01—Abstract
Summary
Summary of the 10-K filed March 15, 1999. Cited figures are marked; the original filing is the authoritative source.
Hershey Foods Corporation (now The Hershey Company) reported record sales and income for 1998, following a record 1997.
Net sales were $4,435,615 thousanda in 1998, up from $4,302,236 thousand in 1997, and net income was $340,888 thousand, or $2.34 per share on a diluted basis, compared with $336,251 thousand and $2.23 in 1997. Management attributed the 1998 sales increase mainly to new confectionery products and higher volume of existing confectionery and grocery brands in North America, partly offset by weaker Asian and Russian sales, Canadian and Mexican currency effects, higher unsalables and lower pasta sales. Gross margin declined, with cost of sales at 59.2% of net sales in 1998 versus 57.9% in 1997, driven by higher milk and cocoa costs.
The company completed the sale of a 94% interest in its U.S. pasta business to New World Pasta, LLC in January 1999, receiving $450.0 millionb in cash proceeds and recording an after-tax gain of approximately $165.0 million, or $1.13 per share diluted, in the first quarter of 1999. The balance sheet strengthened in some respects while leverage remained significant. Stockholders' equity rose to $1,042,301 thousand from $852,806 thousand, and the capitalization ratio fell to 54% from 60%.
Total debt was $879.2 millionc in long-term debt plus $345.9 million in short-term debt at year-end 1998. The company repurchased Common Stock, including 28,000,536 shares purchased from the Milton Hershey School Trust, and in February 1999 approved a new repurchase program of up to $230 million.
Management stated that first-quarter 1999 results may not compare favorably with the prior year, reflecting the pasta divestiture, higher software amortization and international expansion costs. The filing also disclosed an IRS Notice of Proposed Deficiency tied to the Corporate Owned Life Insurance program for 1989 through 1996, which the company intends to contest, and year 2000 remediation expected to be essentially complete by the third quarter of 1999.
02—Key points
Key Highlights
- Record 1998 net sales of $4,435,615 thousand, up from $4,302,236 thousand in 1997
- Net income of $340,888 thousand, with diluted EPS of $2.34 versus $2.23 in 1997
- Cost of sales rose to 59.2% of net sales in 1998 from 57.9% in 1997, mainly on higher milk and cocoa costs
- Sale of 94% of the U.S. pasta business closed in January 1999 for $450.0 million in cash, with an after-tax gain of approximately $165.0 million ($1.13 per diluted share)
- Capitalization ratio improved to 54% from 60%, and stockholders' equity increased to $1,042,301 thousand
- Sales to Wal-Mart Stores, Inc. were approximately 14% of 1998 total net sales
- IRS Notice of Proposed Deficiency related to the COLI program for 1989 through 1996; the company plans to file a protest and vigorously defend its position
03—Questions
Frequently Asked Questions
How did Hershey perform financially in 1998?
Net sales rose to $4,435,615 thousand from $4,302,236 thousand, and net income reached $340,888 thousand, or $2.34 per diluted share, compared with $336,251 thousand and $2.23 per diluted share in 1997. Management described 1998 as a year of record sales and income levels.
What drove the decline in gross margin?
Cost of sales increased to 59.2% of net sales in 1998 from 57.9% in 1997. The filing attributes this mainly to higher costs for milk and cocoa, labor and overhead, higher shipping and distribution costs, and product mix, partly offset by lower costs for certain raw materials and manufacturing efficiencies.
What was the effect of the pasta business sale?
The sale of a 94% majority interest in the U.S. pasta business to New World Pasta, LLC was completed in January 1999. The company received $450.0 million in cash, retained a 6% minority interest, and recorded an after-tax gain of approximately $165.0 million, or $1.13 per diluted share. The pasta business had 1998 net sales of $373.1 million and net income of $25.9 million.
What is the outlook for first-quarter 1999?
Based on preliminary information, first-quarter 1999 results may not compare favorably with the prior year. Net sales are expected to be lower, mainly due to the pasta divestiture, and earnings comparisons will be harder because of higher amortization of capitalized software, the pasta divestiture and expanded international distribution, against a strong first quarter of 1998.
What are the main legal and regulatory risks disclosed?
The company received an IRS Notice of Proposed Deficiency in January 1999 covering 1989 through 1996, mainly disallowing interest expense deductions tied to the Corporate Owned Life Insurance (COLI) program. The company believes it fully complied with tax law, plans to file a protest with the IRS Appeals section in early 1999, and intends to vigorously defend its position. The filing also notes year 2000 remediation costs of $6.0 million to $8.0 million, with remediation expected to be essentially complete by the third quarter of 1999.
04—Continue