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 Unaudited Consolidated Financial
Statements and accompanying notes. This discussion contains a number of
forward-looking statements, all of which are based on current expectations.
Actual results may differ materially. Refer to the Safe Harbor Statement below
as well as the Risk Factors and other information contained in our 2021 Annual
Report on Form 10-K for information concerning the key risks to achieving future
performance goals.
The MD&A is organized in the following sections:
• Overview
• Trends Affecting Our Business
• Consolidated Results of Operations
• Segment Results
• Liquidity and Capital Resources
• Safe Harbor Statement
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 ("U.S.") 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, bars, and snack bites and mixes, popcorn and pretzels.
Business Acquisitions and Divestiture
InDecember 2021 , we completed the acquisition ofPretzels Inc. ("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 complementsHershey's snacks portfolio. Based inBluffton, Indiana , Pretzels operates three manufacturing locations inIndiana andKansas . Pretzels providesHershey deep pretzel category and product expertise and the manufacturing capabilities to support brand growth and future pretzel innovation. Additionally, we completed the acquisition ofDot's Pretzels, LLC ("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 complementsHershey's snacks portfolio. 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 complementHershey's confectionery and confectionery-based portfolio. InJanuary 2021 , we completed the divestiture ofLotte Shanghai Foods Co., Ltd. , 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. Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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TRENDS AFFECTING OUR BUSINESS
OnMarch 11, 2020 , theWorld Health Organization designated coronavirus disease 2019 ("COVID-19") as a global pandemic, which has spread worldwide and impacted various markets around the world, including theU.S. Throughout the pandemic we have remained committed to promoting the health and safety of our employees and communities and helping to maintain the global food supply. Through the first nine months of 2022, relatively minimal COVID-19 restrictions remained as vaccination status (including vaccine boosters) continued to increase around the world, albeit with slower than anticipated rollouts and challenges within certain countries. The lifting of restrictions has resulted in daily activities and habits being more representative of pre-pandemic times. However, beginning in 2021, and continuing through the nine months endedOctober 2, 2022 , the 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, during the nine months endedOctober 2, 2022 , we continued to experience corresponding incremental costs and gross margin pressures (see Results of Operations included in this MD&A). We are continuing to work closely with our business units, contract manufacturers, distributors, contractors and other external business partners to minimize the potential impact on our business. In addition to COVID-19 and broad-based supply chain disruptions, certain geopolitical events, specifically the conflict betweenRussia andUkraine , have increased global economic and political uncertainty. For the nine months endedOctober 2, 2022 , this conflict did not have a material impact on our commodity prices or supply availability. However, we are continuing to monitor for any significant escalation or expansion of economic or supply chain disruptions or broader inflationary costs, which may result in material adverse effects on our results of operations. We experienced an increase in our net sales during the three months endedOctober 2, 2022 , 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 ofOctober 2, 2022 , 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 in 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 and the conflict betweenRussia andUkraine , including broad-based supply chain disruptions, rising levels of inflation, new trends in COVID-19 outbreaks and hotspots, the spread of and emergence of new COVID-19 variants, resurgences of COVID-19 cases 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 on our business, consolidated results of operations, segment results, liquidity and capital resources. Table of Contents The Hershey Company | Q3 2022 Form 10-Q |
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CONSOLIDATED RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
October 2, October 2,
2022 October 3, 2021 Percent Change 2022 October 3, 2021 Percent Change
In millions of dollars except per
share amounts
Net sales $ 2,728.2 $ 2,359.8 15.6 % $ 7,767.0 $ 6,645.2 16.9 %
Cost of sales 1,619.7 1,298.5 24.7 % 4,413.0 3,609.5 22.3 %
Gross profit 1,108.5 1,061.3 4.4 % 3,354.0 3,035.7 10.5 %
Gross margin 40.6 % 45.0 % 43.2 % 45.7 %
Selling, marketing & administrative
("SM&A") expenses 551.9 486.1 13.5 % 1,619.6 1,448.4 11.8 %
SM&A expense as a percent of net
sales 20.2 % 20.6 % 20.9 % 21.8 %
Business realignment activities - 0.4 NM 0.3 2.7 (90.0) %
Operating profit 556.6 574.8 (3.2) % 1,734.1 1,584.6 9.4 %
Operating profit margin 20.4 % 24.4 % 22.3 % 23.8 %
Interest expense, net 35.4 30.2 17.3 % 102.0 97.7 4.4 %
Other (income) expense, net 48.1 23.0 109.3 % 78.2 32.6 139.9 %
Provision for income taxes 73.6 76.7 (4.1) % 305.4 311.3 (1.9) %
Effective income tax rate 15.6% 14.7% 19.7% 21.4%
Net income including noncontrolling
interest 399.5 444.9 (10.2) % 1,248.5 1,143.0 9.2 %
Less: Net gain attributable to
noncontrolling interest - - NM - 1.1 NM
Net income attributable to The
Hershey Company $ 399.5 $ 444.9 (10.2) % $ 1,248.5 $ 1,141.9 9.3 %
Net income per share-diluted $ 1.94 $ 2.14 (9.3) % $ 6.04 $ 5.49 10.0 %
NOTE: Percentage changes may not compute directly as shown due to rounding of amounts presented above. NM = not meaningful
Results of Operations - Third Quarter 2022 vs. Third Quarter 2021
Net sales increased 15.6% in the third quarter of 2022 compared to the same period of 2021, reflecting a favorable price realization of 7.7% primarily due to higher list prices and favorable price elasticities across our reportable segments, a volume increase of 4.1% driven by increased consumer demand and a 4.1% benefit from the 2021 acquisitions of Pretzels and Dot's. These increases were offset by an unfavorable impact from foreign currency exchange rates of 0.3%.
Key
For the third quarter of 2022, our totalU.S. retail takeaway increased 12.7% in the expanded multi-outlet combined plus convenience store channels (IRI MULO +C-Stores ), which includes candy, mint, gum, salty snacks and grocery items. OurU.S. candy, mint and gum ("CMG") consumer takeaway increased 12.2% and experienced a CMG market share gain of approximately 23 basis points. The CMG consumer takeaway and market share information reflects 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. Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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Cost of Sales and Gross Margin
Cost of sales increased 24.7% in the third quarter of 2022 compared to the same period of 2021. The increase was driven by higher sales volume, higher supply chain inflation costs, including higher logistics and labor costs, and an incremental$47.7 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years' commodity purchases. The increase was partially offset by favorable price realization and supply chain productivity. Gross margin decreased by 440 basis points in the third quarter of 2022 compared to the same period of 2021. The decrease was driven by unfavorable year-over-year mark-to-market impact from commodity derivative instruments, higher supply chain inflation costs, including higher logistics and labor costs, and unfavorable product mix. These declines were offset by favorable price realization and volume increases.
SM&A Expenses
SM&A expenses increased$65.8 million , or 13.5%, in the third quarter of 2022 compared to the same period of 2021. Total advertising and related consumer marketing expenses increased 5.4% driven by advertising increases in our confectionery brands and increased investment in our salty snacks portfolio, which were partially offset by cost efficiencies related to new media partners. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 17.8% in the third quarter of 2022 driven by an increase in acquisition and integration related costs, as well as higher compensation costs and investments in capabilities and technology.
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 the third quarter of 2022, we recorded no business realignment costs versus costs of$0.4 million in the third quarter of 2021 related to the International Optimization Program. This program is focused on optimizing ourChina operating model to improve our operational efficiency and provide for a strong, sustainable and simplified base going forward. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Unaudited Consolidated Financial Statements.
Operating Profit and Operating Profit Margin
Operating profit was$556.6 million in the third quarter of 2022 compared to$574.8 million in the same period of 2021 predominantly due to higher SM&A expenses, as noted above, partially offset by higher gross profit. Operating profit margin decreased to 20.4% in 2022 from 24.4% in 2021 driven by these same factors. Interest Expense,Net Net interest expense was$5.2 million higher in the third quarter of 2022 compared to the same period of 2021. The increase was primarily due to higher short-term debt balances in 2022 versus 2021, specifically outstanding commercial paper borrowings. This increase was partially offset by lower average long-term debt balances. Other (Income) Expense, Net Other (income) expense, net was$48.1 million in the third quarter of 2022 versus net expense of$23.0 million in the third quarter of 2021. The increase in net expense was primarily due to higher write-downs on equity investments qualifying for tax credits in 2022 versus 2021 and higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.
Income Taxes and Effective Tax Rate
The effective income tax rate was 15.6% for the third quarter of 2022 compared with 14.7% for the third quarter of 2021. Relative to the 21% statutory rate, the 2022 effective tax rate was impacted by investment tax credits, partially offset by state taxes. Relative to the 21% statutory rate, the 2021 effective tax rate benefited from investment tax credits and the utilization (during the third quarter of 2021) of previously generated capital losses, partially offset by state taxes. Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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Net Income Attributable to
Net income decreased$45.4 million , or 10.2%, while EPS-diluted decreased$0.20 , or 9.3%, in the third quarter of 2022 compared to the same period of 2021. The decrease in both net income and EPS-diluted was driven primarily by higher SM&A expenses and higher other income and expenses, partially offset by higher gross profit and lower income taxes.
Results of Operations - First Nine Months 2022 vs. First Nine Months 2021
Net sales increased 16.9% in the first nine months of 2022 compared to the same period of 2021, reflecting a favorable price realization of 7.7% primarily due to higher list prices across our reportable segments, a volume increase of 4.7% driven by an increase in everyday core brands across our reportable segments and a 4.6% benefit from the 2021 acquisitions of Pretzels, Dot's and Lily's. These increases were offset by an unfavorable impact from foreign currency exchange rates of 0.1%.
Cost of Sales and Gross Margin
Cost of sales increased 22.3% in the first nine months of 2022 compared to the same period of 2021. The increase was driven by higher sales volume, higher supply chain inflation costs, including higher logistics and labor costs, unfavorable product mix and an incremental$36.2 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years' commodity purchases. The increase was partially offset by favorable price realization and supply chain productivity.
Gross margin decreased by 250 basis points in the first nine months of 2022 compared to the same period of 2021. The decrease was driven by unfavorable year-over-year mark-to-market impact from commodity derivative instruments, higher supply chain inflation costs, including higher logistics and labor costs and unfavorable product mix. These declines were offset by favorable price realization and volume increases.
SM&A Expenses
SM&A expenses increased$171.1 million , or 11.8%, in the first nine months of 2022 compared to the same period of 2021. Total advertising and related consumer marketing expenses increased 2.5% driven by increases in the North America Salty Snacks and International segments to raise brand awareness. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 16.7% in the first nine months of 2022 driven by an increase in acquisition and integration related costs, as well as higher compensation costs and investments in capabilities and technology.
Business Realignment Activities
During the first nine months of 2022, we recorded business realignment costs of$0.3 million versus$2.7 million in the first nine months of 2021 related to the International Optimization Program. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Unaudited Consolidated Financial Statements.
Operating Profit and Operating Profit Margin
Operating profit increased 9.4% in the first nine months of 2022 compared to the same period of 2021 predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above. Operating profit margin was 22.3% in 2022 and 23.8% in 2021 driven by the same factors noted above that resulted in lower gross margin for the period.
Interest Expense, Net
Net interest expense was$4.3 million higher in the first nine months of 2022 compared to the same period of 2021. The increase was primarily due to higher short-term debt balances in 2022 versus 2021, specifically outstanding commercial paper borrowings. The increase was partially offset due to lower average long-term debt balances, specifically resulting from the repayment of$84.7 million of 8.800% Debentures upon their maturity inFebruary 2021 and$350 million of 3.100% Notes upon their maturity inMay 2021 . Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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Other (Income) Expense, Net
Other (income) expense, net was$78.2 million in the first nine months of 2022 versus expense of$32.6 million in the first nine months of 2021. The increase in net expense was primarily due to higher write-downs on equity investments qualifying for tax credits in 2022 versus 2021 and higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.
Income Taxes and Effective Tax Rate
Our effective income tax rate was 19.7% for the first nine months of 2022 compared with 21.4% for the first nine months of 2021. Relative to the 21% statutory rate, the 2022 effective tax rate was impacted by investment tax credits, partially offset by state taxes. Relative to the 21% statutory rate, the 2021 effective tax rate was impacted 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, partially offset by investment tax credits and the utilization (during the third quarter of 2021) of previously generated capital losses.
Net Income Attributable to
Net income increased$106.6 million , or 9.3%, while EPS-diluted increased$0.55 , or 10.0%, in the first nine months of 2022 compared to the same period of 2021. The increase in both net income and EPS-diluted was driven primarily by higher gross profit and lower income taxes, partially offset by higher SM&A expenses and higher other income and expenses. Our 2022 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases. Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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SEGMENT RESULTS
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 Chief Operating
Decision Maker 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:
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
2022 2021 2022 2021
In millions of dollars
Net Sales:
North America Confectionery $ 2,235.6 $ 2,024.2 $ 6,361.7 $ 5,700.0
North America Salty Snacks 275.0 147.1 757.4 396.7
International 217.6 188.5 647.8 548.5
Total $ 2,728.2 $ 2,359.8 $ 7,766.9 $ 6,645.2
Segment Income:
North America Confectionery $ 706.8 $ 655.6 $ 2,107.6 $ 1,852.7
North America Salty Snacks 44.5 29.6 103.2 81.1
International 35.4 19.6 108.1 74.5
Total segment income 786.7 704.8 2,318.9 2,008.3
Unallocated corporate expense (1) 179.6 145.0 518.9 434.0
Unallocated mark-to-market losses (gains)
on commodity derivatives (2) 50.0 (18.4) 63.5 (24.1)
Costs associated with business
realignment activities 0.4 3.4 2.4 13.8
Operating profit 556.7 574.8 1,734.1 1,584.6
Interest expense, net 35.4 30.1 102.0 97.7
Other (income) expense, net 48.2 23.0 78.2 32.6
Income before income taxes $ 473.1 $ 521.7 $ 1,553.9 $ 1,454.3
(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 Unaudited Consolidated Financial Statements.
Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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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, includingHershey's Chocolate 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 results, which accounted for 81.9% and 85.8% of our net sales for the three months endedOctober 2, 2022 andOctober 3, 2021 , respectively, were as follows: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change In millions of dollars Net sales$ 2,235.6 $ 2,024.2 10.4 %$ 6,361.7 $ 5,700.0 11.6 % Segment income 706.8 655.6 7.8 % 2,107.6 1,852.7 13.8 % Segment margin 31.6 % 32.4 % 33.1 % 32.5 %
Results of Operations - Third Quarter 2022 vs. Third Quarter 2021
Net sales of our North America Confectionery segment increased$211.4 million , or 10.4%, in the third quarter of 2022 compared to the same period of 2021, reflecting a favorable price realization of 7.7% primarily due to list price increases on certain products across our portfolio and a volume increase of 3.0% due to an increase in everyday coreU.S. confection brands. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.3%. Our North America Confectionery segment also includes licensing and owned retail. This includes ourHershey's Chocolate World stores inthe United States (3 locations),Niagara Falls (Ontario ) andSingapore . Our net sales for licensing and owned retail increased approximately 9.2% during the third quarter of 2022 compared to the same period of 2021. Our North America Confectionery segment income increased$51.2 million , or 7.8%, in the third quarter of 2022 compared to the same period of 2021, primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, higher supply chain inflation costs, as well as, unfavorable product mix.
Results of Operations - First Nine Months 2022 vs. First Nine Months 2021
Net sales of our North America Confectionery segment increased$661.7 million or 11.6% in the first nine months of 2022 compared to the same period of 2021, reflecting a favorable price realization of 7.7% due to list price increases on certain products across our portfolio, a volume increase of 3.4% due to an increase in everyday coreU.S. confection brands and a 0.7% increase from the 2021 acquisition of Lily's. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.2%. Our North America Confectionery segment also includes licensing and owned retail. This includes ourHershey's Chocolate World stores inthe United States (3 locations),Niagara Falls (Ontario ) andSingapore . Our net sales for licensing and owned retail increased approximately 10.6% during the first nine months of 2022 compared to the same period of 2021. Our North America Confectionery segment income increased$254.9 million or 13.8% in the first nine months of 2022 compared to the same period of 2021, primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as, unfavorable product mix. Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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North America Salty Snacks
The North America Salty Snacks segment is responsible for our grocery and snacks market positions, including our salty snacking products. North America Salty Snacks results, which accounted for 10.1% and 6.2% of our net sales for the three months endedOctober 2, 2022 andOctober 3, 2021 , respectively, were as follows: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change In millions of dollars Net sales$ 275.0 $ 147.1 86.9 %$ 757.4 $ 396.7 90.9 % Segment income 44.5 29.6 50.3 % 103.2 81.1 27.3 % Segment margin 16.2 % 20.1 % 13.6 % 20.4 %
Results of Operations - Third Quarter 2022 vs. Third Quarter 2021
Net sales of our North America Salty Snacks segment increased$127.9 million , or 86.9%, in the third quarter of 2022 compared to the same period of 2021, reflecting a 65.5% benefit from the 2021 acquisitions of Dot's and Pretzels, a favorable price realization of 12.5% due to higher prices on certain products, in addition to lower levels of promotional activity versus the prior year period, and a volume increase of 9.0% primarily related to SkinnyPop, Pirate's Booty, and Paqui snacks.
Our North America Salty Snacks segment income increased
Results of Operations - First Nine Months 2022 vs. First Nine Months 2021
Net sales of our North America Salty Snacks segment increased$360.7 million , or 90.9%, in the first nine months of 2022 compared to the same period of 2021, reflecting a 68.5% benefit from the 2021 acquisitions of Dot's and Pretzels, a favorable price realization of 12.9% due to higher prices on certain products, in addition to lower levels of promotional activity versus the prior year period and a volume increase of 9.5% primarily related to SkinnyPop and Pirate's Booty snacks. Our North America Salty Snacks segment income increased$22.1 million , or 27.3%, in the first nine months of 2022 compared to the same period of 2021, due to favorable price realization and volume increases, partially offset by unfavorable product mix, as well as higher supply chain inflation costs and increased advertising and related consumer marketing costs. Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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International
The International segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. We currently, have operations and manufacture product inMexico ,Brazil ,India andMalaysia , primarily for consumers in these regions, and also distribute and sell confectionery products in export markets ofLatin America , as well asAsia ,Europe , theMiddle East andAfrica ("AEMEA") and other regions. International results, which accounted for 8.0% and 8.0% of our net sales for the three months endedOctober 2, 2022 andOctober 3, 2021 , respectively, were as follows: Three Months Ended Nine Months Ended October 2, 2022 October 3, 2021 Percent Change October 2, 2022 October 3, 2021 Percent Change In millions of dollars Net sales$ 217.6 $ 188.5 15.4 %$ 647.8 $ 548.5 18.1 % Segment income 35.4 19.6 80.7 % 108.1 74.5 45.1 % Segment margin 16.3 % 10.4 % 16.7 % 13.6 %
Results of Operations - Third Quarter 2022 vs. Third Quarter 2021
Net sales of our International segment increased$29.1 million , or 15.4%, in the third quarter of 2022 compared to the same period of 2021, reflecting a volume increase of 12.2% and a favorable price realization of 4.4%. The volume increase was primarily attributable to solid marketplace growth inIndia , AEMEA, andBrazil , where net sales increased by 28.9%, 15.8% and 12.6%, respectively. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 1.2%. Our International segment generated income of$35.4 million in the third quarter of 2022 compared to$19.6 million in the third quarter of 2021 driven primarily by favorable price realization and volume increases, partially offset by higher freight and logistics costs.
Results of Operations - First Nine Months 2022 vs. First Nine Months 2021
Net sales of our International segment increased$99.3 million , or 18.1%, in the first nine months of 2022 compared to the same period of 2021, reflecting a volume increase of 15.0% and a favorable price realization of 3.2%. The volume increase was primarily attributable to solid marketplace growth inBrazil ,Mexico , andIndia , where net sales increased by 22.4%, 20.3%, and 18.8%, respectively. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.1%. Our International segment generated income of$108.1 million in the first nine months of 2022 compared to$74.5 million in the first nine months of 2021 primarily resulting from volume increases, favorable price realization, and the execution of our International Optimization Program inChina , as we streamline and optimize ourChina operating model. Table of ContentsThe Hershey Company | Q3 2022 Form 10-Q |
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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, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.
In the third quarter of 2022, unallocated corporate expense totaled
In the first nine months of 2022, unallocated corporate expense totaled$518.9 million , as compared to$434.0 million in the first nine months of 2021. The increase is primarily driven by higher acquisition and integration related costs, as well as incremental investments in capabilities and technology and higher compensation costs.
LIQUIDITY AND CAPITAL RESOURCES
Historically, our primary source of liquidity has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, are generally met by utilizing cash on hand, bank borrowings or the issuance of commercial paper. Commercial paper may also be issued, from time to time, to finance ongoing business transactions, such as the repayment of long-term debt, business acquisitions and for other general corporate purposes. AtOctober 2, 2022 , our cash and cash equivalents totaled$327.7 million , a decrease of$1.5 million compared to the 2021 year-end balance. We believe we have sufficient liquidity to satisfy our cash needs; however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during the ongoing COVID-19 pandemic and in the current economic environment. Additional detail regarding the net uses of cash are outlined in the following discussion. Approximately 80% of the balance of our cash and cash equivalents atOctober 2, 2022 was held by subsidiaries domiciled outside ofthe United States . We intend to continue to reinvest the remainder of the earnings outside ofthe United States for which there would be a material tax implication to distributing, such as withholding tax, for the foreseeable future and, therefore, have not recognized additional tax expense on these earnings. 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. Cash Flow Summary
The following table is derived from our Consolidated Statements of Cash Flows:
Nine Months Ended
In millions of dollars October 2, 2022 October 3, 2021
Net cash provided by (used in):
Operating activities $ 1,560.2 $ 1,403.7
Investing activities (510.0) (839.7)
Financing activities (1,076.0) (1,037.8)
Effect of exchange rate changes on cash and cash
equivalents 24.3 (6.1)
Less: Cash classified as assets held for sale - 11.4
Decrease in cash and cash equivalents $ (1.5) $ (468.5)
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Operating activities
We generated cash of
•Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, a write-down of equity investments and other charges) resulted in$198.8 million of higher cash flow in 2022 relative to 2021.
•The increase in cash provided by operating activities was partially offset by the following net cash outflows:
•Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) consumed cash of$212.3 million in 2022, compared to$185.3 million in 2021. This$27.0 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 and an increase in cash used by accounts receivable due to the timing of customer payments, partially offset by the timing of vendor and supplier payments.
Investing activities
We used cash of$510.0 million for investing activities in the first nine months of 2022, a decrease of$329.7 million compared to$839.7 million in the same period of 2021. This decrease in net cash used in investing activities was mainly driven by the following factors: •Capital spending. Capital expenditures, including capitalized software, primarily to support our ERP system implementation, capacity expansion projects, innovation and cost savings, were$360.0 million in the first nine months of 2022 compared to$347.5 million in the same period of 2021. We expect our full year 2022 capital expenditures, including capitalized software, to approximate$600 million . Our 2022 capital expenditures are largely driven by our key strategic initiatives, including expanding the agility and capacity of our 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 renewable energy tax credits. We invested approximately$159.7 million in the first nine months of 2022, compared to$75.9 million in the same period of 2021. •Business Acquisition. InJune 2021 , we acquired Lily's for an initial cash purchase price of$419.5 million . Further details regarding our business acquisition activity is provided in Note 2 to the Unaudited Consolidated Financial Statements. Financing activities We used cash of$1,076.0 million for financing activities in the first nine months of 2022, an increase of$38.2 million compared to$1,037.8 million in the same period of 2021. This increase in net cash used in financing activities was mainly driven by the following factors: •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. During the first nine months of 2022, we used cash of$145.6 million to reduce a portion of our short-term commercial paper borrowings originally used to fund our 2021 acquisitions of Dot's and Pretzels, partially offset by an increase in short-term foreign bank borrowings. During the first nine months of 2021, we generated cash flow of$340.0 million predominantly through the issuance of short-term commercial paper, partially offset by a reduction in short-term foreign borrowings. •Long-term debt borrowings and repayments. During the first nine months of 2022, long-term debt activity was minimal. During the first nine months of 2021, we repaid$84.7 million of 8.800% Debentures due upon their maturity and$350.0 million of 3.100% Notes due upon their maturity. Table of Contents The Hershey Company | Q3 2022 Form 10-Q |
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•Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were$568.0 million during the first nine months of 2022, an increase of$62.8 million compared to$505.2 million in the same period of 2021. Details regarding our 2022 cash dividends paid to stockholders are as follows: Quarter Ended In millions of dollars except per share amounts April 3, 2022 July 3, 2022 October 2, 2022 Dividends paid per share - Common stock $ 0.901 $ 0.901 $ 1.036 Dividends paid per share - Class B common stock $ 0.819 $ 0.819 $ 0.942 Total cash dividends paid $ 181.1 $ 179.9 $ 207.0 Declaration date February 2, 2022 April 27, 2022 July 27, 2022 Record date February 18, 2022 May 20, 2022 August 19, 2022 Payment date March 15, 2022 June 15, 2022 September 15, 2022 •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: Nine Months Ended In millions October 2, 2022 October 3, 2021 Milton Hershey School Trust repurchase $ 203.4 $ -
Shares repurchased in the open market under pre-approved share repurchase programs
- 150.0
Shares repurchased in the open market to replace Treasury Stock issued for stock options and incentive compensation
151.9 308.0
Cash used for total share repurchases $ 355.3 $ 458.0
Total shares repurchased under pre-approved share
repurchase programs - 0.9
In February 2022 , the Company entered into a Stock Purchase Agreement with
Hershey Trust Company , as trustee for the Milton Hershey School Trust , pursuant
to which the Company purchased 1,000,000 shares of the Company's Common Stock
from the Milton Hershey School Trust at a price equal to $203.35 per share, for
a total purchase price of $203.4 million .
In July 2018 , our Board of Directors approved a $500 million share repurchase
authorization. As of October 2, 2022 , 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 exercised stock options and employee tax withholding. During the
first nine months of 2022, we received $30.8 million from employee exercises of
stock options and paid $34.7 million of employee taxes withheld from share-based
awards. During the first nine months of 2021, we received $39.5 million from
employee exercises of stock options and paid $16.1 million of employee taxes
withheld from share-based awards. Variances are driven primarily by the number
of shares exercised and the share price at the date of grant.
Recent Accounting Pronouncements
Information on recently adopted and issued accounting standards is included in
Note 1 to the Unaudited Consolidated Financial Statements.
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Safe Harbor Statement
We are subject to changing economic, competitive, regulatory and technological risks and uncertainties that could have a material impact on our business, financial condition or results of operations. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions that we have discussed directly or implied in this Quarterly Report on Form 10-Q. Many of these forward-looking statements can be identified by the use of words such as "anticipate," "assume," "believe," "continue," "estimate," "expect," "forecast," "future," "intend," "plan," "potential," "predict," "project," "strategy," "target" and similar terms, and future or conditional tense verbs like "could," "may," "might," "should," "will" and "would," among others. The factors that could cause our actual results to differ materially from the results projected in our forward-looking statements include, but are not limited to the following: •Our business and financial results may be negatively impacted by the failure to successfully manage a disruption in consumer and trade patterns, as well as operational challenges associated with the actual or perceived effects of a disease outbreak, including epidemics, pandemics or similar widespread public health concerns, such as the COVID-19 pandemic; •Our Company's reputation or brand image might be impacted as a result of issues or concerns relating to the quality and safety of our products, ingredients or packaging, human and workplace rights, and other environmental, social or governance matters, which in turn could result in litigation or otherwise negatively impact our operating results; •Disruption to our manufacturing operations or supply chain could impair our ability to produce or deliver finished products, resulting in a negative impact on our operating results;
•We might not be able to hire, engage and retain the talented global workforce we need to drive our growth strategies;
•Risks associated with climate change and other environmental impacts, and increased focus and evolving views of our customers, stockholders and other stakeholders on climate change issues, could negatively affect our business and operations;
•Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results;
•Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity;
•Market demand for new and existing products could decline;
•Increased marketplace competition could hurt our business;
•Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures;
•Our international operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations;
•We may not fully realize the expected cost savings and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business;
•Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products;
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•Political, economic and/or financial market conditions, including impacts on
our business arising from the conflict between
•Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations;
•Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations; and
•Such other matters as discussed in our 2021 Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for the quarterly periods endedApril 3, 2022 andJuly 3, 2022 , and this Quarterly Report on Form 10-Q, including Part II, Item 1A, "Risk Factors."
We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this Quarterly Report on Form 10-Q is filed.
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