The Hershey Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 3, 2021; comparisons are to the periods ended September 27, 2020. Hershey’s North America segment generates about 90% of revenue. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $2,359.8 | $2,219.8 | $6,645.2 | $5,964.5 |
| Gross profit / margin | $1,061.3 / 45.0% | $1,080.0 / 48.7% | $3,035.7 / 45.7% | $2,739.2 / 45.9% |
| Operating profit / margin | $574.8 / 24.4% | $611.4 / 27.5% | $1,584.6 / 23.8% | $1,377.6 / 23.1% |
| Net income attributable to Hershey | $444.9 | $447.3 | $1,142.0 | $987.3 |
| Diluted EPS, common stock | $2.14 | $2.14 | $5.49 | $4.71 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,403.7 | $1,095.3 |
Quarterly change: Sales rose 6.3%, while operating profit fell 6.0% and net income declined 0.5%; diluted EPS was unchanged, aided by lower weighted-average shares from repurchases. Sales growth reflected price realization of 3.1%, Lily’s acquisition contribution of 1.4%, volume growth of 1.3%, and favorable foreign exchange of 0.5%.
Nine-month change: Sales rose 11.4%, net income 15.7%, and diluted EPS 16.6%. Management attributed the improvement principally to higher volume and gross profit, lower interest expense, and the absence of 2020 impairment charges; higher SM&A and taxes partly offset gains.
Cash, debt and liquidity
- Cash and equivalents were $675.5 at October 3, down $468.5 from year-end 2020. Operating activities provided $1,403.7; investing used $839.7 and financing used $1,037.8 during the first nine months.
- Capital additions, including software, were $347.5. The company paid $505.2 in dividends and used $457.9 for share repurchases.
- Short-term debt was $410.4, current long-term debt $2.8, and long-term debt $4,095.2. The company reported covenant compliance and stated it expected to meet cash needs for at least the next 12 months. Its $1.5 billion revolving credit facility was scheduled to expire in July 2024.
- Current assets were $2,741.9 and current liabilities $1,906.5. Approximately 90% of cash was held by subsidiaries outside the United States.
Material changes and management commentary
- Q3 gross margin contracted 370 basis points. Management cited higher freight and logistics costs, additional plant costs, and unfavorable year-over-year commodity-derivative mark-to-market effects, partly offset by pricing and productivity.
- Broad supply-chain disruption, labor shortages, inflation, and demand exceeding supply created incremental costs and margin pressure. Manufacturing plants remained open, with minimal supply-chain disruption since the pandemic began, but the outlook remained uncertain.
- North America Q3 sales grew 5.5%; segment income increased 2.9%, with higher supply-chain and freight costs and unfavorable mix partly offsetting price and volume. International and Other sales rose 13.9% and segment income 58.1%.
- Hershey acquired Lily’s Sweets in June for initial cash consideration of $422.2; the brand was expected to generate annualized sales above $100.0. The purchase-price allocation remained preliminary. Hershey divested its Lotte Shanghai Foods joint venture in January; proceeds and financial-statement impact were immaterial.
- The International Optimization Program, including changes to the China operating model, is expected to finish by mid-2022. Estimated total pretax costs are $50–$75, of which $43.1 had been incurred through October 3.
Outlook, risks and contingencies
- Management reduced its 2021 capital-expenditure estimate to approximately $500–$525 from $550, citing reprioritization of projects in light of consumer demand and supply-chain disruption. The filing text does not provide clear full-year sales or EPS guidance.
- Management warned that pandemic duration, variants, labor availability, inflation, supply constraints, and consumer behavior could continue to affect costs and results. Other stated risks include raw-material availability and prices, pricing elasticity, competition, product quality and safety, acquisition execution, and ERP implementation.
- Tax authorities were pursuing disputes in Malaysia, Mexico, and the United States. An adverse ruling in a non-U.S. tax matter contributed to higher nine-month tax expense; management said provisions were adequate, while outcomes and timing remained uncertain.
- Ordinary-course legal proceedings were not expected by management to have a material effect. Q3 also included a $5.4 pension settlement charge; nine-month charges were $12.8. No long-lived asset impairment was recorded in 2021.
Investor verification points
- Verify whether price increases and supply-chain productivity can offset continuing freight, labor, commodity, and manufacturing-cost inflation without weakening volumes or market share.
- Track cash conversion and working capital: operating cash flow improved, but receivables and inventories increased, and cash declined amid acquisition spending, dividends, repurchases, and debt repayment.
- Assess the final Lily’s purchase-price allocation, contingent consideration, and realized contribution to sales and margins.
- Monitor the International Optimization Program’s costs, timing, and expected benefits, as well as the resolution of tax disputes and the related tax provision.
- Confirm that planned capital spending, capacity projects, and ERP implementation remain on schedule; the filing identifies implementation complications as a risk.