01—Abstract
Summary
Summary of the 10-K filed March 7, 2005. Cited figures are marked; the original filing is the authoritative source.
Hershey Foods Corporation (now The Hershey Company) reported a strong 2004, with record net sales, net income and earnings per share.
Net sales were $4,429,248 thousanda, up from $4,172,551 thousand in 2003, and net income rose to $590,879 thousand from $457,584 thousand. Diluted earnings per share were $2.30, compared with $1.73 in 2003. Results were helped by a $61.1 million non-recurring reduction in the income tax provision from settling federal and state tax audits, which the company said made 2004 earnings not directly comparable with prior years.
Excluding items affecting comparability, diluted EPS was $2.06b in 2004 versus $1.79 in 2003. Gross margin rose to 39.5% from 39.0%, driven by price realization, smaller product weights and supply chain efficiencies, which more than offset higher cocoa and dairy costs. The company repurchased 11,281,589 shares from the Milton Hershey School Trust in July 2004 for about $500.0 million, and total long-term and short-term borrowings rose as a result.
The capitalization ratio increased to 55% from 43%, and the current ratio fell to .9:1 from 1.9:1, largely because $201.2 millionc of 6.7% Notes due 2005 were reclassified to current liabilities. Management said it expects 2005 net sales growth of 6%–7%, gross margin improvement of 30–40 basis points, and an effective tax rate of 36.6%, which it said would leave 2005 net income and EPS relatively flat versus 2004. In December 2004 the company acquired Mauna Loa for $127.8 million, and in October 2004 it acquired Grupo Lorena for $39.0 million.
02—Key points
Key Highlights
- Net sales rose to $4,429,248 thousand in 2004 from $4,172,551 thousand in 2003, driven mainly by higher unit volume from new products and limited edition items.
- Net income was $590,879 thousand in 2004 versus $457,584 thousand in 2003; diluted EPS was $2.30 versus $1.73.
- A $61.1 million adjustment to income tax contingency reserves reduced the 2004 provision for income taxes; diluted EPS excluding items affecting comparability was $2.06 in 2004 versus $1.79 in 2003.
- Gross margin increased to 39.5% in 2004 from 39.0% in 2003, reflecting price realization, product weight reductions and supply chain efficiencies.
- The company purchased 11,281,589 shares of Common Stock from the Milton Hershey School Trust for approximately $500.0 million in July 2004, financed mainly with commercial paper.
- Capitalization ratio rose to 55% from 43%; short-term debt increased to $343,277 thousand, and $201.2 million of 6.7% Notes due 2005 were reclassified to current liabilities.
- For 2005, the company expects net sales growth of 6%–7%, gross margin improvement of 30–40 basis points, and a 36.6% tax rate, resulting in relatively flat net income and EPS versus 2004.
03—Questions
Frequently Asked Questions
How did Hershey's 2004 earnings compare with 2003, and what drove the increase?
Net income was $590.9 million in 2004 versus $457.6 million in 2003, and diluted EPS was $2.30 versus $1.73. The filing attributes the gain to higher income from operations, a $61.1 million non-recurring reduction in the tax provision, lower weighted-average shares from repurchases, and the 2003 cumulative effect of an accounting change.
Why does the company say 2004 results are not directly comparable with prior years?
The 2004 provision for income taxes was reduced by a $61.1 million adjustment to income tax contingency reserves, which resulted from settling federal tax audits for 1999 and 2000 and resolving state audit issues. This lowered the effective income tax rate to 29.3% in 2004, compared with 36.6% in 2003 and 36.7% in 2002.
How did the company's balance sheet and financing change in 2004?
Total assets rose to $3.80 billion, and short-term debt increased by $331.2 million, mainly from commercial paper used to buy back stock from the Milton Hershey School Trust and fund acquisitions. The capitalization ratio increased to 55% from 43%, and the current ratio fell to .9:1 from 1.9:1, partly because $201.2 million of 6.7% Notes due in 2005 were reclassified as current.
What are management's expectations for 2005?
Management expects net sales growth of 6%–7%, including the first-year impact of the Mauna Loa and Grupo Lorena acquisitions, and gross margin improvement of 30–40 basis points. It expects the tax rate to return to an estimated 36.6%, which it said would offset EBIT gains and result in relatively flat net income and EPS versus 2004.
What acquisitions and capital returns did the company make in 2004?
The company acquired Mauna Loa for $127.8 million in December 2004 and Grupo Lorena for $39.0 million in October 2004. It also purchased 11,281,589 shares from the Milton Hershey School Trust for approximately $500.0 million, and repurchased $616,977 thousand of Common Stock during the year according to the cash flow statement.
04—Continue