The Hershey Company — Q2 2022 Form 10-Q
Reporting period: Second quarter and six months ended July 3, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions of dollars unless stated otherwise. Financial statements are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $2,372.6 (+19.3%) | $1,989.4 | $5,038.8 (+17.6%) | $4,285.4 |
| Gross profit / margin | $1,000.0 / 42.1% | $925.4 / 46.5% | $2,245.5 / 44.6% | $1,974.4 / 46.1% |
| Operating profit / margin | $456.5 / 19.2% | $456.7 / 23.0% | $1,177.5 / 23.4% | $1,009.7 / 23.6% |
| Net income attributable to Hershey | $315.6 (+4.8%) | $301.2 | $849.0 (+21.8%) | $697.0 |
| Diluted EPS, common stock | $1.53 (+5.5%) | $1.45 | $4.10 (+22.4%) | $3.35 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1,113.8 | $1,017.7 |
- Revenue drivers: Q2 growth reflected 9.5% favorable price realization, 5.3% from 2021 acquisitions, and 4.6% higher volume, partly offset by foreign exchange. For the first half, price realization was 7.8%, acquisitions contributed 4.9%, and volume rose 4.9%.
- Margins and costs: Q2 gross margin contracted 440 basis points. Management cited freight and logistics costs, supply-chain inflation, unfavorable commodity-derivative mark-to-market effects, and product mix. Pricing and volume partly offset the pressure. Q2 operating profit was essentially flat despite higher sales.
- Segments, Q2: North America Confectionery sales rose 12.9% and segment income 11.6%; North America Salty Snacks sales rose 99.9% and income 43.8%, with acquisitions a major sales driver; International sales rose 21.3% and income 11.3%.
- Cash flow and investment: First-half operating cash flow was $1,113.8; investing cash outflow was $351.0, including $241.0 of capital additions and $116.2 invested in tax-credit partnerships. Financing cash outflow was $755.4, including $361.0 of dividends and $355.3 of share repurchases.
Balance sheet, debt and liquidity
- At July 3, 2022, cash was $339.7, current assets $2,428.5 and current liabilities $3,300.9. Inventories were $1,208.2, up from $988.5 at year-end 2021.
- Short-term debt was $914.9; long-term debt, including its current portion, was $4,093.0. The current portion of long-term debt was $752.6, compared with $2.8 at year-end, reflecting debt classification/maturity timing. Short-term debt less cash was $575.2, per the filing.
- Hershey reported compliance with its credit-facility covenants and said it believed liquidity was sufficient for anticipated needs. Approximately 85% of cash was held by subsidiaries outside the United States.
Outlook, risks and unusual items
- The filing provides no clear full-year net sales or earnings guidance. Management expected 2022 capital expenditures, including capitalized software, to approximate $600 million and said share repurchases would follow its traditional strategy.
- Management cited continuing supply-chain disruption, labor shortages, inflation and capacity constraints. Q2 U.S. candy, mint and gum takeaway rose 17.0%, but market share declined approximately 61 basis points as capacity limited the ability to meet demand. The Russia-Ukraine conflict had not materially affected commodity prices or supply availability through the first half, but escalation remained a risk.
- Commodity derivatives produced $40.8 million of unallocated mark-to-market losses in Q2; management expects $74.3 million of cumulative net gains to be reclassified to segment results over the next 12 months, based on forecast timing of hedged items.
- Other expense increased, primarily due to $14.8 million of Q2 write-downs on tax-credit partnership investments and higher pension-related non-service costs. A related-party property sale and donation resulted in a $13.6 million loss in SM&A. First-half pension settlement charges were non-cash.
- The International Optimization Program is expected to finish in early 2023, with total pretax costs estimated at $50–$75 million; $47.9 million had been incurred since inception. Acquisitions of Dot’s and Pretzels had preliminary purchase-price allocations, with finalization expected by the end of Q3 2022.
- A child-labor and human-trafficking lawsuit was dismissed without prejudice, but plaintiffs appealed in July 2022; Hershey said it considers the case without merit and is defending the appeal. The company also disclosed ongoing tax disputes in multiple jurisdictions and said ordinary-course legal matters were not expected to materially affect results.
Key facts for investors to verify
- Whether pricing and volume can sustain sales growth while recovering gross margin from inflation, freight, product mix and supply constraints.
- Capacity, service levels and market share in U.S. confectionery, including the reported 61-basis-point share loss.
- Progress on acquisition integration and final purchase-price allocations for Dot’s and Pretzels.
- Debt maturities, refinancing needs, working-capital requirements and the planned $600 million capital program.
- Developments in tax audits, the pending litigation appeal, and commodity-hedge gains and losses as they move into segment results.