01—Abstract
Summary
Summary of the 10-K filed February 23, 2007. Cited figures are marked; the original filing is the authoritative source.
The Hershey Company's 2006 annual report describes a difficult year.
Net sales rose 2.6% to $4.94 billiona, but management said results excluding items affecting comparability fell short of long-term goals and were below expectations. Retail takeaway slowed after a shift from limited edition line extensions to new product platforms, and North American chocolate market share declined in the second half. A product recall and temporary plant closure in Canada also weighed on results.
GAAP net income was $559.1 millionb, or $2.34 per diluted share, versus $488.5 million, or $1.97 per diluted share, in 2005, which was burdened by business realignment charges. Excluding items affecting comparability, diluted EPS was $2.37 in 2006 against $2.27 in 2005. The company announced a comprehensive three-year supply chain transformation program in February 2007, expected to be completed by December 31, 2009.
It estimates pre-tax charges and implementation costs of $525 million to $575 millionc, with about $300 million expected in 2007, and projects ongoing annual savings of approximately $170 million to $190 million by 2010. The program includes reducing production lines by more than one-third, outsourcing low value-added items, building a facility in Monterrey, Mexico, and eliminating about 1,500 positions. Management guides to 2007 net sales growth within its 3% to 4% long-term goal, a return to gross margin expansion, and flat EBIT margin excluding items affecting comparability.
The balance sheet shows total assets of $4.16 billiond and long-term debt of $1.25 billion, up from $942.8 million, following $500 million of notes issued in August 2006. Stockholders' equity fell to $683.4 million from $1.02 billion, reflecting $621.6 million of share repurchases and the adoption of SFAS No. 158. Cash dividends rose to $1.08 per share on an annual rate basis, the 32nd consecutive year of increases, and the company completed a $500 million repurchase program in December 2006 and approved an additional $250 million program.
02—Key points
Key Highlights
- Net sales were $4,944.2 million in 2006, up 2.6% from $4,819.8 million in 2005, with U.S. confectionery volume gains contributing over three quarters of the increase.
- GAAP diluted EPS was $2.34 in 2006 versus $1.97 in 2005; excluding items affecting comparability, diluted EPS was $2.37 versus $2.27.
- Net business realignment charges fell to $11.6 million in 2006 from $119.0 million in 2005, and SM&A expense declined 5.8% to $860.3 million.
- A supply chain transformation program announced in February 2007 carries estimated pre-tax charges of $525 million to $575 million and ongoing annual savings of approximately $170 million to $190 million by 2010.
- McLane Company, Inc., the largest customer, accounted for more than 25% of 2006 total net sales and approximately 22.9% of year-end accounts receivable.
- Long-term debt rose to $1,248.1 million from $942.8 million after $500 million of 5.3% and 5.45% notes were issued in August 2006; the company repurchased $621.6 million of common stock in 2006.
- Management described 2006 as a difficult year, with results excluding items affecting comparability falling short of long-term goals and below expectations.
03—Questions
Frequently Asked Questions
Why did Hershey's 2006 results fall short of expectations?
Management attributed the shortfall to a slowdown in retail performance as the company shifted from limited edition line extensions to more sustainable new product platforms, which took longer than expected. Base business sales were hurt by poor merchandising in the second half, and North American chocolate market share declined. Higher obsolescence costs, increased advertising in the fourth quarter, and a product recall and temporary plant closure in Canada also weighed on results.
What is the supply chain transformation program and what will it cost?
Approved by the Board in February 2007, the three-year program is expected to be completed by December 31, 2009. It includes reducing the number of production lines by more than one-third, outsourcing low value-added items, and building a facility in Monterrey, Mexico. The company estimates $525 million to $575 million in pre-tax charges and implementation costs, with approximately $300 million expected in 2007, and gross capital investments of $300 million to $310 million. Ongoing annual savings of approximately $170 million to $190 million are expected by 2010.
What is the company's 2007 outlook?
The company expects 2007 net sales growth within its long-term goal of 3% to 4%, and a return to gross margin expansion excluding items affecting comparability. EBIT is expected to grow 3% to 4% and EBIT margin is expected to be flat, excluding items affecting comparability. Selling, marketing and administrative expenses are expected to rise as a percentage of sales, and capital expenditures are projected at $250 million to $300 million in 2007.
How much did Hershey return to shareholders in 2006?
Cash dividends paid totaled $235.1 million in 2006 on Common and Class B Stock, and the annual Common Stock dividend rate was $1.08 per share, a 10.2% increase over 2005. Share repurchases totaled $621.6 million in 2006. In December 2006 the Board approved an additional $250 million repurchase program, and the company completed a $500 million program that month.
What are the main risks to investors?
Key risks cited include commodity cost volatility for cocoa, sugar, milk, peanuts, almonds, corn sweeteners, natural gas and fuel oil; the ability to pass cost increases to customers; the risk that supply chain savings or program timing and costs differ from expectations; customer concentration with McLane Company, Inc.; intense marketplace competition; and international operations, which generated approximately 10.9% of 2006 net sales outside the United States. The Milton Hershey School Trust also maintains voting control over the company.
04—Continue