01—Abstract
Summary
Summary of the 10-K filed February 26, 2016. Cited figures are marked; the original filing is the authoritative source.
The Hershey Company's 2015 Form 10-K reports net sales of $7.39 billiona, down 0.5% from $7.42 billion in 2014, as volume declines of 3.4% and a 1.6% unfavorable foreign currency impact offset favorable net price realization of 3.5%.
Reported net income fell to $512.95 millionb from $846.91 million, and diluted EPS fell to $2.32 from $3.77, driven primarily by a $280.8 million goodwill and intangible impairment tied to the Shanghai Golden Monkey (SGM) acquisition and $120.98 million of business realignment charges, including the June 2015 productivity initiative. Non-GAAP diluted EPS rose to $4.12 from $3.98. North America generated over 87% of consolidated revenue, with segment income up 8.2% to $2.07 billion, while the International and Other segment posted a $98.1 million segment loss driven by China chocolate weakness.
The filing discloses a material weakness in internal control over financial reporting related to hedge accounting for cocoa derivatives, and KPMG LLP issued an adverse opinion on internal control as of December 31, 2015, though its opinion on the financial statements is unqualified. Management stated that the company will no longer designate commodity derivatives for hedge accounting beginning January 1, 2016. For 2016, the company projects net sales growth of approximately 3% excluding currency effects and adjusted diluted EPS of $4.36 to $4.38c, and it authorized an additional $500 million share repurchase program in January 2016.
Cash from operations rose to $1.21 billiond from $844.4 million, while total debt reached $2.4 billion at year-end. The company declared a quarterly dividend of $0.583 per share, its 342nd consecutive quarterly common dividend. Hershey Trust Company maintains voting control through Class B stock.
02—Key points
Key Highlights
- Net sales declined 0.5% to $7,386.6 million, with volume down 3.4% and price realization up 3.5%.
- Diluted EPS fell 38.5% to $2.32 as reported, while non-GAAP diluted EPS rose to $4.12 from $3.98.
- A $280.8 million goodwill and intangible impairment was recorded, primarily for the SGM business in China.
- The company reported a material weakness in internal control over financial reporting related to cocoa derivative hedge accounting; KPMG issued an adverse opinion on internal control.
- North America segment income rose 8.2% to $2,074.0 million, while International and Other reported a $98.1 million segment loss.
- 2016 guidance calls for net sales growth of about 3% excluding currency and adjusted diluted EPS of $4.36 to $4.38.
- Board approved an additional $500 million share repurchase authorization in January 2016; the 2015 cash dividend totaled $476.1 million.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Hershey kept $0.07.
- Revenue$7.39B100.0%
- Cost of revenue−$4.00B54.2%
- Gross profit$3.38B45.8%
- Operating costs−$2.34B31.7%
- Operating income$1.04B14.0%
- Interest, other & tax−$524.8M7.1%
- Net income$513.0M6.9%
Where FY2015 revenue went
$7.39B- Cost of revenue: $4.00B, 54% of revenue
- SG&A: $1.97B, 27% of revenue
- Net income: $513.0M, 6.9% of revenue
- R&D: $49.3M, 0.7% of revenue
- Other operating costs: $326.3M, 4.4% of revenue
- Interest, other & tax: $524.8M, 7.1% of revenue
Kept 6.9% as net incomeNet income $513.0M · 6.9%R&D $49.3M · 0.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 26, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $7.39B$7.42B | −0.5% |
| Cost of Revenue | $4.00B$4.09B | −2.0% |
| Gross Profit | $3.38B$3.34B | +1.4% |
| R&D Expenses | $49.28M$47.55M | +3.6% |
| SG&A Expenses | $1.97B$1.90B | +3.7% |
| Operating Expenses | $4.78B$6.03B | −20.7% |
| Operating Income | $1.04B$1.39B | −25.5% |
| Interest Expense | $109.31M$93.78M | +16.6% |
| Net Income | $512.95M$846.91M | −39.4% |
| Shares Outstanding (Basic) | 219.68M222.56M | −1.3% |
| Shares Outstanding (Diluted) | 221.32M224.84M | −1.6% |
05—Questions
Frequently Asked Questions
Why did Hershey's reported earnings decline so sharply in 2015?
Reported net income fell $333.9 million, or 39.4%, mainly because of the $280.8 million goodwill and intangible impairment tied to the SGM acquisition, along with $120.98 million in business realignment charges including the 2015 productivity initiative. The effective tax rate also rose to 43.1% from 35.2%, partly because the impairment was non-deductible.
What is the material weakness the company disclosed?
Management identified a material weakness in internal control over financial reporting related to its accounting for cocoa derivative financial instruments under ASC 815. Hedge documentation monitoring controls did not operate as designed in the third and fourth quarters of 2015, so cocoa derivatives did not qualify for hedge accounting. KPMG's opinion states that the company did not maintain effective internal control as of December 31, 2015.
What does Hershey expect for 2016?
The company expects net sales growth of approximately 3% excluding currency effects, which are estimated to be about 1.0% unfavorable. It expects reported diluted EPS of $4.18 to $4.23 and adjusted diluted EPS of $4.36 to $4.38. Long-term targets are net sales growth of 3-5% excluding currency and non-GAAP diluted EPS growth of 6-8%.
How is the company returning cash to shareholders?
In 2015 the company paid $476.1 million in cash dividends and repurchased $582.5 million of stock, including $402.5 million under Board-authorized programs. In January 2016 the Board approved an additional $500 million repurchase authorization, and it declared a quarterly dividend of $0.583 per Common share.
Who controls the company's voting power?
Hershey Trust Company, as trustee for the benefit of Milton Hershey School, holds Class B Stock with 10 votes per share and is entitled to cast approximately 80% of the votes on matters where both classes vote together. Pennsylvania law requires advance notice to the Attorney General of any transaction that would end the trust's voting control, which may make a change in control more difficult.
06—Continue