f10q_3q2007.htm


 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from ______to_______

Commission file number 1-183

THE HERSHEY COMPANY
100 Crystal A Drive
Hershey, PA 17033

Registrant's telephone number:  717-534-4200

State of Incorporation
 
IRS Employer Identification No.
Delaware
 
23-0691590


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  x    Accelerated filer  o    Non-accelerated filer  o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o     No  x


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Common Stock, $1 par value – 166,238,647 shares, as of October 19, 2007.  Class B Common Stock, $1 par value – 60,811,010 shares, as of October 19, 2007.
 


THE HERSHEY COMPANY
 
INDEX
 


 

Part I.  Financial Information
Page Number
   
Item 1.  Consolidated Financial Statements (Unaudited)
 
   
Consolidated Statements of Income
 
Three months ended September 30, 2007 and October 1, 2006
3
   
Consolidated Statements of Income
 
Nine months ended September 30, 2007 and October 1, 2006
4
   
Consolidated Balance Sheets
 
September 30, 2007 and December 31, 2006
5
   
Consolidated Statements of Cash Flows
 
Nine months ended September 30, 2007 and October 1, 2006
6
   
Notes to Consolidated Financial Statements
7
   
   
Item 2.  Management’s Discussion and Analysis of
 
Results of Operations and Financial Condition
21
   
   
Item 3.  Quantitative and Qualitative Disclosures
 
About Market Risk
28
   
   
Item 4.  Controls and Procedures
28
   
   
   
Part II.  Other Information
 
   
Item 2.  Unregistered Sales of Equity Securities and Use
 
Of Proceeds
29
   
   
Item 6.  Exhibits
29
 

 


- 2 -

 
PART I - FINANCIAL INFORMATION
 
Item 1.  Consolidated Financial Statements (Unaudited)
 
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share amounts)
 
   
For the Three Months Ended
 
   
September 30,
2007
   
October 1,
2006
 
             
Net Sales
  $
1,399,469
    $
1,416,202
 
                 
Costs and Expenses:
               
Cost of sales
   
928,846
     
870,733
 
Selling, marketing and administrative
   
229,809
     
221,842
 
Business realignment charge, net
   
112,043
     
1,568
 
                 
Total costs and expenses
   
1,270,698
     
1,094,143
 
                 
Income before Interest and Income Taxes
   
128,771
     
322,059
 
                 
Interest expense, net
   
33,055
     
31,835
 
                 
Income before Income Taxes
   
95,716
     
290,224
 
                 
Provision for income taxes
   
32,932
     
105,103
 
                 
Net Income
  $
62,784
    $
185,121
 
                 
                 
Earnings Per Share - Basic - Class B Common Stock
  $
.26
    $
.73
 
                 
Earnings Per Share - Diluted - Class B Common Stock
  $
.26
    $
.72
 
                 
Earnings Per Share - Basic - Common Stock
  $
.28
    $
.81
 
                 
Earnings Per Share - Diluted - Common Stock
  $
.27
    $
.78
 
                 
Average Shares Outstanding - Basic - Common Stock
   
167,165
     
173,232
 
                 
Average Shares Outstanding - Basic - Class B Common Stock
   
60,812
     
60,816
 
                 
Average Shares Outstanding - Diluted
   
230,388
     
237,681
 
                 
Cash Dividends Paid per Share:
               
Common Stock
  $
.2975
    $
.2700
 
Class B Common Stock
  $
.2678
    $
.2425
 
                 
 
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)
 
   
For the Nine Months Ended
 
   
September 30,
2007
   
October 1,
2006
 
             
Net Sales
  $
3,604,494
    $
3,607,621
 
                 
Costs and Expenses:
               
Cost of sales
   
2,390,402
     
2,222,175
 
Selling, marketing and administrative
   
663,112
     
660,114
 
Business realignment charge, net
   
219,316
     
9,139
 
                 
Total costs and expenses
   
3,272,830
     
2,891,428
 
                 
Income before Interest and Income Taxes
   
331,664
     
716,193
 
                 
Interest expense, net
   
90,523
     
84,528
 
                 
Income before Income Taxes
   
241,141
     
631,665
 
                 
Provision for income taxes
   
81,330
     
226,176
 
                 
Net Income
  $
159,811
    $
405,489
 
                 
                 
Earnings Per Share - Basic - Class B Common Stock
  $
.65
    $
1.58
 
                 
Earnings Per Share - Diluted - Class B Common Stock
  $
.65
    $
1.57
 
                 
Earnings Per Share - Basic - Common Stock
  $
.72
    $
1.76
 
                 
Earnings Per Share - Diluted - Common Stock
  $
.69
    $
1.69
 
                 
Average Shares Outstanding - Basic - Common Stock
   
168,444
     
175,977
 
                 
Average Shares Outstanding - Basic - Class B Common Stock
   
60,814
     
60,817
 
                 
Average Shares Outstanding - Diluted
   
232,026
     
240,326
 
                 
Cash Dividends Paid per Share:
               
Common Stock
  $
.8375
    $
.7600
 
Class B Common Stock
  $
.7528
    $
.6825
 
                 
 
The accompanying notes are an integral part of these consolidated financial statements.

- 4 -


 
THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
 
ASSETS
 
September 30,
2007
   
December 31,
2006
 
             
Current Assets:
           
Cash and cash equivalents
  $
41,573
    $
97,141
 
Accounts receivable - trade
   
638,312
     
522,673
 
Inventories
   
775,380
     
648,820
 
Deferred income taxes
   
58,067
     
61,360
 
Prepaid expenses and other
   
145,433
     
87,818
 
Total current assets
   
1,658,765
     
1,417,812
 
Property, Plant and Equipment, at cost
   
3,698,313
     
3,597,756
 
Less-accumulated depreciation and amortization
    (2,147,961 )     (1,946,456 )
Net property, plant and equipment
   
1,550,352
     
1,651,300
 
Goodwill
   
601,017
     
501,955
 
Other Intangibles
   
150,136
     
140,314
 
Other Assets
   
495,307
     
446,184
 
Total assets
  $
4,455,577
    $
4,157,565
 
                 
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
               
                 
Current Liabilities:
               
Accounts payable
  $
252,276
    $
155,517
 
Accrued liabilities
   
482,215
     
454,023
 
Accrued income taxes
   
5,041
     
 
Short-term debt
   
1,086,098
     
655,233
 
Current portion of long-term debt
   
15,008
     
188,765
 
Total current liabilities
   
1,840,638
     
1,453,538
 
Long-term Debt
   
1,271,658
     
1,248,128
 
Other Long-term Liabilities
   
616,103
     
486,473
 
Deferred Income Taxes
   
171,545
     
286,003
 
Total liabilities
   
3,899,944
     
3,474,142
 
Minority Interest
   
16,284
     
 
Stockholders' Equity:
               
Preferred Stock, shares issued:
               
none in 2007 and 2006
   
     
 
Common Stock, shares issued:  299,090,734 in 2007 and
299,085,666 in 2006
   
299,090
     
299,085
 
Class B Common Stock, shares issued:  60,811,010 in 2007 and
60,816,078 in 2006 
   
60,811
     
60,816
 
Additional paid-in capital
   
330,887
     
298,243
 
Retained earnings
   
3,938,695
     
3,965,415
 
Treasury-Common Stock shares at cost:
               
132,875,127 in 2007 and 129,638,183 in 2006
    (4,000,719 )     (3,801,947 )
Accumulated other comprehensive loss
    (89,415 )     (138,189 )
Total stockholders' equity
   
539,349
     
683,423
 
Total liabilities, minority interest, and stockholders' equity
  $
4,455,577
    $
4,157,565
 
 
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)

   
For the Nine Months Ended
 
   
September 30,
2007
   
October 1,
2006
 
Cash Flows Provided from (Used by) Operating Activities
           
Net Income
  $
159,811
    $
405,489
 
Adjustments to Reconcile Net Income to Net Cash
               
Provided from Operations:
               
Depreciation and amortization
   
227,776
     
148,726
 
Stock-based compensation expense, net of tax of $7,181 and
$14,596, respectively
   
12,822
     
26,174
 
Excess tax benefits from exercise of stock options
    (9,804 )     (5,315 )
Deferred income taxes
   
65,234
     
19,765
 
Business realignment initiatives, net of tax of $118,786 and
$1,910, respectively
   
197,876
     
4,137
 
Contributions to pension plans
    (9,285 )     (18,217 )
Changes in assets and liabilities, net of effects from business acquisitions:
               
Accounts receivable - trade
    (110,415 )     (173,436 )
Inventories
    (128,561 )     (154,013 )
Accounts payable
   
91,221
      (3,853 )
Other assets and liabilities
    (181,391 )     (23,104 )
Net Cash Flows Provided from Operating Activities
   
315,284
     
226,353
 
                 
Cash Flows Provided from (Used by) Investing Activities
               
Capital additions
    (118,204 )     (119,357 )
Capitalized software additions
    (9,526 )     (10,580 )
  Business acquisitions
    (97,030 )    
 
Net Cash Flows (Used by) Investing Activities
    (224,760 )     (129,937 )
                 
Cash Flows Provided from (Used by) Financing Activities
               
Net increase in short-term debt
   
424,067
     
20,970
 
Long-term borrowings
   
     
496,728
 
Repayment of long-term debt
    (188,852 )     (176 )
Cash dividends paid
    (186,531 )     (174,446 )
Exercise of stock options
   
43,878
     
26,123
 
Excess tax benefits from exercise of stock options
   
9,804
     
5,315
 
Repurchase of Common Stock
    (248,458 )     (490,478 )
Net Cash Flows (Used by) Financing Activities
    (146,092 )     (115,964 )
                 
Decrease in Cash and Cash Equivalents
    (55,568 )     (19,548 )
Cash and Cash Equivalents, beginning of period
   
97,141
     
67,183
 
                 
Cash and Cash Equivalents, end of period
  $
41,573
    $
47,635
 
           
                 
Interest Paid
  $
115,974
    $
96,676
 
                 
Income Taxes Paid
  $
145,230
    $
211,997
 
 
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 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 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 2007 presentation.  Operating results for the nine months ended September 30, 2007 may not be indicative of the results that may be expected for the year ending December 31, 2007, because of the seasonal effects of our business.
 
Items Affecting Comparability
 
Securities and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Misstatements When Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”), required companies to change the accounting principle used for evaluating the effect of possible prior year misstatements when quantifying misstatements in current year financial statements. As a result, at December 31, 2006, we changed one of the five criteria of our revenue recognition policy, resulting in a delay in the recognition of revenue on goods in-transit until they are received by our customers. As permitted by SAB No. 108, we adjusted our financial statements for the three-month and nine-month periods ended October 1, 2006 to provide comparability. These adjustments were not material to our results of operations for those periods. For more information, refer to the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.
 
2.        BUSINESS ACQUISITIONS
 
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 invested $58.7 million during the second quarter and own a 51% controlling interest. Total liabilities assumed were $60.7 million. Effective in May 2007, this business acquisition was included in our consolidated results, including the related minority interest.
 
Also in May 2007, our Company and Lotte Confectionery Co., LTD., entered into a manufacturing agreement in China that will produce Hershey products and certain Lotte products for the market in China.  We invested $18.3 million in the second quarter and $20.0 million in the third quarter of 2007 and own a 44% interest.  We are accounting for this investment using the equity method.

- 7 -


 
3.        STOCK COMPENSATION PLANS
 
At our annual meeting of stockholders, held April 17, 2007, stockholders approved The Hershey Company Equity and Incentive Compensation Plan (“EICP”).  The EICP is an amendment and restatement of our former Key Employee Incentive Plan, a share-based employee incentive compensation plan, and is also a continuation of our Broad Based Stock Option Plan, Broad Based Annual Incentive Plan and Directors’ Compensation Plan.  Following its adoption on April 17, 2007, the EICP became the single plan under which grants using shares for compensation and incentive purposes will be made.  The following table summarizes our stock compensation costs:


 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30, 2007
 
October 1, 2006
 
September 30, 2007
 
October 1, 2006
 
(in millions of dollars)
Total compensation amount charged against income for stock compensation plans, including stock options, performance stock units (“PSUs”) and restricted stock units
$  7.6
 
$12.3
 
$  20.0
 
$ 41.8
Total income tax benefit recognized in Consolidated Statements of Income for share-based compensation
$  2.8
 
$ 4.5
 
$    7.2
 
$ 15.0

 
The decrease in share-based compensation expense from 2006 to 2007 was primarily associated with lower performance expectations for PSUs and the timing of stock option grants in 2007. Our annual grant of stock options to management level employees, which customarily has occurred in February of each year, was delayed in 2007 pending approval by our stockholders of the EICP at the annual meeting in April 2007. In 2008, we intend to resume our customary February grant schedule.
 
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:
 
   
For the Nine Months Ended
 
   
September 30,
2007
   
October 1,
2006
 
Dividend yields
    2.0 %     1.6 %
Expected volatility
    19.5 %     23.7 %
Risk-free interest rates
    4.6 %     4.6 %
Expected lives in years
   
6.6
     
6.6
 
 
Stock Options
 
A summary of the status of our stock options as of September 30, 2007, and the change during 2007 is presented below:

 
 
For the Nine Months Ended September 30, 2007
Stock Options
Shares
Weighted-
Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
Outstanding at beginning of the period
13,855,113 
$40.29
6.3 years
Granted
2,115,225 
$54.27
 
Exercised
(1,473,627)
$29.81
 
Forfeited
(288,902)
$54.52
 
Outstanding as of September 30, 2007
14,207,809 
$43.17
6.4 years
Options exercisable as of September 30, 2007
8,487,112 
$37.24
5.1 years

- 8 -



   
For the Nine Months Ended
 
   
September 30,
2007
   
October 1,
2006
 
Weighted-average fair value of options granted (per share)
  $
12.94
    $
15.07
 
Intrinsic value of options exercised (in millions of dollars)
  $
32.2
    $
20.9
 

  •  
As of September 30, 2007, the aggregate intrinsic value of options outstanding was $99.6 million and the aggregate intrinsic value of options exercisable was $95.5 million.
  •  
As of September 30, 2007, there was $45.0 million of total unrecognized compensation cost related to non-vested stock option compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a weighted-average period of 2.6 years.
 
Performance Stock Units and Restricted Stock Units
 
A summary of the status of our performance stock units and restricted stock units as of September 30, 2007, and the change during 2007 is presented below:

Performance Stock Units and Restricted Stock Units
For the Nine
Months Ended
September 30, 2007
 
Weighted-average grant date
fair value for equity awards or
market value for liability
awards
Outstanding at beginning of year
1,075,748 
 
$44.89
Granted
315,899 
 
$51.04
Performance assumption change
(235,108)
 
$51.16
Vested
(432,457)
 
$47.06
Forfeited
(54,358)
 
$50.21
Outstanding as of September 30, 2007
669,724 
 
$39.99

As of September 30, 2007, there was $10.5 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 2.6 years.
 
   
For the Nine Months Ended
 
   
September 30,
2007
   
October 1,
2006
 
Intrinsic value of share-based liabilities paid, combined with the
        fair value of shares vested (in millions of dollars)
  $
21.8
    $
4.2
 
 
The lower amount in 2006 was primarily associated with the additional three-year vesting term for performance stock unit grants for the 2003-2005 performance cycle (“2003 grants”) which reduced the number of shares that vested in 2006 compared with 2007.  An additional three-year vesting term was imposed on the grant date for the 2003 grants with accelerated vesting for retirement, disability or death.  The compensation cost based on grant date fair value for the 2003 grants is being recognized over a period from three to six years.
 
Deferred performance stock units, deferred restricted stock units, and directors’ fees and accumulated dividend amounts representing deferred stock units totaled 728,776 units as of September 30, 2007.  Each unit is equivalent to one share of the Company’s Common Stock.
 
No stock appreciation rights were outstanding as of September 30, 2007.
 
For more information on our stock compensation plans, refer to the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K and our proxy statement for the 2007 annual meeting of stockholders.

- 9 -


 
4.        INTEREST EXPENSE
 
Net interest expense consisted of the following:

   
For the Nine Months Ended
   
September 30,
2007
 
October 1,
2006
   
(in thousands of dollars)
Interest expense
 
$92,690 
 
$   85,800 
Interest income
 
(1,919)
 
(1,226)
Capitalized interest
 
(248)
 
(46)
Interest expense, net
 
$90,523 
 
$   84,528 

 
5.         BUSINESS REALIGNMENT INITIATIVES
 
In February 2007, we announced a comprehensive, three-year supply chain transformation program (the “2007 business realignment initiatives”).  When completed, this program will greatly enhance our manufacturing, sourcing and customer service capabilities, reduce inventories resulting in improvements in working capital and generate significant resources to invest in our growth initiatives.  These initiatives include accelerated marketplace momentum within our core U.S. business, creation of innovative new product platforms to meet customer needs and disciplined global expansion.  Under the program, which will be implemented in stages over three years, we will significantly increase manufacturing capacity utilization by reducing the number of production lines by more than one-third, outsource production of low value-added items and construct a flexible, cost-effective production facility in Monterrey, Mexico to meet current and emerging marketplace needs.  The program will result in a total net reduction of 1,500 positions across our supply chain over the three–year implementation period.
 
The estimated pre-tax cost of the program is from $525 million to $575 million over the next three years.  The total includes from $475 million to $525 million in business realignment costs and approximately $50 million in project implementation costs.  The costs will be incurred primarily in 2007 and 2008, with approximately $380 million to $400 million expected in 2007.
 
In July 2005, we announced initiatives intended to advance our value-enhancing strategy (the “2005 business realignment initiatives”).  Charges for the 2005 business realignment initiatives were recorded during 2005 and 2006 and the 2005 business realignment initiatives were completed by December 31, 2006.

- 10 -


 
Charges (credits) associated with business realignment initiatives recorded during the three-month and nine-month periods ended September 30, 2007 and October 1, 2006 were as follows:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
2007
   
October 1,
2006
   
September 30,
2007
   
October 1,
2006
 
   
(in thousands of dollars)
 
Cost of sales
                       
2007 business realignment initiatives
  $
37,452
    $
    $
88,618
    $
 
2005 business realignment initiatives
   
     
     
      (1,599 )
Previous business realignment initiatives
   
     
     
      (1,600 )
Total cost of sales
   
37,452
     
     
88,618
      (3,199 )
                                 
Selling, marketing and administrative
                               
2007 business realignment initiatives
   
2,395
     
     
8,728
     
 
2005 business realignment initiatives
   
     
108
     
     
108
 
Total selling, marketing and administrative
   
2,395
     
108
     
8,728
     
108
 
                                 
Business realignment and asset impairments, net
                               
2007 business realignment initiatives:
                               
Fixed asset impairments and plant closure expenses
   
8,284
     
     
48,382
     
 
Employee separation costs
   
103,759
     
     
156,618
     
 
Contract termination costs
           
     
14,316
     
 
2005 business realignment initiatives
   
     
1,568
     
     
8,626
 
Previous business realignment initiatives
   
     
     
     
513
 
Total business realignment and asset impairments, net
   
112,043
     
1,568
     
219,316
     
9,139
 
                                 
Total net charges associated with business realignment initiatives
  $
151,890
    $
1,676
    $
316,662
    $
6,048
 
 
The charge of $37.5 million recorded in cost of sales during the third quarter of 2007 for the 2007 business realignment initiatives related to the accelerated depreciation of fixed assets over a reduced estimated remaining useful life and costs related to inventory reductions.  The $2.4 million recorded in selling, marketing and administrative expenses related primarily to project administration.  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 $5.1 million was being held for sale as of September 30, 2007.  The employee separation costs included $35.7 million for involuntary terminations at six North American manufacturing facilities which are being closed.  The facilities are located in Naugatuck, Connecticut; Reading, Pennsylvania; Oakdale, California; Smiths Falls, Ontario; Montreal, Quebec; and Dartmouth, Nova Scotia.  The employee separation costs also included $68.0 million for charges relating to pension and other post-retirement benefits curtailments and special termination benefits.
 
Charges (credits) associated with previous business realignment initiatives which began in 2003 and 2001 resulted from the finalization of the sale of certain properties, adjustments to liabilities which had previously been recorded, and the impact of the settlement as to several of the eight former employees who had filed a complaint alleging that the Company had discriminated against them on the basis of age in connection with the 2003 business realignment initiatives.  A settlement was reached with the remaining former employees in September 2007.  The $1.6 million charge associated with the 2005 business realignment initiatives was related primarily to the U.S. Voluntary Workforce Reduction Program (“VWRP”), in addition to costs for streamlining the Company’s international operations and facility rationalization relating to the closure of the Las Piedras, Puerto Rico plant.  The business realignment charge included $.7 million for involuntary terminations.

- 11 -


 
The charge of $88.6 million recorded in cost of sales during the first nine months of 2007 for the 2007 business realignment initiatives related to the accelerated depreciation of fixed assets over a reduced estimated remaining useful life and costs related to inventory reductions.  The $8.7 million recorded in selling, marketing and administrative expenses related primarily to project administration.  In determining the costs related to fixed asset impairments, fair value was estimated based on the expected sales proceeds.  The employee separation costs included $59.3 million for involuntary terminations and $97.2 million for charges relating to pension and other post-retirement benefits curtailments and special termination benefits.
 
A credit of $1.6 million recorded in cost of sales for the 2005 business realignment initiatives related to higher than expected proceeds from the sale of equipment from the Las Piedras plant.  The $8.6 million charge associated with the 2005 business realignment initiatives related primarily to the U.S. VWRP, along with costs for streamlining the Company’s international operations and facility rationalization relating to the closure of the Las Piedras plant.  The business realignment charge included $3.6 million for involuntary terminations.  Charges (credits) associated with previous business realignment initiatives which began in 2003 and 2001 resulted from the finalization of the sale of certain properties, adjustments to liabilities which had previously been recorded, and the impact of the settlement as to several of the eight former employees who had filed a complaint alleging that the Company had discriminated against them on the basis of age in connection with the 2003 business realignment initiatives.  A settlement was reached with the remaining former employees in September 2007.
 
The September 30, 2007 liability balance relating to the 2007 business realignment initiatives was $57.3 million for employee separation costs.  The September 30, 2007 liability balance relating to the 2005 business realignment initiatives was $5.5 million.  During the first nine months of 2007 we made payments against the liabilities recorded for the 2007 and 2005 business realignment initiatives of $3.6 million and $14.2 million, respectively.  During the first nine months of 2006 we made total payments of $24.7 million against the liabilities recorded for the 2005 business realignment initiatives.
 
6.         EARNINGS PER SHARE
 
In accordance with Statement of Financial Accounting Standards No. 128, 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:
 

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
2007
 
October 1,
2006
 
September 30,
2007
 
October 1,
2006
 
 
(in thousands except per share amounts)
 
         
Net income
$
62,784
  $
185,121
  $
159,811
  $
405,489
 
                         
Weighted-average shares - Basic
                       
Common Stock
 
167,165
   
173,232
   
168,444
   
175,977
 
Class B Common Stock
 
60,812
   
60,816
   
60,814
   
60,817
 
Total weighted-average shares - Basic
 
227,977
   
234,048
   
229,258
   
236,794
 
Effect of dilutive securities:
                       
Employee stock options
 
1,938
   
2,804
   
2,224
   
2,833
 
Performance and restricted stock units
 
473
   
829
   
544
   
699
 
Weighted-average shares - Diluted
 
230,388
   
237,681
   
232,026
   
240,326
 
Earnings Per Share - Basic
                       
Class B Common Stock
$
.26
  $
.73
  $
.65
  $
1.58
 
Common Stock
$
.28
  $
.81
  $
.72
  $
1.76
 
Earnings Per Share - Diluted
                       
Class B Common Stock
$
.26
  $
.72
  $
.65
  $
1.57
 
Common Stock
$
.27
  $
.78
  $
.69
  $
1.69
 


- 12 -


 
The Class B Common Stock is convertible into Common Stock on a share for share basis at any time. In accordance with proposed Financial Accounting Standards Board (“FASB”) Staff Position No. FAS 128-a, Computational Guidance for Computing Diluted EPS under the Two-Class Method, 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.
 
For the three-month and nine-month periods ended September 30, 2007, 6.8 million stock options were not included in the diluted earnings per share calculation because the effect would have been antidilutive. In the third quarter and first nine months of 2006, 3.7 million stock options were not included in the diluted earnings per share calculation because the effect would have been antidilutive.
 
7.        DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 
We account for derivative instruments in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”).  SFAS No. 133 requires us to recognize all derivative instruments at fair value. We classify the derivatives as assets or liabilities on the balance sheet. As of September 30, 2007 and October 1, 2006, all of our derivative instruments were classified as cash flow hedges.
 
Summary of Activity
 
Our cash flow hedging derivative activity during the three months and nine months ended September 30, 2007 and October 1, 2006 was as follows:

 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2007
 
October 1,
2006
 
September 30,
2007
 
October 1,
2006
 
(in millions of dollars)
Net after-tax gains (losses) on cash flow hedging
derivatives
$(2.5)
 
$(25.3)
 
$2.3
 
$(11.0)
Reclassification adjustment of gains (losses)
from accumulated other comprehensive income
to income, net of tax
 0.6 
 
   (2.7)
 
  (.4)
 
    (4.0)
Hedge ineffectiveness gains (losses) recognized
 in cost of sales, before tax
 (.7)
 
      .1 
 
  (.7)
 
      2.0 
 
 
  •  
Net gains and losses on cash flow hedging derivatives were primarily associated with commodities futures contracts in 2007 and with commodities futures contracts and interest rate swap agreements in 2006.
  •  
Reclassification adjustments from accumulated other comprehensive income (loss) to income related to gains or losses on commodities futures contracts and were reflected in cost of sales.  Reclassification adjustments for gains on interest rate swaps were reflected as an adjustment to interest expense.
  •  
We recognized no components of gains or losses on cash flow hedging derivatives in income due to excluding such components from the hedge effectiveness assessment.
 
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 $.5 million after tax as of September 30, 2007. This amount was primarily associated with foreign exchange forward contracts.
 
In February 2006, we terminated a forward swap agreement hedging the anticipated execution of $250 million of term financing because the transaction was no longer expected to occur by the originally specified time period or within an additional two-month period of time thereafter.  A gain of $1.0 million was recorded in the first quarter of 2006 as a result of the discontinuance of this cash flow hedge.  No other gains or losses on cash flow hedging derivatives were reclassified from accumulated other comprehensive income (loss) into income as a result of the discontinuance of a hedge because it became probable that a hedged forecasted transaction would not occur.

- 13 -

For more information, refer to the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.
 
8.        COMPREHENSIVE INCOME
 
A summary of the components of comprehensive income (loss) is as follows:
 
   
For the Three Months Ended
September 30, 2007
 
   
Pre-Tax
Amount
   
Tax
(Expense)
Benefit
   
After-Tax Amount
 
   
(in thousands of dollars)
 
Net income
              $
62,784
 
                     
Other comprehensive income (loss):
                   
Foreign currency translation adjustments
  $
16,738
    $
     
16,738
 
Pension and post-retirement benefit plans
    (282 )    
111
      (171 )
Cash flow hedges:
                       
Losses on cash flow hedging derivatives
    (3,970 )    
1,430
      (2,540 )
Reclassification adjustments
    (987 )    
353
      (634 )
Total other comprehensive income
  $
11,499
    $
1,894
     
13,393
 
Comprehensive income
                  $
76,177
 

   
For the Three Months Ended
October 1, 2006
 
   
Pre-Tax
Amount
   
Tax
(Expense)
Benefit
   
After-Tax Amount
 
   
(in thousands of dollars)
 
Net income
              $
185,121
 
                     
Other comprehensive income (loss):
                   
Foreign currency translation adjustments
  $
2,295
    $
     
2,295
 
Cash flow hedges:
                       
Losses on cash flow hedging derivatives
    (39,603 )    
14,337
      (25,266 )
Reclassification adjustments
   
4,293
      (1,554 )    
2,739
 
Total other comprehensive loss
  $ (33,015 )   $
12,783
      (20,232 )
Comprehensive income
                  $
164,889
 

   
For the Nine Months Ended
September 30, 2007
 
   
Pre-Tax
Amount
   
Tax
(Expense)
Benefit
   
After-Tax Amount
 
   
(in thousands of dollars)
 
Net income
              $
159,811
 
                     
Other comprehensive income (loss):
                   
Foreign currency translation adjustments
  $
44,056
    $
     
44,056
 
Pension and post-retirement benefit plans
   
3,438
      (1,481 )    
1,957
 
Cash flow hedges:
                       
Gains on cash flow hedging derivatives
   
3,677
      (1,338 )    
2,339
 
Reclassification adjustments
   
639
      (217 )    
422
 
Total other comprehensive income
  $
51,810
    $ (3,036 )    
48,774
 
Comprehensive income
                  $
208,585
 

- 14 -


   
For the Nine Months Ended
October 1, 2006
 
   
Pre-Tax
Amount
   
Tax
(Expense)
Benefit
   
After-Tax Amount
 
   
(in thousands of dollars)
 
Net income
              $
405,489
 
                     
Other comprehensive income (loss):
                   
Foreign currency translation adjustments
  $
10,497
    $
     
10,497
 
Minimum pension liability adjustments
   
118
      (42 )    
76
 
Cash flow hedges:
                       
Losses on cash flow hedging derivatives
    (17,201 )    
6,202
      (10,999 )
Reclassification adjustments
   
6,330
      (2,285 )    
4,045
 
Total other comprehensive income
  $ (256 )   $
3,875
     
3,619
 
Comprehensive income
                  $
409,108
 
 
The components of accumulated other comprehensive income (loss) as shown on the Consolidated Balance Sheets are as follows:
 
   
September 30,
2007
   
December 31,
2006
 
   
(in thousands of dollars)
 
Foreign currency translation adjustments
  $
44,021
    $ (35 )
Pension and post-retirement benefit plans, net of tax
    (136,015 )     (137,972 )
Cash flow hedges, net of tax
   
2,579
      (182 )
Total accumulated other comprehensive loss
  $ (89,415 )   $ (138,189 )
 
Effective December 31, 2006, we adopted Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R) (“SFAS No. 158”).  The provisions of SFAS No. 158 require that the funded status of our pension plans and the benefit obligations of our post-retirement benefit plans be recognized in our balance sheet.  Appropriate adjustments were made to various assets and liabilities as of December 31, 2006, with an offsetting after-tax effect of $138.0 million recorded as a component of other comprehensive income rather than as an adjustment to the ending balance of accumulated other comprehensive loss.
 
Excluding the impact of the adoption of SFAS No. 158, total other comprehensive income for the year ended December 31, 2006 was $9.1 million after-tax, compared with the reported other comprehensive loss of $128.9 million after-tax.  The presentation of other comprehensive income for the year ended December 31, 2006 will be adjusted to exclude the impact of the adoption of SFAS No. 158 in our Annual Report on Form 10-K for the year ending December 31, 2007.
 
9.        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:
 
   
September 30,
2007
   
December 31,
2006
 
   
(in thousands of dollars)
 
Raw materials
  $
240,607
    $
214,335
 
Goods in process
   
111,011
     
94,740
 
Finished goods
   
503,909
     
418,250
 
   Inventories at FIFO
   
855,527
     
727,325
 
Adjustment to LIFO
    (80,147 )     (78,505 )
   Total inventories
  $
775,380
    $
648,820
 
 
 
- 15 -

 
The increase in raw material inventories as of September 30, 2007 resulted from the timing of deliveries to support manufacturing requirements, reflecting the seasonality of our business, and higher costs in 2007. The increase in finished goods inventories was primarily associated with seasonal sales patterns, preparation for production line transfers related to the 2007 business realignment initiatives and the introduction of new products.
 
10.     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. In December 2006, we entered into a five-year unsecured revolving credit agreement. The credit limit is $1.1 billion with an option to borrow an additional $400 million with the concurrence of the lenders. These funds may be used for general corporate purposes. Due to seasonal working capital needs, share repurchases and other business activities, we currently expect borrowings to exceed $1.1 billion from time to time during the next twelve months. In lieu of increasing the borrowing limit under the five-year credit agreement, in August 2007, we entered into a new unsecured revolving short-term credit agreement to borrow up to $300 million. Funds borrowed under the new short-term credit agreement may be used for general corporate purposes, including commercial paper backstop. The agreement will expire in August 2008. These unsecured revolving credit agreements contain certain financial and other covenants, customary representations, warranties, and events of default. As of September 30, 2007, we complied with all covenants pertaining to our credit agreements. 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 2006 Annual Report on Form 10-K.
 
11.     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 August 2006, we issued $500 million of Notes under the WKSI Registration Statement.  Proceeds from the debt issuances and any other offerings under the WKSI Registration Statement may be used for general corporate requirements. These may include reducing existing borrowings, financing capital additions, funding contributions to our pension plans, future business acquisitions and working capital requirements.
 
12.     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 September 30, 2007 and December 31, 2006, because of the relatively short maturity of these instruments.
 
The carrying value of long-term debt, including the current portion, was $1,286.7 million as of September 30, 2007, compared with a fair value of $1,319.6 million, an increase of $32.9 million over the carrying value, based on quoted market prices for the same or similar debt issues.
 
Foreign Exchange Forward Contracts
 
The following table summarizes our foreign exchange activity:

 
September 30, 2007
 
Contract
Amount
     Primary
    Currencies
 
(in millions of dollars)
     
Foreign exchange forward contracts to
purchase foreign currencies
 
$           24.2
British pounds
Australian dollars
Mexican pesos
Euros
     
Foreign exchange forward contracts to
sell foreign currencies
 
$           85.7
Canadian dollars
Brazilian reais
Mexican pesos

Our foreign exchange forward contracts mature in 2007 and 2008.

- 16 -


 
We define the fair value of foreign exchange forward contracts as the amount of the difference between contracted and current market foreign currency exchange rates at the end of the period. On a quarterly basis, we estimate the fair value of foreign exchange forward contracts by obtaining market quotes for future contracts with similar terms, adjusted where necessary for maturity differences. We do not hold or issue financial instruments for trading purposes.
 
The total fair value of our foreign exchange forward contracts included in prepaid expenses and other current assets, accrued liabilities and non-current assets (liabilities), as appropriate, on the Consolidated Balance Sheets were as follows:
 
   
September 30,
2007
   
December 31,
2006
 
   
(in millions of dollars)
 
Fair value of foreign exchange forward contracts – (liability) asset
  $
(2.3)
    $
1.5
 
 
13.      INCOME TAXES
 
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. FIN No. 48 describes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
 
We adopted the provisions of FIN No. 48 as of January 1, 2007.  The adoption of FIN No. 48 did not result in a significant change to the liability for unrecognized tax benefits.  Upon adoption, we had unrecognized tax benefits of $79.0 million of which $45.5 million would impact the effective income tax rate if recognized.  The entire amount of unrecognized tax benefits was classified as other long-term liabilities on the balance sheet since we do not expect to make any significant payments to taxing authorities related to such tax positions in the next twelve months.  We report accrued interest and penalties related to unrecognized tax benefits in income tax expense.  Upon adoption, we had accruals of approximately $17.4 million for the payment of interest and penalties.
 
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome.  We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.  Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution.
 
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.  We are no longer subject to U.S. federal examinations by the Internal Revenue Service (“IRS”) for years before 2004 and various tax examinations by state taxing authorities could be conducted for years beginning in 2000.  We are no longer subject to Canadian federal income tax examinations by the Canada Revenue Agency (“CRA”) for years before 1999. U.S. and Canadian federal audit issues typically involve the timing of deductions and transfer pricing adjustments.  We work with the IRS and the CRA to resolve proposed audit adjustments and to minimize the amount of adjustments.  We do not anticipate that any potential tax adjustments will have a significant impact on our financial position or results of operations.

- 17 -


 
14.      PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

Components of net periodic benefits (income) cost consisted of the following:
 


   
Pension Benefits
   
Other Benefits
 
   
For the Three Months Ended
 
   
September 30,
2007
   
October 1,
2006
   
September 30,
2007
   
October 1,
2006
 
   
(in thousands of dollars)
 
Service cost
  $
10,384
    $
14,168
    $
816
    $
1,434
 
Interest cost
   
15,618
     
14,710
     
5,482
     
4,774
 
Expected return on plan assets
    (29,659 )     (26,212 )    
     
 
Amortization of prior service cost
   
262
     
1,145
      (42 )    
49
 
Amortization of unrecognized transition balance
   
     
4
     
     
 
Recognized net actuarial gain/loss
    (104 )    
3,435
     
33
     
928
 
Administrative expenses
   
74
     
176
     
     
 
Net periodic benefits (income) cost
    (3,425 )    
7,426
     
6,289
     
7,185
 
Special termination benefits
   
40,690
     
     
652
     
 
Settlement
   
     
     
     
 
Curtailment
   
4,106
     
     
22,733
     
 
Total amount reflected in earnings
  $
41,371
    $
7,426
    $
29,674
    $
7,185
 
 

           We made contributions of $1.4 million and $5.3 million to the pension plans and other benefits plans, respectively, during the third quarter of 2007.  The Special termination benefits and Curtailment losses recorded in the third quarter of 2007 related to the 2007 business realignment initiatives.  The Settlement and Curtailment losses recorded during the third quarter of 2006 related to the termination of a small non-qualified plan.  In the third quarter of 2006, we made contributions of $9.6 million and $5.0 million to our pension and other benefits plans, respectively.  The contributions in 2007 and 2006 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.
 
In the third quarter of 2007, there was net periodic pension benefits income of $3.4 million, compared with net periodic benefits cost of $7.4 million in the third quarter of 2006.  The net periodic pension benefits income resulted from the changes to the U.S. pension plans announced in October 2006, the higher actual return on pension assets during 2006 and a higher discount rate.
 

   
Pension Benefits
   
Other Benefits
 
   
For the Nine Months Ended
 
   
September 30,
2007
   
October 1,
2006
   
September 30,
2007
   
October 1,
2006
 
   
(in thousands of dollars)
 
Service cost
  $
32,350
    $
42,532
    $
3,165
    $
4,290
 
Interest cost
   
44,837
     
43,964
     
14,943
     
14,313
 
Expected return on plan assets
    (86,801 )     (78,847 )    
     
 
Amortization of prior service cost
   
1,389
     
3,432
      (116 )    
144
 
Amortization of unrecognized transition balance
   
     
13
     
     
 
Recognized net actuarial loss
   
806
     
10,193
     
1,008
     
2,780
 
Administrative expenses
   
375
     
579
     
     
 
Net periodic benefits (income) cost
    (7,044 )    
21,866
     
19,000
     
21,527
 
Special termination benefits
   
46,856
     
     
652
     
 
Settlement
   
     
28
     
     
 
Curtailment
   
8,321
     
31
     
41,595
     
 
Total amount reflected in earnings
  $
48,133
    $
21,925
    $
61,247
    $
21,527
 

- 18 -


 
We made contributions of $9.3 million and $15.7 million to the pension plans and other benefits plans, respectively, during the first nine months of 2007. In the first nine months of 2006, we made contributions of $18.2 million and $18.2 million to our pension and other benefits plans, respectively.  The contributions in 2007 and 2006 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.
 
In the first nine months of 2007, there was net periodic pension benefits income of $7.0 million, compared with net periodic benefits cost of $21.9 million in the first nine months of 2006.  The net periodic pension benefits income resulted from the changes to the U.S. pension plans announced in October 2006, the higher actual return on pension assets during 2006 and a higher discount rate.
 
For 2007, there are no minimum funding requirements for the domestic plans and minimum funding requirements for the non-domestic plans are not material.  We do not anticipate any significant contributions during the remainder of 2007.
 
For more information, refer to the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.
 
15.     SHARE REPURCHASES
 
Repurchases and Issuances of Common Stock
 
A summary of cumulative share repurchases and issuances is as follows:

   
For the nine months ended
September 30, 2007
 
   
Shares
   
Dollars
 
   
(in thousands)
 
Shares repurchased in the open market under pre-approved
share repurchase programs
   
2,916
    $
149,983
 
Shares repurchased to replace Treasury Stock issued for stock options
and incentive compensation
   
1,855
     
98,475
 
Total share repurchases
   
4,771
     
248,458
 
Shares issued for stock options and incentive compensation
    (1,534 )     (49,686 )
Net change
   
3,237
    $
198,772
 
 
  •  
We intend to continue to repurchase shares of Common Stock in order to replace Treasury Stock shares issued for exercised stock options. The value of shares purchased in a given period will vary based on stock options exercised over time and market conditions.
  •  
In December 2006, our Board of Directors approved an additional $250 million share repurchase program. As of September 30, 2007, $100.0 million remained available for repurchases of Common Stock under this program.
 
16.     PENDING ACCOUNTING PRONOUNCEMENTS
 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”).  SFAS No. 157 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements.  SFAS No. 157 is effective for our Company beginning January 1, 2008.  Pending additional guidance from the FASB, we have not yet determined the impact of the adoption of the new accounting standard.
 
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for our Company beginning January 1, 2008.  We do not expect any significant changes to our financial accounting and reporting as a result of this new accounting standard.

- 19 -


17.     SUBSEQUENT EVENTS
 
In October 2007, Richard H. Lenny, Chairman, President and Chief Executive Officer informed our Board of Directors of his intention to retire at the end of 2007.  Mr. Lenny will continue as Chairman of the Board and as a Director of the Company until December 31, 2007, and as Chief Executive Officer until December 1, 2007.
 
Also in October 2007, David J. West was named President and a Director of the Company.  Mr. West will assume the role of Chief Executive Officer on December 1, 2007.  Prior to his appointment, Mr. West was Executive Vice President, Chief Operating Officer.
 
Our Board of Directors also appointed Robert H. Campbell non-executive Chairman of the Board, effective January 1, 2008.  Mr. Campbell is currently a member of The Hershey Company’s Board of Directors, Chairman of the Compensation and Executive Organization Committee, and a member of the Audit Committee and Executive Committee.

- 20 -


 
Item 2.  Management's Discussion and Analysis of Results of Operations and Financial Condition
 
SUMMARY OF OPERATING RESULTS
 
Analysis of Selected Items from Our Income Statement

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
September 30,
2007
 
October 1,
2006
 
Percent
Change
Increase
(Decrease)
 
September 30,
2007
 
October 1,
2006
 
Percent
Change
Increase (Decrease)
 
 (in thousands except per share amounts)
Net Sales
$  1,399.5
 
$1,416.2 
 
(1.2)%
 
$  3,604.5
 
$ 3,607.6 
 
(0.1)%
Cost of Sales
928.9
 
870.7 
 
6.7%
 
2,390.4
 
2,222.2 
 
7.6%
Gross Profit
470.6
 
545.5 
 
(13.7)%
 
1,214.1
 
1,385.4 
 
(12.4)%
Gross Margin
33.6%
 
38.5%
     
33.7%
 
38.4%
   
SM&A Expense
229.8
 
221.8
 
3.6%
 
663.1
 
660.1 
 
0.5%
SM&A Expense as a percent of sales
16.4%
 
15.7%
     
18.4%
 
18.3%
   
Business Realignment  Charge, net
112.0
 
1.6 
 
N/A   
 
219.3
 
9.1 
 
N/A   
EBIT
128.8
 
322.1 
 
(60.0)%
 
331.7
 
716.2 
 
(53.7)%
EBIT Margin
9.2%
 
22.7%
     
9.2%
 
19.9%
   
Interest Expense, net
33.1
 
31.9 
 
3.8%
 
90.5
 
84.5 
 
7.1%
Provision for Income Taxes
32.9
 
105.1 
 
(68.7)%
 
81.4
 
226.2 
 
(64.0)%
Effective Income Tax Rate
34.4%
 
36.2%
     
33.7%
 
35.8%
   
Net Income
$      62.8
 
$   185.1 
 
(66.1)%
 
$    159.8
 
$    405.5 
 
(60.6)%
Net Income Per Share-Diluted
$        .27
 
$       .78 
 
(65.4)%
 
$        .69
 
$      1.69 
 
(59.2)%


Results of Operations - Third Quarter 2007 vs. Third Quarter 2006
 
U.S. Price Increases
 
In April 2007, we announced an increase of approximately 4% to 5% in the wholesale prices of our domestic confectionery line, effective immediately.  The increase applies to our standard bar, king-size bar, 6-pack and vending lines.  These products represent approximately one-third of our portfolio.  This action was implemented to help offset increases in input costs, including raw and packaging materials, fuel, utilities and transportation.  We expect minimal financial impact from the pricing changes for the full year 2007.
 
Net Sales
 
Net sales for the third quarter of 2007 were slightly lower compared with the third quarter of 2006 as a sales volume decline in the U.S. was only partially offset by sales volume increases for our international businesses, primarily exports to Asia and Latin America and higher sales for our business in Mexico.  The sales decrease in the U.S. reflected sluggish retail sales particularly in the convenience store and vending classes of trade which led to reduced inventory levels at select distributors.  Lower levels of new product introductions and the timing of seasonal sales also contributed to lower sales in the U.S. Reduced price realization from higher rates of promotional spending, including increases from trial-driving consumer coupons, and higher returns, discounts and allowances were only partially offset by higher list prices.  Favorable foreign currency exchange rates also contributed modestly to net sales.  The acquisition of the Godrej Hershey Foods and Beverages Company increased net sales by $19.0 million, or 1.3%.
 
Key Marketplace Metrics
 
Consumer takeaway increased 3.5% during the third quarter of 2007 compared with the same period of 2006.  Consumer takeaway is provided for channels of distribution accounting for approximately 80% of our U.S.

- 21 -


 
confectionery retail business. These channels of distribution include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores.
 
Market share in measured channels declined by 1.1 share points during the third quarter of 2007. The change in market share is provided for measured channels which include sales in the food, drug, convenience store and mass merchandiser classes of trade, excluding sales of Wal-Mart Stores, Inc.
 
Cost of Sales and Gross Margin
 
Business realignment charges of $37.5 million were included in cost of sales in the third quarter of 2007.  The remainder of the cost of sales increase was primarily associated with higher input costs, particularly for dairy products, and business acquisitions, offset partially by reduced product obsolescence costs, the sales volume decrease in the U.S. and improved supply chain productivity.
 
Over half of the gross margin decline was attributable to the impact of business realignment initiatives recorded in 2007.  The rest of the decline resulted from higher input costs and reduced price realization which were only partially offset by favorable supply chain productivity and reduced product obsolescence costs.
 
Selling, Marketing and Administrative
 
Selling, marketing and administrative expenses increased primarily as a result of higher selling and advertising expenses which were only partially offset by reduced incentive compensation and consumer promotion expenses.  Expenses of $2.4 million for project implementation related to our 2007 business realignment initiatives were included in selling, marketing and administrative expense for the third quarter of 2007.
 
Business Realignment Initiatives
 
Business realignment charges of $112.0 million were recorded in the third quarter of 2007 associated with the 2007 business realignment initiatives.  The charges were primarily associated with employee separation costs.
 
During the third quarter of 2006, we recorded charges related to previous business realignment initiatives.  The $1.6 million business realignment charge was related primarily to a U.S. VWRP, in addition to costs for streamlining our international operations and facility rationalization related to the closure of the Las Piedras plant.
 
Income Before Interest and Income Taxes and EBIT Margin
 
EBIT decreased in the third quarter of 2007 compared with the third quarter of 2006 principally as a result of higher net business realignment charges associated with our business realignment initiatives. Net pre-tax business realignment charges of $151.9 million were recorded in the third quarter of 2007 compared with $1.7 million recorded in the third quarter of 2006, an increase of $150.2 million. The remainder of the decrease in EBIT was attributable to lower gross profit resulting primarily from higher input costs, and higher selling, marketing and administrative expenses.
 
EBIT margin decreased from 22.7% for the third quarter of 2006 to 9.2% for the third quarter of 2007.  The impact of net business realignment charges reduced EBIT margin by 10.7 percentage points.  The remainder of the decrease resulted from the lower gross margin and higher selling, marketing and administrative expense as a percentage of sales.
 
Interest Expense, Net
 
Net interest expense was higher in the third quarter of 2007 than the comparable period of 2006 primarily reflecting increased short-term borrowings.
 
Income Taxes and Effective Tax Rate
 
Our effective income tax rate was 34.4% for the third quarter of 2007 and benefited by 2.1 percentage points as a result of the higher effective tax rate associated with business realignment charges recorded during the quarter.

- 23 -


 
Net Income and Net Income Per Share
 
Net Income in the third quarter of 2007 was reduced by $94.4 million, or $0.41 per share-diluted, and was reduced by $1.1 million, in the third quarter of 2006 as a result of net charges associated with our business realignment initiatives. After considering the impact of business realignment charges in each period, earnings per share-diluted in the third quarter of 2007 decreased $0.10 as compared to the third quarter of 2006.
 
Results of Operations – First Nine Months 2007 vs. First Nine Months 2006
 
Net Sales
 
Net sales for the first nine months of 2007 were slightly lower than the comparable period of 2006 as lower sales volume for existing products in the U.S. was substantially offset by volume increases from the introduction of new products, primarily in the U.S., and higher sales for our international businesses, primarily Canada, Mexico and exports to Asia. The acquisition of the Godrej Hershey Foods and Beverages Company increased net sales by $26.4 million, or 0.7%, in the first nine months of 2007.  These increases were substantially offset by decreased price realization from higher rates of promotional spending and higher returns, discounts and allowances for products at retail which more than offset increases in list prices.
 
Key Marketplace Metrics
 
Consumer takeaway increased 1.3% during the first nine months of 2007.  Consumer takeaway is provided for channels of distribution accounting for approximately 80% of our U.S. confectionery retail business. These channels of distribution include food, drug, mass merchandisers, including Wal-Mart Stores, Inc., and convenience stores.
 
Market Share in measured channels declined by 1.3 share points during the first nine months of 2007. The change in market share is provided for measured channels which include sales in the food, drug, convenience store and mass merchandiser classes of trade, excluding sales of Wal-Mart Stores, Inc.
 
Cost of Sales and Gross Margin
 
Business realignment charges of $88.6 million were included in cost of sales in the first nine months of 2007, compared with a credit of $3.2 million in the prior year.  The remainder of the cost of sales increase was primarily associated with significantly higher input costs, particularly for dairy products, and the Godrej Hershey Foods and Beverages acquisition, offset somewhat by favorable supply chain productivity.
 
Over half of the gross margin decline was attributable to the impact of business realignment initiatives recorded in 2007 compared with 2006.  The rest of the decline reflected substantially higher costs for raw materials somewhat offset by improved supply chain productivity. Also contributing to the decrease was lower net price realization due to higher promotional costs.
 
Selling, Marketing and Administrative
 
Selling, marketing and administrative expenses increased as a result of project implementation costs related to our 2007 business realignment initiatives of $8.7 million. These costs and increased selling expenses were mostly offset by lower administrative costs associated with incentive compensation. Higher advertising expense was substantially offset by lower consumer promotional expenses.

- 23 -


 
Business Realignment Initiatives
 
Business realignment charges of $219.3 million were recorded in the first nine months of 2007 associated with our 2007 business realignment initiatives. The charges were primarily related to employee separation costs, fixed asset impairments and the closure of certain manufacturing facilities, along with the termination of certain contracts.
 
During the first nine months of 2006, we recorded charges related to previous business realignment initiatives.  The $9.1 million charge for these business realignment initiatives related primarily to a U.S. VWRP, along with facility rationalization relating to the closure of the Las Piedras plant and streamlining our international operations.
 
Income Before Interest and Income Taxes and EBIT Margin
 
EBIT decreased in the first nine months of 2007 compared with the first nine months of 2006 principally as a result of higher net business realignment charges associated with our 2007 business realignment initiatives. Net pre-tax business realignment charges of $316.7 million were recorded in the first nine months of 2007 compared with $6.0 million recorded in the first nine months of 2006, an increase of $310.7 million.  The remainder of the decrease in EBIT was due to lower gross profit, resulting primarily from higher input costs, slightly offset by lower selling, marketing and administrative expenses.
 
EBIT margin decreased from 19.9% for the first nine months of 2006 to 9.2% for the first nine months of 2007.  The impact of net business realignment charges reduced EBIT margin by 8.7 percentage points.  The remainder of the decrease primarily resulted from the lower gross margin.
 
Interest Expense, Net
 
Net interest expense was higher in the first nine months of 2007 than the comparable period of 2006 primarily reflecting increased borrowings in addition to higher average interest rates in 2007.

Income Taxes and Effective Tax Rate
 
Our effective income tax rate was 33.7% for the first nine months of 2007 and benefited by 2.2 percentage points as a result of the higher effective tax rate associated with business realignment charges recorded during the first nine months.  We expect our effective income tax rate for the full year 2007 to be 36.0%, excluding the impact of tax benefits associated with business realignment charges during the year.
 
Net Income and Net Income Per Share
 
Net Income in the first nine months 2007 was reduced by $197.9 million, or $0.85 per share-diluted, and was reduced by $4.1 million, or $0.01 per share-diluted, in the first nine months of 2006 as a result of net charges associated with our business realignment initiatives. After considering the impact of business realignment charges in each period, earnings per share-diluted for the first nine months of 2007 was lower by $.16 per share-diluted as compared with the first nine months of 2006.
 
Liquidity and Capital Resources
 
Historically, our major source of financing has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, generally have been met by issuing commercial paper. Commercial paper may also be issued from time to time to finance ongoing business transactions such as the refinancing of obligations associated with certain lease arrangements, the repayment of long-term debt and for other general corporate purposes. During the first nine months of 2007, cash and cash equivalents decreased by $55.6 million. Cash provided from operations for the first nine months of 2007 increased from the comparable period of 2006 primarily as a result of improved cash flows related to working capital.
 
Cash provided from operations, short-term borrowings, cash provided from stock options exercises and cash on hand at the beginning of the period was sufficient to fund the repayment of long-term debt of $188.9 million, the repurchase of Common Stock for $248.5 million, business acquisitions of $97.0 million, dividend payments of $186.5 million and capital additions and capitalized software expenditures of $127.7 million.
 
Cash used by changes in other assets and liabilities was $181.4 million for the first nine months of 2007 compared with cash used of $23.1 million for the same period of 2006. The increase in the amount of cash used by

- 24 -


 
other assets and liabilities from 2006 to 2007 primarily reflected the impact of business realignment initiatives, incentive compensation and interest payments.
 
During the second quarter of 2007, we acquired a 51% controlling interest in Godrej Hershey Foods and Beverages Company in India for $58.7 million. During the second and third quarters of 2007, we invested a total of $38.3 million to acquire a 44% equity interest under an agreement with Lotte Confectionery Co., LTD in China.
 
A receivable of approximately $17.9 million was included in prepaid expenses and other current assets as of September 30, 2007 and $14.0 million as of December 31, 2006 related to the recovery of damages from a product recall and temporary plant closure in Canada.  The increase resulted from currency exchange rate fluctuations and additional costs.  The product recall during the fourth quarter of 2006 was caused by a contaminated ingredient purchased from an outside supplier with whom we have filed a claim for damages and are currently in litigation.
 
Interest paid was $116.0 million during the first nine months of 2007 versus $96.7 million for the comparable period of 2006.  The increase in interest paid reflects additional borrowings and the higher interest rate environment.  Income taxes paid were $145.2 million during the first nine months of 2007 versus $212.0 million for the comparable period of 2006.  The decrease in taxes paid in 2007 was primarily related to a lower federal extension payment for 2006 income taxes and the impact of lower annualized taxable income in 2007.
 
The ratio of current assets to current liabilities decreased slightly to 0.9:1.0 as of September 30, 2007 from 1.0:1.0 as of December 31, 2006. The capitalization ratio (total short-term and long-term debt as a percent of stockholders' equity, short-term and long-term debt) increased to 81% as of September 30, 2007 from 75% as of December 31, 2006.
 
Generally, our short-term borrowings are in the form of commercial paper or bank loans with an original maturity of three months or less. In December 2006, we entered into a five-year credit agreement establishing an unsecured revolving credit facility to borrow up to $1.1 billion with the option to increase borrowings by an additional $400 million with the concurrence of the lenders. In October 2007, we exercised our option under the agreement to extend the term by one year.  The extension is expected to become effective in the fourth quarter of 2007. We may use these funds for general corporate purposes. Due to seasonal working capital needs, share repurchases and other business activities, we currently expect borrowings to exceed $1.1 billion from time to time during the next twelve months. In lieu of increasing the borrowing limit under the five-year credit agreement, in August 2007, we entered into a new unsecured revolving short-term credit agreement to borrow up to $300 million. Funds borrowed under the new short-term credit agreement may be used for general corporate purposes, including commercial paper backstop.  The agreement will expire in August 2008.
 
Capital Structure
 
Hershey Trust Company, as trustee for the benefit of Milton Hershey School (the “Milton Hershey School Trust”) maintains voting control over The Hershey Company.  Historically, the Milton Hershey School Trust has not taken an active role in setting our policy, nor has it exercised influence with regard to the ongoing business decisions of our Board of Directors or management.  However, in October 2007, the Milton Hershey School Trust issued a statement that, in its role as controlling stockholder of the Company, it intends to retain its controlling interest in The Hershey Company and that the long-term prosperity of the Company requires the Board of Directors of the Company and its management to build on its strong U.S position by aggressively pursuing strategies for domestic and international growth.  The Milton Hershey School Trust also stated that it has communicated to the Company’s Board of Directors that it is not satisfied with the Company’s results which have been underperforming both the market and its own stated expectations.  As a result, the Milton Hershey School Trust has stated that, as controlling stockholder, it is actively engaged in an ongoing process, the goal of which has been to ensure vigorous focus by the Company’s Board of Directors on resolving the Company’s current business challenges and on implementing new growth strategies.
 
For more information on the Company’s capital structure, refer to the consolidated financial statements and notes included in our 2006 Annual Report on Form 10-K.

- 25 -


 
Outlook
 
The outlook section contains a number of forward-looking statements, all of which are based on current expectations.  Actual results may differ materially.  Refer to the Safe Harbor Statement below as well as Risk Factors and other information contained in our 2006 Annual Report on Form 10-K for information concerning the key risks to achieving future performance goals.
 
We have revised our operating performance expectations for the full year 2007 as a result of slower than expected improvement in U.S. sales and increased investment in consumer and customer programs.  Our latest expectations with regard to key operating performance measures are presented below.
 
We expect net sales for the full year 2007 to be essentially even with 2006.  Excluding incremental sales from the Godrej Hershey Beverages and Foods acquisition, net sales are expected to decline approximately 1%. The decline in net sales, primarily in the United States, reflects increased competitive activity, reduced retail velocity, a decrease in sales from the introduction of new products and lower shipments to select distributors.  The sales decrease in the U.S. is expected to be partially offset by incremental sales from the Godrej acquisition and increased sales for our international businesses.
 
We expect that our 2007 business realignment initiatives designed to execute a comprehensive, three-year supply chain transformation plan will result in total pre-tax charges and non-recurring project implementation costs of $525 million to $575 million.  Total charges include project management and start-up costs of approximately $50 million.  In 2007, we now expect to record charges of approximately $380 million to $400 million, or $1.03 to $1.08 per share-diluted.  Total charges to be recorded in 2007 are expected to be higher than our original estimates due to the earlier timing of charges related to early retirement and voluntary severance programs. Charges related to these programs were originally expected to be recorded in 2008, however, they were recorded in the third quarter of 2007 upon acceptance by the employees.
 
As a result of the program, we estimate on-going savings of approximately $170 million to $190 million to be generated by 2010.  A portion of the savings will be invested in our strategic growth initiatives, in such areas as core brand growth, new product innovation, selling and go-to-market capabilities and disciplined global expansion.  The amount and timing of this investment will be contingent upon market conditions and the pace of our innovation and global expansion.
 
Excluding the impact of business realignment charges, we now expect our gross margin to be down nearly 200 basis points for the full year 2007.  We expect significantly higher input costs in 2007 compared with 2006, particularly as a result of a significant increase in dairy input costs.  The dairy markets are not as developed as many of the other commodities markets and, therefore, it is not possible to hedge our costs by taking forward positions to extend coverage for longer periods of time. An unfavorable sales mix resulting primarily from reduced shipments of higher-margin, single-serve items will also contribute to the lower gross margin.
 
Excluding the impact of business realignment charges, we now expect EBIT margin to decline approximately 250 basis points for the full year 2007.  This decline will result from the decision to maintain our increased levels of brand investment, despite the increase in expected dairy costs and an unfavorable sales mix.  In addition to the lower gross margin, increased investment spending for trade promotions, advertising and improved selling capabilities is expected to contribute to the decline in EBIT, EBIT margin and earnings per share-diluted in 2007.
 
Excluding the impact of business realignment charges, earnings per share-diluted is now expected to be in the $2.08 - $2.12 range for the full year 2007.

- 26 -


 
In this section, we have provided diluted earnings per share measures excluding certain items. 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, we believe exclusion of such items provides additional information to investors to facilitate the comparison of past and present operations.  Below is a reconciliation of GAAP and non-GAAP items to our earnings per share outlook:
 
   
2006
   
2007
 
Reported / Expected EPS-Diluted
  $
2.34
    $
1.00 - $1.09
 
Total Realignment Charges
  $
0.03
    $
1.03 - $1.08
 
EPS-Diluted from Operations*
  $
2.37
     
 
 
Expected EPS-Diluted from Operations*
          $
2.08 - $2.12
 
                 
*From operations, excluding business realignment and one-time costs.
 
 

 
Subsequent Events
 
In October 2007, Richard H. Lenny, Chairman, President and Chief Executive Officer informed our Board of Directors of his intention to retire at the end of 2007.  Mr. Lenny will continue as Chairman of the Board and as a Director of the Company until December 31, 2007, and as Chief Executive Officer until December 1, 2007.
 
Also in October 2007, David J. West was named President and a Director of the Company.  Mr. West will assume the role of Chief Executive Officer on December 1, 2007.  Prior to his appointment, Mr. West was Executive Vice President, Chief Operating Officer.
 
Our Board of Directors also appointed Robert H. Campbell non-executive Chairman of the Board, effective January 1, 2008.  Mr. Campbell is currently a member of The Hershey Company’s Board of Directors, Chairman of the Compensation and Executive Organization Committee, and a member of the Audit Committee and Executive Committee.
 
Safe Harbor Statement
 
We are subject to changing economic, competitive, regulatory and technological conditions, risks and uncertainties because of the nature of our operations. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions that we have discussed directly or implied in this report.  Many of the forward-looking statements contained in this report may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated,” and “potential,” among others.
 
Our results could differ materially because of the following factors, which include, but are not limited to:
 
  •  
Our ability to implement and generate expected ongoing annual savings from the initiatives to transform our supply chain and advance our value-enhancing strategy;
 
  •  
Changes in raw material and other costs and selling price increases;
 
  •  
Our ability to execute our supply chain transformation within the anticipated timeframe in accordance with our cost estimates;
 
  •  
The impact of future developments related to the product recall and temporary plant closure in Canada during the fourth quarter of 2006, including our ability to recover costs we incurred for the recall and plant closure from responsible third parties;
 
  •  
Pension cost factors, such as actuarial assumptions, market performance and employee retirement decisions;
 
  •  
Changes in our stock price, and resulting impacts on our expenses for incentive compensation, stock options and certain employee benefits;
 

- 27 -



  •  
Market demand for our new and existing products;
 
  •  
Changes in our business environment, including actions of competitors and changes in consumer preferences;
 
  •  
Changes in governmental laws and regulations, including taxes;
 
  •  
Risks and uncertainties related to our international operations; and
 
  •  
Such other matters as discussed in our Annual Report on Form 10-K for 2006.
 
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
 
The potential net loss in fair value of foreign exchange forward contracts of ten percent resulting from a hypothetical near-term adverse change in market rates was $.2 million as of September 30, 2007 and December 31, 2006.  The market risk resulting from a hypothetical adverse market price movement of ten percent associated with the estimated average fair value of net commodity positions increased from $3.7 million as of December 31, 2006, to $28.6 million as of September 30, 2007.  Market risk represents 10% of the estimated average fair value of net commodity positions at four dates prior to the end of each period.
 
Item 4.  Controls and Procedures
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
As of the end of the period covered by this quarterly report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15 under the Exchange Act.  This evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective.  There has been no change during the most recent fiscal quarter in our internal control over financial reporting identified in connection with the evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION
 
 
Items 1, 1A, 3, 4 and 5 have been omitted as not applicable.
 
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities
 
Period
(a) Total
Number of Shares Purchased
 
(b) Average
Price Paid
per Share
 
(c) Total Number
of Shares
Purchased as
Part of Publicly Announced Plans
or Programs
 
(d) Approximate
Dollar Value of
Shares that May
Yet Be
Purchased Under
the Plans or
 Programs
             
(in thousands of dollars)
 July 2 through
 July 29, 2007
 
366,000
   
$   47.73
   
366,000
   
$132,534
                       
 July 30 through
 August 26, 2007
 
718,400
   
$   47.29
   
687,400
   
$100,017
                       
 August 27 through
 September 30, 2007