Hershey Announces Second Quarter Results

Published on Thursday, 22 July 2010 07:13 Written by TradersHuddle Staff

HERSHEY, Pa.-( Business Wire )-

The Hershey Company (NYSE: HSY):

● Net Sales increase 5.3%, driven by volume

● Reported earnings per share-diluted of $0.20

● Adjusted earnings per share-diluted $0.51, up 19%

● Full-year 2010 net sales to increase about 7%

● Full-year 2010 reported earnings per share-diluted to be in the $2.04 to $2.12 range and adjusted earnings per share-diluted in the $2.47 to $2.52 range

The Hershey Company (NYSE: HSY) today announced sales and earnings for the second quarter ended July 4, 2010. Consolidated net sales were $1,233,242,000 compared with $1,171,183,000 for the second quarter of 2009. Net income for the second quarter of 2010 was $46,723,000 or $0.20 per share-diluted, compared with $71,298,000 or $0.31 per share-diluted, for the comparable period of 2009.

As described in the Note, for the second quarter of 2010, these results, prepared in accordance with generally accepted accounting principles (GAAP), included net pre-tax charges of $86.2 million, or $0.31 per share-diluted. Charges associated with the Project Next Century program announced in June 2010, were $41.5 million, or $0.11 per share-diluted. Additionally, the Company recorded a non-cash goodwill impairment charge of $44.7 million, or $0.20 per share-diluted related to the Godrej Hershey Ltd. joint venture in India. There was no tax benefit associated with the non-cash goodwill impairment charge. While the joint venture has achieved growth, it has been less than initial expectations due to slower realization of development plans and changes in input costs, as well as the macroeconomic environment which has delayed distribution expansion and the implementation of new price points. The India market in which the Godrej Hershey Ltd. joint venture competes remains a strategic growth market for the Company. Despite the business realignment and goodwill impairment charges, reported income before interest and income taxes increased 6.6 percent. For the second quarter of 2009, GAAP results included net pre-tax charges of $42.7 million, or $0.12 per share-diluted. These charges related to the Global Supply Chain Transformation (GSCT) program completed in December 2009. As described in the Note, adjusted net income, which excludes these net charges, was $117,047,000 or $0.51 per share-diluted in the second quarter of 2010, compared with $97,965,000, or $0.43 per share-diluted in the second quarter of 2009, an increase of 19 percent in adjusted earnings per share-diluted.

For the first six months of 2010, consolidated net sales were $2,641,085,000 compared with $2,407,214,000 for the first six months of 2009. Reported net income for the first six months of 2010 was $194,117,000 or $0.84 per share-diluted, compared with $147,192,000 or $0.64 per share-diluted, for the first six months of 2009.

As described in the Note, for the first six months of 2010 and 2009, these results, prepared in accordance with GAAP, include net pre-tax charges of $86.2 million and $61.7 million, or $0.31 and $0.17 per share, respectively. The 2010 charges are associated with the Project Next Century program announced in June and the non-cash goodwill impairment charge associated with the Godrej Hershey Ltd. joint venture, while the 2009 charges are related to the GSCT program completed in December 2009. As described in the Note, adjusted net income for the first six months of 2010, which excludes these net charges, was $264,441,000, or $1.15 per share-diluted, compared with $183,957,000 or $0.81 per share-diluted in 2009, an increase of 42 percent in adjusted earnings per share-diluted.

In 2010, reported gross margin, reported income before interest and income taxes (EBIT) margin and reported earnings per share-diluted will be impacted by the start-up of Project Next Century and the non-cash goodwill impairment charge associated with Godrej Hershey Ltd. As a result, reported earnings per share-diluted, including restructuring and impairment charges of $0.40 to $0.43 per share-diluted, is expected to be in the $2.04 to $2.12 range.

The forecast for total pre-tax GAAP charges and non-recurring project implementation costs related to the Project Next Century program remains at $140 million to $170 million. The Company now expects to record $75 million to $85 million in program charges in 2010. Total program estimates include $120 million to $150 million in pre-tax business realignment and impairment charges and approximately $20 million in project implementation and start-up costs. The cash portion of the total charge is estimated to be $95 million to $110 million, including project implementation and start-up costs. At the conclusion of the program in 2014, ongoing annual savings are expected to be approximately $60 million to $80 million. The expected timing of events and estimated costs and savings, provided in Appendix I attached to this press release, reflects the aforementioned updated estimates.

Second Quarter Performance and Outlook

“Hershey delivered solid results in the second quarter driven by our strategy of increasing advertising, consumer investment and U.S. retail coverage on our core brands,” said David J. West, President and Chief Executive Officer. “Net sales increased by 5.3 percent driven by volume, including improvements in our international business, an approximate one point benefit from foreign currency exchange rates, as well as some net price realization.

“In the second quarter, advertising expense increased about 50 percent as we were on air supporting our core brands, the kick-off of our annual Hershey’s S’mores promotion and the launch of Hershey’s Special Dark, Almond Joy and York Pieces new products. Advertising, as well as greater levels of in-store selling, merchandising and programming has resulted in strong marketplace performance.

“U.S. retail takeaway for the 12 weeks ended June 12, 2010, in channels that account for over 80 percent of our retail business, including the Easter seasonal period, was up 4.0 percent. Easter was April 4, 2010, one week earlier than 2009, and didn’t materially impact our second quarter marketplace performance. In the channels measured by syndicated data, U.S. market share in both the second quarter and year-to-date periods increased 0.3 points. We gained market share in all measured channels, except the drug class-of-trade, which improved sequentially. The mid-single digit percentage increase in U.S. retail takeaway of our standard loose bar instant consumable format for the 12 weeks ended June 12, 2010 was particularly solid. Despite continued macroeconomic challenges, the confectionery category remains resilient with year-to-date U.S. category growth of 3.9 percent in the channels measured by syndicated data. This is at the top end of the category’s historical growth rate of 3 to 4 percent. I’m pleased with Hershey’s performance during this period as we have gained market share on a quarterly and year-to-date basis.

“Adjusted income before interest and income taxes increased 32.2 percent in the second quarter driven by volume trends and mix related to the instant consumable product line; supply chain efficiencies; and productivity gains. Offsetting a portion of these gains were higher marketing and selling expenses, commodity costs, as well as other employee-related administrative and legal costs.

“In the second half of the year we expect to maintain our momentum and look for full-year 2010 net sales to increase about 7 percent, including an approximate one point benefit from foreign currency exchange rates. For the full-year, we have good visibility into our cost structure and expect adjusted gross margin and adjusted EBIT margin to expand, although not at the rate achieved in first half of the year due to the items discussed last quarter. Specifically, we have completely lapped the August 2008 price increase; realized all of the targeted GSCT savings; will have a seasonal shift in orders out of the fourth quarter of 2010 into the first quarter of 2011 due to the timing and refinement of logistical requirements; and we don’t expect year-end LIFO inventory to be favorable in 2010 as it was in 2009. Furthermore, we are planning additional increases in advertising for the full-year and expect advertising expense to increase about 45 to 50 percent in 2010. This is greater than our previous estimate of a 35 to 40 percent increase. Due to timing, the majority of this advertising will not be broadcast until later in the year and we expect its effect on net sales to occur primarily in 2011. Lower trade promotion rates versus our initial expectations and earlier-than-expected achievement of a portion of the productivity savings discussed at the CAGNY conference in February will offset a portion of the additional 2010 advertising investment. Therefore, adjusted earnings per share-diluted is expected to be in the $2.47 to $2.52 range, an increase of low-to-mid-teens, on a percentage basis, versus 2009.”

Note: In this release, Hershey references income measures which are not in accordance with U.S. generally accepted accounting principles (GAAP) because they exclude business realignment and impairment charges. These non-GAAP financial measures are used in evaluating results of operations for internal purposes. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP. Rather, the Company believes exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations.

A reconciliation is provided below of results in accordance with GAAP as presented in the Consolidated Statements of Income to non-GAAP financial measures which exclude business realignment and impairment charges in 2010 associated with Project Next Century and the goodwill impairment charge for Godrej Hershey Ltd. and charges in 2009 related to the GSCT program.

		Second Quarter Ended
		July 4, 2010							July 5, 2009
						Percent of							Percent of
In thousands except per share amounts		Dollars				Net Sales			Dollars				Net Sales
Gross Profit/Gross Margin		$	546,538			44.3	%		$	453,290			38.7	%
Charges included in cost of sales			976							3,116
Adjusted non-GAAP Gross Profit/Gross Margin		$	547,514			44.4	%		$	456,406			39.0	%
EBIT/EBIT Margin		$	124,424			10.1	%		$	116,676			10.0	%
Charges included in cost of sales			976							3,116
Charges included in SM&A			123							1,671
Business Realignment & Impairment charges, net			85,134							37,904
Adjusted non-GAAP EBIT/EBIT Margin		$	210,657			17.1	%		$	159,367			13.6	%
Net Income/Net Margin		$	46,723			3.8	%		$	71,298			6.1	%
Charges included in cost of sales			976							3,116
Charges included in SM&A			123							1,671
Business Realignment & Impairment charges, net			85,134							37,904
Tax impact of charges			(15,909	)						(16,024	)
Adjusted non-GAAP Net Income/Net Margin		$	117,047			9.5	%		$	97,965			8.4	%
EPS - Diluted		$	0.20						$	0.31
Charges included in cost of sales			—							0.01
Charges included in SM&A			—							—
Business Realignment & Impairment charges, net			0.31							0.11
Adjusted non-GAAP EPS - Diluted		$	0.51						$	0.43

		Six Months Ended
		July 4, 2010							July 5, 2009
						Percent of							Percent of
In thousands except per share amounts		Dollars				Net Sales			Dollars				Net Sales
Gross Profit/Gross Margin		$	1,140,518			43.2	%		$	893,518			37.1	%
Charges included in cost of sales			976							7,167
Adjusted non-GAAP Gross Profit/Gross Margin		$	1,141,494			43.2	%		$	900,685			37.4	%
EBIT/EBIT Margin		$	377,758			14.3	%		$	269,610			11.2	%
Charges included in cost of sales			976							7,167
Charges included in SM&A			123							3,754
Business Realignment & Impairment charges, net			85,134							50,742
Adjusted non-GAAP EBIT/EBIT Margin		$	463,991			17.6	%		$	331,273			13.8	%
Net Income/Net Margin		$	194,117			7.3	%		$	147,192			6.1	%
Charges included in cost of sales			976							7,167
Charges included in SM&A			123							3,754
Business Realignment & Impairment charges, net			85,134							50,742
Tax impact of charges			(15,909	)						(24,898	)
Adjusted non-GAAP Net Income/Net Margin		$	264,441			10.0	%		$	183,957			7.6	%
EPS - Diluted		$	0.84						$	0.64
Charges included in cost of sales			—							0.02
Charges included in SM&A			—							0.01
Business Realignment & Impairment charges, net			0.31							0.14
Adjusted non-GAAP EPS - Diluted		$	1.15						$	0.81

In 2009, the Company recorded GAAP charges, including non-cash pension settlement charges, of $99.1 million, or $0.27 per share-diluted, attributable to the GSCT program. Except for possible non-cash pension settlement charges, the Company does not expect any significant charges related to the GSCT program in 2010.

In 2010, the Company expects to record total GAAP charges of about $75 million to $85 million, or $0.20 to $0.23 per share-diluted, attributable to Project Next Century. Additionally, in the second quarter of 2010, the Company recorded a non-cash goodwill impairment charge of $44.7 million, or $0.20 per share-diluted, related to the Godrej Hershey Ltd. joint venture.

		2009			2010 (Projected)
Reported EPS-Diluted		$1.90			$2.04 - $2.12
Total Business Realignment and Impairment Charges		$0.27			$0.40 - $0.43
Adjusted EPS-Diluted *		$2.17			$2.47 - $2.52
*Excludes business realignment and impairment charges.

																									Appendix I
The Hershey Company
Project “Next Century”
Expected Timing of Costs and Savings ($ millions)
		2010						2011						2012						2013						2014
Realignment Charges:
Cash		$45		to		$50		$15		to		$20		$15		to		$20		-				-		-				-
Non-Cash		$25		to		$30		$15		to		$20		$5		to		$10		-				-		-				-
Project Management and Start-up Costs		~$5						~$5						~$10						-				-		-				-
Total “Next Century” Realignment Charges & Costs		$75		to		$85		$35		to		$45		$30		to		$40		-				-		-				-
“Next Century” Cap-Ex		$50		to		$60		$100		to		$120		$80		to		$95		$20		to		$25		-				-
“Ongoing” Hershey Cap-Ex		$140		to		$150		$140		to		$150		$140		to		$150		$140		to		$150		$140		to		$150
Total Hershey Company
Capital Expenditures		$190		to		$210		$240		to		$270		$220		to		$245		$160		to		$175		$140		to		$150
Total Hershey Company Depreciation & Amortization Expense (excluding accelerated D&A)		$175		to		$185		$175		to		$185		$175		to		$185		$175		to		$185		$175		to		$185
“Next Century” projected savings:
Annual		-				-		$10		to		$15		$15		to		$20		$30		to		$35		$5		to		$10
Cumulative		-				-		$10		to		$15		$25		to		$35		$55		to		$70		$60		to		$80

Safe Harbor Statement

This release contains statements that are forward-looking. These statements are made based upon current expectations that are subject to risk and uncertainty. Actual results may differ materially from those contained in the forward-looking statements. Factors that could cause results to differ materially include, but are not limited to: issues or concerns related to the quality and safety of our products, ingredients or packaging; changes in raw material and other costs; market demand for our new and existing products; increased marketplace competition; selling price increases, including volume declines associated with pricing elasticity; disruption to our supply chain; failure to successfully execute acquisitions, divestitures and joint ventures; changes in governmental laws and regulations, including taxes; political, economic, and/or financial market conditions; risks and uncertainties related to our international operations; disruptions, failures or security breaches of our information technology infrastructure; the impact of future developments related to the investigation by government regulators of alleged pricing practices by members of the confectionery industry, including risks of subsequent litigation or further government action; pension cost factors, such as actuarial assumptions, market performance and employee retirement decisions and funding requirements; the ability to implement our supply chain realignment initiatives within the anticipated timeframe in accordance with our cost estimates and our ability to achieve the expected ongoing annual savings from these initiatives; and such other matters as discussed in our Annual Report on Form 10-K for 2009. All information in this press release is as of July 22, 2010. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company’s expectations.

Live Web Cast

As previously announced, the Company will hold a conference call with analysts today at 8:30 a.m. Eastern Time. The conference call will be web cast live via Hershey’s corporate website www.hersheys.com. Please go to the Investor Relations section of the website for further details.

The Hershey Company
Summary of Consolidated Statements of Income
for the periods ended July 4, 2010 and July 5, 2009
(in thousands except per share amounts)
				Second Quarter								Six Months
				2010				2009				2010				2009
Net Sales			$	1,233,242			$	1,171,183			$	2,641,085			$	2,407,214
Costs and Expenses:
Cost of Sales				686,704				717,893				1,500,567				1,513,696
Selling, Marketing and Administrative				336,980				298,710				677,626				573,166
Business Realignment and Impairment Charges, net				85,134				37,904				85,134				50,742
Total Costs and Expenses				1,108,818				1,054,507				2,263,327				2,137,604
Income Before Interest and Income Taxes (EBIT)				124,424				116,676				377,758				269,610
Interest Expense, net				22,780				22,734				46,529				46,630
Income Before Income Taxes				101,644				93,942				331,229				222,980
Provision for Income Taxes				54,921				22,644				137,112				75,788
Net Income			$	46,723			$	71,298			$	194,117			$	147,192
Net Income Per Share	- Basic - Common		$	0.21			$	0.32			$	0.87			$	0.66
	- Basic - Class B		$	0.19			$	0.29			$	0.79			$	0.60
	- Diluted - Common		$	0.20			$	0.31			$	0.84			$	0.64
Shares Outstanding	- Basic - Common			166,882				166,846				167,079				166,817
	- Basic - Class B			60,708				60,710				60,708				60,710
	- Diluted - Common			230,324				228,489				229,946				228,396
Key Margins:
Gross Margin				44.3	%			38.7	%			43.2	%			37.1	%
EBIT Margin				10.1	%			10.0	%			14.3	%			11.2	%
Net Margin				3.8	%			6.1	%			7.3	%			6.1	%

The Hershey Company
Consolidated Balance Sheets
as of July 4, 2010 and December 31, 2009
(in thousands of dollars)
Assets			2010			2009
Cash and Cash Equivalents		$	249,070		$	253,605
Accounts Receivable - Trade (Net)			321,051			410,390
Deferred Income Taxes			67,841			39,868
Inventories			603,728			519,712
Prepaid Expenses and Other			173,298			161,859
Total Current Assets			1,414,988			1,385,434
Net Plant and Property			1,378,512			1,404,767
Goodwill			517,416			571,580
Other Intangibles			123,062			125,520
Deferred Income Taxes			10,720			4,353
Other Assets			175,289			183,377
Total Assets		$	3,619,987		$	3,675,031
Liabilities and Stockholders' Equity
Loans Payable		$	41,005		$	39,313
Accounts Payable			304,993			287,935
Accrued Liabilities			530,011			546,462
Taxes Payable			—			36,918
Total Current Liabilities			876,009			910,628
Long-Term Debt			1,501,335			1,502,730
Other Long-Term Liabilities			508,086			501,334
Deferred Income Taxes			2,055			—
Total Liabilities			2,887,485			2,914,692
Total Stockholders' Equity			732,502			760,339
Total Liabilities and Stockholders' Equity		$	3,619,987		$	3,675,031

The Hershey CompanyFinancial Contact:Mark Pogharian717-534-7556orMedia Contact:Kirk Saville717-534-7641