UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended APRILJULY 5, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-183
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HERSHEY FOODS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 23-0691590
--------------------------------- ------------------------------------------------------ ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 CRYSTAL A DRIVE
HERSHEY, PENNSYLVANIA 17033
------------------------------------------------------------------------------ --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 534-6799
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- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $1 par value - 112,689,152112,661,777 shares, as of May 4,August 3, 1998. Class B
Common Stock, $1 par value - 30,453,908 shares, as of May 4,August 3, 1998.
Exhibit Index - Page 1617
Page 2
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED
APRIL--------------------------
JULY 5, MARCH 30,JUNE 29,
1998 1997
----------- -------------------
NET SALES $ 1,098,076880,399 $ 1,002,469905,729
----------- -----------
COSTS AND EXPENSES:
Cost of sales 652,340 589,281522,715 530,318
Selling, marketing and administrative 299,370 284,005258,309 276,260
----------- -----------
Total costs and expenses 951,710 873,286780,024 806,578
----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 146,366 129,18399,375 99,151
Interest expense, net 22,706 15,68220,744 15,851
----------- -----------
INCOME BEFORE INCOME TAXES 123,660 113,50178,631 83,300
Provision for income taxes 48,227 44,60730,666 32,736
----------- -----------
NET INCOME $ 75,43347,965 $ 68,89450,564
=========== =======================
NET INCOME PER SHARE - BASIC $ .53.33 $ .45.33
=========== ===========
NET INCOME PER SHARE - DILUTED $ .52.33 $ .45.33
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC 143,376 153,166143,510 153,114
=========== ===========
AVERAGE SHARES OUTSTANDING - DILUTED 145,461 154,715145,752 155,064
=========== ===========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .22 $ .20
=========== ===========
Class B Common Stock $ .20 $ .18
=========== ===========
The accompanying notes are an integral part of these statements.
Page 3
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE SIX MONTHS ENDED
------------------------
JULY 5, JUNE 29,
1998 1997
----------- ----------
NET SALES $ 1,978,475 $ 1,908,198
----------- -----------
COSTS AND EXPENSES:
Cost of sales 1,175,055 1,119,600
Selling, marketing and administrative 557,679 560,264
----------- -----------
Total costs and expenses 1,732,734 1,679,864
----------- -----------
INCOME BEFORE INTEREST AND INCOME TAXES 245,741 228,334
Interest expense, net 43,450 31,533
----------- -----------
INCOME BEFORE INCOME TAXES 202,291 196,801
Provision for income taxes 78,893 77,343
----------- -----------
NET INCOME $ 123,398 $ 119,458
=========== ===========
NET INCOME PER SHARE - BASIC $ .86 $ .78
=========== ===========
NET INCOME PER SHARE - DILUTED $ .85 $ .77
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC 143,441 153,139
=========== ===========
AVERAGE SHARES OUTSTANDING - DILUTED 145,612 154,892
=========== ===========
CASH DIVIDENDS PAID PER SHARE:
Common Stock $ .44 $ .40
=========== ===========
Class B Common Stock $ .40 $ .36
=========== ===========
The accompanying notes are an integral part of these statements.
HERSHEY FOODS CORPORATION
CONSOLIDATED BALANCE SHEETS
APRILJULY 5, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS OF DOLLARS)
ASSETS 1998 1997
----------- -------------------
CURRENT ASSETS:
Cash and cash equivalents $ 59,61733,631 $ 54,237
Accounts receivable - trade 279,296230,442 360,831
Inventories 532,141623,578 505,525
Deferred income taxes 85,25586,168 84,024
Prepaid expenses and other 42,84251,818 30,197
----------- -----------
Total current assets 999,1511,025,637 1,034,814
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, AT COST 2,620,8322,649,001 2,587,230
Less - accumulated depreciation and amortization (971,914)(1,002,376) (938,993)
----------- -----------
Net property, plant and equipment 1,648,9181,646,625 1,648,237
----------- -----------
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS 547,240541,197 551,849
OTHER ASSETS 61,15773,535 56,336
----------- -----------
Total assets $ 3,256,4663,286,994 $ 3,291,236
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 131,379100,746 $ 146,932
Accrued liabilities 301,908292,510 371,545
Accrued income taxes 52,08741,007 19,692
Short-term debt 214,910286,799 232,451
Current portion of long-term debt 90100 25,095
----------- -----------
Total current liabilities 700,374721,162 795,715
LONG-TERM DEBT 1,029,1291,029,121 1,029,136
OTHER LONG-TERM LIABILITIES 352,411353,871 346,500
DEFERRED INCOME TAXES 269,491271,281 267,079
----------- -----------
Total liabilities 2,351,4052,375,435 2,438,430
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, shares issued:
none in 1998 and 1997 --- ---
Common Stock, shares issued:
149,496,964 in 1998 and 149,484,964 in 1997 149,497 149,485
Class B Common Stock, shares issued:
30,453,908 in 1998 and 30,465,908 in 1997 30,453 30,465
Additional paid-in capital 27,04628,421 33,852
Unearned ESOP compensation (27,943)(27,144) (28,741)
Retained earnings 2,022,4222,039,507 1,977,849
Treasury-Common Stock shares at cost:
36,757,82636,766,362 in 1998 and 37,018,566 in 1997 (1,253,596)(1,259,141) (1,267,861)
Accumulated other comprehensive income (42,818)(50,034) (42,243)
----------- -----------
Total stockholders' equity 905,061911,559 852,806
----------- -----------
Total liabilities and stockholders' equity $ 3,256,4663,286,994 $ 3,291,236
=========== ===========
The accompanying notes are an integral part of these balance sheets.
Page 4
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
FOR THE THREESIX MONTHS ENDED
APRIL------------------------
JULY 5, MARCH 30,JUNE 29,
1998 1997
----------- ------------------
CASH FLOWS PROVIDED FROM (USED BY) OPERATING ACTIVITIES
Net Income $ 75,433123,398 $ 68,894119,458
Adjustments to Reconcile Net Income to Net Cash
Provided from Operations:
Depreciation and amortization 37,945 40,12477,162 76,397
Deferred income taxes 1,181 21,5582,058 7,349
Changes in assets and liabilities, net of effects from business
acquisitions and divestitures:
Accounts receivable - trade 81,535 48,955130,389 78,322
Inventories (26,616) (72,460)(118,053) (194,901)
Accounts payable (15,553) (12,208)(46,186) 11,307
Other assets and liabilities (33,410) 39,594(59,224) 27,294
Other, net --- 5942,145
--------- ---------
Net Cash Flows Provided from Operating Activities 120,515 135,051109,544 127,371
--------- ---------
CASH FLOWS PROVIDED FROM (USED BY) INVESTING ACTIVITIES
Capital additions (41,756) (38,017)(77,822) (85,365)
Capitalized software additions (7,773)(20,164) ---
Other, net 9,196 (13,181)8,933 10,749
--------- ---------
Net Cash Flows (Used by) Investing Activities (40,333) (51,198)(89,053) (74,616)
--------- ---------
CASH FLOWS PROVIDED FROM (USED BY) FINANCING ACTIVITIES
Net increase (decrease) in short-term debt (17,541) (173,311)54,348 (154,396)
Long-term borrowings --- 150,000
Repayment of long-term debt (25,048) (46)(25,096) (93)
Cash dividends paid (30,860) (29,952)(61,740) (59,897)
Exercise of stock options 10,522 4,10413,849 8,879
Incentive plan transactions (11,875) (11,923)(22,458) (24,577)
Repurchase of Common Stock --- (6,863)(7,654)
--------- ---------
Net Cash Flows (Used by) Financing Activities (74,802) (67,991)(41,097) (87,738)
--------- ---------
Increase(Decrease) in Cash and Cash Equivalents 5,380 15,862(20,606) (34,983)
Cash and Cash Equivalents, beginning of period 54,237 61,422
--------- ---------
Cash and Cash Equivalents, end of period $ 59,61733,631 $ 77,28426,439
========= =========
Interest Paid $ 36,10543,787 $ 12,03829,109
========= =========
Income Taxes Paid $ 2,83740,685 $ 12,59284,050
========= =========
The accompanying notes are an integral part of these statements.
Page 5
HERSHEY FOODS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
CLASS B ADDITIONAL UNEARNED TREASURY OTHER TOTAL
PREFERRED COMMON COMMON PAID-IN ESOP RETAINED COMMON COMPREHENSIVEOMPREHENSIVE STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL COMPENSATION EARNINGS STOCK INCOME EQUITY
--------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS OF DOLLARS
BALANCE AS OF
BALANCE AS OF
DECEMBER 31, 1997 $---$ --- $149,485 $30,465 $33,852 $(28,741) $1,977,849 $(1,267,861) $(42,243) $852,806
--------
Comprehensive income
Net income 75,433 75,433
Other comprehensive
income:
Foreign currency
translation
adjustments (575) (575)
--------
Comprehensive income 74,858
--------
Dividends:
Common Stock, $.22
per share (24,769) (24,769)
Class B Common Stock,
$.20 per share (6,091) (6,091)
Conversion of Class B
Common Stock
into Common Stock 12 (12) ---
Incentive plan
transactions (1,033) (1,033)
Exercise of stock
options (5,902) 14,265 8,363
Employee stock
ownership trust
transactions 129 798 927
--------- -------- -------- ------ ------- ----------- ---------- ------- -------
BALANCE AS OF
APRIL 5, 1998 --- 149,497 30,453 27,046 (27,943) 2,022,422 (1,253,596) (42,818) 905,061
Comprehensive income
Net income 47,965 47,965
Other comprehensive
income:
Foreign currency
translation
adjustments (7,216) (7,216)
--------
Comprehensive income 40,749
--------
Dividends:
Common Stock, $.22
per share (24,789) (24,789)
Class B Common Stock,
$.20 per share (6,091) (6,091)
Exercise of stock
options 1,250 (5,545) (4,295)
Employee stock
ownership trust
transactions 125 799 924
----- -------- ------- ------- -------- ---------- ----------- -------- --------
BALANCE AS OF
APRILJULY 5, 1998 $---$ --- $149,497 $30,453 $27,046 $(27,943) $2,022,422 $(1,253,596) $(42,818) $905,061
====$28,421 $(27,144) $2,039,507 $(1,259,141) $(50,034) $911,559
===== ======== ======= ======= ======== ========== =========== ======== ========
The accompanying notes are an integral part of these statements.
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of the Corporation and its subsidiaries after elimination of
intercompany accounts and transactions. These statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months and year-to-date
ended AprilJuly 5, 1998, are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. For more
information, refer to the consolidated financial statements and
footnotes included in the Corporation's 1997 Annual Report on Form 10-K.
2. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FAS No. 130). Under FAS No. 130, standards
are established for reporting and display of comprehensive income
and its components in financial statements. Comprehensive income is
reported in the Consolidated Statements of Stockholder's Equity.
Other Comprehensive income represents foreign currency translation
adjustments.
3. INTEREST EXPENSE
Interest expense, net consisted of the following:
FOR THE THREE MONTHS ENDED
--------------------------
APRIL 5, 1998 MARCH 30, 1997
------------- --------------
(IN THOUSANDS OF DOLLARS)
Interest expense $ 24,239 $ 16,918
Interest income (933) (1,068)
Capitalized interest (600) (168)
-------- --------
Interest expense, net $ 22,706 $ 15,682
======== ========
FOR THE SIX MONTHS ENDED
------------------------
JULY 5, 1998 JUNE 29, 1997
------------ -------------
(IN THOUSANDS OF DOLLARS)
Interest expense $ 46,332 $ 33,619
Interest income (1,738) (1,644)
Capitalized interest (1,144) (442)
--------- ---------
Interest expense, net $ 43,450 $ 31,533
========= =========
Page 7
4. NET INCOME PER SHARE
A total of 36,757,82636,766,362 shares were held as Treasury Stock as of
AprilJuly 5, 1998.
In February 1997, the Financial Accounting Standards Board issued
Statement ofaccordance with Financial Accounting Standards No. 128 "Earnings perPer
Share" (FAS No. 128). Under FAS No. 128,, Basic and Diluted Earnings per Share are computed based on the
weighted average number of shares of the Common Stock and the Class B
Stock outstanding as follows:
INCOME SHARES PER-SHARE
FOR THE THREE MONTHS ENDED APRILJULY 5, 1998 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars except shares and
per share amounts
NET INCOME PER SHARE - BASIC
- ----------------------------
Net income $ 75,433 143,375,704 $.5347,965 143,509,698 $.33
====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options - 2,021,5432,162,813
Performance stock units - 57,58372,928
Restricted stock units - 5,923
---------- -------------6,747
-------- ------------
NET INCOME PER SHARE - DILUTED
- ------------------------------
Net income and assumed conversions $ 75,433 145,460,753 $.52
========== =============47,965 145,752,186 $.33
======== ============ ====
INCOME SHARES PER-SHARE
FOR THE THREE MONTHS ENDED MARCH 30,JUNE 29, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
In thousands of dollars except shares and
per share amounts
NET INCOME PER SHARE - BASIC
- ----------------------------
Net income $ 68,894 153,165,527 $.4550,564 153,113,903 $.33
====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options - 1,471,2221,851,438
Performance stock units - 75,13694,392
Restricted stock units - 2,935
---------- -------------3,786
--------- ------------
NET INCOME PER SHARE - DILUTED
- ------------------------------
Net income and assumed conversions $ 68,894 154,714,820 $.45
========== =============50,564 155,063,519 $.33
========= ============ ====
Page 8
INCOME SHARES PER-SHARE
FOR THE SIX MONTHS ENDED JULY 5, 1998 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------
In thousands of dollars except shares and
per share amounts
NET INCOME PER SHARE - BASIC
- ----------------------------
Net income $ 123,398 143,441,165 $.86
====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options - 2,092,179
Performance stock units - 72,366
Restricted stock units - 6,694
----------- -----------
NET INCOME PER SHARE - DILUTED
- ------------------------------
Net income and assumed conversions $ 123,398 145,612,404 $.85
========== ============ ====
INCOME SHARES PER-SHARE
FOR THE SIX MONTHS ENDED JUNE 29, 1997 (NUMERATOR) (DENOMINATOR) AMOUNT
- ---------------------------------------------------------------------------------------------
In thousands of dollars except shares and per share amounts
NET INCOME PER SHARE - BASIC
- ----------------------------
Net income $ 119,458 153,139,428 $.78
====
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options - 1,656,928
Performance stock units - 92,685
Restricted stock units - 3,435
---------- ------------
NET INCOME PER SHARE - DILUTED
- ------------------------------
Net income and assumed conversions $ 119,458 154,892,476 $.77
========== ============ ====
5. INVENTORIES
The majority of inventories are valued under the last-in, first-out
(LIFO) method. The remaining inventories are stated at the lower of
first-in, first-out (FIFO) cost or market. Inventories were as follows:
APRILJULY 5, 1998 DECEMBER 31, 1997
------------------------- -----------------
(IN THOUSANDS OF DOLLARS)
Raw materials $ 265,809251,340 $ 223,702
Goods in process 39,47445,727 36,015
Finished goods 341,906439,133 334,639
------------------- ---------
Inventories at FIFO 647,189736,200 594,356
Adjustment to LIFO (115,048)(112,622) (88,831)
--------- ------------------- ----------
Total inventories $ 532,141623,578 $ 505,525
========= =================== ==========
6. LONG-TERM DEBT
In March 1997, the Corporation issued $150 million of 6.95% Notes due
2007 (6.95% Notes) under the November 1993 Form S-3 Registration
Statement. Proceeds from the debt issuance were used to repay a portion
of the commercial paper borrowings associated with the acquisition of
the Leaf North America confectionery operations (Leaf) in December 1996.
In August 1997, the Corporation filed another Form S-3 Registration
Statement under which it could offer, on a delayed or continuous basis,
up to $500 million of additional debt securities. Also in August 1997,
the Corporation issued $150 million of 6.95% Notes due 2012 (Notes) and
$250 million of 7.2% Debentures due 2027 (Debentures) under the November
1993 and August 1997 Registration Statements. Proceeds from the debt
issuance were used to repay short-term borrowings associated with the
purchase of Common Stock from the Hershey Trust Company, as Trustee for
the benefit of Milton Hershey School (Milton Hershey School Trust). As
of AprilJuly 5, 1998, $250 million of debt securities remained available for
issuance under the August 1997 Registration Statement. As of AprilJuly 5,
1998 and December 31, 1997, $150.0 million of commercial paper
borrowings were reclassified as long-term debt in accordance with the
Corporation's intent and ability to refinance such obligations on a
long-term basis.
7. FINANCIAL INSTRUMENTS
The contractcarrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and short-term debt,
including $150.0 million of commercial paper borrowings reclassified as
long-term debt, approximated fair value as of AprilJuly 5, 1998 and December
31, 1997, because of the relatively short maturity of these instruments.
The carrying value of long-term debt, including the current portion, was
$879.2 million as of AprilJuly 5, 1998, compared to a fair value of $956.0$958.8
million, based on quoted market prices for the same or similar debt
issues.
Page 9
As of AprilJuly 5, 1998, the Corporation had foreign exchange forward
contracts maturing in 1998 and 1999 to purchase $10.6$18.3 million in foreign
currency, primarily British sterling and Swiss francs, and to sell $12.7$11.6
million in foreign currency, primarily Japanese yen and Canadian
dollars, at contracted forward rates.
To hedge foreign currency exposure related to anticipated transactions
associated with the purchase of certain raw materials and finished
goods, generally covering 3 to 24 months, the Corporation, from time to
time, also purchases foreign exchange options.options which permit, but do not
require, the Corporation to exchange foreign currencies at a future date
with another party at a contracted exchange rate. As of July 5, 1998,
the Corporation had purchased foreign exchange options of $4.1 million
and written foreign exchange options of $3.9 million, related to German
marks. No options were outstanding as of April 5, 1998.June 29, 1997.
The fair value of foreign exchange forward contracts is estimated by
obtaining quotes for future contracts with similar terms, adjusted where
necessary for maturity differences. The fair value of foreign exchange
options is estimated using active market quotations. As of AprilJuly 5, 1998,
the fair value of foreign exchange forward and options contracts
approximated the contract value. The Corporation does not hold or issue
financial instruments for trading purposes.
In order to minimize its financing costs and to manage interest rate
exposure, the Corporation, from time to time, enters into interest rate
swap agreements to effectively convert a portion of its floating rate
debt to fixed rate debt. As of AprilJuly 5, 1998, the Corporation had
agreements outstanding with an aggregate notional amount of $150.0
million, with maturities through 1999. As of AprilJuly 5, 1998, interest
rates payable were at a weighted average fixed rate of 6.3%, and the
interest rate receivable was floating based on the 30-day commercial
paper composite rate which was 5.5% as of AprilJuly 5, 1998. Any interest
rate differential on interest rate swaps is recognized as an adjustment
to interest expense over the term of each agreement. The Corporation's
risk related to swap agreements is limited to the cost of replacing such
agreements at prevailing market rates.
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES (FAS No. 133). FAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an
asset or liability measured at its fair value. FAS No. 133 requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and
assess the effectiveness of transactions that receive hedge accounting.
FAS No. 133 is effective for fiscal years beginning after June 15, 1999,
but may be implemented as of the beginning of any fiscal quarter after
issuance. Retroactive application is not permitted. FAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired, or
substantively modified after December 31, 1997. Changes in accounting
methods will be required for derivative instruments utilized by the
Corporation to hedge commodity price, foreign currency exchange rate and
interest rate risks. Such derivatives include, but are not limited to,
commodity futures and options contracts, foreign exchange forward and
options contracts and interest rate swaps.
The Corporation has not yet quantified the impacts of adopting FAS No.
133 on its financial statements and has not determined the timing of
or method of adoption. However, the implementation of FAS No. 133 could
increase volatility in earnings and other comprehensive income.
Page 10
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS - FIRSTSECOND QUARTER 1998 VS. FIRSTSECOND QUARTER 1997
- -------------------------------------------------------------------
Consolidated net sales for the firstsecond quarter rosefell from $1,002.5$905.7 million in 1997
to $1,098.1$880.4 million in 1998, an increasea decrease of 10%3% from the prior year. The higherlower sales
primarily reflected increasedlower sales related to the promotional tie-in with the movie
GODZILLA as compared to last year's highly successful LOST WORLD promotion,
continued softness in the Corporation's Asian and Russian markets and a higher
level of core confectionery brands,unsalables. These decreases were offset somewhat by incremental sales
from the introduction of new confectionery products, and
increased sales of pasta and grocery products, offset somewhat by lower
international sales in the Far East.products.
The consolidated gross margin decreased from 41.2%41.4% in 1997 to 40.6% in 1998. The
decrease reflected increased costs associated with seasonal items, higher costs
for certain major raw materials, primarily cocoa and semolina, andthe cost of realigning our Russian business, lower
profitability resulting from the mix of non-chocolate and chocolate
confectionery items sold in the second quarter of 1998 compared to sales in the
firstsecond quarter of 1997.1997, and increased production and distribution costs for
certain products sold under special promotions and for seasonal items. These
unfavorable varianceshigher costs were partially offset by lower costs for raw materials and
packaging and improved manufacturing efficiencies and increased profitability from the acquired Leaf brands.efficiencies. Selling, marketing and
administrative expenses increaseddecreased by 5%6%, primarily reflecting higherlower marketing
expenses for existing products, offset somewhat by increased spending associated
with the introduction of new products.
Net interest expense in the firstsecond quarter of 1998 was $7.0$4.9 million above the
comparable period of 1997 primarily as a result of increased borrowings
associated with the purchase of Common Stock from the Milton Hershey School
Trust.
The second quarter effective income tax rate decreased from 39.3% in 1997
to 39.0% in 1998 primarily due to changes in the mix of the
Corporation's income among various tax jurisdictions.
RESULTS OF OPERATIONS - FIRST SIX MONTHS 1998 VS. FIRST SIX MONTHS 1997
- -----------------------------------------------------------------------
Consolidated net sales for the first quartersix months of 1998 increased by $70.3
million or 4% primarily as a result of incremental sales from the introduction
of new confectionery products, increased sales of core confectionery items and
higher sales of grocery and pasta products. These increases were offset somewhat
by a decline in sales in the Corporation's Asian and Russian markets and a
higher level of unsalables.
The consolidated gross margin decreased from 41.3% in 1997 to 40.6% in 1998. The
decrease was primarily due to lower profitability resulting from the mix of
non-chocolate and chocolate confectionery items sold in 1998 compared to sales
in 1997, the cost of realigning our Russian business, and higher costs for
certain major raw materials, primarily milk and cocoa, labor and overhead. These
cost increases were partially offset by improved manufacturing efficiencies
associated primarily with production of the acquired Leaf brands. Selling,
marketing and administrative expenses were slightly less than 1997, as higher
marketing expenses associated with the introduction of new products were offset
by lower spending for existing brands.
Net interest expense was $11.9 million above prior year, primarily as a result
of increased borrowings associated with the purchase of Common Stock from the
Milton Hershey School Trust.
The effective income tax rate decreased from 39.3% in 1997 to 39.0% in 1998
primarily due to changes in the mix of the Corporation's income among various
tax jurisdictions.
FINANCIAL CONDITION
Historically, the Corporation's major source of financing has been cash
generated from operations. Domestic seasonal working capital needs, which
typically peak during the summer, generally have been met by issuing commercial
paper. During the first threesix months of 1998, the Corporation's cash and cash
equivalents increaseddecreased by $5.4$20.6 million. Cash and cash equivalents on hand at the
beginning of the period, cash provided from operations wasand short-term borrowings
were sufficient to finance capital and capitalized software additions of $41.8$98.0
million, pay cash dividends of $30.9$61.7 million and to repay $25.0$25.1 million of
long-term debt and $17.5 million of
short-term borrowings.debt.
The ratio of current assets to current liabilities was 1.4:1 as of AprilJuly 5, 1998,
and 1.3:1 as of December 31, 1997. The Corporation's capitalization ratio (total
short-term and long-term debt as a percent of stockholders' equity, short-term
and long-term debt) was 58%59% as of AprilJuly 5, 1998, and 60% as of December 31, 1997.
As of AprilJuly 5, 1998, the Corporation maintained committed credit facility
agreements with a syndicate of banks in the amount of $600 million which could
be borrowed directly or used to support the issuance of commercial paper. The
Corporation has options to increase the credit facility by $1.0 billion with the
concurrence of the banks. As of AprilJuly 5, 1998, and March 30,June 29, 1997, the Corporation
also had lines of credit with domestic and international commercial banks in the
amount of approximately $25 million and $20 million, respectively.
Page 11million.
In March 1997, the Corporation issued $150 million of 6.95% Notes under a
November 1993 Registration Statement. In August 1997, the Corporation issued
$150 million of Notes and $250 million of Debentures under the November 1993 and
August 1997 Registration Statements. As of AprilJuly 5, 1998, $250 million of debt
securities remained available for issuance under the August 1997 Registration
Statement. Proceeds from any offering of the $250 million of debt securities
available under the shelf registration may be used for general corporate
requirements, which include reducing existing commercial paper borrowings,
financing capital additions, and funding future business acquisitions and
working capital requirements.
As of AprilJuly 5, 1998, the Corporation's principal capital commitments included
manufacturing capacity expansion and modernization. The Corporation anticipates
that capital expenditures will be in the range of $175 million to $200 million
per annum during the next several years as a result of continued modernization
of existing facilities and capacity expansion to support new products and line
extensions.
In late 1996, the Corporation approved a project to implement an enterprise-wide
integrated information system to replace most of the transaction systems and
applications currently supporting operations of the Corporation. Total
commitments for this system are expected to be in the range of $75 million to
$85 million. ThisThe system is Year 2000 compliantcompliant.
The Corporation is evaluating its manufacturing processes and will replace a large portion
of the Corporation'sremaining
legacy information systems. Legacy systems not being
replaced by the new integrated information systemto identify and remediate any Year 2000 compliance
issues. In addition, major business partners and suppliers are being upgradedcontacted
to gain assurances that they will be Year 2000 compliant and, as of April 5, 1998,compliant. Failure, either by the
costs areCorporation, its major business partners or suppliers, to complete remediation
in a timely manner could result in significant adverse financial consequences to
the Corporation.
At the present time, the total cost to remediate Year 2000 compliance issues is
not expected to be material to the Corporation's business, operations or
financial condition. Progress toward compliance with Year 2000 issues byIt is also expected that remediation to both the
Corporation's manufacturing processes and information systems and those of major
business partners is being reviewed for the most significant operations and
business activities. The extent of Year 2000 compliance efforts by major
partners andor suppliers and the possible effect on the Corporation's business of
their failure to comply continues to be evaluated, but a final determination of
the potential impact cannot be made at this time. The remediation of Year 2000
issues involving the Corporation's information systems is expected towill be completed in time to prevent any material
adverse consequences to the Corporation's business, operations or financial
condition.
The potential loss in fair value of foreign exchange forward contracts and
interest rate swaps resulting from a hypothetical near-term adverse change in
market rates of ten percent was not material as of AprilJuly 5, 1998. 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
declined from $9.6 million as of December 31, 1997, to $7.3$7.5 million as of AprilJuly
5, 1998. Market risk represents 10% of the estimated average fair value of net
commodity positions at four dates prior to the end of each period. The decrease
in average market risk was primarily related to changes in the excess of futures
contracts held over unpriced physical forward contracts in 1998 compared to
1997. Page 12
SAFE HARBOR STATEMENT
The nature of the Corporation's operations and the environment in which it
operates subject it to changing economic, competitive, regulatory and
technological conditions, risks and uncertainties. In connection with the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995, the
Corporation notes the following factors which, among others, could cause future
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein. Forward looking statements
contained in this document include, but are not limited to Year 2000 issues
(particularly with regard to the Corporation's business partners and suppliers),
the impact of the use of derivative instruments, the amount of future capital
expenditures and the possible uses of proceeds from any future borrowings under
the Corporation's currently effective credit facility or August 1997
Registration Statement. Factors which could cause results to differ include, but
are not limited to: changes in the confectionery and pasta business environment,
including actions of competitors and changes in consumer preferences; changes in
governmental laws and regulations, including income taxes; market demand for new
and existing products; and raw material pricing.
Page 13
PART II
Items 1 through 3 and 5 have been omitted as not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Hershey Foods Corporation's Annual Meeting of Stockholders was held on April 28,
1998. The following directors were elected by the holders of Common Stock and
Class B Common Stock, voting together without regard to class:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
William H. Alexander 402,336,618 993,901
Robert H. Campbell 402,650,807 679,712
C. McCollister Evarts 402,288,572 1,041,947
Bonnie Guiton Hill 402,599,830 730,689
John C. Jamison 402,653,029 677,490
John M. Pietruski 402,625,959 704,560
Joseph P. Viviano 402,575,430 755,089
Kenneth L. Wolfe 402,617,029 713,490
The following directors were elected by the holders of the Common Stock voting
as a class:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
Mackey J. McDonald 99,577,164 692,935
Vincent A. Sarni 99,553,669 716,430
Holders of the Common Stock and the Class B Common Stock voting together
approved the appointment of Arthur Andersen LLP as the independent public
accountants for 1998. Stockholders cast 402,729,249 votes FOR the appointment,
330,658 votes AGAINST the appointment and ABSTAINED from casting 270,612 votes
on the appointment of accountants.
No other matters were submitted for stockholder action.
Page 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) EXHIBITS
--------
The following items are attached and incorporated herein by reference:
Exhibit 3 - Restated By-laws of Hershey Foods Corporation as amended and
restated on June 2, 1998.
Exhibit 12 - Statement showing computation of ratio of earnings to fixed
charges for the quarterssix months ended AprilJuly 5, 1998 and March 30,June 29, 1997.
Exhibit 27 - Financial Data Schedule for the period ended AprilJuly 5, 1998
(required for electronic filing only).
b) REPORTS ON FORM 8-K
No reports--------------------
A report on Form 8-K werewas filed duringJuly 10, 1998 announcing that the
three-month period ended
April 5, 1998.Corporation's earnings for the second quarter of 1998 may be below
market expectations.
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HERSHEY FOODS CORPORATION
-------------------------
(Registrant)
Date MAY 13,AUGUST 12, 1998 /S/ WILLIAM F. CHRIST
------------ -------------------------------------------- ------------------------------
William F. Christ
Senior Vice President,
Chief Financial Officer and Treasurer
Date MAY 13,AUGUST 12, 1998 /S/ DAVID W. TACKA
------------ ------------------------------------------- -----------------------------
David W. Tacka
Corporate Controller and
Chief Accounting Officer
Page 16
EXHIBIT INDEX
Exhibit 3 - Amended and Restated By-laws of Hershey Foods Corporation
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule for the period ended AprilJuly 5, 1998
(required for electronic filing only)