-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H2S7rexQhTshoWqsxCbUeOMmK6LMf46btURz42iDtNZr8/R8O3D2l+wOMI6ATyUp eSeuDl0MHObTtoWRE5l7gQ== 0000047111-99-000073.txt : 19990818 0000047111-99-000073.hdr.sgml : 19990818 ACCESSION NUMBER: 0000047111-99-000073 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990704 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERSHEY FOODS CORP CENTRAL INDEX KEY: 0000047111 STANDARD INDUSTRIAL CLASSIFICATION: SUGAR & CONFECTIONERY PRODUCTS [2060] IRS NUMBER: 230691590 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00183 FILM NUMBER: 99694924 BUSINESS ADDRESS: STREET 1: 100 CRYSTAL A DR STREET 2: P O BOX 810 CITY: HERSHEY STATE: PA ZIP: 17033-0810 BUSINESS PHONE: 7175346799 MAIL ADDRESS: STREET 1: P O BOX 810 STREET 2: 100 CRYSTAL A DIRVE CITY: HERSHEY STATE: PA ZIP: 17033-0810 FORMER COMPANY: FORMER CONFORMED NAME: HERSHEY CHOCOLATE CORP DATE OF NAME CHANGE: 19680401 10-Q 1 2Q9910Q 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 July 4, 1999 ------------------------------------------------- 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 - 109,071,088 shares, as of August 2, 1999. Class B Common Stock, $1 par value - 30,443,908 shares, as of August 2, 1999. Exhibit Index - Page 19 1 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 4, July 5, 1999 1998 --------- --------- Net Sales $ 853,239 $880,399 --------- --------- Costs and Expenses: Cost of sales 512,796 522,715 Selling, marketing and administrative 241,371 258,309 --------- -------- Total costs and expenses 754,167 781,024 --------- -------- Income before Interest and Income Taxes 99,072 99,375 Interest expense, net 17,015 20,744 --------- ------- Income before Income Taxes 82,057 78,631 Provision for income taxes 32,002 30,666 --------- ------- Net Income $ 50,055 $ 47,965 ========= ======== Net Income Per Share - Basic $ .36 $ .33 ========= ======== Net Income Per Share - Diluted $ .35 $ .33 ========= ======== Average Shares Outstanding - Basic 140,001 143,510 ========= ======== Average Shares Outstanding - Diluted 141,338 145,752 ========= ======== Cash Dividends Paid per Share: Common Stock $ .2400 $ .2200 ========= ======== Class B Common Stock $ .2175 $ .2000 ========= ======== The accompanying notes are an integral part of these statements. 2 HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands except per share amounts) For the Six Months Ended July 4, July 5, 1999 1998 ------------- -------------- Net Sales $ 1,798,391 $ 1,978,475 ------------- -------------- Costs and Expenses: Cost of sales 1,074,960 1,175,055 Selling, marketing and administrative 508,125 557,679 Gain on sale of business (243,785) --- ------------- -------------- Total costs and expenses 1,339,300 1,732,734 ------------- -------------- Income before Interest and Income Taxes 459,091 245,741 Interest expense, net 35,455 43,450 ------------- -------------- Income before Income Taxes 423,636 202,291 Provision for income taxes 148,911 78,893 ------------- -------------- Net Income $ 274,725 $ 123,398 ============== ============== Net Income Per Share - Basic $ 1.95 $ .86 ============= ============== Net Income Per Share - Diluted $ 1.93 $ .85 ============= ============== Average Shares Outstanding - Basic 140,918 143,441 ============= ============== Average Shares Outstanding - Diluted 142,339 145,612 ============= ============== Cash Dividends Paid per Share: Common Stock $ .480 $ .440 ============= ============== Class B Common Stock $ .435 $ .400 ============= ============== The accompanying notes are an integral part of these statements. 3
HERSHEY FOODS CORPORATION CONSOLIDATED BALANCE SHEETS JULY 4, 1999 AND DECEMBER 31, 1998 (in thousands of dollars) ASSETS 1999 1998 -------------- -------------- Current Assets: Cash and cash equivalents $ 31,749 $ 39,024 Accounts receivable - trade 287,967 451,324 Inventories 656,771 493,249 Deferred income taxes 79,457 58,505 Prepaid expenses and other 125,570 91,864 -------------- -------------- Total current assets 1,181,514 1,133,966 -------------- -------------- Property, Plant and Equipment, at cost 2,533,642 2,702,787 Less - accumulated depreciation and amortization (1,004,121) (1,054,729) -------------- -------------- Net property, plant and equipment 1,529,521 1,648,058 -------------- -------------- Intangibles Resulting from Business Acquisitions 457,448 530,464 Other Assets 90,429 91,610 -------------- -------------- Total assets $ 3,258,912 $ 3,404,098 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 107,222 $ 156,937 Accrued liabilities 278,692 294,415 Accrued income taxes 53,579 17,475 Short-term debt 272,186 345,908 Current portion of long-term debt 2,039 89 -------------- -------------- Total current liabilities 713,718 814,824 Long-term Debt 878,477 879,103 Other Long-term Liabilities 330,154 346,769 Deferred Income Taxes 302,042 321,101 -------------- -------------- Total liabilities 2,224,391 2,361,797 -------------- -------------- Stockholders' Equity: Preferred Stock, shares issued: none in 1999 and 1998 --- --- Common Stock, shares issued: 149,506,964 in 1999 and 149,502,964 in 1998 149,506 149,503 Class B Common Stock, shares issued: 30,443,908 in 1999 and 30,447,908 in 1998 30,444 30,447 Additional paid-in capital 31,744 29,995 Unearned ESOP compensation (23,951) (25,548) Retained earnings 2,398,342 2,189,693 Treasury-Common Stock shares at cost: 40,443,176 in 1999 and 36,804,157 in 1998 (1,496,482) (1,267,422) Accumulated other comprehensive loss (55,082) (64,367) -------------- -------------- Total stockholders' equity 1,034,521 1,042,301 -------------- -------------- Total liabilities and stockholders' equity $ 3,258,912 $ 3,404,098 ============== ==============
The accompanying notes are an integral part of these balance sheets. 4
HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of dollars) For the Six Months Ended July 4, July 5, 1999 1998 ------------- -------------- Cash Flows Provided from (Used by) Operating Activities Net Income $ 274,725 $ 123,398 Adjustments to Reconcile Net Income to Net Cash Provided from Operations: Depreciation and amortization 79,821 77,162 Deferred income taxes (9,476) 2,058 Gain on sale of business, net of tax of $78,769 (165,016) --- Changes in assets and liabilities, net of effects from business acquisitions and divestitures: Accounts receivable - trade 142,848 130,389 Inventories (188,778) (118,053) Accounts payable (38,163) (46,186) Other assets and liabilities (107,357) (59,224) ----------- ----------- Net Cash Flows (Used by) Provided from Operating Activities (11,396) 109,544 ----------- ----------- Cash Flows Provided from (Used by) Investing Activities Capital additions (55,282) (77,822) Capitalized software additions (17,814) (20,164) Proceeds from divestiture 450,000 --- Other, net 2,589 8,933 ------------- ----------- Net Cash Flows Provided from (Used by) Investing Activities 379,493 (89,053) ----------- ----------- Cash Flows Provided from (Used by) Financing Activities Net increase (decrease) in short-term debt (74,052) 54,348 Long-term borrowings 1,685 --- Repayment of long-term debt (110) (25,096) Cash dividends paid (66,076) (61,740) Exercise of stock options 15,135 13,849 Incentive plan transactions --- (22,458) Repurchase of Common Stock (251,954) --- ----------- ----------- Net Cash Flows (Used by) Financing Activities (375,372) (41,097) ----------- ----------- (Decrease) in Cash and Cash Equivalents (7,275) (20,606) Cash and Cash Equivalents, beginning of period 39,024 54,237 ----------- ----------- Cash and Cash Equivalents, end of period $ 31,749 $ 33,631 =========== =========== ------------------------------------------------------------------------------------ Interest Paid $ 36,186 $ 43,787 =========== ========== Income Taxes Paid $ 120,125 $ 40,685 =========== ==========
The accompanying notes are an integral part of these statements. 5
HERSHEY FOODS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated Class B Additional Unearned Treasury Other Total Preferred Common Common Paid-in ESOP Retained Common Comprehensive Stockholders' Stock Stock Stock Capital Compensation Earnings Stock Income (Loss) Equity - ------------------------------------------------------------------------------------------------------------------------------------ In thousands of dollars Balance as of December 31, 1998 $ --- $ 149,503 $30,447 $ 29,995 $(25,548) $2,189,693 $(1,267,422) $ (64,367) $1,042,301 ---------- Comprehensive income: Net income 224,670 224,670 Other comprehensive income: Foreign currency translation adjustments 4,996 4,996 -------- Comprehensive income 229,666 -------- Dividends: Common Stock, $.24 per share (26,599) (26,599) Class B Common Stock, $.2175 per share (6,622) (6,622) Incentive plan transactions (480) (480) Exercise of stock options 2,304 18,808 21,112 Employee stock ownership trust transactions 127 799 926 Repurchase of Common Stock (236,959) (236,959) ------ --------- ------- -------- -------- ---------- ----------- --------- ------------ Balance as of April 4, 1999 --- 149,503 30,447 31,946 (24,749) 2,381,142 (1,485,573) (59,371) 1,023,345 Comprehensive income: Net income 50,055 50,055 Other comprehensive income: Foreign currency translation adjustments 4,289 4,289 -------- Comprehensive income 54,344 -------- Dividends: Common Stock, $.24 per share (26,233) (26,233) Class B Common Stock, $.2175 per share (6,622) (6,622) Conversion of Class B Common Stock into Common Stock 3 (3) --- Exercise of stock options (495) 4,086 3,591 Employee stock ownership trust transactions 121 798 919 Supplemental retirement contribution 172 172 Repurchase of Common Stock (14,995) (14,995) ------- --------- ------- -------- --------- ---------- ----------- --------- ------------ Balance as of July 4, 1999 $ --- $ 149,506 $30,444 $ 31,744 $(23,951) $2,398,342 $(1,496,482) $ (55,082) $1,034,521 ======= ========= ======= ======== ======== ========== =========== ========= ===========
The accompanying notes are an integral part of this statement. 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of the Corporation and its subsidiaries after elimination of intercompany accounts and transactions. These statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to prior year amounts to conform to the 1999 presentation. Operating results for the three months and year-to-date ended July 4, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For more information, refer to the consolidated financial statements and footnotes included in the Corporation's 1998 Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 2. INTEREST EXPENSE Interest expense, net consisted of the following: For the Six Months Ended ------------------------ July 4, 1999 July 5, 1998 ------------ ------------ (in thousands of dollars) Interest expense $ 38,194 $ 46,332 Interest income (1,525) (1,738) Capitalized interest (1,214) (1,144) ---------- ---------- Interest expense, net $ 35,455 $ 43,450 ========== ========== 7 3. NET INCOME PER SHARE A total of 40,443,176 shares were held as Treasury Stock as of July 4, 1999. In accordance with Financial Accounting Standards No. 128 "Earnings Per Share", Basic and Diluted Earnings per Share are computed based on the weighted average number of shares of the Common Stock and the Class B Stock outstanding as follows: Income Shares Per-Share For the Three Months Ended July 4, 1999 (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------- In thousands of dollars except shares and per share amounts Net Income per Share - Basic - ---------------------------- Net income $ 50,055 140,000,667 $.36 ==== Effect of Dilutive Securities - ----------------------------- Stock options - 1,279,354 Performance stock units - 20,725 Restricted stock units - 36,870 -------- ------------ Net Income per Share - Diluted - ------------------------------ Net income and assumed conversions $ 50,055 141,337,616 $.35 ======== =========== ==== Income Shares Per-Share For the Three Months Ended July 5, 1998 (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------- In thousands of dollars except shares and per share amounts Net Income per Share - Basic - ---------------------------- Net income $ 47,965 143,509,698 $.33 ==== Effect of Dilutive Securities - ----------------------------- Stock options - 2,162,813 Performance stock units - 72,928 Restricted stock units - 6,747 -------- ----------- Net Income per Share - Diluted - ------------------------------ Net income and assumed conversions $ 47,965 145,752,186 $.33 ======== =========== ==== 8 Income Shares Per-Share For the Six Months Ended July 4, 1999 (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------- In thousands of dollars except shares and per share amounts Net Income per Share - Basic - ---------------------------- Net income $ 274,725 140,917,694 $1.95 ===== Effect of Dilutive Securities - ----------------------------- Stock options - 1,363,184 Performance stock units - 20,843 Restricted stock units - 37,116 --------- ----------- Net Income per Share - Diluted - ------------------------------ Net income and assumed conversions $ 274,725 142,338,837 $1.93 ========= =========== ===== Income Shares Per-Share For the Six Months Ended July 5, 1998 (Numerator) (Denominator) Amount - -------------------------------------------------------------------------------- In thousands of dollars except shares and per share amounts Net Income per Share - Basic - ---------------------------- Net income $ 123,398 143,441,165 $.86 ==== Effect of Dilutive Securities - ----------------------------- Stock options - 2,092,179 Performance stock units - 72,366 Restricted stock units - 6,694 --------- ----------- Net Income per Share - Diluted - ------------------------------ Net income and assumed conversions $ 123,398 145,612,404 $.85 ========= =========== ==== 4. INVENTORIES 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: July 4, 1999 December 31, 1998 ------------ ----------------- (in thousands of dollars) Raw materials $ 266,160 $ 170,777 Goods in process 73,536 83,522 Finished goods 407,679 322,125 ----------- ----------- Inventories at FIFO 747,375 576,424 Adjustment to LIFO (90,604) (83,175) ----------- ----------- Total inventories $ 656,771 $ 493,249 =========== =========== 9 5. LONG-TERM DEBT In August 1997, the Corporation filed a Form S-3 Registration Statement under which it could offer, on a delayed or continuous basis, up to $500 million of additional debt securities. As of July 4, 1999, $250 million of debt securities remained available for issuance under the August 1997 Registration Statement. 6. FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair value as of July 4, 1999 and December 31, 1998, because of the relatively short maturity of these instruments. The carrying value of long-term debt, including the current portion, was $880.8 million as of July 4, 1999, compared to a fair value of $903.8 million, based on quoted market prices for the same or similar debt issues. As of July 4, 1999, the Corporation had foreign exchange forward contracts maturing in 1999 and 2000 to purchase $20.9 million in foreign currency, primarily British sterling, and to sell $11.7 million in foreign currency, primarily Canadian dollars and Japanese yen, at contracted forward rates. 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. As of July 4, 1999, the fair value of foreign exchange forward contracts approximated the contract 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, from time to time, enters into interest rate swap agreements to effectively convert a portion of its floating rate debt to fixed rate debt. As of July 4, 1999, the Corporation had agreements outstanding with an aggregate notional amount of $75.0 million maturing in 1999. As of July 4, 1999, interest rates payable were at a weighted average fixed rate of 6.3%, and the interest rates receivable were floating based on the 30-day commercial paper composite rate which was approximately 5.0% as of July 4, 1999. Any interest rate differential on interest rate swaps is recognized as an adjustment to interest expense over the term of each agreement. As of July 4, 1999, the fair value of interest rate swap agreements approximated the contract value. The Corporation's risk related to swap agreements is limited to the cost of replacing such agreements at prevailing market rates. 7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The effective date for SFAS No. 133 has been deferred to fiscal years beginning after June 15, 2000, but may be implemented as of the beginning of any fiscal quarter after issuance. 10 Retroactive application is not permitted. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997. Changes in accounting methods will be required for derivative instruments utilized by the Corporation to hedge commodity price, foreign currency exchange rate and interest rate risks. Such derivatives include commodity futures and options contracts, foreign exchange forward and options contracts and interest rate swaps. The Corporation anticipates the adoption of SFAS No. 133 as of January 1, 2001. As of July 4, 1999, net deferred losses on derivatives of approximately $33.3 million after tax would have been reported as a component of other comprehensive loss and classified as accumulated other comprehensive loss on the consolidated balance sheets upon adoption of SFAS No. 133. 8. SHARE REPURCHASES A total of 1,963,089 shares of Common Stock was purchased during the first quarter of 1999 under the share repurchase program begun in 1996, completing the $200 million program. In February 1999, the Corporation's Board of Directors approved an additional share repurchase program authorizing the repurchase of up to $230 million of the Corporation's Common Stock. Under this new program, the Corporation purchased 1,579,779 shares of its Common Stock from Hershey Trust Company, as trustee for the benefit of Milton Hershey School and an additional 694,811 shares through open market transactions during the first half of 1999. As of July 4, 1999, a total of 40,443,176 shares were held as Treasury Stock and $90.5 million remained available for repurchases of Common Stock under the repurchase program approved in February. 11 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations - Second Quarter 1999 vs. Second Quarter 1998 - ------------------------------------------------------------------- Consolidated net sales for the second quarter fell from $880.4 million in 1998 to $853.2 million in 1999, a decrease of 3% from the prior year. The sales decline resulting from the divestiture of the Corporation's pasta business was partially offset by incremental sales from the introduction of new confectionery products, an increase in sales of core confectionery and grocery products and higher export sales in various international markets. The increase in core confectionery and grocery sales was partly attributable to a controlled advance purchase program in June intended to reduce disruptions during the final phase of the implementation of an enterprise-wide information system in early July. The consolidated gross margin decreased from 40.6% in 1998 to 39.9% in 1999. The decrease reflected lower profitability resulting from the mix of confectionery items sold in the second quarter of 1999 compared with sales in the second quarter of 1998 and higher freight and distribution costs. These cost increases were offset partially by reduced costs for packaging and raw materials. Selling, marketing and administrative expenses decreased by 7%, primarily reflecting lower expenses related to the divestiture of the pasta business, partially offset by increased marketing expenditures for core confectionery brands, international exports and the introduction of new products. Net interest expense in the second quarter of 1999 was $3.7 million below the comparable period of 1998, primarily as a result of lower short-term interest expense as a portion of the proceeds from the sale of the pasta business was used to reduce short-term borrowings. The second quarter effective income tax rate was 39.0% in 1999 and 1998. Results of Operations - First Six Months 1999 vs. First Six Months 1998 - ----------------------------------------------------------------------- Consolidated net sales for the first six months of 1999 decreased by $180.1 million or 9%, primarily as a result of the divestiture of the Corporation's pasta business and a decrease in sales of core confectionery products in the first quarter. These sales declines were partially offset by incremental sales from the introduction of new confectionery products, increased sales resulting from the controlled advance purchase program in June and increased export sales in international markets. The consolidated gross margin decreased from 40.6% in 1998 to 40.2% in 1999. The decrease reflected lower profitability resulting from the mix of confectionery items sold in 1999 compared with sales during the comparable period of 1998, primarily related to lower sales of the more profitable standard bars. Higher freight and distribution costs also contributed to the lower gross margin in the first half of 1999. These cost increases were offset partially by decreased costs for packaging materials and raw materials, a one-time benefit from revisions to the Corporation's retiree medical plan and improved manufacturing efficiencies. Selling, marketing and administrative expenses decreased by 9%, reflecting lower expenses resulting from the divestiture of the pasta business and reduced marketing expenses for existing products. These decreases were offset partially by increased spending associated with international exports and the introduction of new products. Net interest expense was $8.0 million below the comparable period of 1998, primarily as a result of lower short-term interest expense as a portion of the proceeds from the sale of the pasta business was used to reduce short-term borrowings. 12 Excluding the provision for income taxes associated with the gain on the sale of the pasta business, the effective income tax rate was 39.0% in 1999 and 1998. In January 1999, the Corporation recorded a gain of $243.8 million, $165.0 million or $1.16 per share - diluted after tax, on the sale of its pasta business. Excluding the after-tax gain on the sale, net income for the first six months of 1999 of $109.7 million was 11% below the comparable period of the prior year and net income per share - diluted excluding the after-tax gain was $.77 per share or $.08 per share below 1998. 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, generally have been met by issuing commercial paper. During the first six months of 1999, the Corporation's cash and cash equivalents decreased by $7.3 million. Cash and cash equivalents on hand at the beginning of the period and proceeds from the divestiture of the pasta business were sufficient to repay $74.1 million of short-term debt, repurchase $252.0 million of the Corporation's Common Stock, finance capital expenditures and capitalized software additions of $73.1 million and pay cash dividends of $66.1 million. The ratio of current assets to current liabilities was 1.7:1 as of July 4, 1999, and 1.4:1 as of December 31, 1998. 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 53% as of July 4, 1999, and 54% as of December 31, 1998. As of July 4, 1999, the Corporation maintained a committed credit facility agreement with a syndicate of banks in the amount of $576.8 million which could be borrowed directly or used to support the issuance of commercial paper. The Corporation has the option to increase the credit facility by $1.0 billion with the concurrence of the banks. The Corporation also had lines of credit with domestic and international commercial banks in the amount of approximately $23.0 million as of July 4, 1999 and December 31, 1998. In March 1997, the Corporation issued $150 million of 6.95% Notes under a November 1993 Registration Statement. In August 1997, the Corporation issued $150 million of Notes and $250 million of Debentures under the November 1993 and August 1997 Registration Statements. As of April 4, 1999, $250 million of debt securities remained available for issuance under the August 1997 Registration Statement. Proceeds from any offering of the $250 million of debt securities available under the shelf registration may be used for general corporate requirements, which include reducing existing commercial paper borrowings, financing capital additions, and funding future business acquisitions and working capital requirements. As of July 4, 1999, 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 $170 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. Such expenditures will be financed with cash provided from operations and short-term borrowings. Year 2000 Issues - ---------------- Year 2000 issues associated with information systems relate to the way dates are recorded and computed in many computer systems. These year 2000 issues could have an impact upon the Corporation's information technology (IT) and non-IT systems. Non-IT systems include 13 embedded technology such as microcontrollers which are integral to the operation of most machinery and equipment. Additionally, year 2000 issues could have a similar impact on the Corporation's major business partners, including both customers and suppliers. While it is not currently possible to estimate the total impact of a failure of either the Corporation or its major business partners or suppliers to complete their year 2000 remediation in a timely manner, the Corporation has determined that it could suffer significant adverse financial consequences as a result of such failure. Awareness and assessment of year 2000 issues regarding major business applications software and other significant IT systems began in 1990. A formal program to address year 2000 issues associated with IT systems was established in late 1995. In early 1998, a team was established with representatives from all major functional areas of the Corporation which assumed overall responsibility for ensuring that remediation of both IT and non-IT systems will be completed in time to prevent material adverse consequences to the Corporation's business, operations or financial condition. The Corporation expects that remediation of these systems will be essentially completed during the third quarter of 1999. In late 1996, the Corporation approved a project to implement an enterprise-wide integrated information system to improve process efficiencies in all of the major functional areas of the Corporation, enabling the Corporation to provide better service to its customers. This system will replace most of the transaction systems and applications supporting operations of the Corporation. In addition to improving efficiency and customer service, another benefit of this system is that it is year 2000 compliant and will address year 2000 issues for approximately 80% of the Corporation's business applications software. As of July 4, 1999, approximately $75.0 million of capitalized software and hardware and $8.5 million of expenses have been incurred for this project. As of July 4, 1999, spending for implementation of this system was approximately 75% complete, with full implementation expected during the third quarter of 1999. Total commitments for this system and subsequently identified enhancements are expected to be approximately $112 million which will be financed with cash provided from operations and short-term borrowings. The Corporation's mainframe, network and desktop hardware and software have recently been upgraded and are substantially year 2000 compliant. The Corporation is in the process of remediating year 2000 compliance issues associated with legacy information systems not being replaced by the integrated information system project, including process automation and factory management systems. During late 1998, the Corporation undertook an extensive review of its year 2000 remediation program. As a result of this review, the Corporation has undertaken additional testing to confirm its year 2000 compliance, but is otherwise maintaining its current program of remediation. As of July 4, 1999, remediation of both IT and non-IT systems was approximately 90% complete, reflecting the latest estimate of testing and work requirements to be performed. The total cost of remediation of IT and non-IT systems not being replaced by the integrated information system project is expected to be in the range of $6.0 million to $8.0 million. The Corporation is also in the process of assessing year 2000 remediation issues relating to its major business partners. All of the Corporation's major customers have been contacted regarding year 2000 issues related to electronic data interchange. The Corporation is also in the process of contacting its major suppliers of ingredients, packaging, facilities, logistics and financial services with regard to year 2000 issues. Because of the uncertainties associated with assessing the ability of major business partners to complete the remediation of their systems in time to prevent operational difficulties, the Corporation will continue to contact and/or visit major customers and suppliers to gain assurances that no significant adverse consequences will result due to their failure to complete remediation of their systems. Year 2000 remediation, conversion, validation and implementation is continuing and, at the present time, it is expected that remediation to both the Corporation's IT and non-IT systems and 14 those of major business partners will be completed in time to prevent material adverse consequences to the Corporation's business, operations or financial condition. However, contingency plans are being developed, including possible increases in raw material and finished goods inventory levels, and the identification of alternate vendors and suppliers. The Corporation is participating in industry-wide efforts to develop contingency plans which, to the extent feasible, may be relied upon to resolve any potential failures resulting from year 2000 issues. Operational and incident specific contingency plans are being developed within the context of an overall business continuity contingency plan for all major functional areas of the Corporation. Subsequent Events - ----------------- In early July, the Corporation implemented the final phase of an enterprise-wide integrated information system. This implementation includes substantial revisions to the order taking and distribution administrative processes which, if problems occur, could adversely impact sales and earnings for future periods. While the Corporation is experiencing some start-up difficulties, it is not yet possible to determine what impact, if any, they will have on financial results. Also in July, the Corporation entered into an operating lease agreement for an amount not to exceed $65 million for the purpose of financing construction costs of a warehouse and distribution facility located on land owned by the Corporation near Hershey, Pennsylvania. Under the agreement, the lessor pays for the construction costs and thereafter leases the facility to the Corporation. The lease term is six years. The lease provides for a substantial residual guarantee and includes an option to purchase the facility at original cost. The first phase of the distribution center is scheduled to open in the second quarter of 2000. Forward Looking Information - --------------------------- 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 income taxes; market demand for new and existing products; and raw material pricing. Item 3. Quantitative and Qualitative Disclosure About Market Risk The potential loss in fair value of foreign exchange forward contracts and interest rate swaps resulting from a hypothetical near-term adverse change in market rates of ten percent was not material as of July 4, 1999. 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 increased from $7.6 million as of December 31, 1998, to $11.7 million as of July 4, 1999. Market risk represents 10% of the estimated average fair value of net commodity positions at four dates prior to the end of each period. 15 PART II - OTHER INFORMATION Items 2 through 4 have been omitted as not applicable. Item 1. Legal Proceedings In January 1999, the Corporation received a Notice of Proposed Deficiency (Notice) from the Internal Revenue Service (IRS) related to the years 1989 through 1996. The most significant issue pertains to the Corporate Owned Life Insurance (COLI) program which was implemented by the Corporation in 1989. The IRS proposed the disallowance of interest expense deductions associated with the underlying life insurance policies. The Corporation believes that it has fully complied with the tax law as it relates to its COLI program. The Corporation filed a protest of the proposed deficiency with the Appeals section of the IRS in April 1999 and intends to vigorously defend its position on this matter. In June 1999, the Pennsylvania Supreme Court determined that the manufacturing exemption for Capital Stock - Franchise Tax purposes is facially discriminatory under the Commerce Clause of the United States Constitution, and remanded for a determination whether the tax on foreign corporations is a valid compensatory tax. The court further suggested that the result might be that the entire exemption would be ruled unconstitutional. If such a ruling is eventually sustained, the Corporation may be subject to additional Pennsylvania state income tax liability. The Corporation has no other material pending legal proceedings, other than ordinary routine litigation incidental to its business. Item 5. Other Information In early July, the Corporation implemented the final phase of an enterprise-wide integrated information system. This implementation includes substantial revisions to the order taking and distribution administrative processes which, if problems occur, could adversely impact sales and earnings for future periods. While the Corporation is experiencing some start-up difficulties, it is not yet possible to determine what impact, if any, they will have on financial results. Also in July, the Corporation entered into an operating lease agreement for an amount not to exceed $65 million for the purpose of financing construction costs of a warehouse and distribution facility located on land owned by the Corporation near Hershey, Pennsylvania. Under the agreement, the lessor pays for the construction costs and thereafter leases the facility to the Corporation. The lease term is six years. The lease provides for a substantial residual guarantee and includes an option to purchase the facility at original cost. The first phase of the distribution center is scheduled to open in the second quarter of 2000. 16 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 4, 1999 and July 5, 1998. Exhibit 27 - Financial Data Schedule for the period ended July 4, 1999 (required for electronic filing only). b) Reports on Form 8-K A report on Form 8-K was filed April 23, 1999 announcing that the Corporation's earnings for the first quarter of 1999 may be below market expectations. 17 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 17, 1999 /s/ William F. Christ --------------- --------------------------------- William F. Christ Senior Vice President, Chief Financial Officer and Treasurer Date August 17, 1999 /s/ David W. Tacka --------------- -------------------------------- David W. Tacka Corporate Controller and Chief Accounting Officer 18 EXHIBIT INDEX Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges Exhibit 27 - Financial Data Schedule for the period ended July 4, 1999 (required for electronic filing only) 19 EX-12 2 RATIO OF EARNINGS EXHIBIT 12 HERSHEY FOODS CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (in thousands of dollars except for ratios) (Unaudited) For the Six Months Ended ------------------------ July 4, July 5, 1999 1998 ------------ ---------- Earnings: Income before income taxes $ 423,636(a) $ 202,291 Add (deduct): Interest on indebtedness 36,980 45,188 Portion of rents representative of the interest factor (b) 6,571 5,813 Amortization of debt expense 243 292 Amortization of capitalized interest 1,613 1,770 --------- --------- Earnings as adjusted $ 469,043 $ 255,354 ========= ========= Fixed Charges: Interest on indebtedness $ 36,980 $ 45,188 Portion of rents representative of the interest factor (b) 6,571 5,813 Amortization of debt expense 243 292 Capitalized interest 1,214 1,144 --------- --------- Total fixed charges $ 45,008 $ 52,437 ========= ========= Ratio of earnings to fixed charges 10.42 4.87 ========= ========= NOTE: (a) Includes a gain of $243.8 million on the sale of the Corporation's pasta business. (b) Portion of rents representative of the interest factor consists of one-third of rental expense for operating leases. EX-27 3 2Q99FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HERSHEY FOODS CORPORATION'S CONSOLIDATED CONDENSED BALANCE SHEET AS OF JULY 4, 1999 AND CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JULY 4, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS. 0000047111 HERSHEY FOODS CORPORATION 1,000 6-MOS DEC-31-1999 JUL-04-1999 31,749 0 287,967 0 656,771 1,181,514 2,533,642 1,004,121 3,258,912 713,718 878,447 0 0 179,950 854,571 3,258,912 1,798,391 1,798,391 1,074,960 1,339,300 0 0 35,455 423,636 148,911 274,725 0 0 0 274,725 1.95 1.93 Balance is net of reserves for doubtful accounts and cash discounts. Total includes the gain on the sale of business of $243,785.
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