Why did net income decline in 2005 despite higher sales?

Net income fell to $493.2 million from $577.9 million mainly because of $119.0 million in pre-tax business realignment charges recorded in the second half of 2005. The 2004 results also benefited from a $61.1 million reduction in the provision for income taxes from adjusting income tax contingency reserves. Gross margin declined to 38.7% from 39.5%, partly due to lower-margin Mauna Loa and Grupo Lorena businesses.

What does the company expect for 2006?

The company expects 2006 sales growth to be somewhat above its 3%-4% long-term goal and EBIT to grow slightly above its 7%-9% goal, excluding items affecting comparability. EBIT margin is expected to improve by approximately 90 basis points, and EPS-diluted growth is expected to be slightly above the 9%-11% goal. Higher input costs for commodities, transportation and employee benefits are anticipated.

How is the company returning capital to shareholders?

Cash dividends paid on Common and Class B Stock were $221.2 million in 2005, up from $205.7 million. The 2005 annual Common Stock dividend rate was $.98 per share, an increase of 11.4%. The company repurchased $537.0 million of stock in 2005, had $562.9 million of remaining repurchase authorization at year-end, and plans to repurchase approximately $575 million in 2006.

What risks does the company identify around its largest customer and cocoa supply?

McLane Company accounted for more than 20% of total 2005 net sales and approximately 20.3% of accounts receivable, creating a concentration risk. Cocoa is the most significant raw material, with West Africa producing approximately 70% of the world's crop. The filing notes that civil unrest in the Ivory Coast has caused volatile prices, though the company believes a significant supply disruption is unlikely. Commodity price increases could affect results if the company cannot pass costs through to customers.

Who controls the company's voting power?

The Milton Hershey School Trust was entitled to cast approximately 78.7% of the total votes of both classes of common stock as of December 31, 2005. Pennsylvania legislation requires advance notice to the Attorney General of any transaction that would end the Trust's voting control, which could make it more difficult for a third party to acquire a majority of the company's voting stock.

HSY 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2006. Cited figures are marked; the original filing is the authoritative source.

The Hershey Company's 2005 annual report reports net sales of $4.84 billion^a, up $406.7 million, or 9.2%, from 2004, with business acquisitions contributing about 2.9% of the increase.

Net income fell to $493.2 million^b from $577.9 million, and diluted EPS declined to $1.99 from $2.25. The decline reflects $119.0 million in pre-tax business realignment charges recorded in the second half of 2005, along with the lower-margin Mauna Loa and Grupo Lorena businesses. Results in 2004 were boosted by a $61.1 million income tax contingency reserve adjustment.

Excluding items affecting comparability, diluted EPS was $2.28^c, up 13.4%, and the company stated it exceeded its long-term goals for sales, EBIT and EPS growth. Gross margin declined to 38.7% from 39.5%, and EBIT margin fell to 17.8% from 19.9%. Operating cash flow dropped to $461.8 million from $787.8 million, mainly because of $277.5 million in pension contributions.

Short-term debt rose to $819.1 million^d from $343.3 million, and total stockholders' equity fell to $1.02 billion from $1.14 billion, as the company repurchased $537.0 million of common stock. The company plans to repurchase about $575 million of stock in 2006 and expects 2006 sales growth somewhat above its 3%-4% long-term goal, with EBIT margin up about 90 basis points.

The Milton Hershey School Trust holds approximately 78.7% of total votes across both classes of common stock, and McLane Company accounted for more than 20% of 2005 net sales. The company also acquired Scharffen Berger and Joseph Schmidt Confections in August 2005 for a combined $47.1 million, with a possible upward adjustment of up to $61.1 million.

02—Key points

Key Highlights

Net sales rose 9.2% to $4,835,974 thousand, with acquisitions contributing about 2.9% of the increase.
Net income declined to $493.2 million ($1.99 diluted EPS) from $577.9 million ($2.25) in 2004, reflecting $119.0 million of 2005 business realignment charges and the prior-year $61.1 million tax reserve benefit.
Excluding items affecting comparability, diluted EPS was $2.28, an increase of 13.4%.
Gross margin fell to 38.7% from 39.5%, and EBIT margin declined to 17.8% from 19.9%.
Operating cash flow was $461.8 million, down from $787.8 million, primarily due to $277.5 million of pension contributions.
The company repurchased $537.0 million of common stock in 2005 and plans about $575 million of repurchases in 2006.
McLane Company accounted for more than 20% of 2005 net sales, and the Milton Hershey School Trust controls about 78.7% of total votes.

03—Questions

Frequently Asked Questions

Why did net income decline in 2005 despite higher sales?
Net income fell to $493.2 million from $577.9 million mainly because of $119.0 million in pre-tax business realignment charges recorded in the second half of 2005. The 2004 results also benefited from a $61.1 million reduction in the provision for income taxes from adjusting income tax contingency reserves. Gross margin declined to 38.7% from 39.5%, partly due to lower-margin Mauna Loa and Grupo Lorena businesses.
What does the company expect for 2006?
The company expects 2006 sales growth to be somewhat above its 3%-4% long-term goal and EBIT to grow slightly above its 7%-9% goal, excluding items affecting comparability. EBIT margin is expected to improve by approximately 90 basis points, and EPS-diluted growth is expected to be slightly above the 9%-11% goal. Higher input costs for commodities, transportation and employee benefits are anticipated.
How is the company returning capital to shareholders?
Cash dividends paid on Common and Class B Stock were $221.2 million in 2005, up from $205.7 million. The 2005 annual Common Stock dividend rate was $.98 per share, an increase of 11.4%. The company repurchased $537.0 million of stock in 2005, had $562.9 million of remaining repurchase authorization at year-end, and plans to repurchase approximately $575 million in 2006.
What risks does the company identify around its largest customer and cocoa supply?
McLane Company accounted for more than 20% of total 2005 net sales and approximately 20.3% of accounts receivable, creating a concentration risk. Cocoa is the most significant raw material, with West Africa producing approximately 70% of the world's crop. The filing notes that civil unrest in the Ivory Coast has caused volatile prices, though the company believes a significant supply disruption is unlikely. Commodity price increases could affect results if the company cannot pass costs through to customers.
Who controls the company's voting power?
The Milton Hershey School Trust was entitled to cast approximately 78.7% of the total votes of both classes of common stock as of December 31, 2005. Pennsylvania legislation requires advance notice to the Attorney General of any transaction that would end the Trust's voting control, which could make it more difficult for a third party to acquire a majority of the company's voting stock.

04—Continue

← View all 10-K filings