The Hershey Company — Q1 2022 Form 10-Q
Reporting period: Three months ended April 3, 2022; compared with the three months ended April 4, 2021. Figures are in U.S. dollars. The filing notes that quarterly results may be affected by seasonal patterns.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $2.666 billion | $2.296 billion | +16.1% |
| Gross profit / margin | $1.245 billion / 46.7% | $1.049 billion / 45.7% | Margin +1.0 percentage point |
| Operating profit / margin | $721.0 million / 27.0% | $553.0 million / 24.1% | Profit +30.4% |
| Net income attributable to Hershey | $533.5 million | $395.8 million | +34.8% |
| Diluted EPS, common stock | $2.57 | $1.90 | +35.3% |
| Cash from operating activities | $656.5 million | $609.6 million | +$46.9 million |
| Capital expenditures, including software | $141.1 million | $114.5 million | +$26.6 million |
Revenue drivers: Management attributed sales growth to 6.9% favorable price realization, 4.6% volume growth and a 4.6% contribution from the 2021 acquisitions of Dot’s Pretzels, Pretzels Inc. and Lily’s Sweets. Results also benefited from everyday performance in core U.S. confectionery and salty snacks.
Cash flow and liquidity: Cash and equivalents were $338.1 million at quarter-end, up $8.8 million from December 31, 2021. Operating cash flow rose, although working capital consumed $128.9 million, mainly reflecting inventory buildup and receivables timing. Investing activities used $164.0 million; financing activities used $463.5 million, including $181.1 million of dividends and a $203.4 million share purchase from the Milton Hershey School Trust. The company said it expected to have sufficient liquidity for at least the next 12 months.
Debt: At April 3, 2022, short-term debt was $873.8 million and total long-term debt, including its current portion, was $4.091 billion. Cash less short-term debt resulted in net short-term debt of $536.7 million. Hershey reported compliance with credit-facility covenants and maintained a $1.5 billion revolving credit facility.
Material changes and segment results
- North America Confectionery sales increased 11.7% to $2.217 billion; segment income increased 21.7% to $781.9 million, with margin rising to 35.3% from 32.4%.
- North America Salty Snacks sales increased 86.2% to $226.1 million, substantially reflecting the Dot’s and Pretzels acquisitions. Segment income fell 16.1% to $21.3 million; margin declined to 9.4% from 20.9%, amid unfavorable mix, inflation and higher marketing costs.
- International sales increased 17.9% to $223.1 million; segment income rose 53.4% to $42.0 million. Management cited volume growth, pricing and progress on its China optimization program.
- U.S. candy, mint and gum consumer takeaway declined 4.4%, and market share fell approximately 156 basis points. Hershey said capacity constraints limited its ability to meet demand.
Outlook, commentary and risks
- Hershey expected 2022 capital expenditures, including capitalized software, to be approximately $600 million, the high end of its previously announced $550 million to $600 million range. The filing does not provide clear full-year revenue or EPS guidance.
- Management reported ongoing supply-chain disruption, labor shortages, higher freight and logistics costs, and inflation. Pricing, productivity and commodity-hedge effects partly offset these pressures; management cautioned that pricing may not fully offset costs and could affect volume.
- The Russia-Ukraine conflict had no material impact on commodity prices or supply availability in the quarter, but the company was monitoring possible escalation and broader economic or supply-chain effects. COVID-19 developments and inflation remained sources of uncertainty.
- Commodity derivatives produced a $27.4 million unallocated mark-to-market gain in Q1. The company reported $114.3 million of cumulative commodity-derivative gains recognized in consolidated cost of sales but not yet allocated to segments; it expected to reclassify $87.6 million to segment results over the next 12 months.
- Other expense increased to $10.4 million, primarily due to larger write-downs on tax-credit partnership investments. The quarter also included $2.6 million of pension settlement charges, described as non-cash.
- The 2021 Pretzels and Dot’s acquisition purchase-price allocations remained preliminary; management expected to finalize them by mid-2022. The International Optimization Program was expected to finish in early 2023, with total pre-tax costs of $50 million to $75 million.
- Ordinary-course legal matters were not expected by management to have a material effect. Tax audits and disputes were ongoing in several jurisdictions; outcomes and timing remain uncertain.
Most important facts for investors to verify
- Whether pricing and capacity improvements sustain confectionery growth and recover the reported U.S. candy, mint and gum takeaway and share losses.
- Whether supply-chain inflation, freight costs and product mix pressure margins after the quarter’s favorable pricing and derivative effects.
- Salty-snack segment profitability and the integration and returns from the Dot’s and Pretzels acquisitions; confirm final purchase-price allocations.
- Progress against the approximately $600 million capital-spending outlook, and the effect of working-capital needs, dividends, repurchases and debt on liquidity.
- Developments in tax disputes, commodity and foreign-exchange exposures, the China optimization program, and the multi-year ERP implementation.