The Hershey Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020, compared with the three months ended March 31, 2019. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted. Hershey is a global confectionery and snacks company, with North America representing about 91% of Q1 sales.
Key financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $2,037.3 | $2,016.5 | +1.0% |
| Gross profit / margin | $866.6 / 42.5% | $892.5 / 44.3% | Margin down 1.8 percentage points |
| Operating profit / margin | $382.8 / 18.8% | $438.9 / 21.8% | Profit down 12.8% |
| Net income attributable to Hershey | $271.1 | $304.4 | Down 10.9% |
| Diluted EPS, common stock | $1.29 | $1.45 | Down 11.0% |
| Operating cash flow | $246.1 | $330.0 | Down $83.9 |
| Capital expenditures, including software | $99.2 | $92.8 | Up $6.4 |
Cash and cash equivalents were $1,094.8 at quarter-end, up from $493.3 at December 31, 2019. Total debt was approximately $5,079.8, including $837.6 of short-term debt, $788.7 of current long-term debt, and $3,453.5 of long-term debt. The company reported a $1.5 billion revolving credit facility, with an option to increase it by $500 million; it was in compliance with its covenants. Current assets were $2,854.8 and current liabilities were $2,892.8.
Cash used in investing activities was $110.7. Financing activities provided $495.6, including $807.3 of net short-term borrowings; cash dividends paid were $157.8 and share repurchases were $169.2. Common and Class B dividends paid per share were $0.773 and $0.702, respectively.
Material changes and operating drivers
- Sales growth reflected 2.8% favorable price realization and a 0.8% contribution from the 2019 ONE Brands acquisition, offset by a 2.3% volume decline and 0.3% unfavorable foreign exchange. Price increases contributed to volume elasticity; the shorter Easter season and international weakness also weighed on volume.
- Cost of sales rose 4.2%. Management cited an additional $50.4 million of year-over-year mark-to-market losses on commodity derivatives, higher freight and logistics and plant costs, partly offset by supply-chain productivity. These factors drove the 1.8-point gross-margin decline.
- SM&A expense increased 4.8%, primarily from higher advertising and compensation-related expenses. Operating profit was also reduced by $7.5 million of long-lived asset impairment charges and $0.9 million of business realignment costs.
- North America sales rose 2.1% and segment income rose 3.0%; segment margin was 31.5%, versus 31.3%. International and Other sales fell 8.1%, segment income fell 20.8%, and segment margin declined to 8.3% from 9.6%, with COVID-19-related declines in China a principal factor.
- The effective tax rate was 19.8%, versus 23.2%; lower taxes partly offset the decline in operating performance. Other expense increased to $11.5 million, primarily due to higher write-downs of tax-credit-related equity investments.
Outlook, risks, and unusual items
- Management said COVID-19 had not materially affected consolidated Q1 results overall, but its full-year impact remained uncertain. Food-service and world-travel retail were expected to decline; Hershey temporarily closed several Chocolate World locations. Supply-chain disruption had been minimal to date, but could worsen.
- 2020 capital expenditure expectations were reduced to approximately $400–$450 million from $475–$525 million as projects were reprioritized. Strategic supply-chain capacity projects and the global ERP program were continuing, although the ERP implementation was expected to be delayed by approximately one year. No full-year sales or EPS guidance is stated in the filing.
- Management reported sufficient liquidity and actions to preserve it, including limiting discretionary spending. Risks include changing consumer and trade patterns, supply-chain or workforce disruption, price-related volume declines, commodity and currency volatility, and uncertainty in the duration and severity of COVID-19.
- Q1 included $81.8 million of unallocated mark-to-market commodity derivative losses, compared with $28.0 million in Q1 2019. Management said the derivatives economically hedge future commodity purchases; the mark-to-market impact contributed to reported cost pressure. The filing also recorded $4.6 million of impairment on a disposal group and $2.9 million of receivable write-downs.
- The sale of the remaining Lotte Shanghai Foods joint-venture business was expected to be completed during 2020. The filing says pending legal matters were not expected to have a material effect. Tax audits are ongoing; outcomes and timing cannot be predicted, and the company expected approximately $7.4 million of unrecognized tax benefits to reverse within 12 months.
Important facts for investors to verify
- Whether COVID-19 effects on demand, food service, travel retail, operations, and supply chains materially changed after March 29, 2020.
- Whether pricing can sustain sales growth without further volume pressure, and whether North America strength offsets continued international weakness.
- How much of the gross-margin and earnings decline reflects derivative mark-to-market timing versus underlying commodity, freight, and production costs.
- Whether operating cash flow, working-capital needs, and short-term borrowing levels remain manageable alongside dividends, repurchases, and planned capital spending.
- Progress on the Lotte Shanghai Foods sale and the delayed ERP implementation, including any further impairments, costs, or schedule changes.