UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended July
2, 2006
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ______to_______
Commission
file number 1-183
THE
HERSHEY COMPANY
100
Crystal A Drive
Hershey,
PA 17033
Registrant's
telephone number: 717-534-4200
State
of Incorporation
|
|
IRS
Employer Identification No.
|
Delaware
|
|
23-0691590
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Exchange Act).
Yes x No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common
Stock, $1 par value - 173,353,056 shares, as of July 21, 2006. Class B Common
Stock, $1 par value - 60,816,078 shares, as of July 21, 2006.
THE
HERSHEY COMPANY
INDEX
Part
I. Financial Information
|
Page
Number
|
|
|
Item
1. Consolidated Financial Statements (Unaudited)
|
|
|
|
Consolidated
Statements of Income
|
|
Three
months ended July 2, 2006 and July 3, 2005
|
3
|
|
|
Consolidated
Statements of Income
|
|
Six
months ended July 2, 2006 and July 3, 2005
|
4
|
|
|
Consolidated
Balance Sheets
|
|
July
2, 2006 and December 31, 2005
|
5
|
|
|
Consolidated
Statements of Cash Flows
|
|
Six
months ended July 2, 2006 and July 3, 2005
|
6
|
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of
|
|
Results
of Operations and Financial Condition
|
16
|
|
|
Item
3. Quantitative and Qualitative Disclosures
|
|
About
Market Risk
|
19
|
|
|
Item
4. Controls and Procedures
|
19
|
|
|
|
|
|
|
Part
II. Other Information
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use
|
|
Of
Proceeds
|
20
|
|
|
Item
6. Exhibits
|
20
|
PART
I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements (Unaudited)
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands except per share amounts)
|
For
the Three Months Ended
|
|
July
2,
2006
|
|
July
3,
2005
|
|
|
|
|
Net
Sales
|
$
|
1,052,067
|
|
$
|
988,447
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
Cost
of sales
|
|
643,375
|
|
|
595,152
|
Selling,
marketing and administrative
|
|
221,478
|
|
|
226,658
|
Business
realignment charge, net
|
|
4,240
|
|
|
—
|
|
|
|
|
|
|
Total
costs and expenses
|
|
869,093
|
|
|
821,810
|
|
|
|
|
|
|
Income
before Interest and Income Taxes
|
|
182,974
|
|
|
166,637
|
|
|
|
|
|
|
Interest
expense, net
|
|
27,490
|
|
|
20,625
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
155,484
|
|
|
146,012
|
|
|
|
|
|
|
Provision
for income taxes
|
|
57,044
|
|
|
52,789
|
|
|
|
|
|
|
Net
Income
|
$
|
98,440
|
|
$
|
93,223
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Basic - Common Stock
|
$
|
.43
|
|
$
|
.39
|
|
|
|
|
|
|
Earnings
Per Share - Basic - Class B Common Stock
|
$
|
.38
|
|
$
|
.35
|
|
|
|
|
|
|
Earnings
Per Share - Diluted
|
$
|
.41
|
|
$
|
.37
|
|
|
|
|
|
|
Average
Shares Outstanding-Basic - Common Stock
|
|
175,779
|
|
|
184,362
|
|
|
|
|
|
|
Average
Shares Outstanding-Basic - Class B Common Stock
|
|
60,817
|
|
|
60,818
|
|
|
|
|
|
|
Average
Shares Outstanding - Diluted
|
|
240,124
|
|
|
248,993
|
|
|
|
|
|
|
Cash
Dividends Paid per Share:
|
|
|
|
|
|
Common
Stock
|
$
|
.245
|
|
$
|
.220
|
Class
B Common Stock
|
$
|
.220
|
|
$
|
.200
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands except per share amounts)
|
For
the Six Months Ended
|
|
July
2,
2006
|
|
July
3,
2005
|
|
|
|
|
Net
Sales
|
$
|
2,184,795
|
|
$
|
2,114,861
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
Cost
of sales
|
|
1,346,253
|
|
|
1,290,736
|
Selling,
marketing and administrative
|
|
438,272
|
|
|
459,816
|
Business
realignment charge, net
|
|
7,571
|
|
|
—
|
|
|
|
|
|
|
Total
costs and expenses
|
|
1,792,096
|
|
|
1,750,552
|
|
|
|
|
|
|
Income
before Interest and Income Taxes
|
|
392,699
|
|
|
364,309
|
|
|
|
|
|
|
Interest
expense, net
|
|
52,693
|
|
|
40,029
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
340,006
|
|
|
324,280
|
|
|
|
|
|
|
Provision
for income taxes
|
|
120,598
|
|
|
118,035
|
|
|
|
|
|
|
Net
Income
|
$
|
219,408
|
|
$
|
206,245
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Basic - Common Stock
|
$
|
.95
|
|
$
|
.86
|
|
|
|
|
|
|
Earnings
Per Share - Basic - Class B Common Stock
|
$
|
.85
|
|
$
|
.78
|
|
|
|
|
|
|
Earnings
Per Share - Diluted
|
$
|
.91
|
|
$
|
.83
|
|
|
|
|
|
|
Average
Shares Outstanding-Basic - Common Stock
|
|
177,344
|
|
|
185,047
|
|
|
|
|
|
|
Average
Shares Outstanding-Basic - Class B Common Stock
|
|
60,818
|
|
|
60,824
|
|
|
|
|
|
|
Average
Shares Outstanding - Diluted
|
|
241,644
|
|
|
249,666
|
|
|
|
|
|
|
Cash
Dividends Paid per Share:
|
|
|
|
|
|
Common
Stock
|
$
|
.49
|
|
$
|
.44
|
Class
B Common Stock
|
$
|
.44
|
|
$
|
.40
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
THE
HERSHEY COMPANY
CONSOLIDATED
BALANCE SHEETS
(in
thousands of dollars)
ASSETS
|
July
2,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
Cash
and cash equivalents
|
$
|
23,485
|
|
$
|
67,183
|
|
Accounts
receivable - trade
|
|
369,436
|
|
|
559,289
|
|
Inventories
|
|
857,861
|
|
|
610,284
|
|
Deferred
income taxes
|
|
62,638
|
|
|
78,196
|
|
Prepaid
expenses and other
|
|
131,629
|
|
|
93,988
|
|
Total
current assets
|
|
1,445,049
|
|
|
1,408,940
|
|
Property,
Plant and Equipment, at cost
|
|
3,532,058
|
|
|
3,458,416
|
|
Less-accumulated
depreciation and amortization
|
|
(1,884,838
|
)
|
|
(1,799,278
|
)
|
Net
property, plant and equipment
|
|
1,647,220
|
|
|
1,659,138
|
|
Goodwill
|
|
489,383
|
|
|
487,338
|
|
Other
Intangibles
|
|
140,004
|
|
|
142,626
|
|
Other
Assets
|
|
590,604
|
|
|
597,194
|
|
Total
assets
|
$
|
4,312,260
|
|
$
|
4,295,236
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
$
|
156,423
|
|
$
|
167,812
|
|
Accrued
liabilities
|
|
415,528
|
|
|
507,843
|
|
Accrued
income taxes
|
|
2,638
|
|
|
23,453
|
|
Short-term
debt
|
|
1,134,327
|
|
|
819,059
|
|
Current
portion of long-term debt
|
|
189,422
|
|
|
56
|
|
Total
current liabilities
|
|
1,898,338
|
|
|
1,518,223
|
|
Long-term
Debt
|
|
752,654
|
|
|
942,755
|
|
Other
Long-term Liabilities
|
|
409,729
|
|
|
412,929
|
|
Deferred
Income Taxes
|
|
400,718
|
|
|
400,253
|
|
Total
liabilities
|
|
3,461,439
|
|
|
3,274,160
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
Preferred
Stock, shares issued:
|
|
|
|
|
|
|
none
in 2006 and 2005
|
|
—
|
|
|
—
|
|
Common
Stock, shares issued: 299,085,666 in 2006 and 299,083,266 in
2005
|
|
299,085
|
|
|
299,083
|
|
Class
B Common Stock, shares issued: 60,816,078 in 2006 and 60,818,478 in
2005
|
|
60,816
|
|
|
60,818
|
|
Additional
paid-in capital
|
|
276,538
|
|
|
252,374
|
|
Unearned
ESOP compensation
|
|
(1,597
|
)
|
|
(3,193
|
)
|
Retained
earnings
|
|
3,752,419
|
|
|
3,646,179
|
|
Treasury-Common
Stock shares at cost:
|
|
|
|
|
|
|
125,234,625
in 2006 and 119,377,690 in 2005
|
|
(3,550,969
|
)
|
|
(3,224,863
|
)
|
Accumulated
other comprehensive income (loss)
|
|
14,529
|
|
|
(9,322
|
)
|
Total
stockholders' equity
|
|
850,821
|
|
|
1,021,076
|
|
Total
liabilities and stockholders' equity
|
$
|
4,312,260
|
|
$
|
4,295,236
|
|
The
accompanying notes are an integral part of these consolidated balance
sheets.
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands of dollars)
|
For
the Six Months Ended
|
|
|
July
2,
2006
|
|
July
3,
2005
|
|
Cash
Flows Provided from (Used by) Operating
Activities
|
|
|
|
|
Net
Income
|
$
|
219,408
|
|
$
|
206,245
|
|
Adjustments
to Reconcile Net Income to Net Cash
|
|
|
|
|
|
|
Provided
from Operations:
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
98,059
|
|
|
97,961
|
|
Stock-based compensation expense, net of tax of $10,131 and $11,861,
respectively
|
|
18,487
|
|
|
20,724
|
|
Excess
tax benefits from exercise of stock options
|
|
(3,529
|
)
|
|
(16,245
|
)
|
Deferred
income taxes
|
|
7,156
|
|
|
2,986
|
|
Business
realignment initiatives, net of tax of $1,347
|
|
3,025
|
|
|
—
|
|
Contributions
to pension plans
|
|
(8,592
|
)
|
|
(96,443
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
Accounts
receivable - trade
|
|
189,853
|
|
|
111,950
|
|
Inventories
|
|
(248,777
|
)
|
|
(262,540
|
)
|
Accounts
payable
|
|
(11,389
|
)
|
|
24,920
|
|
Other
assets and liabilities
|
|
(96,350
|
)
|
|
(70,014
|
)
|
Net
Cash Flows Provided from Operating Activities
|
|
167,351
|
|
|
19,544
|
|
|
|
|
|
|
|
|
Cash
Flows Provided from (Used by) Investing
Activities
|
|
|
|
|
|
|
Capital
additions
|
|
(80,233
|
)
|
|
(94,603
|
)
|
Capitalized
software additions
|
|
(7,104
|
)
|
|
(6,024
|
)
|
Net
Cash Flows (Used by) Investing Activities
|
|
(87,337
|
)
|
|
(100,627
|
)
|
|
|
|
|
|
|
|
Cash
Flows Provided from (Used by) Financing
Activities
|
|
|
|
|
|
|
Net
increase in short-term debt
|
|
315,268
|
|
|
338,887
|
|
Repayment
of long-term debt
|
|
(117
|
)
|
|
(1,101
|
)
|
Cash
dividends paid
|
|
(113,168
|
)
|
|
(105,369
|
)
|
Exercise
of stock options
|
|
17,394
|
|
|
69,929
|
|
Excess
tax benefits from exercise of stock options
|
|
3,529
|
|
|
16,245
|
|
Repurchase
of Common Stock
|
|
(346,618
|
)
|
|
(267,633
|
)
|
Net
Cash Flows (Used by) Provided from Financing Activities
|
|
(123,712
|
)
|
|
50,958
|
|
|
|
|
|
|
|
|
Decrease
in Cash and Cash Equivalents
|
|
(43,698
|
)
|
|
(30,125
|
)
|
Cash
and Cash Equivalents, beginning of period
|
|
67,183
|
|
|
54,837
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, end of period
|
$
|
23,485
|
|
$
|
24,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Paid
|
$
|
51,677
|
|
$
|
39,286
|
|
|
|
|
|
|
|
|
Income
Taxes Paid
|
$
|
154,243
|
|
$
|
120,573
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
THE
HERSHEY COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited consolidated financial statements include the accounts
of
The Hershey Company, its wholly-owned subsidiaries and entities in which
it has
a controlling financial interest (the "Company") after elimination of
intercompany accounts and transactions. These statements have been prepared
in
accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. In the opinion of management,
all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Certain reclassifications have
been
made to prior year amounts to conform to the 2006 presentation. Operating
results for the six months ended July 2, 2006, are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2006, because of the seasonal effects of the Company’s
business.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based
Payment
(“SFAS
No. 123R”). SFAS No. 123R addresses the accounting for transactions in
which an enterprise exchanges its valuable equity instruments for employee
services. It also addresses transactions in which an enterprise incurs
liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of those equity instruments
in exchange for employee services. For public entities, the cost of employee
services received in exchange for equity instruments, including employee
stock
options, would be measured based on the grant-date fair value of those
instruments. That cost would be recognized as compensation expense over the
requisite service period (often the vesting period). Generally, no compensation
cost would be recognized for equity instruments that do not vest. The Company
adopted SFAS No. 123R in the fourth quarter of 2005 and applied the modified
retrospective application method to all prior years for which Statement of
Financial Accounting Standards No. 123 was effective. Accordingly, consolidated
financial statements for all prior periods were adjusted to give effect to
the
fair-value-based method of accounting for awards granted, modified or settled
in
cash subsequent to December 31, 1994. For more information, refer to the
consolidated financial statements and notes included in the Company's 2005
Annual Report on Form 10-K.
2.
|
STOCK
COMPENSATION PLANS
|
The
compensation cost that was charged against income for stock compensation
plans
was $15.5 million and $15.8 million for the second quarter of 2006 and 2005,
respectively. The total income tax benefit recognized in the Consolidated
Statements of Income for share-based compensation arrangements was $5.7 million
and $5.8 million for the second quarter of 2006 and 2005,
respectively.
The
compensation cost that was charged against income for stock compensation
plans
was $29.5 million and $32.6 million for the first six months of 2006 and
2005,
respectively. The total income tax benefit recognized in the Consolidated
Statements of Income for share-based compensation arrangements was $10.5
million
and $11.9 million for the first six months of 2006 and 2005,
respectively.
The
fair
value of each stock option grant was estimated on the date of grant using
a
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants under the Company’s Key Employee Incentive Plan
(“Incentive Plan”) in the first six months of 2006 and 2005, respectively:
dividend yields of 1.6% and 1.7%, expected volatility of 24% and 25%, risk-free
interest rates of 4.6% and 3.9%, and expected lives of 6.6 years and 6.5
years.
Stock
Options
A
summary
of the status of the Company’s stock options as of July 2, 2006, and the change
during 2006 is presented below:
|
|
For
the six months ended
July
2, 2006
|
|
Stock
Options
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Term
|
|
Outstanding
at beginning of year
|
|
|
13,725,113
|
|
$37.83
|
|
|
6.6 years
|
|
Granted
|
|
|
1,640,850
|
|
$52.34
|
|
|
|
|
Exercised
|
|
|
(584,923)
|
|
$29.74
|
|
|
|
|
Forfeited
|
|
|
(221,237)
|
|
$45.43
|
|
|
|
|
Outstanding
as of July 2, 2006
|
|
|
14,559,803
|
|
$39.66
|
|
|
6.6 years
|
|
Options
exercisable as of July 2, 2006
|
|
|
8,795,811
|
|
$33.69
|
|
|
5.4 years
|
|
The
weighted-average fair value per share for options granted under the Incentive
Plan during the first six months of 2006 and 2005 was $15.06 and $16.90,
respectively. The total intrinsic value of options exercised during the first
six months of 2006 and 2005 was $13.5 million and $78.4 million,
respectively. As of July 2, 2006, the aggregate intrinsic value of options
outstanding was $236.9 million and the aggregate intrinsic value of options
exercisable was $192.1 million.
As
of
July 2, 2006, there was $56.2 million of total unrecognized compensation
cost related to non-vested stock option compensation arrangements granted
under
the Company’s stock option plans. That cost is expected to be recognized over a
weighted-average period of 2.7 years.
Performance
Stock Units and Restricted Stock Units
A
summary
of the status of the Company’s performance stock units and restricted stock
units as of July 2, 2006, and the change during 2006 is presented
below:
Performance
Stock Units and Restricted Stock Units
|
For
the six
months
ended
July
2, 2006
|
Weighted-average
grant date fair
value
for equity awards or
market
value for liability awards
|
Outstanding
at beginning of year
|
1,191,367
|
$47.01
|
Granted
|
197,440
|
$55.51
|
Performance
assumption change
|
65,247
|
$55.07
|
Vested
|
(98,491)
|
$37.99
|
Forfeited
|
(8,806)
|
$45.28
|
Outstanding
as of July 2, 2006
|
1,346,757
|
$49.18
|
As
of
July 2, 2006, there was $22.8 million of unrecognized compensation cost relating
to non-vested performance stock units and restricted stock units. That cost
is
expected to be recognized over a weighted-average period of 1.9 years. The
total
intrinsic value of share-based liabilities paid combined with the fair value
of
shares vested during the first six months of 2006 and 2005 was $3.7 million
and
$11.7 million, respectively.
Deferred
performance stock units, deferred restricted stock units, deferred directors’
fees and accumulated dividend amounts totaled 691,866 units as of July 2,
2006.
No
stock
appreciation rights were outstanding as of July 2, 2006.
For
more
information on the Company’s stock compensation plans, refer to the consolidated
financial statements and notes included in the Company’s 2005 Annual Report on
Form 10-K.
Interest
expense, net consisted of the following:
|
|
For
the Six Months Ended
|
|
|
|
July
2,
2006
|
|
July
3,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Interest
expense
|
|
$
|
53,531
|
|
$
|
40,839
|
|
Interest
income
|
|
|
(817
|
)
|
|
(810
|
)
|
Capitalized
interest
|
|
|
(21
|
)
|
|
—
|
|
Interest
expense, net
|
|
$
|
52,693
|
|
$
|
40,029
|
|
4.
|
BUSINESS
REALIGNMENT INITIATIVES
|
In
July
2005, the Company announced initiatives intended to advance its value-enhancing
strategy. The Company also announced that it would record a total pre-tax
charge
of approximately $140 million to $150 million, or $.41 to $.44 per share-diluted
in connection with the initiatives. The Company now expects the total net
cost
to be approximately $130 million before tax or $.30 to $.32 per
share-diluted.
During
the second half of 2005, the Company recorded charges totaling $119.0 million
associated with the initiatives. The charges of $119.0 million consisted
of a
$96.5 million business realignment charge and $22.5 million recorded
in cost of sales (together, the “2005 business realignment initiatives”). The
business realignment charge included $69.5 million related to the U.S.
Voluntary Workforce Reduction Program (“VWRP”), $12.8 million for facility
rationalization relating to the closure of the Las Piedras, Puerto Rico plant
and $14.2 million related to streamlining the Company’s international
operations, primarily associated with costs for a Canadian VWRP. The business
realignment charge included $8.3 million for involuntary termination
benefits primarily for Las Piedras plant employees. The $22.5 million
recorded in cost of sales resulted from accelerated depreciation related
to the
closure of the Las Piedras manufacturing facility.
Charges
(credits) associated with business realignment initiatives recorded during
the
second quarter of 2006 were as follows:
|
|
Cost
of Sales
|
|
Business
Realignment
Charge,
net
|
|
Total
|
|
|
|
(in
thousands of dollars)
|
|
2005
Business Realignment
Initiatives
|
|
$
|
—
|
|
$
|
3,727
|
|
$
|
3,727
|
|
Previous
Business Realignment Initiatives
|
|
|
(1,600
|
)
|
|
513
|
|
|
(1,087
|
)
|
Total
|
|
$
|
(1,600
|
)
|
$
|
4,240
|
|
$
|
2,640
|
|
The
$3.7
million charge associated with the 2005 business realignment initiatives
was
related primarily to the U.S. VWRP, in addition to costs for streamlining
the
Company’s international operations and facility rationalization relating to the
closure of the Las Piedras plant. The business realignment charge included
$2.1
million for involuntary terminations. Charges
(credits) associated with previous business realignment initiatives which
began
in 2003 and 2001 resulted from the finalization of the sale of certain
properties, adjustments to liabilities which had previously been
recorded,
and the
impact of the settlement as to several
of the eight former employees who had filed a complaint alleging that the
Company had discriminated against them on the basis of age in connection
with
the 2003 business realignment initiatives.
The
Company does not expect any significant impact as a result of this
case.
Charges
(credits) associated with business realignment initiatives recorded during
the
first six months of 2006 were as follows:
|
|
Cost
of Sales
|
|
Business
Realignment
Charge,
net
|
|
Total
|
|
|
|
(in
thousands of dollars)
|
|
2005
Business Realignment
Initiatives
|
|
$
|
(1,599
|
)
|
$
|
7,058
|
|
$
|
5,459
|
|
Previous
Business Realignment Initiatives
|
|
|
(1,600
|
)
|
|
513
|
|
|
(1,087
|
)
|
Total
|
|
$
|
(3,199
|
)
|
$
|
7,571
|
|
$
|
4,372
|
|
A
credit
of $1.6 million recorded in cost of sales for the 2005 business realignment
initiatives related to higher than expected proceeds from the sale of equipment
from the Las Piedras, Puerto Rico plant. The $7.1 million charge associated
with the 2005 business realignment initiatives related primarily to the U.S.
VWRP, along with costs for streamlining the Company’s international operations
and facility rationalization relating to the closure of the Las Piedras plant.
The business realignment charge included $2.9 million for involuntary
terminations. The 2005 business realignment initiatives are substantially
complete and the Company believes that they will be fully completed by December
31, 2006. Charges (credits) associated with previous business realignment
initiatives which began in 2003 and 2001 resulted from the finalization of
the
sale of certain properties, adjustments to liabilities which had previously
been
recorded, and the impact of the settlement as to several of the eight former
employees who had filed a complaint alleging that the Company had discriminated
against them on the basis of age in connection with the 2003 business
realignment initiatives. The Company does not expect any significant impact
as a
result of this case.
Changes
in liabilities recorded for the 2005 business realignment initiatives were
as
follows:
Accrued
Liabilities
|
|
Balance
12/31/05
|
|
First
Quarter
Utilization
|
|
Second
Quarter
Utilization
|
|
New
charges
during
the
First
Quarter
|
|
New
charges
during
the
Second
Quarter
|
|
Balance
7/02/06
|
|
|
|
(in
thousands of dollars)
|
|
VWRP
|
|
$
|
31,883
|
|
$
|
(5,966
|
)
|
$
|
(5,612
|
)
|
$
|
825
|
|
$
|
1,758
|
|
$
|
22,888
|
|
Facility
rationalization
|
|
|
—
|
|
|
(1,281
|
)
|
|
(247
|
)
|
|
1,281
|
|
|
247
|
|
|
—
|
|
Streamline
international operations
|
|
|
5,888
|
|
|
(3,024
|
)
|
|
(1,775
|
)
|
|
659
|
|
|
831
|
|
|
2,579
|
|
Total
|
|
$
|
37,771
|
|
$
|
(10,271
|
)
|
$
|
(7,634
|
)
|
$
|
2,765
|
|
$
|
2,836
|
|
$
|
25,467
|
|
Cash
payments and the adjustments during the first six months of 2006 resulted
in a
liability balance for the 2003 business realignment initiatives of
$2.4 million as of July 2, 2006.
In
accordance with Statement of Financial Accounting Standards No. 128,
Earnings
Per Share,
Basic
and Diluted Earnings Per Share are computed based on the weighted-average
number
of shares of the Common Stock and the Class B Common Stock outstanding as
follows:
|
|
For
the Three Months Ended
|
|
For
the Six Months Ended
|
|
|
|
July
2,
2006
|
|
July
3,
2005
|
|
July
2,
2006
|
|
July
3,
2005
|
|
|
|
(in
thousands except per share amounts)
|
|
Net
income
|
|
$
|
98,440
|
|
$
|
93,223
|
|
$
|
219,408
|
|
$
|
206,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
175,779
|
|
|
184,362
|
|
|
177,344
|
|
|
185,047
|
|
Class
B Common Stock
|
|
|
60,817
|
|
|
60,818
|
|
|
60,818
|
|
|
60,824
|
|
Total
weighted-average shares - Basic
|
|
|
236,596
|
|
|
245,180
|
|
|
238,162
|
|
|
245,871
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
2,847
|
|
|
3,491
|
|
|
2,848
|
|
|
3,487
|
|
Performance
and restricted stock units
|
|
|
681
|
|
|
322
|
|
|
634
|
|
|
308
|
|
Weighted-average
shares - Diluted
|
|
|
240,124
|
|
|
248,993
|
|
|
241,644
|
|
|
249,666
|
|
Earnings
Per Share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
$
|
.43
|
|
$
|
.39
|
|
$
|
.95
|
|
$
|
.86
|
|
Class
B Common Stock
|
|
$
|
.38
|
|
$
|
.35
|
|
$
|
.85
|
|
$
|
.78
|
|
Earnings
Per Share - Diluted
|
|
$
|
.41
|
|
$
|
.37
|
|
$
|
.91
|
|
$
|
.83
|
|
Employee
stock options for 3,610,655 shares and 1,796,975 shares were antidilutive
and
were excluded from the earnings per share calculation for the three months
ended
July 2, 2006 and July 3, 2005, respectively.
Employee
stock options for 3,610,655 shares and 1,806,575 shares were antidilutive
and
were excluded from the earnings per share calculation for the six months
ended
July 2, 2006 and July 3, 2005, respectively.
6.
|
DERIVATIVE
INSTRUMENTS AND HEDGING
ACTIVITIES
|
The
Company accounts for derivative instruments in accordance with Statement
of
Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities,
as
amended. All derivative instruments currently utilized by the Company, including
foreign exchange forward contracts and options, interest rate swap agreements
and commodities futures contracts, are designated as cash flow hedges.
Net
after-tax gains on cash flow hedging derivatives reflected in comprehensive
income for the three-month and six-month periods ended July 2, 2006
were $7.7 million and $14.3 million, respectively. Net after-tax
losses on cash flow hedging derivatives reflected in comprehensive income
for
the three-month and six-month periods ended July 3, 2005 were $6.7 million
and $.1 million, respectively. Net gains and losses on cash flow hedging
derivatives in the first six months of 2006 were principally associated with
interest rate swap agreements and in the first six months of 2005 were primarily
associated with commodities futures contracts. Reclassification adjustments
from
accumulated other comprehensive income (loss) to income, for gains or losses
on
cash flow hedging derivatives, were reflected in cost of sales. Reclassification
of after-tax losses of $.7 million and $1.3 million for the
three-month and six-month periods ended July 2, 2006 were associated with
commodities futures contracts. Prior year reclassification for commodities
futures contracts reflected after-tax gains of $3.6 million and
$7.5 million for the three-months and six-months ended July 3, 2005. Gains
on commodities futures contracts recognized in cost of sales because of hedge
ineffectiveness were approximately $2.0 million before tax for the
three-month and six-month periods ended July 2, 2006. Losses on commodities
futures contracts recognized in cost of sales as a result of hedge
ineffectiveness were approximately $1.4 million and $1.0 million
before tax for the three-month and six-month periods ended July 3, 2005.
In
February 2006, the Company terminated a forward swap agreement hedging the
anticipated execution of $250 million of term financing because the
transaction was no longer expected to occur by the originally specified time
period or within an additional two-month period of time thereafter. A gain
of
$1.0 million was recorded in the first quarter of 2006 as a result of the
discontinuance of this cash flow hedge.
No other
gains or losses on cash flow hedging derivatives were reclassified from
accumulated other comprehensive income (loss) into income as a result of
the
discontinuance of a hedge because it became probable that a hedged forecasted
transaction would not occur. There were no components of gains or losses
on cash
flow hedging derivatives that were recognized in income because such components
were excluded from the assessment of hedge effectiveness.
As
of
July 2, 2006, the amount of net after-tax gains on cash flow hedging
derivatives, including foreign exchange forward contracts and options, interest
rate swap agreements and commodities futures contracts, expected to be
reclassified into earnings in the next twelve months was approximately
$1.3 million which were primarily associated with foreign exchange
contracts. For more information, refer to the consolidated financial statements
and notes included in the Company's 2005 Annual Report on Form
10-K.
A
summary
of the components of comprehensive income (loss) is as follows:
|
|
For
the Three Months Ended July 2, 2006
|
|
|
|
Pre-Tax
Amount
|
|
Tax
(Expense) Benefit
|
|
After-Tax
Amount
|
|
|
|
(in
thousands of dollars)
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
98,440
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
8,686
|
|
$
|
—
|
|
|
8,686
|
|
Minimum
pension liability adjustments,
net of tax
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Gains
on cash flow hedging derivatives
|
|
|
12,113
|
|
|
(4,390
|
)
|
|
7,723
|
|
Reclassification
adjustments
|
|
|
1,122
|
|
|
(399
|
)
|
|
723
|
|
Total
other comprehensive income
|
|
$
|
21,921
|
|
$
|
(4,789
|
)
|
|
17,132
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
115,572
|
|
|
|
For
the Three Months Ended July 3, 2005
|
|
|
|
Pre-Tax
Amount
|
|
Tax
(Expense)
Benefit
|
|
After-Tax
Amount
|
|
|
|
(in
thousands of dollars)
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
93,223
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
2,241
|
|
$
|
—
|
|
|
2,241
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Losses
on cash flow hedging derivatives
|
|
|
(10,715
|
)
|
|
3,979
|
|
|
(6,736
|
)
|
Reclassification
adjustments
|
|
|
(5,649
|
)
|
|
2,045
|
|
|
(3,604
|
)
|
Total
other comprehensive loss
|
|
$
|
(14,123
|
)
|
$
|
6,024
|
|
|
(8,099
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
85,124
|
|
|
|
For
the Six Months Ended July 2, 2006
|
|
|
|
Pre-Tax
Amount
|
|
Tax
(Expense) Benefit
|
|
After-Tax
Amount
|
|
|
|
(in
thousands of dollars)
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
219,408
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
8,202
|
|
$
|
—
|
|
|
8,202
|
|
Minimum
pension liability adjustments, net of tax
|
|
|
118
|
|
|
(42
|
)
|
|
76
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Gains
on cash flow hedging derivatives
|
|
|
22,402
|
|
|
(8,135
|
)
|
|
14,267
|
|
Reclassification
adjustments
|
|
|
2,037
|
|
|
(731
|
)
|
|
1,306
|
|
Total
other comprehensive income
|
|
$
|
32,759
|
|
$
|
(8,908
|
)
|
|
23,851
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
243,259
|
|
|
|
For
the Six Months Ended July 3, 2005
|
|
|
|
Pre-Tax
Amount
|
|
Tax
(Expense)
Benefit
|
|
After-Tax
Amount
|
|
|
|
(in
thousands of dollars)
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
206,245
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
(387
|
)
|
$
|
—
|
|
|
(387
|
)
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Losses
on cash flow hedging derivatives
|
|
|
(183
|
)
|
|
124
|
|
|
(59
|
)
|
Reclassification
adjustments
|
|
|
(11,858
|
)
|
|
4,317
|
|
|
(7,541
|
)
|
Total
other comprehensive loss
|
|
$
|
(12,428
|
)
|
$
|
4,441
|
|
|
(7,987
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
198,258
|
|
The
components of accumulated other comprehensive income (loss) as shown on the
Consolidated Balance Sheets are as follows:
|
|
July
2,
2006
|
|
December
31,
2005
|
|
|
|
(in
thousands of dollars)
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
8,445
|
|
$
|
243
|
|
Minimum
pension liability adjustments
|
|
|
(3,284
|
)
|
|
(3,360
|
)
|
Cash
flow hedges
|
|
|
9,368
|
|
|
(6,205
|
)
|
Total
accumulated other comprehensive income (loss)
|
|
$
|
14,529
|
|
$
|
(9,322
|
)
|
The
majority of inventories are valued under the last-in, first-out (LIFO) method.
The remaining inventories are stated at the lower of first-in, first-out
(FIFO)
cost or market. Inventories were as follows:
|
|
July
2,
2006
|
|
December
31,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Raw
materials
|
|
$
|
292,991
|
|
$
|
202,826
|
|
Goods
in process
|
|
|
98,412
|
|
|
92,923
|
|
Finished
goods
|
|
|
544,431
|
|
|
385,798
|
|
Inventories
at FIFO
|
|
|
935,834
|
|
|
681,547
|
|
Adjustment
to LIFO
|
|
|
(77,973
|
)
|
|
(71,263
|
)
|
Total
inventories
|
|
$
|
857,861
|
|
$
|
610,284
|
|
The
increase in raw material inventories as of July 2, 2006, resulted from the
timing of deliveries to support manufacturing requirements, reflecting the
seasonality of the Company’s business, and higher costs in 2006. Finished goods
inventories were higher as of July 2, 2006 reflecting an increase in
the mix of certain higher valued new products, along with inventory builds
related to seasonal items and the introduction of new products.
Generally,
the Company's short-term borrowings are in the form of commercial paper or
bank
loans with an original maturity of three months or less. In November 2004,
the
Company entered into a five-year credit agreement with banks, financial
institutions and other institutional lenders (“Five Year Credit Agreement”). The
Five Year Credit Agreement established an unsecured revolving credit facility
under which the Company may borrow up to $900 million with the option to
increase borrowings by an additional $600 million with the concurrence of
the lenders. Funds borrowed may be used for general corporate purposes,
including commercial paper backstop and business acquisitions. For more
information, refer to the consolidated financial statements and notes included
in the Company’s 2005 Annual Report on Form 10-K.
In
March
2006, the Company entered into a new short-term credit agreement to establish
an
unsecured revolving credit facility to borrow up to $400 million, in lieu
of increasing the borrowing limit under the Five Year Credit Agreement. The
agreement will expire on September 15, 2006. Funds may be used for
general corporate purposes.
In
September 2005, the Company filed a shelf registration statement on Form
S-3
that was declared effective in January 2006 under which it could offer, on
a
delayed or continuous basis, up to $750 million aggregate principal amount
of
additional debt securities (the “$750 Million Shelf Registration Statement”). In
May 2006, the Company filed a new shelf registration statement on Form S-3
that
registered an indeterminate amount of debt securities and was effective
immediately upon filing under new Securities and Exchange Commission regulations
effective December 1, 2005 governing “well-known seasoned issuers” (the “WKSI
Registration Statement”). The WKSI Registration Statement replaces, and will be
used in lieu of, the $750 Million Shelf Registration Statement for future
offerings of long-term debt securities. Proceeds from any offering of the
debt
securities available under the WKSI Registration Statement may be used for
general corporate requirements which include reducing existing commercial
paper
borrowings, financing capital additions, and funding contributions to the
Company’s pension plans, future business acquisitions and working capital
requirements.
11.
|
FINANCIAL
INSTRUMENTS
|
The
carrying amounts of financial instruments including cash and cash equivalents,
accounts receivable, accounts payable and short-term debt approximated fair
value as of July 2, 2006 and December 31, 2005, because of the relatively
short
maturity of these instruments. The carrying value of long-term debt, including
the current portion, was $942.1 million as of July 2, 2006, compared with a
fair value of $987.7 million, an increase of $45.6 million over the
carrying value, based on quoted market prices for the same or similar debt
issues.
As
of
July
2,
2006,
the
Company had foreign exchange forward contracts and options maturing primarily
in
2006 and 2007 to purchase $56.1 million in foreign currency, primarily
Australian dollars, British pounds and euros, and to sell $13.2 million in
foreign currency, primarily Mexican pesos, at contracted forward
rates.
The
fair
value of foreign exchange forward contracts is estimated by obtaining quotes
for
future contracts with similar terms, adjusted where necessary for maturity
differences. As of July 2, 2006 and December 31, 2005, the fair value of
foreign
exchange forward contracts and options was an asset of $2.6 million. The
Company does not hold or issue financial instruments for trading
purposes.
In
order
to minimize its financing costs and to manage interest rate exposure, the
Company, from time to time, enters into interest rate swap agreements. In
December 2005, the Company entered into forward swap agreements to hedge
interest rate exposure related to the anticipated $500 million of term
financing expected to be executed during 2006. The average fixed rate on
the
forward swap agreements was 5.1%. In
February 2006, the Company terminated a forward swap agreement hedging the
anticipated execution of $250 million of term financing because the
transaction was no longer expected to occur by the originally specified time
period or within an additional two-month period of time thereafter. A gain
of
$1.0 million was recorded in the first quarter of 2006 as a result of the
discontinuance of this cash flow hedge. The
fair
value of interest rate swap agreements was an asset of $10.9 million as of
July
2,
2006
and a
liability of $4.9 million as of December 31, 2005. The Company's
risk related to interest rate swap agreements is limited to the cost of
replacing such agreements at prevailing market rates.
12.
|
PENSION
AND OTHER POST-RETIREMENT BENEFIT
PLANS
|
Components
of net periodic benefits cost consisted of the following:
|
|
Pension
Benefits
For
the Three Months Ended
|
|
Other
Benefits
For
the Three Months Ended
|
|
|
|
July
2,
2006
|
|
July
3,
2005
|
|
July
2,
2006
|
|
July
3,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Service
cost
|
|
$
|
13,855
|
|
$
|
11,738
|
|
$
|
1,414
|
|
$
|
1,222
|
|
Interest
cost
|
|
|
15,129
|
|
|
14,122
|
|
|
4,928
|
|
|
4,542
|
|
Expected
return on plan assets
|
|
|
(27,067
|
)
|
|
(21,969
|
)
|
|
—
|
|
|
—
|
|
Amortization
of prior service cost
|
|
|
1,141
|
|
|
1,057
|
|
|
(118
|
)
|
|
(360
|
)
|
Amortization
of unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transition
balance
|
|
|
5
|
|
|
70
|
|
|
—
|
|
|
—
|
|
Recognized
net actuarial loss
|
|
|
3,489
|
|
|
2,862
|
|
|
1,084
|
|
|
402
|
|
Administrative
expenses
|
|
|
101
|
|
|
154
|
|
|
—
|
|
|
—
|
|
Net
periodic benefits cost
|
|
|
6,653
|
|
|
8,034
|
|
|
7,308
|
|
|
5,806
|
|
Settlement
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailment
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
amount reflected in earnings
|
|
$
|
6,712
|
|
$
|
8,034
|
|
$
|
7,308
|
|
$
|
5,806
|
|
Employer
contributions of $.6 million and $6.8 million were made during the
second quarter of 2006 to the Company’s pension plans and other benefits plans,
respectively. The Settlement and Curtailment losses recorded during the second
quarter of 2006 related to the termination of a small non-qualified plan.
In the
second quarter of 2005, the Company contributed $50.4 million and
$5.2 million to the Company’s pension plans and other benefits plans,
respectively. The contributions in 2006 and 2005 also included benefit payments
from the non-qualified pension plans and the post-retirement benefit plans.
The
increase in the expected return on plan assets in the second quarter of 2006
compared with the second quarter of 2005 primarily reflects the return on
higher
beginning of year asset balances and employer contributions made during 2005.
|
|
Pension
Benefits
For
the Six Months Ended
|
|
Other
Benefits
For
the Six Months Ended
|
|
|
|
July
2,
2006
|
|
July
3,
2005
|
|
July
2,
2006
|
|
July
3,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Service
cost
|
|
$
|
28,364
|
|
$
|
24,466
|
|
$
|
2,856
|
|
$
|
2,415
|
|
Interest
cost
|
|
|
29,254
|
|
|
27,925
|
|
|
9,539
|
|
|
9,036
|
|
Expected
return on plan assets
|
|
|
(52,635
|
)
|
|
(43,171
|
)
|
|
—
|
|
|
—
|
|
Amortization
of prior service cost
|
|
|
2,287
|
|
|
2,156
|
|
|
95
|
|
|
(731
|
)
|
Amortization
of unrecognized transition balance
|
|
|
9
|
|
|
148
|
|
|
—
|
|
|
—
|
|
Recognized
net actuarial loss
|
|
|
6,758
|
|
|
5,370
|
|
|
1,852
|
|
|
1,310
|
|
Administrative
expenses
|
|
|
403
|
|
|
404
|
|
|
—
|
|
|
—
|
|
Net
periodic benefits cost
|
|
|
14,440
|
|
|
17,298
|
|
|
14,342
|
|
|
12,030
|
|
Settlement
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Curtailment
|
|
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
amount reflected in earnings
|
|
$
|
14,499
|
|
$
|
17,298
|
|
$
|
14,342
|
|
$
|
12,030
|
|
Employer
contributions of $8.6 million and $13.2 million were made during the
first six months of 2006 to the Company’s pension plans and other benefits
plans, respectively. In the first six months of 2005, the Company contributed
$96.4 million and $10.7 million to the Company’s pension and other benefits
plans, respectively. The contributions in 2006 and 2005 also included benefit
payments from the Company's non-qualified pension plans and post-retirement
benefit plans. For 2006, there are no minimum funding requirements for the
domestic plans and minimum funding requirements for the non-domestic plans
are
not material. However, the Company may make additional contributions in 2006
to
improve the funded status. For more information on the Company’s pension and
other post-retirement benefit plans, refer to the consolidated financial
statements and notes included in the Company’s 2005 Annual Report on Form
10-K.
During
the first six months of 2006, the Company repurchased 6,518,439 shares of
Common
Stock for $346.6 million. Of the total shares repurchased, 1,192,572 shares
were purchased for $62.9 million, completing the $250 million share repurchase
program approved by the Company’s Board of Directors in April 2005 and 4,808,781
shares were purchased for $255.8 million under the $500 million program
authorized in December 2005. As of July 2, 2006, $244.2 million remained
available for repurchases of Common Stock under this program. Included in
the
shares repurchased during the first six months of 2006 were 320,685 shares
purchased for $17.9 million from Hershey Trust Company, as trustee for the
benefit of Milton Hershey School. Total shares repurchased also included
517,086
shares purchased for $27.9 million to replenish Treasury Stock reissued
primarily to satisfy stock options obligations. Over time, the Company’s policy
is to repurchase all shares reissued to satisfy stock options
obligations.
14.
|
PENDING
ACCOUNTING PRONOUNCEMENT
|
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No.
109
(“FIN
No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting
for Income Taxes.
FIN No.
48 describes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected
to be
taken in a tax return and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN No. 48 is fully effective as of January 1,
2007.
The Company has not yet determined the impact from the adoption of this new
accounting interpretation.
In
July
2006, the Company and Hershey Trust Company, as trustee for the benefit of
Milton Hershey School (the “Milton Hershey School Trust”), entered into an
agreement under which the Milton Hershey School Trust intends to continue
to
participate on a proportional basis in the Company’s stock repurchase program.
The price at which the Milton Hershey School Trust will sell stock to the
Company is based on a formula applied on a weekly basis; however,
the
Milton Hershey School Trust will not be required to sell shares to the Company
for any week for which the formula price is less than $55 per share. This
agreement is a renewal of a previous agreement which expired on July 31,
2006.
The renewed agreement will expire on February 2, 2007.
Item
2. Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results
of Operations - Second Quarter 2006 vs. Second Quarter
2005
Net
sales
for the second quarter of 2006 increased $63.6 million, or 6.4%, from 2005.
Sales volume increases from new product platforms, particularly Hershey’s
Kissables
brand
chocolate candies, Ice
Breakers
mint and
gum refreshment items, and dark chocolate products, and from higher seasonal
sales contributed approximately three quarters of the increase in net sales.
Sales in 2006 also benefited from improved price realization resulting from
higher list prices and lower returns, discounts and allowances as a percentage
of sales, offset somewhat by a higher rate of promotional allowances. Favorable
foreign currency exchange rates also contributed to the sales increase, but
were
partially offset by lower sales volume in the Company’s international
businesses, primarily in Canada and Brazil.
Cost
of
sales for the second quarter of 2006 increased $48.2 million, or 8.1%, from
the same period in 2005. The cost increase was primarily associated with
the
sales volume increase and higher raw material and other input costs. Higher
costs associated with obsolete, aged and unsaleable products also contributed
to
the cost of sales increase. A decrease in cost of sales of $1.6 million in
2006 resulted from the adjustment of liabilities associated with business
realignment initiatives. Gross margin decreased from 39.8% in the second
quarter
of 2005 to 38.8% in the second quarter of 2006. The margin decline primarily
resulted from increased costs for product obsolescence. Higher raw material
and
other input costs were substantially offset by improved price realization
and
productivity improvements.
Selling,
marketing and administrative expenses for the second quarter of 2006 decreased
2.3% from the comparable period of 2005, resulting from reduced administrative
costs reflecting the impact of the Company’s business realignment and VWRP
initiatives along with other cost controls. A decision to reduce advertising
expense to fund higher trade and consumer promotions also contributed to
the
lower expenses in 2006. Selling, marketing and administrative expenses as
a
percentage of sales, declined from 22.9% in the second quarter of 2005 to
21.1%
in the same period in 2006.
Net
interest expense in the second quarter of 2006 was $6.9 million higher than
the comparable period of 2005, primarily reflecting higher short-term interest
expense resulting from commercial paper borrowings to fund repurchases of
Common
Stock, contributions to the Company’s pension plans in 2005 and working capital
requirements. Higher interest rates in 2006 also contributed to the increase
in
interest expense.
The
effective income tax rate for the second quarter of 2006 was 36.7% compared
with
36.2% for the second quarter of 2005.
Net
income for the second quarter increased $5.2 million, or 5.6%, from 2005 to
2006, and net income per share-diluted increased $.04, or 10.8%. The increase
in
net income per share-diluted was primarily attributable to the sales volume
increase, improved price realization, solid cost control and the impact of
lower
weighted-average shares outstanding resulting from share repurchases which
more
than offset increased costs related to product obsolescence and higher input
costs.
Results
of Operations - First Six Months 2006 vs. First Six Months
2005
Net
sales
for the first six months of 2006 increased $69.9 million, or 3.3%, from
2005. The higher net sales resulted from sales volume increases in the United
States associated with the introduction of new products and improved price
realization from increased list prices which was offset somewhat by a higher
rate of promotional allowances. Favorable foreign currency exchange rates
contributed to the sales increase, offset somewhat by sales volume declines
in
the Company’s international businesses, primarily in Canada. The acquisition of
the Joseph Schmidt and Sharffen Berger businesses in August 2005 also
contributed to the net sales increase.
Cost
of
sales for the first six months increased $55.5 million, or 4.3%, from 2005
to 2006. The cost increase was primarily caused by the higher sales
volume, increased costs associated with obsolete, aged and unsaleable products
and higher logistics and input costs. These cost increases were partially
offset
by a decrease in cost of sales of $3.2 million in 2006 which resulted from
the Company’s business realignment initiatives, reflecting higher than expected
proceeds associated with the closure of the Las Piedras, Puerto Rico plant
in
2005 and adjustments to certain liabilities which had been previously recorded.
Gross margin decreased from 39.0% in 2005 to 38.4% in 2006. The margin decline
resulted primarily from increased logistics and input costs in addition to
higher costs related to product obsolescence. These margin decreases were
offset
somewhat by improved price realization.
Selling,
marketing and administrative expenses for the first six months decreased
by 4.7%
from the comparable period in 2005, primarily reflecting a decision to reduce
advertising expense to fund increased trade and consumer
promotions. Lower administrative expenses were principally associated
with the Company’s business realignment and VWRP initiatives. Selling, marketing
and administrative expenses as a percentage of sales declined from 21.7%
in 2005
to 20.1% in 2006.
Net
interest expense in the first six months was $12.7 million higher than the
comparable period of 2005, primarily reflecting higher short-term interest
expense resulting from commercial paper borrowings to fund repurchases of
Common
Stock, contributions to the Company’s pension plans in 2005 and working capital
requirements. Higher interest rates in 2006 compared with 2005 also contributed
to the increase in interest expense.
The
effective income tax rate for the first six months of 2006 was 35.5%, compared
with 36.4% in 2005. The lower rate primarily reflected the resolution of
state
tax audit issues and the related adjustments to income tax contingency reserves.
An effective income tax rate of 36.2% is expected for the full year
2006.
Net
income for the six months increased $13.2 million, or 6.4%, from 2005 to
2006, and net income per share-diluted increased $.08 or 9.6%. The increase
in
net income per share-diluted was primarily attributable to the sales volume
increase, improved price realization, solid cost control and the impact of
lower
weighted-average shares outstanding resulting from share repurchases. These
increases were partially offset by higher logistics, product obsolescence
and
input costs. Net costs associated with the Company’s business realignment
initiatives reduced net income by $3.0 million or $.01 per
share-diluted.
The
trends of key marketplace metrics, such as retail takeaway and market share,
remained very strong. During the first six months of 2006, the Company achieved
gains in retail takeaway and market share and strengthened its confectionery
category leadership position. In channels of distribution accounting for
approximately 80% of the Company's U.S. confectionery retail business, consumer
takeaway increased by 6.6% for the year-to-date. These channels of distribution
include food, drug, mass merchandisers, including Wal-Mart Stores, Inc.,
and
convenience stores. Market share in measured channels increased .8 share
points
for the year-to-date. Measured channels include sales in the food, drug,
convenience store and mass merchandiser classes of trade, excluding sales
of
Wal-Mart Stores, Inc.
Liquidity
and Capital Resources
Historically,
the Company's major source of financing has been cash generated from operations.
Domestic seasonal working capital needs, which typically peak during the
summer
months, generally have been met by issuing commercial paper. Commercial paper
may also be issued from time to time to finance ongoing business transactions,
such as the refinancing of obligations associated with certain lease
arrangements, the repayment of long-term debt and for other general corporate
purposes. During the first six months of 2006, the Company's cash and cash
equivalents decreased by $43.7 million. Cash provided from operations,
short-term borrowings, cash provided from stock options exercises and cash
on
hand at the beginning of the period was sufficient to fund the repurchase
of
Common Stock for $346.6 million, dividend payments of $113.2 million
and capital expenditures and capitalized software expenditures of
$87.3 million. Cash used by changes in other assets and liabilities was
$96.4 million for the first six months of 2006 compared with
$70.0 million for the same period of 2005. The increase in the amount of
cash used by other assets and liabilities from 2005 to 2006 primarily reflected
cash payments related to business realignment initiatives and the impact
of the
exercise of stock options.
Income
taxes paid of $154.2 million during the first six months of 2006 increased
from $120.6 million for the comparable period of 2005. The payment of
estimated income taxes in 2005 was reduced significantly as a result of tax
return deductions for pension plan contributions.
The
ratio
of current assets to current liabilities decreased to 0.8:1 as of
July 2, 2006 from 0.9:1 as of December 31, 2005. The
Company's capitalization ratio (total short-term and long-term debt as a
percent
of stockholders' equity, short-term and long-term debt) was 71% as of July
2,
2006 and 63% as of December 31, 2005. The higher capitalization ratio
in 2006 reflected the impact of additional short-term borrowings and a reduction
in stockholders’ equity resulting from repurchases of Common Stock.
Generally,
the Company's short-term borrowings are in the form of commercial paper or
bank
loans with an original maturity of three months or less. In November 2004,
the
Company entered into a five-year credit agreement with banks, financial
institutions and other institutional lenders (the “Five Year Credit Agreement”).
The Five Year Credit Agreement established an unsecured revolving credit
facility under which the Company may borrow up to $900 million with the
option to increase borrowings by an additional $600 million with the
concurrence of the lenders. Funds borrowed may be used for general corporate
purposes, including commercial paper backstop and business
acquisitions.
In
March
2006, the Company entered into a new short-term credit agreement to establish
an
unsecured revolving credit facility to borrow up to $400 million, in lieu
of increasing the borrowing limit under the Five Year Credit Agreement. The
agreement
will
expire on September 15, 2006. Funds may be used for general corporate
purposes. The new short-term credit facility was entered into because the
Company expected borrowings to exceed $900 million for a period of time
beginning in March 2006 and ending in September 2006 due to seasonal
working capital needs, share repurchases and other business
activities.
In
September 2005, the Company filed a shelf registration statement on Form
S-3
that was declared effective in January 2006 under which it could offer, on
a
delayed or continuous basis, up to $750 million aggregate principal amount
of
additional debt securities (the “$750 Million Shelf Registration Statement”). In
May 2006, the Company filed a new shelf registration statement on Form S-3
that
registered an indeterminate amount of debt securities and was effective
immediately upon filing under new Securities and Exchange Commission regulations
effective December 1, 2005 governing “well-known seasoned issuers” (the “WKSI
Registration Statement”). The WKSI Registration Statement replaces, and will be
used in lieu of, the $750 Million Shelf Registration Statement for future
offerings of long-term debt securities. Proceeds from any offering of the
debt
securities available under the WKSI Registration Statement may be used for
general corporate requirements which include reducing existing commercial
paper
borrowings, financing capital additions, and funding contributions to the
Company’s pension plans, future business acquisitions and working capital
requirements. The Company expects to issue $500 million of long-term debt
securities during 2006 under the WKSI Registration Statement.
Outlook
The
outlook section contains a number of forward-looking statements, all of which
are based on current expectations. Actual results may differ materially.
Refer
to the Safe Harbor Statement below as well as Risk Factors and other information
contained in the Company’s 2005 Annual Report on Form 10-K for information
concerning the key risks to achieving future performance goals.
The
Company expects sales growth for the full year 2006 to be somewhat above
its
long-term target of 3%-4%. Sales growth is expected to be driven by continuing
market share gains by core confectionery products; innovative new platforms,
including cookies and snack nuts, and refreshment products under the
Ice
Breakers
mint and
gum brand; expanding sales of single-serve items; and capitalizing on consumer
behavior trends via a “trading up” strategy to increase sales and profitability,
particularly with refreshment and dark chocolate products. The Company expects
that solid seasonal performance will continue to contribute to the momentum
for
sales and market share growth during the remainder of the year.
As
part
of a broad-based portfolio review, the Company is in the process of
rationalizing or exiting certain products and/or product lines such as
Ice
Breakers Liquid Ice
mints,
Hershey’s
SmartZone nutrition
bars and Swoops
candies.
In addition, the Company is exploring the possible sale of the Pot
of Gold
boxed
chocolates brand along with the related manufacturing facility.
The
Company expects to achieve its goal for earnings before interest expense
and
income taxes (“EBIT”) for the full year, excluding the impact of its business
realignment initiatives, resulting in an improvement in EBIT margin of 70
to 90
basis points. Broadly higher input costs and increased costs for product
obsolescence are expected to be offset by price realization and improved
supply
chain efficiency, along with continued tight control of selling, marketing
and
administrative expenses. Improvement in selling, marketing and administrative
expenses as a percentage of sales for the full year 2006 is not anticipated
to
be as significant as the improvement during the first half of the year because
the timing of retiring employees created a hiring lag in the first six months
which will be offset somewhat during the remainder of the year.
The
Company expects an increase in net income per share-diluted for the full
year
2006 slightly above its long-term goal of 9%-11%, excluding the impact of
its
business realignment initiatives.
Subsequent
Event
In
July
2006, the Company and Hershey Trust Company, as trustee for the benefit of
Milton Hershey School (the “Milton Hershey School Trust”), entered into an
agreement under which the Milton Hershey School Trust intends to continue
to
participate on a proportional basis in the Company’s stock repurchase program.
The price at which the Milton Hershey School Trust will sell stock to the
Company is based on a formula applied on a weekly basis; however, the Milton
Hershey School Trust will not be required to sell shares to the Company for
any
week for which the formula price is less than $55 per share. This agreement
is a
renewal of a previous agreement which expired on July 31, 2006. The renewed
agreement will expire on February 2, 2007.
Safe
Harbor Statement
The
nature of the Company’s operations and the environment in which it operates
subject it to changing economic, competitive, regulatory and technological
conditions, risks and uncertainties. In connection with the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995, the Company
notes the following factors that, among others, could
cause
future results to differ materially from the forward-looking statements,
expectations and assumptions expressed or implied herein. Many of the
forward-looking statements contained in this document may be identified by
the
use of forward-looking words such as “intend,” “believe,” “expect,”
“anticipate,” “should,” “planned,” “estimated,” and “potential,” among others.
Factors which could cause results to differ materially include, but are not
limited to: the Company’s ability to implement and generate expected ongoing
annual savings from the initiatives to advance its value-enhancing strategy;
changes in raw material and other costs and selling price increases; the
Company’s ability to implement improvements to and reduce costs associated with
the Company’s supply chain; pension cost factors such as actuarial assumptions,
market performance, and employee retirement decisions; changes in the price
of
the Company’s Common Stock, and resulting impacts on the Company’s expenses for
incentive compensation, stock options and certain employee benefits; market
demand for new and existing products; changes in the Company’s business
environment, including actions of competitors and changes in consumer
preferences; changes in governmental laws and regulations, including taxes;
risks and uncertainties related to the Company’s international operations; and
such other matters as discussed in the Company’s Annual Report on Form 10-K for
2005.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
The
potential net loss in fair value of foreign exchange forward contracts and
options and interest rate swap agreements of ten percent resulting from a
hypothetical near-term adverse change in market rates was $1.3 million as
of July 2, 2006 and $.6 million as of December 31, 2005. The market risk
resulting from a hypothetical adverse market price movement of ten percent
associated with the estimated average fair value of net commodity positions
decreased from $12.6 million as of December 31, 2005, to
$.5 million as of July 2, 2006. Market risk represents 10% of the estimated
average fair value of net commodity positions at four dates prior to the
end of
each period.
Item
4. Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed in the Company's reports
filed
or submitted under the Securities Exchange Act of 1934 (the "Exchange Act")
is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed
to
ensure that information required to be disclosed in the Company's reports
filed
under the Exchange Act is accumulated and communicated to management, including
the Company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
As
of the
end of the period covered by this quarterly report, the Company conducted
an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures, as required by Rule 13a-15 under the
Exchange Act. This evaluation was carried out under the supervision and with
the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer. Based upon that evaluation,
the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective. There has been no change
during the most recent fiscal quarter in the Company's internal control over
financial reporting identified in connection with the evaluation that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
PART
II - OTHER INFORMATION
Items
1, 1A, 3, 4 and 5 have been omitted as not applicable.
Item
2 -
Unregistered Sales of Equity Securities and Use of
Proceeds.
Issuer
Purchases of Equity Securities
Period
|
|
(a)
Total
Number
of
Shares
Purchased
|
|
(b)
Average
Price
Paid per
Share
|
|
(c)
Total Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
|
(d)
Approximate
Dollar
Value of
Shares
that May Yet
Be
Purchased Under
the
Plans or
Programs
|
|
|
|
|
|
|
|
|
|
(in
thousands of dollars)
|
|
April
3 through
April
30, 2006
|
|
|
892,803
|
|
|
$51.56
|
|
|
810,800
|
|
|
$348,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
1 through
May
28, 2006
|
|
|
1,005,952
|
|
|
$54.27
|
|
|
874,426
|
|
|
$300,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May
29 through
July
2, 2006
|
|
|
1,114,346
|
|
|
$55.66
|
|
|
1,022,459
|
|
|
$244,171
|
|
Total
|
|
|
3,013,101
|
|
|
|
|
|
2,707,685
|
|
|
|
|
Item
6 - Exhibits
The
following items are attached or incorporated herein by reference:
Exhibit
Number
|
|
Description
|
|
|
|
12.1
|
|
Statement
showing computation of ratio of earnings to fixed charges for
the six
months ended July 2, 2006 and July 3, 2005.
|
|
|
|
31.1
|
|
Certification
of Richard H. Lenny, Chief Executive Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of David J. West, Chief Financial Officer, pursuant to Section
302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1*
|
|
Certification
of Richard H. Lenny, Chief Executive Officer, and David J. West,
Chief
Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002.
|
|
|
|
*Pursuant
to Securities and Exchange Commission Release No. 33-8212, this
certification will be treated as “accompanying” this Quarterly Report on
Form 10-Q and not “filed” as part of such report for purposes of Section
18 of the Exchange Act or otherwise subject to the liability
of Section 18
of the Exchange Act, and this certification will not be deemed
to be
incorporated by reference into any filing under the Securities
Act of
1933, as amended, or the Exchange Act, except to the extent that
the
Company specifically incorporates it by
reference.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
|
|
THE
HERSHEY COMPANY
|
|
(Registrant)
|
|
|
Date: August
9, 2006
|
/s/David
J.
West
David
J. West
Senior
Vice President,
Chief
Financial Officer
|
|
|
Date: August
9, 2006
|
/s/David
W.
Tacka
David
W. Tacka
Vice
President,
Chief
Accounting Officer
|
EXHIBIT
INDEX
|
|
|
Exhibit
12.1
|
Computation
of Ratio of Earnings to Fixed Charges
|
|
|
Exhibit
31.1
|
Certification
of Richard H. Lenny, Chief Executive Officer, pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002
|
|
|
Exhibit
31.2
|
Certification
of David J. West, Chief Financial Officer, pursuant to Section
302 of the
Sarbanes-Oxley Act of 2002
|
|
|
Exhibit
32.1
|
Certification
of Richard H. Lenny, Chief Executive Officer, and David J. West,
Chief
Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley
Act of
2002
|
|
|