THE HERSHEY COMPANY 
This Management's Discussion and Analysis ("MD&A") is intended to provide an
understanding of Hershey's financial condition, results of operations and cash
flows by focusing on changes in certain key measures from year to year. The MD&A
should be read in conjunction with our Consolidated Financial Statements and
accompanying Notes included in Item 8 of this Annual Report on Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those discussed elsewhere in this Annual Report on Form 10-K, particularly in
Item 1A. "Risk Factors."
The MD&A is organized in the following sections:
• Business Model and Growth Strategy
• Overview
• Trends Affecting Our Business
• Consolidated Results of Operations
• Segment Results
• Liquidity and Capital Resources
• Critical Accounting Policies and Estimates
BUSINESS MODEL AND GROWTH STRATEGY
We are the largest producer of quality chocolate inNorth America , a leading snack maker inthe United States and a global leader in chocolate and non-chocolate confectionery. We report our operations through three segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International, as discussed in Note 13 to the Consolidated Financial Statements. Our vision is to be a snacking powerhouse. We aspire to be a leader in meeting consumers' evolving snacking needs while strengthening the capabilities that drive our growth. We are focused on four strategic imperatives to ensure the Company's success now and in the future: •Drive Core Confection Business and Broaden Participation in Snacking. We continue to be the undisputed leader inU.S. confection by taking actions to deepen our consumer connections and utilize our beloved brands to deliver meaningful innovation, while also diversifying our portfolio to capture profitable and incremental growth across the broader snacking continuum. •Our products frequently play an important role in special moments among family and friends. Seasons are an important part of our business model and for consumers, they are highly anticipated, cherished times, centered around traditions. For us, it's an opportunity for our brands to be part of many connections during the year when family and friends gather. •Innovation is an important lever in this variety-seeking category and we are leveraging work from our proprietary demand landscape analytical tool to shape our future innovation and make it more impactful. We are becoming more disciplined in our focus on platform innovation, which should enable sustainable growth over time and significant extensions to our core. •To expand our breadth in snacking, we are focused on expanding the boundaries of our core confection brands to capture new snacking occasions and increasing our exposure into new snack categories through acquisitions. Our expansion into snacking is being fueled by the recent acquisitions of Dot's and Pretzels inDecember 2021 , which is included in our North America Salty Snacks segment. •Deliver Profitable International Growth. We are focused on ensuring that we efficiently allocate our resources to the areas with the highest potential for profitable growth. We have reset our international investment strategy, while holding fast to our belief that our targeted emerging market strategy will deliver long-term, profitable growth. The uncertain macroeconomic environment in many of these markets is expected to continue and we aim to ensure our investments in these international markets are appropriate relative to the size of the opportunity. Table of Contents The Hershey Company | 2021 Form 10-K |
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•Expand Competitive Advantage through Differentiated Capabilities. In order to generate actionable insights, we must acquire, integrate, access and utilize vast sources of the right data in an effective manner. We are working to leverage our advanced data and analytical techniques to gain a deep understanding of our consumers, our customers, our shoppers, our end-to-end supply chain, our retail environment and key economic drivers at both a macro and precision level, including digital transformation and new media models. In addition, we are in the process of transforming our supply chain capabilities and enterprise resource planning system, which will enable employees to work more efficiently and effectively. •Responsibly Manage Our Operations to Ensure the Long-Term Sustainability of Our Business, Our Planet and Our People. We are a purpose-driven company and for more than a century, our iconic brands have been built on a foundation of community investment and connections between people around the world. We could not have achieved this without our remarkable employeeswho make our purpose a reality. We believe our long-standing values make our Company a special place to work. •We believe our employees are among our most important resources and are critical to our continued success. In 2021, we changed our global employee survey from an annual basis to continuous listening surveys throughout the year. These shorter and faster surveys reach all of our employees around the world to hear their thoughts on the Company's direction and their place in it. The change from an annual survey to continuous touchpoints allows for real-time feedback and action from the Company and creates stronger employee engagement with the Company's strategy, initiatives and leadership. •Our diverse and inclusive culture makes the difference across all areas of the business. Our gender representation includes women occupying many of the top positions in the Company, including Chief Executive Officer and Chairman of the Board, Chief Accounting Officer and Chief Growth Officer, and approximately 50% representation across the Company. In 2020, we achieved 1:1 aggregate gender pay and in 2021, we achieved 1:1 aggregate people of color pay equity for salaried employees inthe United States . •We have made strong progress on our ESG priorities and continue to elevate these ESG initiatives for a greater global impact. While we focus on sustainability and social impact across our value chain, we continue to improve and focus on the lives of cocoa farmers and cocoa communities, the environmental priorities of climate change and the role of packaging in our business, responsibly and sustainably sourcing the inputs to our products and increasing investments in human rights and diversity initiatives and growing diverse representation across the organization.
OVERVIEW
Hershey is a global confectionery leader known for making more moments of goodness through chocolate, sweets, mints and other great tasting snacks. We are the largest producer of quality chocolate inNorth America , a leading snack maker inthe United States and a global leader in chocolate and non-chocolate confectionery. We market, sell and distribute our products under more than 100 brand names in approximately 80 countries worldwide.
Our principal product offerings include chocolate and non-chocolate confectionery products; gum and mint refreshment products and protein bars; pantry items, such as baking ingredients, toppings and beverages; and snack items such as spreads, meat snacks, bars and snack bites and mixes, popcorn and protein bars.
Business Acquisitions and Divestitures
InDecember 2021 , we completed the acquisition of Pretzels, previously a privately held company that manufactures and sells pretzels and other salty snacks for other branded products and private labels inthe United States . Pretzels is an industry leader in the pretzel category with a product portfolio that includes filled, gluten free and seasoned pretzels, as well as extruded snacks that complements Hershey's snacks portfolio. Based inBluffton, Indiana , Pretzels operates three manufacturing locations inIndiana andKansas . Pretzels provides Hershey deep pretzel category and product expertise and the manufacturing capabilities to support brand growth and future pretzel innovation. Additionally, we completed the acquisition of Dot's, previously a privately held company that produces and sells pretzels and other snack food products to retailers and distributors inthe United States , with Dot's Homestyle Pretzels snacks as its primary product. Dot's is the fastest-growing scale brand in the pretzel category and complements Hershey's snacks portfolio. Pretzels and Dot's are expected to generate aggregate annualized net sales over$300 million . Table of ContentsThe Hershey Company | 2021 Form 10-K |
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InJune 2021 , we completed the acquisition of Lily'sSweets, LLC ("Lily's"), previously a privately held company that sells a line of sugar-free and low-sugar confectionery foods to retailers and distributors inthe United States andCanada . Lily's products include dark and milk chocolate style bars, baking chips, peanut butter cups and other confection products that complement Hershey's confectionery and confectionery-based portfolio. Lily's is expected to generate annualized net sales over$100 million . InJanuary 2021 , we completed the divestiture ofLotte Shanghai Foods Co., Ltd. ("LSFC"), which was previously included within the International segment results in our consolidated financial statements. Total proceeds from the divestiture and the impact on our consolidated financial statements were immaterial. During the second quarter of 2020, we completed the divestitures ofKRAVE Pure Foods, Inc. ("Krave"), which was previously included within theNorth America Salty Snacks segment, and the Scharffen Berger and Dagoba brands, both of which were previously included within the North America Confectionery segment results in our consolidated financial statements. InSeptember 2019 , we completed the acquisition ofONE Brands, LLC ("ONE Brands"), previously a privately held company that sells a line of low-sugar, high-protein nutrition bars to retailers and distributors inthe United States , with the ONE bar as its primary product.
TRENDS AFFECTING OUR BUSINESS
OnMarch 11, 2020 , theWorld Health Organization designated COVID-19 as a global pandemic, which has spread worldwide and impacted various markets around the world, including theU.S. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19. Since the onset of COVID-19, there has been minimal disruption to our supply chain network. However, during 2021, continued strong demand for consumer goods and the effects of COVID-19 mitigation strategies have led to broad-based supply chain disruptions across theU.S. and globally, including inflation on many consumer products, labor shortages and demand outpacing supply. As a result, we experienced corresponding incremental costs and gross margin pressures during the year ended December 31, 2021 (see Results of Operations included in this MD&A). We are working closely with our business units, contract manufacturers, distributors, contractors and other external business partners to minimize the potential impact on our business. During 2021, many state governments began easing COVID-19 restrictions, resulting in increased travel during the summer and holiday seasons, full capacity at major sporting and entertainment events, increased occupancy limits for indoor gatherings and the removal of face covering requirements (subject to certain exceptions). This contributed to a resurgence of COVID-19 cases and the spread of COVID-19 variants, which experts believe has peaked in recent weeks in many jurisdictions. The availability of vaccinations (including vaccine boosters) continues to increase around the world, albeit with slower than anticipated rollouts and challenges within certain countries. We experienced an increase in our net sales and net income during the year endedDecember 31, 2021 , which was primarily driven by strong everyday performance on our core U.S. confection brands and salty snack brands (see Segment Results included in this MD&A), partially offset by the aforementioned supply chain disruptions and gross margin pressures. As ofDecember 31, 2021 , we believe we have sufficient liquidity to satisfy our key strategic initiatives and other material cash requirements; however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can operate effectively during the current economic environment. We continue to monitor our discretionary spending across the organization (see Liquidity and Capital Resources included in this MD&A). Based on the length and severity of COVID-19, including broad-based supply chain disruptions, rising levels of inflation, new trends in outbreaks and hotspots, the spread of COVID-19 variants, resurgences and the continued distribution of vaccinations, we may experience continued volatility in retail foot traffic, consumer shopping and consumption behavior and may experience increasing supply chain costs and higher inflation. We will continue to evaluate the nature and extent of these potential and evolving impacts to our business, consolidated results of operations, segment results, liquidity and capital resources. Table of Contents The Hershey Company | 2021 Form 10-K |
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CONSOLIDATED RESULTS OF OPERATIONS
Percent Change
For the years ended December 31, 2021 2020 2019 2021 vs 2020 2020 vs 2019
In millions of dollars except per
share amounts
Net sales $ 8,971.3 $ 8,149.7 $ 7,986.3 10.1 % 2.0 %
Cost of sales 4,922.7 4,448.5 4,363.8 10.7 % 1.9 %
Gross profit 4,048.6 3,701.2 3,622.5 9.4 % 2.2 %
Gross margin 45.1 % 45.4 % 45.4 %
SM&A expense 2,001.4 1,890.9 1,905.9 5.8 % (0.8) %
SM&A expense as a percent of net
sales 22.3 % 23.2% 23.9%
Long-lived and intangible asset
impairment charges - 9.1 112.5 NM (91.9) %
Business realignment costs 3.5 18.5 8.1 (80.9) % 128.1 %
Operating profit 2,043.7 1,782.7 1,596.0 14.6 % 11.7 %
Operating profit margin 22.8 % 21.9 % 20.0 %
Interest expense, net 127.4 149.4 144.1 (14.7) % 3.6 %
Other (income) expense, net 119.1 138.3 71.1 (13.9) % 94.7 %
Provision for income taxes 314.4 219.6 234.0 43.2 % (6.2) %
Effective income tax rate 17.5 % 14.7 % 16.9 %
Net income including noncontrolling
interest 1,482.8 1,275.4 1,146.8 16.3 % 11.2 %
Less: Net gain (loss) attributable
to noncontrolling interest 5.3 (3.3) (2.9) NM 12.1 %
Net income attributable to The
Hershey Company $ 1,477.5 $ 1,278.7 $ 1,149.7 15.5 % 11.2 %
Net income per share-diluted $ 7.11 $ 6.11 $ 5.46 16.4 % 11.9 %
Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above.
NM = not meaningfulNet Sales 2021 compared with 2020 Net sales increased 10.1% in 2021 compared with 2020, reflecting a volume increase of 5.6% due to an increase in everyday coreU.S. confection brands and salty snack brands, a favorable price realization of 3.1% due to higher prices on certain products, a 1.0% benefit from net acquisitions and divestitures driven by the 2021 acquisitions of Lily's, Dot's and Pretzels and a favorable impact from foreign currency exchange rates of 0.4%.
2020 compared with 2019
Net sales increased 2.0% in 2020 compared with 2019, reflecting a favorable price realization of 2.3% due to higher prices on certain products and a 0.5% benefit from net acquisitions and divestitures (predominantly driven by the 2019 acquisition of ONE Brands, partially offset by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands). These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.5% and a volume decrease of 0.3% due to the impact of COVID-19 on sales in our international markets, as well as declines in owned retail and world travel retail and elasticity-driven impacts due to price increases on certain products.
Key
For the full year 2021, our totalU.S. retail takeaway increased 8.9% in the expanded multi-outlet combined plus convenience store channels (IRI MULO +C-Stores ), which includes candy, mint, gum, salty snacks, meat snacks and grocery items. OurU.S. candy, mint and gum ("CMG") consumer takeaway increased 8.7%, resulting in a CMG market share decline of approximately 32 basis points. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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The CMG consumer takeaway and market share information reflect measured channels of distribution accounting for approximately 90% of ourU.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers and convenience store channels, plus Wal-Mart Stores, Inc., partial dollar, club and military channels. These metrics are based on measured market scanned purchases as reported byInformation Resources, Incorporated ("IRI"), the Company's market insights and analytics provider, and provide a means to assess our retail takeaway and market position relative to the overall category.
Cost of Sales and Gross Margin
2021 compared with 2020
Cost of sales increased 10.7% in 2021 compared with 2020. The increase was driven by higher sales volume, higher freight and logistics costs and additional plant costs. These drivers were partially offset by the incremental$78.8 million of favorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years' commodity purchases; however, our mark-to-market activity was significantly impacted by financial market volatility duringMarch 2020 amid the COVID-19 outbreak. Additionally, the increase was partially offset by favorable price realization and supply chain productivity. Gross margin decreased by 30 basis points in 2021 compared with 2020. The decrease was driven by higher freight and logistics costs and additional plant costs. These factors were partially offset by favorable price realization, supply chain productivity and the favorable year-over-year mark-to-market impact from commodity derivative instruments.
2020 compared with 2019
Cost of sales increased 1.9% in 2020 compared with 2019. The increase in cost of sales was attributed to higher freight and logistics costs and additional plant costs, specifically, PPE costs, increased sanitation and wage incentives associated with COVID-19. Additionally, the increase was driven by an incremental$28.9 million of unfavorable mark-to-market activity on our commodity derivative instruments. These derivative instruments are intended to economically hedge future years' commodity purchases; however, they were significantly impacted by financial market volatility during 2020. These drivers were partially offset by favorable price realization and favorable supply chain productivity. Gross margin remained the same in 2020 compared with 2019. Increases were driven by the higher freight and logistics costs, additional plant costs, and unfavorable year-over-year mark-to-market impact from commodity derivative instruments. These factors were offset by favorable price realization and supply chain productivity.
Selling, Marketing and Administrative
2021 compared with 2020
Selling, marketing and administrative ("SM&A") expenses increased $110.4
million , or 5.8%, in 2021 driven by increased corporate expenses. Total
advertising and related consumer marketing expenses decreased 0.2% driven by
lower advertising in our North America Confectionery segment. SM&A expenses,
excluding advertising and related consumer marketing, increased approximately
9.2% in 2021 driven by higher compensation costs and investments in capabilities
and technology.
2020 compared with 2019
SM&A expenses decreased $15.0 million or 0.8% in 2020. Total advertising and
related consumer marketing expenses decreased 2.0% driven by media cost
efficiencies and select brand investment optimization related to COVID-19 in our
International segment. SM&A expenses, excluding advertising and related consumer
marketing, decreased approximately 0.1% in 2020 due to savings in travel and
meeting expenses related to COVID-19 travel restrictions and project timing
shifts.
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Long-Lived and Intangible Asset Impairment Charges
In 2021, we recorded no impairments charges. In 2020 and 2019, we recorded the following impairment charges: For the year endedDecember 31, 2020
2019
In millions of dollars Adjustment to disposal group (1)$ 6.2 $ 2.7 Other asset write-down (2) 2.9
-
Customer relationship and trademark intangible assets (3) -
100.1
Other long-lived assets not held for sale (4) -
9.7
Long-lived and intangible asset impairment charges$ 9.1
(1)In connection with our LSFC disposal group, which was previously classified as held for sale during 2020 and 2019, we recorded impairment charges to adjust long-lived asset values. The fair value of the disposal group was supported by potential sales prices with third-party buyers. The sale of the LSFC joint venture was completed inJanuary 2021 .
(2)In connection with a previous sale, the Company wrote-down certain receivables deemed uncollectible.
(3)During the fourth quarter of 2019, we recorded impairment charges to write down customer relationship and trademark intangible assets associated with Krave. These charges were determined by comparing the fair value of the asset group to its carrying value. We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and relief-from-royalty valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. (4)During 2019, we recorded impairment charges predominantly comprised of select long-lived assets that had not yet met the held for sale criteria. The fair value of these assets was supported by potential sales prices with third-party buyers and market analysis. The assessment of the valuation of goodwill and other long-lived assets is based on management estimates and assumptions, as discussed in our critical accounting policies included in Item 7 of this Annual Report on Form 10-K. These estimates and assumptions are subject to change due to changing economic and competitive conditions.
Business Realignment Activities
We periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of our key growth strategies. In 2021, 2020 and 2019 , we recorded business realignment costs of$3.5 million ,$18.5 million and$8.1 million , respectively. The 2021 and 2020 costs related primarily to the International Optimization Program, a program focused on optimizing ourChina operating model to improve our operational efficiency and provide for a strong, sustainable and simplified base going forward. The 2019 costs related primarily to the Margin for Growth Program, a program focused on improving global efficiency and effectiveness, optimizing the Company's supply chain, streamlining the Company's operating model and reducing administrative expenses to generate long-term savings. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Consolidated Financial Statements.
Operating Profit and Operating Profit Margin
2021 compared with 2020
Operating profit increased 14.6% in 2021 compared with 2020 due primarily to higher gross profit, lower business realignment costs and lower impairment charges, partially offset by higher SM&A in the 2021 period, as noted above. Operating profit margin increased to 22.8% in 2021 from 21.9% in 2020 driven by these same factors. 2020 compared with 2019 Operating profit increased 11.7% in 2020 compared with 2019 due primarily to higher gross profit, lower SM&A and lower impairment charges, partially offset by higher business realignment costs in the 2020 period, as noted above. Operating profit margin increased to 21.9% in 2020 from 20.0% in 2019 driven by these same factors. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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Interest Expense, Net
2021 compared with 2020
Net interest expense was
2020 compared with 2019
Net interest expense was$5.2 million higher in 2020 than in 2019. The increase was due to higher long-term debt balances in 2020 versus 2019, specifically due to$1.0 billion of notes issued inOctober 2019 and$1.0 billion of notes issued inMay 2020 . Other (Income) Expense, Net 2021 compared with 2020 Other (income) expense, net totaled an expense of$119.1 million in 2021 versus an expense of$138.3 million in 2020. The decrease in the net expense was primarily due to lower write-downs on equity investments qualifying for historic and renewable energy tax credits, in addition to lower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2021 compared to the 2020 period.
2020 compared with 2019
Other (income) expense, net totaled an expense of$138.3 million in 2020 versus an expense of$71.1 million in 2019. The increase in the net expense was primarily due to higher write-downs on equity investments qualifying for federal solar tax credits, partially offset by lower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2020 compared to the 2019 period.
Income Taxes and Effective Tax Rate
2021 compared with 2020
Our effective income tax rate was 17.5% for 2021 compared with 14.7% for 2020. Relative to the 21% statutory rate, the 2021 effective tax rate benefited from investment tax credits, partially offset by incremental tax reserves incurred as a result of an adverse ruling in connection with a non-U.S. tax litigation matter, as well as state taxes. The 2020 effective rate, relative to the 21% statutory rate, benefited from investment tax credits and the benefit of employee share-based payments, partially offset by state taxes.
2020 compared with 2019
Our effective income tax rate was 14.7% for 2020 compared with 16.9% for 2019. Relative to the 21% statutory rate, the 2020 effective tax rate benefited from investment tax credits and the benefit of employee share-based payments, partially offset by state taxes. The 2019 effective rate, relative to the 21% statutory rate, was impacted by changes to foreign valuation allowances, a favorable foreign rate differential, investment tax credits and the benefit of employee share-based payments, which were partially offset by the impact of state taxes. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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Net Income Attributable to
2021 compared with 2020
Net income increased$198.8 million , or 15.5%, while EPS-diluted increased$1.00 , or 16.4%, in 2021 compared with 2020. The increase in both net income and EPS-diluted was driven primarily by higher gross profit, partially offset by higher SM&A and higher income taxes in 2021. Our 2021 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.
2020 compared with 2019
Net income increased$129.0 million , or 11.2%, while EPS-diluted increased$0.65 , or 11.9%, in 2020 compared with 2019. The increase in both net income and EPS-diluted was driven primarily by higher gross profit, lower SM&A, lower impairment charges, and lower income taxes in 2020, partially offset by higher other income and expenses, higher business realignment costs, and higher interest expense. Our 2020 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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SEGMENT RESULTS
SinceDecember 31, 2014 , the Company has reported its operations through two segments: (i)North America and (ii) International and Other. After the completion of the Company's acquisitions of Dot's and Pretzels inDecember 2021 , as described in Note 2 to the Consolidated Financial Statements, management of the Company has elected to begin reporting its operations through three reportable segments. Therefore, effective in the fourth quarter of 2021, the Company realigned its former two reportable segments into three reportable segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International. We have retroactively reflected these changes in all historical periods presented. The summary that follows provides a discussion of the results of operations of our three reportable segments: North America Confectionery, North America Salty Snacks and International. For segment reporting purposes, we use "segment income" to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations.
Our segment results, including a reconciliation to our consolidated results, were as follows:
For the years ended December 31, 2021 2020 2019 In millions of dollars Net Sales: North America Confectionery$ 7,682.4 $ 7,084.9 $ 6,815.1 North America Salty Snacks 555.4 438.2 410.0 International 733.5 626.6 761.2 Total$ 8,971.3 $ 8,149.7 $ 7,986.3 Segment Income: North America Confectionery$ 2,475.9 $ 2,274.6 $ 2,120.2 North America Salty Snacks 100.7 75.8 50.8 International 74.2 - 50.6 Total segment income 2,650.8 2,350.4 2,221.6 Unallocated corporate expense (1) 614.9 520.7 532.6 Unallocated mark-to-market (gains) losses on commodity derivatives (2) (24.4) 6.4 (28.6) Long-lived and intangible asset impairment charges - 9.1 112.5 Costs associated with business realignment activities 16.6 31.5 9.2 Operating profit 2,043.7 1,782.7 1,595.9 Interest expense, net 127.4 149.4 144.1 Other (income) expense, net 119.1 138.3 71.0 Income before income taxes$ 1,797.2
(1)Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.
(2)Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains). See Note 13 to the Consolidated Financial Statements.
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North America Confectionery
The North America Confectionery segment is responsible for our chocolate and non-chocolate confectionery market position inthe United States andCanada . This includes developing and growing our business in chocolate and non-chocolate confectionery, gum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines. While a less significant component, this segment also includes our retail operations, including Hershey'sChocolate World stores inHershey, Pennsylvania ;New York, New York ;Las Vegas, Nevada ;Niagara Falls (Ontario ) andSingapore , as well as operations associated with licensing the use of certain trademarks and products to third parties around the world. North America Confectionery accounted for 85.6%, 86.9% and 85.3% of our net sales in 2021, 2020 and 2019, respectively.North America Confectionery results for the years endedDecember 31, 2021 , 2020 and 2019 were as follows: Percent Change For the years ended December 31, 2021 2020 2019 2021 vs 2020 2020 vs 2019 In millions of dollars Net sales$ 7,682.4 $ 7,084.9 $ 6,815.1 8.4 % 4.0 % Segment income 2,475.9 2,274.6 2,120.2 8.8 % 7.3 % Segment margin 32.2 % 32.1 % 31.1 % 2021 compared with 2020 Net sales of our North America Confectionery segment increased$597.5 million , or 8.4%, in 2021 compared to 2020, reflecting a volume increase of 5.1% due to an increase in everyday coreU.S. confection brands, a favorable price realization of 2.1% due to higher prices on certain products, a 0.9% benefit from the 2021 acquisition of Lily's and a favorable impact from foreign currency exchange rates of 0.3%. Our North America Confectionery segment also includes licensing and owned retail. At the onset of the pandemic, all Hershey'sChocolate World stores were temporarily closed and subsequently re-opened inJuly 2020 with increased safety measures. This includedthe United States (3 locations),Niagara Falls (Ontario ) andSingapore . As a result, our net sales increased approximately 37.4% during 2021 compared to 2020. Our North America Confectionery segment income increased$201.3 million , or 8.8%, in 2021 compared to 2020, primarily due to favorable price realization and volume increases, partially offset by higher supply chain-related costs, higher freight and logistics costs, as well as unfavorable product mix.
2020 compared with 2019
Net sales of our North America Confectionery segment increased$269.8 million , or 4.0%, in 2020 compared to 2019, reflecting favorable price realization of 2.8% attributed to higher prices on certain products, a 0.9% benefit from net acquisitions and divestitures (predominantly driven by the 2019 acquisition of ONE Brands, partially offset by the 2020 divestitures of the Scharffen Berger and Dagoba brands), and a volume increase of 0.3% due to an increase in everyday coreU.S. confection brands. Our North America Confectionery segment also includes licensing and owned retail. At the onset of the pandemic, all Hershey'sChocolate World stores were temporarily closed and subsequently re-opened inJuly 2020 with increased safety measures. This includedthe United States (3 locations),Niagara Falls (Ontario ) andSingapore . As a result, our net sales decreased approximately 25.8% during 2020 compared to 2019. Our North America Confectionery segment income increased$154.4 million , or 7.3%, in 2020 compared to 2019, primarily due to favorable price realization and volume increases, partially offset by higher supply chain-related costs, specifically, PPE costs, increased sanitation and wage incentives associated with COVID-19. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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North America Salty Snacks
The North America Salty Snacks segment is responsible for our grocery and snacks market positions, including our salty snacking products. North America Salty Snacks accounted for 6.2%, 5.4% and 5.1% of our net sales in 2021, 2020 and 2019, respectively. North America Salty Snacks results for the years endedDecember 31, 2021 , 2020 and 2019 were as follows: Percent Change For the years ended December 31, 2021 2020 2019 2021 vs 2020 2020 vs 2019 In millions of dollars Net sales$ 555.4 $ 438.2 $ 410.0 26.7 % 6.9 % Segment income 100.7 75.8 50.8 32.8 % 49.2 % Segment margin 18.1 % 17.3 % 12.4 % 2021 compared with 2020 Net sales for our North America Salty Snacks segment increased$117.2 million , or 26.7%, in 2021 compared to 2020, reflecting a volume increase of 16.9% primarily related to SkinnyPop and Pirates Booty snacks, a favorable price realization of 5.7% due to higher prices on certain products and a 4.1% benefit from net acquisitions and divestitures driven by the 2021 acquisitions of Dot's and Pretzels. Our North America Salty Snacks segment income increased$24.9 million , or 32.8%, in 2021 compared to 2020, primarily due to favorable price realization and volume increases, partially offset by higher supply chain-related costs, higher freight and logistics costs, as well as unfavorable product mix.
2020 compared with 2019
Net sales for our North America Salty Snacks segment increased$28.2 million , or 6.9%, in 2020 compared to 2019, reflecting a volume increase of 10.6%, primarily related to SkinnyPop and Pirates Booty snacks, partially offset by a 3.7% negative impact from the 2020 Krave divestiture.
Our North America Salty Snacks segment income increased
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International
The International segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. Currently, this includes our operations inAsia markets,Latin America ,Europe ,Africa and theMiddle East , along with exports to these regions. International accounted for 8.2%, 7.7% and 9.5% of our net sales in 2021, 2020 and 2019, respectively. International results for the years endedDecember 31, 2021 , 2020 and 2019 were as follows: Percent Change For the years ended December 31, 2021 2020 2019 2021 vs 2020 2020 vs 2019 In millions of dollars Net sales$ 733.5 $ 626.6 $ 761.2 17.1 % (17.7) % Segment income 74.2 - 50.6 NM NM Segment margin 10.1 % - % 6.6 % NM = not meaningful 2021 compared with 2020 Net sales of our International segment increased$106.9 million , or 17.1%, in 2021 compared to 2020, reflecting a favorable price realization of 12.1%, a volume increase of 4.2% and a favorable impact from foreign currency exchange rates of 0.8%. The volume increase was primarily attributed to solid marketplace growth inMexico ,India , andBrazil , where net sales increased by 39.0%, 23.9% and 21.3%, respectively. Our International segment also includes world travel retail, where net sales increased approximately 27.1%. These increases also benefited from a favorable impact from foreign currency exchange rates of 1.0%. Our International segment income increased$74.2 million in 2021 compared to 2020 with the improvement primarily resulting from execution of our International Optimization Program inChina , as we streamline and optimize ourChina operating model, as well as volume increases and favorable price realization.
2020 compared with 2019
Net sales of our International segment decreased$134.6 million , or 17.7%, in 2020 compared to 2019, reflecting a volume decline of 11.0%, an unfavorable impact from foreign currency exchange rates of 4.9% and an unfavorable price realization of 1.8%. The volume declines were attributed to significant sales declines inMexico ,China and world travel retail, where net sales decreased by 24.6%, 46.0% and 43.3%, respectively due to the implementation of quarantine protocols by local governments to mitigate the spread of COVID-19. Furthermore, net sales declines inChina were also attributable to the commencement of the International Optimization Program. Our International segment income decreased$50.6 million in 2020 compared to 2019. This decrease was driven by the lower level of net sales associated with the COVID-19 disruption. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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Unallocated Corporate Expense
Unallocated corporate expense includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance.
Unallocated corporate expense totaled
Unallocated corporate expense totaled
LIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity include cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, the adequacy of available commercial paper and bank lines of credit, and the ability to attract long-term capital with satisfactory terms. We generate substantial amounts of cash from operations and remain in a strong financial position, with sufficient liquidity available for capital reinvestment, strategic acquisitions and the payment of dividends.
Cash Flow Summary
The following table is derived from our Consolidated Statements of Cash Flows:
In millions of dollars 2021 2020 2019 Net cash provided by (used in): Operating activities$ 2,082.9 $ 1,699.6 $ 1,763.9 Investing activities (2,222.8) (531.3) (780.5) Financing activities (681.1) (499.2) (1,081.4) Effect of exchange rate changes on cash and cash equivalents (5.1) (7.0) 3.3 Less: Cash classified as assets held for sale 11.4 (11.4) -
(Decrease) increase in cash and cash equivalents
$ 650.7 $ (94.7) Operating activities Our principal source of liquidity is cash flow from operations. Our net income and, consequently, our cash provided by operations are impacted by sales volume, seasonal sales patterns, timing of new product introductions, profit margins and price changes. Sales are typically higher during the third and fourth quarters of the year due to seasonal and holiday-related sales patterns. Generally, working capital needs peak during the summer months. We meet these needs primarily with cash on hand, bank borrowings or the issuance of commercial paper. We generated cash of$2.1 billion from operating activities in 2021, an increase of$383.3 million compared to$1.7 billion in 2020. This increase in net cash provided by operating activities was mainly driven by the following factors: •Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) generated cash of$47 million in 2021 and consumed cash of$166 million in 2020. This$213 million fluctuation was mainly driven by strong demand ofU.S. inventories, specifically our everyday coreU.S. confection brands and salty snack brands. •Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, long-lived and intangible asset charges, write-down of equity investments and other charges) resulted in$185 million of higher cash flow in 2021 relative to 2020. Table of Contents The Hershey Company | 2021 Form 10-K |
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Cash provided by operating activities in 2020 decreased
•Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) consumed cash of$166 million in 2020 and generated cash of$60 million in 2019. This$226 million fluctuation was mainly driven by a higher year-over-year build up ofU.S. inventories to satisfy product requirements and maintain sufficient levels to accommodate customer requirements, as well as an increase in cash used by accounts receivable due to an increase in sales ofU.S. seasonal products.
•The decrease in cash provided by operating activities was partially offset by the following net cash inflows:
•Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, long-lived and intangible asset charges, write-down of equity investments and other charges) resulted in$207 million of higher cash flow in 2020 relative to 2019. Pension and Post-Retirement Activity. We recorded net periodic benefit costs of$28.4 million ,$34.5 million and$41.4 million in 2021, 2020 and 2019, respectively, relating to our benefit plans (including our defined benefit and other post retirement plans). The main drivers of fluctuations in expense from year to year are assumptions in formulating our long-term estimates, including discount rates used to value plan obligations, expected returns on plan assets, the service and interest costs and the amortization of actuarial gains and losses. The funded status of our qualified defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and the level of funding. We contribute cash to our plans at our discretion, subject to applicable regulations and minimum contribution requirements. Cash contributions to our pension and post retirement plans totaled$51.1 million ,$11.7 million and$20.1 million in 2021, 2020 and 2019, respectively. Investing activities Our principal uses of cash for investment purposes relate to purchases of property, plant and equipment and capitalized software, as well as acquisitions of businesses, partially offset by proceeds from sales of property, plant and equipment. We used cash of$2.2 billion for investing activities in 2021 compared to$531.3 million in 2020, with the increase in cash spend driven by higher levels of acquisition activity. We used cash of$780.5 million for investing activities in 2019, and the decrease in 2020 in cash spend was driven by no acquisition activity.
Primary investing activities include the following:
•Capital spending. Capital expenditures, including capitalized software, primarily to support our ERP system implementation, capacity expansion, innovation and cost savings, were$495.9 million in 2021,$441.6 million in 2020 and$318.2 million in 2019. Our 2021 expenditures increased compared to 2020 due to progress on capacity expansion projects and our ERP system implementation. Our 2020 expenditures were substantially higher than 2019 expenditures due to progress on our key strategic initiatives. We expect 2022 capital expenditures, including capitalized software, to approximate$550 million to$600 million . The increase in our 2022 capital expenditures is largely driven by our key strategic initiatives, including expanding the agility and capacity of the Company's supply chain and building digital infrastructure across the enterprise. We intend to use our existing cash and internally generated funds to meet our 2022 capital requirements. •Investments in partnerships qualifying for tax credits. We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested approximately$128.4 million in 2021,$87.2 million in 2020 and$80.2 million in 2019 in projects qualifying for tax credits. •Business acquisitions. In 2021, we spent an aggregate$1.6 billion to acquire Lily's (June 2021 ), as well as Dot's and Pretzels (December 2021 ). In 2020, we had no acquisition activity. In 2019, we spent$402.2 million to acquire ONE Brands. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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•Other investing activities. In 2021 and 2020, our other investing activities were minimal. In 2019, we generated$20.1 million of proceeds from the sale of property, plant and equipment and other long-lived assets. This included the sale of selectPennsylvania facilities and land for sales proceeds of approximately$27.6 million , resulting in a gain on the sale of$11.3 million .
Financing activities
Our cash flow from financing activities generally relates to the use of cash for purchases of our Common Stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of stock options. Financing activities in 2021 used cash of$681.1 million , compared to cash used of$499.2 million in 2020. We used cash of$1.1 billion for financing activities in 2019, primarily to fund acquisition activity.
The majority of our financing activity was attributed to the following:
•Short-term borrowings, net. In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. In 2021, we generated cash flow of$869.0 million predominantly through the issuance of short-term commercial paper. In 2020, we generated cash flow of$41.8 million due to an increase in short-term foreign bank borrowings. In 2019, we used$1.2 billion to reduce short-term commercial paper borrowings and short-term foreign bank borrowings. We utilized the proceeds from the issuance of long-term debt inOctober 2019 to repay outstanding commercial paper used to fund the ONE Brands acquisition. •Long-term debt borrowings and repayments. InFebruary 2021 andMay 2021 , we repaid$84.7 million of 8.800% Debentures and$350 million of 3.100% Notes due upon their maturities, respectively. InMay 2020 , we issued$300 million of 0.900% Notes due in 2025,$350 million of 1.700% Notes due in 2030 and$350 million of 2.650% Notes due in 2050 (the "2020 Notes"). Proceeds from the issuance of the 2020 Notes, net of discounts and issuance costs, totaled$989.9 million . Additionally, inMay 2020 andDecember 2020 , we repaid$350 million of 2.900% Notes and$350 million of 4.125% Notes due upon their maturities, respectively. InOctober 2019 , we issued$300 million of 2.05% Notes due in 2024,$300 million of 2.45% Notes due in 2029 and$400 million of 3.125% Notes due in 2049 (the "2019 Notes"). Proceeds from the issuance of the 2019 Notes, net of discounts and issuance costs, totaled$989.6 million . •Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were$686.0 million in 2021,$640.7 million in 2020 and$610.3 million in 2019. Dividends per share of Common Stock increased 8.1% to$3.410 per share in 2021 compared to$3.154 per share in 2020, while dividends per share of Class B Common Stock increased 8.2% in 2021. Details regarding our 2021 cash dividends paid to stockholders are as follows: Quarter Ended In millions of dollars except per share amounts April 4, 2021 July 4, 2021 October 3, 2021 December 31, 2021 Dividends paid per share - Common stock $ 0.804$ 0.804 $ 0.901 $ 0.901 Dividends paid per share - Class B common stock $ 0.731$ 0.731 $ 0.819 $ 0.819 Total cash dividends paid $ 162.7$ 161.6 $ 180.9 $ 180.8 Declaration date February 2, 2021 April 27,
2021 July 23, 2021 October 27, 2021 Record date February 19, 2021 May 21, 2021 August 20, 2021 November 19, 2021 Payment date March 15, 2021 June 15, 2021 September 15, 2021 December 15, 2021 •Share repurchases. We repurchase shares of Common Stock to offset the dilutive impact of treasury shares issued under our equity compensation plans. The value of these share repurchases in a given period varies based on the volume of stock options exercised and our market price. In addition, we periodically repurchase shares of Common Stock pursuant to Board-authorized programs intended to drive additional stockholder value. Details regarding our share repurchases are as follows: Table of Contents The Hershey Company | 2021 Form 10-K |
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In millions 2021 2020 2019 Shares repurchased in the open market under pre-approved share repurchase programs$ 150.0
308.0 61.2 377.2
Cash used for total share repurchases $ 458.0 $ 211.2 $ 527.2
Total shares repurchased under pre-approved share
repurchase programs 0.9 1.0 1.4
In July 2018 , our Board of Directors approved a $500 million share repurchase
authorization. As of December 31, 2021 , approximately $110 million remained
available for repurchases of our Common Stock under this program. The share
repurchase program does not have an expiration date. In May 2021 , our Board of
Directors approved an additional $500 million share repurchase authorization.
This program is to commence after the existing 2018 authorization is completed
and is to be utilized at management's discretion. We expect 2022 share
repurchases to be in line with our traditional buyback strategy.
•Proceeds from the exercise of stock options, including tax benefits. We
received $33.2 million from employee exercises of stock options, net of employee
taxes withheld from share-based awards in 2021. We received $25.5 million and
$240.8 million in 2020 and 2019, respectively. Variances are driven primarily by
the number of shares exercised and the share price at the date of grant.
Financial Condition
AtDecember 31, 2021 , our cash and cash equivalents totaled$329.3 million . AtDecember 31, 2020 , our cash and cash equivalents totaled$1.1 billion . Our cash and cash equivalents at the end of 2021 decreased$814.7 million compared to the 2020 year-end balance as a result of the uses of net cash outlined in the previous discussion. Approximately 60% of the balance of our cash and cash equivalents atDecember 31, 2021 was held by subsidiaries domiciled outside ofthe United States . During 2021, previously undistributed earnings of certain international subsidiaries were no longer considered indefinitely reinvested; however, the Company had previously recognized a one-timeU.S. repatriation tax due underU.S. tax reform, and as a result, only an immaterial amount of withholding tax was recognized. For the remainder of the Company's cash held by international subsidiaries, we intend to continue to reinvest the undistributed earnings indefinitely. We believe we have sufficient liquidity to satisfy our cash needs for at least the next 12 months, including our cash needs inthe United States . We maintain debt levels we consider prudent based on our cash flow, interest coverage ratio and percentage of debt to capital. We use debt financing to lower our overall cost of capital which increases our return on stockholders' equity. Our total short- and long-term debt was$5.0 billion atDecember 31, 2021 and$4.6 billion atDecember 31, 2020 . Our total debt increased in 2021 mainly due to the issuance of short-term commercial paper used to fund our 2021 acquisitions of Lily's, Dot's and Pretzels, partially offset by the repayment of$84.7 million Debentures that matured inFebruary 2021 and$350 million Notes that matured inMay 2021 . As a source of short-term financing, we maintain a$1.5 billion unsecured revolving credit facility with the option to increase borrowings by an additional$500 million with the consent of the lenders. As ofDecember 31, 2021 , the termination date of this agreement isJuly 2, 2024 , however, we may extend the termination date for up to two additional one-year periods upon notice to the administrative agent under the facility. We may use these funds for general corporate purposes, including commercial paper backstop and business acquisitions. As ofDecember 31, 2021 , we had$680 million of available capacity under the agreement. The unsecured revolving credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. We were in compliance with all covenants as ofDecember 31, 2021 . In addition to the revolving credit facility, we maintain lines of credit in various currencies with domestic and international commercial banks. As ofDecember 31, 2021 , we had available capacity of$164 million under these lines of credit. Furthermore, we have a current shelf registration statement filed with theSEC that allows for the issuance of an indeterminate amount of debt securities. Proceeds from the debt issuances and any other offerings under the current registration statement may be used for general corporate requirements, including reducing existing borrowings, Table of ContentsThe Hershey Company | 2021 Form 10-K |
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financing capital additions and funding contributions to our pension plans, future business acquisitions and working capital requirements.
Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing cash-flow-to-debt and debt-to-capitalization levels as well as our current credit rating. We believe that our existing sources of liquidity are adequate to meet anticipated funding needs at comparable risk-based interest rates for the foreseeable future. Acquisition spending and/or share repurchases could potentially increase our debt. Operating cash flow and access to capital markets are expected to satisfy our various short- and long-term cash flow requirements, including acquisitions and capital expenditures.
Equity Structure
We have two classes of stock outstanding - Common Stock and Class
Hershey Trust Company , as trustee for the trust established by Milton S. andCatherine S. Hershey that has as its sole beneficiaryMilton Hershey School , maintains voting control overThe Hershey Company . In addition, three representatives ofHershey Trust Company currently serve as members of the Company's Board. In performing their responsibilities on the Company's Board, these representatives may from time to time exercise influence with regard to the ongoing business decisions of our Board or management.Hershey Trust Company , as trustee for the Trust, in its role as controlling stockholder of the Company, has indicated it intends to retain its controlling interest inThe Hershey Company . The Company's Board, and not theHershey Trust Company board, is solely responsible and accountable for the Company's management and performance.Pennsylvania law requires that theOffice of Attorney General be provided advance notice of any transaction that would result inHershey Trust Company , as trustee for the Trust, no longer having voting control of the Company. The law provides specific statutory authority for the Attorney General to intercede and petition the court having jurisdiction overHershey Trust Company , as trustee for the Trust, to stop such a transaction if the Attorney General can prove that the transaction is unnecessary for the future economic viability of the Company and is inconsistent with investment and management considerations under fiduciary obligations. This legislation makes it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby may delay or prevent a change in control of the Company.
Material Cash Requirements
The following table summarizes our future material cash requirements as ofDecember 31, 2021 : Payments due by Period Less than 1 In millions of dollars Total year 1-3 years 3-5 years More than 5 years Short-term debt (primarilyU.S. commercial paper)$ 939.4 $ 939.4 $ - $ - $ - Long-term notes (excluding finance lease obligations) 4,043.6 - 1,050.0 1,100.0 1,893.6 Interest expense (1) 1,193.4 112.5 186.3 143.4 751.2 Operating lease obligations (2) 448.0 46.3 72.6 44.7 284.4 Finance lease obligations (3) 170.8 7.3 9.4 8.0 146.1 Unconditional purchase obligations (4) 2,205.4 1,742.1 438.3 25.0 - Total obligations$ 9,000.6 $ 2,847.6 $ 1,756.6 $ 1,321.1 $ 3,075.3
(1) Includes the net interest payments on fixed rate debt associated with long-term notes.
(2) Includes the minimum rental commitments (including imputed interest) under non-cancelable operating leases primarily for offices, retail stores, warehouses and distribution facilities. (3) Includes the minimum rental commitments (including imputed interest) under non-cancelable finance leases primarily for offices and warehouse facilities, as well as vehicles. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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(4) Purchase obligations consist primarily of fixed commitments for the purchase of raw materials to be utilized in the normal course of business. Amounts presented included fixed price forward contracts and unpriced contracts that were valued using market prices as ofDecember 31, 2021 . The amounts presented in the table do not include items already recorded in accounts payable or accrued liabilities at year-end 2021, nor does the table reflect cash flows we are likely to incur based on our plans, but are not obligated to incur. Such amounts are part of normal operations and are reflected in historical operating cash flow trends. We do not believe such purchase obligations will adversely affect our liquidity position. In entering into contractual obligations, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. Our risk is limited to replacing the contracts at prevailing market rates. We do not expect any significant losses resulting from counterparty defaults. These obligations impact our liquidity and capital resource needs. To meet those cash requirements, we intend to use our existing cash and internally generated funds. To the extent necessary, we may also borrow under our existing unsecured revolving credit facility or under other short-term borrowings, and depending on market conditions and upon the significance of the cost of a particular Note maturity or acquisition to our then-available sources of funds, to obtain additional short- and long-term financing. We believe that cash provided from these sources will be adequate to meet our future short- and long-term cash requirements.
Asset Retirement Obligations
We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations, which require that we handle or dispose of asbestos in a specified manner if such facilities undergo major renovations or are demolished. We do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos.
Income Tax Obligations
Liabilities for unrecognized income tax benefits are excluded from the table above as we are unable to reasonably predict the ultimate amount or timing of a settlement of these potential liabilities. See Note 10 to the Consolidated Financial Statements for more information.
Recent Accounting Pronouncements
Information on recently adopted and issued accounting standards is included in
Note 1 to the Consolidated Financial Statements.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to use judgment and make estimates and assumptions. We believe that our most critical accounting policies and estimates relate to the following:
•Accrued Liabilities for Trade Promotion Activities
•Pension and Other Post-Retirement Benefits Plans
•Business Acquisitions, Valuation and Impairment of
Management has discussed the development, selection and disclosure of critical accounting policies and estimates with the Audit Committee of our Board. While we base estimates and assumptions on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Other significant accounting policies are outlined in
Note 1 to the Consolidated Financial Statements.
Accrued Liabilities for Trade Promotion Activities
We promote our products with advertising, trade promotions and consumer incentives. These programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. We expense advertising costs and other direct marketing expenses as incurred. We recognize the costs of trade promotion and consumer incentive activities as a reduction to net sales along with a corresponding accrued liability based on estimates at the time of revenue recognition. These estimates are based on our analysis of the programs offered, historical trends, expectations regarding customer and consumer participation, sales and payment trends and our experience with payment patterns associated with similar programs offered in the past. The estimated costs of these programs are reasonably likely to change in future periods due to changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. Differences between estimated expense and actual program performance are recognized as a change in estimate in a subsequent period and are normally not significant. During 2021, 2020, and 2019, actual annual promotional costs have not deviated from the estimated amount by more than 3%. Our trade promotion and consumer incentive accrued liabilities totaled$174.0 million and$195.6 million atDecember 31, 2021 and 2020, respectively.
Pension and Other Post-Retirement Benefits Plans
We sponsor various defined benefit pension plans. The primary plans are The Hershey Company Retirement Plan and The Hershey Company Retirement Plan for Hourly Employees, which are cash balance plans that provide pension benefits for mostU.S. employees hired prior toJanuary 1, 2007 . We also sponsor two primary other post-employment benefit ("OPEB") plans, consisting of a health care plan and life insurance plan for retirees. The health care plan is contributory, with participants' contributions adjusted annually, and the life insurance plan is non-contributory. For accounting purposes, the defined benefit pension and OPEB plans require assumptions to estimate the projected and accumulated benefit obligations, including the following variables: discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality; expected return on assets; and health care cost trend rates. These and other assumptions affect the annual expense and obligations recognized for the underlying plans. Our assumptions reflect our historical experiences and management's best judgment regarding future expectations. Our related accounting policies, accounting balances and plan assumptions are discussed in Note 11 to the Consolidated Financial Statements.
Pension Plans
Changes in certain assumptions could significantly affect pension expense and benefit obligations, particularly the estimated long-term rate of return on plan assets and the discount rates used to calculate such obligations: •Long-term rate of return on plan assets. The expected long-term rate of return is evaluated on an annual basis. We consider a number of factors when setting assumptions with respect to the long-term rate of return, including current and expected asset allocation and historical and expected returns on the plan asset categories. Actual asset allocations are regularly reviewed and periodically rebalanced to the targeted allocations when considered appropriate. Investment gains or losses represent the difference between the expected return estimated using the Table of ContentsThe Hershey Company | 2021 Form 10-K |
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long-term rate of return and the actual return realized. For 2021, we increased the expected return on plan assets assumption to 4.9% from the 4.8% assumption used during 2020. The historical average return (compounded annually) over the 20 years prior toDecember 31, 2021 was approximately 6.3%. As ofDecember 31, 2021 , our primary plans had cumulative unrecognized investment and actuarial losses of approximately$201 million . We amortize the unrecognized net actuarial gains and losses in excess of the corridor amount, which is the greater of 10% of a respective plan's projected benefit obligation or the fair market value of plan assets. These unrecognized net losses may increase future pension expense if not offset by (i) actual investment returns that exceed the expected long-term rate of investment returns, (ii) other factors, including reduced pension liabilities arising from higher discount rates used to calculate pension obligations or (iii) other actuarial gains when actual plan experience is favorable as compared to the assumed experience. A 100 basis point decrease or increase in the long-term rate of return on pension assets would correspondingly increase or decrease annual net periodic pension benefit expense by approximately$10 million . •Discount rate. We utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. This approach provides a more precise measurement of service and interest costs by improving the correlation between the projected cash flows to the corresponding spot rates along the yield curve. This approach does not affect the measurement of our pension and other post-retirement benefit liabilities but generally results in lower benefit expense in periods when the yield curve is upward sloping. A 100 basis point decrease (increase) in the weighted-average pension discount rate would increase (decrease) annual net periodic pension benefit expense by approximately$6 million and theDecember 31, 2021 pension liability would increase by approximately$97 million or decrease by approximately$83 million , respectively. Pension income for defined benefit pension plans is expected to be approximately$2 million in 2021. Pension expense beyond 2022 will depend on future investment performance, our contributions to the pension trusts, changes in discount rates and various other factors related to the covered employees in the plans.
Other Post-Employment Benefit Plans
Changes in significant assumptions could affect consolidated expense and benefit obligations, particularly the discount rates used to calculate such obligations:
•Discount rate. The determination of the discount rate used to calculate the benefit obligations of the OPEB plans is discussed in the pension plans section above. A 100 basis point decrease (increase) in the discount rate assumption for these plans would not be material to the OPEB plans' consolidated expense and theDecember 31, 2021 benefit liability would increase by approximately$23 million or decrease by approximately$19 million , respectively.
Business Acquisitions, Valuation and Impairment of
We use the acquisition method of accounting for business acquisitions. Under the acquisition method, the results of operations of the acquired business have been included in the consolidated financial statements since the respective dates of the acquisitions. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets. As a result, we normally obtain the assistance of a third-party valuation specialist in estimating fair values of tangible and intangible assets. The fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.Goodwill and indefinite-lived intangible assets are not amortized, but instead, are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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We test goodwill for impairment by performing either a qualitative or quantitative assessment. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors in assessing the fair value of the related reporting unit. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required. For those reporting units tested using a quantitative approach, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge for the differential (up to the carrying value of goodwill). We test individual indefinite-lived intangible assets by comparing the estimated fair values with the book values of each asset. We determine the fair value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to measure fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and profitability, and cash flows associated with taxes and capital spending. Additional assumptions include forecasted growth rates, estimated discount rates, which may be risk-adjusted for the operating market of the reporting unit, and estimated royalty rates that would be charged for comparable branded licenses. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions. We also have intangible assets, consisting primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions, that are expected to have determinable useful lives. The costs of finite-lived intangible assets are amortized to expense over their estimated lives. Our estimates of the useful lives of finite-lived intangible assets consider judgments regarding the future effects of obsolescence, demand, competition and other economic factors. We conduct impairment tests when events or changes in circumstances indicate that the carrying value of these finite-lived assets may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss is calculated based on the estimated fair value of the assets.
Results of Impairment Tests
AtDecember 31, 2021 , the net book value of our goodwill totaled$2,633.2 million . As it relates to our 2021 annual testing performed at the beginning of the fourth quarter, we tested all of our reporting units using a qualitative assessment and determined that no quantitative testing was deemed necessary. Based on our testing, all of our reporting units had an excess fair value well over the their respective carrying values. There were no other events or circumstances that would indicate that impairment may exist. We had no goodwill impairment charges in 2021, 2020 or 2019. In 2019, sales and operating performance associated with our Krave business were below expectations. In the fourth quarter of 2019, as part of a strategic review initiated by our leadership team, we updated our strategic forecast which projected underperformance related to the Krave business primarily due to mainstream brands driving category volume and an increase in the overall competitive landscape. We deemed this to be a triggering event requiring us to test our Krave long-lived asset group for impairment. Based on our assessment, we determined that the carrying value was not recoverable and calculated an impairment loss as the excess of the asset group's carrying value over its fair value. Therefore, as a result of this testing, during the fourth quarter of 2019, we recorded an impairment charge totaling$100.1 million to write down the long-lived asset group, which predominantly consisted of customer relationship and trademark intangible assets. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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Income Taxes
We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company, interpretation of tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate. We file income tax returns in theU.S. federal jurisdiction and various state and foreign jurisdictions. We are regularly audited by federal, state and foreign tax authorities; a number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. From time to time, these audits result in assessments of additional tax. We maintain reserves for such assessments. We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. Future changes in judgments and estimates related to the expected ultimate resolution of uncertain tax positions will affect income in the quarter of such change. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome. Accrued interest and penalties related to unrecognized tax benefits are included in income tax expense. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances, such as receiving audit assessments or clearing of an item for which a reserve has been established. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution. We believe it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation allowances. Our valuation allowances are primarily related toU.S. capital loss carryforwards and various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets for which we do not expect to realize a benefit. Table of ContentsThe Hershey Company | 2021 Form 10-K |
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