The Hershey Company: Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended October 2, 2022, compared with the periods ended October 3, 2021. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless otherwise noted.
Business context and reporting period
Hershey sells confectionery and snack products across North America and international markets. It reports three segments: North America Confectionery, North America Salty Snacks, and International. Salty-snacks sales in 2022 benefited substantially from the 2021 acquisitions of Dot’s Pretzels and Pretzels Inc.; Lily’s Sweets also contributed to confectionery growth.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2,728.2 | $2,359.8 | $7,767.0 | $6,645.2 |
| Gross profit | $1,108.5 | $1,061.3 | $3,354.0 | $3,035.7 |
| Gross margin | 40.6% | 45.0% | 43.2% | 45.7% |
| Operating profit | $556.6 | $574.8 | $1,734.1 | $1,584.6 |
| Operating margin | 20.4% | 24.4% | 22.3% | 23.8% |
| Net income attributable to Hershey | $399.5 | $444.9 | $1,248.5 | $1,142.0 |
| Diluted EPS, common stock | $1.94 | $2.14 | $6.04 | $5.49 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $1,560.2 | $1,403.7 |
Quarterly sales rose 15.6%, driven by 7.7% favorable price realization, 4.1% volume growth, and a 4.1% acquisition benefit, partly offset by foreign currency. Nine-month sales rose 16.9%, including 7.7% price realization, 4.7% volume growth, and a 4.6% acquisition benefit. Quarterly net income fell 10.2% and diluted EPS fell 9.3%; for the nine-month period, net income rose 9.3% and diluted EPS rose 10.0%.
Quarterly gross margin contracted 440 basis points, while nine-month gross margin contracted 250 basis points. Hershey cited supply-chain inflation, including labor and logistics, unfavorable product mix, and commodity-derivative mark-to-market effects; price increases and productivity partly offset these pressures. Higher SM&A also weighed on quarterly operating profit. Nine-month earnings growth reflected higher gross profit and a lower effective tax rate, partly offset by increased SM&A and other expense.
- Segments, Q3: North America Confectionery sales grew 10.4% and segment income 7.8%. North America Salty Snacks sales grew 86.9% and segment income 50.3%, including acquisition contributions. International sales grew 15.4% and segment income 80.7%.
- Cash flow and investment: Nine-month capital additions, including software, were $360.0 million. Operating cash flow less capital additions was approximately $1.20 billion. Investing activities used $510.0 million, including $159.7 million invested in tax-credit partnerships.
- Dividends and repurchases: Nine-month cash dividends were $568.0 million and share repurchases were $355.3 million, including a $203.4 million purchase of 1 million shares from the Milton Hershey School Trust.
Financial position and liquidity
At October 2, 2022, cash and cash equivalents were $327.7 million; current assets were $2,692.7 million and current liabilities were $3,388.6 million. Short-term debt was $793.9 million, current long-term debt was $752.2 million, and long-term debt was $3,340.7 million. The company reported short-term debt, net of cash, of $466.1 million. It had a $1.5 billion revolving credit facility, reported covenant compliance, and said it believed liquidity was adequate for anticipated needs. Approximately 80% of cash was held by subsidiaries outside the United States.
Cash declined $1.5 million from year-end 2021. Inventory increased to $1,184.4 million from $988.5 million, reflecting a build to meet customer requirements. Management attributed working-capital cash use partly to higher inventory and the timing of customer receipts. The filing forecast approximately $600 million of full-year 2022 capital expenditures and said these would be funded with existing cash and internally generated funds.
Outlook, commentary, risks, and unusual items
The filing provides no clear full-year revenue or EPS guidance. Management said it expected 2022 capital expenditures of approximately $600 million and share repurchases to be in line with its traditional strategy. It described strong demand for core U.S. confectionery and salty-snack brands, alongside ongoing supply constraints, labor shortages, inflation, and gross-margin pressure. The Russia-Ukraine conflict had not materially affected commodity prices or supply availability through the first nine months, but Hershey continued to monitor possible escalation and disruption.
- Commodity derivatives produced an unfavorable year-over-year mark-to-market impact cited as $47.7 million for the quarter and $36.2 million for the nine months, relating to hedges of future commodity purchases. Derivative gains and losses may add reported earnings volatility before the related inventory is sold.
- Other expense was $48.2 million in Q3 and $78.2 million for nine months, primarily reflecting write-downs of tax-credit partnership investments and pension/post-retirement non-service costs. The nine-month partnership write-down was $70.8 million.
- A June related-party property sale and donation resulted in a $13.6 million loss. The company also recorded pension settlement charges during the first nine months.
- The International Optimization Program is expected to finish by the end of 2023, with total pre-tax costs estimated at $50 million to $75 million; $48.3 million had been incurred through the period.
- Risks highlighted include supply-chain and manufacturing disruption, inflation and raw-material availability, the possibility that pricing may not offset costs or may reduce volume, labor availability, consumer demand, competition, acquisition integration, geopolitical uncertainty, climate and regulatory matters, and ERP implementation and cybersecurity risks.
- Legal proceedings in the ordinary course were not expected by management to have a material effect. Tax audits and disputes are ongoing in several jurisdictions; management said it believed adequate provision had been made for tax uncertainties.
Important facts for investors to verify
- Whether price increases and volume growth can offset inflation, labor, logistics, and commodity costs without weakening demand.
- How much of sales and profit growth reflects underlying organic performance versus the Dot’s, Pretzels, and Lily’s acquisitions.
- Whether gross margins recover as derivative effects flow through and supply-chain cost pressures change.
- Inventory levels, working-capital trends, and the ability to fund capital spending, dividends, and repurchases while managing debt.
- Progress and remaining costs for the China optimization program, acquisition integration, and the multi-year ERP rollout.
- Developments in tax disputes, partnership investment write-downs, and other significant unusual expenses.