The Hershey Company — Q1 2021 Form 10-Q
Reporting period: Three months ended April 4, 2021; compared with the three months ended March 29, 2020. Results are unaudited. Hershey’s North America segment generated about 91% of sales.
Financial results
| Metric | Q1 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $2.296 billion | $2.037 billion | +12.7% |
| Gross profit / margin | $1.049 billion / 45.7% | $867 million / 42.5% | +21.0%; +3.2 percentage points |
| Operating profit / margin | $553 million / 24.1% | $383 million / 18.8% | +44.5% |
| Net income attributable to Hershey | $396 million | $271 million | +46.0% |
| Diluted EPS, common stock | $1.90 | $1.29 | +47.3% |
| Operating cash flow | $610 million | $246 million | +$364 million |
| Capital expenditures, including software | $114 million | $99 million | +$15 million |
Revenue growth reflected an 11.0% volume increase and 1.9% favorable price realization, partly offset by divestitures and foreign exchange. U.S. retail takeaway increased 13.4%; candy, mint and gum takeaway rose 14.7%, with an approximately 108-basis-point market-share gain. Cash from operations benefited from stronger earnings and a substantially smaller working-capital cash use than in the prior-year quarter.
At April 4, 2021, cash and equivalents were $1.132 billion. Debt comprised $64 million of short-term debt and $4.448 billion of long-term debt, including its current portion; total debt was approximately $4.513 billion. The company had a $1.5 billion revolving credit facility and reported covenant compliance and no outstanding commercial paper. Current assets were $2.860 billion and current liabilities $1.775 billion.
Cash dividends paid were $163 million and share repurchases used $240 million. The board’s $500 million repurchase authorization had approximately $260 million remaining. Common-stock and Class B dividends paid per share were $0.804 and $0.731, respectively.
Material changes and drivers
- Gross margin expansion was attributed to favorable commodity-derivative mark-to-market effects, pricing and supply-chain productivity; higher freight, logistics and plant costs partly offset the gains.
- Operating profit also benefited from no impairment charge in Q1 2021 versus $7.5 million in Q1 2020. The comparison included a $90.8 million year-over-year improvement in favorable commodity-derivative mark-to-market activity.
- SM&A expense rose 4.1%, reflecting higher advertising, employee costs and corporate spending. Corporate expense increased to $137.8 million from $124.6 million, primarily due to incentive compensation and technology and capability investments.
- Effective tax rate increased to 22.8% from 19.8%. Other expense fell to $2.4 million from $11.5 million, mainly because write-downs on tax-credit partnership investments were lower.
- North America sales rose 12.8% and segment income 13.8%. International and Other sales rose 11.2%, while segment income increased to $33.8 million from $16.0 million, partly reflecting China optimization, volume and pricing.
Outlook, risks and notable items
- Management expected 2021 capital expenditures, including capitalized software, to be approximately $550 million, principally for the ERP implementation, supply-chain capacity, automation and technology.
- The company expected to use $350 million to repay 3.100% Notes at maturity in May 2021. Management said share repurchases would return to a more traditional strategy for the remainder of 2021. The filing provides no specific full-year sales or EPS guidance.
- COVID-19 had caused minimal supply-chain disruption, and manufacturing facilities were open. Management considered liquidity sufficient but warned that pandemic duration, variants, consumer behavior and recovery could affect results.
- The International Optimization Program, including changes to the China operating model, was expected to finish by mid-2022 and carry total pretax costs of $50–$75 million, including $40–$65 million in cash costs. Q1 2021 charges were $6.9 million; cumulative charges since inception were $36.3 million.
- Other risks cited include commodity and freight inflation, supply availability, pricing elasticity, competition, international growth, execution of cost-saving initiatives, ERP implementation, cybersecurity and product, labor-rights and other ESG-related concerns.
- A proposed class action alleging child-labor and human-trafficking law violations named Hershey among several defendants. Hershey had not been served, considered the suit without merit and intended to defend it; management did not expect pending legal matters to materially affect financial condition, results or cash flows.
- Hershey completed the LSFC divestiture in January 2021; proceeds and financial-statement impact were immaterial. It also repaid $84.7 million of 8.800% debentures at maturity and recorded a $2.5 million pension settlement charge.
Key facts for investors to verify
- How much of the margin and earnings improvement was sustainable versus attributable to commodity-derivative mark-to-market comparisons and the absence of prior-year impairment charges.
- Whether volume, pricing and market-share gains continue, and how higher freight, plant and input costs affect margins.
- Progress, remaining costs and expected benefits of the China optimization program and the multiyear ERP and capacity investments.
- Cash-flow quality, including working-capital and tax-payment timing, as well as the planned 2021 capital spending and May debt maturity payment.
- Developments in the cited litigation, tax audits, COVID-19 conditions and the other disclosed operational and market risks.