01—Abstract
Summary
Summary of the 10-K filed February 22, 2013. Cited figures are marked; the original filing is the authoritative source.
The Hershey Company's 2012 Form 10-K reports a strong year: net sales rose 9.3% to $6.64 billion, net income increased to $660.9 milliona, and diluted EPS grew to $2.89 from $2.74.
Management attributed sales growth to net price realization (approximately 5.7%), sales volume (approximately 2.2%), and the Brookside acquisition (approximately 1.9%). Gross margin improved to 43.0% from 41.6%, while SM&A expense rose 15.3% to $1.70 billionb, driven largely by advertising, which increased 15.9% to $480.0 million. Reported EBIT was $1.11 billion, and the company cited adjusted non-GAAP EPS of $3.24, up 14.5%, after excluding business realignment charges, pension expense, and acquisition costs.
Cash flow and balance sheet were solid. Net cash from operating activities was $1.09 billionc, versus $587.9 million in 2011, and capital additions were $258.7 million. The company repurchased $510.6 million of Common Stock and paid $341.2 million in dividends.
Total assets reached $4.75 billiond, and long-term debt was $1.53 billion, with $1.1 billion available under the revolving credit facility. The Next Century manufacturing consolidation program carries total expected pre-tax charges of $190 million to $200 million, with annual savings of $65 million to $80 million expected once complete. For 2013, management guided to net sales growth of 5% to 7%, GAAP EPS growth of 20% to 23%, adjusted EPS growth of 10% to 12%, and advertising spending up approximately 20%.
Key risks include customer concentration, with McLane Company accounting for approximately 22.2% of 2012 net sales, cocoa and other commodity price volatility, and pending antitrust litigation over chocolate pricing in the U.S. and Canada. The Milton Hershey School Trust retains voting control of the company.
02—Key points
Key Highlights
- Net sales increased 9.3% to $6.64 billion in 2012, driven by net price realization of approximately 5.7%, volume growth of approximately 2.2%, and the Brookside acquisition contributing approximately 1.9%.
- Diluted EPS rose to $2.89 from $2.74; adjusted non-GAAP diluted EPS was $3.24, up 14.5%, excluding business realignment, pension, and acquisition-related items.
- Gross margin expanded to 43.0% from 41.6%, while SM&A expense rose 15.3% to $1.70 billion, with advertising up 15.9% to $480.0 million.
- Operating cash flow was $1.09 billion, up from $587.9 million in 2011, supporting $510.6 million in share repurchases and $341.2 million in dividends.
- Brookside Foods was acquired in January 2012 for approximately $172.9 million, adding about $90 million in annual net sales at acquisition.
- 2013 guidance calls for net sales growth of 5% to 7%, GAAP diluted EPS growth of 20% to 23%, and adjusted diluted EPS growth of 10% to 12%.
- Customer concentration is significant: McLane Company accounted for approximately 22.2% of 2012 net sales, and the Milton Hershey School Trust retains voting control of the company.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Hershey kept $0.10.
- Revenue$6.64B100.0%
- Cost of revenue−$3.78B57.0%
- Gross profit$2.86B43.0%
- Operating costs−$1.15B17.3%
- Operating income$1.71B25.7%
- Interest, other & tax−$1.05B15.8%
- Net income$660.9M9.9%
04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 22, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $6.64B$6.08B | +9.3% |
| Cost of Revenue | $3.78B$3.55B | +6.6% |
| Gross Profit | $2.86B$2.53B | +13.0% |
| R&D Expenses | $38.96M$33.20M | +17.3% |
| SG&A Expenses | $1.70B$1.48B | +15.3% |
| Operating Expenses | $5.53B$5.03B | +10.1% |
| Operating Income | $1.71B— | — |
| Interest Expense | $98.51M$78.19M | +26.0% |
| Net Income | $660.93M$628.96M | +5.1% |
| Shares Outstanding (Basic) | 225.04M227K | +99221.2% |
| Shares Outstanding (Diluted) | 228.34M229.92M | −0.7% |
05—Questions
Frequently Asked Questions
What drove the increase in net sales in 2012?
Net sales rose 9.3% to $6.64 billion. The filing attributes approximately 5.7 percentage points to net price realization, about 2.2 points to sales volume (primarily new products in the U.S.), and about 1.9 points to the Brookside acquisition, partly offset by about 0.5 points of unfavorable foreign currency effects.
How did profitability change in 2012?
Gross margin increased to 43.0% from 41.6%, and EBIT rose to $1.11 billion from $1.06 billion. EBIT margin declined to 16.7% from 17.4%, mainly because SM&A expense grew faster than sales and business realignment and impairment charges increased to $83.8 million.
What legal risks does Hershey disclose?
The company faces Canadian Competition Bureau investigations, for which Hershey Canada has reached a tentative settlement and accrued a liability, and U.S. civil antitrust lawsuits over alleged chocolate price overcharges between 2003 and 2008. The filing states it cannot predict the range of potential liability, and management believes these matters should not materially affect financial position or liquidity, though they could affect results of operations and cash flows when accrued or paid.
What is the company's 2013 outlook?
Management expects 2013 net sales growth of 5% to 7%, a 250 to 270 basis point increase in reported gross margin, and GAAP diluted EPS growth of 20% to 23%, or $3.47 to $3.56 per share. Adjusted diluted EPS is projected at $3.56 to $3.63, and advertising is expected to rise approximately 20%.
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