The Hershey Company (NYSE: HSY) — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Although the request labels the period “2022 Q4,” this filing reports full-year results; it does not provide a standalone fourth-quarter summary here. Amounts are in U.S. dollars.
Business context
Hershey makes and sells confectionery and snacks through North America Confectionery, North America Salty Snacks and International. Its strategy centers on growing core confectionery, expanding in snacks, pursuing profitable international growth, and investing in capabilities and operations. The 2021 acquisitions of Lily’s, Dot’s Pretzels and Pretzels Inc. contributed to the 2022 results, especially in salty snacks.
Key financial results
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $10.419 billion | $8.971 billion | +16.1% |
| Gross profit / margin | $4.499 billion / 43.2% | $4.049 billion / 45.1% | Margin down 1.9 percentage points |
| Operating profit / margin | $2.261 billion / 21.7% | $2.044 billion / 22.8% | Profit +10.6%; margin down 1.1 points |
| Net income attributable to Hershey | $1.645 billion | $1.478 billion | +11.3% |
| Diluted EPS | $7.96 | $7.11 | +12.0% |
| Cash from operations | $2.328 billion | $2.083 billion | +$245 million |
| Cash and cash equivalents at year-end | $464 million | $329 million | +$135 million |
| Total short- and long-term debt | About $4.8 billion | About $5.0 billion | Down about $0.2 billion |
- Sales drivers: Higher pricing contributed 8.0%, acquisitions and divestitures 4.3%, and volume 4.0%; foreign exchange reduced growth by 0.2%.
- Margin pressure: Higher logistics, labor and other supply-chain inflation, unfavorable product mix, and commodity-derivative mark-to-market effects weighed on gross margin. Pricing and volume partly offset these pressures.
- Cash uses: Investing activities used $787 million, including $520 million in capital expenditures and $276 million invested in partnerships qualifying for tax credits. Financing activities used $1.416 billion, including $775 million of dividends and $389 million of share repurchases.
- Liquidity: Hershey reported $942 million of available capacity under its $1.5 billion revolving credit facility and $178 million available under other bank lines. It said liquidity was adequate and reported compliance with credit covenants.
- Dividends: Cash dividends totaled $775 million; the 2022 common dividend was $3.874 per share, up 13.6% from 2021.
Material changes versus 2021
- North America Confectionery sales rose 11.1% to $8.537 billion; segment income increased 13.5% to $2.811 billion.
- North America Salty Snacks sales increased 85.3% to $1.029 billion, substantially reflecting the Dot’s and Pretzels acquisitions; segment income rose 58.8% to $160 million. Segment margin declined to 15.5% from 18.1%.
- International sales increased 16.3% to $853 million and segment income rose to $108 million from $74 million.
- Net income and diluted EPS grew, but gross and operating margins declined amid higher costs. Other expense increased to $206 million from $119 million, primarily due to larger write-downs of investments qualifying for tax credits and higher pension-related non-service costs.
- Operating cash flow increased, while investing cash outflow fell sharply from 2021’s acquisition-driven $2.223 billion. Debt decreased, and cash increased year over year.
Outlook, risks and unusual items
- Outlook disclosed: The filing does not provide a clear full-year 2023 revenue, earnings or EPS guidance figure. Management expected 2023 capital expenditures, including capitalized software, of approximately $800–$900 million and long-term debt repayments of approximately $750 million. It expected share repurchases to follow its traditional strategy.
- Management commentary: Demand remained strong in 2022, but inflation, labor shortages and supply constraints increased costs and pressured margins. Management said the Russia-Ukraine conflict had not materially affected commodity prices or supply availability in 2022, while noting that further disruption remained possible.
- Key risks: Volatile commodity and energy costs; supply-chain, manufacturing and labor disruption; pricing and volume trade-offs; intense competition and changing consumer preferences; climate and agricultural sourcing risks; international-market uncertainty; and cybersecurity or delays/costs associated with the multi-year ERP implementation.
- Concentration and contingencies: McLane Company accounted for approximately 28% of 2022 net sales and 26% of year-end receivables. A proposed class action involving alleged child labor and human-trafficking claims was dismissed without prejudice in 2022 and appealed; Hershey said it considered the claims without merit. The company said other ordinary-course legal matters were not expected to have a material effect.
- Unusual items: The company recorded $188 million of write-downs on tax-credit partnership investments, alongside $229 million of investment tax credits and related tax benefits. A related-party property sale and donation resulted in a $13.6 million loss recorded in SM&A. No goodwill impairment was recorded in 2022.
- Reporting and controls: The auditor issued an unqualified opinion on the financial statements and internal controls. The auditor identified trade-promotion accrual valuation as a critical audit matter; the year-end accrual was $216 million.
Most important facts for investors to verify
- Whether pricing, volume and acquired snack brands can sustain sales growth as inflation and supply-chain costs affect margins.
- 2023 execution and returns on the planned $800–$900 million of capital spending, including confectionery capacity and ERP investments.
- Debt refinancing and liquidity around the approximately $750 million of 2023 maturities, and the impact of higher short-term borrowing rates.
- McLane customer concentration, the performance and integration of the 2021 acquisitions, and salty-snack segment profitability.
- Resolution of the appealed child-labor lawsuit and tax audits, and the assumptions supporting trade-promotion accruals and tax-credit investments.