01—Abstract
Summary
Summary of the 10-K filed February 20, 2009. Cited figures are marked; the original filing is the authoritative source.
The Hershey Company's 2008 results were in line with management's expectations, with net sales of $5.13 billiona, up 3.8% from $4.95 billion in 2007, driven by favorable price realization, improved U.S. marketplace performance and international sales gains, partly offset by reduced U.S. sales volume.
Net income rose to $311.4 millionb, or $1.36 per diluted Common Stock share, from $214.2 million, or $.93, in 2007. The increase was largely due to lower business realignment charges tied to the global supply chain transformation program; excluding items affecting comparability, EBIT declined 11.6% and diluted EPS declined 9.6%, reflecting significantly higher input and energy costs. Management is preparing for further cost pressure in 2009.
It expects a commodity cost basket increase of about $175 millionc, a pension expense increase of approximately $70 million, and advertising spend up $30 million to $35 million. It expects 2009 net sales growth of two to three percent and diluted EPS growth below its long-term six-to-eight percent objective. Price increases taken in 2008 will not be fully effective until the second half of 2009 because of previously committed promotions.
Balance sheet changes included total assets falling to $3.63 billiond from $4.25 billion, stockholders' equity falling to $318.2 million from $592.9 million, and long-term debt rising to $1.51 billion after a $250 million note issuance in March 2008. The filing also discloses an antitrust investigation by the Canadian Competition Bureau tied to the Company's pricing practices, along with approximately 92 related civil antitrust suits in the United States and nine in Canada. Management believes these should not have a material adverse effect.
On the governance side, Chairman Kenneth L. Wolfe resigned at the Milton Hershey School Trust's request, and James E.
Nevels was elected non-executive Chairman. The Trust retains voting control, holding approximately 80% of total votes.
02—Key points
Key Highlights
- Net sales were $5,132.8 million in 2008, up 3.8% from $4,946.7 million in 2007, driven by favorable price realization and international growth, partly offset by lower U.S. sales volume.
- Diluted EPS was $1.36 versus $0.93 in 2007; excluding items affecting comparability, EBIT fell 11.6% and diluted EPS fell 9.6%.
- Business realignment and impairment charges were $180.7 million pre-tax in 2008 versus $412.6 million in 2007, including a $45.7 million impairment of trademarks primarily for the Mauna Loa brand.
- Gross margin improved to 34.2% from 33.0%, but SM&A expense rose to 20.9% of sales from 18.1%.
- Management expects 2009 commodity cost increases of about $175 million and pension expense up roughly $70 million, with 2009 net sales growth of two to three percent.
- Operating cash flow was $519.6 million in 2008 versus $778.8 million in 2007; $262.6 million of capital additions and a $250 million note issuance in March 2008 were key cash items.
- The Company faces a Canadian Competition Bureau antitrust investigation and about 92 U.S. and nine Canadian related civil antitrust suits, which management does not expect to be materially adverse.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 20, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $5.13B$4.95B | +3.8% |
| Cost of Revenue | $3.38B$3.32B | +1.8% |
| Gross Profit | $1.76B$1.63B | +7.7% |
| R&D Expenses | $28.10M— | — |
| SG&A Expenses | $1.07B$895.87M | +19.8% |
| Operating Expenses | $4.54B$4.49B | +1.2% |
| Net Income | $311.40M$214.15M | +45.4% |
| Shares Outstanding (Basic) | 227.49M— | — |
05—Questions
Frequently Asked Questions
Why did reported net income rise sharply in 2008 when operating performance weakened?
Net income rose to $311.4 million from $214.2 million mainly because net business realignment charges fell to $180.7 million from $412.6 million. Excluding items affecting comparability, EBIT decreased 11.6% and diluted EPS decreased 9.6%, reflecting higher input and energy costs.
What cost and profit pressures does management expect in 2009?
Management expects the commodity cost basket to rise by about $175 million and pension expense to increase by approximately $70 million, and it plans to raise advertising by $30 million to $35 million. Price increases will not be fully effective until the second half of 2009 because of previously committed promotions, and EPS growth is expected to fall below the long-term six-to-eight percent objective.
How concentrated is the Company's customer base?
McLane Company, Inc., one of the largest U.S. wholesale distributors, accounted for approximately 26% of total 2008 net sales and approximately 27.3% of accounts receivable at year-end 2008. The filing states that no other customer exceeded 10% of accounts receivable.
What legal risks does the filing disclose?
The Company is subject to a Canadian Competition Bureau antitrust investigation related to its pricing practices, and the U.S. Department of Justice has opened an inquiry. It is also a party to approximately 92 related civil antitrust suits in the United States and nine in Canada. Management believes these matters should not have a material adverse effect, and it intends to defend the lawsuits vigorously.
Who controls the Company and what governance changes occurred?
The Milton Hershey School Trust, through Hershey Trust Company, maintains voting control and held approximately 80% of total votes of both classes of common stock. On February 16, 2009, Chairman Kenneth L. Wolfe resigned at the Trust's request, and director James E. Nevels was elected non-executive Chairman.
06—Continue