The Hershey Company — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also presents unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Hershey is a branded confectionery and snacks company, with North America representing approximately 91% of 2020 sales.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net sales | $8.150 billion | $7.986 billion | +2.0% |
| Gross profit / margin | $3.701 billion / 45.4% | $3.622 billion / 45.4% | Profit +2.2%; margin flat |
| Operating profit / margin | $1.783 billion / 21.9% | $1.596 billion / 20.0% | Profit +11.7% |
| Net income attributable to Hershey | $1.279 billion | $1.150 billion | +11.2% |
| Diluted EPS | $6.11 | $5.46 | +11.9% |
| Operating cash flow | $1.700 billion | $1.764 billion | Down $64 million |
| Capital additions, including software | $442 million | $318 million | Up $123 million |
Fourth quarter: Sales were $2.185 billion versus $2.068 billion in Q4 2019. Gross profit was $962 million versus $912 million; net income was $291 million versus $207 million; diluted common-stock EPS was $1.39 versus $0.98.
- Segment performance: North America sales rose 4.7% to $7.417 billion and segment income rose 9.2% to $2.322 billion; segment margin increased to 31.3% from 30.0%. International and Other sales fell 19.0% to $733 million, while segment income fell 70.1% to $29 million and margin declined to 3.9% from 10.6%.
- Sales drivers: Full-year sales growth reflected 2.3% favorable price realization and a 0.5% net acquisition/divestiture benefit, partly offset by foreign exchange and a 0.3% volume decline. The North America segment grew in both core confectionery and snacks; the snacks portfolio generated $521 million, up from $432 million.
- Margin and earnings: Gross margin was flat. Higher freight, logistics and COVID-related plant costs, plus commodity-derivative mark-to-market effects, were offset by pricing and supply-chain productivity. Lower impairment charges and SM&A, and a lower effective tax rate, supported higher operating profit and earnings. Diluted EPS also benefited from lower weighted-average shares following repurchases.
Cash, debt and liquidity
- Cash and cash equivalents were $1.144 billion at year-end, up from $493 million. Total debt was approximately $4.6 billion, versus $4.3 billion a year earlier; cash less total debt implies net debt of approximately $3.5 billion.
- Hershey issued $1.0 billion of notes in May 2020, with coupons of 0.900% to 2.650% and maturities from 2025 to 2050. It repaid $700 million of notes at maturity during the year. Net interest expense increased to $149 million from $144 million.
- The company reported $1.5 billion of available capacity under its revolving credit facility and $193 million available under other bank lines; it was in compliance with credit covenants. Management said liquidity was sufficient for anticipated needs.
- Operating cash flow declined as working capital used $166 million, compared with generating $60 million in 2019, principally due to higher U.S. inventory and receivables. Investing activities used $531 million; financing activities used $499 million.
- Cash dividends totaled $641 million, and share repurchases totaled $211 million. The 2020 common-stock dividend was $3.154 per share, up 5.5% year over year.
Material changes, outlook and risks
- COVID-19: Management reported minimal supply-chain disruption and all manufacturing plants operating, but added sanitation, PPE and wage-incentive costs. U.S. retail takeaway increased 5.3%; U.S. confectionery consumer takeaway rose 4.9%, with approximately 159 basis points of market-share gain. International and Other was materially affected, including sales declines in Mexico and China, and lower owned retail and travel retail sales. Management characterized impacts as temporary but said their ultimate extent remained uncertain.
- Capital and programs: Management expected 2021 capital expenditures, including capitalized software, of approximately $550 million, primarily for ERP implementation and supply-chain capacity. No specific 2021 revenue or EPS guidance is provided in the supplied filing text. Management expected share repurchases to return to a more traditional strategy in 2021.
- Restructuring and divestitures: The International Optimization Program began in Q4 2020, with anticipated total pretax costs of $50 million to $75 million through mid-2022 and approximately 350 positions affected. The Krave and Scharffen Berger/Dagoba divestitures closed in 2020; the Lotte Shanghai Foods sale closed in January 2021 for immaterial net proceeds.
- ERP and other execution risks: Certain ERP work was paused amid resource and design challenges, delaying the overall implementation by approximately one year. The multiyear system replacement could entail additional cost, delay or control risks. Other cited risks include commodity prices and availability, intense competition, consumer and retail behavior changes, international operations, cybersecurity, and reliance on key customers and suppliers.
- Unusual items: Other expense rose to $138 million, primarily reflecting a $126 million write-down of equity investments associated with historic and solar tax-credit partnerships. The effective tax rate fell to 14.7% from 16.9%, benefiting from investment tax credits and share-based-payment tax benefits. Business realignment costs were $18.5 million in the income statement; the broader costs associated with realignment activities were $31.5 million.
- Contingencies and audit: The company said ordinary-course legal matters were not expected to have a material financial effect. The independent auditor issued unqualified opinions on the financial statements and internal control. The critical audit matter was the valuation of $195.6 million in accrued trade-promotion liabilities.
Important facts for investors to verify
- Whether North America growth and elevated U.S. takeaway persist as pandemic-driven shopping patterns normalize, and whether the International and Other segment recovers from its 2020 decline.
- Whether pricing, productivity and product mix can offset raw-material, freight, labor and other cost pressures without materially reducing volume.
- Delivery of the ERP program and planned capacity investments, including the disclosed 2021 capital-spending estimate and implementation delay.
- Debt repayment and cash-flow capacity alongside dividends, repurchases and capital investment; also review the maturity schedule and contractual obligations.
- Customer concentration: McLane represented approximately 31% of 2020 sales and 24% of year-end receivables.
- Execution and cost outcomes for the International Optimization Program, and the effect of the completed and subsequent divestitures on comparable results.
- Sensitivity of tax-credit investment accounting, trade-promotion accrual estimates, and commodity-derivative mark-to-market results.