Form 10Q_3Q2006
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 October
1, 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 - 171,023,033 shares, as of October 20, 2006. Class B
Common
Stock, $1 par value - 60,816,078 shares, as of October 20, 2006.
THE
HERSHEY COMPANY
INDEX
Part
I. Financial Information
|
Page
Number
|
|
|
Item
1. Consolidated Financial Statements (Unaudited)
|
|
|
|
Consolidated
Statements of Income
|
|
Three
months ended October 1, 2006 and October 2, 2005
|
3
|
|
|
Consolidated
Statements of Income
|
|
Nine
months ended October 1, 2006 and October 2, 2005
|
4
|
|
|
Consolidated
Balance Sheets
|
|
October
1, 2006 and December 31, 2005
|
5
|
|
|
Consolidated
Statements of Cash Flows
|
|
Nine
months ended October 1, 2006 and October 2, 2005
|
6
|
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
|
|
|
Item
2. Management’s Discussion and Analysis of
|
|
Results
of Operations and Financial Condition
|
18
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures
|
|
About
Market Risk
|
22
|
|
|
|
|
Item
4. Controls and Procedures
|
22
|
|
|
|
|
Part
II. Other Information
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use
|
|
Of
Proceeds
|
23
|
|
|
Item
6. Exhibits
|
23
|
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
|
|
|
|
October
1,
2006
|
|
October
2,
2005
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
1,413,361
|
|
$
|
1,368,240
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
870,171
|
|
|
849,939
|
|
Selling,
marketing and administrative
|
|
|
221,842
|
|
|
228,168
|
|
Business
realignment charge, net
|
|
|
1,568
|
|
|
84,843
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
1,093,581
|
|
|
1,162,950
|
|
|
|
|
|
|
|
|
|
Income
before Interest and Income Taxes
|
|
|
319,780
|
|
|
205,290
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
31,835
|
|
|
23,701
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
287,945
|
|
|
181,589
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
104,280
|
|
|
67,437
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
183,665
|
|
$
|
114,152
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Basic - Common Stock
|
|
$
|
.81
|
|
$
|
.48
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Basic - Class B Common Stock
|
|
$
|
.72
|
|
$
|
.43
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Diluted
|
|
$
|
.77
|
|
$
|
.46
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding-Basic - Common Stock
|
|
|
173,232
|
|
|
183,854
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding-Basic - Class B Common Stock
|
|
|
60,816
|
|
|
60,818
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding - Diluted
|
|
|
237,681
|
|
|
248,368
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Paid per Share:
|
|
|
|
|
|
|
|
Common
Stock
|
|
$
|
.2700
|
|
$
|
.2450
|
|
Class
B Common Stock
|
|
$
|
.2425
|
|
$
|
.2200
|
|
|
|
|
|
|
|
|
|
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 Nine Months Ended
|
|
|
|
October
1,
2006
|
|
October
2,
2005
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
3,598,156
|
|
$
|
3,483,101
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses:
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
2,216,424
|
|
|
2,140,675
|
|
Selling,
marketing and administrative
|
|
|
660,114
|
|
|
687,984
|
|
Business
realignment charge, net
|
|
|
9,139
|
|
|
84,843
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
2,885,677
|
|
|
2,913,502
|
|
|
|
|
|
|
|
|
|
Income
before Interest and Income Taxes
|
|
|
712,479
|
|
|
569,599
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
84,528
|
|
|
63,730
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
|
627,951
|
|
|
505,869
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
224,878
|
|
|
185,472
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
403,073
|
|
$
|
320,397
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Basic - Common Stock
|
|
$
|
1.75
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Basic - Class B Common Stock
|
|
$
|
1.57
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Diluted
|
|
$
|
1.68
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding-Basic - Common Stock
|
|
|
175,977
|
|
|
184,648
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding-Basic - Class B Common Stock
|
|
|
60,817
|
|
|
60,822
|
|
|
|
|
|
|
|
|
|
Average
Shares Outstanding - Diluted
|
|
|
240,326
|
|
|
249,233
|
|
|
|
|
|
|
|
|
|
Cash
Dividends Paid per Share:
|
|
|
|
|
|
|
|
Common
Stock
|
|
$
|
.7600
|
|
$
|
.6850
|
|
Class
B Common Stock
|
|
$
|
.6825
|
|
$
|
.6200
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
THE
HERSHEY COMPANY
CONSOLIDATED
BALANCE SHEETS
(in
thousands of dollars)
ASSETS
|
|
October
1,
2006
|
|
December
31,
2005
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
47,635
|
|
$
|
67,183
|
|
Accounts
receivable - trade
|
|
|
720,861
|
|
|
559,289
|
|
Inventories
|
|
|
767,754
|
|
|
610,284
|
|
Deferred
income taxes
|
|
|
66,844
|
|
|
78,196
|
|
Prepaid
expenses and other
|
|
|
97,353
|
|
|
93,988
|
|
Total
current assets
|
|
|
1,700,447
|
|
|
1,408,940
|
|
Property,
Plant and Equipment, at cost
|
|
|
3,563,355
|
|
|
3,458,416
|
|
Less-accumulated
depreciation and amortization
|
|
|
(1,923,465
|
)
|
|
(1,799,278
|
)
|
Net
property, plant and equipment
|
|
|
1,639,890
|
|
|
1,659,138
|
|
Goodwill
|
|
|
490,215
|
|
|
487,338
|
|
Other
Intangibles
|
|
|
139,562
|
|
|
142,626
|
|
Other
Assets
|
|
|
589,348
|
|
|
597,194
|
|
Total
assets
|
|
$
|
4,559,462
|
|
$
|
4,295,236
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
163,959
|
|
$
|
167,812
|
|
Accrued
liabilities
|
|
|
448,938
|
|
|
507,843
|
|
Accrued
income taxes
|
|
|
14,877
|
|
|
23,453
|
|
Short-term
debt
|
|
|
840,029
|
|
|
819,059
|
|
Current
portion of long-term debt
|
|
|
189,005
|
|
|
56
|
|
Total
current liabilities
|
|
|
1,656,808
|
|
|
1,518,223
|
|
Long-term
Debt
|
|
|
1,255,162
|
|
|
942,755
|
|
Other
Long-term Liabilities
|
|
|
411,972
|
|
|
412,929
|
|
Deferred
Income Taxes
|
|
|
405,201
|
|
|
400,253
|
|
Total
liabilities
|
|
|
3,729,143
|
|
|
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
|
|
|
287,016
|
|
|
252,374
|
|
Unearned
ESOP compensation
|
|
|
(798
|
)
|
|
(3,193
|
)
|
Retained
earnings
|
|
|
3,874,806
|
|
|
3,646,179
|
|
Treasury-Common
Stock shares at cost: 127,579,567 in 2006 and 119,377,690 in
2005
|
|
|
(3,684,903
|
)
|
|
(3,224,863
|
)
|
Accumulated
other comprehensive loss
|
|
|
(5,703
|
)
|
|
(9,322
|
)
|
Total
stockholders' equity
|
|
|
830,319
|
|
|
1,021,076
|
|
Total
liabilities and stockholders' equity
|
|
$
|
4,559,462
|
|
$
|
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 Nine Months Ended
|
|
|
|
October
1,
2006
|
|
October
2,
2005
|
|
Cash
Flows Provided from (Used by) Operating
Activities
|
|
|
|
|
|
Net
Income
|
|
$
|
403,073
|
|
$
|
320,397
|
|
Adjustments
to Reconcile Net Income to Net Cash
|
|
|
|
|
|
|
|
Provided
from Operations:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
148,726
|
|
|
163,166
|
|
Stock-based
compensation expense, net of tax of $14,596 and $15,565,
respectively
|
|
|
26,174
|
|
|
27,195
|
|
Excess
tax benefits from exercise of stock options
|
|
|
(5,315
|
)
|
|
(18,305
|
)
|
Deferred
income taxes
|
|
|
20,216
|
|
|
82,827
|
|
Business
realignment initiatives, net of tax of $1,910 and $35,558,
respectively
|
|
|
4,137
|
|
|
65,806
|
|
Contributions
to pension plans
|
|
|
(18,217
|
)
|
|
(275,468
|
)
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable - trade
|
|
|
(161,572
|
)
|
|
(232,624
|
)
|
Inventories
|
|
|
(159,470
|
)
|
|
(185,192
|
)
|
Accounts
payable
|
|
|
(3,853
|
)
|
|
51,814
|
|
Other
assets and liabilities
|
|
|
(27,546
|
)
|
|
(4,912
|
)
|
Net
Cash Flows Provided from (Used by) Operating Activities
|
|
|
226,353
|
|
|
(5,296
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows Provided from (Used by) Investing
Activities
|
|
|
|
|
|
|
|
Capital
additions
|
|
|
(119,357
|
)
|
|
(140,080
|
)
|
Capitalized
software additions
|
|
|
(10,580
|
)
|
|
(8,677
|
)
|
Business
acquisitions
|
|
|
—
|
|
|
(47,074
|
)
|
Net
Cash Flows (Used by) Investing Activities
|
|
|
(129,937
|
)
|
|
(195,831
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows Provided from (Used by) Financing
Activities
|
|
|
|
|
|
|
|
Net
increase in short-term debt
|
|
|
20,970
|
|
|
491,477
|
|
Long-term
borrowings
|
|
|
496,728
|
|
|
248,318
|
|
Repayment
of long-term debt
|
|
|
(176
|
)
|
|
(60,675
|
)
|
Cash
dividends paid
|
|
|
(174,446
|
)
|
|
(163,721
|
)
|
Exercise
of stock options
|
|
|
26,123
|
|
|
76,913
|
|
Excess
tax benefits from exercise of stock options
|
|
|
5,315
|
|
|
18,305
|
|
Repurchase
of Common Stock
|
|
|
(490,478
|
)
|
|
(426,429
|
)
|
Net
Cash Flows (Used by) Provided from Financing Activities
|
|
|
(115,964
|
)
|
|
184,188
|
|
|
|
|
|
|
|
|
|
Decrease
in Cash and Cash Equivalents
|
|
|
(19,548
|
)
|
|
(16,939
|
)
|
Cash
and Cash Equivalents, beginning of period
|
|
|
67,183
|
|
|
54,837
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents, end of period
|
|
$
|
47,635
|
|
$
|
37,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Paid
|
|
$
|
96,676
|
|
$
|
70,611
|
|
|
|
|
|
|
|
|
|
Income
Taxes Paid
|
|
$
|
211,997
|
|
$
|
127,964
|
|
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 nine months ended October 1, 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 $12.3 million and $10.2 million for the third quarter of 2006 and 2005,
respectively. The total income tax benefit recognized in the Consolidated
Statements of Income for share-based compensation arrangements was $4.5 million
and $3.7 million for the third quarter of 2006 and 2005,
respectively.
The
compensation cost that was charged against income for stock compensation plans
was $41.8 million and $42.8 million for the first nine months of 2006 and 2005,
respectively. The total income tax benefit recognized in the Consolidated
Statements of Income for share-based compensation arrangements was $15.0 million
and $15.6 million for the first nine 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 nine 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 October 1, 2006, and the
change during 2006 is presented below:
|
For
the nine months ended
October
1, 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
|
|
1,737,200
|
|
$52.42
|
|
|
Exercised
|
|
(878,114
|
)
|
$29.75
|
|
|
Forfeited
|
|
(299,724
|
)
|
$46.05
|
|
|
Outstanding
as of October 1, 2006
|
|
14,284,475
|
|
$39.90
|
|
6.4
years
|
Options
exercisable as of October 1, 2006
|
|
8,529,084
|
|
$33.88
|
|
5.2
years
|
The
weighted-average fair value per share for options granted under the Incentive
Plan during the first nine months of 2006 and 2005 was $15.07 and $16.91,
respectively. The total intrinsic value of options exercised during the first
nine months of 2006 and 2005 was $20.9 million and $85.8 million,
respectively. As of October 1, 2006, the aggregate intrinsic value of options
outstanding was $209.1 million and the aggregate intrinsic value of options
exercisable was $172.1 million.
As
of
October 1, 2006, there was $49.4 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 2.6 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 October 1, 2006, and the change during 2006 is presented
below:
Performance
Stock Units and Restricted Stock Units
|
For
the nine
months
ended
October
1, 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
|
233,340
|
$55.40
|
Performance
assumption change
|
27,212
|
$54.63
|
Vested
|
(106,483)
|
$39.50
|
Forfeited
|
(15,356)
|
$49.56
|
Outstanding
as of October 1, 2006
|
1,330,080
|
$48.03
|
As
of
October 1, 2006, there was $17.4 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 nine months of 2006 and 2005 was $4.2
million and $12.1 million, respectively. The lower amount in 2006 was
primarily associated with the additional three-year vesting term for the 2003
performance stock unit grants which reduced the number of shares that vested
in
2006 compared with 2005. An additional three-year vesting term was imposed
for
the 2003 grants with accelerated vesting for retirement, disability or
death. The compensation cost for the 2003 grants is being recognized over
a period from three to six years based on grant date fair value.
Deferred
performance stock units, deferred restricted stock units, deferred directors’
fees and accumulated dividend amounts totaled 693,244 units as of October 1,
2006.
No
stock
appreciation rights were outstanding as of October 1, 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 Nine Months Ended
|
|
|
|
October
1,
2006
|
|
October
2,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Interest
expense
|
|
$
|
85,800
|
|
$
|
64,883
|
|
Interest
income
|
|
|
(1,226
|
)
|
|
(1,153
|
)
|
Capitalized
interest
|
|
|
(46
|
)
|
|
—
|
|
Interest
expense, net
|
|
$
|
84,528
|
|
$
|
63,730
|
|
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 pre-tax cost to be under $130 million or $.30 to $.32 per
share-diluted.
During
the third quarter of 2005, the Company recorded charges totaling
$101.4 million associated with its business realignment initiatives. The
charges of $101.4 million consisted of an $84.8 million realignment
charge and $16.6 million recorded in cost of sales (together, the “2005
business realignment initiatives”). The business realignment charge included
$62.6 million related to a U.S. voluntary workforce reduction program
(“VWRP”), $10.0 million for facility rationalization relating to the
closure of the Las Piedras, Puerto Rico plant and $12.2 million related to
streamlining the Company’s international operations, primarily associated with
costs for a Canadian VWRP. The third quarter charge for facility rationalization
included a $4.7 million liability for involuntary termination benefits for
Las Piedras plant employees. The $16.6 million recorded in cost of sales
resulted from accelerated depreciation related to the closure of the Las Piedras
manufacturing facility.
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. The business
realignment charge included $69.5 million related to the 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 the
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
associated with business realignment initiatives recorded during the third
quarter of 2006 were as follows:
|
|
Selling,
Marketing
and Administrative
|
|
Business
Realignment
Charge,
net
|
|
Total
|
|
|
|
(in
thousands of dollars)
|
|
2005
Business Realignment Initiatives
|
|
$
|
108
|
|
$
|
1,568
|
|
$
|
1,676
|
|
The
$.1
million charge recorded in selling, marketing and administrative expenses for
the 2005 business realignment initiatives resulted from accelerated depreciation
relating to the termination of an office building lease. The $1.6 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 $.7 million
for
involuntary terminations.
Charges
(credits) associated with business realignment initiatives recorded during
the
first nine months of 2006 were as follows:
|
|
Cost
of
Sales
|
|
Selling,
Marketing
and Administrative
|
|
Business
Realignment
Charge,
net
|
|
Total
|
|
|
|
(in
thousands of dollars)
|
|
2005
Business Realignment Initiatives
|
|
$
|
(1,599
|
)
|
$
|
108
|
|
$
|
8,626
|
|
$
|
7,135
|
|
Previous
Business Realignment Initiatives
|
|
$
|
(1,600
|
)
|
|
—
|
|
|
513
|
|
$
|
(1,087
|
)
|
Total
|
|
$
|
(3,199
|
)
|
$
|
108
|
|
$
|
9,139
|
|
$
|
6,048
|
|
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 $.1 million charge recorded in
selling, marketing and administrative expenses for the 2005 business realignment
initiatives resulted from accelerated depreciation relating to the termination
of an office building lease. The $8.6 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 $3.6 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
|
|
Utilization
During First
Six
Months
|
|
Third
Quarter
Utilization
|
|
New
Charges
During
First Six Months
|
|
New
Charges
During
the
Third
Quarter
|
|
Balance
10/01/06
|
|
|
|
(in
thousands of dollars)
|
|
VWRP
|
|
$
|
31,883
|
|
$
|
(11,578
|
)
|
$
|
(5,658
|
)
|
$
|
2,583
|
|
$
|
656
|
|
$
|
17,886
|
|
Facility
rationalization
|
|
|
—
|
|
|
(1,528
|
)
|
|
(19
|
)
|
|
1,528
|
|
|
19
|
|
|
—
|
|
Streamline
international operations
|
|
|
5,888
|
|
|
(4,799
|
)
|
|
(1,130
|
)
|
|
1,490
|
|
|
326
|
|
|
1,775
|
|
Total
|
|
$
|
37,771
|
|
$
|
(17,905
|
)
|
$
|
(6,807
|
)
|
$
|
5,601
|
|
$
|
1,001
|
|
$
|
19,661
|
|
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 Nine Months Ended
|
|
|
|
October
1,
2006
|
|
October
2,
2005
|
|
October
1,
2006
|
|
October
2,
2005
|
|
|
|
(in
thousands except per share amounts)
|
|
Net
income
|
|
$
|
183,665
|
|
$
|
114,152
|
|
$
|
403,073
|
|
$
|
320,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
173,232
|
|
|
183,854
|
|
|
175,977
|
|
|
184,648
|
|
Class
B Common Stock
|
|
|
60,816
|
|
|
60,818
|
|
|
60,817
|
|
|
60,822
|
|
Total
weighted-average shares - Basic
|
|
|
234,048
|
|
|
244,672
|
|
|
236,794
|
|
|
245,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
2,804
|
|
|
3,281
|
|
|
2,833
|
|
|
3,419
|
|
Performance
and restricted stock units
|
|
|
829
|
|
|
415
|
|
|
699
|
|
|
344
|
|
Weighted-average
shares - Diluted
|
|
|
237,681
|
|
|
248,368
|
|
|
240,326
|
|
|
249,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
$
|
.81
|
|
$
|
.48
|
|
$
|
1.75
|
|
$
|
1.34
|
|
Class
B Common Stock
|
|
$
|
.72
|
|
$
|
.43
|
|
$
|
1.57
|
|
$
|
1.21
|
|
Earnings
Per Share - Diluted
|
|
$
|
.77
|
|
$
|
.46
|
|
$
|
1.68
|
|
$
|
1.29
|
|
Employee
stock options for 3,658,580 shares and 1,915,530 shares were antidilutive and
were excluded from the earnings per share calculation for the three-month and
nine-month periods ended October 1, 2006 and October 2, 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 losses on cash flow hedging derivatives reflected in comprehensive
income for the three-month and nine-month periods ended October 1, 2006 were
$25.3 million and $11.0 million, respectively. Net after-tax gains on
cash flow hedging derivatives reflected in comprehensive income for the
three-month and nine-month periods ended October 2, 2005 were
$1.0 million and $.9 million, respectively. Net losses on cash flow
derivatives in the third quarter of 2006 were primarily associated with
commodities futures contracts and interest rate swaps, as compared with net
gains primarily related to foreign exchange forward contracts in the third
quarter of 2005. Net losses on cash flow hedging derivatives in the first nine
months of 2006 were principally associated with commodities futures contracts,
partially offset by gains on interest rate swap agreements. Net gains on cash
flow hedging derivatives in the first nine 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 $2.7 million and $4.0 million for the
three-month and nine-month periods ended October 1, 2006 were
associated with commodities futures contracts. Prior year reclassification
for
commodities futures contracts reflected after-tax gains of $5.9 million and
$13.5 million for the three-months and nine-months ended October 2, 2005,
respectively. Gains on commodities futures contracts recognized in cost of
sales
because of hedge ineffectiveness were approximately $.1 million and
$2.0 million before tax for the three-month and nine-month periods ended
October 1, 2006, respectively. Losses on commodities futures contracts
recognized in cost of sales as a result of hedge ineffectiveness were
approximately $1.2 million and $2.2 million before tax for the
three-month and nine-month periods ended October 2, 2005.
In
August
2006, a forward swap agreement hedging the anticipated issuance of
$250 million of 10-year notes matured, resulting in cash receipts of
$3.7 million. The $3.7 million gain on the swap will be amortized as a
reduction to interest expense over the term of the $250 million of 5.45%
Notes due September 1, 2016 which were issued in August 2006.
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
October 1, 2006, the amount of net after-tax losses on cash flow hedging
derivatives, including foreign exchange forward contracts and options, and
commodities futures contracts, expected to be reclassified into earnings in
the
next twelve months was approximately $8.3 million which were primarily
associated with commodities futures 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 October 1, 2006
|
|
|
|
Pre-Tax
Amount
|
|
Tax
(Expense) Benefit
|
|
After-Tax
Amount
|
|
|
|
(in
thousands of dollars)
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
183,665
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
2,295
|
|
$
|
—
|
|
|
2,295
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Losses
on cash flow hedging derivatives
|
|
|
(39,603
|
)
|
|
14,337
|
|
|
(25,266
|
)
|
Reclassification
adjustments
|
|
|
4,293
|
|
|
(1,554
|
)
|
|
2,739
|
|
Total
other comprehensive loss
|
|
$
|
(33,015
|
)
|
$
|
12,783
|
|
|
(20,232
|
)
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
163,433
|
|
|
|
|
|
|
For
the Three Months Ended October 2, 2005
|
|
|
|
Pre-Tax
Amount
|
|
Tax
(Expense) Benefit
|
|
After-Tax
Amount
|
|
|
|
(in
thousands of dollars)
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
114,152
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
18,985
|
|
$
|
—
|
|
|
18,985
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Gains
on cash flow hedging derivatives
|
|
|
1,504
|
|
|
(547
|
)
|
|
957
|
|
Reclassification
adjustments
|
|
|
(9,288
|
)
|
|
3,379
|
|
|
(5,909
|
)
|
Total
other comprehensive income
|
|
$
|
11,201
|
|
$
|
2,832
|
|
|
14,033
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
128,185
|
|
|
|
For
the Nine Months Ended October 1, 2006
|
|
|
|
Pre-Tax
Amount
|
|
Tax
(Expense) Benefit
|
|
After-Tax
Amount
|
|
|
|
(in
thousands of dollars)
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
403,073
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
10,497
|
|
$
|
—
|
|
|
10,497
|
|
Minimum
pension liability adjustments, net of tax
|
|
|
118
|
|
|
(42
|
)
|
|
76
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Losses
on cash flow hedging derivatives
|
|
|
(17,201
|
)
|
|
6,202
|
|
|
(10,999
|
)
|
Reclassification
adjustments
|
|
|
6,330
|
|
|
(2,285
|
)
|
|
4,045
|
|
Total
other comprehensive income
|
|
$
|
(256
|
)
|
$
|
3,875
|
|
|
3,619
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
406,692
|
|
|
|
For
the Nine Months Ended October 2, 2005
|
|
|
|
Pre-Tax
Amount
|
|
Tax
(Expense)
Benefit
|
|
After-Tax
Amount
|
|
|
|
(in
thousands of dollars)
|
|
Net
income
|
|
|
|
|
|
|
|
$
|
320,397
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
$
|
18,597
|
|
$
|
—
|
|
|
18,597
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Gains
on cash flow hedging derivatives
|
|
|
1,321
|
|
|
(423
|
)
|
|
898
|
|
Reclassification
adjustments
|
|
|
(21,150
|
)
|
|
7,700
|
|
|
(13,450
|
)
|
Total
other comprehensive income
|
|
$
|
(1,232
|
)
|
$
|
7,277
|
|
|
6,045
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
$
|
326,442
|
|
The
components of accumulated other comprehensive income (loss) as shown on the
Consolidated Balance Sheets are as follows:
|
|
October
1,
2006
|
|
December
31,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Foreign
currency translation adjustments
|
|
$
|
10,740
|
|
$
|
243
|
|
Minimum
pension liability adjustments
|
|
|
(3,284
|
)
|
|
(3,360
|
)
|
Cash
flow hedges
|
|
|
(13,159
|
)
|
|
(6,205
|
)
|
Total
accumulated other comprehensive income (loss)
|
|
$
|
(5,703
|
)
|
$
|
(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:
|
|
October
1,
2006
|
|
December
31,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Raw
materials
|
|
$
|
260,040
|
|
$
|
202,826
|
|
Goods
in process
|
|
|
98,837
|
|
|
92,923
|
|
Finished
goods
|
|
|
486,850
|
|
|
385,798
|
|
Inventories
at FIFO
|
|
|
845,727
|
|
|
681,547
|
|
Adjustment
to LIFO
|
|
|
(77,973
|
)
|
|
(71,263
|
)
|
Total
inventories
|
|
$
|
767,754
|
|
$
|
610,284
|
|
The
increase in raw material inventories as of October 1, 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 October 1, 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. In
September 2006, the Company entered into an agreement which amended the
short-term credit facility to extend the term of the short-term credit facility
through December 1, 2006, and reduce the total credit limit under the short-term
credit facility from $400 million to $200 million. All other terms and
conditions of the short-term credit facility remain the same. Funds may be
used
for general corporate purposes.
10.
LONG-TERM
DEBT
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
offerings of long-term debt securities occurring subsequent to May
2006.
In
August
2006, the Company issued $250 million of 5.3% Notes due September 1, 2011,
and $250 million of 5.45% Notes due September 1, 2016 under the WKSI
Registration Statement. Proceeds from these debt issuances and any other
offerings of 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 October 1, 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 $1,444.2 million as of October 1, 2006,
compared with a fair value of $1,532.3 million, an increase of
$88.1 million over the carrying value, based on quoted market prices for
the same or similar debt issues.
As
of
October
1, 2006,
the
Company had foreign exchange forward contracts and options maturing primarily
in
2006 and 2007 to purchase $35.6 million in foreign currency, primarily
Australian dollars, euros and British pounds, and to sell $13.6 million in
foreign currency, primarily Mexican pesos and Brazilian reis, 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 October 1, 2006 and December 31, 2005, the fair value of
foreign exchange forward contracts and options was an asset of $1.5 million
and $2.6 million, respectively. 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.
In
August
2006, a forward swap agreement hedging the anticipated issuance of 10-year
notes
matured, resulting in cash receipts of $3.7 million. This gain will be
amortized as a reduction to interest expense over the term of the
$250 million of 5.45% Notes due September 1, 2016 which were issued in
August 2006. As of October 1, 2006, the Company was not a party to any interest
rate swap agreements. The fair value of interest rate swap agreements was 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
|
|
Other
Benefits
|
|
|
|
For
the Three Months Ended
|
|
For
the Three Months Ended
|
|
|
|
October
1,
2006
|
|
October
2,
2005
|
|
October
1,
2006
|
|
October
2,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Service
cost
|
|
$
|
14,168
|
|
$
|
12,397
|
|
$
|
1,434
|
|
$
|
1,452
|
|
Interest
cost
|
|
|
14,710
|
|
|
14,029
|
|
|
4,774
|
|
|
5,114
|
|
Expected
return on plan assets
|
|
|
(26,212
|
)
|
|
(21,859
|
)
|
|
—
|
|
|
—
|
|
Amortization
of prior service cost
|
|
|
1,145
|
|
|
5,024
|
|
|
49
|
|
|
(195
|
)
|
Amortization
of unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transition
balance
|
|
|
4
|
|
|
77
|
|
|
—
|
|
|
—
|
|
Recognized
net actuarial loss (gain)
|
|
|
3,435
|
|
|
(1,225
|
)
|
|
928
|
|
|
731
|
|
Administrative
expenses
|
|
|
176
|
|
|
201
|
|
|
—
|
|
|
—
|
|
Net
periodic benefits cost
|
|
|
7,426
|
|
|
8,644
|
|
|
7,185
|
|
|
7,102
|
|
Settlement
|
|
|
—
|
|
|
23,127
|
|
|
—
|
|
|
1,918
|
|
Curtailment
|
|
|
—
|
|
|
788
|
|
|
—
|
|
|
7,874
|
|
Total
amount reflected in earnings
|
|
$
|
7,426
|
|
$
|
32,559
|
|
$
|
7,185
|
|
$
|
16,894
|
|
Employer
contributions of $9.6 million and $5.0 million were made during the
third quarter of 2006 to the Company’s pension plans and other benefits plans,
respectively. In the third quarter of 2005, the Company contributed
$179.0 million and $5.4 million to the Company’s pension plans 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. The increase in the expected return on plan
assets in the third quarter of 2006 compared with the third quarter of 2005
primarily reflects the return on higher beginning of year asset balances and
employer contributions made during 2005.
|
|
Pension
Benefits
|
|
Other
Benefits
|
|
|
|
For
the Nine Months Ended
|
|
For
the Nine Months Ended
|
|
|
|
October
1,
2006
|
|
October
2,
2005
|
|
October
1,
2006
|
|
October
2,
2005
|
|
|
|
(in
thousands of dollars)
|
|
Service
cost
|
|
$
|
42,532
|
|
$
|
36,863
|
|
$
|
4,290
|
|
$
|
3,867
|
|
Interest
cost
|
|
|
43,964
|
|
|
41,954
|
|
|
14,313
|
|
|
14,150
|
|
Expected
return on plan assets
|
|
|
(78,847
|
)
|
|
(65,030
|
)
|
|
—
|
|
|
—
|
|
Amortization
of prior service cost
|
|
|
3,432
|
|
|
7,180
|
|
|
144
|
|
|
(926
|
)
|
Amortization
of unrecognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transition
balance
|
|
|
13
|
|
|
225
|
|
|
—
|
|
|
—
|
|
Recognized
net actuarial loss
|
|
|
10,193
|
|
|
4,145
|
|
|
2,780
|
|
|
2,041
|
|
Administrative
expenses
|
|
|
579
|
|
|
605
|
|
|
—
|
|
|
—
|
|
Net
periodic benefits cost
|
|
|
21,866
|
|
|
25,942
|
|
|
21,527
|
|
|
19,132
|
|
Settlement
|
|
|
28
|
|
|
23,127
|
|
|
—
|
|
|
1,918
|
|
Curtailment
|
|
|
31
|
|
|
788
|
|
|
—
|
|
|
7,874
|
|
Total
amount reflected in earnings
|
|
$
|
21,925
|
|
$
|
49,857
|
|
$
|
21,527
|
|
$
|
28,924
|
|
Employer
contributions of $18.2 million and $18.2 million were made during the
first nine months of 2006 to the Company’s pension plans and other benefits
plans, respectively. The settlement and curtailment losses which were recorded
during the second quarter of 2006 related to the termination of a small
non-qualified plan. The settlement and curtailment losses recorded during the
three months and nine months ended October 2, 2005, were associated with the
voluntary workforce reduction program. In the first nine months of 2005, the
Company contributed $275.5 million and $16.1 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. The Company does not anticipate any
significant contributions during the remainder of 2006. 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 nine months of 2006, the Company repurchased 9,183,448 shares of
Common Stock for $490.5 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 7,203,232 shares were purchased for $384.9 million under the $500
million program authorized in December 2005. As of October 1, 2006,
$115.1 million remained available for repurchases of Common Stock under
this program. Included in the shares repurchased during the first nine months
of
2006 were 689,704 shares purchased for $38.5 million from Hershey Trust
Company, as trustee for the benefit of Milton Hershey School. Total shares
repurchased also included 787,644 shares purchased for $42.7 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.
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.
14.
|
PENDING
ACCOUNTING PRONOUNCEMENTS
|
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 effective for the Company
as
of January 1, 2007. The Company is in the process of determining the impact
of
FIN No. 48, but does not expect any significant changes to the recognition
and
measurement of its tax positions or to its effective income tax rate as a result
of the adoption of this new accounting interpretation.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, Fair
Value Measurements
(“SFAS
No. 157”). SFAS No. 157 establishes a framework for measuring fair value in
GAAP, and expands disclosures about fair value measurements. SFAS No. 157
applies under other accounting pronouncements that require or permit fair value
measurements. SFAS No. 157 is effective for the Company beginning January 1,
2008. The Company has not yet determined the impact of the adoption of this
new
accounting standard.
Also
in
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans,
an
amendment of FASB Statements No. 87, 88, 106, and 132 (R) (“SFAS No. 158”).
SFAS No. 158 requires an employer that is a business entity and sponsors one
or
more single-employer defined benefit plans to:
·
|
Recognize
the funded status of a benefit plan—measured as the difference between
plan assets at fair value and the benefit obligation—in its statement of
financial position. For a pension plan, the benefit obligation is
the
projected benefit obligation; for any other post-retirement benefit
plan,
such as a retiree health care plan, the benefit obligation is the
accumulated post-retirement benefit obligation.
|
·
|
Recognize
as a component of other comprehensive income, net of tax, the gains
or
losses and prior service costs or credits that arise during the period
but
are not recognized as components of net periodic benefit
cost.
|
·
|
Measure
defined benefit plan assets and obligations as of the date of the
employer’s fiscal year-end statement of financial
position.
|
·
|
Disclose
in the notes to financial statements additional information about
certain
effects on net periodic benefit cost for the next fiscal year that
arise
from delayed recognition of the gains or losses, prior service costs
or
credits, and transition asset or
obligation.
|
The
recognition and related disclosure provisions of SFAS No. 158 are effective
for
the Company as of December 31, 2006. Based on the funded status of the
Company’s pension and post-retirement benefit plans measured as of
December 31, 2005, SFAS No. 158 will result in a reduction of assets
related to its pension plans, with a corresponding reduction of stockholders’
equity. The recognition of additional post-retirement benefit plan liabilities
will also result in a reduction of stockholders’ equity. The after-tax impact of
these accounting changes is expected to result in a total reduction to
stockholders’ equity of approximately $150 million to $250 million.
There will be no impact on the Company's results of operations as
a result of the adoption of SFAS No. 158.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB
108”), which provides interpretive guidance on the consideration of the effects
of prior year misstatements in quantifying current year misstatements for the
purpose of a materiality assessment. SAB 108 is effective for the Company as
of
December 31, 2006. The Company is evaluating the possible impact on its
financial position, if any, related to implementation of SAB 108.
In
October 2006, the Company announced that it is redesigning its U.S. pension
and
savings plans to maintain competitive retirement benefits for its employees
while reducing future company pension costs. The changes, effective January
1,
2007, will affect approximately 6,400 U.S. employees not covered by a collective
bargaining agreement.
The
Company’s new retirement program will include the following:
·
|
A
higher company match in the 401(k) plan to encourage and support
employees
in saving for retirement.
|
·
|
A
modified defined benefit pension plan that recognizes both age and
service, provides future benefits at a reduced rate for current employees,
and is closed to new employees hired on or after January 1,
2007.
|
·
|
A
company contribution in the 401(k) plan, in addition to the increased
company match, for employees hired on or after January 1,
2007.
|
The
changes to retirement benefits protect employees’ previously earned pension
benefits and will not affect current retirees and terminated employees with
a
deferred pension benefit. Changes have also been made to the Company’s
Supplemental Executive Retirement Plan and certain other non-qualified plans
to
reduce future costs.
In
October 2006, the Company purchased the assets of Dagoba Organic Chocolates,
LLC
based in Ashland, Oregon. Dagoba is primarily sold in natural food and gourmet
stores across the country and is known for its high-quality organic chocolate
bars, drinking chocolates and baking products.
Item
2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results
of Operations - Third Quarter 2006 vs. Third Quarter
2005
Net
sales
for the third quarter of 2006 increased $45.1 million, or 3.3%, from 2005.
The net sales increase primarily reflected sales volume increases in the United
States from new products, particularly Hershey’s
Kissables
brand
chocolate candies, and new product platforms, including dark and premium
chocolate products and Ice
Breakers
mint and
gum refreshment items, along with solid seasonal sales.
Cost
of
sales for the third quarter of 2006 increased $20.2 million or 2.4% from the
same period of 2005. The cost increase in 2006 was primarily associated with
the
sales volume increase and higher input costs, particularly for energy and raw
materials, partially offset by $16.6 million related to the Company’s
business realignment initiatives included in cost of sales in 2005. Gross margin
increased from 37.9% in the third quarter of 2005 to 38.4% in the third quarter
of 2006, however, gross margin in 2005 was reduced by 1.2 percentage points
as a
result of costs associated with the Company’s business realignment initiatives.
Gross margin in the third quarter of 2006 was negatively impacted primarily
as a
result of increased input costs and an unfavorable sales mix, offset somewhat
by
improved supply chain productivity and increased gross margin for the Company’s
international businesses.
Selling,
marketing and administrative expenses for the third quarter of 2006 decreased
2.8% from the comparable period of 2005, primarily resulting from reduced
administrative costs reflecting the impact of the Company’s business realignment
initiatives, including the VWRP, along with other cost controls and reduced
incentive compensation expense. These cost decreases were offset somewhat by
higher consumer promotion and advertising expenses. Selling, marketing and
administrative expenses as a percentage of sales declined from 16.7% in the
third quarter of 2005, to 15.7% in the same period in 2006.
Net
interest expense in the third quarter of 2006 was $8.1 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 third quarter of 2006 was 36.2% compared
with
37.1% for the third quarter of 2005. The impact of the tax effect on the
business realignment charges recorded in 2005 increased the effective income
tax
rate by .7 percentage points.
Net
income for the third quarter increased $69.5 million from 2005 to 2006, and
net income per share-diluted increased $.31. Net income in 2006 was reduced
by
$1.1 million, or $.01 per share-diluted, and net income in 2005 was reduced
by $65.8 million, or $.26 per share-diluted, as a result of charges
associated with the Company’s business realignment initiatives which were
recorded in each period. The higher sales volume, lower administrative expenses
and the impact of lower weighted average shares outstanding resulting from
share
repurchases contributed to the increase in earnings per share-diluted in
2006.
The
trends of key marketplace metrics, such as retail takeaway and market share,
were below expectations in the third quarter of 2006. During that period, the
Company achieved a modest gain in retail takeaway, but market share declined.
In
channels of distribution accounting for approximately 80% of the Company's
U.S.
confectionery retail business,
consumer takeaway increased by 0.9% for the quarter. These channels of
distribution include food, drug, mass merchandisers, including Wal-Mart Stores,
Inc., and convenience stores. Market share in measured channels decreased 0.8
share points in the third quarter. Measured channels include sales in the food,
drug, convenience store and mass merchandiser classes of trade, excluding sales
of Wal-Mart Stores, Inc.
Results
of Operations - First Nine Months 2006 vs. First Nine Months
2005
Net
sales
for the first nine months of 2006 increased $115.1 million, or 3.3%, from
2005. Approximately 80% of the net sales increase resulted from sales volume
growth primarily associated with the introduction of new products and strong
seasonal sales. Sales also increased as a result of improved price realization
from increased list prices in the United States implemented in 2005, partially
offset by a slightly higher rate of promotional allowances. Favorable foreign
currency exchange rates
contributed
to the increase, offset somewhat by sales volume declines in the Company’s
international businesses. The Joseph Schmidt and Sharffen Berger businesses
acquired in August 2005 also contributed to the net sales increase.
Cost
of
sales for the first nine months increased $75.7 million, or 3.5%, from 2005
to 2006. Cost of sales in 2006 included a net credit of $3.2 million
related to the Company’s business realignment initiatives. The cost increase in
2006 was primarily caused by the higher sales volume, higher costs for energy
and raw materials and increased costs associated with obsolete, aged or
unsalable products, partially offset by a charge of $16.6 million related
to the Company’s business realignment initiatives included in cost of sales in
2005. The cost increases in 2006 were offset somewhat by cost reductions
resulting from improved supply chain productivity. Gross margin decreased from
38.5% in 2005 to 38.4% in 2006. Gross margin in 2006 was improved 0.1 percentage
point and in 2005 was reduced by 0.5 percentage points as a result of the
Company’s business realignment initiatives. Gross margin in 2006 was negatively
impacted by higher costs for energy and raw materials, an unfavorable sales
mix
and higher costs related to product obsolescence, partially offset by improved
price realization and supply chain productivity.
Selling,
marketing and administrative expenses for the first nine months decreased by
$27.9 million, or 4.1%, from the comparable period in 2005, primarily due
to lower administrative costs principally associated with the Company’s business
realignment initiatives, including the VWRP, and lower incentive compensation
expenses. Reduced advertising expense also contributed to the decrease, but
was
substantially offset by higher consumer promotions. Selling, marketing and
administrative expenses as a percentage of sales declined from 19.8% in 2005
to
18.3% in 2006.
Net
interest expense in the first nine months was $20.8 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 first nine months of 2006 was 35.8%, compared
with 36.7% in 2005. The lower rate in 2006 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 nine months increased $82.7 million from 2005 to 2006, and
net income per share-diluted increased $.39. Net income in 2006 was reduced
by
$4.1 million, or $.01 per share-diluted, and in 2005 was reduced by
$65.8 million, or $.26 per share-diluted, as a result of net charges
associated with the Company’s business realignment initiatives which were
recorded in each period. In addition to the impact of the business realignment
initiatives, earnings per share-diluted in 2006 increased primarily as a result
of the higher sales volume and lower administrative expenses which more than
offset the impact of increased input costs and higher costs associated with
product obsolescence. The impact of lower weighted-average shares outstanding,
net of higher interest expense, also contributed to the increase in earnings
per
share-diluted in 2006.
In
channels of distribution accounting for approximately 80% of the Company's
U.S.
confectionery retail business, retail takeaway increased 4.9% during the first
nine months of 2006. Market share in measured channels increased 0.3 share
points during the first nine months of 2006. 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 nine months of 2006, the Company's cash and cash
equivalents decreased by $19.5 million.
Cash
provided from operations totaled $226.4 million, reflecting net income and
depreciation and amortization, offset somewhat by increased cash used by working
capital, particularly accounts receivable and inventories. Cash used by changes
in other assets and liabilities was $27.5 million for the first nine months
of 2006 compared with $4.9 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, employee benefits and incentive compensation.
Cash
used
by investing activities of $129.9 million was associated with capital
additions and capitalized software additions. Cash used by financing activities
of $116.0 million reflected share repurchases and the payment of dividends,
substantially offset by increased short-term and long-term borrowings and cash
provided from stock options exercises.
Income
taxes paid of $212.0 million during the first nine months of 2006 increased
from $128.0 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 increased to 1.0:1 as of October 1,
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 73% as of October 1, 2006 and 63% as of
December 31, 2005. The higher capitalization ratio in 2006 reflected
the impact of additional short-term and long-term borrowings and a reduction
in
stockholders’ equity resulting from repurchases of Common Stock. The Company’s
capitalization ratio will increase as of December 31, 2006, as a result of
the
reduction in stockholders’ equity from the adoption of SFAS No. 158 as discussed
in Note 14.
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.
In
September 2006, the Company entered into an agreement which amended the
short-term credit facility to extend the term of the short-term credit facility
through December 1, 2006, and reduce the total credit limit under the short-term
credit facility from $400 million to $200 million. All other terms and
conditions of the short-term credit facility remain the same. 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 offerings
of
long-term debt securities occurring subsequent to May 2006.
In August
2006, the Company issued $250 million of 5.3% Notes due September 1,
2011, and $250 million of 5.45% Notes due September 1, 2016 under the WKSI
Registration Statement. Proceeds
from these debt issuances and any other offerings of 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 recently explored the possible sale of the Pot
of Gold
boxed
chocolates brand along with the related manufacturing facility and has decided
not to sell at this time.
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 within its long-term
target of 3%-4%. Sales growth expectations have been reduced somewhat as a
result of the slowing of retail takeaway and a decline in market share during
the third quarter, primarily for the Company’s chocolate confectionery business.
The focus in the fourth quarter will be on restoring the Company’s marketplace
momentum and overall confectionery category growth.
The
Company’s results for 2006 will fall short of its previous expectations and are
expected to be somewhat below its goal for earnings before interest expense
and
income taxes (“EBIT”) for the full year, excluding the impact of its business
realignment initiatives. The Company expects an improvement in EBIT margin
of 50
to 70 basis points for the full year. EBIT margin improvement will be reduced
somewhat during the fourth quarter of 2006 as a result of enhancements to the
Company’s consumer and customer programs for new product platforms and the
seasonal business. Increased investments will be made in advertising, consumer
promotions, retail coverage and merchandising during the remainder of the year.
As a result, the
Company
expects an increase in net income per share-diluted for the full year 2006
somewhat below its long-term goal of 9%-11%, excluding the impact of its
business realignment initiatives.
The
Company expects sales growth for 2007 to be within the long-term goal of 3%
to
4%. In 2006 the Company is completing a broad-based portfolio review and
rationalizing or exiting certain products. New product platforms are expected
to
be the major source of growth in 2007, particularly dark and premium chocolate
products, refreshment gum and mint items, substantial snacks, such as layered
sandwich cookies, brownies, single serve soft cookies and value-added snack
nuts, and health and wellness products, including sixty calorie and one hundred
calorie portion control products.
Input
costs are expected to increase in 2007 compared with 2006, although to a lesser
extent than the cost increases in 2006 compared with 2005. The Company’s
productivity and cost control initiatives are expected to mitigate these cost
factors, along with a more profitable sales mix, savings from changes to the
Company’s pension plans and continued tight control of selling, marketing and
administrative expenses. Selling, marketing and administrative expenses as
a
percentage of sales are expected to increase somewhat in 2007 as a result of
increased brand investment and restoration of certain administrative expenses
which were unusually low during 2006 as a result of the Company’s business
realignment initiatives and lower than expected performance.
The
Company expects an increase in net income per share-diluted for 2007 within
its
long-term goal of 9%-11%, excluding the impact of its business realignment
initiatives.
Subsequent
Events
In
October 2006, the Company announced that it is redesigning its U.S. pension
and
savings plans to maintain competitive retirement benefits for its employees
while reducing future company pension costs. The changes, effective January
1,
2007, will affect approximately 6,400 U.S. employees not covered by a collective
bargaining agreement.
The
Company’s new retirement program will include the following:
·
|
A
higher company match in the 401(k) plan to encourage and support
employees
in saving for retirement.
|
·
|
A
modified defined benefit pension plan that recognizes both age and
service, provides future benefits at a reduced rate for current employees,
and is closed to new employees hired on or after January 1,
2007.
|
·
|
A
company contribution in the 401(k) plan, in addition to the increased
company match, for employees hired on or after January 1,
2007.
|
The
changes to retirement benefits protect employees’ previously earned pension
benefits and will not affect current retirees and terminated employees with
a
deferred pension benefit. Changes have also been made to the Company’s
Supplemental Executive Retirement Plan and certain other non-qualified plans
to
reduce future costs. The Company has contributed nearly $800 million to its
pension plans over the past five years and they are fully funded.
In
October 2006, the Company purchased the assets of Dagoba Organic Chocolates,
LLC
based in Ashland, Oregon. Dagoba is primarily sold in natural food and gourmet
stores across the country and is known for its high-quality organic chocolate
bars, drinking chocolates and baking products.
Safe
Harbor Statement
The
nature of our operations and the environment in which we operate subject the
Company 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, we note
the
following factors that, among others, could cause future results to differ
materially from the forward-looking statements, expectations and assumptions
that we have discussed directly or implied in this report. Many of the
forward-looking statements contained in this report 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: our
ability to implement and generate expected ongoing annual savings from the
initiatives to advance our value-enhancing strategy; changes in raw material
and
other costs and selling price increases; our ability to implement improvements
to and reduce costs associated with our supply chain; pension cost factors
such
as actuarial assumptions, market performance, and employee retirement decisions;
changes in the price of our Common Stock, and resulting impacts on our expenses
for incentive compensation, stock options and certain employee benefits; market
demand for new and existing products; changes in our business environment,
including actions of competitors and changes in consumer preferences; changes
in
governmental laws and regulations, including taxes; risks and uncertainties
related to our international operations; and such other matters as discussed
in
our 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 $.2 million as of
October 1, 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
$.4 million as of October 1, 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)
|
|
July
3 through
July
30, 2006
|
|
826,440
|
|
$55.80
|
|
|
744,460
|
|
|
$202,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
31 through
August
27, 2006
|
|
915,550
|
|
$53.98
|
|
|
781,691
|
|
|
$160,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
28 through
October
1, 2006
|
|
923,019
|
|
$52.35
|
|
|
868,300
|
|
|
$115,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2,665,009
|
|
|
|
|
2,394,451
|
|
|
|
|
Item
6 - Exhibits
The
following items are attached or incorporated herein by reference:
Exhibit
Number
|
|
Description
|
|
|
|
4.1
|
|
On
August 23, 2006, the Company issued and sold $250,000,000 aggregate
principal amount of its 5.300% Notes due September 1, 2011, and
$250,000,000 aggregate principal amount of its 5.450% Notes due September
1, 2016. Neither series of debt instruments exceeds 10% of the total
assets of the Company and its subsidiaries on a consolidated basis.
The
Company will furnish to the Commission upon request copies of the
instruments governing both series of Notes.
|
10.1
|
|
Agreement
dated January 27, 2006, between the Company and Hershey Trust Company,
as
Trustee for the benefit of Milton Hershey School, is incorporated
by
reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed January 27, 2006.
|
10.2
|
|
Agreement
dated July 26, 2006, between the Company and Hershey Trust Company,
as
Trustee for the benefit of Milton Hershey School, is incorporated
by
reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed July 28, 2006.
|
10.3
|
|
Short-Term
Credit Agreement, dated March 13, 2006, among the Company and the
banks,
financial institutions and other institutional lenders listed on
the
respective signature pages thereof (“Lenders”), Citibank, N.A., as
administrative agent for the Lenders, Bank of America, N.A., as
syndication agent, UBS Loan Finance LLC, as documentation agent,
and
Citigroup Global Markets Inc. and Banc of America Securities LLC,
as joint
lead arrangers and joint book managers, is incorporated by reference
from
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed March 15,
2006.
|
10.4
|
|
Letter
Amendment to Short Term Credit Agreement, dated September 14, 2006,
among
the Company and the banks, financial institutions and other institutional
lenders listed on the respective signature pages thereof (“Lenders”), and
Citibank, N.A., as agent for the Lenders, is incorporated by reference
from Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed
September 15, 2006.
|
12.1
|
|
Statement
showing computation of ratio of earnings to fixed charges for the
nine
months ended October 1, 2006 and
October 2, 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: November
8, 2006
|
/s/David
J.
West
David
J. West
Senior
Vice President,
Chief
Financial Officer
|
|
|
Date: November
8, 2006
|
/s/David
W.
Tacka
David
W. Tacka
Vice
President,
Chief
Accounting Officer
|
|
|
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
|
|
|