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Hershey Foods 10-Q 2009 UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
For the
quarterly period ended October 4, 2009
OR
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
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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 – 167,011,152 shares, as of October 23,
2009. Class B Common Stock,
$1 par
value – 60,708,908 shares, as of October 23, 2009.
THE
HERSHEY COMPANY
INDEX
-2-
PART
I - FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements (Unaudited)
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands except per share amounts)
The
accompanying notes are an integral part of these consolidated financial
statements.
-3-
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
(in
thousands except per share amounts)
The
accompanying notes are an integral part of these consolidated financial
statements.
-4-
THE
HERSHEY COMPANY
CONSOLIDATED
BALANCE SHEETS
(in
thousands of dollars)
The
accompanying notes are an integral part of these consolidated balance
sheets.
-5-
THE
HERSHEY COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands of dollars)
The
accompanying notes are an integral part of these consolidated financial
statements.
-6-
THE
HERSHEY COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
BASIS OF PRESENTATION
Our
unaudited consolidated financial statements provided in this report include the
accounts of the Company and our majority-owned subsidiaries and entities in
which we have a controlling financial interest after the elimination of
intercompany accounts and transactions. We have a controlling
financial interest if we own a majority of the outstanding voting common stock
and noncontrolling stockholders do not have substantive participating rights, or
we have significant control over an entity through contractual or economic
interests in which we are the primary beneficiary. We prepared these statements
in accordance with the instructions to Form 10-Q. These statements do
not include all of the information and footnotes required by U.S. generally
accepted accounting principles (“GAAP”) for complete financial
statements.
We
included all adjustments (consisting only of normal recurring accruals) which we
believe were considered necessary for a fair presentation. We
reclassified certain prior year amounts to conform to the 2009
presentation. Operating results for the nine months ended
October 4, 2009 may not be indicative of the results that may be expected
for the year ending December 31, 2009, because of the seasonal effects of
our business. For more information, refer to the consolidated financial
statements and notes included in our 2008 Annual Report on
Form 10-K.
In May
2009, the Financial Accounting Standards Board (“FASB”) issued a new standard
effective for both interim and annual financial statements ending after June 15,
2009. It establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. In our
second quarter of 2009, we adopted this new standard which did not have a
material impact on our financial accounting or disclosure.
We
evaluated all subsequent events through the date and time our financial
statements were issued on November 12, 2009. No subsequent events
occurred during this reporting period that require recognition or disclosure in
this filing.
2. BUSINESS
ACQUISITIONS AND DIVESTITURES
In
January 2008, our Brazilian subsidiary, Hershey do Brasil, entered into a
cooperative agreement with Pandurata Alimentos LTDA (“Bauducco”), a leading
manufacturer of baked goods in Brazil whose primary brand is
Bauducco. The arrangement with Bauducco leverages Bauducco’s
strong sales and distribution capabilities for our products throughout
Brazil. Under this agreement we manufacture and market, and they
sell and distribute our products. In the first quarter of 2008, we
received approximately $2.0 million in cash and recorded an other intangible
asset of $13.7 million associated with the cooperative agreement with Bauducco
in exchange for our conveying to Bauducco a 49% interest in Hershey do
Brasil. We maintain a 51% controlling interest in Hershey do
Brasil.
In March
2009, our Company completed the acquisition of the Van Houten Singapore consumer
business. The acquisition from Barry Callebaut, AG provides our
Company with an exclusive license of the Van Houten brand name and related
trademarks in Asia and the Middle East for the retail and duty free distribution
channels. The purchase price for the acquisition of Van Houten
Singapore and the licensing agreement was approximately $15.2
million.
Results
subsequent to the acquisition dates were included in the consolidated financial
statements. Had the results of the acquisitions been included in the
consolidated financial statements for each of the periods presented, the effect
would not have been material.
3. NONCONTROLLING
INTERESTS IN SUBSIDIARIES
As of
January 1, 2009, the Company adopted a FASB accounting standard that establishes
new accounting and reporting requirements for the noncontrolling interest in a
subsidiary (formerly known as minority interest) and for the deconsolidation of
a subsidiary and requires the noncontrolling interest to be reported as a
component of equity. In addition, changes in a parent’s ownership
interest while the parent retains its controlling interest will be accounted for
as equity transactions, and any retained noncontrolling equity investment upon
the deconsolidation of a subsidiary will be measured initially at fair
value.
In May
2007, we entered into an agreement with Godrej Beverages and Foods, Ltd., one of
India’s largest consumer goods, confectionery and food companies, to manufacture
and distribute confectionery products, snacks and beverages across
India. Under the agreement, we own a 51% controlling interest in
Godrej Hershey Ltd. In January 2009, the Company contributed cash of
approximately $8.7 million to Godrej Hershey Ltd. and owners of the
noncontrolling interests in Godrej Hershey Ltd. contributed approximately
$7.3 million. The ownership interest percentages in Godrej Hershey
Ltd.
-7-
did not
change significantly as a result of these contributions. The
noncontrolling interests in Godrej Hershey Ltd. are included in the equity
section of the Consolidated Balance Sheets.
We also
own a 51% controlling interest in Hershey do Brasil under the cooperative
agreement with Bauducco. The noncontrolling interest in Hershey do
Brasil is included in the equity section of the Consolidated Balance
Sheets.
The
increase in noncontrolling interests in subsidiaries from $31.7 million as of
December 31, 2008 to $40.4 million as of October 4, 2009 reflected the $7.3
million contribution from the noncontrolling interests in Godrej Hershey Ltd.
and the impact of currency translation adjustments, partially offset by a
reduction resulting from the recording of the share of losses pertaining to the
noncontrolling interests. The share of losses pertaining to the
noncontrolling interests in subsidiaries was $2.7 million for the nine months
ended October 4, 2009 and $4.1 million for the nine months ended September 28,
2008. This was reflected in selling, marketing and administrative
expenses.
4. STOCK
COMPENSATION PLANS
The
Hershey Company Equity and Incentive Compensation Plan (“EICP”) is the plan
under which grants using shares for compensation and incentive purposes are
made. The following table summarizes our stock compensation
costs:
The
increase in share-based compensation expense for the third quarter and first
nine months of 2009 resulted from the higher performance expectations for our
PSU awards.
We
estimated the fair value of each stock option grant on the date of the grant
using a Black-Scholes option-pricing model and the weighted-average assumptions
set forth in the following table:
-8-
Stock
Options
A summary
of the status of our stock options as of October 4, 2009, and the change
during 2009 is presented below:
Performance
Stock Units and Restricted Stock Units
A summary
of the status of our performance stock units and restricted stock units as of
October 4, 2009, and the change during 2009 is presented
below:
As of
October 4, 2009, there was $33.4 million of unrecognized compensation
cost relating to non-vested performance stock units and restricted stock
units. We expect to recognize that cost over a weighted-average
period of 2.1 years.
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Deferred
performance stock units, deferred restricted stock units, and directors’ fees
and accumulated dividend amounts representing deferred stock units totaled
516,104 units as of October 4, 2009. Each unit is equivalent to
one share of the Company’s Common Stock.
No stock
appreciation rights were outstanding as of October 4, 2009.
For more
information on our stock compensation plans, refer to the consolidated financial
statements and notes included in our 2008 Annual Report on Form 10-K and our
proxy statement for the 2009 annual meeting of stockholders.
5. INTEREST
EXPENSE
Net
interest expense consisted of the following:
6. BUSINESS
REALIGNMENT INITIATIVES
In
February 2007, we announced a comprehensive, three-year supply chain
transformation program (the “global supply chain transformation program or
GSCT”) and, in December 2007, we initiated a business realignment program
associated with our business in Brazil (together, “the 2007 business realignment
initiatives”). In December 2008, we approved a modest expansion in
the scope of the global supply chain transformation program to include the
closure of two subscale manufacturing facilities of Artisan Confections Company,
a wholly-owned subsidiary, and consolidation of the associated production into
existing U.S. facilities, along with rationalization of other select portfolio
items. The affected facilities are located in Berkeley and San
Francisco, California. The additional business realignment charges
related to the expansion in scope will be recorded in 2009 and include severance
for approximately 150 impacted employees.
The
original estimated pre-tax cost of the program announced in February 2007 was
from $525 million to $575 million over three years. The total
included from $475 million to $525 million in business realignment costs and
approximately $50 million in project implementation costs. The
increase in scope approved in December 2008 increased the total expected cost by
about $25 million. In addition, the current trends of employee lump
sum withdrawals from the defined benefit pension plans are expected to result in
non-cash pension settlement losses from $30 million to $40 million during the
remainder of 2009 and 2010, in addition to the $36.7 million recorded during the
first nine months of 2009. Therefore, we continue to expect total
pre-tax charges and non-recurring project implementation costs of $640 million
to $665 million for the GSCT. Total costs of $72.7 million were
recorded during the first nine months of 2009, costs of $130.0 million were
recorded in 2008 and costs of $400.0 million were recorded in 2007 for this
program.
In an
effort to improve the performance of our business in Brazil, in January 2008
Hershey do Brasil entered into a cooperative agreement with
Bauducco. Business realignment and impairment charges of $4.9 million
were recorded in 2008.
-10-
Charges
(credits) associated with business realignment initiatives recorded during the
three-month and nine-month periods ended October 4, 2009 and
September 28, 2008 were as follows:
The
charge of $1.3 million recorded in cost of sales during the third quarter of
2009 related primarily to the start-up costs associated with the global supply
chain transformation program. The $1.7 million recorded in selling,
marketing and administrative expenses related primarily to project
administration for the global supply chain transformation
program. The $1.6 million of fixed asset impairments and plant
closure expenses for 2009 related primarily to the preparation of plants for
sale and production line removal costs. In determining the costs
related to fixed asset impairments, fair value was estimated based on the
expected sales proceeds. Certain real estate with a carrying value of
$12.9 million was being held for sale as of October 4, 2009. The
global supply chain transformation program employee separation costs were
related to involuntary terminations at the manufacturing facilities of Artisan
Confections Company which have been closed. As of October 4,
2009, manufacturing facilities located in Dartmouth, Nova Scotia; Oakdale,
California; and Montreal, Quebec have been closed and sold. The facilities
located in Naugatuck, Connecticut; Reading, Pennsylvania; and Smiths Falls,
Ontario have been closed and are being held for sale. The higher
pension settlement loss in the third quarter of 2009 compared to the third
quarter of 2008 resulted from an increase in actuarial losses associated with
the significant decline in the fair value of pension assets in 2008, along with
the increased level of lump sum withdrawals from a defined benefit pension plan
related to employee departures associated with the global supply chain
transformation program.
The
charge of $8.5 million recorded in cost of sales during the first nine months of
2009 for the global supply chain transformation program related to start-up
costs associated with the global supply chain transformation program and the
accelerated depreciation of fixed assets over a reduced estimated remaining
useful life. The $5.4 million recorded in selling, marketing and
administrative expenses related primarily to project administration for the
global supply chain transformation program. The $18.5 million of fixed asset
impairments and plant closure expenses related primarily to the preparation of
plants for sale and production line removal costs. In determining the costs
related to fixed asset impairments, fair value was estimated based on the
expected sales proceeds. The global supply chain transformation program employee
separation costs were related to involuntary terminations at the manufacturing
facilities of Artisan Confections Company which have
-11-
been
closed. The higher pension settlement loss in the first nine months
of 2009 compared to the first nine months of 2008 resulted from an increase in
actuarial losses associated with the significant decline in the fair value of
pension assets in 2008, along with the increased level of lump sum withdrawals
from a defined benefit pension plan related to employee departures associated
with the global supply chain transformation program.
The
charge of $20.0 million recorded in cost of sales during the third quarter of
2008 related primarily to the accelerated depreciation of fixed assets over a
reduced estimated remaining useful life and start-up costs associated with the
global supply chain transformation program. The $2.2 million recorded
in selling, marketing and administrative expenses related primarily to project
administration for the global supply chain transformation program. In
determining the costs related to fixed asset impairments, fair value was
estimated based on the expected sales proceeds. The $.2 million of
losses on sale of fixed assets resulted from reductions to the carrying value of
assets being held for sale. The $1.8 million of fixed asset
impairments and plant closure expenses for 2008 related primarily to the
preparation of plants for sale and production line removal costs. The
global supply chain transformation program employee separation costs related to
involuntary terminations at the North American manufacturing facilities which
were being closed.
The
charge of $60.1 million recorded in cost of sales during the first nine months
of 2008 related primarily to the accelerated depreciation of fixed assets over a
reduced estimated remaining useful life and start-up costs associated with the
global supply chain transformation program. The $6.1 million recorded
in selling, marketing and administrative expenses related primarily to project
administration for the global supply chain transformation program. In
determining the costs related to fixed asset impairments, fair value was
estimated based on the expected sales proceeds. The $6.6 million of
gains on sale of fixed assets resulted from the receipt of proceeds in excess of
the carrying value primarily from the sale of a warehousing and distribution
facility. The $17.0 million of fixed asset impairments and plant
closure expenses for 2008 related primarily to the preparation of plants for
sale and production line removal costs. The global supply chain
transformation program employee separation costs related to involuntary
terminations at the North American manufacturing facilities which were being
closed.
The
2008 Brazilian business realignment charges were related to costs for
involuntary terminations and costs associated with office consolidation related
to the cooperative agreement with Bauducco.
The
October 4, 2009 liability balance relating to the 2007 business realignment
initiatives was $9.8 million for employee separation costs. During
the first nine months of 2009, we made payments against the liabilities recorded
for the 2007 business realignment initiatives of $24.7 million principally
related to employee separation costs.
7. EARNINGS
PER SHARE
We
compute Basic and Diluted Earnings Per Share based on the weighted-average
number of shares of the Common Stock and the Class B Common Stock outstanding as
follows:
-12-
The Class
B Common Stock is convertible into Common Stock on a share for share basis at
any time. The calculation of earnings per share-diluted for the Class
B Common Stock was performed using the two-class method and the calculation of
earnings per share-diluted for the Common Stock was performed using the
if-converted method.
8.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We
classify derivatives as assets or liabilities on the balance sheet. Accounting
for the change in fair value of the derivative depends on:
There are
three types of hedging relationships:
As of
October 4, 2009 and December 31, 2008, we classified all of our derivative
instruments as cash flow hedges.
The
amount of net losses on cash flow hedging derivatives, including foreign
exchange forward contracts, interest rate swap agreements and commodities
futures contracts, expected to be reclassified into earnings in the next twelve
months was approximately $10.7 million after tax as of October 4,
2009. This amount was primarily associated with commodities futures
contracts.
For more
information, refer to the consolidated financial statements and notes included
in our 2008 Annual Report on Form 10-K.
Objectives,
Strategies and Accounting Policies Associated with Derivative
Instruments
We use
certain derivative instruments, from time to time, to manage interest rate,
foreign currency exchange rate and commodity market price risk exposures. We
enter into interest rate swap agreements and foreign currency forward contracts
and options for periods consistent with their related underlying exposures. We
enter into commodities futures and options contracts for varying periods. Our
commodities futures and options contracts are effective as hedges of market
price risks associated with anticipated raw material purchases, energy
requirements and transportation costs.
We do not
hold or issue derivative instruments for trading purposes and are not a party to
any instruments with leverage or prepayment features. In entering into these
contracts, we have assumed the risk that might arise from the possible inability
of counterparties to meet the terms of their contracts. We mitigate
this risk by performing financial assessments prior to contract execution,
conducting periodic evaluations of counterparty performance and maintaining a
diverse portfolio of qualified counterparties. We do not expect any
significant losses from counterparty defaults.
Interest
Rate Swaps
In order
to minimize financing costs and to manage interest rate exposure, from time to
time, we enter into interest rate swap agreements. We include gains and losses
on interest rate swap agreements in other comprehensive income. We recognize
gains and losses on interest rate swap agreements as an adjustment to interest
expense in the same period as the hedged interest payments affect
earnings. We classify cash flows from interest rate swap agreements
as net cash provided from operating activities on the Consolidated Statements of
Cash Flows. Our risk related to interest rate swap agreements is
limited to the cost of replacing the agreements at prevailing market
rates.
Foreign
Exchange Forward Contracts
We enter
into foreign exchange forward contracts to hedge transactions primarily related
to commitments and forecasted purchases of equipment, raw materials and finished
goods denominated in foreign currencies. We may also hedge payment of forecasted
intercompany transactions with our subsidiaries outside the United States. These
contracts reduce currency risk from exchange rate movements. We generally hedge
foreign currency price risks for periods from 3 to 24 months.
-13-
Foreign
exchange forward contracts are effective as hedges of identifiable, foreign
currency commitments. Since there is a direct relationship between the foreign
currency derivatives and the foreign currency denomination of the transactions,
the derivatives are highly effective in hedging cash flows related to
transactions denominated in the corresponding foreign currencies. We designate
our foreign exchange forward contracts as cash flow hedging
derivatives.
These
contracts meet the criteria for cash flow hedge accounting treatment.
Accordingly, we include related gains and losses in other comprehensive income.
Subsequently, we recognize the gains and losses in cost of sales or selling,
marketing and administrative expense in the same period that the hedged items
affect earnings. In entering into these contracts, we have assumed the risk that
might arise from the possible inability of counterparties to meet the terms of
their contracts. We do not expect any significant losses from counterparty
defaults.
We
classify the fair value of foreign exchange forward contracts as prepaid
expenses and other current assets, other non-current assets, accrued liabilities
or other long-term liabilities on the Consolidated Balance Sheets. We report the
offset to the contracts in accumulated other comprehensive loss, net of income
taxes. We record gains and losses on these contracts as a component of other
comprehensive income and reclassify them into earnings in the same period during
which the hedged transaction affects earnings. For hedges associated with the
purchase of equipment, we designate the related cash flows as net cash flows
(used by) provided from investing activities on the Consolidated Statements of
Cash Flows. We classify cash flows from other foreign exchange forward contracts
as net cash provided from operating activities.
As of
October 4, 2009, the fair value of foreign exchange forward contracts with
gains totaled $5.8 million and the fair value of foreign exchange forward
contracts with losses totaled $6.4 million. Over the last three years
the volume of activity for foreign exchange forward contracts to purchase
foreign currencies ranged from a contract amount of $.8 million to $31.9
million. Over the same period, the volume of activity for foreign
exchange forward contracts to sell foreign currencies ranged from a contract
amount of $14.7 million to $165.1 million.
Commodities
Futures and Options Contracts
We enter
into commodities futures and options contracts to reduce the effect of raw
material price fluctuations and to hedge transportation costs. We generally
hedge commodity price risks for 3 to 24 month periods. The commodities futures
and options contracts are highly effective in hedging price risks for our raw
material requirements and transportation costs. Because our commodities futures
and options contracts meet hedge criteria, we account for them as cash flow
hedges. Accordingly, we include gains and losses on hedging in other
comprehensive income. We recognize gains and losses ratably in cost of sales in
the same period that we record the hedged raw material requirements in cost of
sales.
We use
exchange traded futures contracts to fix the price of unpriced physical forward
purchase contracts. Physical forward purchase contracts meet the definition of
“normal purchase and sales” and, therefore, are not accounted for as derivative
instruments. On a daily basis, we receive or make cash transfers
reflecting changes in the value of futures contracts (unrealized gains and
losses). As mentioned above, such gains and losses are included as a component
of other comprehensive income. The cash transfers offset higher or lower cash
requirements for payment of future invoice prices for raw materials, energy
requirements and transportation costs. Futures held in excess of the amount
required to fix the price of unpriced physical forward contracts are effective
as hedges of anticipated purchases.
Over the
last three years our total annual volume of futures and options traded in
conjunction with commodities hedging strategies ranged from 55,000 to 70,000
contracts. We use futures and options contracts in combination with
forward purchasing of cocoa products, sugar, corn sweeteners, natural gas, fuel
oil and certain dairy products primarily to provide favorable pricing
opportunities and flexibility in sourcing our raw material and energy
requirements. Our commodity procurement practices are intended to
reduce the risk of future price increases and provide visibility to future
costs, but also may potentially limit our ability to benefit from possible price
decreases.
Hedge
Effectiveness—Commodities
We
perform an assessment of hedge effectiveness for commodities futures and options
contracts on a quarterly basis. Because of the rollover strategy used for
commodities futures contracts, as required by futures market conditions, some
ineffectiveness may result in hedging forecasted manufacturing requirements.
This occurs as we switch futures contracts from nearby contract positions to
contract positions that are required to fix the price of anticipated
manufacturing requirements. Hedge ineffectiveness may also result from
variability in basis differentials associated with the purchase of raw materials
for manufacturing requirements. We record the ineffective portion of
gains or losses on commodities futures and options contracts currently in cost
of sales.
-14-
The
prices of commodities futures contracts reflect delivery to the same locations
where we take delivery of the physical commodities. Therefore, there is no
ineffectiveness resulting from differences in location between the derivative
and the hedged item.
Financial
Statement Location and Amounts Pertaining to Derivative Instruments
The fair
value of derivative instruments in the Consolidated Balance Sheet as of
October 4, 2009 was as follows:
The fair
value of the interest rate swap agreements represents the difference in the
present values of cash flows calculated at the contracted interest rates and at
current market interest rates at the end of the period. We calculate
the fair value of interest rate swap agreements quarterly based on the quoted
market price for the same or similar financial instruments.
We define
the fair value of foreign exchange forward contracts and options as the amount
of the difference between the contracted and current market foreign currency
exchange rates at the end of the period. We estimate the fair value
of foreign exchange forward contracts and options on a quarterly basis by
obtaining market quotes of spot and forward rates for contracts with similar
terms, adjusted where necessary for maturity differences.
As of
October 4, 2009, prepaid expense and other current assets were associated
with the fair value of commodity options contracts. Accrued
liabilities were related to cash transfers payable on commodities futures
contracts reflecting the change in quoted market prices on the last trading day
for the period. We make or receive cash transfers to or from
commodity futures brokers on a daily basis reflecting changes in the value of
futures contracts on the IntercontinentalExchange or various other
exchanges. These changes in value represent unrealized gains and
losses.
The
effect of derivative instruments on the Consolidated Statements of Income for
the nine months ended October 4, 2009 was as follows:
All gains
(losses) recognized in earnings were related to the ineffective portion of the
hedging relationship. We recognized no components of gains and losses
on cash flow hedging derivatives in income due to excluding such components from
the hedge effectiveness assessment.
-15-
9. COMPREHENSIVE
INCOME
A summary
of the components of comprehensive income (loss) is as follows:
-16-
The
components of accumulated other comprehensive income (loss) as shown on the
Consolidated Balance Sheets are as follows:
10. INVENTORIES
We value
the majority of our inventories under the last-in, first-out (“LIFO”) method and
the remaining inventories at the lower of first-in, first-out (“FIFO”) cost or
market. Inventories were as follows:
The
increase in raw material inventories as of October 4, 2009 resulted from the
timing of deliveries to support manufacturing requirements and higher prices in
2009. The decrease in finished goods inventories was primarily
associated with initiatives to improve sales forecasting and inventory planning,
the impact of the global supply chain transformation program and seasonal sales
patterns.
11. SHORT-TERM
DEBT
As a
source of short-term financing, we utilize commercial paper or bank loans with
an original maturity of three months or less. Our five-year unsecured revolving
credit agreement expires in December 2012. The credit limit is $1.1 billion with
an option to borrow an additional $400 million with the concurrence of the
lenders. The unsecured revolving credit agreement contains certain financial and
other covenants, customary representations, warranties and events of default. As
of October 4, 2009, we complied with all covenants pertaining to the credit
agreement. There were no significant compensating balance agreements that
legally restricted these funds. For more information, refer to the consolidated
financial statements and notes included in our 2008 Annual Report on Form
10-K.
-17-
12. LONG-TERM
DEBT
In May
2006, we filed a shelf registration statement on Form S-3 that registered an
indeterminate amount of debt securities. This registration statement
was effective immediately upon filing under Securities and Exchange Commission
regulations governing “well-known seasoned issuers” (the “WKSI Registration
Statement”). In March 2008, the Company issued $250 million of 5.0%
Notes due April 1, 2013 under the WKSI Registration
Statement. The net proceeds of this debt issuance were used to repay
a portion of the Company’s outstanding indebtedness under its short-term
commercial paper program. The May 2006 WKSI Registration Statement
expired in May 2009. Accordingly, in May 2009, we filed a new
registration statement on Form S-3 to replace the May 2006 WKSI Registration
Statement. The May 2009 WKSI Registration Statement registered an
indeterminate amount of debt securities and was effective
immediately.
13. 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 4, 2009 and December 31, 2008, because of the
relatively short maturity of these instruments.
The
carrying value of long-term debt, including the current portion, was
$1,519.1 million as of October 4, 2009, compared with a fair value of
$1,686.5 million, an increase of $167.4 million over the carrying
value, based on quoted market prices for the same or similar debt
issues.
Interest
Rate Swaps
In order
to minimize financing costs and to manage interest rate exposure, the Company,
from time to time, enters into interest rate swap agreements. In
March 2009, the Company entered into forward starting interest rate swap
agreements to hedge interest rate exposure related to the anticipated $250
million of term financing expected to be executed during 2011 to repay $250
million of 5.3% Notes maturing in September 2011. The
weighted-average fixed rate on the forward starting swap agreements was
3.5%. The fair value of interest rate swap agreements was a net asset
of $3.5 million as of October 4, 2009. The Company’s risk related to
interest rate swap agreements is limited to the cost of replacing such
agreements at prevailing market rates. For more information see Note
8. Derivative Instruments and Hedging Activities.
Foreign
Exchange Forward Contracts
The
following table summarizes our foreign exchange activity:
Our
foreign exchange forward contracts mature in 2009 and 2010. For more
information, see Note 8. Derivative Instruments and Hedging
Activities.
14. FAIR
VALUE ACCOUNTING
We follow
a fair value measurement hierarchy to price certain assets or
liabilities. The fair value is determined based on inputs or
assumptions that market participants would use in pricing the asset or
liability. These assumptions consist of (1) observable inputs -
market data obtained from independent sources, or (2) unobservable inputs -
market data determined using the company’s own assumptions about
valuation.
We
prioritize the inputs to valuation techniques, with the highest priority being
given to Level 1 inputs and the lowest priority to Level 3 inputs, as defined
below:
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We use
certain derivative instruments, from time to time, to manage interest rate,
foreign currency exchange rate and commodity market price risk exposures, all of
which are recorded at fair value based on quoted market prices or
rates.
A summary
of our cash flow hedging derivative assets and liabilities measured at fair
value on a recurring basis as of October 4, 2009, is as
follows:
As of
October 4, 2009, cash flow hedging derivative Level 1 assets were associated
with the fair value of commodity options contracts. As of October 4,
2009, cash flow hedging derivative Level 1 liabilities were related to cash
transfers payable on commodities futures contracts reflecting the change in
quoted market prices on the last trading day for the period. As of
October 4, 2009, cash flow hedging derivative Level 2 assets were related to the
fair value of interest rate swap agreements and foreign exchange forward
contracts with gains. Cash flow hedging Level 2 liabilities were
related to the fair value of foreign exchange forward contracts with
losses. For more information, see Note 8. Derivative Instruments and
Hedging Activities.
15. INCOME
TAXES
The
number of years with open tax audits varies depending on the tax
jurisdiction. Our major taxing jurisdictions include the United
States (federal and state) and Canada. During the second quarter of
2009, the U.S. Internal Revenue Service completed its audit of our U.S. income
tax returns for 2005 and 2006, resulting in the resolution of tax contingencies
associated with the 2004, 2005 and 2006 tax years.
16. PENSION
AND OTHER POST-RETIREMENT BENEFIT PLANS
Components
of net periodic benefits (income) cost consisted of the following:
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We made
contributions of $43.8 million and $5.7 million to the pension plans
and other benefits plans, respectively, during the third quarter of
2009. In the third quarter of 2008, we made contributions of
$20.8 million and $6.0 million to our pension and other benefits
plans, respectively. The contributions in 2009 primarily reflected
voluntary contributions to our qualified pension plans to improve the funded
status and the 2008 contributions primarily reflected benefit payments from our
non-qualified pension plans and post-retirement benefit plans.
In the
third quarter of 2009, there was net periodic pension benefits expense of
$12.1 million, compared with net periodic pension benefits income of
$4.3 million in the third quarter of 2008. The net periodic
pension benefits expense was primarily due to the significant decline in the
value of pension assets during 2008 reflecting unprecedented volatility and
deterioration in financial market and economic conditions. The
special termination benefits and settlement losses recorded in the third quarter
of 2009 and 2008 primarily related to the 2007 business realignment
initiatives.
We made
contributions of $45.8 million and $17.9 million to the pension plans
and other benefits plans, respectively, during the first nine months of
2009. In the first nine months of 2008, we made contributions of
$24.6 million and $17.9 million to our pension and other benefits
plans, respectively.
In the
first nine months of 2009, there was net periodic pension benefits expense of
$36.3 million, compared with net periodic pension benefits income of
$13.1 million in the first nine months of 2008. The net periodic
pension benefits expense was primarily due to the significant decline in the
value of pension assets during 2008 reflecting unprecedented volatility and
deterioration in financial market and economic conditions. The
special termination benefits and settlement losses recorded during the first
nine months of 2009 and 2008 related to the 2007 business realignment
initiatives.
For 2009,
there are no minimum funding requirements in excess of available credits for the
domestic plans and minimum funding requirements for the non-domestic plans are
not material. The Company made contributions to pension plans during
the third quarter of 2009 to improve the funded status of certain qualified
pension plans.
For more
information, refer to the consolidated financial statements and notes included
in our 2008 Annual Report on
Form
10-K.
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17. SHARE
REPURCHASES
Repurchases
and Issuances of Common Stock
A summary
of cumulative share repurchases and issuances is as follows:
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