Why did reported net income rise so sharply in 2002?

Net income rose to $403.6 million from $207.2 million mainly because 2001 included a $228.3 million pre-tax business realignment and asset impairments charge and a $50.1 million cost of sales charge, while 2002 charges were much smaller ($27.6 million and $6.4 million, respectively). Excluding these items and incremental sale-exploration expenses in both years, net income increased $44.5 million, or 11%.

What is the outlook for cocoa costs and pricing?

Cocoa prices rose sharply in 2002 after a rebellion in the Ivory Coast, and continued unrest could cause further increases. The company states that its costs during 2003 will not necessarily reflect market fluctuations because of forward purchasing, but its cocoa costs will increase substantially in 2004. It plans to offset these pressures through possible price increases or product weight changes, improved sales mix, supply chain savings and cost control.

What did the company say about its 2003 targets?

Management set long-term goals of 3% to 4% revenue growth and 9% to 11% EPS growth, and planned 9% to 11% EPS growth in 2003. It announced an approximate 11% increase in the standard-size candy bar price effective January 1, 2003, representing an average increase of about 3% across the domestic product line, and expects 2003 sales volume growth to be somewhat lower than its long-term goal.

What happened with the possible sale of the company?

On July 25, 2002, the company confirmed that the Milton Hershey School Trust, which controls 77.6% of combined voting power, wanted the company to explore a sale of the entire Corporation. On September 17, 2002, the Trust elected not to sell its controlling interest and asked that the process be terminated. The company incurred $17.2 million of expenses in 2002 related to exploring the sale.

How did the 2002 strike affect operations?

Employees at two principal Hershey, Pennsylvania plants, covering about 3,000 employees, went on strike from April 26, 2002 until June 6, 2002. The filing states the work stoppage did not have a material impact on 2002 results of operations.

HSY 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 2003. Cited figures are marked; the original filing is the authoritative source.

Hershey Foods Corporation reported net sales of $4.12 billion^a for 2002, down from $4.14 billion in 2001, with net sales decreasing $16.9 million as higher promotion costs, returns, discounts and allowances, the divestiture of the Heide brands and a sluggish retail environment offset volume gains in key confectionery brands.

Net income rose to $403.6 million^b ($2.93 diluted EPS) from $207.2 million ($1.50 diluted EPS) in 2001, which included business realignment charges. Excluding business realignment initiatives and incremental expenses to explore a possible sale of the Corporation in both years, net income increased $44.5 million, or 11%, and gross margin excluding those items rose from 36.7% to 38.0%. Cocoa prices rose sharply in 2002 following unrest in the Ivory Coast, and the company states its cocoa costs will increase substantially in 2004.

The company ended 2002 with total assets of $3.48 billion^c, stockholders' equity of $1.37 billion, and a capitalization ratio of 39% versus 44% a year earlier. It contributed $308.1 million to its pension plans during 2002 and announced a plan to repurchase up to $500 million of Common Stock, expected to be completed within approximately 12 months.

The filing also notes that the Milton Hershey School Trust, which controls about 77.3%^d of combined voting power, asked the company to terminate a process to explore a sale of the Corporation in September 2002. Management's 2003 outlook calls for 3% to 4% revenue growth, 9% to 11% EPS growth, and an 11% increase in standard candy bar prices effective January 1, 2003.

02—Key points

Key Highlights

Net sales were $4,120.3 million in 2002, down from $4,137.2 million in 2001, reflecting higher promotion costs, returns and allowances, and divestitures.
Net income increased to $403.6 million ($2.93 diluted EPS) from $207.2 million ($1.50 diluted EPS) in 2001, which included business realignment charges.
Excluding business realignment and sale-exploration expenses, net income increased $44.5 million, or 11%, and gross margin rose from 36.7% to 38.0%.
Cocoa futures annual average prices rose to 76.9 cents per pound in 2002 from 47.1 cents in 2001; the company expects cocoa costs to increase substantially in 2004.
The company contributed $308.1 million to pension plans in 2002 and authorized repurchases of up to $500 million of Common Stock.
Long-term debt was $868.8 million at year-end, with a capitalization ratio of 39%, down from 44% in 2001.
Wal-Mart Stores, Inc. and subsidiaries accounted for approximately 21% of total net sales in 2002.

03—Questions

Frequently Asked Questions

Why did reported net income rise so sharply in 2002?
Net income rose to $403.6 million from $207.2 million mainly because 2001 included a $228.3 million pre-tax business realignment and asset impairments charge and a $50.1 million cost of sales charge, while 2002 charges were much smaller ($27.6 million and $6.4 million, respectively). Excluding these items and incremental sale-exploration expenses in both years, net income increased $44.5 million, or 11%.
What is the outlook for cocoa costs and pricing?
Cocoa prices rose sharply in 2002 after a rebellion in the Ivory Coast, and continued unrest could cause further increases. The company states that its costs during 2003 will not necessarily reflect market fluctuations because of forward purchasing, but its cocoa costs will increase substantially in 2004. It plans to offset these pressures through possible price increases or product weight changes, improved sales mix, supply chain savings and cost control.
What did the company say about its 2003 targets?
Management set long-term goals of 3% to 4% revenue growth and 9% to 11% EPS growth, and planned 9% to 11% EPS growth in 2003. It announced an approximate 11% increase in the standard-size candy bar price effective January 1, 2003, representing an average increase of about 3% across the domestic product line, and expects 2003 sales volume growth to be somewhat lower than its long-term goal.
What happened with the possible sale of the company?
On July 25, 2002, the company confirmed that the Milton Hershey School Trust, which controls 77.6% of combined voting power, wanted the company to explore a sale of the entire Corporation. On September 17, 2002, the Trust elected not to sell its controlling interest and asked that the process be terminated. The company incurred $17.2 million of expenses in 2002 related to exploring the sale.
How did the 2002 strike affect operations?
Employees at two principal Hershey, Pennsylvania plants, covering about 3,000 employees, went on strike from April 26, 2002 until June 6, 2002. The filing states the work stoppage did not have a material impact on 2002 results of operations.

04—Continue

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