This excerpt taken from the HSY 10-Q filed May 11, 2005.
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
Results of Operations First Quarter 2005 vs. First Quarter 2004
Net sales for the first quarter of 2005 increased $113.3 million, or 11%, from 2004. The Mauna Loa and Grupo Lorena acquisitions contributed incremental sales of $29.0 million, or approximately 3% of the increase from 2004. Approximately three quarters of the organic sales growth of 8% resulted from unit volume growth, primarily reflecting the introduction of new products and improved performance by the Companys international businesses, particularly in Canada and Mexico. Additionally, a portion of the organic sales volume increase resulted from a buy-in prior to the effective date of selling price increases. The remainder of the sales increase resulted from a more efficient rate of promotional spending and lower returns, discounts and allowances as a percentage of sales.
Cost of sales for the quarter increased $69.5 million, or 11%, from 2004 to 2005. The cost increase was primarily caused by the higher sales volume and higher raw material costs, principally associated with increased prices for cocoa and dairy products. Gross margin increased slightly from 38.2% in 2004 to 38.3% in 2005. The margin expansion reflected improved price realization, primarily from reduced promotional spending as a percentage of sales, as well as selling price increases and a lower rate of returns, discounts and allowances. These margin improvements were substantially offset by higher raw material costs and a less favorable product mix, primarily associated with the lower margin Mauna Loa and Grupo Lorena businesses.
Selling, marketing and administrative expenses for the first quarter of 2005 increased 10% from the comparable period in 2004, primarily reflecting increased employee compensation costs, incremental expenses related to the business acquisitions and higher advertising expense. Selling, marketing and administrative expenses as a percentage of sales, declined from 20.1% in 2004 to 20.0% in 2005.
Net interest expense in the first quarter of 2005 was $4.6 million higher than the comparable period of 2004, primarily reflecting higher short-term interest expense and decreased capitalized interest. The increase in short-term interest expense was primarily associated with commercial paper borrowings for repurchases of Common Stock and the 2004 business acquisitions.
The effective income tax rate for the first quarter of 2005 was 36.6% compared with 36.4% for the first quarter of 2004, reflecting the best estimates of the expected effective income tax rates for the full-years.
Net income for the first quarter increased $11.1 million, or 10%, from 2004 to 2005, and net income per share-diluted increased $.06, or 15%. The increase was primarily attributable to increased income from operations and the impact of lower weighted-average shares outstanding resulting from share repurchases.
Liquidity and Capital Resources
Historically, the Companys major source of financing has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, generally have been met by issuing commercial paper. During the first quarter of 2005, the Companys cash and cash equivalents decreased by $36.8 million. Cash provided from operations, short-term borrowings, cash received from stock options exercises and cash on hand at the beginning of the period was sufficient to fund incentive plan transactions reflecting the repurchase of Common Stock issued for stock options exercises and benefits plans of $223.5 million, dividend payments of $52.8 million, the repurchase of the Companys Common Stock for $44.2 million under the 2002 stock repurchase program, and capital expenditures and capitalized software expenditures of $32.2 million. Cash used by changes in other assets and liabilities was $63.5 million for the first quarter of 2005 compared with $55.3 million for the same period of 2004. The increase from the prior year primarily reflected contributions to the Companys pension plans in 2005 and decreases in liabilities associated with marketing programs, partially offset by a reduction in the use of cash from commodity transactions.
Income taxes paid of $15.3 million during the first quarter of 2005 decreased from $28.4 million for the comparable period of 2004. The payment of estimated income taxes in 2005 was reduced significantly as a result of deductions for pension plan contributions.
The ratio of current assets to current liabilities decreased to 0.8:1 as of April 3, 2005 from 0.9:1 as of December 31, 2004. The Companys capitalization ratio (total short-term and long-term debt as a percent of stockholders equity, short-term and long-term debt) was 59% as of April 3, 2005 and 55% as of December 31, 2004. The higher capitalization ratio in 2005 primarily reflected the impact of additional short-term borrowings.
In November 2004, the Company entered into a five-year credit agreement with banks, financial institutions and other institutional lenders. The credit agreement established an unsecured revolving credit facility under which the Company may
borrow up to $900 million with the option to increase borrowings by an additional $600 million with the concurrence of the lenders. Funds borrowed may be used for general corporate purposes, including commercial paper backstop and business acquisitions.
In April 2005, the Companys Board of Directors approved a share repurchase program authorizing the repurchase of up to $250 million of the Companys Common Stock in the open market, or through privately negotiated transactions. Acquired shares of the Common Stock will be held as Treasury Stock.
Safe Harbor Statement
The nature of the Companys operations and the environment in which it operates subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company notes the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. Many of the forward-looking statements contained in this document may be identified by the use of forward-looking words such as intend, believe, expect, anticipate, should, planned, estimated and potential, among others. Factors which could cause results to differ include, but are not limited to: changes in the Companys business environment, including actions of competitors and changes in consumer preferences; customer and consumer response to selling price increases; changes in governmental laws and regulations, including taxes; market demand for new and existing products; changes in raw material and other costs; pension cost factors, such as actuarial assumptions, market performance and employee retirement decisions; successful resolution of upcoming labor contract negotiations; and the Companys ability to implement improvements to and reduce costs associated with the Companys supply chain.