Attached files
file | filename |
---|---|
EX-31.1 - CEO CERTIFICATION - HERSHEY CO | exh31_1.htm |
EX-32.1 - SECTION 906 CERTIFICATIONS - HERSHEY CO | exh32_1.htm |
EX-31.2 - CFO CERTIFICATION - HERSHEY CO | exh31_2.htm |
EX-12.1 - RATIO OF EARNINGS TO FIXED CHARGES - HERSHEY CO | exh12_1.htm |
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 October 4, 2009
OR
o
|
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
THE HERSHEY
COMPANY
100
Crystal A Drive
Hershey,
PA 17033
Registrant’s
telephone number: 717-534-4200
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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer x
|
Accelerated
filer o
|
|
Non-accelerated
filer o (Do not check if a smaller
reporting company)
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
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 – 167,011,152 shares, as of October 23,
2009. Class B Common Stock,
$1 par
value – 60,708,908 shares, as of October 23, 2009.
THE
HERSHEY COMPANY
INDEX
Part
I. Financial Information
|
Page
Number
|
Item
1. Consolidated Financial Statements
(Unaudited)
|
|
Consolidated
Statements of Income
Three
months ended October 4, 2009 and September 28, 2008
|
3
|
Consolidated
Statements of Income
Nine
months ended October 4, 2009 and September 28, 2008
|
4
|
Consolidated
Balance Sheets
October
4, 2009 and December 31, 2008
|
5
|
Consolidated
Statements of Cash Flows
Nine
months ended October 4, 2009 and September 28, 2008
|
6
|
Notes
to Consolidated Financial Statements
|
7
|
Item
2. Management’s Discussion and Analysis of
Results of Operations and Financial
Condition
|
22
|
Item
3. Quantitative and Qualitative Disclosures
About
Market Risk
|
28
|
|
|
Item
4. Controls and Procedures
|
28
|
Part
II. Other Information
|
|
Item
2. Unregistered Sales of Equity Securities and Use
of
Proceeds
|
30
|
|
|
Item
6. Exhibits
|
30
|
-2-
PART
I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements (Unaudited)
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands except per share amounts)
For
the Three Months Ended
|
||||||||
October
4,
2009
|
September
28,
2008
|
|||||||
Net
Sales
|
$ | 1,484,118 | $ | 1,489,609 | ||||
Costs
and Expenses:
|
||||||||
Cost
of sales
|
895,020 | 988,380 | ||||||
Selling,
marketing and administrative
|
301,466 | 272,401 | ||||||
Business
realignment and impairment charges, net
|
8,008 | 8,877 | ||||||
|
||||||||
Total
costs and expenses
|
1,204,494 | 1,269,658 | ||||||
Income
before Interest and Income Taxes
|
279,624 | 219,951 | ||||||
Interest
expense, net
|
22,302 | 24,915 | ||||||
Income
before Income Taxes
|
257,322 | 195,036 | ||||||
Provision
for income taxes
|
95,299 | 70,498 | ||||||
Net
Income
|
$ | 162,023 | $ | 124,538 | ||||
Earnings
Per Share - Basic - Class B Common Stock
|
$ | .66 | $ | .51 | ||||
Earnings
Per Share - Diluted - Class B Common Stock
|
$ | .65 | $ | .51 | ||||
Earnings
Per Share - Basic - Common Stock
|
$ | .73 | $ | .56 | ||||
Earnings
Per Share - Diluted - Common Stock
|
$ | .71 | $ | .54 | ||||
Average
Shares Outstanding - Basic - Common Stock
|
167,299 | 166,682 | ||||||
Average
Shares Outstanding - Basic - Class B Common Stock
|
60,709 | 60,784 | ||||||
Average
Shares Outstanding - Diluted
|
229,553 | 228,670 | ||||||
Cash
Dividends Paid Per Share:
|
||||||||
Common
Stock
|
$ | .2975 | $ | .2975 | ||||
Class
B Common Stock
|
$ | .2678 | $ | .2678 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-3-
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands except per share amounts)
For
the Nine Months Ended
|
||||||||
October
4,
2009
|
September
28,
2008
|
|||||||
Net
Sales
|
$ | 3,891,332 | $ | 3,755,388 | ||||
Costs
and Expenses:
|
||||||||
Cost
of sales
|
2,408,716 | 2,495,196 | ||||||
Selling,
marketing and administrative
|
874,632 | 788,962 | ||||||
Business
realignment and impairment charges, net
|
58,750 | 34,748 | ||||||
|
||||||||
Total
costs and expenses
|
3,342,098 | 3,318,906 | ||||||
Income
before Interest and Income Taxes
|
549,234 | 436,482 | ||||||
Interest
expense, net
|
68,932 | 72,911 | ||||||
Income
before Income Taxes
|
480,302 | 363,571 | ||||||
Provision
for income taxes
|
171,087 | 134,321 | ||||||
Net
Income
|
$ | 309,215 | $ | 229,250 | ||||
Earnings
Per Share - Basic - Class B Common Stock
|
$ | 1.26 | $ | .93 | ||||
Earnings
Per Share - Diluted - Class B Common Stock
|
$ | 1.26 | $ | .93 | ||||
Earnings
Per Share - Basic - Common Stock
|
$ | 1.39 | $ | 1.03 | ||||
Earnings
Per Share - Diluted - Common Stock
|
$ | 1.35 | $ | 1.00 | ||||
Average
Shares Outstanding - Basic - Common Stock
|
166,980 | 166,696 | ||||||
Average
Shares Outstanding - Basic - Class B Common Stock
|
60,710 | 60,798 | ||||||
Average
Shares Outstanding - Diluted
|
228,784 | 228,757 | ||||||
Cash
Dividends Paid Per Share:
|
||||||||
Common
Stock
|
$ | .8925 | $ | .8925 | ||||
Class
B Common Stock
|
$ | .8034 | $ | .8034 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
-4-
THE
HERSHEY COMPANY
CONSOLIDATED
BALANCE SHEETS
(in
thousands of dollars)
ASSETS
|
October
4,
2009
|
December
31,
2008
|
||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$ | 119,253 | $ | 37,103 | ||||
Accounts
receivable - trade
|
567,609 | 455,153 | ||||||
Inventories
|
559,318 | 592,530 | ||||||
Deferred
income taxes
|
31,164 | 70,903 | ||||||
Prepaid
expenses and other
|
185,293 | 189,256 | ||||||
Total
current assets
|
1,462,637 | 1,344,945 | ||||||
Property,
Plant and Equipment, at cost
|
3,348,034 | 3,437,420 | ||||||
Less-accumulated
depreciation and amortization
|
(1,935,216 | ) | (1,978,471 | ) | ||||
Net
property, plant and equipment
|
1,412,818 | 1,458,949 | ||||||
Goodwill
|
567,163 | 554,677 | ||||||
Other
Intangibles
|
125,345 | 110,772 | ||||||
Deferred
Income Taxes
|
24,776 | 13,815 | ||||||
Other
Assets
|
180,368 | 151,561 | ||||||
Total
assets
|
$ | 3,773,107 | $ | 3,634,719 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 285,231 | $ | 249,454 | ||||
Accrued
liabilities
|
546,425 | 504,065 | ||||||
Accrued
income taxes
|
33,652 | 15,189 | ||||||
Short-term
debt
|
227,389 | 483,120 | ||||||
Current
portion of long-term debt
|
15,632 | 18,384 | ||||||
Total
current liabilities
|
1,108,329 | 1,270,212 | ||||||
Long-term
Debt
|
1,503,435 | 1,505,954 | ||||||
Other
Long-term Liabilities
|
481,105 | 504,963 | ||||||
Deferred
Income Taxes
|
42,721 | 3,646 | ||||||
Total
liabilities
|
3,135,590 | 3,284,775 | ||||||
Stockholders’
Equity:
|
||||||||
The
Hershey Company Stockholders’ Equity
|
||||||||
Preferred
Stock, shares issued: none in 2009 and 2008
|
— | — | ||||||
Common
Stock, shares issued: 299,192,836 in 2009 and 299,190,836 in
2008
|
299,192 | 299,190 | ||||||
Class
B Common Stock, shares issued: 60,708,908 in 2009 and 60,710,908 in
2008
|
60,709 | 60,711 | ||||||
Additional
paid-in capital
|
386,842 | 352,375 | ||||||
Retained
earnings
|
4,087,572 | 3,975,762 | ||||||
Treasury-Common
Stock shares, at cost: 132,194,512 in 2009 and 132,866,673 in
2008
|
(3,989,117 | ) | (4,009,931 | ) | ||||
Accumulated
other comprehensive loss
|
(248,128 | ) | (359,908 | ) | ||||
The
Hershey Company stockholders’ equity
|
597,070 | 318,199 | ||||||
Noncontrolling
interests in subsidiaries
|
40,447 | 31,745 | ||||||
Total
stockholders’ equity
|
637,517 | 349,944 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 3,773,107 | $ | 3,634,719 |
The
accompanying notes are an integral part of these consolidated balance
sheets.
-5-
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands of dollars)
For
the Nine Months Ended
|
||||||||
October
4,
2009
|
September
28,
2008
|
|||||||
Cash
Flows Provided from (Used by) Operating Activities
|
||||||||
Net
Income
|
$ | 309,215 | $ | 229,250 | ||||
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||
Provided
from Operations:
|
||||||||
Depreciation
and amortization
|
138,874 | 190,762 | ||||||
Stock-based
compensation expense, net of tax of $15,793 and
$9,892, respectively
|
28,077 | 17,283 | ||||||
Excess
tax benefits from exercise of stock options
|
(3,002 | ) | (769 | ) | ||||
Deferred
income taxes
|
70,125 | 58,367 | ||||||
Business
realignment initiatives, net of tax of $29,429 and
$33,529, respectively
|
43,250 | 67,430 | ||||||
Contributions
to pension plans
|
(45,834 | ) | (24,620 | ) | ||||
Changes
in assets and liabilities, net of effects from business
acquisitions and divestitures:
|
||||||||
Accounts
receivable - trade
|
(110,731 | ) | (127,564 | ) | ||||
Inventories
|
17,894 | (62,809 | ) | |||||
Accounts
payable
|
34,556 | 94,593 | ||||||
Other
assets and liabilities
|
153,124 | (193,332 | ) | |||||
Net
Cash Flows Provided from Operating Activities
|
635,548 | 248,591 | ||||||
Cash
Flows Provided from (Used by) Investing Activities
|
||||||||
Capital
additions
|
(94,465 | ) | (198,446 | ) | ||||
Capitalized
software additions
|
(12,416 | ) | (12,672 | ) | ||||
Proceeds
from sales of property, plant and equipment
|
4,907 | 77,180 | ||||||
Business
acquisition
|
(15,220 | ) | — | |||||
Proceeds
from divestiture
|
— | 1,960 | ||||||
Net
Cash Flows (Used by) Investing Activities
|
(117,194 | ) | (131,978 | ) | ||||
Cash
Flows Provided from (Used by) Financing Activities
|
||||||||
Net
decrease in short-term debt
|
(255,287 | ) | (137,575 | ) | ||||
Long-term
borrowings
|
— | 247,845 | ||||||
Repayment
of long-term debt
|
(6,474 | ) | (3,281 | ) | ||||
Cash
dividends paid
|
(197,405 | ) | (197,218 | ) | ||||
Exercise
of stock options
|
21,952 | 34,635 | ||||||
Excess
tax benefits from exercise of stock options
|
3,002 | 769 | ||||||
Contributions
from noncontrolling interests in subsidiaries
|
7,322 | — | ||||||
Repurchase
of Common Stock
|
(9,314 | ) | (55,354 | ) | ||||
Net
Cash Flows (Used by) Financing Activities
|
(436,204 | ) | (110,179 | ) | ||||
Increase
in Cash and Cash Equivalents
|
82,150 | 6,434 | ||||||
Cash
and Cash Equivalents, beginning of period
|
37,103 | 129,198 | ||||||
Cash
and Cash Equivalents, end of period
|
$ | 119,253 | $ | 135,632 | ||||
Interest
Paid
|
$ | 91,508 | $ | 87,672 | ||||
Income
Taxes Paid
|
$ | 140,778 | $ | 115,977 |
The
accompanying notes are an integral part of these consolidated financial
statements.
-6-
THE
HERSHEY COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION
Our
unaudited consolidated financial statements provided in this report include the
accounts of the Company and our majority-owned subsidiaries and entities in
which we have a controlling financial interest after the elimination of
intercompany accounts and transactions. We have a controlling
financial interest if we own a majority of the outstanding voting common stock
and noncontrolling stockholders do not have substantive participating rights, or
we have significant control over an entity through contractual or economic
interests in which we are the primary beneficiary. We prepared these statements
in accordance with the instructions to Form 10-Q. These statements do
not include all of the information and footnotes required by U.S. generally
accepted accounting principles (“GAAP”) for complete financial
statements.
We
included all adjustments (consisting only of normal recurring accruals) which we
believe were considered necessary for a fair presentation. We
reclassified certain prior year amounts to conform to the 2009
presentation. Operating results for the nine months ended
October 4, 2009 may not be indicative of the results that may be expected
for the year ending December 31, 2009, because of the seasonal effects of
our business. For more information, refer to the consolidated financial
statements and notes included in our 2008 Annual Report on
Form 10-K.
In May
2009, the Financial Accounting Standards Board (“FASB”) issued a new standard
effective for both interim and annual financial statements ending after June 15,
2009. It establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In our
second quarter of 2009, we adopted this new standard which did not have a
material impact on our financial accounting or disclosure.
We
evaluated all subsequent events through the date and time our financial
statements were issued on November 12, 2009. No subsequent events
occurred during this reporting period that require recognition or disclosure in
this filing.
2. BUSINESS
ACQUISITIONS AND DIVESTITURES
In
January 2008, our Brazilian subsidiary, Hershey do Brasil, entered into a
cooperative agreement with Pandurata Alimentos LTDA (“Bauducco”), a leading
manufacturer of baked goods in Brazil whose primary brand is
Bauducco. The arrangement with Bauducco leverages Bauducco’s
strong sales and distribution capabilities for our products throughout
Brazil. Under this agreement we manufacture and market, and they
sell and distribute our products. In the first quarter of 2008, we
received approximately $2.0 million in cash and recorded an other intangible
asset of $13.7 million associated with the cooperative agreement with Bauducco
in exchange for our conveying to Bauducco a 49% interest in Hershey do
Brasil. We maintain a 51% controlling interest in Hershey do
Brasil.
In March
2009, our Company completed the acquisition of the Van Houten Singapore consumer
business. The acquisition from Barry Callebaut, AG provides our
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.
Results
subsequent to the acquisition dates were included in the consolidated financial
statements. Had the results of the acquisitions been included in the
consolidated financial statements for each of the periods presented, the effect
would not have been material.
3. NONCONTROLLING
INTERESTS IN SUBSIDIARIES
As of
January 1, 2009, the Company adopted a FASB accounting standard that establishes
new accounting and reporting requirements for the noncontrolling interest in a
subsidiary (formerly known as minority interest) and for the deconsolidation of
a subsidiary and requires the noncontrolling interest to be reported as a
component of equity. In addition, changes in a parent’s ownership
interest while the parent retains its controlling interest will be accounted for
as equity transactions, and any retained noncontrolling equity investment upon
the deconsolidation of a subsidiary will be measured initially at fair
value.
In May
2007, we entered into an agreement with Godrej Beverages and Foods, Ltd., one of
India’s largest consumer goods, confectionery and food companies, to manufacture
and distribute confectionery products, snacks and beverages across
India. Under the agreement, we own a 51% controlling interest in
Godrej Hershey Ltd. In January 2009, the Company contributed cash of
approximately $8.7 million to Godrej Hershey Ltd. and owners of the
noncontrolling interests in Godrej Hershey Ltd. contributed approximately
$7.3 million. The ownership interest percentages in Godrej Hershey
Ltd.
-7-
did not
change significantly as a result of these contributions. The
noncontrolling interests in Godrej Hershey Ltd. are included in the equity
section of the Consolidated Balance Sheets.
We also
own a 51% controlling interest in Hershey do Brasil under the cooperative
agreement with Bauducco. The noncontrolling interest in Hershey do
Brasil is included in the equity section of the Consolidated Balance
Sheets.
The
increase in noncontrolling interests in subsidiaries from $31.7 million as of
December 31, 2008 to $40.4 million as of October 4, 2009 reflected the $7.3
million contribution from the noncontrolling interests in Godrej Hershey Ltd.
and the impact of currency translation adjustments, partially offset by a
reduction resulting from the recording of the share of losses pertaining to the
noncontrolling interests. The share of losses pertaining to the
noncontrolling interests in subsidiaries was $2.7 million for the nine months
ended October 4, 2009 and $4.1 million for the nine months ended September 28,
2008. This was reflected in selling, marketing and administrative
expenses.
4. STOCK
COMPENSATION PLANS
The
Hershey Company Equity and Incentive Compensation Plan (“EICP”) is the plan
under which grants using shares for compensation and incentive purposes are
made. The following table summarizes our stock compensation
costs:
For
the Three Months Ended
|
For
the Nine Months Ended
|
|||||||||||
October
4,
2009
|
September
28,
2008
|
October
4,
2009
|
September
28,
2008
|
|||||||||
(in
millions of dollars)
|
||||||||||||
Total
compensation amount charged against income for stock options, performance
stock units (“PSUs”) and restricted stock units
|
$ | 12.0 | $ | 8.9 | $ | 43.5 | $ | 26.7 | ||||
Total
income tax benefit recognized in the Consolidated Statements of Income for
share-based compensation
|
$ | 4.6 | $ | 3.2 | $ | 15.7 | $ | 9.6 |
The
increase in share-based compensation expense for the third quarter and first
nine months of 2009 resulted from the higher performance expectations for our
PSU awards.
We
estimated the fair value of each stock option grant on the date of the grant
using a Black-Scholes option-pricing model and the weighted-average assumptions
set forth in the following table:
For
the Nine Months Ended
|
|||||
October
4,
2009
|
September
28,
2008
|
||||
Dividend
yield
|
3.3% | 2.4% | |||
Expected
volatility
|
21.6% | 18.1% | |||
Risk-free
interest rates
|
2.1% | 3.1% | |||
Expected
lives in years
|
6.6 | 6.6 |
-8-
Stock
Options
A summary
of the status of our stock options as of October 4, 2009, and the change
during 2009 is presented below:
For
the Nine Months Ended October 4, 2009
|
|||||||
Stock
Options
|
Shares
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Contractual
Term
|
||||
Outstanding
at beginning of year
|
16,671,643 | $42.08 |
6.6
years
|
||||
Granted
|
3,160,470 | $34.92 | |||||
Exercised
|
(792,751 | ) | $27.69 | ||||
Forfeited
|
(402,506 | ) | $44.40 | ||||
Outstanding
as of October 4, 2009
|
18,636,856 | $41.43 |
6.4
years
|
||||
Options
exercisable as of October 4, 2009
|
10,968,359 | $43.34 |
4.8
years
|
For
the Nine Months Ended
|
||||||
October
4,
2009
|
September
28,
2008
|
|||||
Weighted-average
fair value of options granted (per share)
|
$ | 5.31 | $ | 6.20 | ||
Intrinsic
value of options exercised (in millions of dollars)
|
$ | 8.9 | $ | 8.3 |
·
|
As
of October 4, 2009, the aggregate intrinsic value of options outstanding
was $56.0 million and the aggregate intrinsic value of options
exercisable was $30.3 million.
|
·
|
As
of October 4, 2009, there was $30.9 million of total unrecognized
compensation cost related to non-vested stock option compensation
arrangements granted under our stock option plans. That cost is
expected to be recognized over a weighted-average period of 2.4
years.
|
Performance
Stock Units and Restricted Stock Units
A summary
of the status of our performance stock units and restricted stock units as of
October 4, 2009, and the change during 2009 is presented
below:
Performance
Stock Units and Restricted Stock Units
|
For
the Nine
Months
Ended
October
4,
2009
|
Weighted-average
grant date
fair
value for equity awards or
market
value for liability awards
|
||
Outstanding
at beginning of year
|
766,209 | $36.13 | ||
Granted
|
571,348 | $35.06 | ||
Performance
assumption change
|
497,639 | $38.45 | ||
Vested
|
(276,094) | $34.50 | ||
Forfeited
|
(17,376) | $35.60 | ||
Outstanding
as of October 4, 2009
|
1,541,726 | $38.51 |
As of
October 4, 2009, there was $33.4 million of unrecognized compensation
cost relating to non-vested performance stock units and restricted stock
units. We expect to recognize that cost over a weighted-average
period of 2.1 years.
For
the Nine Months Ended
|
|||||
October
4,
2009
|
September
28,
2008
|
||||
Intrinsic
value of share-based liabilities paid, combined with the fair
value of shares vested (in millions of dollars)
|
$ 9.0 | $ 9.4 |
-9-
Deferred
performance stock units, deferred restricted stock units, and directors’ fees
and accumulated dividend amounts representing deferred stock units totaled
516,104 units as of October 4, 2009. Each unit is equivalent to
one share of the Company’s Common Stock.
No stock
appreciation rights were outstanding as of October 4, 2009.
For more
information on our stock compensation plans, refer to the consolidated financial
statements and notes included in our 2008 Annual Report on Form 10-K and our
proxy statement for the 2009 annual meeting of stockholders.
5. INTEREST
EXPENSE
Net
interest expense consisted of the following:
For
the Nine Months Ended
|
||||||||
October
4,
2009
|
September
28,
2008
|
|||||||
(in
thousands of dollars)
|
||||||||
Interest
expense
|
$ | 71,693 | $ | 78,775 | ||||
Interest
income
|
(693 | ) | (1,305 | ) | ||||
Capitalized
interest
|
(2,068 | ) | (4,559 | ) | ||||
Interest
expense, net
|
$ | 68,932 | $ | 72,911 |
6. BUSINESS
REALIGNMENT INITIATIVES
In
February 2007, we announced a comprehensive, three-year supply chain
transformation program (the “global supply chain transformation program or
GSCT”) and, in December 2007, we initiated a business realignment program
associated with our business in Brazil (together, “the 2007 business realignment
initiatives”). 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.
The
original estimated pre-tax cost of the program announced in February 2007 was
from $525 million to $575 million over three years. The total
included from $475 million to $525 million in business realignment costs and
approximately $50 million in project implementation costs. The
increase in scope approved in December 2008 increased the total expected cost by
about $25 million. In addition, the current trends of employee lump
sum withdrawals from the defined benefit pension plans are expected to result in
non-cash pension settlement losses from $30 million to $40 million during the
remainder of 2009 and 2010, in addition to the $36.7 million recorded during the
first nine months of 2009. Therefore, we continue to expect total
pre-tax charges and non-recurring project implementation costs of $640 million
to $665 million for the GSCT. Total costs of $72.7 million were
recorded during the first nine months of 2009, costs of $130.0 million were
recorded in 2008 and costs of $400.0 million were recorded in 2007 for this
program.
In an
effort to improve the performance of our business in Brazil, in January 2008
Hershey do Brasil entered into a cooperative agreement with
Bauducco. Business realignment and impairment charges of $4.9 million
were recorded in 2008.
-10-
Charges
(credits) associated with business realignment initiatives recorded during the
three-month and nine-month periods ended October 4, 2009 and
September 28, 2008 were 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 of dollars)
|
||||||||||||
Cost
of sales:
2007 business realignment initiatives
|
$ | 1,325 | $ | 19,965 | $ | 8,492 | $ | 60,146 | ||||
Selling,
marketing and administrative:
2007 business realignment initiatives
|
1,683 | 2,188 | 5,437 | 6,065 | ||||||||
Business
realignment and impairment charges, net:
|
||||||||||||
Global supply chain transformation program:
|
||||||||||||
Losses
(gains) on sale of fixed assets
|
— | 233 | — | (6,557 | ) | |||||||
Fixed
asset impairments and plant closure expenses
|
1,584 | 1,755 | 18,473 | 17,020 | ||||||||
Employee
separation costs
|
193 | 3,984 | 3,071 | 11,115 | ||||||||
Pension
settlement loss
|
6,181 | 1,882 | 36,736 | 6,625 | ||||||||
Contract
termination costs
|
50 | 1 | 470 | 1,592 | ||||||||
Brazilian
business realignment:
|
||||||||||||
Employee
separation costs
|
— | 92 | — | 1,618 | ||||||||
Fixed
asset impairment charges
|
— | 35 | — | 752 | ||||||||
Contract
termination and other exit costs
|
— | 895 | — | 2,583 | ||||||||
Total
business realignment and
impairment charges, net
|
8,008 | 8,877 | 58,750 | 34,748 | ||||||||
Total
net charges associated with 2007 business
realignment initiatives
|
$ | 11,016 | $ | 31,030 | $ | 72,679 | $ | 100,959 |
The
charge of $1.3 million recorded in cost of sales during the third quarter of
2009 related primarily to the start-up costs associated with the global supply
chain transformation program. The $1.7 million recorded in selling,
marketing and administrative expenses related primarily to project
administration for the global supply chain transformation
program. The $1.6 million of fixed asset impairments and plant
closure expenses for 2009 related primarily to the preparation of plants for
sale and production line removal costs. In determining the costs
related to fixed asset impairments, fair value was estimated based on the
expected sales proceeds. Certain real estate with a carrying value of
$12.9 million was being held for sale as of October 4, 2009. The
global supply chain transformation program employee separation costs were
related to involuntary terminations at the manufacturing facilities of Artisan
Confections Company which have been closed. As of October 4,
2009, manufacturing facilities located in Dartmouth, Nova Scotia; Oakdale,
California; and Montreal, Quebec have been closed and sold. The facilities
located in Naugatuck, Connecticut; Reading, Pennsylvania; and Smiths Falls,
Ontario have been closed and are being held for sale. The higher
pension settlement loss in the third quarter of 2009 compared to the third
quarter 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.
The
charge of $8.5 million recorded in cost of sales during the first nine months of
2009 for the global supply chain transformation program related to start-up
costs associated with the global supply chain transformation program and the
accelerated depreciation of fixed assets over a reduced estimated remaining
useful life. The $5.4 million recorded in selling, marketing and
administrative expenses related primarily to project administration for the
global supply chain transformation program. The $18.5 million of fixed asset
impairments and plant closure expenses related primarily to the preparation of
plants for sale and production line removal costs. In determining the costs
related to fixed asset impairments, fair value was estimated based on the
expected sales proceeds. The global supply chain transformation program employee
separation costs were related to involuntary terminations at the manufacturing
facilities of Artisan Confections Company which have
-11-
been
closed. 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.
The
charge of $20.0 million recorded in cost of sales during the third quarter of
2008 related primarily 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 $2.2 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 value was
estimated based on the expected sales proceeds. The $.2 million of
losses on sale of fixed assets resulted from reductions to the carrying value of
assets being held for sale. The $1.8 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
charge of $60.1 million recorded in cost of sales during the first nine months
of 2008 related primarily 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 value 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 million for employee separation costs. During
the first nine months of 2009, we made payments against the liabilities recorded
for the 2007 business realignment initiatives of $24.7 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 |
-12-
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.
8.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
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:
—
|
cash
flow hedge;
|
—
|
fair
value hedge; and
|
—
|
hedge
of foreign currency exposure of a net investment in a foreign
operation.
|
As of
October 4, 2009 and December 31, 2008, we classified all of our derivative
instruments 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.
-13-
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.
-14-
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
October 4, 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 | $ | — |
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
October 4, 2009, prepaid expense and other current assets were associated
with the fair value of commodity options contracts. Accrued
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.
The
effect of derivative instruments on the Consolidated Statements of Income for
the nine months ended October 4, 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)
|
$ | 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 |
|
(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.
|
|
(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.
-15-
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 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 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 |
-16-
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 | ) |
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 |
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 October 4, 2009, 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 2008 Annual Report on Form
10-K.
-17-
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 October 4, 2009 and December 31, 2008, because of the
relatively short maturity of these instruments.
The
carrying value of long-term debt, including the current portion, was
$1,519.1 million as of October 4, 2009, compared with a fair value of
$1,686.5 million, an increase of $167.4 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 million as of October 4, 2009. 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 information 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
|
Our
foreign exchange forward contracts mature in 2009 and 2010. 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;
|
-18-
—
|
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 October 4, 2009, 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 | $ | — |
As of
October 4, 2009, 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 payable on commodities futures contracts reflecting the change in
quoted market prices on the last trading day for the period. As of
October 4, 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. For more information, see Note 8. Derivative Instruments and
Hedging Activities.
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) and Canada. During the second quarter of
2009, the U.S. Internal Revenue Service 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.
16. PENSION
AND OTHER POST-RETIREMENT BENEFIT PLANS
Components
of net periodic benefits (income) cost consisted of the following:
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 |
-19-
We made
contributions of $43.8 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 months of
2009. In the first nine months of 2008, we made contributions of
$24.6 million and $17.9 million to our pension and other benefits
plans, respectively.
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,
there are no minimum funding requirements in excess of available credits for the
domestic plans and minimum funding requirements for the non-domestic plans are
not material. The Company made contributions to pension plans during
the third quarter of 2009 to improve the funded status of certain qualified
pension plans.
For more
information, refer to the consolidated financial statements and notes included
in our 2008 Annual Report on
Form
10-K.
-20-
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
|
||||||||
Shares
|
Dollars
|
|||||||
(in
thousands)
|
||||||||
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 | ||||||
Total
share repurchases
|
252 | 9,314 | ||||||
Shares
issued for stock options and incentive compensation
|
(924 | ) | (30,128 | ) | ||||
Net
change
|
(672 | ) | $ | (20,814 | ) |
In
December 2006, our Board of Directors approved a $250.0 million share repurchase
program. As of October 4, 2009, $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.
-21-
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
|
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 -
Third Quarter 2009 vs. Third Quarter 2008
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 third quarter of 2009 were down slightly compared with the same period
of 2008. Net sales during the third quarter of 2008 were increased
approximately 2% from the buy-in related to the August 2008 price
increase. Price realization increased net sales in 2009 by more than
10%, but was offset substantially by sales volume decreases, reflecting the
impact of pricing elasticity. The impact of foreign currency exchange
rates reduced net sales by approximately 1.1%. The acquisition of the
Van Houten Singapore business increased net sales by $3.9 million, or
0.3%.
-22-
Key
Marketplace Metrics
Consumer
takeaway increased 4.8% during the third quarter 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 was flat during the third quarter of 2009 compared
with the same period of 2008. 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
Cost of
sales decreased in the third quarter of 2009 compared with the same period of
2008. The decrease was primarily due to lower 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. Business
realignment charges of $1.3 million were included in cost of sales in the third
quarter of 2009 compared with $20.0 million in the third quarter of
2008.
The
increase in gross margin in the third quarter of 2009 compared with the third
quarter of 2008 was 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, incentive compensation 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 business
realignment initiatives were included in selling, marketing and administrative
expenses for the third quarter of 2009 compared with $2.2 million recorded in
the third quarter of 2008.
Business
Realignment Initiatives
Business
realignment charges of $8.0 million were recorded in the third quarter of
2009 associated with the 2007 business realignment initiatives. The
charges were primarily related to pension settlement losses and plant closure
expenses. Business realignment charges of $8.9 million were recorded
in the third quarter of 2008 primarily associated with employee separation
costs, pension settlement losses, fixed asset impairment and plant closure
expenses.
Income
Before Interest and Income Taxes and EBIT Margin
EBIT
increased in the third quarter of 2009 compared with the third quarter of 2008
as a result of higher gross profit and lower business realignment charges,
partially offset by increased selling, marketing and administrative
expenses. Net pre-tax business realignment charges of
$11.0 million were recorded in the third quarter of 2009 compared with
$31.0 million recorded in the third quarter of 2008.
EBIT
margin increased from 14.8% for the third quarter of 2008 to 18.8% for the third
quarter of 2009. The increase was attributable to 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 reduced EBIT margin by 0.8 percentage points in 2009 and by 2.0 points
in 2008.
-23-
Interest
Expense, Net
Net
interest expense was lower in the third quarter of 2009 than the comparable
period of 2008 primarily reflecting lower interest rates and lower average debt
balances, offset partially by a decrease in capitalized interest.
Income
Taxes and Effective Tax Rate
Our
effective income tax rate was 37.0% for the third quarter of 2009 compared with
36.1% for the same period of 2008. The impact of tax rates associated
with business realignment and impairment charges decreased the effective income
tax rate by 0.2 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.
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 $0.10 per
share-diluted, in the third quarter 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 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.
-24-
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 nine months of 2009, cash and cash equivalents increased by
$82.2 million.
Cash
provided from operations was sufficient to fund the repayment of short-term debt
of $255.3 million, dividend payments of $197.4 million, capital
additions and capitalized software expenditures of $106.9 million, a
business acquisition of $15.2 million and the repurchase of Common Stock for
$9.3 million.
Net cash
provided from operating activities was $635.5 million in 2009 and $248.6 million
in 2008. The increase was primarily the result of higher net income
and the change in cash provided by other assets and liabilities which increased
to $153.1 million for the first nine months of 2009 compared with cash used of
$193.3 million for the same period of 2008. The change in the amount
of cash provided from (used by) other assets and liabilities from 2008 to 2009
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. Cash used to build
seasonal working capital decreased to $58.3 million in 2009 from $95.8 million
in 2008, primarily as a result of lower inventory levels.
-25-
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 million during the first nine months of 2009 versus $87.7 million
for the comparable period of 2008. Income taxes paid were $140.8
million during the first nine months of 2009 versus $116.0 million for the
comparable period of 2008. The increase in taxes paid in 2009 was
primarily related to the impact of higher annualized taxable income in
2009.
The ratio
of current assets to current liabilities increased to 1.3:1.0 as of
October 4, 2009 from 1.1:1.0 as of December 31, 2008. 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% as of
October 4, 2009 from 85% as of December 31, 2008.
Generally,
our short-term borrowings are in the form of 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.
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 2008 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 volume 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 expected to
be more than offset by price realization. For the full-year 2009, we
continue to expect full year net sales growth to be within our three to five
percent long-term objective due primarily to our pricing actions and core brand
sales growth.
We
continue to expect our commodity cost basket to increase significantly in 2009
compared with 2008, although the total increase is expected to be less than our
initial estimates. We also continue to expect an increase in 2009
pension expense. Despite these increases we plan to continue to
invest in our core brands in the U.S. and key international markets to build on
our momentum. Specifically, advertising expense is now expected to
increase by 50 percent in 2009 and we expect to make further investments in
category management, consumer capabilities 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. We expect an increase in
earnings per share-diluted in 2009, excluding business realignment charges, with
adjusted earnings per share-diluted to be in the $2.12 to $2.14
range.
-26-
For 2009,
we expect total pre-tax business realignment and impairment charges for our
global supply chain transformation program, including the increase in the scope
of the program and non-cash pension settlement losses, to be in the range of
$100 million to $120 million, or $0.26 to $0.32 per share-diluted.
Below is
a reconciliation of GAAP and non-GAAP items to the Company’s adjusted earnings
per share-diluted outlook:
2009
|
||
Expected
EPS-diluted
|
$1.80
- $1.88
|
|
Total
expected business realignment and impairment charges
|
$0.26
- $0.32
|
|
Non-GAAP
expected adjusted EPS-diluted
|
$2.12
- $2.14
|
We believe that the disclosure of
non-GAAP expected EPS-diluted excluding business realignment and impairment
charges provides investors with a better comparison of expected year-to-year
operating results.
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 million 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-cash 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
leaving 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 months 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 expected for the fourth quarter of 2009.
-27-
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,” among others.
Our
results could differ materially because of the following factors, which include,
but are not limited to:
·
|
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 could affect future financial
results;
|
·
|
Price
increases may not be sufficient to offset cost increases and maintain
profitability or may result in sales volume declines associated with
pricing elasticity;
|
·
|
Market
demand for new and existing products could
decline;
|
·
|
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;
|
·
|
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;
|
·
|
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.
|
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 million as of October
4, 2009 and was $1.0 million as of
December 31, 2008. 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 decreased from
$44.1 million as of December 31, 2008, to $32.4 million as
of October 4, 2009. 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”) is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’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’s Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.
-28-
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’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’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 internal control
over financial reporting.
-29-
PART
II - OTHER INFORMATION
Items
1, 1A, 3, 4 and 5 have been omitted as not applicable.
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
|
— | — |
Item
6 - Exhibits
The
following items are attached or incorporated herein by reference:
Exhibit
Number
|
Description
|
|
12.1
|
Statement
showing computation of ratio of earnings to fixed charges for the nine
months ended October 4, 2009 and September 28,
2008.
|
|
31.1
|
Certification
of David J. West, Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of Humberto P. Alfonso, Chief Financial Officer, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|
|
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 |
-30-
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.
|
||
THE
HERSHEY COMPANY
|
||
(Registrant)
|
||
Date: November
12, 2009
|
/s/Humberto P.
Alfonso
Humberto P. Alfonso
Chief Financial Officer
|
|
Date: November
12, 2009
|
/s/David W.
Tacka
David W. Tacka
Chief Accounting Officer
|
-31-
EXHIBIT
INDEX
|
||
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 |
-32-