01—Abstract
Summary
Summary of the 10-K filed February 19, 2008. Cited figures are marked; the original filing is the authoritative source.
The Hershey Company's 2007 annual report describes a very difficult year.
Net sales were $4.95 billiona, essentially even with 2006's $4.94 billion, as international growth and the Godrej Hershey acquisition were largely offset by lower U.S. sales. Gross margin fell to 33.0% from 37.8%, and management attributes the decline to sharp increases in commodity costs, particularly dairy, which the filing says totaled approximately $100 million. Net income dropped to $214.2 million from $559.1 million, and diluted EPS fell to $.93 from $2.34, largely because of $412.6 million in net pre-tax business realignment and impairment charges tied to the global supply chain transformation program and the Brazil business.
The company's outlook for 2008 is for continued input cost pressure of approximately $100 millionb, reducing gross margin by 200 basis points, along with higher brand-support and international investment. Management expects net sales to grow 3% to 4% and non-GAAP diluted EPS excluding items affecting comparability of $1.85 to $1.90, versus GAAP EPS of $1.43 to $1.53. The supply chain program carries estimated pre-tax costs of $525 million to $575 million through 2009 and plans to reduce the number of production lines by more than one-third and eliminate 1,500 positions.
Investors should also note several risks disclosed in the filing: an ongoing antitrust investigation by the Canadian Competition Bureau, a European Commission information request, a U.S. Department of Justice inquiry, and roughly 50 U.S. and three Canadian related civil suits. The Milton Hershey School Trust retains voting control, and the board was substantially reconstituted in November 2007. The company also paid $252.3 millionc in dividends and repurchased $256.3 million of stock in 2007.
02—Key points
Key Highlights
- Net sales were $4,946.7 million in 2007, essentially flat versus $4,944.2 million in 2006; U.S. sales declined while international sales and the Godrej Hershey acquisition increased sales.
- Gross margin fell to 33.0% from 37.8%, with cost of sales increases of about $100 million from commodities, primarily dairy products, and 2.6 percentage points of decline attributed to 2007 business realignment charges.
- Net income fell to $214.2 million ($.93 diluted EPS) from $559.1 million ($2.34 diluted EPS), reflecting $412.6 million in net pre-tax business realignment and impairment charges.
- The global supply chain transformation program is expected to cost $525 million to $575 million pre-tax through 2009, with a net reduction of 1,500 positions and more than one-third fewer production lines.
- 2008 guidance calls for net sales growth of 3% to 4% and non-GAAP diluted EPS of $1.85 to $1.90 excluding items affecting comparability, with GAAP EPS of $1.43 to $1.53.
- Operating cash flow was $778.8 million in 2007, versus $723.2 million in 2006, aided by working capital improvements; the company paid $252.3 million in dividends and repurchased $256.3 million of Common Stock.
- The company faces antitrust investigations by Canadian and U.S. authorities and a European Commission information request tied to chocolate pricing practices, plus about 50 U.S. and three Canadian related civil suits, which management believes should not have a material adverse effect.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2007filed February 19, 2008Financial Statements
| Revenue | $4.95B |
| Cost of Revenue | $3.32B |
| Gross Profit | $1.63B |
| SG&A Expenses | $895.87M |
| Operating Expenses | $4.49B |
| Net Income | $214.15M |
05—Questions
Frequently Asked Questions
Why did Hershey's earnings decline so sharply in 2007?
The filing attributes the decline mainly to $412.6 million in net pre-tax business realignment and impairment charges, along with higher input costs, particularly dairy, which increased costs by approximately $100 million. Lower gross margin from reduced price realization due to higher promotional spending, and higher advertising and international infrastructure spending, also contributed.
What is the company's outlook for 2008?
Management expects net sales to grow 3% to 4% and non-GAAP diluted EPS excluding items affecting comparability of $1.85 to $1.90. Input costs are expected to rise about $100 million, reducing gross margin by 200 basis points, and EBIT is expected to decrease excluding business realignment charges. GAAP diluted EPS is expected to be $1.43 to $1.53.
What is the supply chain transformation program and what does it cost?
Announced in February 2007, the three-year program is designed to enhance manufacturing, sourcing and customer service capabilities and reduce inventories. It is expected to cost $525 million to $575 million pre-tax, cut more than one-third of production lines, outsource low value-added items, close several North American plants, and build a new facility in Monterrey, Mexico. Total costs of $400.0 million were recorded in 2007.
Who controls the company and what are the governance considerations?
The Milton Hershey School Trust, through Hershey Trust Company, maintains voting control, holding about 80% of total votes of both classes of common stock. In November 2007, all directors except three resigned, and eight new directors were appointed. Pennsylvania legislation requires advance notice to the Attorney General of any transaction that would end the Trust's voting control.
What legal risks does the company face?
The company is subject to an antitrust investigation by the Canadian Competition Bureau, a request for information from the European Commission, and an inquiry by the U.S. Department of Justice related to its pricing practices. It is party to approximately 50 related civil antitrust suits in the United States and three in Canada. Management believes these should not have a material adverse effect on financial position, liquidity or results of operations.
06—Continue