The Hershey Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 2, 2023; comparative periods ended July 3, 2022. Unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and results
Hershey sells confectionery and snack products across three reportable segments: North America Confectionery, North America Salty Snacks, and International. It completed the acquisition of certain Weaver popcorn manufacturing assets on May 31, 2023, for initial cash consideration of $165.8 million; the assets are included in North America Salty Snacks.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $2,490.3 (+5.0%) | $2,372.6 | $5,477.9 (+8.7%) | $5,038.8 |
| Gross profit / margin | $1,132.1 / 45.5% | $1,000.0 / 42.1% | $2,514.4 / 45.9% | $2,245.5 / 44.6% |
| Operating profit / margin | $560.7 / 22.5% | $456.5 / 19.2% | $1,360.6 / 24.8% | $1,177.5 / 23.4% |
| Net income | $407.0 (+29.0%) | $315.6 | $994.2 (+17.1%) | $849.0 |
| Diluted EPS, common stock | $1.98 (+29.4%) | $1.53 | $4.83 (+17.8%) | $4.10 |
| Operating cash flow | Not separately presented | Not separately presented | $1,049.8 | $1,113.8 |
Financial position, cash flow, and capital allocation
- Six-month cash used in investing was $516.0 million, including $330.5 million of capital expenditures and capitalized software and the Weaver acquisition. Operating cash flow less that capital spending was approximately $719.3 million, versus $872.8 million in the prior-year period; this is a simple derived measure, not a company-reported free-cash-flow figure.
- Cash and equivalents were $446.2 million at July 2, 2023, down $17.7 million from year-end. Total short- and long-term debt was approximately $4.95 billion, compared with $4.79 billion at December 31, 2022. Short-term debt was $859.8 million; the commercial-paper weighted-average rate was 5.2%.
- Hershey issued $750 million of notes at 4.250% and 4.500%, and repaid $750 million of notes at maturity during the first half. Its new revolving credit facility permits borrowings up to $1.35 billion, with a possible $500 million increase subject to lender consent; the company reported covenant compliance.
- Dividends paid totaled $413.5 million in the first half. The company repurchased 1 million shares from the Milton Hershey School Trust for $239.9 million; approximately $370 million remained under its May 2021 repurchase authorization at quarter-end.
Material changes and management commentary
- Q2 sales growth was driven by 7.7% favorable price realization, offset by a 2.7% volume decline; management attributed the decline primarily to everyday core U.S. confectionery brands. For the first half, price realization was 8.6% and volume increased 0.2%.
- Q2 gross margin expanded 340 basis points, supported by pricing, product mix, supply-chain productivity, and favorable year-over-year commodity-derivative mark-to-market effects; higher logistics and labor costs partly offset the improvement. First-half gross margin expanded 130 basis points despite inflationary costs, unfavorable derivative effects, and product mix.
- First-half net sales and net income growth were primarily price-led, with management noting consumers were buying less than in the prior-year period and that margin pressures persisted. U.S. candy, mint, and gum takeaway rose 1.3%, while market share declined 83 basis points in the measured channels.
- Segment sales and income increased year over year in Q2. North America Confectionery sales rose 4.4% and segment income 6.2%; North America Salty Snacks rose 6.3% and 17.1%; International rose 8.5% and 34.0%, respectively.
- Other expense was $84.5 million in Q2, versus $19.7 million a year earlier, largely reflecting a $77.4 million write-down of investments in partnerships qualifying for tax credits and higher pension-related non-service costs. Q2 effective tax rate fell to 7.4% from 21.8%; the company cited investment tax credits and employee share-based payments, partly offset by state taxes and tax reserves.
- Management expects 2023 capital expenditures, including capitalized software, of approximately $800–$850 million, principally for capacity expansion and the ERP system. The filing does not provide a clear full-year sales or earnings guidance figure. Management said liquidity was sufficient for anticipated needs and expected 2023 share repurchases to follow its traditional strategy.
Risks, contingencies, and unusual items
- Management identified risks from inflation and raw-material availability, supply-chain disruption, pricing-related volume declines, weaker demand or competition, recession concerns, and geopolitical uncertainty related to Russia and Ukraine. The conflict had not materially affected commodity prices or supply availability through the period, but the company continued to monitor it.
- The multi-year global ERP implementation creates execution and operational risks; further phases are expected over several years. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- Legal proceedings arising in the ordinary course were not expected by management to have a material effect. Tax audits and disputes are ongoing in several jurisdictions; the company said it had provided for tax uncertainties and expected about $23.6 million of reductions in unrecognized tax benefits within 12 months.
- The International Optimization Program, focused on China operations, was completed in Q2 2023; cumulative pretax charges since inception were $54.2 million.
Key facts for investors to verify
- Whether sales growth remains supported by pricing if confectionery volumes and market share continue to weaken.
- How gross margins develop as commodity hedges roll through, and as logistics, labor, and other supply-chain costs change.
- Whether operating cash generation can support the planned $800–$850 million capital program, dividends, acquisitions, and repurchases while managing debt and working capital.
- The realized contribution and integration costs of the Weaver acquisition, and progress and implementation risks for the ERP program.
- The sustainability of the unusually low Q2 effective tax rate and the timing and outcomes of investment-tax-credit accounting and tax disputes.