarter and nine months ended September 29, 1996 were
153,712,298 and 154,209,159 respectively, and were 161,261,218 and
169,346,386 for the respective periods in 1995. There were no shares
of Preferred Stock outstanding during the periods presented.
A total of 8,797,770 shares of Common Stock have been repurchased
under share repurchase programs which began in 1993. Of the total
shares repurchased, 528,000 shares were retired and the remainder
were held as Treasury Stock as of September 29, 1996. In addition,
in August 1995, the Corporation purchased 18,099,546 shares
(9,049,773 shares on a pre-split basis) of its Common Stock from
Hershey Trust Company, as Trustee for the benefit of Milton Hershey
School. A total of 26,369,316 shares were held as Treasury Stock as
of September 29, 1996.
<PAGE>
5. 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:
September 29, 1996 December 31, 1995
(in thousands of dollars)
Raw materials $207,641 $189,371
Goods in process 37,226 28,201
Finished goods 330,066 249,106
Inventories at FIFO 574,933 466,678
Adjustment to LIFO (83,172) (69,108)
Total inventories $491,761 $397,570
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6. 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. The restructuring
program was essentially complete as of June 30, 1996.
7. 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.
8. 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.
9. 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 nine-month period of 1995, the effect
would not have been material.
10. 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.
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11. The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term
debt approximated fair value as of September 29, 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 September 29,
1996 and December 31, 1995, based upon quoted market prices, as of
those dates, for the same or similar debt issues.
As of September 29, 1996, the Corporation had foreign exchange
forward contracts maturing in 1996 and 1997 to purchase $23.8 million
in foreign currency, primarily British sterling and German marks, and
to sell $28.6 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 September 29, 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 September 29, 1996, the
Corporation had agreements outstanding with an aggregate notional
amount of $200.0 million with maturities through 1997. As of
September 29, 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 during the period. The Corporation's risk
related to swap agreements is limited to the cost of replacing such
agreements at current market rates.
12. Reference is made to the Registrant's 1995 Annual Report on Form 10-K
for more detailed financial statements and footnotes.
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Management's Discussion and Analysis
Results of Operations - Third Quarter 1996 vs. Third Quarter 1995
Consolidated net sales for the third quarter rose from $981.1
million in 1995 to $1,072.3 million in 1996, an increase of 9% from
the prior year. The higher sales primarily reflected incremental
sales from new confectionery and grocery products, confectionery
selling price increases in the United States, increased sales
volume for existing international and domestic confectionery brands
and incremental sales from the acquisition of Henry Heide. These
increases were offset somewhat by lower sales resulting from the
divestiture of Hershey Canada Inc.'s Planters and Life Savers
businesses in January 1996.
The consolidated gross margin increased from 41.7% in 1995 to 42.7%
in 1996. The increase was primarily the result of confectionery
price increases, increased manufacturing efficiencies and improved
profitability related to new product introductions and certain
international businesses. These favorable variances were partially
offset by higher costs for certain major raw materials, primarily
cocoa beans and milk. Selling, marketing and administrative
expenses increased by 10%, due to increased advertising and
promotion expenses principally associated with the introduction of
new products, offset somewhat by reduced spending for existing
brands, and higher selling expenses related primarily to
international sales volume increases.
Net interest expense in the third quarter of 1996 was in line with
the comparable period of 1995 as higher fixed interest expense was
offset by reduced short-term interest expense. The higher fixed
interest expense related to the issuance in October 1995 of $200
million of 6.7% Notes due 2005 (Notes). 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 third quarter effective income tax rate increased from 38.5% in
1995 to 40.1% in 1996. The lower rate in 1995 was due primarily to
the tax benefit associated with the partial reversal of 1994
accrued restructuring reserves related to foreign entities and the
1995 restructuring charge for a voluntary retirement program
recorded in the third quarter of last year.
Results of Operations - First Nine Months 1996 vs. First Nine
Months 1995
Consolidated net sales for the first nine months of 1996 increased
by $229.4 million or 9% as a result of incremental sales from new
confectionery and grocery products, confectionery selling price
increases in the United States, increased confectionery sales
volume primarily in various international markets, and incremental
sales from the acquisition of Henry Heide. These increases were
offset somewhat as a result of the divestitures of OZF Jamin in the
second quarter of 1995 and Hershey Canada Inc.'s Planters and Life
Savers businesses in January 1996.
The consolidated gross margin remained at 41.7% in 1995 and 1996.
Confectionery price increases, improved profitability associated
with the introduction of new products and the favorable impact of
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the OZF Jamin divestiture were offset by higher costs for certain
major raw materials, primarily cocoa beans, milk, and durum
semolina and increased manufacturing costs attributable to
production start-up and manufacturing of new products, and adverse
weather conditions in the first quarter. Selling, marketing and
administrative expenses increased by 7%, primarily due to increased
advertising and promotion expenses associated with the introduction
of new products and higher selling expenses primarily related to
international sales volume increases and new product introductions.
Net interest expense was $6.2 million above prior year, primarily
reflecting higher fixed interest expense resulting from the
issuance of $200 million of Notes in October 1995.
The effective income tax rate increased from 39.3% in 1995 to 40.1%
in 1996. The lower rate in 1995 was due primarily to the tax
benefit associated with the reversal of 1994 accrued restructuring
reserves related to foreign entities and the 1995 restructuring
charge for a voluntary retirement program in the third quarter of
1995.
Financial Condition
Historically, the Corporation's major source of financing has been
cash generated from operations. Domestic seasonal working capital
needs, which typically peak during the summer, generally have been
met by issuing commercial paper. During the first nine months of
1996, the Corporation's cash and cash equivalents increased by
$27.6 million. Cash provided from operations, the divestiture of
Hershey Canada Inc.'s Planters and Life Savers businesses and
short-term borrowings was sufficient to finance capital additions
of $108.5 million, pay cash dividends of $84.7 million and fund
share repurchases of $35.7 million.
The ratio of current assets to current liabilities was 1.1:1 as of
September 29, 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
42% as of September 29, 1996 and December 31, 1995.
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 September 29, 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. In
addition, as of September 29, 1996 and October 1, 1995, the
Corporation had lines of credit with domestic and international
commercial banks in the amount of approximately $100 million and
$1.0 billion, respectively, 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 September 29, 1996, $300
million of debt securities remained available for issuance under
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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 September 29,
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 during the period.
As of September 29, 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 $150 million to $225 million
per annum during the next several years as a result of capacity
expansion to support new products and line extensions and continued
modernization of existing facilities.
Subsequent Event
In October 1996, the Corporation announced that it had reached
preliminary agreements with Huhtamaki Oy, the international foods
company based in Finland, to acquire Huhtamaki's Leaf North America
confectionery operations for a purchase price of US $440 million
plus a royalty for the license of Leaf's North American
confectionery brands from Huhtamaki. Correspondingly, Huhtamaki
will acquire the Corporation's European confectionery interests,
the German praline manufacturer Gubor and the Italian sugar
confectionery company Sperlari, for a purchase price of US $110
million. The transaction is expected to be completed by year-end,
subject to approval by both companies' boards and by appropriate
regulatory authorities.
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Part II
Items 1 through 5 have been omitted as not applicable.
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 nine months ended September
29, 1996 and October 1, 1995.
Exhibit 27 - Financial Data Schedule for the period ended
September 29, 1996 (required for electronic filing only).
b) Reports on Form 8-K
A report on Form 8-K was filed October 23, 1996, announcing
that the Corporation had reached a preliminary agreement with
Huhtamaki Oy, the international foods company based in
Finland, to acquire its Leaf North America confectionery
operations and to sell to Huhtamaki the Corporation's European
confectionery operations.
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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 November 6, 1996 /s/ William F. Christ
William F. Christ
Senior Vice President and
Chief Financial Officer
Date November 6, 1996 /s/ David W. Tacka
David W. Tacka
Corporate Controller and
Chief Accounting Officer
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EXHIBIT INDEX
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule for the period ended
September 29, 1996 (required for electronic filing only)
<PAGE>
<PAGE>
EXHIBIT 12
HERSHEY FOODS CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands of dollars except for ratios)
(Unaudited)
For the Nine Months Ended
September 29, October 1,
1996 1995
Earnings:
Income before income taxes $324,761 $289,857
Add (deduct):
Interest on indebtedness 39,583 32,507
Portion of rents representative of the
interest factor(a) 6,454 6,223
Amortization of debt expense 175 41
Amortization of capitalized interest 2,491 2,369
Earnings as adjusted $373,464 $330,997
Fixed Charges:
Interest on indebtedness $ 39,583 $ 32,507
Portion of rents representative of the
interest factor(a) 6,454 6,223
Amortization of debt expense 175 41
Capitalized interest 1,490 1,350
Total fixed charges $ 47,702 $ 40,121
Ratio of earnings to fixed charges 7.83 8.25
NOTE:
(a) Portion of rents representative of the interest factor consists of one-
third of rental expense for operating leases.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HERSHEY
FOODS CORPORATION'S CONSOLIDATED CONDENSED BALANCE SHEET AS OF SEPTEMBER 29,
1996 AND CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER
29, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-29-1996
<CASH> 59,964
<SECURITIES> 0
<RECEIVABLES> 384,245<F1>
<ALLOWANCES> 0
<INVENTORY> 491,761
<CURRENT-ASSETS> 1,054,176
<PP&E> 2,281,448
<DEPRECIATION> 831,207
<TOTAL-ASSETS> 2,966,716
<CURRENT-LIABILITIES> 930,975
<BONDS> 338,752
0
0
<COMMON> 179,950
<OTHER-SE> 969,803
<TOTAL-LIABILITY-AND-EQUITY> 2,966,716
<SALES> 2,800,193
<TOTAL-REVENUES> 2,800,193
<CGS> 1,633,520
<TOTAL-COSTS> 2,438,793
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,639
<INCOME-PRETAX> 324,761
<INCOME-TAX> 130,229
<INCOME-CONTINUING> 194,532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194,532
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 0
<FN>
<F1>BALANCE IS NET OF RESERVES FOR DOUBTFUL ACCOUNTS AND CASH DISCOUNTS.
</FN>
</TABLE>
