A summary of the status of our performance stock units and restricted stock units as of OctoberApril 4, 2009,2010, and the change during 20092010 is presented below:
Deferred performance stock units, deferred restricted stock units, and directors’ fees and accumulated dividend amounts representing deferred stock units totaled 516,104414,984 units as of OctoberApril 4, 2009.2010. Each unit is equivalent to one share of the Company’s Common Stock.
For more information on our stock compensation plans, refer to the consolidated financial statements and notes included in our 20082009 Annual Report on Form 10-K and our proxy statement for the 20092010 annual meeting of stockholders.
In February 2007, we announced a comprehensive, three-year supply chain transformation program (the “global supply chain transformation programprogram” or GSCT”) and, in December 2007, we initiated a business realignment program associated with our business in Brazil (together, “the 2007 business realignment initiatives”“GSCT”). In December 2008, we approved a modest expansion in the scope of the global supply chain transformation program to include 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 rationalization of other select portfolio items. The affected facilities are located in Berkeley and San Francisco, California. The additional business realignment charges related to the expansion in scope will be recorded in 2009 and include severance for approximately 150 impacted employees.
Employee separation costs of $2.3 million for the GSCT in the first quarter of 2009 were related to involuntary terminations at the North American manufacturing facilities of Artisan Confections Company which were closed. Certain real estate with a carrying value of $20.3 million was being closed.held for sale as of April 5, 2009. As of April 5, 2009, manufacturing facilities located in Dartmouth, Nova Scotia; Oakdale, California; and Montreal, Quebec were closed and sold. The facilities located in Naugatuck, Connecticut; Reading, Pennsylvania; and Smiths Falls, Ontario had been closed and were being held for sale as of April 5, 2009.
The charge of $60.1 million recorded in cost of sales during the first nine months of 2008 related primarilyApril 4, 2010 liability balance relating 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 $6.1 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 valueprogram was estimated based on the expected sales proceeds. The $6.6 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 $17.0 million of fixed asset impairments and plant closure expenses for 2008 related primarily to the preparation of plants for sale and production line removal costs. The global supply chain transformation program employee separation costs related to involuntary terminations at the North American manufacturing facilities which were being closed.
The 2008 Brazilian business realignment charges were related to costs for involuntary terminations and costs associated with office consolidation related to the cooperative agreement with Bauducco.
The October 4, 2009 liability balance relating to the 2007 business realignment initiatives was $9.8$5.5 million for employee separation costs.costs to be paid during the remainder of 2010. During the first ninethree months of 2009,2010, we made payments against the liabilities recorded for the 2007 business realignment initiativesGSCT of $24.7$3.7 million principally related to employee separation costs.
7. EARNINGS PER SHARE
We compute Basic and Diluted Earnings Per Share based on the weighted-average number of shares of the Common Stock and the Class B Common Stock outstanding as follows:
| | For the Three Months Ended | | For the Nine Months Ended | |
| | October 4, 2009 | | September 28, 2008 | | October 4, 2009 | | September 28, 2008 | |
| | (in thousands except per share amounts) | |
| Net income | $ | 162,023 | | $ | 124,538 | | $ | 309,215 | | $ | 229,250 | |
| Weighted-average shares - Basic | | | | | | | | | | | | |
| Common Stock | | 167,299 | | | 166,682 | | | 166,980 | | | 166,696 | |
| Class B Common Stock | | 60,709 | | | 60,784 | | | 60,710 | | | 60,798 | |
| Total weighted-average shares - Basic | | 228,008 | | | 227,466 | | | 227,690 | | | 227,494 | |
| Effect of dilutive securities: | | | | | | | | | | | | |
| Employee stock options | | 1,116 | | | 904 | | | 785 | | | 939 | |
| Performance and restricted stock units | | 429 | | | 300 | | | 309 | | | 324 | |
| Weighted-average shares - Diluted | | 229,553 | | | 228,670 | | | 228,784 | | | 228,757 | |
| Earnings Per Share - Basic | | | | | | | | | | | | |
| Class B Common Stock | $ | .66 | | $ | .51 | | $ | 1.26 | | $ | .93 | |
| Common Stock | $ | .73 | | $ | .56 | | $ | 1.39 | | $ | 1.03 | |
| Earnings Per Share - Diluted | | | | | | | | | | | | |
| Class B Common Stock | $ | .65 | | $ | .51 | | $ | 1.26 | | $ | .93 | |
| Common Stock | $ | .71 | | $ | .54 | | $ | 1.35 | | $ | 1.00 | |
| | | | For the Three Months Ended |
| | | | April 4, 2010 | | | April 5, 2009 |
| | In thousands except per share amounts | | |
| | Net income | | $ | 147,394 | | | $ | 75,894 |
| | Weighted-average shares - Basic | | | | | | | |
| | Common Stock | | | 167,257 | | | | 166,767 |
| | Class B Common Stock | | | 60,709 | | | | 60,711 |
| | Total weighted-average shares - Basic | | | 227,966 | | | | 227,478 |
| | Effect of dilutive securities: | | | | | | | |
| | Employee stock options | | | 1,007 | | | | 593 |
| | Performance and restricted stock units | | | 578 | | | | 213 |
| | Weighted-average shares - Diluted | | | 229,551 | | | | 228,284 |
| | Earnings Per Share - Basic | | | | | | | |
| | Class B Common Stock | | $ | .60 | | | $ | .31 |
| | Common Stock | | $ | .66 | | | $ | .34 |
| | Earnings Per Share - Diluted | | | | | | | |
| | Class B Common Stock | | $ | .60 | | | $ | .31 |
| | Common Stock | | $ | .64 | | | $ | .33 |
The Class B Common Stock is convertible into Common Stock on a share for share basis at any time. The calculation of earnings per share-diluted for the Class B Common Stock was performed using the two-class method and the calculation of earnings per share-diluted for the Common Stock was performed using the if-converted method.
For the three-month period ended April 4, 2010, 8.7 million stock options were not included in the diluted earnings per share calculation because the effect would have been antidilutive. In the first quarter of 2009, 17.1 million stock options were not included in the diluted earnings per share calculation because the effect would have been antidilutive.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We account for derivative instruments in accordance with Financial Accounting Standards Board accounting standards, which require us to recognize all derivative instruments at fair value. We classify derivatives as assets or liabilities on the balance sheet. Accounting for the change in fair value of the derivative depends on:
— | whether the instrument qualifies for, and has been designated as, a hedging relationship; and |
— | the type of hedging relationship. |
There are three types of hedging relationships:
— | hedge of foreign currency exposure of a net investment in a foreign operation. |
As of OctoberApril 4, 20092010 and December 31, 2008, we classified2009, all of our derivative instruments were classified as cash flow hedges.
The amount of net losses on cash flow hedging derivatives, including foreign exchange forward contracts, interest rate swap agreements and commodities futures contracts, expected to be reclassified into earnings in the next twelve months was approximately $10.7 million after tax as of October 4, 2009. This amount was primarily associated with commodities futures contracts.
For more information, refer to the consolidated financial statements and notes included in our 2008 Annual Report on Form 10-K.
Objectives, Strategies and Accounting Policies Associated with Derivative Instruments
We use certain derivative instruments, from time to time, to manage interest rate, foreign currency exchange rate and commodity market price risk exposures. We enter into interest rate swap agreements and foreign currency forward contracts and options for periods consistent with their related underlying exposures. We enter into commodities futures and options contracts for varying periods. Our commodities futures and options contracts are effective as hedges of market price risks associated with anticipated raw material purchases, energy requirements and transportation costs.
We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features. In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.
Interest Rate Swaps
In order to minimize financing costs and to manage interest rate exposure, from time to time, we enter into interest rate swap agreements. We include gains and losses on interest rate swap agreements in other comprehensive income. We recognize gains and losses on interest rate swap agreements as an adjustment to interest expense in the same period as the hedged interest payments affect earnings. We classify cash flows from interest rate swap agreements as net cash provided from operating activities on the Consolidated Statements of Cash Flows. Our risk related to interest rate swap agreements is limited to the cost of replacing the agreements at prevailing market rates.
Foreign Exchange Forward Contracts
We enter into foreign exchange forward contracts to hedge transactions primarily related to commitments and forecasted purchases of equipment, raw materials and finished goods denominated in foreign currencies. We may also hedge payment of forecasted intercompany transactions with our subsidiaries outside the United States. These contracts reduce currency risk from exchange rate movements. We generally hedge foreign currency price risks for periods from 3 to 24 months.
Foreign exchange forward contracts are effective as hedges of identifiable, foreign currency commitments. Since there is a direct relationship between the foreign currency derivatives and the foreign currency denomination of the transactions, the derivatives are highly effective in hedging cash flows related to transactions denominated in the corresponding foreign currencies. We designate our foreign exchange forward contracts as cash flow hedging derivatives.
These contracts meet the criteria for cash flow hedge accounting treatment. Accordingly, we include related gains and losses in other comprehensive income. Subsequently, we recognize the gains and losses in cost of sales or selling, marketing and administrative expense in the same period that the hedged items affect earnings. In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We do not expect any significant losses from counterparty defaults.
We classify the fair value of foreign exchange forward contracts as prepaid expenses and other current assets, other non-current assets, accrued liabilities or other long-term liabilities on the Consolidated Balance Sheets. We report the offset to the contracts in accumulated other comprehensive loss, net of income taxes. We record gains and losses on these contracts as a component of other comprehensive income and reclassify them into earnings in the same period during which the hedged transaction affects earnings. For hedges associated with the purchase of equipment, we designate the related cash flows as net cash flows (used by) provided from investing activities on the Consolidated Statements of Cash Flows. We classify cash flows from other foreign exchange forward contracts as net cash provided from operating activities.
As of October 4, 2009, the fair value of foreign exchange forward contracts with gains totaled $5.8 million and the fair value of foreign exchange forward contracts with losses totaled $6.4 million. Over the last three years the volume of activity for foreign exchange forward contracts to purchase foreign currencies ranged from a contract amount of $.8 million to $31.9 million. Over the same period, the volume of activity for foreign exchange forward contracts to sell foreign currencies ranged from a contract amount of $14.7 million to $165.1 million.
Commodities Futures and Options Contracts
We enter into commodities futures and options contracts to reduce the effect of raw material price fluctuations and to hedge transportation costs. We generally hedge commodity price risks for 3 to 24 month periods. The commodities futures and options contracts are highly effective in hedging price risks for our raw material requirements and transportation costs. Because our commodities futures and options contracts meet hedge criteria, we account for them as cash flow hedges. Accordingly, we include gains and losses on hedging in other comprehensive income. We recognize gains and losses ratably in cost of sales in the same period that we record the hedged raw material requirements in cost of sales.
We use exchange traded futures contracts to fix the price of unpriced physical forward purchase contracts. Physical forward purchase contracts meet the definition of “normal purchase and sales” and, therefore, are not accounted for as derivative instruments. On a daily basis, we receive or make cash transfers reflecting changes in the value of futures contracts (unrealized gains and losses). As mentioned above, such gains and losses are included as a component of other comprehensive income. The cash transfers offset higher or lower cash requirements for payment of future invoice prices for raw materials, energy requirements and transportation costs. Futures held in excess of the amount required to fix the price of unpriced physical forward contracts are effective as hedges of anticipated purchases.
Over the last three years our total annual volume of futures and options traded in conjunction with commodities hedging strategies ranged from 55,000 to 70,000 contracts. We use futures and options contracts in combination with forward purchasing of cocoa products, sugar, corn sweeteners, natural gas, fuel oil and certain dairy products primarily to provide favorable pricing opportunities and flexibility in sourcing our raw material and energy requirements. Our commodity procurement practices are intended to reduce the risk of future price increases and provide visibility to future costs, but also may potentially limit our ability to benefit from possible price decreases.
Hedge Effectiveness—Commodities
We perform an assessment of hedge effectiveness for commodities futures and options contracts on a quarterly basis. Because of the rollover strategy used for commodities futures contracts, as required by futures market conditions, some ineffectiveness may result in hedging forecasted manufacturing requirements. This occurs as we switch futures contracts from nearby contract positions to contract positions that are required to fix the price of anticipated manufacturing requirements. Hedge ineffectiveness may also result from variability in basis differentials associated with the purchase of raw materials for manufacturing requirements. We record the ineffective portion of gains or losses on commodities futures and options contracts currently in cost of sales.
The prices of commodities futures contracts reflect delivery to the same locations where we take delivery of the physical commodities. Therefore, there is no ineffectiveness resulting from differences in location between the derivative and the hedged item.
Financial Statement Location and Amounts Pertaining to Derivative Instruments
The fair value of derivative instruments in the Consolidated Balance Sheet as of OctoberApril 4, 2010 was as follows:
| | Balance Sheet Caption | | Interest Rate Swap Agreements | | | Foreign Exchange Forward Contracts and Options | | | Commodities Futures and Options Contracts |
| | In thousands of dollars | | |
| | Prepaid expense and other current assets | | $ | — | | | $ | 874 | | | $ | 1 |
| | Other assets | | $ | 6,893 | | | $ | 1,399 | | | $ | — |
| | Accrued liabilities | | $ | — | | | $ | 7,752 | | | $ | — |
| | Other long-term liabilities | | $ | — | | | $ | 1,832 | | | $ | — |
The fair value of derivative instruments in the Consolidated Balance Sheet as of December 31, 2009 was as follows:
| Balance Sheet Caption | | Interest Rate Swap Agreements | | | Foreign Exchange Forward Contracts and Options | | | Commodities Futures and Options Contracts | |
| | | (in thousands of dollars) | |
| Prepaid expense and other current assets | | $ | — | | | $ | 4,700 | | | $ | 26,409 | |
| Other assets | | $ | 3,473 | | | $ | 1,114 | | | $ | — | |
| Accrued liabilities | | $ | — | | | $ | 5,519 | | | $ | 17,468 | |
| Other long-term liabilities | | $ | — | | | $ | 928 | | | $ | — | |
| | Balance Sheet Caption | | Interest Rate Swap Agreements | | | Foreign Exchange Forward Contracts and Options | | | Commodities Futures and Options Contracts |
| | In thousands of dollars | | |
| | Prepaid expense and other current assets | | $ | — | | | $ | 2,872 | | | $ | 11,835 |
| | Other assets | | $ | 9,171 | | | $ | — | | | $ | — |
| | Accrued liabilities | | $ | — | | | $ | 7,708 | | | $ | 3,228 |
The fair value of the interest rate swap agreements represents the difference in the present values of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments.
We define the fair value of foreign exchange forward contracts and options as the amount of the difference between the contracted and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign exchange forward contracts and options on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences. As of April 4, 2010, the fair value of foreign exchange forward contracts with gains totaled $2.3 million and the fair value of foreign exchange forward contracts with losses totaled $9.6 million.
As of OctoberApril 4, 2009,2010, prepaid expense and other current assets were associated with the fair value of commodity options contracts. Accrued liabilitiescontracts were related to cash transfers payablereceivable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. We make or receive cash transfers to or from commodity futures brokers on a daily basis reflecting changes in the value of futures contracts on the IntercontinentalExchange or various other exchanges. These changes in value represent unrealized gains and losses.
The effect of derivative instruments on the Consolidated Statements of Income for the ninethree months ended OctoberApril 4, 20092010 was as follows:
| Cash Flow Hedging Derivatives | | Interest Rate Swap Agreements | | | Foreign Exchange Forward Contracts and Options | | | Commodities Futures and Options Contracts | |
| | | (in thousands of dollars) | |
| Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion) | | $ | 3,473 | | | $ | (957 | ) | | $ | 79,758 | |
| Gains (losses) reclassified from accumulated OCI into income (effective portion) (a) | | $ | — | | | $ | 6,916 | | | $ | 2,800 | |
| Gains (losses) recognized in income (ineffective portion) (b) | | $ | — | | | $ | — | | | $ | 306 | |
| | Cash Flow Hedging Derivatives | | Interest Rate Swap Agreements | | | Foreign Exchange Forward Contracts and Options | | | Commodities Futures and Options Contracts |
| | In thousands of dollars | | |
| | Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion) | | $ | (2,278) | | | $ | (6,179) | | | $ | (25,171) |
| | Gains (losses) reclassified from accumulated OCI into income (effective portion) (a) | | $ | — | | | $ | (1,947) | | | $ | 16,800 |
| | Gains (losses) recognized in income (ineffective portion) (b) | | $ | — | | | $ | — | | | $ | 1,286 |
| | (a) | Gains (losses) reclassified from accumulated OCI into earnings were included in cost of sales for commodities futures and options contracts and in selling, marketing and administrative expenses for foreign exchange forward contracts and options.options designated as hedges of intercompany purchases of inventory. Other gains and losses for foreign exchange forward contracts and options were included in selling, marketing and administrative expenses. |
| (b) | Gains (losses) recognized in earnings were included in cost of sales. |
The effect of derivative instruments on the Consolidated Statements of Income for the three months ended April 5, 2009 was as follows:
| | Cash Flow Hedging Derivatives | | Interest Rate Swap Agreements | | | Foreign Exchange Forward Contracts and Options | | | Commodities Futures and Options Contracts |
| | In thousands of dollars | | |
| | Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion) | | $ | 107 | | | $ | 1,959 | | | $ | 18,978 |
| | Gains (losses) reclassified from accumulated OCI into income (effective portion) (a) | | $ | — | | | $ | 3,274 | | | $ | (3,500) |
| | Gains (losses) recognized in income (ineffective portion) (b) | | $ | — | | | $ | — | | | $ | 171 |
| (a) | Gains (losses) reclassified from accumulated OCI into earnings were included in cost of sales for commodities futures and options contracts and for foreign exchange forward contracts and options designated as hedges of intercompany purchases of inventory. Other gains and losses for foreign exchange forward contracts and options were included in selling, marketing and administrative expenses. |
| | (b) | Gains (losses) recognized in earnings were included in cost of sales. |
All gains (losses) recognized in earnings were related to the ineffective portion of the hedging relationship. We recognized no components of gains and losses on cash flow hedging derivatives in income due to excluding such components from the hedge effectiveness assessment.
The amount of net gains on cash flow hedging derivatives, including foreign exchange forward contracts, interest rate swap agreements and commodities futures and options contracts, expected to be reclassified into earnings in the next twelve months was approximately $25.2 million after tax as of April 4, 2010. This amount was primarily associated with commodities futures and options contracts.
For more information, refer to the consolidated financial statements and notes included in our 2009 Annual Report on Form 10-K.
9. COMPREHENSIVE INCOME
A summary of the components of comprehensive income (loss) is as follows:
| | For the Three Months Ended October 4, 2009 | |
| | Pre-Tax Amount | | | Tax (Expense) Benefit | | | After-Tax Amount | |
| | (in thousands of dollars) | |
| Net income | | | | | | | $ | 162,023 | |
| | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | |
| Foreign currency translation adjustments | $ | 10,674 | | | $ | — | | | | 10,674 | |
| Pension and post-retirement benefit plans | | 16,615 | | | | (6,789 | ) | | | 9,826 | |
| Cash flow hedges: | | | | | | | | | | | |
| Gains on cash flow hedging derivatives | | 69,402 | | | | (27,449 | ) | | | 41,953 | |
| Reclassification adjustments | | (15,697 | ) | | | 6,167 | | | | (9,530 | ) |
| Total other comprehensive income | $ | 80,994 | | | $ | (28,071 | ) | | | 52,923 | |
| Comprehensive income | | | | | | | | | $ | 214,946 | |
| | | | For the Three Months Ended April 4, 2010 | |
| | | | Pre-Tax Amount | | | Tax (Expense) Benefit | | | After-Tax Amount | |
| | In thousands of dollars | | | |
| | Net income | | | | | | | | $ | 147,394 | |
| | | | | | | | | | | | |
| | Other comprehensive income (loss): | | | | | | | | | | |
| | Foreign currency translation adjustments | | $ | 12,268 | | | $ | — | | | | 12,268 | |
| | Pension and post-retirement benefit plans | | | 7,125 | | | | (2,761 | ) | | | 4,364 | |
| | Cash flow hedges: | | | | | | | | | | | | |
| | Losses on cash flow hedging derivatives | | | (33,628 | ) | | | 11,932 | | | | (21,696 | ) |
| | Reclassification adjustments | | | (14,853 | ) | | | 5,679 | | | | (9,174 | ) |
| | Total other comprehensive loss | | $ | (29,088 | ) | | $ | 14,850 | | | | (14,238 | ) |
| | Comprehensive income | | | | | | | | | | $ | 133,156 | |
| | For the Three Months Ended September 28, 2008 | |
| | Pre-Tax Amount | | | Tax (Expense) Benefit | | | After-Tax Amount | |
| | (in thousands of dollars) | |
| Net income | | | | | | | $ | 124,538 | |
| | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | |
| Foreign currency translation adjustments | $ | (17,153 | ) | | $ | — | | | | (17,153 | ) |
| Pension and post-retirement benefit plans | | 4,438 | | | | (1,817 | ) | | | 2,621 | |
| Cash flow hedges: | | | | | | | | | | | |
| Losses on cash flow hedging derivatives | | (62,646 | ) | | | 22,090 | | | | (40,556 | ) |
| Reclassification adjustments | | (10,365 | ) | | | 3,737 | | | | (6,628 | ) |
| Total other comprehensive loss | $ | (85,726 | ) | | $ | 24,010 | | | | (61,716 | ) |
| Comprehensive income | | | | | | | | | $ | 62,822 | |
| | | | For the Three Months Ended April 5, 2009 | |
| | | | Pre-Tax Amount | | | Tax (Expense) Benefit | | | After-Tax Amount | |
| | In thousands of dollars | | | |
| | Net income | | | | | | | | $ | 75,894 | |
| | | | | | | | | | | | |
| | Other comprehensive income (loss): | | | | | | | | | | |
| | Foreign currency translation adjustments | | $ | (1,767 | ) | | $ | — | | | | (1,767 | ) |
| | Pension and post-retirement benefit plans | | | 8,145 | | | | (3,135 | ) | | | 5,010 | |
| | Cash flow hedges: | | | | | | | | | | | | |
| | Gains on cash flow hedging derivatives | | | 21,044 | | | | (6,971 | ) | | | 14,073 | |
| | Reclassification adjustments | | | 226 | | | | (88 | ) | | | 138 | |
| | Total other comprehensive income | | $ | 27,648 | | | $ | (10,194 | ) | | | 17,454 | |
| | Comprehensive income | | | | | | | | | | $ | 93,348 | |
| | For the Nine Months Ended October 4, 2009 | |
| | Pre-Tax Amount | | | Tax (Expense) Benefit | | | After-Tax Amount | |
| | (in thousands of dollars) | |
| Net income | | | | | | | $ | 309,215 | |
| | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | |
| Foreign currency translation adjustments | $ | 27,278 | | | $ | — | | | | 27,278 | |
| Pension and post-retirement benefit plans | | 64,713 | | | | (25,495 | ) | | | 39,218 | |
| Cash flow hedges: | | | | | | | | | | | |
| Gains on cash flow hedging derivatives | | 82,274 | | | | (31,100 | ) | | | 51,174 | |
| Reclassification adjustments | | (9,716 | ) | | | 3,826 | | | | (5,890 | ) |
| Total other comprehensive income | $ | 164,549 | | | $ | (52,769 | ) | | | 111,780 | |
| Comprehensive income | | | | | | | | | $ | 420,995 | |
| | For the Nine Months Ended September 28, 2008 | |
| | Pre-Tax Amount | | | Tax (Expense) Benefit | | | After-Tax Amount | |
| | (in thousands of dollars) | |
| Net income | | | | | | | $ | 229,250 | |
| | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | |
| Foreign currency translation adjustments | $ | (17,248 | ) | | $ | — | | | | (17,248 | ) |
| Pension and post-retirement benefit plans | | 9,362 | | | | (3,778 | ) | | | 5,584 | |
| Cash flow hedges: | | | | | | | | | | | |
| Gains on cash flow hedging derivatives | | 34,654 | | | | (12,930 | ) | | | 21,724 | |
| Reclassification adjustments | | (39,329 | ) | | | 14,189 | | | | (25,140 | ) |
| Total other comprehensive loss | $ | (12,561 | ) | | $ | (2,519 | ) | | | (15,080 | ) |
| Comprehensive income | | | | | | | | | $ | 214,170 | |
The components of accumulated other comprehensive income (loss) as shown on the Consolidated Balance Sheets are as follows:
| | | October 4, 2009 | | | December 31, 2008 | |
| | | (in thousands of dollars) | |
| Foreign currency translation adjustments | | $ | (2,475 | ) | | $ | (29,753 | ) |
| Pension and post-retirement benefit plans, net of tax | | | (275,135 | ) | | | (314,353 | ) |
| Cash flow hedges, net of tax | | | 29,482 | | | | (15,802 | ) |
| Total accumulated other comprehensive loss | | $ | (248,128 | ) | | $ | (359,908 | ) |
| | | | April 4, 2010 | | | December 31, 2009 | |
| | In thousands of dollars | | | |
| | Foreign currency translation adjustments | | $ | 20,817 | | | $ | 8,549 | |
| | Pension and post-retirement benefit plans, net of tax | | | (271,346 | ) | | | (275,710 | ) |
| | Cash flow hedges, net of tax | | | 33,447 | | | | 64,317 | |
| | Total accumulated other comprehensive loss | | $ | (217,082 | ) | | $ | (202,844 | ) |
10. INVENTORIES
We value the majority of our inventories under the last-in, first-out (“LIFO”) method and the remaining inventories at the lower of first-in, first-out (“FIFO”) cost or market. Inventories were as follows:
| | | October 4, 2009 | | | December 31, 2008 | |
| | | (in thousands of dollars) | |
| Raw materials | | $ | 254,801 | | | $ | 215,309 | |
| Goods in process | | | 90,300 | | | | 95,986 | |
| Finished goods | | | 410,128 | | | | 419,016 | |
| Inventories at FIFO | | | 755,229 | | | | 730,311 | |
| Adjustment to LIFO | | | (195,911 | ) | | | (137,781 | ) |
| Total inventories | | $ | 559,318 | | | $ | 592,530 | |
| | | | April 4, 2010 | | | December 31, 2009 | |
| | In thousands of dollars | | | |
| | Raw materials | | $ | 246,916 | | | $ | 246,572 | |
| | Goods in process | | | 77,594 | | | | 84,000 | |
| | Finished goods | | | 313,728 | | | | 376,573 | |
| | Inventories at FIFO | | | 638,238 | | | | 707,145 | |
| | Adjustment to LIFO | | | (156,384 | ) | | | (187,433 | ) |
| | Total inventories | | $ | 481,854 | | | $ | 519,712 | |
The increase in raw material inventories as of October 4, 2009 resulted from the timing of deliveries to support manufacturing requirements and higher prices in 2009. The decrease in finished goods inventories was primarily associated with initiatives to improve sales forecasting and inventory planning, the impact of the global supply chain transformation program and seasonal sales patterns.
11. SHORT-TERM DEBT
As a source of short-term financing, we utilize commercial paper or bank loans with an original maturity of three months or less. Our five-year unsecured revolving credit agreement expires in December 2012. The credit limit is $1.1 billion with an option to borrow an additional $400 million with the concurrence of the lenders. The unsecured revolving credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of OctoberApril 4, 2009,2010, we complied with all covenants pertaining to the credit agreement. There were no significant compensating balance agreements that legally restricted these funds. For more information, refer to the consolidated financial statements and notes included in our 20082009 Annual Report on Form 10-K.
12. LONG-TERM DEBT
In May 2006, we filed a shelf registration statement on Form S-3 that registered an indeterminate amount of debt securities. This registration statement was effective immediately upon filing under Securities and Exchange Commission regulations governing “well-known seasoned issuers” (the “WKSI Registration Statement”). In March 2008, the Company issued $250 million of 5.0% Notes due April 1, 2013 under the WKSI Registration Statement. The net proceeds of this debt issuance were used to repay a portion of the Company’s outstanding indebtedness under its short-term commercial paper program. The May 2006 WKSI Registration Statement expired in May 2009. Accordingly, in May 2009, we filed a new registration statement on Form S-3 to replace the May 2006 WKSI Registration Statement. The May 2009 WKSI Registration Statement registered an indeterminate amount of debt securities and was effective immediately.
13. 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 OctoberApril 4, 20092010 and December 31, 2008,2009, because of the relatively short maturity of these instruments.
The carrying value of long-term debt, including the current portion, was $1,519.1$1,516.0 million as of OctoberApril 4, 2009,2010, compared with a fair value of $1,686.5$1,668.2 million, an increase of $167.4$152.2 million over the carrying value, based on quoted market prices for the same or similar debt issues.
Interest Rate Swaps
In order to minimize financing costs and to manage interest rate exposure, the Company, from time to time, enters into interest rate swap agreements. In March 2009, the Company entered into forward starting interest rate swap agreements to hedge interest rate exposure related to the anticipated $250 million of term financing expected to be executed during 2011 to repay $250 million of 5.3% Notes maturing in September 2011. The weighted-average fixed rate on the forward starting swap agreements was 3.5%. The fair value of interest rate swap agreements was a net asset of $3.5$6.9 million as of OctoberApril 4, 2009.2010. The Company’s risk related to interest rate swap agreements is limited to the cost of replacing such agreements at prevailing market rates. For more informationinf ormation see Note 8. Derivative Instruments and Hedging Activities.
Foreign Exchange Forward Contracts
The following table summarizes our foreign exchange activity:
| | | October 4, 2009 | |
| | | Contract Amount | | Primary Currencies | |
| | | (in millions of dollars) | |
Foreign exchange forward contracts to purchase foreign currencies | | $ | 4.4 | | Euros | |
| | | | | | | |
Foreign exchange forward contracts to sell foreign currencies | | $ | 111.8 | | Canadian dollars | |
| | | | April 4, 2010 |
| | | | Contract Amount | | Primary Currencies |
| | In millions of dollars | | |
| | Foreign exchange forward contracts to purchase foreign currencies | | $ | 18.7 | | Euros |
| | | | | | | |
| | Foreign exchange forward contracts to sell foreign currencies | | $ | 123.3 | | Canadian dollars |
Our foreign exchange forward contracts mature in 20092010 and 2010.2011. For more information, see Note 8. Derivative Instruments and Hedging Activities.
14. FAIR VALUE ACCOUNTING
We follow a fair value measurement hierarchy to price certain assets or liabilities. The fair value is determined based on inputs or assumptions that market participants would use in pricing the asset or liability. These assumptions consist of (1) observable inputs - market data obtained from independent sources, or (2) unobservable inputs - market data determined using the company’s own assumptions about valuation.
We prioritize the inputs to valuation techniques, with the highest priority being given to Level 1 inputs and the lowest priority to Level 3 inputs, as defined below:
— | Level 1 Inputs – quoted prices in active markets for identical assets or liabilities; |
— | Level 2 Inputs – quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; inputs other than quoted prices that are observable; and inputs that are derived from or corroborated by observable market data by correlation; and |
— | Level 3 Inputs – unobservable inputs used to the extent that observable inputs are not available. These reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. |
We use certain derivative instruments, from time to time, to manage interest rate, foreign currency exchange rate and commodity market price risk exposures, all of which are recorded at fair value based on quoted market prices or rates.
A summary of our cash flow hedging derivative assets and liabilities measured at fair value on a recurring basis as of OctoberApril 4, 2009,2010, is as follows:
| Description | | Fair Value as of October 4, 2009 | | | Quoted Prices in Active Markets of Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) |
| | | (in thousands of dollars) |
| Assets | | | | | | | | | | | |
| Cash flow hedging derivatives | | $ | 35,696 | | | $ | 26,409 | | | $ | 9,287 | | | $ | — |
| Liabilities | | | | | | | | | | | | | | | |
| Cash flow hedging derivatives | | $ | 23,915 | | | $ | 17,468 | | | $ | 6,447 | | | $ | — |
| | Description | | Fair Value as of April 4, 2010 | | | Quoted Prices in Active Markets of Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) |
| | In thousands of dollars | | |
| | Assets | | | | | | | | | | | |
| | Cash flow hedging derivatives | | $ | 9,167 | | | $ | 1 | | | $ | 9,166 | | | $ | — |
| | | | | | | | | | | | | | | | | |
| | Liabilities | | | | | | | | | | | | | | | |
| | Cash flow hedging derivatives | | $ | 9,584 | | | $ | — | | | $ | 9,584 | | | $ | — |
As of OctoberApril 4, 2009,2010, cash flow hedging derivative Level 1 assets were associated with the fair value of commodity options contracts. As of October 4, 2009, cash flow hedging derivative Level 1 liabilities were related to cash transfers payablereceivable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. As of OctoberApril 4, 2009,2010, cash flow hedging derivative Level 2 assets were related to the fair value of interest rate swap agreements and foreign exchange forward contracts with gains. Cash flow hedging Level 2 liabilities were related to the fair value of foreign exchange forward contracts with losses. For more information, see Note 8. Derivative Instruments and Hedging Activities.Activities and refer to the consolidated financial statements and notes included in our 2009 Annual Report on Form 10-K.
A summary of our cash flow hedging derivative assets and liabilities measured at fair value on a recurring basis as of December 31, 2009, is as follows:
| | Description | | Fair Value as of December 31, 2009 | | | Quoted Prices in Active Markets of Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) |
| | In thousands of dollars | | |
| | Assets | | | | | | | | | | | |
| | Cash flow hedging derivatives | | $ | 23,878 | | | $ | 11,835 | | | $ | 12,043 | | | $ | — |
| | | | | | | | | | | | | | | | | |
| | Liabilities | | | | | | | | | | | | | | | |
| | Cash flow hedging derivatives | | $ | 10,936 | | | $ | 3,228 | | | $ | 7,708 | | | $ | — |
As of December 31, 2009, cash flow hedging derivative Level 1 assets were associated with the fair value of commodity options contracts. As of December 31, 2009, cash flow hedging derivative Level 1 liabilities were related to cash transfers payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. We make or receive cash transfers to or from commodity futures brokers on a daily basis reflecting changes in the value of futures contracts on the IntercontinentalExchange or various other exchanges. These changes in value represent unrealized gains and losses.
As of December 31, 2009, cash flow hedging derivative Level 2 assets were related to the fair value of interest rate swap agreements and foreign exchange forward contracts with gains. Cash flow hedging Level 2 liabilities were related to the fair value of foreign exchange forward contracts with losses. We define the fair value of foreign exchange forward contracts as the amount of the difference between the contracted and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign exchange forward contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences.
15. INCOME TAXES
The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United States (federal and state), Canada and Canada.Mexico. During the second quarter of 2009, the U.S. Internal Revenue Service (“IRS”) completed its audit of our U.S. income tax returns for 2005 and 2006, resulting in the resolution of tax contingencies associated with the 2004, 2005 and 2006 tax years. During the fourth quarter 2009, the IRS commenced its audit of our U.S. income tax returns for 2007 and 2008. Tax examinations by various state taxing authorities could generally be conducted for years beginning in 2004. We are no longer subject to Canadian federal income tax examinations by the Canada Revenue Agency (“CRA”) for ye ars before 1999, and we are no longer subject to Mexican federal income tax examinations by Servicio de Administracion Tributaria (“SAT”) for years before 2004. U.S., Canadian and Mexican federal audit issues typically involve the timing of deductions and transfer pricing adjustments. We work with the IRS, the CRA and the SAT to resolve proposed audit adjustments and to minimize the amount of adjustments. We do not anticipate that any potential tax adjustments will have a significant impact on our financial position or results of operations.
16. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Components of net periodic benefits (income)benefit cost consisted of the following:
| | | | Pension Benefits | | | Other Benefits | |
| | | | For the Three Months Ended | |
| | | | April 4, 2010 | | | April 5, 2009 | | | April 4, 2010 | | | April 5, 2009 | |
| | In thousands of dollars | | | |
| | Service cost | | $ | 6,929 | | | $ | 6,468 | | | $ | 363 | | | $ | 383 | |
| | Interest cost | | | 13,118 | | | | 14,583 | | | | 4,418 | | | | 4,817 | |
| | Expected return on plan assets | | | (18,760 | ) | | | (17,530 | ) | | | — | | | | — | |
| | Amortization of prior service cost | | | 285 | | | | 299 | | | | (69 | ) | | | (120 | ) |
| | Recognized net actuarial loss (gain) | | | 7,098 | | | | 8,445 | | | | (25 | ) | | | (26 | ) |
| | Administrative expenses | | | 117 | | | | 94 | | | | — | | | | — | |
| | Net periodic benefit cost | | $ | 8,787 | | | $ | 12,359 | | | $ | 4,687 | | | $ | 5,054 | |
| | | Pension Benefits | | | Other Benefits | |
| | | For the Three Months Ended | |
| | | October 4, 2009 | | | September 28, 2008 | | | October 4, 2009 | | | September 28, 2008 | |
| | | (in thousands of dollars) | |
| Service cost | | $ | 6,471 | | | $ | 7,364 | | | $ | 382 | | | $ | 438 | |
| Interest cost | | | 14,788 | | | | 14,902 | | | | 4,682 | | | | 5,078 | |
| Expected return on plan assets | | | (17,822 | ) | | | (26,910 | ) | | | — | | | | — | |
| Amortization of prior service cost | | | 302 | | | | 322 | | | | (118 | ) | | | (115 | ) |
| Recognized net actuarial loss (gain) | | | 8,297 | | | | (134 | ) | | | (40 | ) | | | — | |
| Administrative expenses | | | 40 | | | | 107 | | | | — | | | | — | |
| Net periodic benefits cost (income) | | | 12,076 | | | | (4,349 | ) | | | 4,906 | | | | 5,401 | |
| Special termination benefits | | | — | | | | (2 | ) | | | — | | | | — | |
| Settlement losses | | | 6,181 | | | | 4,458 | | | | — | | | | — | |
| Total amount reflected in earnings | | $ | 18,257 | | | $ | 107 | | | $ | 4,906 | | | $ | 5,401 | |
We made contributions of $43.8$1.3 million and $5.7 million to the pension plans and other benefits plans, respectively, during the third quarter of 2009. In the third quarter of 2008, we made contributions of $20.8 million and $6.0 million to our pension and other benefits plans, respectively. The contributions in 2009 primarily reflected voluntary contributions to our qualified pension plans to improve the funded status and the 2008 contributions primarily reflected benefit payments from our non-qualified pension plans and post-retirement benefit plans.
In the third quarter of 2009, there was net periodic pension benefits expense of $12.1 million, compared with net periodic pension benefits income of $4.3 million in the third quarter of 2008. The net periodic pension benefits expense was primarily due to the significant decline in the value of pension assets during 2008 reflecting unprecedented volatility and deterioration in financial market and economic conditions. The special termination benefits and settlement losses recorded in the third quarter of 2009 and 2008 primarily related to the 2007 business realignment initiatives.
| | | Pension Benefits | | | Other Benefits | |
| | | For the Nine Months Ended | |
| | | October 4, 2009 | | | September 28, 2008 | | | October 4, 2009 | | | September 28, 2008 | |
| | | (in thousands of dollars) | |
| Service cost | | $ | 19,360 | | | $ | 22,128 | | | $ | 1,146 | | | $ | 1,315 | |
| Interest cost | | | 44,070 | | | | 44,801 | | | | 14,012 | | | | 15,248 | |
| Expected return on plan assets | | | (53,204 | ) | | | (80,818 | ) | | | — | | | | — | |
| Amortization of prior service cost | | | 903 | | | | 965 | | | | (356 | ) | | | (343 | ) |
| Recognized net actuarial loss (gain) | | | 24,988 | | | | (421 | ) | | | (113 | ) | | | (2 | ) |
| Administrative expenses | | | 227 | | | | 286 | | | | — | | | | — | |
| Net periodic benefits cost (income) | | | 36,344 | | | | (13,059 | ) | | | 14,689 | | | | 16,218 | |
| Special termination benefits | | | — | | | | 145 | | | | — | | | | — | |
| Settlement losses | | | 36,736 | | | | 9,301 | | | | — | | | | — | |
| Total amount reflected in earnings | | $ | 73,080 | | | $ | (3,613 | ) | | $ | 14,689 | | | $ | 16,218 | |
We made contributions of $45.8 million and $17.9 million to the pension plans and other benefits plans, respectively, during the first nine monthsquarter of 2009.2010. In the first nine monthsquarter of 2008,2009, we made contributions of $24.6$1.3 million and $17.9$6.6 million to our pension and other benefits plans, respectively. The contributions in 2010 and 2009 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.
In the first nine months of 2009, there was net periodic pension benefits expense of $36.3 million, compared with net periodic pension benefits income of $13.1 million in the first nine months of 2008. The net periodic pension benefits expense was primarily due to the significant decline in the value of pension assets during 2008 reflecting unprecedented volatility and deterioration in financial market and economic conditions. The special termination benefits and settlement losses recorded during the first nine months of 2009 and 2008 related to the 2007 business realignment initiatives.
For 2009,2010, there are no minimum funding requirements in excess of available credits for the domestic plans andsignificant minimum funding requirements for the non-domestic plans are not material. The Company made contributions toour pension plans during the third quarterand planned voluntary funding of 2009 to improve the funded status of certain qualifiedour pension plans.plans in 2010 is not material.
For more information, refer to the consolidated financial statements and notes included in our 20082009 Annual Report on
Form 10-K.
17. SHARE REPURCHASES
Repurchases and Issuances of Common Stock
A summary of cumulative share repurchases and issuances is as follows:
| | For the Nine Months Ended October 4, 2009 | | | For the Three Months Ended April 4, 2010 | |
| | Shares | | | Dollars | | |
| (in thousands) | | |
| In thousands | | | Shares | | | Dollars | |
| | | |
Shares repurchased in the open market under pre-approved share repurchase programs | | — | | | $ | — | | | | — | | | $ | — | |
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation | | 252 | | | | 9,314 | | | | 1,680 | | | | 64,152 | |
| Total share repurchases | | 252 | | | | 9,314 | | | | 1,680 | | | | 64,152 | |
| Shares issued for stock options and incentive compensation | | (924 | ) | | | (30,128 | ) | | | | (884 | ) | | | (28,827 | ) |
| Net change | | (672 | ) | | $ | (20,814 | ) | | | | 796 | | | $ | 35,325 | |
In December 2006, our Board of Directors approved a $250.0$250 million share repurchase program. As of OctoberApril 4, 2009,2010, $100.0 million remained available for repurchases of Common Stock under this program.
18. PENDING ACCOUNTING PRONOUNCEMENTS
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140 (“SFAS No. 166”). SFAS No. 166 addresses how information should be provided about transfers of financial assets; the effects of a transfer on a company’s financial position, performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. SFAS No. 166 removes the concept of a qualifying special-purpose entity and modifies or eliminates certain other provisions related to transfers of financial assets. It also establishes additional requirements, including a requirement for enhanced disclosures to provide financial statement users with greater transparency.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). SFAS No. 167 amends certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to improve financial reporting by enterprises involved with variable interest entities, and to provide more relevant and reliable information to users of financial statements.
SFAS Nos. 166 and 167 are effective for us as of January 1, 2010 and we are currently evaluating the impact on our consolidated financial statements upon adoption.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820), Measuring Liabilities at Fair Value ("ASU 2009-05"). ASU 2009-05 provides clarification to entities that measure liabilities at fair value under circumstances where a quoted price in an active market is not available. ASU 2009-05 is effective for us in the fourth quarter of 2009. We believe there will be no significant impact on our consolidated financial statements upon adoption.
Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
SUMMARY OF OPERATING RESULTS
Analysis of Selected Items from Our Income Statement
| | | For the Three Months Ended | |
| | | April 4, 2010 | | | April 5, 2009 | | | Percent Change Increase (Decrease) | |
In millions except per share amounts | | |
| Net Sales | | $ | 1,407.8 | | | $ | 1,236.0 | | | 13.9 | % |
| Cost of Sales | | | 813.9 | | | | 795.8 | | | 2.3 | % |
| Gross Profit | | | 593.9 | | | | 440.2 | | | 34.9 | % |
| Gross Margin | | | 42.2 | % | | | 35.6 | % | | | |
| SM&A Expense | | | 340.6 | | | | 274.5 | | | 24.1 | % |
| SM&A Expense as a percent of sales | | | 24.2 | % | | | 22.2 | % | | | |
| Business Realignment and Impairment Charges, net | | | — | | | | 12.8 | | | (100.0 | )% |
| EBIT | | | 253.3 | | | | 152.9 | | | 65.6 | % |
| EBIT Margin | | | 18.0 | % | | | 12.4 | % | | | |
| Interest Expense, net | | | 23.7 | | | | 23.9 | | | (0.6 | )% |
| Provision for Income Taxes | | | 82.2 | | | | 53.1 | | | 54.7 | % |
| Effective Income Tax Rate | | | 35.8 | % | | | 41.2 | % | | | |
| Net Income | | $ | 147.4 | | | $ | 75.9 | | | 94.2 | % |
| Net Income Per Share-Diluted | | $ | .64 | | | $ | .33 | | | 93.9 | % |
| | For the Three Months Ended | | For the Nine Months Ended |
| | October 4, 2009 | | September 28, 2008 | | Percent Change Increase (Decrease) | | October 4, 2009 | | September 28, 2008 | | Percent Change Increase (Decrease) |
| | (in thousands except per share amounts) |
| Net Sales | $ 1,484.1 | | $ 1,489.6 | | (0.4)% | | $ 3,891.3 | | $ 3,755.4 | | 3.6% |
| Cost of Sales | 895.0 | | 988.4 | | (9.4)% | | 2,408.7 | | 2,495.2 | | (3.5)% |
| Gross Profit | 589.1 | | 501.2 | | 17.5% | | 1,482.6 | | 1,260.2 | | 17.7% |
| Gross Margin | 39.7% | | 33.6% | | | | 38.1% | | 33.6% | | |
| SM&A Expense | 301.5 | | 272.4 | | 10.7% | | 874.6 | | 789.0 | | 10.9% |
SM&A Expense as a percent of sales | 20.3% | | 18.3% | | | | 22.5% | | 21.0% | | |
Business Realignment Charges, net | 8.0 | | 8.9 | | (9.8)% | | 58.8 | | 34.7 | | 69.1% |
| EBIT | 279.6 | | 219.9 | | 27.1% | | 549.2 | | 436.5 | | 25.8% |
| EBIT Margin | 18.8% | | 14.8% | | | | 14.1% | | 11.6% | | |
| Interest Expense, net | 22.3 | | 24.9 | | (10.5)% | | 68.9 | | 72.9 | | (5.5)% |
| Provision for Income Taxes | 95.3 | | 70.5 | | 35.2% | | 171.1 | | 134.3 | | 27.4% |
| Effective Income Tax Rate | 37.0% | | 36.1% | | | | 35.6% | | 36.9% | | |
| Net Income | $ 162.0 | | $ 124.5 | | 30.1% | | $ 309.2 | | $ 229.3 | | 34.9% |
| Net Income Per Share-Diluted | $ .71 | | $ .54 | | 31.5% | | $ 1.35 | | $ 1.00 | | 35.0% |
Results of Operations - ThirdFirst Quarter 20092010 vs. ThirdFirst Quarter 20082009
U.S. Price Increases
In August 2008, we announced an increase in wholesale prices across the United States, Puerto Rico and export chocolate and sugar confectionery lines. This price increase was effective immediately, and represented a weighted average eleven percent increase on our instant consumable, multi-pack and packaged candy lines. These changes approximated a ten percent increase over the entire domestic product line.
In January 2008, we announced an increase in the wholesale prices of our domestic confectionery line, effective immediately. This price increase applied to our standard bar, king-size bar, 6-pack and vending lines and represented a weighted average increase of approximately thirteen percent on these items. These price changes approximated a three percent price increase over our entire domestic product line.
In April 2007, we announced an increase of approximately four percent to five percent in the wholesale prices of our domestic confectionery line, effective immediately. The price increase applied to our standard bar, king-size bar, 6-pack and vending lines. These products represent approximately one-third of our U.S. confectionery portfolio.
We implemented these pricing actions to help offset increases in input costs, including raw materials, fuel, utilities and transportation, and to support increased investments in advertising and consumer-focused marketing programs.
Net Sales
Net sales for the thirdfirst quarter of 2010 increased over the comparable period of 2009 due to core brand sales volume increases, sales of new products, higher pricing, primarily on seasonal products, and price realization related to improved trade promotion program efficiencies. The sales volume increase included a seasonal volume shift from the fourth quarter of 2009 were down slightly compared withto the same period of 2008. Net sales during the thirdfirst quarter of 20082010. Sales in local currency were increased approximately 2% from the buy-in related to the August 2008 price increase. Price realization increased net saleshigher for our international businesses, particularly in 2009 by more than 10%,Canada, China, Mexico and Brazil, but waswere partially offset substantially by sales volume decreases, reflecting the impact of pricing elasticity. The impact ofdeclines in India. Favorable foreign currency exchange rates reduced netalso contributed approximately 1% to the sales by approximately 1.1%.increase. The acquisition of the Van Houten Singapore businessincrementally increased net sales during the quarter by $3.9$1.4 million, or 0.3%0.1%.
Key Marketplace Metrics
Consumer takeaway increased 4.8%7.5% during the thirdfirst quarter of 20092010 compared with the same period of 2008.2009. However, the first quarter of 2010 benefited from an early Easter season. Excluding the impact of Easter sales, consumer takeaway increased 5.5% during the period. 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.
Market share in measured channels was flatincreased by 0.5 share points during the thirdfirst quarter of 2009 compared with the same period of 2008. Market2010. The change in market share is provided for channels measured channelsby 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
CostThe cost of sales decreasedincrease was primarily associated with higher volume levels, offset somewhat by lower input and product obsolescence costs. The lower input costs resulted primarily from interim accounting for commodities. Commodity costs for the remainder of 2010 are expected to exceed costs for the comparable period in the third quarter2009. Improvements in supply chain productivity also partially offset cost of 2009 comparedsales increases associated with the same period of 2008. The decrease was primarily due to lowerhigher sales volume and increased supply chain efficiencies and productivity. Input costs were higher in the third quarter of 2009 versus 2008, primarily reflecting higher raw material costs and higher pension expense. Businessvolume. No business realignment charges of $1.3 million were included in cost of sales in the thirdfirst quarter of 2010 compared with $4.1 million in the first quarter of 2009.
The gross margin increase in the first quarter of 2010 compared with the first quarter of 2009 compared with $20.0 millionresulted from favorable net price realization, supply chain efficiencies, some of which were related to fixed cost absorption as volume was greater than a year ago, and lower commodity input costs. The favorable commodity costs were an anomaly in the thirdfirst quarter due to timing and are projected to be higher than prior year for the remainder of 2008.2010.
The increase in gross margin in the third quarter of 2009 compared with the third quarter of 2008 wasSelling, Marketing and Administrative
Selling, marketing and administrative expenses increased primarily due to favorable price realization and supply chain productivity improvements, partially offset by higher input costs. Approximately one-fifth of the gross margin increase was attributable to the impact of reduced costs for business realignment initiatives recorded in 2009 compared with 2008.
Selling, Marketing and Administrative
Higher selling, marketing and administrative costs were principally associated with higher advertising and incentive compensation expenses, along with investments to improve our selling capabilities. Advertising costs in the first quarter of 2010 increased approximately 67% from the same period in 2009. Higher legal expenses and pension expenses. However, consumer promotion costs were lower than 2008 as the prior year costs included spending associated with several new product introductions. Expenses of $1.7 million related to our consideration of a transaction with Cadbury plc also contributed to the increase.
No business realignment initiativescosts were included in selling, marketing and administrative expenses forin the thirdfirst quarter of 20092010 compared with $2.2$2.1 million in the first quarter of 2009.
Business Realignment Initiatives
No business realignment charges were recorded in the thirdfirst quarter of 2008.
Business Realignment Initiatives
2010. Business realignment charges of $8.0$12.8 million were recorded in the thirdfirst quarter of 2009 associated with the 2007 business realignment initiatives.global supply chain transformation program. The charges were primarily related to pension settlement losses andassociated with fixed asset impairments, plant closure expenses. Business realignment charges of $8.9 million were recorded in the third quarter of 2008 primarily associated withexpenses, and employee separation and contract termination costs, pension settlement losses,partially offset by gains on the sale of fixed asset impairment and plant closure expenses.assets.
Income Before Interest and Income Taxes and EBIT Margin
EBIT increased in the thirdfirst quarter of 20092010 compared with the thirdfirst quarter of 20082009 as a result of higher gross profit, and lower business realignment charges, partially offset by increasedhigher selling, marketing and administrative expenses. NetNo net pre-tax business realignment and impairment charges of $11.0 million were recorded in the thirdfirst quarter of 20092010 compared with $31.0$19.0 million recorded in the thirdfirst quarter of 2008.2009.
EBIT margin increased from 14.8%12.4% for the thirdfirst quarter of 20082009 to 18.8%18.0% for the thirdfirst quarter of 2009. The increase was attributable2010 due to the higher gross margin, partially offset by higher selling, marketing and administrative expense as a percentage of sales. TheEBIT margin was 1.5 percentage points lower in 2009 due to the impact of net business realignment charges reduced EBIT margin by 0.8 percentage points in 2009 and by 2.0 points in 2008.
Interest Expense, Net
Net interest expense was lower in the thirdfirst quarter of 20092010 than the comparable period of 20082009 primarily reflecting lower short-term borrowings, offset marginally by lower capitalized interest rates and lower average debt balances, offset partially by a decrease in capitalized interest.2010 as compared with 2009.
Income Taxes and Effective Tax Rate
Our effective income tax rate was 37.0%35.8% for the thirdfirst quarter of 2010. We expect our income tax rate for the full year 2010 to be about 35.0%. The higher 41.2% tax rate for the first quarter of 2009 compared with 36.1% forwas due to the same periodtiming of 2008. Thecertain changes related to tax uncertainties, and the impact of tax rates associated withnet business realignment and impairment charges decreasedwas a reduction of the effective income tax rate by 0.2.7 percentage points in 2009 and increased the effective income tax rate by 0.6 percentage points in 2008. The higher 2009 tax rate reflects the absence of a one-time Federal tax refund recorded in the third quarter of 2008.points.
Net Income and Net Income Per Share
Net income in the third quarter of 2009 was reduced by $6.5 million, or $0.02 per share-diluted, and was reduced by $21.3 million, or $0.10Earnings per share-diluted in the thirdfirst quarter of 20082010 increased $0.31 as compared with the first quarter of 2009. Net income was reduced by $10.1 million, or $0.05 per share-diluted, in the first quarter of 2009 as a result of net charges associated with our business realignment initiatives. After considering the impact of business realignment charges in each period, earnings per share-diluted in the third quarter of 2009 increased $0.09, or 14.1% as compared with the third quarter of 2008.
Results of Operations – First Nine Months 2009 vs. First Nine Months 2008
Net Sales
The increase in net sales was attributable to favorable price realization from list price increases, offset partially by sales volume decreases, primarily in the United States. Sales volume increases for our international businesses were more than offset by the unfavorable impact of foreign currency exchange rates which reduced net sales by approximately 1.8%. The acquisition of Van Houten Singapore increased net sales by $7.9 million, or 0.2%, in the first nine months of 2009.
Key Marketplace Metrics
Consumer takeaway increased 7.8% during the first nine months of 2009 compared with the same period of 2008. 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.
Market share in measured channels improved by 0.3 share points during the first nine months of 2009. The change in market share is provided for measured channels 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
The cost of sales decrease in the first nine months of 2009 compared with 2008 was primarily due to sales volume decreases and supply chain productivity improvements, offset partially by higher input costs, particularly raw materials and pension expense. Lower business realignment charges included in cost of sales in 2009 compared with 2008 also contributed to the cost of sales decrease. Business realignment charges of $8.5 million were included in cost of sales in the first nine months of 2009, compared with $60.1 million in the prior year.
The gross margin improvement resulted primarily from favorable price realization and supply chain productivity improvements, offset partially by increased input costs and pension expense. Approximately one-third of the gross margin increase was attributable to the impact of business realignment initiatives recorded in 2009 compared with 2008.
Selling, Marketing and Administrative
Selling, marketing and administrative expenses increased primarily due to higher advertising expense, and increases in administrative and selling costs, principally associated with higher pension, incentive compensation and other employee-related expenses. The increase in advertising expense was partly offset by lower consumer promotions. Expenses of $5.4 million related to our 2007 business realignment initiatives were included in selling, marketing and administrative expenses in 2009 compared with $6.1 million in 2008.
Business Realignment Initiatives
Business realignment charges of $58.8 million were recorded in the first nine months of 2009 compared with $34.7 million in the same period of 2008. The charges in 2009 were primarily related to pension settlement losses, fixed asset impairments, plant closure expenses and employee separation costs. Business realignment charges recorded in 2008 primarily related to fixed asset impairments and plant closure expenses, employee separation costs and pension settlement losses, offset partially by gains on sales of fixed assets. The higher pension settlement loss in the first nine months of 2009 compared to the first nine months of 2008 resulted from an increase in actuarial losses associated with the significant decline in the fair value of pension assets in 2008, along with the increased level of lump sum withdrawals from a defined benefit pension plan related to employee departures associated with the global supply chain transformation program.
Income Before Interest and Income Taxes and EBIT Margin
EBIT increased in the first nine months of 2009 compared with the first nine months of 2008 principally as a result of higher gross profit and reduced business realignment charges, partially offset by increased selling, marketing and administrative expenses. Net pre-tax business realignment charges of $72.7 million were recorded in the first nine months of 2009 compared with $101.0 million recorded in the first nine months of 2008, a decrease of $28.3 million.
EBIT margin increased from 11.6% for the first nine months of 2008 to 14.1% for the first nine months of 2009. The increase in EBIT margin was the result of the higher gross margin, partially offset by higher selling, marketing and administrative expense as a percentage of sales. The impact of net business realignment charges in the first nine months of 2009 reduced EBIT margin by 1.9 percentage points and in the first nine months of 2008 reduced EBIT margin by 2.7 percentage points.
Interest Expense, Net
Net interest expense was lower in the first nine months of 2009 than the comparable period of 2008 primarily due to lower interest rates and lower average debt balances, partially offset by a decrease in capitalized interest.
Income Taxes and Effective Tax Rate
Our effective income tax rate was 35.6% for the first nine months of 2009 and was decreased by 0.7 percentage points as a result of the effective tax rate associated with business realignment charges recorded during the first nine months. We expect our effective income tax rate for the full year 2009 to be 36.0%, excluding the impact of tax rates associated with business realignment charges during the year.
Net Income and Net Income Per Share
Net income in the first nine months of 2009 was reduced by $43.3 million, or $0.19 per share-diluted, and was reduced by $67.4 million, or $0.30 per share-diluted, in the first nine months of 2008 as a result of net charges associated with our business realignment initiatives. After considering the impact of business realignment charges in each period, earnings per share-diluted in the first nine months of 2009 increased $0.24 as compared with the first nine months of 2008.
Liquidity and Capital Resources
Historically, our 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. Commercial paper may also be issued, from time to time, to finance ongoing business transactions such as the repayment of long-term debt, business acquisitions and for other general corporate purposes. During the first ninethree months of 2009,2010, cash and cash equivalents increased by $82.2$50.2 million to $303.8 million.
Cash provided from operations was sufficient to fund the repayment of short-term debt of $255.3 million, dividend payments of $197.4$70.9 million, capital additions and capitalized software expenditures of $106.9 million, a business acquisition of $15.2$35.5 million and the repurchase of Common Stock for $9.3$64.2 million.
Net cash provided from operating activities was $635.5$181.2 million in 20092010 and $248.6$277.2 million in 2008.2009. The increasedecrease was primarily the result of higher net income and the change in cash (used by) provided byfrom other assets and liabilities, which increased to $153.1partially offset by higher net income in 2010. Cash used by changes in other assets and liabilities was $102.9 million for the first ninethree months of 20092010 compared with cash usedprovided of $193.3$9.5 million for the same period of 2008.2009. The change in the amount of cash (used by) provided from (used by) other assets and liabilities from 20082009 to 20092010 primarily reflected the effect of hedging transactions, the impact of business realignment initiatives, the timing of payments associated with selling and marketing programs, as well as employee benefits.transactions. Cash used to build seasonalprovided from working capital decreasedwas $40.1 million lower in 2010 due primarily to $58.3 million in 2009higher accounts receivable resulti ng from $95.8 million in 2008, primarily as a result of lower inventory levels.the higher sales and Easter timing.
In March 2009, the Company completed the acquisition of the Van Houten Singapore consumer business. The acquisition from Barry Callebaut, AG provides the Company with an exclusive license of the Van Houten brand name and related trademarks in Asia and the Middle East for the retail and duty free distribution channels. The purchase price for the acquisition of Van Houten Singapore and the licensing agreement was approximately $15.2 million.
During the first quarter of 2008, Hershey do Brasil entered into a cooperative agreement with Bauducco. We received cash of $2.0 million from Bauducco and recorded an intangible asset of $13.7 million related to the agreement. We will maintain a 51% controlling interest in Hershey do Brasil.
Proceeds from the sale of manufacturing and distribution facilities and related equipment under the global supply chain transformation program were $4.9 million in the first nine months of 2009 and $77.2 million in the first nine months of 2008.
A receivable of approximately $16.2 million was included in prepaid expenses and other current assets as of October 4, 2009 and $14.5 million as of December 31, 2008 related to the recovery of damages from a product recall and temporary plant closure in Canada. The increase primarily resulted from currency exchange rate fluctuations. The product recall during the fourth quarter of 2006 was caused by a contaminated ingredient purchased from an outside supplier with whom we have filed a claim for damages and are currently in litigation.
Interest paid was $91.5$45.0 million during the first ninethree months of 20092010 versus $87.7$45.8 million for the comparable period of 2008.2009. Income taxes paid were $140.8$29.6 million during the first ninethree months of 20092010 versus $116.0$16.7 million for the comparable period of 2008.2009. The increase in taxes paid in 20092010 was primarily related to the impact of higher annualized taxablepayment for 2009 income in 2009.taxes.
The ratio of current assets to current liabilities increased to 1.3:1.6:1.0 as of OctoberApril 4, 20092010 from 1.1:1.5:1.0 as of December 31, 2008.2009. The capitalization ratio (total short-term and long-term debt as a percent of stockholders' equity, short-term and long-term debt) decreased to 73%66% as of OctoberApril 4, 20092010 from 85%67% as of December 31, 2008.2009.
Generally, our short-term borrowings are in the form of commercial paper or bank loans with an original maturity of three months or less. However, at the end of the first quarter of 2010, no commercial paper borrowings were outstanding. Our five-year unsecured revolving credit agreement expires in December 2012. The credit limit is $1.1 billion with an option to borrow an additional $400 million with the concurrence of the lenders.
Outlook
In March 2008, the Company issued $250 million of 5.0% Notes due April 1, 2013 under the WKSI Registration Statement. The net proceeds of this debt issuance were used to repay a portion of the Company’s outstanding indebtedness under its short-term commercial paper program.
Outlook
The outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Refer to the Safe Harbor Statement below as well as Risk Factors and other information contained in our 20082009 Annual Report on Form 10-K for information concerning the key risks to achieving future performance goals.
During the remainder of 2009, we expect price realization to have a smaller impact as compared to the full year. The closure of our online gifts business will also have a negative impact on our net sales during the remainder of 2009. We expect unit sales volumethe economic environment to decline due to the elasticity effects of price increases implemented during 2008 which resulted in higher everyday and promoted prices for consumers. The decline in sales volume will be mitigated somewhat by our brand-building and marketplace initiatives, as the impact of the declines in unit sales volume is expectedcontinue to be more than offset by price realization. For the full-year 2009,challenging in 2010. In this environment, we will continue to expect full year net sales growthbuild our business by focusing on a consumer-driven approach to be within our three to five percent long-term objective due primarily to our pricing actions and core brand sales growth.investment and new product innovation in North America, along with investments in our strategic international businesses.
We continue to expect our commodity cost basket to increase significantly in 2009 compared with 2008, although the total increase is expectedadvertising investment by 35% to be less than40% behind our initial estimates.core brands and new product introductions. We will also continue to expect an increase in 2009 pension expense. Despite these increases we plan to continue to invest in consumer insights, in-store selling, merchandising and programming to drive profitable growth for both our core brandsCompany and our customers.
We expect our cost structure to remain at elevated levels in the U.S.2010. Key commodity markets remain volatile, however, we have good visibility into our full-year cost structure for 2010. We also expect to continue to achieve productivity and key international markets to build on our momentum. Specifically, advertising expense is now expected to increase by 50 percentefficiency improvements, along with price realization in 2009 and2010, resulting in enhanced margins.
For 2010, we expect to make further investments in category management, consumer capabilitiesachieve net sales growth of at least 6%, including an approximate one percentage point benefit from foreign currency exchange rates. This will exceed our long-term objective and customer insights. These cost increases will be more than offset by higher net pricing, savings from the global supply chain transformation program and on-going operating productivity improvement. Weinitial estimate of 3% to 5%. For 2010, we expect ana low-to-mid-teens increase in earnings per share-diluted in 2009, excluding business realignment charges, with adjusted earnings per share-diluted on a percentage basis versus 2009. This will also exceed our long-term objective and initial estimate of 6% to be in the $2.12 to $2.14 range.8%.
For 2009, we expect total pre-tax business realignment and impairment charges forWe are performing an in-depth assessment of our global supply chain transformation program,as part of an update of our strategic plan. We are looking for additional opportunities to increase capacity utilization, improve efficiency and modernize manufacturing capabilities. No decisions have been made, however, this assessment could result in further changes to and increased capital investment in our manufacturing network.
Note: In the Outlook above, the Company has provided income measures excluding certain items, in addition to net income determined in accordance with GAAP. These non-GAAP financial measures are used in evaluating results of operations for internal purposes. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the Company believes exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations.
In 2009, the Company recorded GAAP charges, including the increase in the scope of the program and non-cash pension settlement losses, to be in the rangecharges, of $100 million to $120$99.1 million, or $0.26$0.27 per share-diluted, attributable to $0.32 per share-diluted.the GSCT program. Except for possible non-cash pension settlement charges, the Company does not expect any significant charges related to the GSCT program in 2010.
Below is a reconciliation of GAAP and non-GAAP items to the Company’s 2009 adjusted earnings per share-diluted outlook:share-diluted:
| | | 2009 | |
| Reported EPS-Diluted | $1.90 | |
| | | |
| | Expected EPS-dilutedTotal Business Realignment and Impairment Charges | $1.80 - $1.880.27 | |
| | | |
| | Total expected business realignment and impairment chargesAdjusted EPS-Diluted * | $0.26 - $0.32 |
| 2.17 | | |
| Non-GAAP expected adjusted EPS-diluted | $2.12 - $2.14 |
We believe that the disclosure of non-GAAP expected EPS-diluted excluding*Excludes business realignment and impairment charges provides investors with a better comparison of expected year-to-year operating results.charges.
Outlook for Global Supply Chain Transformation Program
We expect total pre-tax charges and non-recurring project implementation costs for the global supply chain transformation program of $640 millionPossible adjustments to $665 million, including estimated pension settlement losses in 2009 and 2010. This includes pension settlement losses recorded in 2007 and 2008 as required in accordance with FASB Statement of Financial Accounting Standards No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (as amended) (now Accounting Standards Codification section 715-30-35). Pension settlement losses are non-cashexclude business realignment charges for the Company. Such charges accelerate the recognition of pension expense related to actuarial gains and losses resulting from interest rate changes and differences in actual versus assumed returns on pension assets. The Company normally amortizes actuarial gains and losses over a period of about 13 years.
The global supply chain transformation program charges recorded in 2007 and 2008 included pension settlement losses of approximately $24.6 million as employees leaving2010 are not known at this time; therefore, the Company under the program have been withdrawing lump sums from the defined benefit pension plans. An additional $36.7 million in pension settlement losses were recorded in the first nine monthsis unable to provide a reconciliation of 2009. In addition to these charges, incremental pension settlement losses of $30 to $40 million are expected during the remainder of 2009 and 2010, with approximately $30 million of this amount expectedadjusted earnings per share-diluted for the fourth quarter of 2009.2010.
Safe Harbor Statement
We are subject to changing economic, competitive, regulatory and technological conditions, risks and uncertainties because of the nature of our operations. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions that we have discussed directly or implied in this report. Many of the forward-looking statements contained in this report may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated,” and “potential,”&# 8221; among others.
OurThe factors that could cause our actual results couldto differ materially because offrom the following factors, whichresults projected in our forward-looking statements include, but are not limited to:to the following:
· | · | Issues or concerns related to the quality and safety of our products, ingredients or packaging could cause a product recall and/or result in harm to the Company’s reputation, negatively impacting our operating results; |
· | · | Increases in raw material and energy costs, along with the availability of adequate supplies of raw materials could affect future financial results; |
| · | Market demand for new and existing products could decline; |
· | · | Increased marketplace competition could hurt our business; |
| · | Price increases may not be sufficient to offset cost increases and maintain profitability, or may result in sales volume declines associated with pricing elasticity; |
| · | Disruption to our supply chain could impair our ability to produce or deliver our finished products, resulting in a negative impact on our operating results; |
· | Market demand for new· | Our financial results may be adversely impacted by the failure to successfully execute acquisitions, divestitures and existing products could decline;joint ventures; |
· | Increased marketplace competition could hurt our business; |
| · | Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products; |
· | · | Political, economic, and/or financial market conditions in the United States and abroad could negatively impact our financial results; |
· | · | International operations could fluctuate unexpectedly and adversely impact our business; |
| · | Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations; |
· | · | Future developments related to the investigation by government regulators of alleged pricing practices by members of the confectionery industry could impact our reputation, the regulatory environment under which we operate, and our operating results; |
· | · | Pension costs or funding requirements could increase at a higher than anticipated rate; and |
· | Annual savings from initiatives to transform our supply chain and advance our value-enhancing strategy may be less than we expect; |
| · | Implementation of our global supply chain transformation program may not occur within the anticipated timeframe and/or may exceed our cost estimates; and |
· | Such other matters as discussed in our Annual Report on Form 10-K for 2008.2009. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The potential net loss in fair value of foreign exchange forward contracts and interest rate swap agreements of ten percent resulting from a hypothetical near-term adverse change in market rates was $.3$4.8 million as of OctoberApril 4, 20092010 and was $1.0$4.9 million as of December 31, 2008.2009. The potential net loss in fair value of foreign exchange forward contracts and options of ten percent resulting from a hypothetical near-term adverse change in market rates was $13.6 million as of April 4, 2010 and was $10.9 million as of December 31, 2009. 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 decreasedincreased from $44.1$36.3 million as of December 31, 2008,2009, to $32.4$42.7 million as of OctoberApril 4, 2009.2010. Market risk represents ten percent of the estimated average fair value of net commodity positions at four dates prior to the end of each period.
Item 4. Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”"Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sCommission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including the Company’sCompany's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this quarterly report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15 under the Exchange Act. This evaluation was carried out under the supervision and with the participation of the Company’sCompany's management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’sCompany's disclosure controls and procedures are effective. There has been no change during the most recent fiscal quarter in our internal control over financial reporting identified in connection with the evaluation that has materially affected, or is reasonably likely to materially affect, our internalinterna l control over financial reporting.
PART II - OTHER INFORMATION
Items 1, 1A, 3, 4 and 5 have been omitted as not applicable.applicable or as removed and reserved.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period | (a) Total Number
of Shares
Purchased
| | (b) Average
Price Paid
per Share
| | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | |
| | | | | | | (in thousands of
dollars)
| |
July 6 through
August 2, 2009
| | — | | | $ — | | | — | | | $100,017 | |
| | | | | | | | | | | | |
August 3 through
August 30, 2009
| | — | | | $ — | | | — | | | $100,017 | |
| | | | | | | | | | | | |
August 31 through
October 4, 2009
| | — | | | $ — | | | — | | | $100,017 | |
Total | | — | | | | | | — | | | | |
| | Period | (a) Total Number of Shares Purchased | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| | | | | | | | | In thousands of dollars |
| | | | | | | | | |
| | January 1 through January 31, 2010 | — | | | $ — | | — | | | $100,017 |
| | | | | | | | | | | |
| | February 1 through February 28, 2010 | 1,293,800 | | | $ 37.77 | | — | | | $100,017 |
| | | | | | | | | | | |
| | March 1 through April 4, 2010 | 386,000 | | | $ 39.59 | | — | | | $100,017 |
| | | | | | | | | | | |
| | Total | 1,679,800 | | | | | — | | | |
Item 6 - Exhibits
The following items are attached or incorporated herein by reference:
Exhibit Number | | Description |
| | | |
12.1 3.1 | | The Company’s By-laws, amended and restated as of February 23, 2010, are incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed February 25, 2010. |
| 10.1 | | Form of Notice of Special Award of Restricted Stock Units is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed February 25, 2010. |
| 12.1 | | Statement showing computation of ratio of earnings to fixed charges for the ninethree months ended OctoberApril 4, 20092010 and September 28, 2008.April 5, 2009. |
| 31.1 | | |
31.1 | | Certification of David J. West, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2 | | |
31.2 | | Certification of Humberto P. Alfonso, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | | |
32.1 | | Certification of David J. West, Chief Executive Officer, and Humberto P. Alfonso, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 101.INS | | XBRL Instance Document |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema |
| | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the RegistrantCompany has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
| | | THE HERSHEY COMPANY |
| | | (Registrant) |
| | |
| | | |
Date: NovemberMay 12, 2009 | 2010 | /s/Humberto P. Alfonso Humberto P. Alfonso Chief Financial Officer |
| | | |
Date: NovemberMay 12, 2009 | 2010 | /s/David W. Tacka David W. Tacka Chief Accounting Officer |
| EXHIBIT INDEX |
| | |
| Exhibit 3.1 | Amended and Restated By-laws |
| |
| Exhibit 10.1 | Form of Notice of Special Award of Restricted Stock Units |
| | |
| Exhibit 12.1 | | Computation of Ratio of Earnings to Fixed Charges |
| | | |
| Exhibit 31.1 | | Certification of David J. West, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| Exhibit 31.2 | | Certification of Humberto P. Alfonso, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | | |
| Exhibit 32.1 | | Certification of David J. West, Chief Executive Officer, and Humberto P. Alfonso, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | | |
| Exhibit 101.INS | | XBRL Instance Document |
| | | |
| Exhibit 101.SCH | | XBRL Taxonomy Extension Schema |
| | | |
| Exhibit 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | | |
| Exhibit 101.LAB | | XBRL Taxonomy Extension Label Linkbase |
| | | |
| Exhibit 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
| | | |
| Exhibit 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |