The Hershey Company — Q3 2020 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 27, 2020, compared with the periods ended September 29, 2019. Hershey sells confectionery and snack products; North America accounted for about 91% of Q3 sales. Figures below are in U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | First nine months 2020 | First nine months 2019 |
|---|---|---|---|---|
| Net sales | $2,219.8m | $2,134.4m | $5,964.5m | $5,918.1m |
| Gross profit / margin | $1,080.0m / 48.7% | $943.3m / 44.2% | $2,739.2m / 45.9% | $2,710.6m / 45.8% |
| Operating profit / margin | $611.4m / 27.5% | $460.8m / 21.6% | $1,377.6m / 23.1% | $1,309.8m / 22.1% |
| Net income attributable to Hershey | $447.3m | $325.3m | $987.3m | $942.5m |
| Diluted EPS, common stock | $2.14 | $1.54 | $4.71 | $4.47 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1,095.3m | $993.4m |
| Capital expenditures, including software | Not presented quarterly | Not presented quarterly | $292.1m | $236.6m |
Operating cash flow less capital expenditures was approximately $803.2m for the first nine months of 2020, compared with $756.8m in 2019; this is a simple derived measure, not a company-reported free-cash-flow figure. Cash and equivalents were $1,205.9m at September 27, 2020, versus $493.3m at year-end 2019. Total debt, including short-term debt and the current portion of long-term debt, was approximately $4,927.2m; $788.3m of long-term debt was current. The company reported $45.7m of short-term foreign bank loans and no commercial paper outstanding.
Material changes versus the prior comparable period
- Q3 sales rose 4.0%. Higher pricing contributed 2.9%, volume 0.9%, and net acquisitions and divestitures 0.8%; foreign exchange reduced growth by 0.6%. U.S. retail takeaway in measured channels rose 6.4%, with candy, mint and gum market share up approximately 185 basis points.
- Q3 operating profit rose 32.7% and diluted EPS rose 39.0%. Gross margin expanded 450 basis points, supported by favorable commodity-derivative mark-to-market effects, supply-chain productivity and pricing. Lower marketing and other costs also helped; share repurchases reduced weighted-average shares.
- Nine-month sales increased 0.8%, while volume declined 2.5%; pricing and acquisitions offset declines, including COVID-related weakness in international markets, owned retail and travel retail. Nine-month diluted EPS increased 5.4%.
- Performance varied sharply by segment. Q3 North America sales increased 6.3% and segment income rose 13.4%. International and Other sales fell 14.4% and segment income fell 37.8%. For the first nine months, that segment’s sales and income declined 19.6% and 55.3%, respectively.
- Cash from operations increased by $102.0m year over year for the first nine months. Investing cash use fell substantially, mainly because the prior-year period included the ONE Brands acquisition.
Outlook, management commentary, risks and unusual items
- Management reported minimal supply-chain disruption, with all manufacturing plants open, but cautioned that further disruption remained possible. It described COVID-19’s financial effects as uncertain and dependent on the pandemic’s length and severity, economic recovery, and government actions. Renewed outbreaks could affect retail traffic, shopping and consumption.
- No full-year revenue or earnings guidance is stated in the supplied filing text. The company expected 2020 capital expenditures, including capitalized software, of approximately $400m–$450m.
- The ERP implementation was expected to be delayed by approximately one year after selected work was paused because of resource constraints and challenges in the design phase. Management planned to continue strategically important ERP and supply-chain capacity projects.
- In May 2020, Hershey issued $1.0bn of notes at rates from 0.900% to 2.650%, with maturities from 2025 to 2050; proceeds helped increase liquidity amid pandemic uncertainty. It repaid $350m of notes at maturity. Management stated it believed liquidity was sufficient.
- Q3 cost of sales benefited from an incremental $83.3m year-over-year favorable commodity-derivative mark-to-market effect. For the first nine months, commodity-derivative mark-to-market effects were $20.0m unfavorable year over year. These effects can cause reported margins to fluctuate and are not necessarily aligned with the timing of the underlying purchases.
- Nine-month long-lived asset impairment charges were $9.1m, including $6.2m related to a disposal group and $2.9m in other asset write-downs. KRAVE and the Scharffen Berger and Dagoba brands were divested in Q2; proceeds and income-statement effects were immaterial. In October, Hershey agreed to divest its Lotte Shanghai Foods joint venture, subject to approvals and closing conditions; proceeds were expected to be immaterial.
- Other notable items included $29.3m of nine-month write-downs of equity investments qualifying for tax credits and pension settlement charges related to employee lump-sum withdrawals. The company said pending legal matters were not expected to have a material effect, while tax-audit outcomes remain uncertain.
- Key risks include COVID-19 effects, commodity and energy costs and availability, pricing elasticity, competition, supply-chain disruptions, international-market performance, execution of acquisitions and strategic initiatives, and ERP implementation. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Q3 North America strength and U.S. takeaway persist, and whether pricing continues to offset volume and input-cost pressures.
- How renewed COVID-19 effects, reopening restrictions and retail or travel disruption affect the International and Other segment and company-wide demand.
- Whether commodity-derivative mark-to-market gains or losses reverse as hedged inventory is sold, and how that affects reported gross margin.
- Progress toward the $400m–$450m 2020 capital-spending range and the revised ERP timeline, including execution and cost risks.
- Debt maturities, interest expense, liquidity and cash deployment, including dividends and remaining share-repurchase authorization.
- Closing of the Lotte Shanghai Foods divestiture, tax-audit developments, and any changes in impairment assumptions or other contingencies.