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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended October 2, 2022
OR
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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 COMPANY
(Exact name of registrant as specified in its charter)
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Delaware |
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23-0691590 |
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(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
19 East Chocolate Avenue, Hershey, PA 17033
(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:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock, one dollar par value |
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HSY |
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New York Stock Exchange |
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):
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Large accelerated filer |
x |
Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
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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—146,968,799 shares, as of
October 30, 2022.
Class B Common Stock, one dollar par value—58,113,777 shares, as of
October 30, 2022.
THE HERSHEY COMPANY
Quarterly Report on Form 10-Q
For the Period Ended October 2, 2022
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Notes to Unaudited Consolidated Financial Statements
|
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The Hershey Company | Q3 2022 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 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Net sales |
|
$ |
2,728,153 |
|
|
$ |
2,359,839 |
|
|
$ |
7,766,956 |
|
|
$ |
6,645,209 |
|
|
Cost of sales
|
|
1,619,653 |
|
|
1,298,504 |
|
|
4,412,977 |
|
|
3,609,478 |
|
|
Gross profit
|
|
1,108,500 |
|
|
1,061,335 |
|
|
3,353,979 |
|
|
3,035,731 |
|
|
Selling, marketing and administrative expense
|
|
551,880 |
|
|
486,139 |
|
|
1,619,564 |
|
|
1,448,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business realignment costs |
|
— |
|
|
365 |
|
|
274 |
|
|
2,748 |
|
|
Operating profit
|
|
556,620 |
|
|
574,831 |
|
|
1,734,141 |
|
|
1,584,550 |
|
|
Interest expense, net |
|
35,378 |
|
|
30,154 |
|
|
101,970 |
|
|
97,655 |
|
|
Other (income) expense, net |
|
48,157 |
|
|
23,004 |
|
|
78,222 |
|
|
32,612 |
|
|
Income before income taxes |
|
473,085 |
|
|
521,673 |
|
|
1,553,949 |
|
|
1,454,283 |
|
|
Provision for income taxes |
|
73,598 |
|
|
76,746 |
|
|
305,428 |
|
|
311,255 |
|
|
Net income including noncontrolling interest |
|
399,487 |
|
|
444,927 |
|
|
1,248,521 |
|
|
1,143,028 |
|
|
Less: Net gain attributable to noncontrolling interest |
|
— |
|
|
— |
|
|
— |
|
|
1,072 |
|
|
Net income attributable to The Hershey Company
|
|
$ |
399,487 |
|
|
$ |
444,927 |
|
|
$ |
1,248,521 |
|
|
$ |
1,141,956 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share—basic: |
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
2.00 |
|
|
$ |
2.22 |
|
|
$ |
6.23 |
|
|
$ |
5.67 |
|
|
Class B common stock |
|
$ |
1.82 |
|
|
$ |
2.01 |
|
|
$ |
5.67 |
|
|
$ |
5.16 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share—diluted: |
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
1.94 |
|
|
$ |
2.14 |
|
|
$ |
6.04 |
|
|
$ |
5.49 |
|
|
Class B common stock |
|
$ |
1.81 |
|
|
$ |
2.01 |
|
|
$ |
5.65 |
|
|
$ |
5.14 |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per share: |
|
|
|
|
|
|
|
|
|
Common stock |
|
$ |
1.036 |
|
|
$ |
0.901 |
|
|
$ |
2.838 |
|
|
$ |
2.509 |
|
|
Class B common stock |
|
$ |
0.942 |
|
|
$ |
0.819 |
|
|
$ |
2.580 |
|
|
$ |
2.281 |
|
See Notes to Unaudited Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 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 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
|
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 |
|
|
|
|
|
$ |
399,487 |
|
|
|
|
|
|
$ |
444,927 |
|
|
|
|
|
|
$ |
1,248,521 |
|
|
|
|
|
|
$ |
1,143,028 |
|
|
Other comprehensive income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (losses) gains during
period |
|
$ |
(13,511) |
|
|
$ |
— |
|
|
(13,511) |
|
|
$ |
(11,571) |
|
|
$ |
— |
|
|
(11,571) |
|
|
$ |
(15,851) |
|
|
$ |
— |
|
|
(15,851) |
|
|
$ |
2,623 |
|
|
$ |
— |
|
|
2,623 |
|
|
Reclassification to earnings due to the sale of
businesses |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
5,210 |
|
|
— |
|
|
5,210 |
|
|
Pension and post-retirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (loss) gain and service cost |
|
(27,909) |
|
|
6,704 |
|
|
(21,205) |
|
|
(8,793) |
|
|
2,093 |
|
|
(6,700) |
|
|
(66,720) |
|
|
13,895 |
|
|
(52,825) |
|
|
11,912 |
|
|
(2,835) |
|
|
9,077 |
|
|
Reclassification to earnings |
|
6,904 |
|
|
(1,657) |
|
|
5,247 |
|
|
8,457 |
|
|
(671) |
|
|
7,786 |
|
|
20,345 |
|
|
(4,883) |
|
|
15,462 |
|
|
24,246 |
|
|
(4,739) |
|
|
19,507 |
|
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) on cash flow hedging derivatives |
|
891 |
|
|
(706) |
|
|
185 |
|
|
5,779 |
|
|
(2,153) |
|
|
3,626 |
|
|
245 |
|
|
(1,343) |
|
|
(1,098) |
|
|
(2,200) |
|
|
(2,312) |
|
|
(4,512) |
|
|
Reclassification to earnings |
|
2,258 |
|
|
(643) |
|
|
1,615 |
|
|
4,709 |
|
|
(119) |
|
|
4,590 |
|
|
9,143 |
|
|
(1,666) |
|
|
7,477 |
|
|
13,527 |
|
|
(501) |
|
|
13,026 |
|
|
Total other comprehensive income, net of tax |
|
$ |
(31,367) |
|
|
$ |
3,698 |
|
|
(27,669) |
|
|
$ |
(1,419) |
|
|
$ |
(850) |
|
|
(2,269) |
|
|
$ |
(52,838) |
|
|
$ |
6,003 |
|
|
(46,835) |
|
|
$ |
55,318 |
|
|
$ |
(10,387) |
|
|
44,931 |
|
|
Total comprehensive income including noncontrolling
interest |
|
|
|
|
|
$ |
371,818 |
|
|
|
|
|
|
$ |
442,658 |
|
|
|
|
|
|
$ |
1,201,686 |
|
|
|
|
|
|
$ |
1,187,959 |
|
|
Comprehensive (loss) income attributable to noncontrolling
interest |
|
|
|
|
|
— |
|
|
|
|
|
|
(5) |
|
|
|
|
|
|
— |
|
|
|
|
|
|
6,321 |
|
|
Comprehensive income attributable to The Hershey
Company |
|
|
|
|
|
$ |
371,818 |
|
|
|
|
|
|
$ |
442,663 |
|
|
|
|
|
|
$ |
1,201,686 |
|
|
|
|
|
|
$ |
1,181,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Unaudited Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 3
|
|
THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
December 31, 2021 |
|
|
(unaudited) |
|
|
|
ASSETS |
|
|
|
|
|
Current assets: |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
327,741 |
|
|
$ |
329,266 |
|
|
Accounts receivable—trade, net |
|
929,482 |
|
|
671,464 |
|
|
Inventories |
|
1,184,385 |
|
|
988,511 |
|
|
|
|
|
|
|
Prepaid expenses and other |
|
251,126 |
|
|
256,965 |
|
|
Total current assets |
|
2,692,734 |
|
|
2,246,206 |
|
|
Property, plant and equipment, net |
|
2,622,587 |
|
|
2,586,187 |
|
|
Goodwill |
|
2,604,889 |
|
|
2,633,174 |
|
|
Other intangibles |
|
1,985,099 |
|
|
2,037,588 |
|
|
Other non-current assets |
|
888,406 |
|
|
868,203 |
|
|
Deferred income taxes |
|
39,192 |
|
|
40,873 |
|
|
Total assets |
|
$ |
10,832,907 |
|
|
$ |
10,412,231 |
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payable |
|
$ |
915,299 |
|
|
$ |
692,338 |
|
|
Accrued liabilities |
|
845,472 |
|
|
855,638 |
|
|
Accrued income taxes |
|
81,771 |
|
|
3,070 |
|
|
Short-term debt |
|
793,871 |
|
|
939,423 |
|
|
Current portion of long-term debt |
|
752,201 |
|
|
2,844 |
|
|
Total current liabilities |
|
3,388,614 |
|
|
2,493,313 |
|
|
Long-term debt |
|
3,340,671 |
|
|
4,086,627 |
|
|
Other long-term liabilities |
|
750,870 |
|
|
787,058 |
|
|
Deferred income taxes |
|
269,672 |
|
|
288,004 |
|
|
Total liabilities |
|
7,749,827 |
|
|
7,655,002 |
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
The Hershey Company stockholders’ equity |
|
|
|
|
|
Preferred stock, shares issued: none in 2022 and 2021
|
|
— |
|
|
— |
|
|
Common stock, shares issued: 163,439,248 at October 2, 2022
and 160,939,248 at December 31, 2021
|
|
163,439 |
|
|
160,939 |
|
|
Class B common stock, shares issued: 58,113,777 at October 2,
2022 and 60,613,777 at December 31, 2021
|
|
58,114 |
|
|
60,614 |
|
|
Additional paid-in capital |
|
1,280,462 |
|
|
1,260,331 |
|
|
Retained earnings |
|
3,401,198 |
|
|
2,719,936 |
|
|
Treasury—common stock shares, at cost: 16,484,611 at
October 2, 2022 and 15,444,011 at December 31,
2021
|
|
(1,524,083) |
|
|
(1,195,376) |
|
|
Accumulated other comprehensive loss |
|
(296,050) |
|
|
(249,215) |
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity |
|
3,083,080 |
|
|
2,757,229 |
|
|
Total liabilities and stockholders’ equity |
|
$ |
10,832,907 |
|
|
$ |
10,412,231 |
|
See Notes to Unaudited Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 4
|
|
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
October 2, 2022 |
|
October 3, 2021 |
|
Operating Activities |
|
|
|
|
Net income including noncontrolling interest |
$ |
1,248,521 |
|
|
$ |
1,143,028 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
Depreciation and amortization |
279,082 |
|
|
231,953 |
|
|
Stock-based compensation expense |
50,640 |
|
|
51,009 |
|
|
Deferred income taxes |
(9,751) |
|
|
762 |
|
|
|
|
|
|
|
|
|
|
Write-down of equity investments |
70,754 |
|
|
28,734 |
|
|
|
|
|
|
Other |
92,632 |
|
|
77,548 |
|
|
Changes in assets and liabilities, net of business acquisitions and
divestitures: |
|
|
|
|
Accounts receivable—trade, net |
(259,064) |
|
|
(222,864) |
|
|
Inventories |
(201,425) |
|
|
(38,864) |
|
|
Prepaid expenses and other current assets |
(40,565) |
|
|
11,908 |
|
|
Accounts payable and accrued liabilities |
248,230 |
|
|
76,446 |
|
|
Accrued income taxes |
124,965 |
|
|
92,236 |
|
|
Contributions to pension and other benefit plans |
(16,639) |
|
|
(38,576) |
|
|
Other assets and liabilities |
(27,186) |
|
|
(9,603) |
|
|
Net cash provided by operating activities |
1,560,194 |
|
|
1,403,717 |
|
|
Investing Activities |
|
|
|
|
Capital additions (including software) |
(359,993) |
|
|
(347,450) |
|
|
|
|
|
|
|
|
|
|
Equity investments in tax credit qualifying
partnerships |
(159,713) |
|
|
(75,917) |
|
|
Business acquisitions, net of cash and cash equivalents
acquired |
— |
|
|
(419,501) |
|
|
Other investing activities |
9,730 |
|
|
3,129 |
|
|
|
|
|
|
Net cash used in investing activities |
(509,976) |
|
|
(839,739) |
|
|
Financing Activities |
|
|
|
|
Net (decrease) increase in short-term debt |
(145,552) |
|
|
339,981 |
|
|
|
|
|
|
Repayment of long-term debt and finance leases |
(3,321) |
|
|
(438,029) |
|
|
|
|
|
|
|
|
|
|
Cash dividends paid |
(567,989) |
|
|
(505,194) |
|
|
Repurchase of common stock |
(355,271) |
|
|
(457,946) |
|
|
Proceeds from exercised stock options |
30,824 |
|
|
39,499 |
|
|
Taxes withheld and paid on employee stock awards
|
(34,722) |
|
|
(16,137) |
|
|
|
|
|
|
Net cash used in financing activities |
(1,076,031) |
|
|
(1,037,826) |
|
|
Effect of exchange rate changes on cash and cash
equivalents |
24,288 |
|
|
(6,057) |
|
|
Decrease in cash and cash equivalents, including cash classified as
held for sale |
(1,525) |
|
|
(479,905) |
|
|
Less: Increase in cash and cash equivalents classified as held for
sale |
— |
|
|
11,434 |
|
|
Net decrease in cash and cash equivalents |
(1,525) |
|
|
(468,471) |
|
|
Cash and cash equivalents, beginning of period |
329,266 |
|
|
1,143,987 |
|
|
Cash and cash equivalents, end of period |
$ |
327,741 |
|
|
$ |
675,516 |
|
|
Supplemental Disclosure |
|
|
|
|
Interest paid |
$ |
90,787 |
|
|
$ |
92,397 |
|
|
Income taxes paid |
190,724 |
|
|
199,735 |
|
See Notes to Unaudited Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 5
|
|
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Three Months Ended October 2, 2022 and October 3,
2021
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock |
|
Common
Stock |
|
Class B
Common
Stock |
|
Additional
Paid-in
Capital |
|
Retained
Earnings |
|
Treasury
Common
Stock |
|
Accumulated Other
Comprehensive
Loss |
|
Total
Stockholders’
Equity |
|
Balance, July 3, 2022
|
|
$ |
— |
|
|
$ |
163,439 |
|
|
$ |
58,114 |
|
|
$ |
1,258,091 |
|
|
$ |
3,208,598 |
|
|
$ |
(1,528,121) |
|
|
$ |
(268,381) |
|
|
$ |
2,891,740 |
|
|
Net income |
|
|
|
|
|
|
|
|
|
399,487 |
|
|
|
|
|
|
399,487 |
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,669) |
|
|
(27,669) |
|
|
Dividends (including dividend equivalents): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $1.036 per share
|
|
|
|
|
|
|
|
|
|
(152,144) |
|
|
|
|
|
|
(152,144) |
|
|
Class B Common Stock, $0.942 per share
|
|
|
|
|
|
|
|
|
|
(54,743) |
|
|
|
|
|
|
(54,743) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
18,132 |
|
|
|
|
|
|
|
|
18,132 |
|
|
Exercise of stock options and incentive-based
transactions |
|
|
|
|
|
|
|
4,239 |
|
|
|
|
4,038 |
|
|
|
|
8,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 2, 2022
|
|
$ |
— |
|
|
$ |
163,439 |
|
|
$ |
58,114 |
|
|
$ |
1,280,462 |
|
|
$ |
3,401,198 |
|
|
$ |
(1,524,083) |
|
|
$ |
(296,050) |
|
|
$ |
3,083,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$ |
— |
|
|
$ |
160,939 |
|
|
$ |
60,614 |
|
|
$ |
1,218,708 |
|
|
$ |
2,301,805 |
|
|
$ |
(1,180,881) |
|
|
$ |
(296,136) |
|
|
$ |
8,844 |
|
|
$ |
2,273,893 |
|
|
Net income |
|
|
|
|
|
|
|
|
|
444,927 |
|
|
|
|
|
|
— |
|
|
444,927 |
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,264) |
|
|
(5) |
|
|
(2,269) |
|
|
Dividends (including dividend equivalents): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $0.901 per share
|
|
|
|
|
|
|
|
|
|
(131,551) |
|
|
|
|
|
|
|
|
(131,551) |
|
|
Class B Common Stock, $0.819 per share
|
|
|
|
|
|
|
|
|
|
(49,643) |
|
|
|
|
|
|
|
|
(49,643) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
18,903 |
|
|
|
|
|
|
|
|
|
|
18,903 |
|
|
Exercise of stock options and incentive-based
transactions |
|
|
|
|
|
|
|
2,401 |
|
|
|
|
4,072 |
|
|
|
|
|
|
6,473 |
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
(23,600) |
|
|
|
|
|
|
(23,600) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 3, 2021
|
|
$ |
— |
|
|
$ |
160,939 |
|
|
$ |
60,614 |
|
|
$ |
1,240,012 |
|
|
$ |
2,565,538 |
|
|
$ |
(1,200,409) |
|
|
$ |
(298,400) |
|
|
$ |
8,839 |
|
|
$ |
2,537,133 |
|
See Notes to Unaudited Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 6
|
|
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Nine Months Ended October 2, 2022 and October 3,
2021
(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 |
|
|
|
Total
Stockholders’
Equity |
|
Balance, December 31, 2021
|
|
$ |
— |
|
|
$ |
160,939 |
|
|
$ |
60,614 |
|
|
$ |
1,260,331 |
|
|
$ |
2,719,936 |
|
|
$ |
(1,195,376) |
|
|
$ |
(249,215) |
|
|
|
|
$ |
2,757,229 |
|
|
Net income |
|
|
|
|
|
|
|
|
|
1,248,521 |
|
|
|
|
|
|
|
|
1,248,521 |
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,835) |
|
|
|
|
(46,835) |
|
|
Dividends (including dividend equivalents): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $2.838 per share
|
|
|
|
|
|
|
|
|
|
(414,869) |
|
|
|
|
|
|
|
|
(414,869) |
|
|
Class B Common Stock, $2.58 per share
|
|
|
|
|
|
|
|
|
|
(152,390) |
|
|
|
|
|
|
|
|
(152,390) |
|
|
Conversion of Class B Common Stock into Common Stock |
|
|
|
2,500 |
|
|
(2,500) |
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Stock-based compensation |
|
|
|
|
|
|
|
50,592 |
|
|
|
|
|
|
|
|
|
|
50,592 |
|
|
Exercise of stock options and incentive-based
transactions |
|
|
|
|
|
|
|
(30,461) |
|
|
|
|
26,564 |
|
|
|
|
|
|
(3,897) |
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
(355,271) |
|
|
|
|
|
|
(355,271) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 2, 2022
|
|
$ |
— |
|
|
$ |
163,439 |
|
|
$ |
58,114 |
|
|
$ |
1,280,462 |
|
|
$ |
3,401,198 |
|
|
$ |
(1,524,083) |
|
|
$ |
(296,050) |
|
|
|
|
$ |
3,083,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2020
|
|
$ |
— |
|
|
$ |
160,939 |
|
|
$ |
60,614 |
|
|
$ |
1,191,200 |
|
|
$ |
1,928,673 |
|
|
$ |
(768,992) |
|
|
$ |
(338,082) |
|
|
$ |
3,531 |
|
|
$ |
2,237,883 |
|
|
Net income |
|
|
|
|
|
|
|
|
|
1,141,956 |
|
|
|
|
|
|
1,072 |
|
|
1,143,028 |
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
39,682 |
|
|
5,249 |
|
|
44,931 |
|
|
Dividends (including dividend equivalents): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $2.509 per share
|
|
|
|
|
|
|
|
|
|
(366,831) |
|
|
|
|
|
|
|
|
(366,831) |
|
|
Class B Common Stock, $2.281 per share
|
|
|
|
|
|
|
|
|
|
(138,260) |
|
|
|
|
|
|
|
|
(138,260) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
51,979 |
|
|
|
|
|
|
|
|
|
|
51,979 |
|
|
Exercise of stock options and incentive-based
transactions |
|
|
|
|
|
|
|
(3,167) |
|
|
|
|
26,529 |
|
|
|
|
|
|
23,362 |
|
|
Repurchase of common stock |
|
|
|
|
|
|
|
|
|
|
|
(457,946) |
|
|
|
|
|
|
(457,946) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divestiture of noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,013) |
|
|
(1,013) |
|
|
Balance, October 3, 2021
|
|
$ |
— |
|
|
$ |
160,939 |
|
|
$ |
60,614 |
|
|
$ |
1,240,012 |
|
|
$ |
2,565,538 |
|
|
$ |
(1,200,409) |
|
|
$ |
(298,400) |
|
|
$ |
8,839 |
|
|
$ |
2,537,133 |
|
See Notes to Unaudited Consolidated Financial
Statements.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 7
|
|
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.
Operating results for the quarter ended October 2, 2022 may
not be indicative of the results that may be expected for the year
ending December 31, 2022 because of seasonal effects on our
business. These financial statements should be read in conjunction
with our Annual Report on Form 10-K for the year ended
December 31, 2021 (our “2021 Annual Report on Form 10-K”),
which provides a more complete understanding of our accounting
policies, financial position, operating results and other
matters.
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, beginning in 2021
and throughout 2022, ongoing 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. and globally,
including inflation on many consumer products, labor shortages and
demand outpacing supply. We continue to work 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, rising levels of inflation,
the spread of 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 March 2020, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“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
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 8
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
rates. Entities may apply this ASU upon issuance through December
31, 2022 on a prospective basis. We early adopted the provisions of
this ASU in the first quarter of 2022. Adoption of the new standard
did not have a material impact on our consolidated financial
statements.
Recently Issued Accounting Pronouncements Not Yet
Adopted
In October 2021, the FASB issued ASU No. 2021-08,
Business Combinations (Topic 805): Accounting for Contract Assets
and Contract Liabilities from Contracts with Customers.
This ASU requires an acquirer to recognize and measure contract
assets and contract liabilities acquired in a business combination
in accordance with
Revenue from Contracts with Customers (Topic 606)
rather than adjust them to fair value at the acquisition date. ASU
2021-08 is effective for annual periods beginning after December
15, 2022 and interim periods within those annual periods. This ASU
should be applied prospectively to business combinations occurring
on or after the date of adoption. Evaluation of this new standard
is dependent on multiple circumstances including the timing and
complexity of completed business combinations. As a result, we
intend to adopt the provisions of this ASU in the first quarter of
2023.
In September 2022, the FASB issued ASU No. 2022-04,
Liabilities—Supplier Finance Programs (Subtopic
405-50):
Disclosure of Supplier Finance Program
Obligations.
This ASU requires a buyer in a supplier finance program to disclose
qualitative and quantitative information about the program
including the program’s nature, activity during the period, changes
from period to period and potential magnitude. ASU 2022-04 is
effective for annual periods beginning after December 15, 2022 and
interim periods within those annual periods. A rollforward of
obligations during the annual period, including the amount of
obligations confirmed and obligations subsequently paid, is
effective for annual periods beginning after December 15, 2023 with
early adoption permitted. This ASU should be applied
retrospectively to each period in which a balance sheet is
presented, except for the amendment on rollforward information,
which should be applied prospectively. Adoption of the new standard
is not expected to have a material impact on our consolidated
financial statements.
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 ACQUISITIONS AND DIVESTITURE
2021 Activity
Pretzels Inc.
On December 14, 2021, we completed the acquisition of Pretzels
Inc. (“Pretzels”), previously a privately held company that
manufactures and sells pretzels and other salty snacks for other
branded products and private labels in the United States. Pretzels
is an industry leader in the pretzel category with a product
portfolio that includes filled, gluten free and seasoned pretzels,
as well as extruded snacks that complements Hershey’s snacks
portfolio. Based in Bluffton, Indiana, Pretzels operates three
manufacturing locations in Indiana and Kansas. Pretzels provides
Hershey deep pretzel category and product expertise and the
manufacturing capabilities to support brand growth and future
pretzel innovation. The cash consideration paid for Pretzels
totaled $304,334 and consisted of cash on hand and short-term
borrowings. Acquisition-related costs for the Pretzels acquisition
were immaterial.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 9
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
The acquisition has been accounted for as a business combination
and, accordingly, Pretzels has been included within the North
America Salty Snacks segment from the date of acquisition. The
purchase consideration was allocated to assets acquired and
liabilities assumed based on their respective fair values as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Allocation (1) |
|
Adjustments |
|
Final Allocation |
|
Goodwill |
$ |
165,301 |
|
|
$ |
890 |
|
|
$ |
166,191 |
|
|
Other intangible assets |
32,100 |
|
|
(6,000) |
|
|
26,100 |
|
|
Current assets acquired |
30,717 |
|
|
118 |
|
|
30,835 |
|
|
Property, plant and equipment, net |
96,099 |
|
|
4,617 |
|
|
100,716 |
|
|
Other non-current assets, primarily operating lease ROU
assets |
111,787 |
|
|
— |
|
|
111,787 |
|
|
Deferred income taxes |
541 |
|
|
232 |
|
|
773 |
|
|
Current liabilities assumed |
(22,713) |
|
|
— |
|
|
(22,713) |
|
|
Other long-term liabilities, primarily operating lease
liabilities |
(109,355) |
|
|
— |
|
|
(109,355) |
|
|
Net assets acquired |
$ |
304,477 |
|
|
$ |
(143) |
|
|
$ |
304,334 |
|
(1) As reported in the Company’s 2021 Annual Report on Form
10-K.
The purchase price allocation presented above has been finalized as
of the third quarter of 2022. The measurement period adjustments to
the initial allocation were based on more detailed information
obtained about the specific assets acquired and liabilities
assumed, specifically, post-closing adjustments to the working
capital acquired including certain holdbacks.
Goodwill was determined as the excess of the purchase price over
the fair value of the net assets acquired (including the
identifiable intangible assets). A portion of goodwill derived from
this acquisition is deductible 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 Pretzels’ products.
Other intangible assets include trademarks valued at $5,700 and
customer relationships valued at $20,400. Trademarks were assigned
an estimated useful life of five years and customer relationships
were assigned an estimated useful life of 19 years.
Dot's Pretzels, LLC
On December 13, 2021, we completed the acquisition of Dot’s
Pretzels, LLC (“Dot’s”), previously a privately held company that
produces and sells pretzels and other snack food products to
retailers and distributors in the United States, with
Dot’s Homestyle Pretzels
snacks as its primary product. Dot’s is the fastest-growing scale
brand in the pretzel category and complements Hershey’s snacks
portfolio. The cash consideration paid for Dot’s totaled $891,169
and consisted of cash on hand and short-term borrowings.
Acquisition-related costs for the Dot’s acquisition were
immaterial.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 10
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
The acquisition has been accounted for as a business combination
and, accordingly, Dot’s has been included within the North America
Salty Snacks segment from the date of acquisition. The purchase
consideration was allocated to assets acquired and liabilities
assumed based on their respective fair values as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Allocation (1) |
|
Adjustments |
|
Final Allocation |
|
Goodwill |
$ |
303,345 |
|
|
$ |
(18,918) |
|
|
$ |
284,427 |
|
|
Other intangible assets |
526,300 |
|
|
16,800 |
|
|
543,100 |
|
|
Current assets acquired |
51,121 |
|
|
— |
|
|
51,121 |
|
|
Property, plant and equipment, net |
39,256 |
|
|
1,010 |
|
|
40,266 |
|
|
Other non-current assets |
2,201 |
|
|
— |
|
|
2,201 |
|
|
Other liabilities assumed, primarily current
liabilities |
(28,057) |
|
|
(1,889) |
|
|
(29,946) |
|
|
Net assets acquired |
$ |
894,166 |
|
|
$ |
(2,997) |
|
|
$ |
891,169 |
|
(1) As reported in the Company’s 2021 Annual Report on Form
10-K.
The purchase price allocation presented above has been finalized as
of the third quarter of 2022. The measurement period adjustments to
the initial allocation were based on more detailed information
obtained about the specific assets acquired and liabilities
assumed, specifically, the refinement of certain assumptions in the
value of customer relationships based on an analysis of historical
customer-specific data and post-closing adjustments to the working
capital acquired including certain holdbacks.
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 goodwill derived from this
acquisition is deductible 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 Dot’s products.
Other intangible assets include trademarks valued at $336,600 and
customer relationships valued at $206,500. Trademarks were assigned
an estimated useful life of 33 years and customer relationships
were assigned an estimated useful life of 18 years.
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 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 were 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. Based on financial results through December 31,
2021, the fair value was reduced during the fourth quarter of 2021
to $1,250, with the adjustment to fair value recorded in the
selling, marketing and administrative (“SM&A”) expense caption
within the Consolidated Statements of Income. We paid this
contingent consideration during the second quarter of 2022.
Acquisition-related costs for the Lily’s acquisition were
immaterial.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 11
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
The acquisition has been accounted for as a business combination
and, accordingly, Lily’s has been included within the North America
Confectionery 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:
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
175,826 |
|
|
Other intangible assets |
|
235,800 |
|
|
Other assets acquired, primarily current assets |
|
33,092 |
|
|
Other liabilities assumed, primarily current
liabilities |
|
(9,620) |
|
|
Deferred income taxes |
|
(7,888) |
|
|
Net assets acquired |
|
$ |
427,210 |
|
The purchase price allocation presented above has been finalized as
of the fourth quarter of 2021 and includes an immaterial amount of
measurement period adjustments. The measurement period adjustments
to the initial allocation were based on more detailed information
obtained about the specific assets acquired and liabilities
assumed.
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 deductible 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., which was previously included within the
International segment results in our consolidated financial
statements. Total proceeds from the divestiture and the impact on
our consolidated financial statements were immaterial and were
recorded in the SM&A expense caption within the Consolidated
Statements of Income.
3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill by reportable segment
for the nine months ended October 2, 2022 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America Confectionery |
|
North America Salty Snacks |
|
International |
|
Total |
|
Balance at December 31, 2021
|
|
$ |
2,026,006 |
|
|
$ |
589,798 |
|
|
$ |
17,370 |
|
|
$ |
2,633,174 |
|
|
|
|
|
|
|
|
|
|
Measurement period adjustments (see
Note
2)
|
|
— |
|
|
(18,028) |
|
|
— |
|
|
(18,028) |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
(9,733) |
|
|
— |
|
|
(524) |
|
|
(10,257) |
|
|
Balance at October 2, 2022
|
|
$ |
2,016,273 |
|
|
$ |
571,770 |
|
|
$ |
16,846 |
|
|
$ |
2,604,889 |
|
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 12
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
The following table provides the gross carrying amount and
accumulated amortization for each major class of intangible
asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
December 31, 2021 |
|
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
Trademarks |
|
$ |
1,700,950 |
|
|
$ |
(177,195) |
|
|
$ |
1,705,390 |
|
|
$ |
(141,760) |
|
|
Customer-related |
|
512,539 |
|
|
(85,687) |
|
|
504,667 |
|
|
(65,131) |
|
|
Patents |
|
7,890 |
|
|
(7,890) |
|
|
8,623 |
|
|
(8,623) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2,221,379 |
|
|
(270,772) |
|
|
2,218,680 |
|
|
(215,514) |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
Trademarks |
|
34,492 |
|
|
|
|
34,422 |
|
|
|
|
Total other intangible assets
|
|
$ |
1,985,099 |
|
|
|
|
$ |
2,037,588 |
|
|
|
Total amortization expense for the three months ended
October 2, 2022 and October 3, 2021 was $19,909 and
$13,936, respectively. Total amortization expense for the nine
months ended October 2, 2022 and October 3, 2021 was
$59,827 and $37,192, respectively. In 2022, our amortization
expense increased as a result of our 2021 business combination
activity (see
Note
2).
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 2, 2022, 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 2021 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 2, 2022 |
|
December 31, 2021 |
|
Short-term foreign bank borrowings against lines of
credit |
$ |
130,343 |
|
$ |
119,038 |
|
U.S. commercial paper |
663,528 |
|
820,385 |
|
Total short-term debt |
$ |
793,871 |
|
$ |
939,423 |
|
Weighted average interest rate on outstanding commercial
paper |
3.0 |
% |
|
0.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 13
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
Long-term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Type and Rate
|
|
Maturity Date
|
|
October 2, 2022 |
|
December 31, 2021 |
|
2.625% Notes
|
|
May 1, 2023 |
|
250,000 |
|
|
250,000 |
|
|
3.375% Notes
|
|
May 15, 2023 |
|
500,000 |
|
|
500,000 |
|
|
2.050% Notes
|
|
November 15, 2024 |
|
300,000 |
|
|
300,000 |
|
|
0.900% Notes
|
|
June 1, 2025 |
|
300,000 |
|
|
300,000 |
|
|
3.200% Notes
|
|
August 21, 2025 |
|
300,000 |
|
|
300,000 |
|
|
2.300% Notes
|
|
August 15, 2026 |
|
500,000 |
|
|
500,000 |
|
|
7.200% Debentures
|
|
August 15, 2027 |
|
193,639 |
|
|
193,639 |
|
|
2.450% Notes
|
|
November 15, 2029 |
|
300,000 |
|
|
300,000 |
|
|
1.700% Notes
|
|
June 1, 2030 |
|
350,000 |
|
|
350,000 |
|
|
3.375% Notes
|
|
August 15, 2046 |
|
300,000 |
|
|
300,000 |
|
|
3.125% Notes
|
|
November 15, 2049 |
|
400,000 |
|
400,000 |
|
2.650% Notes
|
|
June 1, 2050 |
|
350,000 |
|
350,000 |
Finance lease obligations (see
Note
7)
|
|
|
|
69,719 |
|
69,146 |
|
Net impact of interest rate swaps, debt issuance costs and
unamortized debt discounts |
|
|
|
(20,486) |
|
(23,314) |
|
Total long-term debt |
|
|
|
4,092,872 |
|
|
4,089,471 |
|
|
Less—current portion |
|
|
|
752,201 |
|
2,844 |
|
Long-term portion |
|
|
|
$ |
3,340,671 |
|
|
$ |
4,086,627 |
|
Interest Expense
Net interest expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Interest expense |
|
$ |
38,520 |
|
|
$ |
33,066 |
|
|
$ |
109,526 |
|
|
$ |
106,597 |
|
|
Capitalized interest |
|
(2,487) |
|
|
(2,380) |
|
|
(6,155) |
|
|
(7,181) |
|
|
Interest expense
|
|
36,033 |
|
|
30,686 |
|
|
103,371 |
|
|
99,416 |
|
|
Interest income |
|
(655) |
|
|
(532) |
|
|
(1,401) |
|
|
(1,761) |
|
|
Interest expense, net
|
|
$ |
35,378 |
|
|
$ |
30,154 |
|
|
$ |
101,970 |
|
|
$ |
97,655 |
|
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 14
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
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 exchange-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 $679,205 as
of October 2, 2022 and $313,200 as of December 31,
2021.
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 $33,002 at October 2, 2022 and $94,623 at
December 31, 2021. 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 $537 at October 2, 2022 and $2,993 at
December 31, 2021. 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.
Interest Rate Risk
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 2, 2022 and December 31,
2021 was $19,768 and $24,975, respectively.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 15
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
The following table presents the classification of derivative
assets and liabilities within the Consolidated Balance Sheets as of
October 2, 2022 and December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2022 |
|
December 31, 2021 |
|
|
Assets (1) |
|
Liabilities (1) |
|
Assets (1) |
|
Liabilities (1) |
|
Derivatives designated as cash flow hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
8,383 |
|
|
$ |
4,945 |
|
|
$ |
2,949 |
|
|
$ |
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
Commodities futures and options (2) |
|
5,797 |
|
|
493 |
|
|
2,423 |
|
|
1,376 |
|
|
Deferred compensation derivatives |
|
— |
|
|
1,098 |
|
|
2,412 |
|
|
— |
|
|
Foreign exchange contracts |
|
380 |
|
|
148 |
|
|
550 |
|
|
— |
|
|
|
|
6,177 |
|
|
1,739 |
|
|
5,385 |
|
|
1,376 |
|
|
Total |
|
$ |
14,560 |
|
|
$ |
6,684 |
|
|
$ |
8,334 |
|
|
$ |
2,087 |
|
(1)Derivative
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.
(2)As
of October 2, 2022, amounts reflected on a net basis in
liabilities were assets of $44,502 and liabilities of $39,740,
which are associated with cash transfers receivable or payable on
commodities futures contracts reflecting the change in quoted
market prices on the last trading day for the period. The
comparable amounts reflected on a net basis in liabilities at
December 31, 2021 were assets of $31,774 and liabilities of
$32,701. At October 2, 2022 and December 31, 2021, the
remaining amount reflected in assets and liabilities related to the
fair value of other non-exchange traded derivative instruments,
respectively.
Income Statement Impact of Derivative Instruments
The effect of derivative instruments on the Consolidated Statements
of Income for the three months ended October 2, 2022 and
October 3, 2021 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) |
|
|
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
|
|
|
|
Commodities futures and options
|
|
$ |
(14,044) |
|
|
$ |
33,643 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
Foreign exchange contracts |
|
(39) |
|
|
1 |
|
|
891 |
|
|
5,779 |
|
|
421 |
|
|
(2,030) |
|
|
|
|
|
|
Interest rate swap agreements
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(2,679) |
|
|
(2,679) |
|
|
|
|
|
|
Deferred compensation derivatives
|
|
(1,098) |
|
|
82 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
Total
|
|
$ |
(15,181) |
|
|
$ |
33,726 |
|
|
$ |
891 |
|
|
$ |
5,779 |
|
|
$ |
(2,258) |
|
|
$ |
(4,709) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 16
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
The effect of derivative instruments on the Consolidated Statements
of Income for the nine months ended October 2, 2022 and
October 3, 2021 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) |
|
|
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
|
|
|
|
Commodities futures and options
|
|
$ |
28,027 |
|
|
$ |
64,199 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
Foreign exchange contracts |
|
(173) |
|
|
574 |
|
|
245 |
|
|
(2,200) |
|
|
(956) |
|
|
(5,174) |
|
|
|
|
|
|
Interest rate swap agreements
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(8,187) |
|
|
(8,353) |
|
|
|
|
|
|
Deferred compensation derivatives
|
|
(6,142) |
|
|
3,592 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
Total
|
|
$ |
21,712 |
|
|
$ |
68,365 |
|
|
$ |
245 |
|
|
$ |
(2,200) |
|
|
$ |
(9,143) |
|
|
$ |
(13,527) |
|
|
|
|
|
(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 $7,479 as of
October 2, 2022. This amount is primarily associated with
interest rate swap agreements.
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 not have any Level 3 financial assets or liabilities, nor
were there any transfers between levels during the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 17
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
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 2, 2022 and December 31,
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (Liabilities) |
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
October 2, 2022:
|
|
|
|
|
|
|
|
|
|
Derivative Instruments: |
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (1) |
|
$ |
— |
|
$ |
8,763 |
|
$ |
— |
|
$ |
8,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities futures and options (3) |
|
5,797 |
|
|
— |
|
|
— |
|
|
5,797 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (1) |
|
— |
|
|
5,093 |
|
|
— |
|
|
5,093 |
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation derivatives (2) |
|
— |
|
|
1,098 |
|
|
— |
|
|
1,098 |
|
|
Commodities futures and options (3) |
|
493 |
|
|
— |
|
|
— |
|
|
493 |
|
|
December 31, 2021:
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (1) |
|
$ |
— |
|
$ |
3,499 |
|
$ |
— |
|
$ |
3,499 |
|
|
|
|
|
|
|
|
|
|
Deferred compensation derivatives (2) |
|
— |
|
|
2,412 |
|
|
— |
|
|
2,412 |
|
|
Commodities futures and options (3) |
|
2,423 |
|
|
— |
|
|
— |
|
|
2,423 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
Foreign exchange contracts (1) |
|
— |
|
|
711 |
|
|
— |
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodities futures and options (3) |
|
1,376 |
|
|
— |
|
|
— |
|
|
1,376 |
|
(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.
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 2, 2022 and December 31, 2021
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 2, 2022 |
|
December 31, 2021 |
|
October 2, 2022 |
|
December 31, 2021 |
|
Current portion of long-term debt |
|
$ |
745,579 |
|
$ |
2,844 |
|
$ |
752,201 |
|
$ |
2,844 |
|
Long-term debt |
|
2,827,974 |
|
|
4,274,304 |
|
|
3,340,671 |
|
|
4,086,627 |
|
|
Total |
|
$ |
3,573,553 |
|
|
$ |
4,277,148 |
|
|
$ |
4,092,872 |
|
|
$ |
4,089,471 |
|
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 18
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
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 acquisitions of Pretzels, Dot’s and Lily’s
during 2021, as discussed in
Note
2,
we used various valuation techniques to determine fair value, with
the primary techniques being discounted cash flow analysis and the
relief-from-royalty, 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 2, 2022 and
October 3, 2021, we recorded no impairment
charges.
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
consolidated 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.
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 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 2, 2022 and October 3, 2021 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Lease expense |
|
Classification |
|
October 2, 2022 |
|
October 3, 2021 |
|
Operating lease cost |
|
Cost of sales or SM&A (1) |
|
$ |
11,812 |
|
|
$ |
10,764 |
|
|
Finance lease cost: |
|
|
|
|
|
|
|
Amortization of ROU assets |
|
Depreciation and amortization (1) |
|
1,539 |
|
|
1,971 |
|
|
Interest on lease liabilities |
|
Interest expense, net |
|
1,030 |
|
|
1,100 |
|
|
Net lease cost (2) |
|
|
|
$ |
14,381 |
|
|
$ |
13,835 |
|
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 19
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
The components of lease expense for the nine months ended
October 2, 2022 and October 3, 2021 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Lease expense |
|
Classification |
|
October 2, 2022 |
|
October 3, 2021 |
|
Operating lease cost |
|
Cost of sales or SM&A (1) |
|
$ |
37,309 |
|
|
$ |
33,318 |
|
|
Finance lease cost: |
|
|
|
|
|
|
|
Amortization of ROU assets |
|
Depreciation and amortization (1) |
|
4,989 |
|
|
6,032 |
|
|
Interest on lease liabilities |
|
Interest expense, net |
|
3,083 |
|
|
3,321 |
|
|
Net lease cost (2) |
|
|
|
$ |
45,381 |
|
|
$ |
42,671 |
|
(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 2, 2022 |
|
December 31, 2021 |
|
Weighted-average remaining lease term (years) |
|
|
|
|
|
Operating leases |
|
15.2 |
|
15.4 |
|
Finance leases |
|
29.2 |
|
30.0 |
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
Operating leases |
|
3.1 |
% |
|
3.1 |
% |
|
Finance leases |
|
6.1 |
% |
|
6.1 |
% |
Supplemental balance sheet information related to leases were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leases |
|
Classification |
|
October 2, 2022 |
|
December 31, 2021 |
|
Assets |
|
|
|
|
|
|
|
Operating lease ROU assets |
|
Other non-current assets |
|
$ |
328,098 |
|
|
$ |
351,712 |
|
|
|
|
|
|
|
|
|
|
Finance lease ROU assets, at cost |
|
Property, plant and equipment, gross |
|
84,073 |
|
|
89,190 |
|
|
Accumulated amortization |
|
Accumulated depreciation |
|
(14,396) |
|
|
(16,694) |
|
|
Finance lease ROU assets, net |
|
Property, plant and equipment, net |
|
69,677 |
|
|
72,496 |
|
|
|
|
|
|
|
|
|
|
Total leased assets |
|
|
|
$ |
397,775 |
|
|
$ |
424,208 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
Operating |
|
Accrued liabilities |
|
$ |
31,415 |
|
|
$ |
36,292 |
|
|
Finance |
|
Current portion of long-term debt |
|
2,934 |
|
|
3,564 |
|
|
Non-current |
|
|
|
|
|
|
|
Operating |
|
Other long-term liabilities |
|
295,694 |
|
|
310,899 |
|
|
Finance |
|
Long-term debt |
|
66,785 |
|
|
65,582 |
|
|
Total lease liabilities |
|
|
|
$ |
396,828 |
|
|
$ |
416,337 |
|
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 20
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
The maturity of our lease liabilities as of October 2, 2022
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
Finance leases |
|
Total |
|
2022 (rest of year) |
$ |
10,184 |
|
|
$ |
1,860 |
|
|
$ |
12,044 |
|
|
2023 |
40,229 |
|
|
6,494 |
|
|
46,723 |
|
|
2024 |
37,277 |
|
|
5,560 |
|
|
42,837 |
|
|
2025 |
26,118 |
|
|
4,398 |
|
|
30,516 |
|
|
2026 |
22,258 |
|
|
4,025 |
|
|
26,283 |
|
|
Thereafter |
284,584 |
|
|
146,082 |
|
|
430,666 |
|
|
Total lease payments |
420,650 |
|
|
168,419 |
|
|
589,069 |
|
|
Less: Imputed interest |
93,541 |
|
|
98,700 |
|
|
192,241 |
|
|
Total lease liabilities |
$ |
327,109 |
|
|
$ |
69,719 |
|
|
$ |
396,828 |
|
Supplemental cash flow and other information related to leases were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
Cash paid for amounts included in the measurement of lease
liabilities: |
|
|
|
|
|
Operating cash flows from operating leases |
|
$ |
34,528 |
|
|
$ |
32,243 |
|
|
Operating cash flows from finance leases |
|
3,083 |
|
|
3,321 |
|
|
Financing cash flows from finance leases |
|
3,336 |
|
|
3,313 |
|
|
|
|
|
|
|
|
ROU assets obtained in exchange for lease liabilities: |
|
|
|
|
|
Operating leases |
|
$ |
6,629 |
|
|
$ |
7,013 |
|
|
Finance leases |
|
4,192 |
|
|
436 |
|
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
17).
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 were
$132,226 and $93,089 as of October 2, 2022 and
December 31, 2021, respectively.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 21
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
9. 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. Costs associated with business realignment
activities are classified in our Consolidated Statements of Income
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Cost of sales |
|
$ |
(1) |
|
|
$ |
213 |
|
|
$ |
3 |
|
|
$ |
5,250 |
|
|
Selling, marketing and administrative expense |
|
394 |
|
|
2,819 |
|
|
2,096 |
|
|
5,795 |
|
|
Business realignment costs |
|
— |
|
|
365 |
|
|
274 |
|
|
2,748 |
|
|
Costs associated with business realignment activities |
|
$ |
393 |
|
|
$ |
3,397 |
|
|
$ |
2,373 |
|
|
$ |
13,793 |
|
Costs recorded by program during the three and nine months ended
October 2, 2022 and October 3, 2021 related to these
activities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
International Optimization Program: |
|
|
|
|
|
|
|
|
|
Severance and employee benefit costs |
|
$ |
2 |
|
|
$ |
377 |
|
|
$ |
287 |
|
|
$ |
3,199 |
|
|
Other program costs |
|
391 |
|
|
3,020 |
|
|
2,086 |
|
|
10,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
393 |
|
|
$ |
3,397 |
|
|
$ |
2,373 |
|
|
$ |
13,793 |
|
Amounts classified as liabilities qualifying as exit and disposal
costs primarily represent employee-related and certain third-party
service provider charges, however, such amounts at October 2,
2022 are not significant.
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 the end of 2023, 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
segment. However, segment operating results do not include these
business realignment expenses because we evaluate segment
performance excluding such costs.
For the nine months ended October 2, 2022 and October 3,
2021, we recognized total costs associated with the International
Optimization Program of $2,373 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
$48,315.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 22
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
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 2, 2022
and October 3, 2021 were 19.7% and 21.4%, respectively.
Relative to the statutory rate, the 2022 effective tax rate was
impacted by investment tax credits, partially offset by state
taxes.
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, China, Canada 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 $15,220 within the next 12 months because of the
expiration of statutes of limitations and settlements of tax
audits.
Inflation Reduction Act
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed
into law. The IRA enacted a 15% corporate minimum tax on certain
corporations and an excise tax on share repurchases after December
31, 2022, and created and extended certain energy-related tax
credits and incentives. We currently do not expect the tax-related
provisions of the IRA to have a material impact on our consolidated
financial statements, including our annual effective tax rate, or
on our liquidity. We will continue to monitor and assess the impact
the IRA may have on our business and financial
results.
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
(“CARES”) 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 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.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 23
|
|
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 2, 2022 and October 3, 2021 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
|
|
Three Months Ended |
|
Three Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Service cost |
|
$ |
4,028 |
|
$ |
5,256 |
|
$ |
80 |
|
$ |
45 |
|
Interest cost |
|
8,810 |
|
|
4,785 |
|
|
1,154 |
|
|
964 |
|
|
Expected return on plan assets |
|
(11,973) |
|
|
(12,249) |
|
|
— |
|
|
— |
|
|
Amortization of prior service credit |
|
(1,413) |
|
|
(1,536) |
|
|
— |
|
|
— |
|
|
Amortization of net loss |
|
4,563 |
|
|
4,585 |
|
|
26 |
|
|
— |
|
|
Settlement loss |
|
3,728 |
|
|
5,408 |
|
|
— |
|
|
— |
|
|
Total net periodic benefit cost |
|
$ |
7,743 |
|
|
$ |
6,249 |
|
|
$ |
1,260 |
|
|
$ |
1,009 |
|
We made contributions of $824 and $1,484 to the
pension plans and other benefits plans, respectively, during the
third quarter of 2022. In the third quarter of 2021, we made
contributions of $25,711 and $3,527 to our pension plans and other
benefit plans, respectively. The contributions
in 2022 and 2021 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 2, 2022 and October 3, 2021 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Service cost |
|
$ |
13,639 |
|
$ |
16,178 |
|
$ |
238 |
|
$ |
135 |
|
Interest cost |
|
20,438 |
|
|
13,511 |
|
|
3,467 |
|
|
2,893 |
|
|
Expected return on plan assets |
|
(36,788) |
|
|
(36,861) |
|
|
— |
|
|
— |
|
|
Amortization of prior service credit |
|
(4,238) |
|
|
(4,607) |
|
|
— |
|
|
— |
|
|
Amortization of net loss |
|
10,402 |
|
|
16,005 |
|
|
77 |
|
|
— |
|
|
Settlement loss |
|
14,104 |
|
|
12,848 |
|
|
— |
|
|
— |
|
|
Total net periodic benefit cost |
|
$ |
17,557 |
|
|
$ |
17,074 |
|
|
$ |
3,782 |
|
|
$ |
3,028 |
|
We made contributions of $4,580 and $12,059 to the
pension plans and other benefits plans, respectively, during the
first nine months of 2022. In the first nine months of 2021,
we made contributions of $26,894 and $11,682 to our pension plans
and other benefit plans, respectively. The contributions
in 2022 and 2021 also included benefit payments
from our non-qualified pension plans and post-retirement benefit
plans.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 24
|
|
THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise
indicated)
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
17).
During the first nine months of 2022, we recognized pension
settlement charges in our hourly retirement plan and salaried
retirement plan due to lump sum withdrawals by employees retiring
or leaving the Company. The non-cash settlement charges, which
represent the acceleration of a portion of the respective plan’s
accumulated unrecognized actuarial loss, were triggered when the
cumulative lump sum distributions exceeded the plan’s anticipated
annual service and interest costs. In connection with the third
quarter 2022 settlements, the related plan assets and liabilities
were remeasured using a discount rate as of the remeasurement date
that was 288 basis points higher than the rate as of December 31,
2021 and an expected rate of return on plan assets of
5.8%.
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 Human
Capital Committee of our Board and if in accordance with an
applicable deferred compensation plan of the Company. Currently,
the Compensation and Human Capital 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.
For the periods presented, compensation expense for all types of
stock-based compensation programs and the related income tax
benefit recognized were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
October 2, 2022 |
|
October 3, 2021 |
|
October 2, 2022 |
|
October 3, 2021 |
|
Pre-tax compensation expense
|
|
$ |
18,079 |
|
|
$ |
18,527 |
|
|
$ |
50,640 |
|
|
$ |
51,009 |
|
|
Related income tax benefit |
|
2,990 |
|
|
2,791 |
|
|
9,925 |
|
|
10,814 |
|
Compensation expenses for stock compensation plans are primarily
included in selling, marketing and administrative expense. As of
October 2, 2022, total stock-based compensation expense
related to non-vested awards not yet recognized was $93,265 and the
weighted-average period over which this amount is expected to be
recognized was approximately 1.8 years.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 25
|
|
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.
A summary of activity relating to grants of stock options for the
period ended October 2, 2022 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
Shares |
Weighted-Average
Exercise Price (per share) |
Weighted-Average Remaining
Contractual Term |
Aggregate Intrinsic Value |
|
Outstanding at beginning of the period |
1,332,956 |
|
$102.78 |
4.3 years |
|
|
Granted |
4,025 |
|
$202.03 |
|
|
|
Exercised |
(315,250) |
|
$98.38 |
|
|
|
Forfeited |
(3,858) |
|
$102.97 |
|
|
|
Expired |
(1,873) |
|
$103.07 |
|
|
|
Outstanding as of October 2, 2022
|
1,016,000 |
|
$104.53 |
4.0 years |
$ |
117,793 |
|
|
Options exercisable as of October 2, 2022
|
978,507 |
|
$102.65 |
3.8 years |
$ |
115,291 |
|
The weighted-average fair value of options granted was $37.28 and
$24.12 per share for the periods ended October 2, 2022 and
October 3, 2021, 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 2, 2022 |
|
October 3, 2021 |
|
Dividend yields
|
|
1.9 |
% |
|
2.2 |
% |
|
Expected volatility |
|
21.1 |
% |
|
21.8 |
% |
|
Risk-free interest rates
|
|
1.9 |
% |
|
1.0 |
% |
|
Expected term in years |
|
6.3 |
|
6.3 |
The total intrinsic value of options exercised was $36,362 and
$28,416 for the periods ended October 2, 2022 and
October 3, 2021, 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 2, 2022 and October 3, 2021 can range from 0% to
250% of the targeted amounts.
|
|
|
|
|
|
|
|
|
|
|
The Hershey Company | Q3 2022 Form 10-Q | Page 26
|
|
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 2, 2022 and
October 3, 2021, 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 2, 2022 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
|
|
1,303,521 |
|
|
$146.96 |
|
Granted
|
|
305,109 |
|
|
$211.29 |
|
Performance assumption change (1)
|
|
105,143 |
|
|
$245.93 |
|
Vested
|
|
(505,135) |
|
|
$130.07 |
|
Forfeited
|
|
(27,016) |
|
|
$163.35 |
|
Outstanding as of October 2, 2022
|
|
1,181,622 |
|
|
$182.34 |
(1)Reflects
the net number of PSUs above and below target levels based on the
performance metrics.
The following table sets forth information about the fair value of
the PSUs and RSUs granted for potential future distribution to
employees and non-employee directors. In addition, the table
provides assumptions used to determine the fair value of the
market-based total shareholder return component using the Monte
Carlo simulation model on the date of grant.