The Hershey Company — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended October 1, 2023; comparisons are with the periods ended October 2, 2022. Unaudited GAAP results. Hershey operates in North America Confectionery, North America Salty Snacks, and International.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $3,030 million (+11.1%) | $2,728 million | $8,508 million (+9.5%) | $7,767 million |
| Gross profit / margin | $1,360 million / 44.9% | $1,109 million / 40.6% | $3,875 million / 45.5% | $3,354 million / 43.2% |
| Operating profit / margin | $736 million / 24.3% | $557 million / 20.4% | $2,097 million / 24.6% | $1,734 million / 22.3% |
| Net income | $519 million (+29.8%) | $399 million | $1,513 million (+21.2%) | $1,249 million |
| Diluted EPS, common stock | $2.52 (+29.9%) | $1.94 | $7.36 (+21.9%) | $6.04 |
| Operating cash flow | Not presented as a quarterly figure | Not presented as a quarterly figure | $1,566 million | $1,560 million |
Q3 sales growth reflected favorable pricing of 9.8%, volume growth of 0.9%, and a 0.4% foreign-exchange benefit. For the first nine months, favorable pricing of 9.1% and volume growth of 0.4% drove sales growth, with no foreign-exchange impact. Q3 gross margin expanded 430 basis points; nine-month margin expanded 230 basis points.
Segment results
- North America Confectionery: Q3 sales $2,458 million (+9.9%) and segment income $847 million (+19.9%). Higher pricing more than offset a 1.0% volume decline. Nine-month sales rose 8.5% and segment income 13.5%.
- North America Salty Snacks: Q3 sales $345 million (+25.5%) and segment income $57 million (+29.0%); volume increased 22.2%, primarily from SkinnyPop and Dot’s. Nine-month sales rose 17.2% and segment income 43.3%.
- International: Q3 sales $227 million (+4.4%), but segment income fell 10.4% to $32 million, reflecting lower volume and unfavorable mix. Nine-month sales rose 10.8% and segment income 18.2%.
Cash, debt and liquidity
- Cash was $471 million at October 1, 2023, up $7 million from year-end 2022. Nine-month operating cash flow was nearly flat year over year. Working-capital items used $450 million of cash, mainly due to receivables growth and timing of supplier payments.
- Investing activities used $736 million, including $549 million of capital spending and $166 million for the Weaver acquisition. Financing activities used $784 million, including $651 million of dividends and $240 million of share repurchases; debt issuance and short-term borrowing partly offset these uses.
- Short-term debt was $820 million; long-term debt, including its current portion, was $4,094 million. Total borrowings were approximately $4.9 billion. Hershey repaid $750 million of notes at maturity and issued $750 million of notes in 2023, with net proceeds of $744 million. Commercial paper’s weighted-average rate was 5.4%.
- The company reported a $1.35 billion revolving credit facility, with an option to increase it by $500 million with lender consent, and said it had sufficient liquidity. It was in compliance with facility covenants. About 85% of cash was held by non-U.S. subsidiaries; management said most could be repatriated without material tax implications.
- Capital expenditures are expected to be approximately $800–$850 million for 2023. Management said existing cash and internally generated funds would meet 2023 capital requirements.
Changes, outlook and risks
- Higher pricing, sales volume, and favorable Q3 commodity-derivative mark-to-market effects supported profit growth. These were partly offset by higher logistics, labor, marketing, compensation, and technology costs. Q3 advertising and consumer marketing expense increased 20%.
- Management attributed nine-month sales and income growth primarily to price realization, with only modest volume growth, and noted inflation, consumer-behavior shifts, and recession concerns. In Q3, U.S. confectionery takeaway rose 2.5%, but market share declined about 120 basis points; salty-snack takeaway was flat and market share declined 16 basis points.
- No full-year sales or earnings guidance is provided in the supplied filing text. Management flagged potential impacts from inflation, commodity and supply-chain costs, pricing-related volume declines, geopolitical events, competition, product demand, and acquisition execution.
- Weaver manufacturing assets were acquired for an initial $166 million and added to North America Salty Snacks. The purchase-price allocation was preliminary; management did not expect material adjustments.
- Paqui-branded items were voluntarily removed, resulting in additional supply-chain expense in Q3; the filing text does not provide a clear amount or further details about the removal.
- Other expense included $115 million of write-downs on tax-credit partnership investments for the first nine months, versus $71 million in the prior-year period. A retiree medical annuity purchase cost $89 million in cash and resulted in a $1 million non-cash settlement charge. The International Optimization Program was completed in 2023.
- Tax audits and disputes are ongoing in Mexico, Canada, and the U.S.; management believes provisions are adequate. Ordinary-course legal matters are not expected by management to materially affect results. The filing identifies ERP implementation, product safety, supply-chain disruption, commodity costs, and geopolitical developments as risks. Disclosure controls were judged effective; ERP rollout continued, with the final phase planned for 2024.
Important facts for investors to verify
- Whether sales growth can be sustained without increasing reliance on price increases, and whether confectionery market-share declines continue.
- How commodity-derivative gains and losses, input-cost inflation, and product mix affect future margins.
- Cash conversion and working-capital trends as receivables and inventories rise, alongside elevated planned capital spending.
- Debt costs, refinancing needs, and the company’s capacity to fund dividends, investment, acquisitions, and repurchases.
- Final Weaver acquisition accounting, Paqui-related costs, tax-audit outcomes, and successful completion of the ERP implementation.