Hershey Co 10-Q for FY2021 Q3
Hershey Co (HSY)
10-Q
2021-10-28
For: 2021-10-03
View Original
Added on
April 06, 2026
About this 10-Q
Hershey Co filed this 10-Q on October 28, 2021, covering the quarter ended October 3, 2021 (FY2021 Q3).
Headline figures
Quarter ended October 3, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.36B
- up 6.3% from $2.22B a year earlier
- Net income
- $444.93M
- down 0.5% from net income of $447.28M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended October 3, 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ______to_______
Commission file number 1-183
THE HERSHEY CO MPANY
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices and Zip Code)
(717 ) 534-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| x | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, one dollar par value—145,389,951 shares, as of October 22, 2021.
Class B Common Stock, one dollar par value—60,613,777 shares, as of October 22, 2021.
THE HERSHEY COMPANY
Quarterly Report on Form 10-Q
For the Period Ended October 3, 2021
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | ||||||||
Item 1. Financial Statements | ||||||||
Notes to Unaudited Consolidated Financial Statements | ||||||||
The Hershey Company | Q3 2021 Form 10-Q | Page 1 | ||||||||
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
Cost of sales | ||||||||||||||||||||||||||
Gross profit | ||||||||||||||||||||||||||
Selling, marketing and administrative expense | ||||||||||||||||||||||||||
Long-lived asset impairment charges | ||||||||||||||||||||||||||
| Business realignment costs (benefits) | ( | |||||||||||||||||||||||||
Operating profit | ||||||||||||||||||||||||||
Interest expense, net | ||||||||||||||||||||||||||
Other (income) expense, net | ||||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
Provision for income taxes | ||||||||||||||||||||||||||
| Net income including noncontrolling interest | ||||||||||||||||||||||||||
| Less: Net (loss) gain attributable to noncontrolling interest | ( | ( | ||||||||||||||||||||||||
Net income attributable to The Hershey Company | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income per share—basic: | ||||||||||||||||||||||||||
Common stock | $ | $ | $ | $ | ||||||||||||||||||||||
Class B common stock | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income per share—diluted: | ||||||||||||||||||||||||||
Common stock | $ | $ | $ | $ | ||||||||||||||||||||||
Class B common stock | $ | $ | $ | $ | ||||||||||||||||||||||
| Dividends paid per share: | ||||||||||||||||||||||||||
Common stock | $ | $ | $ | $ | ||||||||||||||||||||||
Class B common stock | $ | $ | $ | $ | ||||||||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
The Hershey Company | Q3 2021 Form 10-Q | Page 2 | ||||||||
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income including noncontrolling interest | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income, net of tax: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation (losses) gains during period | $ | ( | $ | ( | $ | $ | $ | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification to earnings due to the sale of businesses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension and post-retirement benefit plans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial (loss) gain and service cost | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification to earnings | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gains (losses) on cash flow hedging derivatives | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification to earnings | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive (loss) income, net of tax | $ | ( | $ | ( | ( | $ | $ | ( | $ | $ | ( | $ | ( | $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income including noncontrolling interest | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive (loss) income attributable to noncontrolling interest | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income attributable to The Hershey Company | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| October 3, 2021 | December 31, 2020 | |||||||||||||
| (unaudited) | ||||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable—trade, net | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid expenses and other | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Other intangibles | ||||||||||||||
| Other non-current assets | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued liabilities | ||||||||||||||
| Accrued income taxes | ||||||||||||||
| Short-term debt | ||||||||||||||
| Current portion of long-term debt | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Total liabilities | ||||||||||||||
| Stockholders’ equity: | ||||||||||||||
| The Hershey Company stockholders’ equity | ||||||||||||||
Preferred stock, shares issued: | ||||||||||||||
Common stock, shares issued: | ||||||||||||||
Class B common stock, shares issued: | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
Treasury—common stock shares, at cost: | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Total—The Hershey Company stockholders’ equity | ||||||||||||||
| Noncontrolling interest in subsidiary | ||||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended | |||||||||||
| October 3, 2021 | September 27, 2020 | ||||||||||
| Operating Activities | |||||||||||
| Net income including noncontrolling interest | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income taxes | |||||||||||
| Impairment of long-lived assets | |||||||||||
| Write-down of equity investments | |||||||||||
| Other | |||||||||||
| Changes in assets and liabilities, net of business acquisitions and divestitures: | |||||||||||
| Accounts receivable—trade, net | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other current assets | |||||||||||
| Accounts payable and accrued liabilities | |||||||||||
| Accrued income taxes | |||||||||||
| Contributions to pension and other benefit plans | ( | ( | |||||||||
| Other assets and liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Investing Activities | |||||||||||
| Capital additions (including software) | ( | ( | |||||||||
| Equity investments in tax credit qualifying partnerships | ( | ( | |||||||||
| Business acquisitions, net of cash and cash equivalents acquired | ( | ||||||||||
| Other investing activities | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Net increase in short-term debt | |||||||||||
| Long-term borrowings, net of debt issuance costs | |||||||||||
| Repayment of long-term debt and finance leases | ( | ( | |||||||||
| Cash dividends paid | ( | ( | |||||||||
| Repurchase of common stock | ( | ( | |||||||||
| Exercise of stock options | |||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| (Decrease) increase in cash and cash equivalents, including cash classified as held for sale | ( | ||||||||||
| Less: Decrease (increase) in cash and cash equivalents classified as held for sale | ( | ||||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
| Supplemental Disclosure | |||||||||||
| Interest paid | $ | $ | |||||||||
| Income taxes paid | |||||||||||
See Notes to Unaudited Consolidated Financial Statements.
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months Ended October 3, 2021 and September 27, 2020
(in thousands)
(unaudited)
| Preferred Stock | Common Stock | Class B Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Common Stock | Accumulated Other Comprehensive Loss | Noncontrolling Interests in Subsidiaries | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, July 4, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (including dividend equivalents): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock, $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Class B Common Stock, $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, October 3, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Class B Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Common Stock | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interests in Subsidiaries | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, June 28, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (including dividend equivalents): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock, $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Class B Common Stock, $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 27, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Nine Months Ended October 3, 2021 and September 27, 2020
(in thousands)
(unaudited)
| Preferred Stock | Common Stock | Class B Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Common Stock | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interests in Subsidiaries | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (including dividend equivalents): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock, $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Class B Common Stock, $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Divestiture of noncontrolling interest | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, October 3, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Class B Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Common Stock | Accumulated Other Comprehensive Loss | Noncontrolling Interests in Subsidiaries | Total Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2019 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive (loss) income | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (including dividend equivalents): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Common Stock, $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Class B Common Stock, $ | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance, September 27, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||
See Notes to Unaudited Consolidated Financial Statements.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements provided in this report include the accounts of The Hershey Company (the “Company,” “Hershey,” “we” or “us”) and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock and minority shareholders do not have substantive participating rights, we have significant control through contractual or economic interests in which we are the primary beneficiary or we have the power to direct the activities that most significantly impact the entity’s economic performance. We use the equity method of accounting when we have a 20% to 50% interest in other companies and exercise significant influence. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method. Both equity and cost method investments are included as Other non-current assets in the Consolidated Balance Sheets.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. The financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods.
COVID-19
On March 11, 2020, the World Health Organization designated coronavirus disease 2019 (“COVID-19”) as a global pandemic. We continue to actively monitor COVID-19 and its potential impact on our operations and financial results. Employee health and safety remains our first priority while we continue our efforts to support community food supplies. Since the onset of COVID-19, there has been minimal disruption to our supply chain network, and all our manufacturing plants are currently open. However, during the third quarter of 2021, continued strong demand for consumer goods and the effects of COVID-19 mitigation strategies have led to broad-based supply chain disruptions across the United States, including inflation on many consumer products, labor shortages and demand outpacing supply. 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.
The ultimate impact that COVID-19 will have on our consolidated financial statements remains uncertain and ultimately will be dictated by the length and severity of the pandemic, including broad-based supply chain disruptions, COVID-19 variants or resurgences, as well as the economic recovery and actions taken in response by local, state and national governments around the world, including the distribution of vaccinations. We will continue to evaluate the nature and extent of these potential and evolving impacts to our business and consolidated financial statements.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We adopted the provisions of this ASU in the fourth quarter of 2020. Adoption of the new standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. Entities may apply this ASU upon issuance through December 31, 2022 on a prospective basis. We are currently evaluating the impact of the new standard on our consolidated financial statements and related disclosures.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.
2. BUSINESS ACQUISITION AND DIVESTITURES
2021 Activity
Lily's Sweets, LLC
On June 25, 2021, we completed the acquisition of Lily’s Sweets, LLC (“Lily’s”), previously a privately held company that sells a line of sugar-free and low-sugar confectionery foods to retailers and distributors in the United States and Canada. 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. The initial cash consideration paid for Lily’s totaled $422,210 and the Company may be required to pay additional cash consideration if certain defined targets related to net sales and gross margin are exceeded during the period from the closing date through December 31, 2021. As of the acquisition date, the estimated fair value of the contingent consideration obligation was classified as a liability of $5,000 and was determined using a scenario-based analysis on forecasted future results. Acquisition-related costs for the Lily’s acquisition were immaterial.
The acquisition has been accounted for as a business combination and, accordingly, Lily’s has been included within the North America segment from the date of acquisition. The purchase consideration, inclusive of the acquisition date fair value of the contingent consideration, was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:
| Initial Allocation (1) | Adjustments | Updated Allocation | ||||||||||||||||||
| Goodwill | $ | $ | $ | |||||||||||||||||
| Other intangible assets | ||||||||||||||||||||
| Other assets acquired, primarily current assets | ||||||||||||||||||||
| Other liabilities assumed, primarily current liabilities | ( | ( | ||||||||||||||||||
| Deferred income taxes | ( | ( | ||||||||||||||||||
| Net assets acquired | $ | $ | $ | |||||||||||||||||
(1)As reported in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended July 4, 2021.
The purchase price allocation presented above is preliminary. The measurement period adjustments to the initial allocation are based on more detailed information obtained about the specific assets acquired. We continue to refine our purchase price allocation, including goodwill, and expect to finalize by the end of 2021.
Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). The majority of goodwill derived from this acquisition is expected to be deductible
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Lily’s products.
Other intangible assets include trademarks valued at $151,600 and customer relationships valued at $84,200 . Trademarks were assigned an estimated useful life of 33 years and customer relationships were assigned estimated useful lives ranging from 17 to 18 years.
Lotte Shanghai Foods Co., Ltd.
In January 2021, we completed the divestiture of Lotte Shanghai Foods Co., Ltd. (“LSFC”), which was previously included within the International and Other segment results in our consolidated financial statements. Total proceeds from the divestiture and the impact on our consolidated financial statements were immaterial and were recorded in the selling, marketing and administrative (“SM&A”) expense caption within the Consolidated Statements of Income.
2020 Activity
During the second quarter of 2020, we completed the divestitures of KRAVE Pure Foods, Inc. and the Scharffen Berger and Dagoba brands, all of which were previously included within the North America segment results in our consolidated financial statements. Total proceeds from the divestitures and the impact on our Consolidated Statements of Income, both individually and on an aggregate basis, were immaterial.
3. GOODWILL AND INTANGIBLE ASSETS
North America | International and Other | Total | ||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | |||||||||||||||||
| Foreign currency translation | ( | |||||||||||||||||||
Balance at October 3, 2021 | $ | $ | $ | |||||||||||||||||
| October 3, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||||||||||||
| Trademarks | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Customer-related | ( | ( | ||||||||||||||||||||||||
| Patents | ( | ( | ||||||||||||||||||||||||
Total | ( | ( | ||||||||||||||||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||||||||||||
| Trademarks | ||||||||||||||||||||||||||
Total other intangible assets | $ | $ | ||||||||||||||||||||||||
Total amortization expense for the three months ended October 3, 2021 and September 27, 2020 was $13,936 and $11,618 , respectively. Total amortization expense for the nine months ended October 3, 2021 and September 27, 2020 was $37,192 and $34,838 , respectively.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
4. SHORT AND LONG-TERM DEBT
Short-term Debt
As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. 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. This facility is scheduled to expire on July 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.
The credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of October 3, 2021, we were in compliance with all covenants pertaining to the credit agreement, and we had no significant compensating balance agreements that legally restricted these funds. For more information, refer to the Consolidated Financial Statements included in our 2020 Annual Report on Form 10-K.
In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. Commitment fees relating to our revolving credit facility and lines of credit are not material. Short-term debt consisted of the following:
| October 3, 2021 | December 31, 2020 | ||||||||||
| Short-term foreign bank borrowings against lines of credit | $ | $ | |||||||||
| U.S. commercial paper | |||||||||||
| Total short-term debt | $ | $ | |||||||||
| Weighted average interest rate on outstanding commercial paper | % | N/A | |||||||||
Long-term Debt
Long-term debt consisted of the following:
Debt Type and Rate | Maturity Date | October 3, 2021 | December 31, 2020 | |||||||||||||||||
| February 15, 2021 | $ | $ | ||||||||||||||||||
| May 15, 2021 | ||||||||||||||||||||
| May 1, 2023 | ||||||||||||||||||||
| May 15, 2023 | ||||||||||||||||||||
| November 15, 2024 | ||||||||||||||||||||
| June 1, 2025 | ||||||||||||||||||||
| August 21, 2025 | ||||||||||||||||||||
| August 15, 2026 | ||||||||||||||||||||
| August 15, 2027 | ||||||||||||||||||||
| November 15, 2029 | ||||||||||||||||||||
| June 1, 2030 | ||||||||||||||||||||
| August 15, 2046 | ||||||||||||||||||||
| November 15, 2049 | ||||||||||||||||||||
| June 1, 2050 | ||||||||||||||||||||
| Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts | ( | ( | ||||||||||||||||||
| Total long-term debt | ||||||||||||||||||||
| Less—current portion | ||||||||||||||||||||
| Long-term portion | $ | $ | ||||||||||||||||||
(1)In February 2021, we repaid $84,715 of 8.800 % Debentures due upon their maturity.
(2)In May 2021, we repaid $350,000 of 3.100 % Notes due upon their maturity.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Interest Expense
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Interest expense | $ | $ | $ | $ | ||||||||||||||||||||||
Capitalized interest | ( | ( | ( | ( | ||||||||||||||||||||||
Interest expense | ||||||||||||||||||||||||||
| Interest income | ( | ( | ( | ( | ||||||||||||||||||||||
Interest expense, net | $ | $ | $ | $ | ||||||||||||||||||||||
5. DERIVATIVE INSTRUMENTS
We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures.
In entering into these contracts, 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 entering into exchanged-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.
Commodity Price Risk
We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3 - to 24 -month periods. Our open commodity derivative contracts had a notional value of $383,928 as of October 3, 2021 and $279,843 as of December 31, 2020.
Derivatives used to manage commodity price risk are not designated for hedge accounting treatment. Therefore, the changes in fair value of these derivatives are recorded as incurred within cost of sales. As discussed in Note 13, we define our segment income to exclude gains and losses on commodity derivatives until the related inventory is sold, at which time the related gains and losses are reflected within segment income. This enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.
Foreign Exchange Price Risk
We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, Brazilian real, Malaysian ringgit, Mexican peso and Swiss franc. We typically utilize foreign currency forward exchange contracts to hedge these exposures for periods ranging from 3 to 12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $98,949 at October 3, 2021 and $130,131 at December 31, 2020. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $2,747 at October 3, 2021 and $2,519 at December 31, 2020. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Interest Rate Risk
We manage our targeted mix of fixed and floating rate debt with debt issuances and by entering into fixed-to-floating interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. These swaps are designated as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings as interest expense (income), net. In December 2020, our fixed-to-floating interest rate swap matured in connection with the repayment of certain long-term debt upon its maturity. Therefore, as of October 3, 2021 and December 31, 2020, we had no
In order to manage interest rate exposure, in previous years we utilized interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which were settled upon issuance of the related debt, were designated as cash flow hedges and the gains and losses that were deferred in other comprehensive income are being recognized as an adjustment to interest expense over the same period that the hedged interest payments affect earnings.
Equity Price Risk
We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at October 3, 2021 and December 31, 2020 was $24,866 and $30,194 , respectively.
The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of October 3, 2021 and December 31, 2020:
| October 3, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Assets (1) | Liabilities (1) | Assets (1) | Liabilities (1) | |||||||||||||||||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||||||||||||||||||||
| Foreign exchange contracts | $ | $ | $ | $ | ||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
| Commodities futures and options (2) | ||||||||||||||||||||||||||
| Deferred compensation derivatives | ||||||||||||||||||||||||||
| Foreign exchange contracts | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
(1)Derivatives assets are classified on our Consolidated Balance Sheets within prepaid expenses and other as well as other non-current assets. Derivative liabilities are classified on our Consolidated Balance Sheets within accrued liabilities and other long-term liabilities.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Income Statement Impact of Derivative Instruments
The effect of derivative instruments on the Consolidated Statements of Income for the three months ended October 3, 2021 and September 27, 2020 was as follows:
| Non-designated Hedges | Cash Flow Hedges | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gains (losses) recognized in income (a) | Gains (losses) recognized in other comprehensive income (“OCI”) | Gains (losses) reclassified from accumulated OCI (“AOCI”) into income (b) | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||
Commodities futures and options | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap agreements | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
Deferred compensation derivatives | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||||||||||||
The effect of derivative instruments on the Consolidated Statements of Income for the nine months ended October 3, 2021 and September 27, 2020 was as follows:
| Non-designated Hedges | Cash Flow Hedges | |||||||||||||||||||||||||||||||||||||||||||||||||
| Gains (losses) recognized in income (a) | Gains (losses) recognized in OCI | Gains (losses) reclassified from AOCI into income (b) | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||
Commodities futures and options | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
Interest rate swap agreements | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
Deferred compensation derivatives | ||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | ( | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||
(a)Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.
(b)Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.
The amount of pre-tax net losses on derivative instruments, including interest rate swap agreements and foreign currency forward exchange contracts expected to be reclassified into earnings in the next 12 months was approximately $11,529 as of October 3, 2021. This amount is primarily associated with interest rate swap agreements.
Fair Value Hedging Relationships
For the three and nine months ended October 3, 2021, we had no 1,389 and $2,148 , respectively, relating to our fixed-to-floating interest swap arrangements.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
6. FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements requires that financial assets and liabilities be classified and disclosed in one of the following categories of the fair value hierarchy:
Level 1 – Based on unadjusted quoted prices for identical assets or liabilities in an active market. | ||
Level 2 – Based on observable market-based inputs or unobservable inputs that are corroborated by market data. | ||
Level 3 – Based on unobservable inputs that reflect the entity’s own assumptions about the assumptions that a market participant would use in pricing the asset or liability. | ||
We did no
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis as of October 3, 2021 and December 31, 2020:
| Assets (Liabilities) | ||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
October 3, 2021: | ||||||||||||||||||||||||||
| Derivative Instruments: | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Foreign exchange contracts (1) | $ | $ | $ | $ | ||||||||||||||||||||||
| Deferred compensation derivatives (2) | ||||||||||||||||||||||||||
| Commodities futures and options (3) | ||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Foreign exchange contracts (1) | ||||||||||||||||||||||||||
| Commodities futures and options (3) | ||||||||||||||||||||||||||
December 31, 2020: | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Foreign exchange contracts (1) | $ | $ | $ | $ | ||||||||||||||||||||||
| Deferred compensation derivatives (2) | ||||||||||||||||||||||||||
| Commodities futures and options (3) | ||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Foreign exchange contracts (1) | ||||||||||||||||||||||||||
| Commodities futures and options (3) | ||||||||||||||||||||||||||
(1)The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences.
(2)The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index.
(3)The fair value of commodities futures and options contracts is based on quoted market prices.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Other Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair values as of October 3, 2021 and December 31, 2020 because of the relatively short maturity of these instruments.
The estimated fair value of our long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy. The fair values and carrying values of long-term debt, including the current portion, were as follows:
| Fair Value | Carrying Value | |||||||||||||||||||||||||
| October 3, 2021 | December 31, 2020 | October 3, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Current portion of long-term debt | $ | $ | $ | $ | ||||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
Other Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, GAAP requires that, under certain circumstances, we also record assets and liabilities at fair value on a nonrecurring basis.
In connection with the acquisition of Lily’s in the second quarter of 2021, as discussed in Note 2, we used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis, relief-from-royalty and a form of the multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.
During the nine months ended October 3, 2021, we recorded no impairment charges. During the nine months ended September 27, 2020, we recorded the following impairment charges, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy:
| 2020 | ||||||||
| Adjustment to disposal group (1) | $ | |||||||
| Other asset write-down (2) | ||||||||
| Long-lived asset impairment charges | $ | |||||||
(1)In connection with the sale of the LSFC joint venture (disposal group previously classified as held for sale), 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 in January 2021.
(2)In connection with a previous sale, the Company wrote-down certain receivables deemed uncollectible.
7. LEASES
We lease office and retail space, warehouse and distribution facilities, land, vehicles, and equipment. We determine if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of lease payments over the lease term and are recognized at the lease commencement date.
As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants.
For real estate, equipment and vehicles that support selling, marketing and general administrative activities the Company accounts for the lease and non-lease components as a single lease component. These asset categories comprise the majority of our leases. The lease and non-lease components of real estate and equipment leases supporting production activities are not accounted for as a single lease component. Consideration for such contracts are allocated to the lease component and non-lease components based upon relative standalone prices either observable or estimated if observable prices are not readily available.
The components of lease expense for the three months ended October 3, 2021 and September 27, 2020 were as follows:
| Three Months Ended | ||||||||||||||||||||
| Lease expense | Classification | October 3, 2021 | September 27, 2020 | |||||||||||||||||
| Operating lease cost | Cost of sales or SM&A (1) | $ | $ | |||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||
| Amortization of ROU assets | Depreciation and amortization (1) | |||||||||||||||||||
| Interest on lease liabilities | Interest expense, net | |||||||||||||||||||
| Net lease cost (2) | $ | $ | ||||||||||||||||||
The components of lease expense for the nine months ended October 3, 2021 and September 27, 2020 were as follows:
| Nine Months Ended | ||||||||||||||||||||
| Lease expense | Classification | October 3, 2021 | September 27, 2020 | |||||||||||||||||
| Operating lease cost | Cost of sales or SM&A (1) | $ | $ | |||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||
| Amortization of ROU assets | Depreciation and amortization (1) | |||||||||||||||||||
| Interest on lease liabilities | Interest expense, net | |||||||||||||||||||
| Net lease cost (2) | $ | $ | ||||||||||||||||||
(1)Supply chain-related amounts were included in cost of sales.
(2)Net lease cost does not include short-term leases, variable lease costs or sublease income, all of which are immaterial.
Information regarding our lease terms and discount rates were as follows:
| October 3, 2021 | December 31, 2020 | |||||||||||||
| Weighted-average remaining lease term (years) | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
| Weighted-average discount rate | ||||||||||||||
| Operating leases | % | % | ||||||||||||
| Finance leases | % | % | ||||||||||||
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| Leases | Classification | October 3, 2021 | December 31, 2020 | |||||||||||||||||
| Assets | ||||||||||||||||||||
| Operating lease ROU assets | Other non-current assets | $ | $ | |||||||||||||||||
| Finance lease ROU assets, at cost | Property, plant and equipment, gross | |||||||||||||||||||
| Accumulated amortization | Accumulated depreciation | ( | ( | |||||||||||||||||
| Finance lease ROU assets, net | Property, plant and equipment, net | |||||||||||||||||||
| Total leased assets | $ | $ | ||||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Operating | Accrued liabilities | $ | $ | |||||||||||||||||
| Finance | Current portion of long-term debt | |||||||||||||||||||
| Non-current | ||||||||||||||||||||
| Operating | Other long-term liabilities | |||||||||||||||||||
| Finance | Long-term debt | |||||||||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||||||||
| Operating leases | Finance leases | Total | |||||||||||||||
| 2021 (rest of year) | $ | $ | $ | ||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total lease payments | |||||||||||||||||
| Less: Imputed interest | |||||||||||||||||
| Total lease liabilities | $ | $ | $ | ||||||||||||||
As of October 3, 2021, the Company had entered into an additional lease as a lessee, primarily for real estate. This lease has not yet commenced and will result in ROU assets and corresponding lease liabilities of approximately $22,000 . This lease is expected to commence during the fourth quarter of 2021, with a lease term of approximately 8 years.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| Nine Months Ended | ||||||||||||||
| October 3, 2021 | September 27, 2020 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash flows from operating leases | $ | $ | ||||||||||||
| Operating cash flows from finance leases | ||||||||||||||
| Financing cash flows from finance leases | ||||||||||||||
| ROU assets obtained in exchange for lease liabilities: | ||||||||||||||
| Operating leases | $ | $ | ||||||||||||
| Finance leases | ||||||||||||||
8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
We invest in partnerships that make equity investments in projects eligible to receive federal historic and renewable energy tax credits. The tax credits, when realized, are recognized as a reduction of tax expense under the flow-through method, at which time the corresponding equity investment is written-down to reflect the remaining value of the future benefits to be realized. The equity investment write-down is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 18).
Additionally, we acquire ownership interests in emerging snacking businesses and startup companies, which vary in method of accounting based on our percentage of ownership and ability to exercise significant influence over decisions relating to operating and financial affairs. These investments afford the Company the rights to distribute brands that the Company does not own to third-party customers primarily in North America. Net sales and expenses of our equity method investees are not consolidated into our financial statements; rather, our proportionate share of earnings or losses are recorded on a net basis within other (income) expense, net in the Consolidated Statements of Income.
Both equity and cost method investments are reported within other non-current assets in our Consolidated Balance Sheets. We regularly review our investments and adjust accordingly for capital contributions, dividends received and other-than-temporary impairments. Total investments in unconsolidated affiliates was $77,865 and $52,351 as of October 3, 2021 and December 31, 2020, respectively.
9. BUSINESS REALIGNMENT ACTIVITIES
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Selling, marketing and administrative expense | ||||||||||||||||||||||||||
| Business realignment costs (benefits) | ( | |||||||||||||||||||||||||
| Costs associated with business realignment activities | $ | $ | $ | $ | ||||||||||||||||||||||
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| International Optimization Program: | ||||||||||||||||||||||||||
| Severance | $ | $ | $ | $ | ||||||||||||||||||||||
| Other program costs | ||||||||||||||||||||||||||
| Margin for Growth Program: | ||||||||||||||||||||||||||
| Severance | ( | |||||||||||||||||||||||||
| Other program costs | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
The following table presents the liability activity for costs qualifying as exit and disposal costs for the nine months ended October 3, 2021:
| Total | |||||
Liability balance at December 31, 2020 (1) | $ | ||||
2021 business realignment charges (2) | |||||
Cash payments | ( | ||||
Liability balance at October 3, 2021 (1) | $ | ||||
(1)The liability balances reflected above are reported within accrued liabilities and other long-term liabilities.
2020 International Optimization Program
In the fourth quarter of 2020, we commenced a program (“International Optimization Program”) to streamline resources and investments in select international markets, including the optimization of our China operating model that will improve our operational efficiency and provide for a strong, sustainable and simplified base going forward.
The International Optimization Program is expected to be completed by mid-2022, with total pre-tax costs anticipated to be $50,000 to $75,000 . Cash costs are expected to be $40,000 to $65,000 , primarily related to workforce reductions of approximately 350 positions outside of the United States, costs to consolidate and relocate production, and third-party costs incurred to execute these activities. The costs and related benefits of the International Optimization Program relate to the International and Other segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs.
For the three and nine months ended October 3, 2021, we recognized total costs associated with the International Optimization Program of $3,397 and $13,793 , respectively. These charges predominantly included third-party charges in support of our initiative to transform our China operating model, as well as severance and employee benefit costs. Since inception, we have incurred pre-tax charges to execute the program totaling $43,136 .
Margin for Growth Program
In the first quarter of 2017, the Company’s Board of Directors (“Board”) unanimously approved several initiatives under a single 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. This project was completed in mid-2020.
We recognized total costs of $2,170 associated with the Margin for Growth Program for the six months ended June 28, 2020, at which time the program ended. These charges included employee severance, largely relating to initiatives to improve the cost structure of our corporate operating model as part of optimizing our global supply chain. In addition,
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
we incurred other program costs, which related primarily to third-party charges in support of our initiative to improve global efficiency and effectiveness.
The costs and related benefits of the Margin for Growth Program relate approximately 63 % to the North America segment and 37 % to the International and Other segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs.
10. INCOME TAXES
The majority of our taxable income is generated in the United States and taxed at the United States statutory rate of 21 %. The effective tax rates for the nine months ended October 3, 2021 and September 27, 2020 were 21.4 % and 20.1 %, respectively. Relative to the 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.
The Company and its subsidiaries file tax returns in the United States, including various state and local returns, and in other foreign jurisdictions. We are routinely audited by taxing authorities in our filing jurisdictions, and a number of these disputes are currently underway, including multi-year controversies at various stages of review, negotiation and litigation in Malaysia, Mexico, and the United States. The outcome of tax audits cannot be predicted with certainty, including the timing of resolution or potential settlements. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Based on our current assessments, we believe adequate provision has been made for all income tax uncertainties. We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $12,619 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits.
American Rescue Plan Act
On March 11, 2021, the American Rescue Plan Act (“ARPA”) was signed into law. The ARPA strengthens and extends certain federal programs enacted through the Coronavirus Aid, Relief, and Economic Security Act and other COVID-19 relief measures, and establishes new federal programs, including provisions on taxes, healthcare and unemployment benefits. The ARPA did not have a material impact on our consolidated financial statements for the nine months ended October 3, 2021.
Coronavirus Aid, Relief, and Economic Security Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on our consolidated financial statements for the nine months ended October 3, 2021 and September 27, 2020.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Net Periodic Benefit Cost
The components of net periodic benefit cost for the three months ended October 3, 2021 and September 27, 2020 were as follows:
| Pension Benefits | Other Benefits | |||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ||||||||||||||||||||||||
Amortization of prior service (credit) cost | ( | ( | ||||||||||||||||||||||||
| Amortization of net loss (gain) | ( | |||||||||||||||||||||||||
| Settlement loss | ||||||||||||||||||||||||||
| Total net periodic benefit cost | $ | $ | $ | $ | ||||||||||||||||||||||
We made contributions of $25,711 and $3,527 to the pension plans and other benefits plans, respectively, during the third quarter of 2021. In the third quarter of 2020, we made contributions of $748 and $3,157 to our pension plans and other benefit plans, respectively. The contributions in 2021 and 2020 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.
The components of net periodic benefit cost for the nine months ended October 3, 2021 and September 27, 2020 were as follows:
| Pension Benefits | Other Benefits | |||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | ||||||||||||||||||||||
| Interest cost | ||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ||||||||||||||||||||||||
Amortization of prior service (credit) cost | ( | ( | ||||||||||||||||||||||||
| Amortization of net loss (gain) | ( | |||||||||||||||||||||||||
| Settlement loss | ||||||||||||||||||||||||||
| Total net periodic benefit cost | $ | $ | $ | $ | ||||||||||||||||||||||
We made contributions of $26,894 and $11,682 to the pension plans and other benefits plans, respectively, during the first nine months of 2021. In the first nine months of 2020, we made contributions of $1,753 and $10,485 to our pension plans and other benefit plans, respectively. The contributions in 2021 and 2020 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.
The non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 18).
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
12. STOCK COMPENSATION PLANS
Share-based grants for compensation and incentive purposes are made pursuant to the Equity and Incentive Compensation Plan (“EICP”). The EICP provides for grants of one or more of the following stock-based compensation awards to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent:
•Non-qualified stock options (“stock options”);
•Performance stock units (“PSUs”) and performance stock;
•Stock appreciation rights;
•Restricted stock units (“RSUs”) and restricted stock; and
•Other stock-based awards.
The EICP also provides for the deferral of stock-based compensation awards by participants if approved by the Compensation and Executive Organization Committee of our Board and if in accordance with an applicable deferred compensation plan of the Company. Currently, the Compensation and Executive Organization Committee has authorized the deferral of PSU and RSU awards by certain eligible employees under the Company’s Deferred Compensation Plan. Our Board has authorized our non-employee directors to defer any portion of their cash retainer, committee chair fees and RSUs awarded that they elect to convert into deferred stock units under our Directors’ Compensation Plan.
At the time stock options are exercised or PSUs and RSUs become payable, Common Stock is issued from our accumulated treasury shares. Dividend equivalents are credited on RSUs on the same date and at the same rate as dividends paid on our Common Stock. Dividend equivalents are charged to retained earnings and included in accrued liabilities until paid.
Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. In addition, historical data is used to estimate forfeiture rates and record share-based compensation expense only for those awards that are expected to vest.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
Pre-tax compensation expense | $ | $ | $ | $ | ||||||||||||||||||||||
| Related income tax benefit | ||||||||||||||||||||||||||
Compensation expenses for stock compensation plans are primarily included in selling, marketing and administrative expense. As of October 3, 2021, total stock-based compensation expense related to non-vested awards not yet recognized was $93,180 and the weighted-average period over which this amount is expected to be recognized was approximately 2.1 years.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Stock Options
The exercise price of each stock option awarded under the EICP equals the closing price of our Common Stock on the New York Stock Exchange on the date of grant. Each stock option has a maximum term of 10 years. Grants of stock options provide for pro-rated vesting, typically over a four-year period. Expense for stock options is based on grant date fair value and recognized on a straight-line method over the vesting period, net of estimated forfeitures.
| Stock Options | Shares | Weighted-Average Exercise Price (per share) | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
Outstanding at beginning of the period | $ | |||||||||||||
| Granted | $ | |||||||||||||
Exercised | ( | $ | ||||||||||||
| Forfeited | ( | $ | ||||||||||||
Outstanding as of October 3, 2021 | $ | $ | ||||||||||||
Options exercisable as of October 3, 2021 | $ | $ | ||||||||||||
The weighted-average fair value of options granted was $24.12 and $21.31 per share for the periods ended October 3, 2021 and September 27, 2020, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions:
| Nine Months Ended | ||||||||||||||
| October 3, 2021 | September 27, 2020 | |||||||||||||
Dividend yields | % | % | ||||||||||||
| Expected volatility | % | % | ||||||||||||
Risk-free interest rates | % | % | ||||||||||||
| Expected term in years | ||||||||||||||
The total intrinsic value of options exercised was $28,416 and $27,394 for the periods ended October 3, 2021 and September 27, 2020, respectively.
Performance Stock Units and Restricted Stock Units
Under the EICP, we grant PSUs to select executives and other key employees. Vesting is contingent upon the achievement of certain performance objectives. We grant PSUs over three-year performance cycles. If we meet targets for financial measures at the end of the applicable three-year performance cycle, we award a resulting number of shares of our Common Stock to the participants. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award.
For PSUs granted, the target award is a combination of a market-based total shareholder return and performance-based components. For market-based condition components, market volatility and other factors are taken into consideration in determining the grant date fair value and the related compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. For performance-based condition components, we estimate the probability that the performance conditions will be achieved each quarter and adjust compensation expenses accordingly. The performance scores of PSU grants during the nine months ended October 3, 2021 and September 27, 2020 can range from 0 250
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
We recognize the compensation expenses associated with PSUs ratably over the three-year term. Compensation expenses are based on the grant date fair value because the grants can only be settled in shares of our Common Stock. The grant date fair value of PSUs is determined based on the Monte Carlo simulation model for the market-based total shareholder return component and the closing market price of the Company’s Common Stock on the date of grant for performance-based components.
During the nine months ended October 3, 2021 and September 27, 2020, we awarded RSUs to certain executive officers and other key employees under the EICP. We also awarded RSUs to non-employee directors.
We recognize the compensation expenses associated with employee RSUs over a specified award vesting period based on the grant date fair value of our Common Stock. We recognize expense for employee RSUs based on the straight-line method. The compensation expenses associated with non-employee director RSUs is recognized ratably over the vesting period, net of estimated forfeitures.
A summary of activity relating to grants of PSUs and RSUs for the period ended October 3, 2021 is as follows:
Performance Stock Units and Restricted Stock Units | Number of units | Weighted-average grant date fair value for equity awards (per unit) | ||||||||||||
Outstanding at beginning of year | $ | |||||||||||||
Granted | $ | |||||||||||||
Performance assumption change (1) | $ | |||||||||||||
Vested | ( | $ | ||||||||||||
Forfeited | ( | $ | ||||||||||||
Outstanding as of October 3, 2021 | $ | |||||||||||||
(1)Reflects the net number of PSUs above and below target levels based on the performance metrics.
| Nine Months Ended | ||||||||||||||
| October 3, 2021 | September 27, 2020 | |||||||||||||
Units granted | ||||||||||||||
Weighted-average fair value at date of grant | $ | $ | ||||||||||||
Monte Carlo simulation assumptions: | ||||||||||||||
| Estimated values | $ | $ | ||||||||||||
| Dividend yields | % | % | ||||||||||||
| Expected volatility | % | % | ||||||||||||
The fair value of shares vested totaled $50,361 and $52,181 for the periods ended October 3, 2021 and September 27, 2020, respectively.
Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 263,594 units as of October 3, 2021. Each unit is equivalent to one share of the Company’s Common Stock.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
13. SEGMENT INFORMATION
Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international markets. Our business is primarily organized around geographic regions, which enables us to build processes for repeatable success in our global markets. As a result, we have defined our operating segments on a geographic basis, as this aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment. Our North America business, which generates approximately 90 % of our consolidated revenue, is our only individually reportable segment. None of our other operating segments individually meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other.
•North America - This segment is responsible for our traditional chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines.
•International and Other - International and Other is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. This segment also includes our global retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company’s trademarks and products to third parties around the world.
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 managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM as well as the measure of segment performance used for incentive compensation purposes.
As discussed in Note 5, derivatives used to manage commodity price risk are not designated for hedge accounting treatment. These derivatives are recognized at fair market value with the resulting realized and unrealized (gains) losses recognized in unallocated derivative (gains) losses outside of the reporting segment results until the related inventory is sold, at which time the related gains and losses are reallocated to segment income. This enables us to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.
Certain manufacturing, warehousing, distribution and other activities supporting our global operations are integrated to maximize efficiency and productivity. As a result, assets and capital expenditures are not managed on a segment basis and are not included in the information reported to the CODM for the purpose of evaluating performance or allocating resources. We disclose depreciation and amortization that is generated by segment-specific assets, since these amounts are included within the measure of segment income reported to the CODM.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Our segment net sales and earnings were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
Net sales: | ||||||||||||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||||||||||||
| International and Other | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Segment income: | ||||||||||||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||||||||||||
| International and Other | ||||||||||||||||||||||||||
| Total segment income | ||||||||||||||||||||||||||
| Unallocated corporate expense (1) | ||||||||||||||||||||||||||
| Unallocated mark-to-market (gains) losses on commodity derivatives | ( | ( | ( | |||||||||||||||||||||||
| Operating profit | ||||||||||||||||||||||||||
| Income before income taxes | $ | $ | $ | $ | ||||||||||||||||||||||
(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.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in income | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||
| Net gains on commodity derivative positions reclassified from unallocated to segment income | ||||||||||||||||||||||||||
| Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses | $ | ( | $ | ( | $ | ( | $ | |||||||||||||||||||
As of October 3, 2021, the cumulative amount of mark-to-market gains on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was $86,675 . Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pre-tax gains on commodity derivatives of $57,391 to segment operating results in the next twelve months.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||||||||||||
| International and Other | ||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
Additional information regarding our net sales disaggregated by geographical region is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||||||||||||
| All other countries | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||
| Confectionery and confectionery-based portfolio | $ | $ | $ | $ | ||||||||||||||||||||||
| Snacks portfolio | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
14. TREASURY STOCK ACTIVITY
| Nine Months Ended October 3, 2021 | |||||||||||
| Shares | Dollars | ||||||||||
| In thousands | |||||||||||
| Shares repurchased in the open market under pre-approved share repurchase programs | $ | ||||||||||
| Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation | $ | ||||||||||
Total share repurchases | |||||||||||
Shares issued for stock options and incentive compensation | ( | ( | |||||||||
| Net change | $ | ||||||||||
In July 2018, our Board of Directors approved a $500,000 share repurchase authorization to repurchase shares of our Common Stock. As of October 3, 2021, $109,983 remained available for repurchases of our Common Stock under this program. In May 2021, our Board of Directors approved an additional $500,000 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 are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The program has no expiration date and acquired shares of Common Stock will be held as treasury shares. Purchases under approved share repurchase authorizations are in addition to our practice of buying back shares sufficient to offset those issued under incentive compensation plans.
15. NONCONTROLLING INTEREST
Noncontrolling Interest in Subsidiary
As discussed in Note 2, in January 2021 we completed the divestiture of LSFC, a joint venture originally established in 2007 in China for the purpose of manufacturing and selling product to the joint venture partners. Prior to the sale, we owned a 50 % controlling interest in LSFC.
| Noncontrolling Interest | |||||
Balance, December 31, 2020 | $ | ||||
| Net gain attributable to noncontrolling interest | |||||
| Divestiture of noncontrolling interest | ( | ||||
| Other comprehensive income - foreign currency translation adjustments | |||||
Balance, October 3, 2021 | $ | ||||
16. CONTINGENCIES
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
17. EARNINGS PER SHARE
We compute basic earnings per share for Common Stock and Class B common stock using the two-class method. The Class B common stock is convertible into Common Stock on a share-for-share basis at any time. The computation of diluted earnings per share for Common Stock assumes the conversion of Class B common stock using the if-converted method, while the diluted earnings per share of Class B common stock does not assume the conversion of those shares.
| Three Months Ended | ||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||||
| Common Stock | Class B Common Stock | Common Stock | Class B Common Stock | |||||||||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Allocation of distributed earnings (cash dividends paid) | $ | $ | $ | $ | ||||||||||||||||||||||
| Allocation of undistributed earnings | ||||||||||||||||||||||||||
| Total earnings—basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator (shares in thousands): | ||||||||||||||||||||||||||
| Total weighted-average shares—basic | ||||||||||||||||||||||||||
| Earnings Per Share—basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Allocation of total earnings used in basic computation | $ | $ | $ | $ | ||||||||||||||||||||||
| Reallocation of total earnings as a result of conversion of Class B common stock to Common stock | ||||||||||||||||||||||||||
| Reallocation of undistributed earnings | ( | ( | ||||||||||||||||||||||||
| Total earnings—diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator (shares in thousands): | ||||||||||||||||||||||||||
| Number of shares used in basic computation | ||||||||||||||||||||||||||
| Weighted-average effect of dilutive securities: | ||||||||||||||||||||||||||
| Conversion of Class B common stock to Common shares outstanding | ||||||||||||||||||||||||||
| Employee stock options | ||||||||||||||||||||||||||
| Performance and restricted stock units | ||||||||||||||||||||||||||
| Total weighted-average shares—diluted | ||||||||||||||||||||||||||
| Earnings Per Share—diluted | $ | $ | $ | $ | ||||||||||||||||||||||
There were no antidilutive stock options for the three months ended October 3, 2021. The earnings per share calculations for the three months ended September 27, 2020 excluded 15,000 stock options that would have been antidilutive.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| Nine Months Ended | ||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||||
| Common Stock | Class B Common Stock | Common Stock | Class B Common Stock | |||||||||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Allocation of distributed earnings (cash dividends paid) | $ | $ | $ | $ | ||||||||||||||||||||||
| Allocation of undistributed earnings | ||||||||||||||||||||||||||
| Total earnings—basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator (shares in thousands): | ||||||||||||||||||||||||||
| Total weighted-average shares—basic | ||||||||||||||||||||||||||
| Earnings Per Share—basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Allocation of total earnings used in basic computation | $ | $ | $ | $ | ||||||||||||||||||||||
| Reallocation of total earnings as a result of conversion of Class B common stock to Common stock | ||||||||||||||||||||||||||
| Reallocation of undistributed earnings | ( | ( | ||||||||||||||||||||||||
| Total earnings—diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator (shares in thousands): | ||||||||||||||||||||||||||
| Number of shares used in basic computation | ||||||||||||||||||||||||||
| Weighted-average effect of dilutive securities: | ||||||||||||||||||||||||||
| Conversion of Class B common stock to Common shares outstanding | ||||||||||||||||||||||||||
| Employee stock options | ||||||||||||||||||||||||||
| Performance and restricted stock units | ||||||||||||||||||||||||||
| Total weighted-average shares—diluted | ||||||||||||||||||||||||||
| Earnings Per Share—diluted | $ | $ | $ | $ | ||||||||||||||||||||||
The earnings per share calculations for the nine months ended October 3, 2021 and September 27, 2020 excluded 43,000 and 15,000 stock options, respectively, that would have been antidilutive.
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
18. OTHER (INCOME) EXPENSE, NET
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
Write-down of equity investments in partnerships qualifying for historic and renewable energy tax credits (see Note 8) | $ | $ | $ | $ | |||||||||||||||||||
Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans (see Note 11) | |||||||||||||||||||||||
| Other (income) expense, net | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
19. SUPPLEMENTAL BALANCE SHEET INFORMATION
| October 3, 2021 | December 31, 2020 | |||||||||||||
| Inventories: | ||||||||||||||
| Raw materials | $ | $ | ||||||||||||
| Goods in process | ||||||||||||||
| Finished goods | ||||||||||||||
| Inventories at First In First Out | ||||||||||||||
| Adjustment to Last In First Out | ( | ( | ||||||||||||
| Total inventories | $ | $ | ||||||||||||
| Prepaid expenses and other: | ||||||||||||||
| Prepaid expenses | $ | $ | ||||||||||||
| Other current assets | ||||||||||||||
| Total prepaid expenses and other | $ | $ | ||||||||||||
| Property, plant and equipment: | ||||||||||||||
| Land | $ | $ | ||||||||||||
| Buildings | ||||||||||||||
| Machinery and equipment | ||||||||||||||
| Construction in progress | ||||||||||||||
| Property, plant and equipment, gross | ||||||||||||||
| Accumulated depreciation | ( | ( | ||||||||||||
| Property, plant and equipment, net | $ | $ | ||||||||||||
| Other non-current assets: | ||||||||||||||
| Capitalized software, net | $ | $ | ||||||||||||
| Operating lease ROU assets | ||||||||||||||
| Investments in unconsolidated affiliates | ||||||||||||||
| Other non-current assets | ||||||||||||||
| Total other non-current assets | $ | $ | ||||||||||||
| Accrued liabilities: | ||||||||||||||
| Payroll, compensation and benefits | $ | $ | ||||||||||||
| Advertising, promotion and product allowances | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
| Other long-term liabilities: | ||||||||||||||
| Post-retirement benefits liabilities | $ | $ | ||||||||||||
| Pension benefits liabilities | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Other | ||||||||||||||
| $ | $ | |||||||||||||
| Accumulated other comprehensive loss: | ||||||||||||||
| Foreign currency translation adjustments | $ | ( | $ | ( | ||||||||||
| Pension and post-retirement benefit plans, net of tax | ( | ( | ||||||||||||
| Cash flow hedges, net of tax | ( | ( | ||||||||||||
| Total accumulated other comprehensive loss | $ | ( | $ | ( | ||||||||||
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2020 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
Hershey is a global confectionery leader known for bringing goodness to the world through chocolate, sweets, mints, gum and other great tasting snacks. We are the largest producer of quality chocolate in North America, a leading snack maker in the United States (“U.S.”) and a global leader in chocolate and non-chocolate confectionery. We market, sell and distribute our products under more than 90 brand names in approximately 85 countries worldwide.
We report our operations through two segments: North America and International and Other. The majority of our products are confectionery or confectionery-based and include chocolate and non-chocolate confectionery products, gum and mint refreshment products, spreads, snack bites and mixes, as well as pantry items such as baking ingredients, toppings and sundae syrups. The confectionery and confectionery-based portfolio is predominantly sold under the renowned brands of Hershey’s, Reese’s and Kisses, as well as Kit Kat®, Jolly Rancher, Ice Breakers, Twizzlers, Heath, Payday, Cadbury and a variety of other popular brands. Our snacks portfolio includes ready-to-eat popcorn, baked and trans fat free snacks, protein bars and other better-for-you snacks. The snacks portfolio is predominantly sold under the brands of SkinnyPop, Pirate's Booty, ONE Bar, and Paqui.
2021 Acquisition and Divestiture
In June 2021, we completed the acquisition of Lily’s Sweets, LLC (“Lily’s”), previously a privately held company that sells a line of sugar-free and low-sugar confectionery foods to retailers and distributors in the United States and Canada. 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.
In January 2021, we completed the divestiture of Lotte Shanghai Foods Co., Ltd. (“LSFC”), which was previously included within the International and Other segment results in our consolidated financial statements. Total proceeds from the divestiture and the impact on our consolidated financial statements were immaterial.
2020 Divestitures
During the second quarter of 2020, we completed the divestitures of KRAVE Pure Foods, Inc. (“Krave”) and the Scharffen Berger and Dagoba brands, all of which were previously included within the North America segment results in our consolidated financial statements. Total proceeds from the divestitures and the impact on our consolidated financial statements, both individually and on an aggregate basis, were immaterial.
TRENDS AFFECTING OUR BUSINESS
On March 11, 2020, the World Health Organization designated coronavirus disease 2019 (“COVID-19”) as a global pandemic, which has spread worldwide and impacted various markets around the world, including the U.S. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19.
Local, state and national governments continue to emphasize the importance of food supply during this pandemic and have asked that food manufacturers and retailers remain open to meet the needs of our communities. Employee safety is our first priority, and as a result, we put preparedness plans in place at our manufacturing facilities. Our manufacturing facilities are currently open; however, we have adjusted shift schedules, enforced social distancing, increased sanitation and adjusted time and attendance policies for worker absenteeism. Our sales teams continue to support community food supplies, while adhering to social distancing guidelines, implementing flexible hours, reducing person-to-person interaction and increasing safety measures. At the onset of the pandemic, the Company temporarily closed all Hershey’s Chocolate World stores in the U.S. (3 locations), Niagara Falls (Ontario) and Singapore; however, since July 2020, all locations have been re-opened on a limited capacity basis with increased safety measures and enforced social distancing.
In June 2020 we commenced a phased-in approach to reopen our corporate headquarters in Hershey, Pennsylvania and other select offices with increased safety protocols. We have successfully onboarded several teams; however, occupancy levels remain low as we continue to monitor the latest COVID-19 related public health and government guidance. As a result, a majority of our office-based employees continue to work remotely where possible. We have crisis management teams in place to monitor the continually evolving situation and recommending risk mitigation actions as deemed necessary. Since the onset of COVID-19, there has been minimal disruption to our supply chain network. However, during the third quarter of 2021, continued strong demand for consumer goods and the effects of COVID-19 mitigation strategies have led to broad-based supply chain disruptions across the U.S., 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 three months ended October 3, 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 season, 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 led to a temporary resurgence of COVID-19 cases during the summer months but has declined in recent weeks as 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 during the three and nine months ended October 3, 2021, which was primarily driven by strong everyday performance on our core U.S. confection brands and solid growth in our snacks portfolio and select international markets (see Segment Results included in this MD&A). Despite higher net sales, our net income during the three months ended October 3, 2021 decreased slightly due to the aforementioned supply chain disruptions and gross margin pressures.
As of October 3, 2021, 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 operate effectively during the ongoing COVID-19 pandemic. 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, 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.
CONSOLIDATED RESULTS OF OPERATIONS
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | Percent Change | October 3, 2021 | September 27, 2020 | Percent Change | |||||||||||||||||||||||||||||||||
In millions of dollars except per share amounts | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,359.8 | $ | 2,219.8 | 6.3 | % | $ | 6,645.2 | $ | 5,964.5 | 11.4 | % | ||||||||||||||||||||||||||
| Cost of sales | 1,298.5 | 1,139.8 | 13.9 | % | 3,609.5 | 3,225.3 | 11.9 | % | ||||||||||||||||||||||||||||||
| Gross profit | 1,061.3 | 1,080.0 | (1.7) | % | 3,035.7 | 2,739.2 | 10.8 | % | ||||||||||||||||||||||||||||||
| Gross margin | 45.0 | % | 48.7 | % | 45.7 | % | 45.9 | % | ||||||||||||||||||||||||||||||
| Selling, marketing & administrative (“SM&A”) expenses | 486.1 | 468.6 | 3.7 | % | 1,448.4 | 1,353.0 | 7.1 | % | ||||||||||||||||||||||||||||||
| SM&A expense as a percent of net sales | 20.6 | % | 21.1 | % | 21.8 | % | 22.7 | % | ||||||||||||||||||||||||||||||
| Long-lived asset impairment charges | — | — | NM | — | 9.1 | NM | ||||||||||||||||||||||||||||||||
| Business realignment costs (benefits) | 0.4 | — | NM | 2.7 | (0.5) | (678.5) | % | |||||||||||||||||||||||||||||||
| Operating profit | 574.8 | 611.4 | (6.0) | % | 1,584.6 | 1,377.6 | 15.0 | % | ||||||||||||||||||||||||||||||
| Operating profit margin | 24.4 | % | 27.5 | % | 23.8 | % | 23.1 | % | ||||||||||||||||||||||||||||||
| Interest expense, net | 30.2 | 37.3 | (19.1) | % | 97.7 | 111.6 | (12.5) | % | ||||||||||||||||||||||||||||||
| Other (income) expense, net | 23.0 | 11.6 | 97.6 | % | 32.6 | 34.4 | (5.2) | % | ||||||||||||||||||||||||||||||
| Provision for income taxes | 76.7 | 115.2 | (33.4) | % | 311.3 | 247.5 | 25.8 | % | ||||||||||||||||||||||||||||||
| Effective income tax rate | 14.7% | 20.5% | 21.4% | 20.1% | ||||||||||||||||||||||||||||||||||
| Net income including noncontrolling interest | 444.9 | 447.3 | (0.5) | % | 1,143.0 | 984.1 | 16.2 | % | ||||||||||||||||||||||||||||||
| Less: Net gain (loss) attributable to noncontrolling interest | — | — | NM | 1.1 | (3.2) | (133.1) | % | |||||||||||||||||||||||||||||||
| Net income attributable to The Hershey Company | $ | 444.9 | $ | 447.3 | (0.5) | % | $ | 1,141.9 | $ | 987.3 | 15.7 | % | ||||||||||||||||||||||||||
| Net income per share—diluted | $ | 2.14 | $ | 2.14 | — | % | $ | 5.49 | $ | 4.71 | 16.6 | % | ||||||||||||||||||||||||||
| NOTE: Percentage changes may not compute directly as shown due to rounding of amounts presented above. | ||||||||||||||||||||||||||||||||||||||
| NM = not meaningful | ||||||||||||||||||||||||||||||||||||||
Results of Operations - Third Quarter 2021 vs. Third Quarter 2020
Net Sales
Net sales increased 6.3% in the third quarter of 2021 compared to the same period of 2020, reflecting a favorable price realization of 3.1% due to higher prices on certain products, a 1.4% increase from the 2021 acquisition of Lily’s, a volume increase of 1.3% due to an increase in our snacks portfolio, as well as, a favorable impact from foreign currency exchange rates of 0.5%.
Key U.S. Marketplace Metrics
For the third quarter of 2021, our total U.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. Our U.S. candy, mint and gum (“CMG”) consumer takeaway increased 8.0% and experienced a CMG market share loss of approximately 95 basis points.
The CMG consumer takeaway and market share information reflects measured channels of distribution accounting for approximately 90% of our U.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 by Information 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
Cost of sales increased 13.9% in the third quarter of 2021 compared to the same period of 2020. The increase was driven by higher sales volume, higher freight and logistics costs and additional plant costs, as well as, the incremental $40.6 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 370 basis points in the third quarter of 2021 compared to the same period of 2020. The decrease was driven by higher freight and logistics costs and additional plant costs and the unfavorable year-over-year mark-to-market impact from commodity derivative instruments. These factors were offset by favorable price realization and supply chain productivity.
SM&A Expenses
SM&A expenses increased $17.5 million or 3.7% in the third quarter of 2021 driven by increased corporate expenses. Total advertising and related consumer marketing expenses decreased 3.6% driven by lower advertising in the North America segment in response to sustained consumer demand and capacity constraints on select brands. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 8.1% in the third quarter of 2021 driven by 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 2021, we recorded business realignment costs of $0.4 million related to the International Optimization Program, a program focused on optimizing our China operating model to improve our operational efficiency and provide for a strong, sustainable and simplified base going forward. There were no business realignment costs in the third quarter of 2020. 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 decreased 6.0% in the third quarter of 2021 compared to the same period of 2020 predominantly due to lower gross profit, as well as higher SM&A expenses, as noted above. Operating profit margin decreased to 24.4% in 2021 from 27.5% in 2020 driven by these same factors.
Interest Expense, Net
Net interest expense was $7.1 million lower in the third quarter of 2021 compared to the same period of 2020. The decrease was primarily due to lower long-term debt balances in 2021 versus 2020, specifically resulting from $785 million of long-term debt repayments with varying maturity dates during the last twelve months preceding October 3, 2021.
Other (Income) Expense, Net
Other (income) expense, net was $23.0 million in the third quarter of 2021 versus net expense of $11.6 million in the third quarter of 2020. The increase in net expense was primarily due to higher write-downs on equity investments qualifying for historic and renewable energy tax credits in 2021 versus 2020 and higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2021.
Income Taxes and Effective Tax Rate
The effective income tax rate was 14.7% for the third quarter of 2021 compared with 20.5% for the third quarter of 2020. 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. Relative to the 21% statutory rate, the 2020 effective tax rate benefited from favorable foreign rate differential and investment tax credits, partially offset by state taxes.
Net Income Attributable to The Hershey Company and Earnings Per Share-diluted
Net income decreased $2.4 million, or 0.5%, while EPS-diluted had no change, in the third quarter of 2021 compared to the same period of 2020. The decrease in net income was driven primarily by lower gross profit, as well as higher SM&A expenses and other expenses, partially offset by lower income taxes, as noted above. Our 2021 EPS-diluted benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.
Results of Operations - First Nine Months 2021 vs. First Nine Months 2020
Net Sales
Net sales increased 11.4% in the first nine months of 2021 compared to the same period of 2020, reflecting a volume increase of 8.5% due to an increase in everyday core U.S. confection brands and our snacks portfolio, a favorable price realization of 2.0% due to higher prices on certain products, a 0.5% increase from net acquisitions and divestitures (predominantly driven by the 2021 acquisition of Lily’s, partially offset by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands), as well as, a favorable impact from foreign currency exchange rates of 0.4%.
Cost of Sales and Gross Margin
Cost of sales increased 11.9% in the first nine months of 2021 compared to the same period of 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 $64.4 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 during March 2020 amid COVID-19 fears. Additionally, the increase was partially offset by favorable price realization and supply chain productivity.
Gross margin decreased by 20 basis points in the first nine months of 2021 compared to the same period of 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.
SM&A Expenses
SM&A expenses increased $95.5 million or 7.1% in the first nine months of 2021. Total advertising and related consumer marketing expenses increased 2.5% driven by increased investment in core brands and incremental sponsorships in North America. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 9.6% in the first nine months of 2021 driven by higher compensation costs and investments in capabilities and technology.
Long-Lived Asset Impairment Charges
We had no impairment charges during the first nine months of 2021. During the first nine months of 2020, we recorded long-lived asset impairment charges of $9.1 million, predominantly comprising of impairment charges to adjust long-lived asset values of our LSFC disposal group which was previously classified as held for sale. Additionally, in connection with a previous sale, the Company wrote-down certain receivables deemed uncollectible.
Business Realignment Activities
During the first nine months of 2021, we recorded business realignment costs of $2.7 million related to the International Optimization Program. During the first nine months of 2020, we recorded business realignment benefits of $0.5 million related to the Margin for Growth 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 15.0% in the first nine months of 2021 compared to the same period of 2020 predominantly due to higher gross profit and lower impairment charges, partially offset by higher SM&A expenses, as noted above. Operating profit margin increased to 23.8% in 2021 from 23.1% in 2020 driven by these same factors.
Interest Expense, Net
Net interest expense was $13.9 million lower in the first nine months of 2021 compared to the same period of 2020. The decrease was primarily due to lower long-term debt balances in 2021 versus 2020, specifically resulting from $785 million of long-term debt repayments with varying maturity dates during the last twelve months preceding October 3, 2021.
Other (Income) Expense, Net
Other (income) expense, net was $32.6 million in the first nine months of 2021 versus expense of $34.4 million in the first nine months of 2020. The decrease in net expense was primarily due to lower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2021 and lower write-downs on equity investments qualifying for historic and renewable energy tax credits in 2021 versus 2020.
Income Taxes and Effective Tax Rate
Our effective income tax rate was 21.4% for the first nine months of 2021 compared with 20.1% for the first nine months of 2020. 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. Relative to the 21% statutory rate, the 2020 effective tax rate was favorably impacted by investment tax credits and the benefit of employee share-based payments, partially offset by state taxes.
Net Income Attributable to The Hershey Company and Earnings Per Share-diluted
Net income increased $154.6 million, or 15.7%, while EPS-diluted increased $0.78, or 16.6%, in the first nine months of 2021 compared to the same period of 2020. The increase in both net income and EPS-diluted was driven primarily by higher gross profit, as well as, lower interest expense and impairment charges, partially offset by higher SM&A expenses and higher income taxes. 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.
SEGMENT RESULTS
The summary that follows provides a discussion of the results of operations of our two reportable segments: North America and International and Other. The segments reflect our operations on a geographic basis. 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:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||||
| Net Sales: | ||||||||||||||||||||||||||
| North America | $ | 2,125.6 | $ | 2,014.1 | $ | 5,986.7 | $ | 5,442.8 | ||||||||||||||||||
| International and Other | 234.2 | 205.7 | 658.5 | 521.7 | ||||||||||||||||||||||
| Total | $ | 2,359.8 | $ | 2,219.8 | $ | 6,645.2 | $ | 5,964.5 | ||||||||||||||||||
| Segment Income: | ||||||||||||||||||||||||||
| North America | $ | 666.1 | $ | 647.1 | $ | 1,893.6 | $ | 1,726.3 | ||||||||||||||||||
| International and Other | 38.7 | 24.5 | 114.7 | 36.5 | ||||||||||||||||||||||
| Total segment income | 704.8 | 671.6 | 2,008.3 | 1,762.8 | ||||||||||||||||||||||
| Unallocated corporate expense (1) | 145.0 | 132.0 | 434.0 | 363.4 | ||||||||||||||||||||||
| Unallocated mark-to-market (gains) losses on commodity derivatives (2) | (18.4) | (71.8) | (24.1) | 10.5 | ||||||||||||||||||||||
| Long-lived asset impairment charges | — | — | — | 9.1 | ||||||||||||||||||||||
| Costs associated with business realignment activities | 3.4 | — | 13.8 | 2.2 | ||||||||||||||||||||||
| Operating profit | 574.8 | 611.4 | 1,584.6 | 1,377.6 | ||||||||||||||||||||||
| Interest expense, net | 30.1 | 37.3 | 97.7 | 111.6 | ||||||||||||||||||||||
| Other (income) expense, net | 23.0 | 11.6 | 32.6 | 34.4 | ||||||||||||||||||||||
| Income before income taxes | $ | 521.7 | $ | 562.5 | $ | 1,454.3 | $ | 1,231.6 | ||||||||||||||||||
(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 (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses. See Note 13 to the Unaudited Consolidated Financial Statements.
North America
The North America segment is responsible for our chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. North America results, which accounted for 90.1% and 90.7% of our net sales for the three months ended October 3, 2021 and September 27, 2020, respectively, were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | Percent Change | October 3, 2021 | September 27, 2020 | Percent Change | |||||||||||||||||||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 2,125.6 | $ | 2,014.1 | 5.5 | % | $ | 5,986.7 | $ | 5,442.8 | 10.0 | % | ||||||||||||||||||||||||||
| Segment income | 666.1 | 647.1 | 2.9 | % | 1,893.6 | 1,726.3 | 9.7 | % | ||||||||||||||||||||||||||||||
| Segment margin | 31.3 | % | 32.1 | % | 31.6 | % | 31.7 | % | ||||||||||||||||||||||||||||||
Results of Operations - Third Quarter 2021 vs. Third Quarter 2020
Net sales of our North America segment increased $111.5 million or 5.5% in the third quarter of 2021 compared to the same period of 2020, reflecting a favorable price realization of 2.4% due to higher prices on certain products, a volume increase of 1.3% due to an increase in our snacks portfolio, a 1.5% increase from the 2021 acquisition of Lily’s, and a favorable impact from foreign currency exchange rates of 0.3%.
Our North America segment income increased $19.0 million or 2.9% in the third quarter of 2021 compared to the same period of 2020, primarily due to volume increases and favorable price realization, partially offset by higher supply chain-related costs, higher freight and logistics costs, as well as unfavorable product mix.
Results of Operations - First Nine Months 2021 vs. First Nine Months 2020
Net sales of our North America segment increased $543.9 million or 10.0% in the first nine months of 2021 compared to the same period of 2020, reflecting a volume increase of 7.6% due to an increase in everyday core U.S. confection brands and our snacks portfolio, favorable price realization of 1.5% attributed to higher prices on certain products, a 0.5% increase from net acquisitions and divestitures (predominantly driven by the 2021 acquisition of Lily’s, partially offset by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands) and a favorable impact from foreign currency exchange rates of 0.4%.
Our North America segment income increased $167.3 million or 9.7% in the first nine months of 2021 compared to the same period of 2020, primarily due to volume increases and favorable price realization, partially offset by higher supply chain-related costs and higher freight and logistics costs.
International and Other
The International and Other 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 in India and other Asia markets, Latin America, Europe, Africa and the Middle East, along with exports to these regions. While a less significant component, this segment also includes our global retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain trademarks and products to third parties around the world. International and Other results, which accounted for 9.9% and 9.3% of our net sales for the three months ended October 3, 2021 and September 27, 2020, respectively, were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | Percent Change | October 3, 2021 | September 27, 2020 | Percent Change | |||||||||||||||||||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 234.2 | $ | 205.7 | 13.9 | % | $ | 658.5 | $ | 521.7 | 26.2 | % | ||||||||||||||||||||||||||
| Segment income | 38.7 | 24.5 | 58.1 | % | 114.7 | 36.5 | 214.2 | % | ||||||||||||||||||||||||||||||
| Segment margin | 16.5 | % | 11.9 | % | 17.4 | % | 7.0 | % | ||||||||||||||||||||||||||||||
Results of Operations - Third Quarter 2021 vs. Third Quarter 2020
Net sales of our International and Other segment increased $28.5 million or 13.9% in the third quarter of 2021 compared to the same period of 2020, reflecting a favorable price realization of 9.5% and volume increase of 1.9%. The volume increase was primarily attributed to solid marketplace growth in Mexico, Brazil, and India, where net sales increased by 72.3%, 13.0%, and 5.0%, respectively. These increases also benefited from a favorable impact from foreign currency exchange rates of 2.5%.
Our International and Other segment also includes licensing, owned retail and world travel retail. At the onset of the pandemic, all Hershey's Chocolate World stores were temporarily closed and subsequently re-opened in July 2020 with increased safety measures. This included the United States (3 locations), Niagara Falls (Ontario) and Singapore. As a result, our net sales increased approximately 47.7% during the third quarter of 2021 compared to the same period of 2020.
Our International and Other segment generated income of $38.7 million in the third quarter of 2021 compared to $24.5 million in the third quarter of 2020 with the improvement primarily resulting from execution of our International Optimization Program in China, as we streamline and optimize our China operating model, as well as volume increases and favorable price realization.
Results of Operations - First Nine Months 2021 vs. First Nine Months 2020
Net sales of our International and Other segment increased $136.8 million or 26.2% in the first nine months of 2021 compared to the same period of 2020, reflecting a volume increase of 17.2% and favorable price realization of 8.1%. The volume increase was primarily attributed to solid marketplace growth in Mexico, Brazil, India and AEMEA Markets, where net sales increased by 50.0%, 25.4%, 34.4% and 17.5%, respectively. These increases also benefited from a favorable impact from foreign currency exchange rates of 0.9%.
Our International and Other segment also includes licensing, owned retail and world travel retail. At the onset of the pandemic, all Hershey’s Chocolate World stores were temporarily closed and subsequently re-opened in July 2020 with increased safety measures. This included the United States (3 locations), Niagara Falls (Ontario) and Singapore. As a result, our net sales increased approximately 42.6% during the first nine months of 2021 compared to the same period of 2020.
Our International and Other segment generated income of $114.7 million in the first nine months of 2021 compared to $36.5 million in the first nine months of 2020 with the improvement primarily resulting from execution of our International Optimization Program in China, as we streamline and optimize our China operating model, as well as volume increases and favorable price realization.
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.
In the third quarter of 2021, unallocated corporate expense totaled $145.0 million, as compared to $132.0 million in the third quarter of 2020. The increase is primarily driven by higher incentive compensation, higher group insurance costs from COVID-19-related delays in preventive care, and incremental investments in capabilities and technology.
In the first nine months of 2021, unallocated corporate expense totaled $434.0 million, as compared to $363.4 million in the first nine months of 2020. The increase is primarily driven by higher incentive compensation, higher group insurance costs from COVID-19-related delays in preventive care, and incremental investments in capabilities and technology.
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.
At October 3, 2021, our cash and cash equivalents totaled $675.5 million, a decrease of $468.5 million compared to the 2020 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. Additional detail regarding the net uses of cash are outlined in the following discussion.
Approximately 90% of the balance of our cash and cash equivalents at October 3, 2021 was held by subsidiaries domiciled outside of the United States. During the first nine months of 2021, previously undistributed earnings of certain international subsidiaries were no longer considered indefinitely reinvested; however, the Company had previously recognized a one-time U.S. repatriation tax due under U.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 twelve months, including our cash needs in the United States.
Cash Flow Summary
The following table is derived from our Consolidated Statements of Cash Flows:
| Nine Months Ended | |||||||||||||||||||||||
| In millions of dollars | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||||||||
| Operating activities | $ | 1,403.7 | $ | 1,095.3 | |||||||||||||||||||
| Investing activities | (839.7) | (341.3) | |||||||||||||||||||||
| Financing activities | (1,037.8) | (20.0) | |||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (6.1) | (10.7) | |||||||||||||||||||||
| Less: Cash classified as assets held for sale | 11.4 | (10.7) | |||||||||||||||||||||
| (Decrease) increase in cash and cash equivalents | $ | (468.5) | $ | 712.6 | |||||||||||||||||||
Operating activities
We generated cash of $1.4 billion from operating activities in the first nine months of 2021, an increase of $308.4 million compared to $1.1 billion in the same period of 2020. This increase in net cash provided by operating activities was mainly driven by the following factors:
•Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, long-lived asset charges, a write-down of equity investments and other charges) resulted in $205.1 million of higher cash flow in 2021 relative to 2020.
•Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) consumed cash of $185.3 million in 2021, compared to $295.3 million in 2020. This $110.0 million fluctuation was mainly driven by strong demand of U.S. inventories, specifically our everyday core U.S. confection brands.
Investing activities
We used cash of $839.7 million for investing activities in the first nine months of 2021, an increase of $498.4 million compared to $341.3 million in the same period of 2020. This increase in net cash used in investing activities was mainly driven by the following factors:
•Capital spending. Capital expenditures, including capitalized software, primarily to support capacity expansion, innovation and cost savings, were $347.5 million in the first nine months of 2021 compared to $292.1 million in the same period of 2020. For full year 2021, we now expect capital expenditures, including capitalized software, to approximate $500 million to $525 million, a reduction from our previously announced estimate of $550 million, as we evaluate and re-prioritize our capital projects to align with consumer demand and broad-based supply chain disruptions. Our 2021 capital expenditures are largely driven by the continuation of our new global enterprise resource planning system implementation, as well as our supply chain capacity projects.
•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 $75.9 million in the first nine months of 2021, compared to $46.4 million in the same period of 2020.
•Business Acquisition. In June 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 $1,037.8 million for financing activities in the first nine months of 2021, an increase of $1,017.8 million compared to $20.0 million in the same period of 2020. 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 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. During the first nine months of 2020, we generated cash flow of $13.4 million due to an increase in short-term foreign bank borrowings.
•Long-term debt borrowings and repayments. 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. During the first nine months of 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, in May 2020, we repaid $350 million of 2.900% Notes due upon their maturity.
•Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $505.2 million during the first nine months of 2021, an increase of $27.2 million compared to $478.0 million in the same period of 2020. 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 | |||||||||||||||||
| Dividends paid per share – Common stock | $ | 0.804 | $ | 0.804 | $ | 0.901 | ||||||||||||||
| Dividends paid per share – Class B common stock | $ | 0.731 | $ | 0.731 | $ | 0.819 | ||||||||||||||
| Total cash dividends paid | $ | 162.7 | $ | 161.6 | $ | 180.9 | ||||||||||||||
| Declaration date | February 2, 2021 | April 27, 2021 | July 23, 2021 | |||||||||||||||||
| Record date | February 19, 2021 | May 21, 2021 | August 20, 2021 | |||||||||||||||||
| Payment date | March 15, 2021 | June 15, 2021 | September 15, 2021 | |||||||||||||||||
•Share repurchases. We used cash for total share repurchases of $458.0 million and $211.2 million during the first nine months of 2021 and 2020, respectively, pursuant to our practice of replenishing treasury shares available for issuance for stock options and incentive compensation, as well as our share repurchases in the open market under pre-approved share repurchase programs. In July 2018, our Board of Directors approved a $500 million share repurchase authorization. As of October 3, 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.
•Proceeds from the exercise of stock options, including tax benefits. We received $23.4 million from employee exercises of stock options, net of employee taxes withheld from share-based awards, during the first nine months of 2021, a minimal increase compared to $19.1 million in the same period of 2020.
Recent Accounting Pronouncements
Information on recently adopted and issued accounting standards is included in Note 1 to the Unaudited Consolidated Financial Statements.
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 Prospectus. 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;
•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;
•Political, economic and/or financial market conditions could negatively impact our financial results;
•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 2020 Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for the quarterly periods ended April 4, 2021 and July 4, 2021, 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In December 2020, our fixed-to-floating interest rate swap matured in connection with the repayment of certain long-term debt upon its maturity. Therefore, as of October 3, 2021 and December 31, 2020, we had no interest rate swap derivative instruments in a fair value hedging relationship. A hypothetical 100 basis point increase in interest rates applied to this variable-rate debt through its December 2020 maturity would have increased interest expense by approximately $3.2 million for the year 2020. There is no hypothetical impact for 2021.
In addition, the total amount of short-term debt, net of cash, amounted to net cash positions of $265.1 million and $1.1 billion, at October 3, 2021 and December 31, 2020, respectively. A hypothetical 100 basis point increase in interest rates applied to this variable-rate short-term debt as of October 3, 2021 would have changed interest expense by approximately $3.9 million for the first nine months of 2021 and $8.6 million for the full year 2020.
We consider our current risk related to market fluctuations in interest rates on our remaining debt portfolio, excluding fixed-rate debt converted to variable rates with fixed-to-floating instruments, to be minimal since this debt is largely long-term and fixed-rate in nature. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A 100 basis point increase in market interest rates would decrease the fair value of our fixed-rate long-term debt at October 3, 2021 and December 31, 2020 by approximately $323 million and $357 million, respectively. However, since we currently have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position.
The potential decline in fair value of foreign currency forward exchange contracts resulting from a hypothetical near-term adverse change in market rates of 10% was $29.0 million as of October 3, 2021 and $25.6 million as of December 31, 2020, generally offset by a reduction in foreign exchange associated with our transactional activities.
Our open commodity derivative contracts had a notional value of $383.9 million as of October 3, 2021 and $279.8 million as of December 31, 2020. At the end of the first quarter 2021, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased our net unrealized losses by $43.1 million, generally offset by a reduction in the cost of the underlying commodity purchases.
Other than as described above, market risks have not changed significantly from those described in our 2020 Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of October 3, 2021. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 3, 2021.
We rely extensively on information systems and technology to manage our business and summarize operating results. We are in the process of a multi-year implementation of a new global enterprise resource planning (“ERP”) system, which will replace our existing operating and financial systems. The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of the business. The implementation is expected to occur in phases over the next several years. When the next phases of the updated processes are rolled out in connection with the ERP implementation, we will give appropriate consideration to whether these process changes necessitate changes in the design of and testing for effectiveness of internal controls over financial reporting.
There have been no changes in our internal control over financial reporting during the quarter ended October 3, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Information on legal proceedings is included in Note 16 to the Unaudited Consolidated Financial Statements.
Item 1A. Risk Factors.
When evaluating an investment in our Common Stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A, “Risk Factors,” of our 2020 Annual Report on Form 10-K, Part II and the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements filed with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table shows the purchases of shares of Common Stock made by or on behalf of Hershey, or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of Hershey, for each fiscal month in the three months ended October 3, 2021:
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||||||||||||
| (in thousands of dollars) | ||||||||||||||||||||||||||
| July 5 through August 1 | — | $ | — | — | $ | 109,983 | ||||||||||||||||||||
| August 2 through August 29 | — | $ | — | — | $ | 109,983 | ||||||||||||||||||||
| August 30 through October 3 | 134,000 | $ | 176.12 | — | $ | 109,983 | ||||||||||||||||||||
| Total | 134,000 | $ | 176.12 | — | ||||||||||||||||||||||
(1) During the three months ended October 3, 2021, 134,000 shares of Common Stock were purchased in open market transactions in connection with our practice of buying back shares sufficient to offset those issued under incentive compensation plans.
(2) In July 2018, our Board of Directors approved a $500 million share repurchase authorization. As of October 3, 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 (excluded from the table above). This program is to commence after the existing 2018 authorization is completed and is to be utilized at management’s discretion.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits.
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
| Exhibit Number | Description | |||||||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
101.SCH | XBRL Taxonomy Extension Schema | |||||||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |||||||
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarterly period ended October 3, 2021, formatted in Inline XBRL and contained in Exhibit 101. | |||||||
| * | Filed herewith | |||||||
| ** | Furnished herewith | |||||||
| + | Management contract, compensatory plan or arrangement | |||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE HERSHEY COMPANY | ||||||||||||||
(Registrant) | ||||||||||||||
| Date: | October 28, 2021 | /s/ Steven E. Voskuil | ||||||||||||
Steven E. Voskuil | ||||||||||||||
| Senior Vice President, Chief Financial Officer | ||||||||||||||
| (Principal Financial Officer) | ||||||||||||||
| Date: | October 28, 2021 | /s/ Jennifer L. McCalman | ||||||||||||
| Jennifer L. McCalman | ||||||||||||||
| Vice President, Chief Accounting Officer | ||||||||||||||
| (Principal Accounting Officer) | ||||||||||||||