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Consolidated net sales of Hershey in Q3 of 2017 worth $2,033.1 million
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Tuesday, 31 October, 2017, 08 : 00 AM [IST]
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Hershey
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The Hershey Company announced sales and earnings for the third quarter of 2017 ended October 1. Consolidated net sales were $2,033.1 million vis-a-vis $2,003.5 million for the corresponding quarter of 2016. The reported net income for the third quarter of 2017 was $273.3 million (or $1.28 per share-diluted), vis-a-vis $227.4 million (or $1.06 per share-diluted) for the corresponding period of 2016.
“Snacking continues to outpace the market in a rapidly changing environment,” said Michele Buck, president and chief executive officer, The Hershey Company. “We’re executing against the right strategies and investing in the brands and channels that will continue to drive our business forward,” she added.
“Hershey’s solid third-quarter results were in line with our expectations, and we are on track to deliver on the goals we established earlier this year, including, core brand growth, the launch of successful innovation and progress against our multi-year productivity and cost savings initiatives,” Buck said.
“The implementation of our confectionery and snacks’ consumer-driven demand model continues. The investments we’re making in our power chocolate brands - Reese’s, Hershey’s, Kit Kat and Kisses - are resonating with consumers in the marketplace as evidenced by the third-quarter combined retail takeaway in the United States on these brands of about five per cent,” she added.
“While early, our new warehouse-based snacks initiative is off to a good start with Hershey’s and Reese’s Popped Snack Mix and Chocolate Dipped Pretzels progressing as planned. Halloween seasonal sales are tracking as expected with solid programming, merchandising and promotions being executed in the marketplace,” Buck said.
The Hershey Company’s board of directors approved a new $100 million stock repurchase authorisation. Hershey’s solid balance sheet and strong cash flow generation gives the company continued flexibility against its cash priorities, including returning cash to shareholders in the form of buybacks and dividends, while also being able to participate in opportunistic merger and acquisition activity.
As described in the note below, for the third quarter of 2017, these results, prepared in accordance with the generally accepted accounting principles (GAAP) in the United States, included items impacting comparability of $7.8 million, or $0.05 per share-diluted.
Reported gross margin of 46.2 per cent represented an increase of 370 basis points versus the third quarter of 2016, while reported operating profit of $439 million in the third quarter of 2017 resulted in operating margin of 21.6 per cent.
For the third quarter of 2016, items impacting comparability totalled $72.4 million, or $0.23 per share-diluted. As described in the note, adjusted net income, which excludes these items, was $283.6 million, or $1.33 per share-diluted, for the third quarter of 2017, vis-a-vis $277.3 million, or $1.29 per share-diluted, for the corresponding period of 2016.
The following table presents a summary of items impacting comparability in each period (see Appendix I for additional information):
|
|
|
Pre-Tax
($
million)
|
|
|
|
Earnings
Per Share-Diluted
|
|
|
|
Three
Months Ended
|
|
|
|
Three
Months Ended
|
|
|
|
October
1,
|
|
|
|
October
2,
|
|
|
|
October
1,
|
|
|
|
October
2,
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
Derivative
Mark-to-Market (Gains) Losses
|
$
|
(22.0)
|
$
|
35.8
|
$
|
(0.08)
|
$
|
0.10
|
Business
Realignment Activities
|
|
8.3
|
|
|
|
28.0
|
|
|
|
0.03
|
|
|
|
0.10
|
Acquisition
Integration Costs
|
|
—
|
|
|
|
2.3
|
|
|
|
—
|
|
|
|
0.01
|
Non-Service
Related Pension Expense
|
|
21.5
|
|
|
|
6.3
|
|
|
|
0.06
|
|
|
|
0.02
|
Long-Lived
Asset Impairment Charges*
|
|
—
|
|
|
|
—
|
|
|
|
0.04
|
|
|
|
—
|
|
|
$
|
7.8
|
|
$
|
72.4
|
|
$
|
0.05
|
|
$
|
0.23
|
• There were no pre-tax impairment charges associated with long-lived assets during the three months ended October 1, 2017. However, the long-lived asset impairment charge in the first quarter of 2017 was not treated as a discrete tax item. Therefore, the tax impact was included in the estimated annual effective tax rate resulting in an earnings per share- (EPS) diluted impact for each of the quarters throughout 2017.
For the first nine months of 2017, consolidated net sales amounted to $5,575.8 million vis-a-vis $5,469.9 million for the same period of 2016, an increase of 1.9 per cent. Reported net income for the first nine months of 2017 was $601.8 million, or $2.81 per share-diluted, vis-a-vis $603.2 million, or $2.80 per share-diluted, for the corresponding period of 2016.
For the first nine months of 2017 and 2016, these results, prepared in accordance with GAAP, included items impacting comparability of $253.3 million and $133.1 million, or $0.92 and $0.44 per share-diluted, respectively.
Adjusted net income, which excludes these items, was $798.8 million, or $3.73 per share-diluted, for the first nine months of 2017, vis-a-vis $698.9 million, or $3.24 per share-diluted, for the corresponding period of 2016, an increase of 15.1 per cent in adjusted earnings per share-diluted.
The following table presents a summary of items impacting comparability in each period (see Appendix I for additional information):
|
|
|
Pre-Tax
($
million)
|
|
|
|
Earnings
Per Share-Diluted
|
|
|
|
Nine
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
|
October
1,
|
|
|
|
October
2,
|
|
|
|
October
1,
|
|
|
|
October
2,
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2016
|
Derivative
Mark-to-Market (Gains) Losses
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$
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(27.5)
|
$
|
30.9
|
$
|
(0.11)
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$
|
0.09
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Business
Realignment Activities
|
|
69.7
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|
|
|
104.5
|
|
|
|
0.24
|
|
|
|
0.40
|
Acquisition
Integration Costs
|
|
0.3
|
|
|
|
3.7
|
|
|
|
—
|
|
|
|
0.01
|
Non-Service
Related Pension Expense
|
|
30.1
|
|
|
|
20.7
|
|
|
|
0.08
|
|
|
|
0.06
|
Noncontrolling
Interest Share of Business Realignment
|
|
(28.0)
|
|
|
|
—
|
|
|
|
(0.13)
|
|
|
|
—
|
and
Impairment Charges (After-Tax)
|
|
|
|
|
|
|
|
|
|
|
Settlement
of Shanghai Golden Monkey (SGM) Liability
|
|
—
|
|
|
|
(26.7)
|
|
|
|
—
|
|
|
|
(0.12)
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Long-Lived
Asset Impairment Charges
|
|
208.7
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|
|
|
—
|
|
|
|
0.84
|
|
|
|
—
|
|
|
$
|
253.3
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|
$
|
133.1
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|
$
|
0.92
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|
$
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0.44
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In 2017, the company expects reported earnings per share-diluted of $3.54 to $3.68, including items impacting comparability of approximately $1.13 to $1.18 per share-diluted.
This projection, prepared in accordance with GAAP, assumes business realignment costs of $0.16 to $0.21 per share-diluted, including Margin for Growth Programme costs of $0.11 to $0.16 per share-diluted, long-lived asset impairment charges of $0.87 per share-diluted relating to the Margin for Growth Programme, and non-service related pension expense (NSRPE) of about $0.10 per share-diluted. The total per share-diluted impact relating to the Margin for Growth Programme, included in the amounts above, is currently estimated to be $0.98 to $1.03.
Third-quarter performance Consolidated net sales were $2,033.1 million in the third quarter of 2017, an increase of 1.5 per cent versus the third quarter of 2016, including a 0.4 point benefit from foreign currency translation.
Net sales growth was driven by the North America segment which benefited from core brand growth, innovation, including Hershey’s Cookie Layer Crunch, and the launch of Hershey’s and Reese’s Popped Snack Mix and Chocolate Dipped Pretzels. Volume was a 0.7 point contribution to sales growth and net price realisation was a 0.4 point benefit.
Adjusted gross margin was 45.3 per cent in the third quarter of 2017, compared to 45.6 per cent in the third quarter of 2016.
Supply chain productivity and cost savings initiatives, as well as lower input costs, were more than offset by higher freight rates and increased manufacturing and distribution costs associated with an effort to maintain customer service targets, as well as an unfavourable sales mix.
Additionally, as discussed last quarter, the transition to new packaging formats continued and, as expected, pressured gross margin. Advertising and related consumer marketing expense increased by 3.7 per cent versus the third quarter of 2016.
Advertising expense increased by 10 per cent, partially offset by lower consumer promotions. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased by 0.2 per cent in the quarter as previously discussed cost savings and efficiency initiatives were offset by investments in go-to-market capabilities and employee-related costs.
As a result, consolidated adjusted operating profit of $446.9 million in the third quarter of 2017 was about the same as the third quarter of 2016.
Outlook The company continues to execute against the priorities outlined earlier in the year. Its seasonal business and programmes are on track and the fourth quarter launch of Hershey's Gold, a caramelised crème with peanuts and pretzels, should enable us to deliver on our objectives.
It is committed to its business model of investing in its brands and go-to-market capabilities that should strengthen Hershey's leadership position and build upon marketplace results. It reaffirms its full-year constant currency net sales growth of around 1.25 per cent and expects foreign currency exchange rates to be about neutral, versus a prior estimate of 0.25 points unfavourable.
For the full year, we expect adjusted gross margin to increase about 25 basis points versus our previous outlook of about a 50-basis point increase.
Productivity and cost savings initiatives, as well as lower input costs, are expected to be partially offset by the aforementioned higher freight, new packaging and customer service costs.
Our brands typically respond positively to marketplace investments, and there is no change to our full-year North America advertising and related consumer marketing outlook.
The International and Other segment’s advertising and related consumer marketing expense are estimated to be lower in 2017 versus 2016, resulting in a total company spend that should be about the same as last year.
In 2017, the company continues to anticipate its effective tax rate to range between 26.5 per cent and 27 per cent.
As discussed earlier this year, the reduction in the 2017 tax rate versus 2016 is primarily driven by a favourable foreign rate differential and investment tax credits, as well as the adoption of accounting standards update 2016-09 for the accounting of employee share-based payments.
As a result, the company continues to expect the full year increase in adjusted earnings per share-diluted to be around the high end of its outlook of $4.72 to $4.81, or a seven to nine per cent increase vis-a-vis last year.
Business segment results The following are comments about the segment’s performance for the third quarter of 2017 versus the corresponding period a year ago.
The schedule of supplementary information for additional information on segment net sales and profit has been attached.
North America (the United States and Canada) Hershey’s North America net sales were $1,792.4 million in the third quarter of 2017, an increase of 1.6 per cent vis-a-vis the corresponding period last year, including a 0.3-point benefit from foreign currency translation.
Volume was a 1.6-point contribution to sales growth and net price realisation was a 0.3-point headwind.
The total Hershey retail takeaway in the United States (which includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items) for the 12 weeks ended October 8, 2017 increased one per cent in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores).
Hershey’s candy, mint and gum (CMG) retail takeaway in the United States for the 12 weeks ended October 8, 2017, in the MULO + C-Stores channels increased by 1.4 per cent, with a market share of 0.3 points. Given the company’s strong performance in the first half of the year, its year-to-date CMG market share is up by 0.1 points.
Advertising and related consumer marketing expense increased 5.3 per cent in the third quarter of 2017 vis-a-vis the corresponding period a year ago.
The aforementioned increase in supply chain costs and slightly higher division selling, general and administrative expense pressured segment incomes.
The company believed that these marketplace investments will be enablers of future profitable growth.
As a result, the income of the North America segment declined by 1.7 per cent to $554.6 million in the third quarter of 2017, compared to $563.9 million in the third quarter of 2016.
International and Other Third-quarter net sales for Hershey’s International and Other segment increased by 0.8 per cent to $240.7 million. Net price realisation was a 4.7-point benefit and volume a 5.2-point headwind.
Excluding the 1.3-point impact of favourable foreign currency exchange rates, net sales declined by 0.5 per cent. The combined constant currency net sales growth in Mexico, Brazil and India was about eight per cent.
As expected, China net sales were about the same as the corresponding period a year ago. The International and Other segment’s income of $16.4 million, which was compared to the segment income of $4.3 million in the third quarter of 2016, was driven primarily by cost savings initiatives in China related to the Margin for Growth Programme discussed in the previous quarters.
Unallocated corporate expense Hershey’s unallocated adjusted corporate expense in the third quarter of 2017 was $124.1 million, an increase of $2.3 million vis-a-vis the corresponding period of 2016, due primarily to higher employee-related costs.
Note In this release, Hershey references income measures that are not in accordance with GAAP because they exclude business realignment activities, impairment of long-lived assets, acquisition integration costs, settlement of the SGM liability, NSRPE and gains and losses associated with mark-to-market commodity derivatives.
These non-GAAP financial measures are used in evaluating results of operations for internal purposes and are not intended to replace the presentation of financial results in accordance with GAAP.
Rather, the company believes that the exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations.
A reconciliation of the non-GAAP financial measures referenced in this release to their nearest comparable GAAP financial measures as presented in the Consolidated Statements of Income is provided below.
Reconciliation
of Certain Non-GAAP Financial Measures
|
|
|
|
|
|
|
Consolidated
results
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
In
thousands except per share data
|
|
October
1, 2017
|
|
|
|
October
2, 2016
|
|
|
October
1, 2017
|
|
|
|
October
2, 2016
|
Reported
gross profit
|
$
|
9,40,222
|
$
|
8,50,848
|
|
|
$
|
26,09,992
|
$
|
24,15,622
|
Derivative
mark-to-market (gains) losses
|
|
(21,954)
|
|
|
|
35,791
|
|
|
|
(27,486)
|
|
|
|
30,851
|
Business
realignment activities
|
|
213
|
|
|
|
24,470
|
|
|
|
6,475
|
|
|
|
57,948
|
NSRPE
|
|
2,779
|
|
|
|
2,620
|
|
|
|
8,344
|
|
|
|
9,132
|
Non-GAAP
gross profit
|
$
|
9,21,260
|
$
|
9,13,729
|
|
|
$
|
25,97,325
|
$
|
25,13,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
operating profit
|
$
|
4,39,020
|
$
|
3,74,024
|
|
|
$
|
9,46,292
|
$
|
9,76,295
|
Derivative
mark-to-market (gains) losses
|
|
(21,954)
|
|
|
|
35,791
|
|
|
|
(27,486)
|
|
|
|
30,851
|
Business
realignment activities
|
|
8,257
|
|
|
|
27,962
|
|
|
|
69,699
|
|
|
|
1,04,487
|
Acquisition
integration costs
|
|
—
|
|
|
|
2,265
|
|
|
|
311
|
|
|
|
3,727
|
NSRPE
|
|
21,540
|
|
|
|
6,360
|
|
|
|
30,123
|
|
|
|
20,666
|
Long-lived
asset impairment charges
|
|
—
|
|
|
|
—
|
|
|
2,08,712
|
|
|
|
—
|
Non-GAAP
operating profit
|
$
|
4,46,863
|
$
|
4,46,402
|
|
|
$
|
12,27,651
|
$
|
11,36,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
provision for income taxes
|
$
|
1,26,788
|
$
|
1,00,434
|
|
|
$
|
2,75,291
|
$
|
2,97,671
|
Derivative
mark-to-market (gains) losses *
|
|
(3,078)
|
|
|
|
13,566
|
|
|
|
(2,726)
|
|
|
|
11,694
|
Business
realignment activities*
|
|
1,112
|
|
|
|
5,576
|
|
|
|
18,312
|
|
|
|
16,409
|
Acquisition
integration costs*
|
|
—
|
|
|
|
859
|
|
|
|
118
|
|
|
|
1,413
|
NSRPE*
|
|
8,171
|
|
|
|
2,432
|
|
|
|
11,440
|
|
|
|
7,900
|
Long-lived
asset impairment charges**
|
|
(8,710)
|
|
|
|
—
|
|
|
29,264
|
|
|
|
—
|
Non-GAAP
provision for income taxes
|
$
|
1,24,283
|
$
|
1,22,867
|
|
|
$
|
3,31,699
|
$
|
3,35,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
net income
|
$
|
2,73,303
|
$
|
2,27,403
|
|
|
$
|
6,01,848
|
$
|
6,03,191
|
Derivative
mark-to-market (gains) losses
|
|
(18,876)
|
|
|
|
22,225
|
|
|
|
(24,760)
|
|
|
|
19,157
|
Business
realignment activities
|
|
7,145
|
|
|
|
22,386
|
|
|
|
51,387
|
|
|
|
88,073
|
Acquisition
integration costs
|
|
—
|
|
|
|
1,406
|
|
|
|
193
|
|
|
|
2,314
|
NSRPE
|
|
13,369
|
|
|
|
3,928
|
|
|
|
18,683
|
|
|
|
12,766
|
Long-lived
asset impairment charges
|
|
8,710
|
|
|
|
—
|
|
1,79,448
|
|
|
|
—
|
Noncontrolling
interest share of business realignment
|
|
(5)
|
|
|
|
—
|
|
(27,967)
|
|
|
|
—
|
and
impairment charges
|
|
|
|
|
|
|
|
|
Settlement
of SGM liability
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(26,650)
|
Non-GAAP
net income
|
$
|
2,83,646
|
$
|
2,77,348
|
|
|
$
|
7,98,832
|
$
|
6,98,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
EPS - Diluted
|
$
|
1.28
|
$
|
1.06
|
|
|
$
|
2.81
|
$
|
2.80
|
Derivative
mark-to-market (gains) losses
|
|
(0.08)
|
|
|
|
0.10
|
|
|
|
(0.11)
|
|
|
|
0.09
|
Business
realignment activities
|
|
0.03
|
|
|
|
0.10
|
|
|
|
0.24
|
|
|
|
0.40
|
Acquisition
integration costs
|
|
—
|
|
|
|
0.01
|
|
|
|
—
|
|
|
|
0.01
|
NSRPE
|
|
0.06
|
|
|
|
0.02
|
|
|
|
0.08
|
|
|
|
0.06
|
Long-lived
asset impairment charges
|
|
0.04
|
|
|
|
—
|
|
0.84
|
|
|
|
—
|
Noncontrolling
interest share of business realignment
|
|
—
|
|
|
|
—
|
|
(0.13)
|
|
|
|
—
|
and
impairment charges
|
|
|
|
|
|
|
|
|
Settlement
of SGM liability
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
|
(0.12)
|
Non-GAAP
EPS - Diluted
|
|
$
|
1.33
|
|
$
|
1.29
|
|
|
$
|
3.73
|
|
$
|
3.24
|
-
The tax
effect for each adjustment is determined by calculating the tax
impact of the adjustment on the company’s
quarterly effective tax rate.
-
*There
were no pre-tax impairment charges associated with long-lived assets
during the three months ended October 1, 2017. However, the
long-lived asset impairment charge in the first quarter of 2017 was
not treated as a discrete tax item. Therefore, the tax impact was
included in the estimated annual effective tax rate resulting in an
EPS-diluted impact for each of the quarters throughout 2017.
In the
assessment of the
company’s results,
it
reviewed
and discussed
the following financial metrics that were
derived from the reported and non-GAAP financial measures presented
above:
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
October
1, 2017
|
|
October
2, 2016
|
|
October
1, 2017
|
|
October
2, 2016
|
As
reported gross margin
|
46.2%
|
42.5%
|
46.8%
|
44.2%
|
Non-GAAP
gross margin (1)
|
45.3%
|
45.6%
|
46.6%
|
|
46%
|
As
reported operating profit margin
|
21.6%
|
18.7%
|
17%
|
17.8%
|
Non-GAAP
operating profit margin (2)
|
22%
|
22.3%
|
22%
|
20.8%
|
As
reported effective tax rate
|
31.6%
|
30.6%
|
32.4%
|
33%
|
Non-GAAP
effective tax rate (3)
|
30.4%
|
30.7%
|
29.3%
|
32.4%
|
(1) Calculated as non-GAAP gross profit as a percentage of net sales for each period presented.
(2) Calculated as non-GAAP operating profit as a percentage of net sales for each period presented.
(3) Calculated as non-GAAP provision for income taxes as a percentage of non-GAAP income before taxes [calculated as non-GAAP operating profit minus non-GAAP interest expense, net plus or minus non-GAAP other (income) expense, net].
We present certain percentage changes in net sales on a constant currency basis, which excludes the impact of foreign currency exchange.
To present this information for historical periods, current period net sales for entities reporting in other than the US dollar are translated into US dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year, rather than at the actual average monthly exchange rates in effect during the current period of the current fiscal year.
As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in the average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.
A reconciliation between reported and constant currency growth rates is provided below:
|
Three
Months Ended October 1, 2017
|
|
|
|
|
|
|
|
|
Percentage
Change
|
|
Percentage
Change as
|
Impact
of Foreign
|
|
|
on
Constant
|
|
|
Reported
|
|
|
Currency
Exchange
|
Currency
Basis
|
|
North
America segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
12.1
|
%
|
|
4.6
%
|
7.5
%
|
|
|
|
|
|
|
|
|
|
Total
North America segment
|
1.6
|
%
|
0.3
|
%
|
1.3
|
%
|
International
and Other segment
|
|
|
|
|
|
|
|
|
Mexico
|
15.5
%
|
|
5.9
%
|
9.6
%
|
Brazil
|
6.4
|
%
|
|
3.1
|
%
|
3.3
|
%
|
India
|
20.9
|
%
|
|
4.9
|
%
|
16
|
%
|
Greater
China
|
(7.3)%
|
(0.2)%
|
(7.1)%
|
|
|
|
|
|
|
|
|
|
Total
International and Other segment
|
0.8
|
%
|
|
1.3
|
%
|
(0.5)%
|
Total
Company
|
1.5
|
%
|
|
0.4
%
|
1.1
%
|
The company also presents the percentage change in projected 2017 net sales on a constant currency basis.
To determine this, projected 2017 net sales for entities reporting in currencies other than the US dollar are translated into US dollars at the company’s average monthly exchange rates in effect during the corresponding period of the prior fiscal year, and are compared to the 2016 results translated into US dollars using the same 2016 average monthly exchange rates.
Below is a reconciliation of projected 2017 and full-year 2016 earnings per share-diluted calculated in accordance with GAAP to non-GAAP adjusted earnings per share-diluted:
|
|
2017
(Projected)
|
|
2016
|
Reported
EPS – Diluted
|
$3.54-$3.68
|
$3.34
|
Derivative
mark-to-market losses
|
—
|
0.66
|
Business
realignment costs (including Margin for Growth Programme
costs)
|
0.16-0.21
|
0.42
|
Acquisition
and integration costs
|
—
|
0.02
|
Non-service
related pension expense
|
0.10
|
0.08
|
Settlement
of SGM liability
|
—
|
(0.12)
|
Long-lived
asset impairment charges
|
0.87
|
|
0.01
|
Adjusted
EPS – Diluted
|
|
$4.72-$4.81
|
|
$4.41
|
The Hershey Company’s 2017 projected earnings per share-diluted, as presented above, do not include the impact of mark-to-market gains and losses on its commodity derivative contracts that will be reflected within corporate unallocated expenses in its segment results until the related inventory is sold, since the company is not able to forecast the impact of the market changes.
Appendix I The details of the charges included in GAAP results, as summarised in the press release (above) are as follows:
Mark-to-market [(Gains) losses on commodity derivatives] Commensurate with our discontinuance of hedge accounting treatment for commodity derivatives, the company is adjusting the mark-to-market (gains) losses on such commodity derivatives, until such time as the related inventory is sold.
Since it often purchases commodity contracts to price inventory requirements in future years, it makes this adjustment to facilitate the year-over-year comparison of cost of sales on a basis that reflects the derivative gains and losses with the underlying economic exposure being hedged for the period.
Business realignment activities We periodically undertake restructuring and cost reduction activities as part of ongoing efforts to enhance long-term profitability.
During the first quarter of 2017, we commenced the Margin for Growth Programme to drive continued net sales, operating income and earnings per share-diluted growth over the next several years.
This programme is focused on improving global efficiency and effectiveness, optimising the company’s supply chain, streamlining its operating model and reducing administrative expenses to generate long-term savings.
For the three- and nine-month periods of 2017, business realignment charges related primarily to severance expenses, other third-party advisory costs and non-cash accelerated depreciation expenses related to this programme, in addition to severance expenses incurred under a voluntary separation plan included within the Operational Optimisation Programme, a programme commenced in 2016 to optimise the company’s production and supply chain network, including the integration of the China sales force and consolidation of production within certain facilities in China and North America.
During the three- and nine-month periods of 2016, the company incurred costs relating primarily to non-cash accelerated depreciation expenses, severance expenses and other third-party advisory costs relating to this programme, in addition to pension settlement charges driven by individuals who departed under the 2015 productivity initiative receiving lumpsum pension distributions.
Acquisition integration costs Costs incurred during the three- and nine-month periods of 2017 and 2016 related to the integration of the 2016 acquisition of Ripple Brand Collective, LLC, as the company incorporates this business into its operating practices and information systems.
Non-service related pension expenses Non-service related pension expenses (NSRPE) include interest costs, the expected return on pension plan assets, the amortisation of actuarial gains and losses and certain curtailment and settlement losses or credits.
NSRPE can fluctuate from year-to-year as a result of changes in market interest rates and market returns on pension plan assets.
The company believes that the service cost component of its total pension benefit costs closely reflects the operating costs of its business and provides for a better comparison of its operating results from year-to-year.
Therefore, it excludes the NSRPE from its internal performance measures. Its most significant defined benefit pension plans have been closed to new participants for a number of years, resulting in ongoing service costs that are stable and predictable.
Long-lived asset impairment charges During the first quarter of 2017, in conjunction with the Margin for Growth Programme, the company wrote down certain intangible assets and property, plant and equipment.
Non-controlling interest share of business realignment and impairment charges Certain of the business realignment and impairment charges recorded in connection with the Margin for Growth Programme related to a joint venture in which the company owns a 50 per cent controlling interest.
Therefore, it has also adjusted for the portion of these charges included within the loss attributed to the non-controlling interest.
Settlement of SGM liability In the fourth quarter of 2015, the company reached an agreement with the SGM selling shareholders to reduce the originally-agreed purchase price for the remaining 20 per cent of SGM, and the company completed the purchase on February 3, 2016.
In the first quarter of 2016, it recorded a $26.7 million gain relating to the settlement of the SGM liability, representing the net carrying amount of the recorded liability in excess of the cash paid to settle the obligation for the remaining 20 per cent of the outstanding shares.
Safe Harbour Statement This release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Many of these forward-looking statements can be identified by the use of words such as intend, believe, expect, anticipate, should, planned, projected, estimated and potential, among others.
These statements are made based upon current expectations that are subject to risk and uncertainty.
As actual results may differ materially from those contained in the forward-looking statements, one should not place undue reliance on the forward-looking statements when deciding whether to buy, sell or hold the company's securities.
Factors that could cause results to differ materially include, but are not limited to, issues or concerns related to the quality and safety of the company’s products, ingredients or packaging; changes in raw material and other costs, along with the availability of adequate supplies of raw materials; selling price increases, including volume declines associated with pricing elasticity; market demand for the company’s new and existing products; increased marketplace competition; disruption to our manufacturing operations or supply chain; failure to successfully execute and integrate 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 the company’s international operations; disruptions, failures or security breaches of its information technology infrastructure; its ability to hire, engage and retain a talented global workforce; the company’s ability to realise expected cost savings and operating efficiencies associated with strategic initiatives or restructuring programmes; complications with the design or implementation of its new enterprise resource planning system; and such other matters as discussed in the company’s annual report on Form 10-K for the year ended December 31, 2016 and its quarterly report on Form 10-Q for the quarter ended July 2, 2017.
All information in this press release is as of October 26, 2017. 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.
The Hershey Company
Consolidated Statements of Income
for the periods ended October 1, 2017 and October 2, 2016 (unaudited) (in thousands except per share amounts)
|
|
|
|
|
Third
Quarter
|
|
Nine
Months
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
Net
sales
|
|
|
$
|
20,33,121
|
|
$
|
20,03,454
|
|
$
|
55,75,790
|
|
$
|
54,69,937
|
Cost
of sales
|
|
|
|
|
10,92,899
|
|
|
11,52,606
|
|
|
29,65,798
|
|
|
30,54,315
|
Gross
profit
|
|
|
|
|
9,40,222
|
|
|
8,50,848
|
|
|
26,09,992
|
|
|
24,15,622
|
Selling,
marketing and administrative expense
|
|
|
4,97,182
|
|
|
4,74,494
|
|
|
14,04,970
|
|
|
14,08,759
|
Long-lived
asset impairment charges
|
|
|
|
—
|
|
—
|
|
2,08,712
|
|
|
—
|
Business
realignment costs
|
|
|
|
|
4,020
|
|
|
2,330
|
|
|
50,018
|
|
|
30,568
|
Operating
profit
|
|
|
|
|
4,39,020
|
|
|
3,74,024
|
|
|
9,46,292
|
|
|
9,76,295
|
Interest
expense, net
|
|
|
|
|
24,589
|
|
|
24,387
|
|
|
72,456
|
|
|
66,730
|
Other
(income) expense, net
|
|
|
|
|
13,630
|
|
|
21,800
|
|
|
23,557
|
|
|
8,703
|
Income
before income taxes
|
|
|
|
|
4,00,801
|
|
|
3,27,837
|
|
|
8,50,279
|
|
|
9,00,862
|
Provision
for income taxes
|
|
|
|
|
1,26,788
|
|
|
1,00,434
|
|
|
2,75,291
|
|
|
2,97,671
|
Net
income including noncontrolling interest
|
|
|
274,013
|
|
|
227,403
|
|
|
574,988
|
|
|
6,03,191
|
Less:
Net income (loss) attributable to noncontrolling
|
|
|
710
|
|
|
—
|
|
|
(26,860)
|
|
|
—
|
interest
|
|
|
|
|
|
|
|
|
|
Net
income attributable to The Hershey Company
|
|
$
|
2,73,303
|
|
$
|
2,27,403
|
|
$
|
6,01,848
|
|
$
|
6,03,191
|
Net
income per share
|
-
Basic
|
-
Common
|
|
$
|
1.32
|
|
$
|
1.09
|
|
$
|
2.91
|
|
$
|
2.88
|
|
-
Diluted - Common
|
|
$
|
1.28
|
|
$
|
1.06
|
|
$
|
2.81
|
|
$
|
2.80
|
|
-
Basic
|
-
Class B
|
$
|
1.20
|
|
$
|
0.99
|
|
$
|
2.64
|
|
$
|
2.63
|
Shares
outstanding
|
-
Basic
|
-
Common
|
|
|
1,51,418
|
|
|
1,53,259
|
|
|
1,52,004
|
|
|
1,53,943
|
|
-
Diluted - Common
|
|
|
2,13,392
|
|
|
2,15,161
|
|
|
2,14,123
|
|
|
2,15,758
|
|
-
Basic
|
-
Class B
|
|
|
60,620
|
|
|
60,620
|
|
|
60,620
|
|
|
60,620
|
Key
margins:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
|
|
46.2%
|
|
42.5%
|
|
46.8%
|
|
44.2%
|
Operating
profit margin
|
|
|
|
|
21.6%
|
|
18.7%
|
|
17%
|
|
17.8%
|
Net
margin
|
|
|
|
|
13.4%
|
|
11.4%
|
|
10.8%
|
|
11%
|
The Hershey Company
Supplementary Information – Segment Results
for the periods ended October 1, 2017 and October 2, 2016 (unaudited) (in thousands of dollars)
|
|
|
Third
Quarter
|
|
|
|
|
|
|
Nine
Months
|
|
|
|
|
|
2017
|
|
|
2016
|
|
%
Change
|
|
2017
|
|
|
2016
|
|
%
Change
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
$
|
17,92,377
|
$
|
17,64,528
|
|
1.6
|
%
$
|
49,46,537
|
$
|
48,42,840
|
2.1
|
|
International
and Other
|
|
2,40,744
|
|
|
2,38,926
|
|
0.8
|
%
|
|
|
6,29,253
|
|
|
6,27,097
|
0.3
|
|
Total
|
$
|
20,33,121
|
$
|
20,03,454
|
|
1.5
|
%
$
|
55,75,790
|
$
|
54,69,937
|
1.9
|
|
Segment
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
$
|
5,54,578
|
$
|
5,63,946
|
|
(1.7)%
|
$
|
15,68,098
|
$
|
15,19,059
|
3.2
|
|
International
and Other
|
|
16,400
|
|
|
4,284
|
|
282.8
|
%
|
|
|
26,491
|
|
|
(12,411)
|
|
NM
|
Total
segment income
|
|
5,70,978
|
|
|
5,68,230
|
|
0.5
|
%
|
|
|
15,94,589
|
|
|
15,06,648
|
5.8
|
|
Unallocated
corporate expense (1)
|
|
1,24,115
|
|
|
1,21,828
|
|
1.9
|
%
|
|
|
3,66,938
|
|
|
3,70,622
|
(1)%
|
Mark-to-market
adjustment for
|
|
(21,954)
|
|
|
35,791
|
|
NM
|
|
(27,486)
|
|
|
30,851
|
|
NM
|
commodity
derivatives (2)
|
|
|
|
|
|
|
|
|
Long-lived
asset impairment
|
|
—
|
|
|
—
|
—
%
|
|
2,08,712
|
|
|
—
|
|
NM
|
charges
|
|
|
|
|
|
|
|
Costs
associated with business
|
|
8,257
|
|
|
27,962
|
|
(70.5)%
|
|
|
69,699
|
|
|
1,04,487
|
(33.3)%
|
realignment
initiatives
|
|
|
|
|
|
|
|
|
Non-service
related pension
|
|
21,540
|
|
|
6,360
|
|
238.7
|
%
|
|
|
30,123
|
|
|
20,666
|
45.8
|
|
Acquisition
integration costs
|
|
—
|
|
|
2,265
|
|
(100.0)%
|
|
|
311
|
|
|
3,727
|
(91.7)%
|
Operating
profit
|
|
4,39,020
|
|
|
3,74,024
|
|
17.4
|
%
|
|
|
9,46,292
|
|
|
9,76,295
|
(3.1)%
|
Interest
expense, net
|
|
24,589
|
|
|
24,387
|
|
0.8
|
%
|
|
|
72,456
|
|
|
66,730
|
8.6
|
|
Other
(income) expense, net
|
|
13,630
|
|
|
21,800
|
|
(37.5)%
|
|
|
23,557
|
|
|
8,703
|
170.7
|
|
Income
before income taxes
|
$
|
4,00,801
|
$
|
3,27,837
|
|
22.3
|
%
$
|
8,50,279
|
$
|
9,00,862
|
(5.6)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance, and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, and (d) other gains or losses that are not integral to segment performance.
(2) Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses. NM - not meaningful
|
Third
Quarter
|
Nine
Months
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Segment
income as a percent of net sales:
|
|
|
|
|
|
|
|
North
America
|
30.9%
|
32%
|
31.7%
|
31.4%
|
International
and Other
|
6.8%
|
1.8%
|
4.2%
|
(2)%
|
The Hershey Company
Consolidated Balance Sheets
as of October 1, 2017 and December 31, 2016 (in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Cash
and cash equivalents
|
$
|
2,75,056
|
$
|
2,96,967
|
Accounts
receivable - trade, net
|
|
|
|
7,42,832
|
|
|
|
5,81,381
|
Inventories
|
|
|
|
9,38,187
|
|
|
|
7,45,678
|
Prepaid
expenses and other
|
|
|
|
2,58,379
|
|
|
|
1,92,752
|
Total
current assets
|
|
|
|
22,14,454
|
|
|
|
18,16,778
|
Property,
plant and equipment, net
|
|
|
|
20,50,124
|
|
|
|
21,77,248
|
Goodwill
|
|
|
|
8,22,348
|
|
|
|
8,12,344
|
Other
intangibles
|
|
|
|
3,75,455
|
|
|
|
4,92,737
|
Other
assets
|
|
|
|
1,74,611
|
|
|
|
1,68,365
|
Deferred
income taxes
|
|
|
|
18,485
|
|
|
|
56,861
|
Total
assets
|
$
|
56,55,477
|
$
|
55,24,333
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
$
|
5,29,442
|
$
|
5,22,536
|
Accrued
liabilities
|
|
|
|
6,73,435
|
|
|
|
7,50,986
|
Accrued
income taxes
|
|
|
|
19,109
|
|
|
|
3,207
|
Short-term
debt
|
|
|
|
8,15,588
|
|
|
|
6,32,471
|
Current
portion of long-term debt
|
|
|
|
3,00,096
|
|
|
|
243
|
Total
current liabilities
|
|
|
|
23,37,670
|
|
|
|
19,09,443
|
Long-term
debt
|
|
|
|
20,54,132
|
|
|
|
23,47,455
|
Other
long-term liabilities
|
|
|
|
4,02,396
|
|
|
|
4,00,161
|
Deferred
income taxes
|
|
|
|
22,303
|
|
|
|
39,587
|
Total
liabilities
|
|
|
|
48,16,501
|
|
|
|
46,96,646
|
Total
stockholders' equity
|
|
|
|
8,38,976
|
|
|
|
8,27,687
|
Total
liabilities and stockholders' equity
|
|
$
|
56,55,477
|
|
$
|
55,24,333
|
|
|
|
|
|
|
|