UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to_______
Commission file number 1-183
HERSHEY FOODS CORPORATION
100 Crystal A Drive
Hershey, PA 17033
Registrant’s telephone number: 717-534-6799
| State of Incorporation | IRS Employer Identification No. | |
| Delaware | 23-0691590 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
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 — 100,186,375 shares, as of July 25, 2003. Class B Common Stock, $1 par value — 30,422,096 shares, as of July 25, 2003.
Exhibit Index – Page 16
-1-
| For the Three Months Ended
|
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| June 29, 2003 |
June 30, 2002 | ||||||||||
| Net Sales | $ | 849,115 | $ | 823,462 | |||||||
| Costs and Expenses: | |||||||||||
| Cost of sales | 515,370 | 509,991 | |||||||||
| Selling, marketing and administrative | 201,388 | 195,875 | |||||||||
| Business realignment charge, net | 3,885 | 1,976 | |||||||||
| Total costs and expenses | 720,643 | 707,842 | |||||||||
| Income before Interest and Income Taxes | 128,472 | 115,620 | |||||||||
| Interest expense, net | 15,544 | 15,863 | |||||||||
| Income before Income Taxes | 112,928 | 99,757 | |||||||||
| Provision for income taxes | 41,444 | 36,609 | |||||||||
| Net Income | $ | 71,484 | $ | 63,148 | |||||||
| Net Income Per Share-Basic | $ | .55 | $ | .46 | |||||||
| Net Income Per Share-Diluted | $ | .54 | $ | .46 | |||||||
| Average Shares Outstanding-Basic | 131,130 | 136,831 | |||||||||
| Average Shares Outstanding-Diluted | 131,983 | 138,002 | |||||||||
| Cash Dividends Paid per Share: | |||||||||||
| Common Stock | $ | .3275 | $ | .3025 | |||||||
| Class B Common Stock | $ | .2950 | $ | .2725 | |||||||
The accompanying notes are an integral part of these statements.
-2-
| For the Six Months Ended
|
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| June 29, 2003 |
June 30, 2002 | ||||||||||
| Net Sales | $ | 1,802,277 | $ | 1,811,968 | |||||||
| Costs and Expenses: | |||||||||||
| Cost of sales | 1,112,249 | 1,134,015 | |||||||||
| Selling, marketing and administrative | 388,940 | 398,616 | |||||||||
| Business realignment charge, net | 3,885 | 10,738 | |||||||||
| Total costs and expenses | 1,505,074 | 1,543,369 | |||||||||
| Income before Interest and Income Taxes | 297,203 | 268,599 | |||||||||
| Interest expense, net | 30,155 | 31,328 | |||||||||
| Income before Income Taxes | 267,048 | 237,271 | |||||||||
| Provision for income taxes | 98,006 | 87,078 | |||||||||
| Net Income | $ | 169,042 | $ | 150,193 | |||||||
| Net Income Per Share-Basic | $ | 1.28 | $ | 1.10 | |||||||
| Net Income Per Share-Diluted | $ | 1.27 | $ | 1.09 | |||||||
| Average Shares Outstanding-Basic | 132,234 | 136,765 | |||||||||
| Average Shares Outstanding-Diluted | 133,094 | 138,062 | |||||||||
| Cash Dividends Paid per Share: | |||||||||||
| Common Stock | $ | .655 | $ | .605 | |||||||
| Class B Common Stock | $ | .590 | $ | .545 | |||||||
The accompanying notes are an integral part of these statements.
-3-
| ASSETS | 2003 |
2002 | ||||||
|---|---|---|---|---|---|---|---|---|
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 18,698 | $ | 297,743 | ||||
| Accounts receivable - trade | 230,380 | 370,976 | ||||||
| Inventories | 676,630 | 503,291 | ||||||
| Prepaid expenses and other | 153,364 | 91,608 | ||||||
| Total current assets | 1,079,072 | 1,263,618 | ||||||
| Property, Plant and Equipment, at cost | 3,007,185 | 2,903,019 | ||||||
| Less-accumulated depreciation and amortization | (1,504,720 | ) | (1,416,964 | ) | ||||
| Net property, plant and equipment | 1,502,465 | 1,486,055 | ||||||
| Goodwill | 386,484 | 378,453 | ||||||
| Other Intangibles | 39,651 | 39,898 | ||||||
| Other Assets | 290,668 | 312,527 | ||||||
| Total assets | $ | 3,298,340 | $ | 3,480,551 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 134,293 | $ | 124,507 | ||||
| Accrued liabilities | 329,116 | 356,716 | ||||||
| Accrued income taxes | 5,220 | 12,731 | ||||||
| Deferred income taxes | -- | 24,768 | ||||||
| Short-term debt | 42,461 | 11,135 | ||||||
| Current portion of long-term debt | 10,476 | 16,989 | ||||||
| Total current liabilities | 521,566 | 546,846 | ||||||
| Long-term Debt | 850,738 | 851,800 | ||||||
| Other Long-term Liabilities | 363,380 | 362,162 | ||||||
| Deferred Income Taxes | 358,830 | 348,040 | ||||||
| Total liabilities | 2,094,514 | 2,108,848 | ||||||
| Stockholders' Equity: | ||||||||
| Preferred Stock, shares issued: | ||||||||
| none in 2003 and 2002 | -- | -- | ||||||
| Common Stock, shares issued: | ||||||||
| 149,528,776 in 2003 and 149,528,564 in 2002 | 149,528 | 149,528 | ||||||
| Class B Common Stock, shares issued: | ||||||||
| 30,422,096 in 2003 and 30,422,308 in 2002 | 30,422 | 30,422 | ||||||
| Additional paid-in capital | 1,079 | 593 | ||||||
| Unearned ESOP compensation | (11,177 | ) | (12,774 | ) | ||||
| Retained earnings | 3,075,908 | 2,991,090 | ||||||
| Treasury-Common Stock shares at cost: | ||||||||
| 49,296,241 in 2003 and 45,730,735 in 2002 | (2,051,009 | ) | (1,808,227 | ) | ||||
| Accumulated other comprehensive income | 9,075 | 21,071 | ||||||
| Total stockholders' equity | 1,203,826 | 1,371,703 | ||||||
| Total liabilities and stockholders' equity | $ | 3,298,340 | $ | 3,480,551 | ||||
The accompanying notes are an integral part of these balance sheets.
-4-
| For the Six Months Ended |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| June 29, 2003 |
June 30, 2002 | ||||||||||
| Cash Flows Provided from (Used by) Operating Activities | |||||||||||
| Net Income | $ | 169,042 | $ | 150,193 | |||||||
| Adjustments to Reconcile Net Income to Net Cash | |||||||||||
| Provided from Operations: | |||||||||||
| Depreciation and amortization | 88,071 | 91,023 | |||||||||
| Deferred income taxes | 10,774 | (6,707 | ) | ||||||||
| Business realignment initiatives | 3,885 | 10,738 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable - trade | 140,596 | 82,183 | |||||||||
| Inventories | (130,641 | ) | (126,459 | ) | |||||||
| Accounts payable | 9,786 | 1,209 | |||||||||
| Other assets and liabilities | (165,950 | ) | (33,256 | ) | |||||||
| Net Cash Flows Provided from Operating Activities | 125,563 | 168,924 | |||||||||
| Cash Flows Provided from (Used by) Investing Activities | |||||||||||
| Capital additions | (78,921 | ) | (48,719 | ) | |||||||
| Capitalized software additions | (8,021 | ) | (5,263 | ) | |||||||
| Proceeds from business divestiture | -- | 12,000 | |||||||||
| Net Cash Flows (Used by) Investing Activities | (86,942 | ) | (41,982 | ) | |||||||
| Cash Flows Provided from (Used by) Financing Activities | |||||||||||
| Net increase in short-term debt | 31,326 | 728 | |||||||||
| Repayment of long-term debt | (7,566 | ) | (8,976 | ) | |||||||
| Cash dividends paid | (84,224 | ) | (80,912 | ) | |||||||
| Exercise of stock options | 29,410 | 62,603 | |||||||||
| Incentive plan transactions | (34,384 | ) | (49,742 | ) | |||||||
| Repurchase of Common Stock | (252,228 | ) | -- | ||||||||
| Net Cash Flows (Used by) Financing Activities | (317,666 | ) | (76,299 | ) | |||||||
| (Decrease) Increase in Cash and Cash Equivalents | (279,045 | ) | 50,643 | ||||||||
| Cash and Cash Equivalents, beginning of period | 297,743 | 134,147 | |||||||||
| Cash and Cash Equivalents, end of period | $ | 18,698 | $ | 184,790 | |||||||
| Interest Paid | $ | 31,601 | $ | 32,494 | |||||||
| Income Taxes Paid | $ | 136,119 | $ | 26,983 | |||||||
The accompanying notes are an integral part of these statements.
-5-
1. BASIS OF PRESENTATION
| The accompanying unaudited consolidated financial statements include the accounts of Hershey Foods Corporation and its majority-owned subsidiaries (the “Corporation”) 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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to prior year amounts to conform to the 2003 presentation. Operating results for the six months ended June 29, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003, because of the seasonal effects of the Corporation’s business. For more information, refer to the consolidated financial statements and notes included in the Corporation’s 2002 Annual Report on Form 10-K. |
2. EMPLOYEE STOCK OPTIONS AND OTHER STOCK-BASED EMPLOYEE COMPENSATION PLANS
| As of June 29, 2003, the Corporation had two stock-based employee compensation plans. The Corporation applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in net income for employee stock options since all stock options are granted at an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense for performance stock units is recognized ratably over a period of up to seventy-two months based on the quarter-end market values of the stock. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. |
| For the Three Months Ended
|
For the Six Months Ended
|
||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 6/29/03 |
6/30/02 |
6/29/03 |
6/30/02 | ||||||||||||||||||||
| (in thousands of dollars except per share amounts) | |||||||||||||||||||||||
| Net income, as reported | $ | 71,484 | $ | 63,148 | $ | 169,042 | $ | 150,193 | |||||||||||||||
| Deduct: Total stock-based employee | |||||||||||||||||||||||
| compensation expense determined under | |||||||||||||||||||||||
| fair value method, net of related tax | |||||||||||||||||||||||
| effects | (3,975) | (3,112) | (7,660) | (6,187) | |||||||||||||||||||
| Pro forma net income | $ | 67,509 | $ | 60,036 | $ | 161,382 | $ | 144,006 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic - as reported | $ | .55 | $ | .46 | $ | 1.28 | $ | 1.10 | |||||||||||||||
| Basic - pro forma | $ | .51 | $ | .44 | $ | 1.22 | $ | 1.05 | |||||||||||||||
| Diluted - as reported | $ | .54 | $ | .46 | $ | 1.27 | $ | 1.09 | |||||||||||||||
| Diluted - pro forma | $ | .51 | $ | .44 | $ | 1.21 | $ | 1.04 | |||||||||||||||
| The fair value of each option grant is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the first six months of 2003 and 2002, respectively: dividend yields of 2.0% and 1.9%; expected volatility of 28% and 28%; risk-free interest rates of 3.6% and 4.7%; and expected lives of 6.4 years and 6.4 years. |
3. BUSINESS REALIGNMENT INITIATIVES
| In July 2003, the Corporation announced a number of initiatives continuing its value-enhancing strategy. These initiatives include streamlining the supply chain by divesting or eliminating certain non-strategic brands and products, production line rationalization and realigning the sales organization. |
| During 2003, these actions are expected to result in a net charge of approximately $17.0 million, or $.08 per share-diluted, of which $.02 per share-diluted was recognized in the second quarter. The $17.0 million net charge is expected to consist of employee termination and early retirement costs of $9.8 million, asset impairment and other |
-6-
| costs relating to production line rationalization and the discontinuance of certain brands and products of $8.9 million, and a $1.7 million net gain, resulting from the divestiture of certain brands. |
| During the second quarter of 2003, the Corporation recorded pre-tax charges related to the business rationalization and realignment initiatives of $4.0 million. The $4.0 million net charge consisted of the write-off of certain inventories of $.1 million included in cost of sales, and a net business realignment charge of $3.9 million including fixed asset impairment charges of $4.2 million and a net gain of $.3 million, relating to production line rationalization and the elimination of non-strategic brands and products. In determining the fixed asset impairment losses, fair value was estimated based on the expected sales proceeds. |
| The remainder of the 2003 business rationalization and realignment initiatives will be recorded in the third and fourth quarters. The initiatives are expected to be completed by December 31, 2003. |
| In late October 2001, the Corporation’s Board of Directors approved a plan to improve the efficiency and profitability of the Corporation’s operations. The plan included asset management improvements, product line rationalization, supply chain efficiency improvements, and a voluntary work force reduction program (collectively, “the business realignment initiatives”). The major components were completed as of December 31, 2002. For more information on the business realignment initiatives recorded in the fourth quarter of 2001 and during 2002, refer to the consolidated financial statements and notes included in the Corporation’s 2002 Annual Report on Form 10-K. |
4. INTEREST EXPENSE