WASHINGTON, D.C. 20549
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):
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
THE HERSHEY COMPANY
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 20172023
TABLE OF CONTENTS
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Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including the exhibits hereto and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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. Forward-looking statements are predictions only and actual results could differ materially from management’s expectations due to a variety of factors, including those described below in Item 1A. “Risk Factors” and in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All forward-looking statements attributable to us or persons working on our behalf are expressly qualified in their entirety by such risk factors. Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. The forward-looking statements that we make in this Annual Report on Form 10-K are based on management’s current views and assumptions regarding future events and speak only as of their dates. We assume no obligation to update developments of these risk factors or to announce publicly any revisions to any of the forward-looking statements that we make, or to make corrections to reflect future events or developments, except as required by the federal securities laws.
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| The Hershey Company | 2023 Form 10-K | Page 1 | |
PART I
Item 1. BUSINESS
The Hershey Company was incorporated under the laws of the State of Delaware on October 24, 1927 as a successor to a business founded in 1894 by Milton S. Hershey. In this report, the terms “Hershey,” “Company,” “we,” “us” or “our” mean The Hershey Company and its wholly-owned subsidiaries and entities in which it has a controlling financial interest, unless the context indicates otherwise.
Hershey is a global confectionery leader known for bringingmaking more moments of goodness to the world through chocolate, sweets, mints and other great tasting snacks. We are the largest producer of quality chocolate in North America, a leading snack maker in the United States and a global leader in chocolate and non-chocolate confectionery. We market, sell and distribute our products under more than 8090 brand names in approximately 80 countries worldwide.
Reportable Segments
OurThe Company reports its operations through three segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International. This 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 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 assessment, and further aligns with our product categories and the key markets we serve.
•North America business, which generates approximately 88% of our consolidated revenue, is our only reportable segment. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other.
North America -Confectionery– 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, gum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines. This segment also includes our retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania; New York, New York; Las Vegas, Nevada; 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.
•North America Salty Snacks –This segment is responsible for our salty snacking products in the United States. This includes ready-to-eat popcorn, baked and trans fat free snacks, pretzels and other snacking product lines.
snacks.•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 China, 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), Dubai, 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.
Financial and other information regarding our reportable segments is provided in our Management’s Discussion and Analysis and Note 1113 to the Consolidated Financial Statements. Business Acquisitions and Divestitures
In January 2018,On May 31, 2023, we completed the acquisition of allcertain assets that provide additional manufacturing capacity from Weaver Popcorn Manufacturing, Inc. (“Weaver”), a leader in the production and co-packing of microwave popcorn and ready-to-eat popcorn, and former co-manufacturer of the outstanding shares of Amplify Snack Brands, Inc. ("Amplify"), a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as Company’s SkinnyPop, Oatmega, Paqui and Tyrrells. The acquisition enables us to capture more consumer snacking occasions by creating a broader portfolio of brands. brand.
In April 2016,December 2021, we completed the acquisition of all of the outstanding shares of Ripple Brand Collective, LLC,Pretzels Inc. (“Pretzels”), previously a privately held company based in Congers, New York that owns the barkTHINS mass premium chocolate snacking brand. The acquisition was undertaken in order to broaden our product offeringsmanufactures and sells pretzels and other salty snacks for other branded products and private labels in the premiumUnited States. Pretzels is an industry leader in the pretzel category with a product portfolio that includes filled, gluten free and portable snacking categories.
In March 2015,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. Additionally in December 2021, we completed the acquisition of allDot’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, which complements Hershey’s snacks portfolio.
In June 2021, we completed the acquisition of the outstanding shares of KRAVE Pure Foods, Inc.Lily’s Sweets, LLC (“Krave”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 Sonoma, California based manufacturerUnited States and
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| The Hershey Company | 2023 Form 10-K | Page 2 | |
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.
In January 2021, we completed the divestiture of KraveLotte Shanghai Foods Co., a leading all-natural brand of premium meat snack products. The transactionLtd. (“LSFC”), which was undertaken to enable us to tap intopreviously included within the rapidly growing meat snacks categoryInternational segment results in our consolidated financial statements. Total proceeds from the divestiture and further expand into the broader snacks space.
impact on our consolidated financial statements were immaterial.
Products and Brands
Our principal product offerings include chocolate and non-chocolate confectionery products; gum and mint refreshment products;products and protein bars; snack items such as popcorn, pretzels, spreads, snack bites and mixes; and pantry items, such as baking ingredients, toppings and beverages; and snack items such as spreads, meat snacks, bars and snack bites and mixes, popcorn and protein bars and cookies.beverages.
•Within our North America markets,Confectionery segment, our product portfolio includes a wide variety of chocolate offerings marketed and sold under the renowned brands of Hershey’s, Reese’s and Kisses, along with other popular chocolate and non-chocolate confectionery brands such as Jolly Rancher, Almond Joy, Brookside, barkTHINS, Cadbury,Good & Plenty, Heath, Kit Kat®, LancasterPayday, PaydayRolo®, Rolo®Twizzlers, Twizzlers, Whoppers and York. We also offer premium chocolateOur protein bar products primarily in the United States, through the Scharffen Bergerinclude ONE bar and Dagoba brands. Ourour gum and mint products include Ice Breakers mints and chewing gum, BreathsaversBreath Savers mints and Bubble Yum bubble gum. OurWe also have pantry and snack items, that are principally sold in North America includeincluding baking products, toppings and sundae syrups sold under the Hershey’s,, Reese’s, Heath and HeathLily’s brands, as well as Hershey’sand Reese’schocolate spreads and snack bites and mixes, Krave meatmixes.
•Within our North America Salty Snacks segment, we have our salty snack products, Popwell half-popped cornitems. This includes ready-to-eat SkinnyPop popcorn, baked and trans fat free Pirates Booty snacks ready-to-eat SkinnyPop popcorn and other better-for-you snack brands such as Oatmega, Paqui and Tyrrells.
Dot’s Homestyle Pretzels snacks.•Within our International and Other markets,segment, we manufacture, market and sell many of these same brands, as well as other brands that are marketed regionally, such as Golden Monkey confectionery and Munching Monkey snack products in China, Pelon Pelo Rico confectionery products in Mexico, IO-IO snack products in Brazil and Nutrine and Maha Lacto confectionery products and Jumpin and Sofit beverage products in India.
Principal Customers and Marketing Strategy
Our customers are mainly wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. The majority of our customers, with the exception of wholesale distributors, resell our products to end-consumers in retail outlets in North America and other locations worldwide.
In 2017,2023, approximately 29%28% of our consolidated net sales were made to McLane Company, Inc., one of the largest wholesale distributors in the United States (“U.S.”) to convenience stores, drug stores, wholesale clubs and mass merchandisers and the primary distributor of our products to Wal-Mart Stores, Inc.
The foundation of our marketing strategy is our strong brand equities, product innovation and the consistently superior quality of our products. We devote considerable resources to the identification, development, testing, manufacturing and marketing of new products. We utilize a variety of promotional programs directed towards our customers, as well as advertising and promotional programs for consumers of our products, to stimulate sales of certain products at various times throughout the year.
In conjunction with our sales and marketing efforts, our efficient product distribution network helps us maintain sales growth and provide superior customer service by facilitating the shipment of our products from our manufacturing plants to strategically located distribution centers. We primarily use common carriers to deliver our products from these distribution points to our customers.
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| The Hershey Company | 2023 Form 10-K | Page 3 | |
Raw Materials and Pricing
Cocoa products, including cocoa liquor, cocoa butter and cocoa powder processed from cocoa beans, are the most significant raw materials we use to produce our chocolate products. These cocoa products are purchased directly from third-party suppliers, who source cocoa beans that are grown principally in Far Eastern, West African, Central and South American regions. West Africa accounts for approximately 70% of the world’s supply of cocoa beans.
Adverse changes in climate or extreme weather, crop disease, political unrest and other problems in cocoa-producing countries have caused price fluctuations in the past, but have never resulted in the total loss of a particular producing country’s cocoa crop and/or exports. In the event that a significant disruption occurs in any given country, we believe cocoa from other producing countries and from current physical cocoa stocks in consuming countries would provide a significant supply buffer.
In 2016, we established aOur trading company in Switzerland that performs all aspects of cocoa procurement, including price risk management, physical supply procurement and sustainable sourcing oversight. The trading company was implemented to optimizeoptimizes the supply chain for our cocoa requirements, with a strategic focus on gaining real time access to cocoa market intelligence. It also provides us with the ability to recruit and retain world class commodities traders and procurement professionals and enables enhanced collaboration with commodities trade groups, the global cocoa community and sustainable sourcing resources.
We also use substantial quantities of sugar, corn products, Class II and IV dairy products, wheat products, peanuts, almonds and energy in our production process. Most of these inputs for our domestic and Canadian operations are purchased from suppliers in the United States. For our international operations, inputs not locally available may be imported from other countries.
We change prices and weights of our products when necessary to accommodate changes in input costs, the competitive environment and profit objectives, while at the same time maintaining consumer value. Price increases and weight changes help to offset increases in our input costs, including raw and packaging materials, fuel, utilities, transportation costs and employee benefits. When we implement price increases, there is usually a time lag between the effective date of the list price increases and the impact of the price increases on net sales, in part because we typically honor previous commitments to planned consumer and customer promotions and merchandising events subsequent to the effective date of the price increases. In addition, promotional allowances may be increased subsequent to the effective date, delaying or partially offsetting the impact of price increases on net sales.
Competition
Many of our confectionery and salty snack brands enjoy wide consumer acceptance and are among the leading brands sold in the marketplace in North America and certain markets in Latin America.international markets. We sell our brands in highly competitive markets with many other global multinational, national, regional and local firms. Some of our competitors are large private companies, withas well as large retailers, that have significant resources and substantial international operations. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing and promotional activity, the ability to identify and satisfy consumer preferences, as well as convenience and service. In recent years, weWe have also experienced increased competition from other snack items, which has pressured confectionery category growth.and through innovation and acquisitions, we are continuing to expand the boundaries of our brands to capture new snacking occasions.
Working Capital, Seasonality and Backlog
Our sales are typically higher during the third and fourth quarters of the year, representing seasonal and holiday-related sales patterns. We manufacture primarily for stock and typically fill customer orders within a few days of receipt. Therefore, the backlog of any unfilled orders is not material to our total annual sales. Additional information relating to our cash flows from operations and working capital practices is provided in our Management’s Discussion and Analysis.
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| The Hershey Company | 2023 Form 10-K | Page 4 | |
Trademarks, Service Marks and License Agreements
We own various registered and unregistered trademarks and service marks. The trademarks covering our key product brands are of material importance to our business. Depending on the country, trademarks remain valid for as long as they are in use or their registration status is maintained. Trademark registrations generally are renewable for fixed terms. We follow a practice of seeking trademark protection in the United States and other key international markets where our products are sold. We also grant trademark licenses to third parties to produce and sell pantry items, flavored milks and various other products primarily under the Hershey’s and Reese’s brand names.
Furthermore, we have rights under license agreements with several companies to manufacture and/or sell and distribute certain products. Our rights under these agreements are extendible on a long-term basis at our option. Our most significant licensing agreements are as follows:
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| Company | | Brand | | BrandLocation | | Location | | Requirements |
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| Kraft Foods Ireland Intellectual Property Limited/Cadbury UK Limited | | York
Peter Paul Almond Joy
Peter Paul Mounds
| | Worldwide | | None |
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| Cadbury UK Limited | | Cadbury
Caramello | | Cadbury
Caramello
| United States | | Minimum sales requirement exceeded in 20172023 |
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| Société des Produits Nestlé SA | | Kit Kat® Rolo® | | United States | | Minimum unit volume sales exceeded in 20172023 |
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Huhtamäki Oy affiliateIconic IP Interests, LLC | | Good & Plenty Heath Jolly Rancher Milk Duds Payday Whoppers | | Worldwide | | None |
Research and Development
We engage in a variety of research and development activities in a number of countries, including the United States,U.S., Mexico, Brazil, India and China.Malaysia. We develop new products, improve the quality of existing products, improve and modernize production processes and develop and implement new technologies to enhance the quality and value of both current and proposed product lines. Information concerning our research and development expense is contained in Note 1 to the Consolidated Financial Statements. Food Quality and Safety Regulation
The manufacture and sale of consumer food products is highly regulated. In the United States,U.S., our activities are subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate our businesses outside of the United States.U.S.
We believe our Product Excellence Program provides us with an effective product quality and safety program. This program is integral to our global supply chain platform and is intended to ensure that all products we purchase, manufacture and distribute are safe, are of high quality and comply with applicable laws and regulations.
Through our Product Excellence Program, we evaluate our supply chain including ingredients, packaging, processes, products, distribution and the environment to determine where product quality and safety controls are necessary. We identify risks and establish controls intended to ensure product quality and safety. Various government agencies and third-party firms, as well as our quality assurance staff, conduct audits of all facilities that manufacture our products to assure effectiveness and compliance with our program and applicable laws and regulations.
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| The Hershey Company | 2023 Form 10-K | Page 5 | |
Environmental Considerations
We make routineBeyond ordinary operating and capital expenditures that we make to comply with government regulations, including environmental laws and regulations. Theseregulations, we have made a number of voluntary commitments to drive long-term growth and business resilience and reduce our environmental impacts, including efforts to eliminate commodity-driven deforestation and reduce greenhouse gas (“GHG”) emissions across our own operations and supply chain. Our climate change related investments and expenditures primarily focus on achieving a 50% absolute reduction in our Scope 1 and 2 GHG emissions and a 25% absolute reduction in our Scope 3 GHG emissions by 2030 (compared to a 2018 baseline), as well as having 100% of plastic packaging be recyclable, reusable or compostable and eliminating 25 million pounds of packaging by 2030. All of our climate-related investments are in progress or on track as outlined in our Environmental, Social and Governance (“ESG”) Report. The annual operating and capital expenditures associated with these ordinary course payments and additional climate change commitments are not material with respect to our results of operations, capital expenditures or competitive position.
Sustainability
The Company’s commitment to sustainability started with our founder’s belief in responsible citizenship. He was a purpose-driven leader who believed we could use chocolate to Make More Moments of Goodness in the world for our consumers today and for many generations to come. This belief resulted in a strong investment in local communities and the establishment of Milton Hershey School for disadvantaged kids. We continue that legacy today through our global sustainability strategy: Our Shared Goodness Promise, which guides how we empower the remarkable people who make and sell our brands, interact with farming communities that grow our ingredients, deliver on our commitments to consumers, customers, and external stakeholders, protect the environment and support children and youth.
Employees
AsTo learn more about our ESG-related goals, progress and initiatives, as well as review our annual ESG Report and accompanying suite of December 31, 2017, we employed approximately 15,360 full-timeESG reporting frameworks, policies, and 1,550 part-time employees worldwide. Collective bargaining agreements covered approximately 5,450 employees. During 2018, agreements will be negotiated for certain employees at four facilities outsidedisclosures, access the Sustainability section of our website at: https://www.thehersheycompany.com/en_us/sustainability.html. Information found on the Company’s website is not part of this Annual Report on Form 10-K or any other report filed with the United States comprising approximately 72% of total employees under collective bargaining agreements. We believe that our employee relations are generally good.Securities and Exchange Commission (“SEC”).
Financial Information by Geographic Area
Our principal operations and markets are located in the United States. The percentage of total consolidated net sales for our businesses outside of the United States was 16.7%12.7% for 2017, 16.7%2023, 12.5% for 20162022 and 17.2%13.0% for 2015.2021. The percentage of total long-lived assets outside of the United States was 25.2%17.4% as of December 31, 20172023 and 29.8%17.9% as of December 31, 2016.2022.
Corporate Social ResponsibilityHuman Capital
As of December 31, 2023, the Company employed approximately 18,650 full-time and 1,855 part-time employees worldwide. Collective bargaining agreements covered approximately 6,295 employees, or approximately 31% of the Company’s employees worldwide. During 2024, agreements are expected to be negotiated for certain employees at five facilities, four of which are outside of the United States, comprising approximately 72% of total employees under collective bargaining agreements. We believe our efforts in managing our workforce have been effective, as evidenced by a strong culture and a good relationship between the Company and our employees.
We are a purpose-driven company and for more than a century, our iconic brands have been built on a foundation of community investment and connections between people around the world. We could not have achieved this without our remarkable employees who make our purpose a reality. As a result, our human capital strategies are material to our operations and core to the long-term success of the Company.
•Our founder, Milton S. Hershey, established an enduring modelPeople, Safety and Employee Engagement. Our employees are among our most important resources and are critical to our continued success. We provide a workplace that develops, supports and motivates our people. The overall well-being and safety of our employees remains one of our top priorities. We continue to invest in training, workplace resources and leading systems and processes to ensure the responsible citizenship while creating a successful business. Driving sustainable business practices, making a differencemanagement of all facilities. Additionally, continuous listening surveys are distributed throughout the year to all employees globally to hear their thoughts on the Company’s direction and their place in our communitiesit. These continuous touchpoints allow for real-time feedback and operatingaction from the Company. These surveys are further
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| The Hershey Company | 2023 Form 10-K | Page 6 | |
supplemented with quarterly and informative enterprise and team town halls, which, in conjunction with the highest integritycontinuous listening surveys, generate stronger employee engagement with the Company’s strategy, initiatives and leadership.
•Talent Acquisition, Development and Training. Hiring and developing our employees is critically important to our operations and we are vital partsfocused on creating experiences and programs that foster growth and performance. We provide all employees the chance to learn, grow and own their work. We have partnered with leading online content experts and increased internal learning development to expand our catalog of online and classroom courses. Additionally, we co-created a culture of development with the enthusiastic support of our heritage.employees. Through individual development plans, learning opportunities, feedback and coaching, employees can build careers at The Hershey Company, as evidenced by the fact that the majority of our ten executive officers were promoted from within the organization (see Information about Our Executive Officers). •Compensation, Benefits and Wellness. In addition to offering competitive, fair and transparent compensation, we also offer a suite of benefits, including comprehensive health and meaningful retirement benefits to eligible employees, tying incentive compensation to both business and individual performance, offering parental leave and adoption benefits and maintaining an employee stock purchase plan. We continue this legacy today by providing high quality products while conductingalso provide a number of innovative programs designed to promote physical and emotional well-being, including ergonomic workspaces, a state-of-the-art fitness center at our business in a socially responsibleHershey, Pennsylvania campus and environmentally sustainable manner. Each year we publish a full corporate social responsibility (“CSR”) reportprivate rooms designed for quiet reflection, prayer or wellness breaks. The Company also offers SmartFlex benefits which provides an updateis our suite of policies that allows individuals to create their own balance between work and personal life, including flexing work time based on the progress we have made in advancing our CSRwork priorities or personal commitments, such as food safety, responsible sourcingcaring for children or family members. We believe that this flexibility improves productivity, boosts job satisfaction and increases employee engagement. Additionally, the Company offers a “Best of ingredients,Both” flexible work model for corporate transparency,and commercial employees to balance work and personal well-being. This model allows employees the option to work either remotely, in-office, or both, depending on individual needs, personal schedules and work demands. This offers the benefits of flexibility and in-person collaboration, while maintaining productivity and overall job satisfaction.
•Diversity, Equity and Inclusion. Our diverse and inclusive culture makes the difference across all areas of the business around the world. Our gender representation includes women occupying many of the top positions in the Company, including Chief Executive Officer and Chairman of the Board, Chief Accounting Officer and President, Salty Snacks, and approximately 50% representation across the Company. Additionally, five of our focus11 Board members are women (45% representation). In 2023, we maintained fair and equitable pay achievements, including 1:1 aggregate people of color pay equity (2021) and 1:1 aggregate gender pay (2020) for salaried employees in the United States. Further, our eight employee-led Business Resource Groups, which include Abilities First, Black Heritage, Asian and Pacific Islander, GenH (Generations), Latino, Prism (LGBTQ), Veteran’s and Women’s, play a critical role in attracting diverse talent, providing mentoring and career development opportunities, delivering commercial business insights and connecting people to the Company and the communities where we do business. In 2023, the Company was ranked #3 on improving basic nutritionDiversityInc’s Top 50 Companies for Diversity and was ranked as a top 50 company on Forbes Top Companies for Women. Additionally, the Company also ranked as a top 30 company on Wall Street Journal’s Top 250 Best-Managed Companies of 2023, and was recognized as a Best Place to help children learnWork for Disability Inclusion based on our Disability Equality Index score.
•Community and growSocial Impact. Our philanthropy and volunteerism efforts reflect how we live out the Company’s value of Making More Moments of Goodness, from supporting causes our continued investmentemployees care about to investing in the long-term success of the communities where we live and work. To learn more aboutWe work closely with counterparts in each of our goals, progressplant and office locations across the United States and globally to identify local community needs and craft tailored approaches to provide support. This work includes forging partnerships with local non-governmental organizations, providing grants and contributions and organizing volunteer service activities and employee fundraisers.
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| The Hershey Company | 2023 Form 10-K | Page 7 | |
Business Realignment Activities and Strategic Initiatives
From time to time, we implement business realignment activities to support key strategic initiatives youdesigned to maintain long-term growth. Further to such goal, we completed our International Optimization Program in 2023, an initiative which began in the fourth quarter of 2020 and was designed to increase our operating effectiveness and efficiency, to reduce our costs and/or to generate savings that can accessbe reinvested in other areas of our full CSR report at www.thehersheycompany.com/en_us/responsibility.html.business.
In February 2024, the Board of Directors approved the Advancing Agility & Automation Initiative, which is a multi-year productivity program to improve supply chain and manufacturing-related spend, optimize selling, general and administrative expenses, leverage new technology and business models to further simplify and automate processes, and generate long-term savings.
Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Consolidated Financial Statements. Available Information
The Company's website address is www.thehersheycompany.com.www.thehersheycompany.com. We file or furnish annual, quarterly and current reports, proxy statements and other information, including amendments to these reports, with the United States Securities and Exchange Commission (“SEC”).SEC. You may obtain a copy of any of these reports, free of charge, from the Investors section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an Internet site that also contains these reports at: www.sec.gov.at www.sec.gov. In addition, copies of the Company'sCompany’s annual report will be made available, free of charge, on written request to the Company.
We have a Code of Conduct that applies to our Board of Directors (“Board”) and all Company officers and employees, including, without limitation, our Chief Executive Officer and “senior financial officers” (including the Chief Financial Officer, Chief Accounting Officer and persons performing similar functions). You can obtain a copy of our Code of Conduct, as well as our Corporate Governance Guidelines and charters for each of the Board’s standing committees, from the Investors section of our website.website at: https://www.thehersheycompany.com/en_us/investors.html. If we change or waive any portion of the Code of Conduct that applies to any of our directors, executive officers or senior financial officers, we will post that information on our website.
Cautionary Note Regarding Forward-Looking Statements
This Information found on the Company’s website is not part of this Annual Report on Form 10-K includingor any other report filed with the exhibits heretoSEC.
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| The Hershey Company | 2023 Form 10-K | Page 8 | |
Item 1A. RISK FACTORS
You should carefully read the following discussion of significant factors, events and uncertainties when evaluating our business and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. Other than statements of historical fact, information regarding activities, events and developments that we expect or anticipate will or may occur in the future, including, but not limited to, information relating to our future growth and profitability targets and strategies designed to increase total shareholder value, are forward-looking statements based on management’s estimates, assumptions and projections. Forward-looking statements also include, but are not limited to, statements regarding our future economic and financial condition and results of operations, the plans and objectives of management and our assumptions regarding our performance and such plans and objectives. Many of the forward-looking statements contained in this document may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated” and “potential,” among others. Forward-looking statementsinformation contained in this Annual Report on Form 10-K are predictions only and actual results could differ materially from management’s expectations due to a variety of factors, including those described below. All forward-looking statements attributable to us or persons working on our behalf are expressly qualified in their entirety by such risk factors.10-K. The forward-looking statements that we make in this Annual Report on Form 10-K are based on management’s current views and assumptions regarding future events and speak only as of their dates. We assume no obligation to update developments ofconsequences discussed in these risk factors or to announce publicly any revisions to any ofcould materially and adversely affect our business, operating results, liquidity and financial condition. While we believe we have identified and discussed below the forward-looking statementskey risk factors affecting our business, these risk factors do not identify all the risks we face, and there may be additional risks and uncertainties that we make,do not presently know or that we do not currently believe to make correctionsbe significant that may have a material adverse effect on our business, performance or financial condition in the future.
Risks Related to reflect future eventsOur Business and Operations
Our Company’s reputation or developments, exceptbrand image might be impacted as required by the federal securities laws.
Issuesa result of issues or concerns relatedrelating 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 cause a product recall and/or result in harm to the Company’s reputation,litigation or otherwise negatively impactingimpact our operating results.
In order to sell our iconic, branded products, we need to maintain a good reputation with our customers, consumers, suppliers, vendors and consumers.employees, among others. Issues related to the quality and safety of our products, ingredients or packaging could jeopardize our Company’s image and reputation. We have in the past recalled or removed certain products from store shelves, and may in the future need to do so again in the future. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, could decrease demand for our products or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, wenegative publicity related to our environmental, social or governance practices could also impact our reputation with customers, consumers, suppliers and vendors.
We have been in the past and in the future could potentially be subject to litigation or government actions 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 could result in payments of fines or damages. Costs associated with these potential actions, as well as the potential impact on our reputation or ability to sell our products, could negatively affect 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.
Approximately 72% of our manufacturing capacity is located in the United States. Disruption to our global manufacturing operations or our supply chain could result from, among other factors, the following:
•Natural disasters;
•Pandemics, epidemics or other outbreak of disease (such as the coronavirus disease 2019 (“COVID-19”) global pandemic);
•Climate change and severity of extreme weather;
•Fires or explosions;
•Terrorism or other acts of violence;
•Labor strikes or other labor activities;
•Unavailability of raw or packaging materials;
•Third party service provider disruptions, such as cyber breaches or system failures;
•Operational and/or financial instability of key suppliers, and other vendors or service providers; and
•Suboptimal production planning which could impact our ability to cost-effectively meet product demand.
We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if they were to occur, including our global supply chain strategies and our principle-based global labor relations strategy. If we are unable, or find that it is not financially feasible, to effectively plan for, mitigate or manage operational stability and business resiliency risks, particularly within our international markets and snacks portfolio, due to the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted if such events were to occur.
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| The Hershey Company | 2023 Form 10-K | Page 9 | |
We might not be able to hire, engage and retain the talented global human capital we need to drive our growth strategies.
Our future success depends upon our ability to identify, hire, develop, engage and retain talented personnel across the globe. Competition for global talent is intense, and we might not be able to identify and hire the personnel we need to continue to evolve and grow our business. In particular, if we are unable to hire the right individuals to fill new or existing senior management positions as vacancies arise, our business performance may be adversely impacted.
Activities related to identifying, recruiting, hiring and integrating qualified individuals require significant time and attention. We may also need to invest significant amounts of cash and equity to attract talented new employees, and we may never realize returns on these investments.
In addition to hiring new employees, we must continue to focus on retaining and engaging the talented individuals we need to sustain our core business and lead our developing businesses into new markets, channels and categories. This may require significant investments in training, coaching and other career development and retention activities. If we are not able to effectively retain and grow our talent, our ability to achieve our strategic objectives will be adversely affected, which may negatively impact our financial condition and results of operations.
Risks associated with climate change and other environmental impacts, and increased focus and evolving views of our customers, stockholders and other stakeholders on climate change issues, could negatively affect our business and operations.
Climate-related changes can increase variability in, or otherwise impact, natural disasters, including weather patterns, with the potential for increased frequency and severity of significant weather events, natural hazards, rising mean temperature and sea levels, and long-term changes in precipitation patterns. Climate change or weather-related disruptions to our supply chain can impact the availability and cost of materials needed for manufacturing, which may increase insurance and other operating costs.
Increased focus on climate change has led to legislative and regulatory efforts to combat both potential causes and adverse impacts of climate change, including regulation of GHG emissions. New or increasing laws and regulations related to GHG emissions and other climate change related concerns may adversely affect us, our suppliers and our customers, and may require the Company to invest in additional capital investments to maintain compliance. Our value chain faces similar challenges as our products rely on agricultural ingredients and a global supply chain. Climate change poses a significant and increasing risk to global food production systems and to the safety and resilience of the communities where we live, work and source our ingredients. The GHG impacts of land-use change are most pronounced in our cocoa supply chain, where we have already been working for several years to prevent deforestation and build climate resilience. Additionally, any non-compliance with legislative and regulatory requirements could negatively impact our reputation and ability to do business.
Investors, customers, advisory services, government regulators and other market participants have increasingly focused on the environmental or sustainability practices of companies, including Hershey. Shareholders and financial institutions have increasingly evaluated a company’s ESG practices, disclosures and performance before making investments or other financial decisions. We believe our sustainability practices, disclosures and performance are focused on the most material risks and opportunities to our business and support our environmental goals and continue to evolve to meet the growing needs of our stakeholders. However, if our environmental goals do not meet investor or other external stakeholder expectations and standards, our access to capital may be negatively impacted. An enforcement action for non-compliance with regulations or reporting requirements could harm our reputation, financial position and ability to grow. A failure to meet investor or other external stakeholder expectations or standards may adversely affect our results of operations, ability to manage our liquidity, or ability to implement our strategies.
The Company publishes its environmental goals, with a particular focus on achieving a 50% absolute reduction in our Scope 1 and 2 GHG emissions and a 25% absolute reduction in our Scope 3 GHG emissions by 2030 (compared to a 2018 baseline), as well as having 100% of plastic packaging be recyclable, reusable or compostable and eliminating 25 million pounds of packaging by 2030. The costs of these voluntary commitments may be greater than expected, and there can be no assurance the Company will achieve its goals, or meet the evolving sustainability expectations and standards of our investors or other external stakeholders. Any failure to achieve our goals, a perception of our failure to act responsibly with respect to the environment, or failure to respond to new or evolving legal and regulatory
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| The Hershey Company | 2023 Form 10-K | Page 10 | |
requirements or other sustainability concerns could adversely affect our business, reputation and increase risk of litigation.
The effects and costs of climate change, or any failure to meet related requirements and expectations, could have a negative impact on our reputation, financial condition and results of operations.
Risks Related to the Industry in Which We Operate
Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results.
We use many different commodities for our business, including cocoa products, sugar, corn products, dairy products, wheat products, peanuts, almonds, corn sweeteners, natural gas and fuel oil.diesel fuel.
Commodities are subject to price volatility and changes in supply caused by numerous factors, including:
•Commodity market fluctuations; |
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Ÿ | Commodity market fluctuations; |
Ÿ | Currency exchange rates; |
Ÿ | Imbalances between supply and demand; |
Ÿ | The effect of weather on crop yield; |
Ÿ | Speculative influences; |
Ÿ | Trade agreements among producing and consuming nations; |
Ÿ | Supplier compliance with commitments; |
Ÿ | Political unrest in producing countries; and |
Ÿ | Changes in governmental agricultural programs and energy policies. |
•Currency exchange rates;
•Imbalances between supply and demand;
•Rising levels of inflation and interest rates related to domestic and global economic conditions or supply chain issues;
•The effects of climate change and extreme weather on crop yield and quality;
•Speculative influences;
•Trade agreements among producing and consuming nations;
•Supplier compliance with commitments;
•Import/export requirements for raw materials and finished goods;
•Political unrest in producing countries;
•Introduction of living income premiums or similar requirements;
•Changes in governmental agricultural programs and energy policies; and
•Other events beyond our control such as the impacts on the business or supply chain arising from the ongoing conflict between Russia and Ukraine.
Although we use forward contracts and commodity futures and options contracts where possible to hedge commodity prices where possible, commodity price increases ultimately result in corresponding increases in our raw material and energy costs. If we are unable to offset cost increases for major raw materials and energy, there could be a negative impact on our financial condition and results of operations.
Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity.
We may be able to pass some or all raw material, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes (including if inflation outpaces our pricing elasticity) sufficiently, or in a timely manner, to offset increased raw material, energy or other input costs, including packaging, freight, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our financial condition and results of operations.
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| The Hershey Company | 2023 Form 10-K | Page 11 | |
Market demand for new and existing products could decline.
We operate in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and to consumers. Our continued success is impacted by many factors, including the following:
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Ÿ | Effective retail execution; |
Ÿ | Appropriate advertising campaigns and marketing programs; |
Ÿ | Our ability to secure adequate shelf space at retail locations; |
Ÿ | Our ability to drive sustainable innovation and maintain a strong pipeline of new products in the confectionery and broader snacking categories; |
Ÿ | Changes in product category consumption; |
Ÿ | Our response to consumer demographics and trends, including but not limited to, trends relating to store trips and the impact of the growing e-commerce channel; and |
Ÿ | Consumer health concerns, including obesity and the consumption of certain ingredients. |
•Effective retail execution;•Appropriate advertising campaigns and marketing programs;
•Our ability to secure adequate shelf space at retail locations;
•Our ability to drive sustainable innovation and maintain a strong pipeline of new products in the confectionery and broader snacking categories;
•Our ability to react to changes in product category consumption;
•Our response to consumer demographics and trends, including but not limited to, trends relating to store trips and the impact of the growing digital commerce channel; and
•Consumer health and wellness concerns, including weight management (i.e., use of medications, dieting) and the consumption of certain ingredients.
There continues to be competitive product and pricing pressures in the markets where we operate, as well as challenges in maintaining profit margins. We must maintain mutually beneficial relationships with our key customers, including retailers and distributors, to compete effectively. Our largest customer, McLane Company, Inc., accounted for approximately 29%28% of our total net sales in 2017.2023. McLane Company, Inc. is one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers, including Wal-Mart Stores, Inc.
Increased marketplace competition could hurt our business.
The global confectionery and snacks packaged goods industry is intensely competitive and consolidation in this industry continues. Some of our competitors are large private companies, as well as large retailers, that have significant resources and substantial international operations. We continue to experience increased levels of in-store activity for other snack items, which has pressured confectionery category growth. In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we may be required to increase expenditures for promotions and advertising, and must continue to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks because we operate in a highly competitive retail environment.
DisruptionRisks Related 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.
Approximately 70% of our manufacturing capacity is located in the United States. Disruption to our global manufacturing operations or our supply chain could result from, among other factors, the following:
|
| |
Ÿ | Natural disaster; |
Ÿ | Pandemic outbreak of disease; |
Ÿ | Weather; |
Ÿ | Fire or explosion; |
Ÿ | Terrorism or other acts of violence; |
Ÿ | Labor strikes or other labor activities; |
Ÿ | Unavailability of raw or packaging materials; |
Ÿ | Operational and/or financial instability of key suppliers, and other vendors or service providers; and |
Ÿ | Suboptimal production planning which could impact our ability to cost-effectively meet product demand.
|
We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if they were to occur, including our global supply chain strategies and our principle-based global labor relations strategy. If we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted if such events were to occur.Strategic Initiatives
Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures.
From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our financial condition, results of operations and cash flows.
In January 2018,2023, we completed the acquisition of allcertain assets that provide additional manufacturing capacity from Weaver Popcorn, a manufacturer of SkinnyPop popcorn, which helped us strengthen our supply chain capabilities. In 2021, we successfully completed the outstanding sharesdivestiture of Amplify Snack Brands, Inc.LSFC as we better prioritize resources against assets and brands that fit our business model and scale capabilities. Additionally, we completed the acquisitions of Lily’s in June 2021 and Dot’s and Pretzels in December 2021. While we believe significant operating synergies can be obtained in connection with this acquisition,these acquisitions, achievement of these synergies will be driven by our ability to successfully leverage Hershey's Hershey’s
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| The Hershey Company | 2023 Form 10-K | Page 12 | |
resources, expertise, capability-building, distribution locations and capability-building.customer base. In addition, the acquisitionacquisitions of Amplify is anDot’s and Pretzels are important stepsteps in our journey to expand our breadth in snacking, as itthey should enable us to bring scale and category management capabilities to a key sub-segment of the warehouse snack aisle. If we are unable to successfully couple Hershey’s scale and expertise in brand building with Amplify’sLily’s, Dot’s and Pretzels’ existing operations, it may impact our ability to expand our snacking footprint at our desired pace.
Our international operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations.
In 2023, 2022 and 2021, respectively, we derived approximately 12.7%, 12.5% and 13.0% of our net sales from customers located outside of the United States. Additionally, approximately 17% of our total long-lived assets were located outside of the United States as of December 31, 2023. As part of our strategy, we have made investments outside of the United States, particularly in Canada, Malaysia, Mexico, Brazil and India. As a result, we are subject to risks and uncertainties relating to international sales and operations, including:
•The inability to manage operational stability and business resiliency within our international markets due to unforeseen global economic and environmental changes resulting in business interruption, supply constraints, inflation, deflation or decreased demand;
•The inability to establish, develop and achieve market acceptance of our global brands in international markets;
•Difficulties and costs associated with compliance and enforcement of remedies under a wide variety of complex laws, treaties and regulations;
•Unexpected changes in regulatory environments;
•Political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict;
•Nationalization of our properties by foreign governments;
•Tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation;
•Potentially negative consequences from changes in tax laws;
•The imposition of tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements;
•Increased costs, disruptions in shipping or reduced availability of freight transportation;
•The impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies;
•Failure to gain sufficient profitable scale in certain international markets resulting in an inability to cover manufacturing fixed costs or resulting in losses from impairment or sale of assets; and
•Failure to recruit, retain and build a talented and engaged global workforce.
If we are not able to achieve our projected international growth objectives and mitigate the numerous risks and uncertainties associated with our international operations, there could be a negative impact on our financial condition 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.
We depend on our ability to evolve and grow, and as changes in our business environment occur, we may adjust our business plans by introducing new strategic initiatives or restructuring programs to meet these changes. Recently introduced strategic initiatives include our efforts to continue to expand our presence in digital commerce, to transform our manufacturing, commercial and corporate operations through digital technologies and to enhance our data analytics capabilities to develop new commercial insights. If we are not able to capture our share of the expanding digital commerce market, if we do not adequately leverage technology to improve operating efficiencies or if we are unable to develop the data analytics capabilities needed to generate actionable commercial insights, our business performance may be impacted, which may negatively impact our financial condition and results of operations.
Additionally, from time to time we implement business realignment activities to support key strategic initiatives designed to maintain long-term sustainable growth, such as the International Optimization Program, which we commenced in the fourth quarter of 2020 and completed in 2023. This program was intended to increase our operating effectiveness and efficiency, to reduce our costs and/or to generate savings that can be reinvested in other areas of our
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| The Hershey Company | 2023 Form 10-K | Page 13 | |
business. Additionally, in February 2024, the Board of Directors approved the Advancing Agility & Automation Initiative, which is a multi-year productivity program to improve supply chain and manufacturing-related spend, optimize selling, general and administrative expenses, leverage new technology and business models to further simplify and automate processes, and generate long-term savings. We cannot guarantee that we will be able to successfully implement these strategic initiatives and restructuring programs, that we will achieve or sustain the intended benefits under these programs, or that the benefits, even if achieved, will be adequate to meet our long-term growth and profitability expectations, which could in turn adversely affect our business.
Risks Related to Governmental and Regulatory Changes
Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products.
Changes in U.S. and non-U.S. laws and regulations and the manner in which they are interpreted or applied may alter our business environment. These negative impacts could result from changes in food and drug laws, laws related to advertising and marketing practices, accounting standards, taxation compliance and requirements, competition laws, employment laws, import/export requirements and environmental laws, among others. For example, the European Union’s Deforestation Regulation (“EUDR”) will require the Company to conduct extensive diligence on seven commodities, including cocoa, palm oil and soy, as well as products derived from these commodities, such as chocolate, and the value chain, to ensure the goods do not result from recent deforestation, forest degradation, or breaches of local laws in order to sell such products in the European Union market or exported from it. The EUDR is scheduled to be effective in December 2024. The EUDR, and other current or proposed regulations in markets in which we operate, are likely to increase our compliance costs, could depress sales in such markets if our products are not in compliance by applicable effective dates, and could result in fines and penalties or reputational harm if we do not fully comply. It is possible that we could become subject to additional liabilities in the future resulting from changes in laws and regulations that could result in an adverse effect on our financial condition and results of operations.
Political, economic and/or financial market conditions, including impacts on our business arising from the ongoing conflict between Russia and Ukraine, could negatively impact our financial results.
Our operations are impacted by consumer spending levels and impulse purchases, which are affected by general macroeconomic conditions, consumer confidence, employment levels, the availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in food and energy costs, sustained global recessions, broad political instability, rising unemployment, pandemic, or other outbreak of disease (such as COVID-19), climate change, weather, natural and other disasters and declines in personal spending could adversely impact our revenues, profitability and financial condition.
Changes in financial market conditions may make it difficult to access credit markets on commercially acceptable terms, which may reduce liquidity or increase borrowing costs for our Company, our customers and our suppliers. A significant reduction in liquidity could increase counterparty risk associated with certain suppliers and service providers, resulting in disruption to our supply chain and/or higher costs, and could impact our customers, resulting in a reduction in our revenue, or a possible increase in bad debt expense.
OurAdditionally, in February 2022, Russia invaded Ukraine and this conflict is still ongoing. In response, the U.S. and other countries have imposed sanctions on Russia and may impose further sanctions that could damage or disrupt international operationscommerce and the global economy. With respect to the conflict between Russia and Ukraine, the situation remains dynamic and subject to rapid and possibly material change. The Company’s efforts to manage and mitigate any direct or indirect effects from this conflict may not achieve projected growth objectives, which could adversely impactultimately be unsuccessful, and the effectiveness of these efforts depends on factors beyond our overall business and results of operations.
In 2017, 2016 and 2015, respectively, we derived approximately 17% of our net sales from customers located outsidecontrol, including the duration of the United States. Additionally, approximately 25% of our total long-lived assets were located outsideconflict and potential governmental actions. The potential effects of the United States as of December 31, 2017. As part of our strategy, we have made investments outsideongoing conflict between Russia and Ukraine may also impact many of the United States, particularly in China, Malaysia, Mexico, Brazil and India. As a result, we are subject to risks and uncertainties relating to international sales and operations, including:other risk factors described herein.
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| |
Ÿ | Unforeseen global economic and environmental changes resulting in business interruption, supply constraints, inflation, deflation or decreased demand; |
Ÿ | Inability to establish, develop and achieve market acceptance |
Ÿ | Difficulties and costs associated with compliance and enforcement of remedies under a wide variety of complex laws, treaties and regulations; |
Ÿ | Unexpected changes in regulatory environments; |
Ÿ | Political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict; |
Ÿ | Nationalization of our properties by foreign governments; |
Ÿ | Tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation; |
Ÿ | Potentially negative consequences from changes in tax laws; |
ŸContents | The imposition of tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements; |
ŸHershey Company | 2023 Form 10-K | Page 14 | Increased costs, disruptions in shipping or reduced availability of freight transportation; |
Ÿ | The impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies; |
Ÿ | Failure to gain sufficient profitable scale in certain international markets resulting in an inability to cover manufacturing fixed costs or resulting in losses from impairment or sale of assets; and |
Ÿ | Failure to recruit, retain and build a talented and engaged global workforce. |
Risks Related to achieve our projected international growth objectivesDigital Transformation, Cybersecurity and mitigate the numerous risks and uncertainties associated with our international operations, there could be a negative impact on our financial condition and results of operations.Data Privacy
Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations.
Information technology is critically important to our business operations. We use information technology to manage all business processes including manufacturing, financial, logistics, sales, marketing and administrative functions. These processes collect, interpret and distribute business data and communicate internally and externally with employees, suppliers, customers and others.
other third parties.
We are regularly the target of attempted cyber, ransomware and other security threats. Therefore, we continuously monitor and update our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. We invest in industry standard security technology to protect the Company’s data and business processes against risk of data security breach and cyber attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security effectiveness through industry acceptedindustry-accepted methods and remediate significant findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuityresiliency preparedness. We also have processes in place to prevent disruptions resulting from theour implementation of new software and systems of the latest technology.systems. Employees are trained annually on cybersecurity wellness and our acceptable use policy and we have implemented phishing simulations to increase awareness and compliance. We also currently maintain a cyber insurance policy that provides coverage for security breaches; however, such insurance may not be sufficient in type or amount to cover us against claims related to security breaches, cyber-attacks and other related breaches.
While weWe have been subject to cyber attacks, ransomware and other security breaches, though these incidents didhistorically have not havehad a significant impact on our business operations. We believe our security technology toolsThe techniques that are used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and processes provide adequate measuresmay be difficult to detect for long periods of protection against security breachestime, and the sophistication of efforts by hackers to gain unauthorized access to information systems has continued to increase in reducing cybersecurity risks. Nevertheless, despiterecent years and may continue to do so. Despite continued vigilance in these areas, disruptions in or failures of information technology systems are possible and could have a negative impact on our operations or business reputation. For instance, in September 2023, we experienced a smishing breach, which did not have an impact on our consolidated financial statements. Promptly after extracting the threat actor, we worked with a cyber expert firm and determined that certain employee and third-party personal information was exposed. Failure of our systems, including failures due to cyber attacks, ransomware or other security breaches that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our Company, our employees and those with whom we do business. This in turn could have a negative impact on our financial condition and results or operations. In addition, the cost to remediate any damages to our information technology systems suffered as a result of a cyber attack, ransomware or other security breach could be significant.
We might not be able to hire, engage and retain the talented global workforce we need to drive our growth strategies.
Our future success depends upon our ability to identify, hire, develop, engage and retain talented personnel across the globe. Competition for global talent is intense, and we might not be able to identify and hire the personnel we need to continue to evolve and grow our business. In particular, if we are unable to hire the right individuals to fill new or existing senior management positions as vacancies arise, our business performance may be impacted.
Activities related to identifying, recruiting, hiring and integrating qualified individuals require significant time and attention. We may also need to invest significant amounts of cash and equity to attract talented new employees, and we may never realize returns on these investments.
In addition to hiring new employees, we must continue to focus on retaining and engaging the talented individuals we need to sustain our core business and lead our developing businesses into new markets, channels and categories. This may require significant investments in training, coaching and other career development and retention activities. If we are not able to effectively retain and grow our talent, our ability to achieve our strategic objectives will be adversely affected, which may impact our financial condition and results of operations.
We may not fully realize the expected costs savings and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business.
We depend on our ability to evolve and grow, and as changes in our business environment occur, we may adjust our business plans by introducing new strategic initiatives or restructuring programs to meet these changes. From time to time, we implement business realignment activities to support key strategic initiatives designed to maintain long-term sustainable growth, such as the Margin for Growth Program we commenced in the first quarter of 2017. These programs are intended to increase our operating effectiveness and efficiency, to reduce our costs and/or to generate savings that can be reinvested in other areas of our business. We cannot guarantee that we will be able to successfully implement these strategic initiatives and restructuring programs, that we will achieve or sustain the intended benefits under these programs, or that the benefits, even if achieved, will be adequate to meet our long-term growth and profitability expectations, which could in turn adversely affect our business.
Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations.
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. This ERP system 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 ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We may not be able to successfully implement the ERP system without experiencing further delays, increased costs and other difficulties. If we are unable to successfully design and implement the new ERP system as planned, our financial positions, results of operations and cash flows could be negatively impacted. Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could be further delayed.
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Item 1B. | The Hershey Company | 2023 Form 10-K | Page 15 | UNRESOLVED STAFF COMMENTS |
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 1C. CYBERSECURITY
Cybersecurity Risk Management and Strategy
Information technology is important to our business operations, and we are committed to protecting the privacy, security and integrity of our data, as well as our employee and customer data. The Company has a comprehensive cybersecurity program in place for assessing, identifying and managing cybersecurity risks that is designed to protect its systems and data from unauthorized access, use or other security impact. This program is integrated into the Company’s overall Enterprise Risk Management and Resiliency process.
We continuously monitor and update our information technology networks and infrastructure to prevent, detect, address and mitigate risks associated with unauthorized access, misuse, computer viruses and other events that could have a security impact. We invest in industry standard security technology to protect the Company’s data and business processes against risk of cybersecurity incidents. Our data security management program includes identity, trust, vulnerability and threat management business processes, as well as adoption of standard data protection policies. We measure our data security effectiveness by benchmarking against industry-accepted methods and we work to remediate any significant findings. We maintain and routinely test backup systems and disaster recovery and also have processes in place to prevent disruptions resulting from our implementation of new software and systems.
The Company has a comprehensive incident response plan to address cybersecurity incidents. The Company’s incident response plan includes procedures for identifying, containing and responding to cybersecurity incidents and is subject to regular review and assessment to ensure that it is effective in protecting the Company’s information technology. To date, the Company believes that its cybersecurity program has been effective in protecting the confidentiality, integrity, and availability of its information; however, the Company cannot guarantee that its cybersecurity program will be successful in preventing all cybersecurity incidents. Further, we currently maintain a cyber insurance policy that provides coverage for security breaches; however, such insurance may not be sufficient in type or amount to cover us against claims related to security breaches, cyber-attacks and other related breaches.
The Company engages external parties, including consultants, computer security firms and risk management and governance experts, to enhance its cybersecurity oversight. In order to oversee and identify risks from cybersecurity threats associated with the Company’s use of third-party service providers, we also have a third-party risk management program designed to help protect against the misuse of information technology by third parties and business partners, which includes certification of our major technology suppliers and any outsourced services through accepted security certification standards.
While we are regularly subject to cybersecurity attacks, ransomware and other security breaches, the Company has not experienced any material cybersecurity incidents or a series of related unauthorized occurrences for the year ended December 31, 2023. The Company does not believe that there are currently any known risks from cybersecurity threats that are reasonably likely to materially affect the Company or its business strategy, results of operations or financial condition. However, as discussed under “Item 1A. Risk Factors,” specifically the risks titled “Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations,” the sophistication of cyber, ransomware and other security threats continues to increase, and the preventative actions we take to reduce the risk of these incidents and protect our systems and information may be insufficient. Accordingly, no matter how well designed or implemented our controls are, we will not be able to anticipate all cybersecurity attacks, ransomware and other security breaches and we may not be able to implement effective preventive measures against such security breaches in a timely manner. Cybersecurity Governance and Oversight
The Company’s Board of Directors has a mix of experiences, skills, qualifications and backgrounds to support strategy and risk oversight, including expertise in cybersecurity and oversight of cybersecurity matters. This oversight is achieved through the Company’s Finance and Risk Management (“F&RM”) Committee, which is comprised of five members of our Board of Directors, and one Board member who serves in an ex-officio capacity. The F&RM Committee is responsible for reviewing key enterprise risks identified through our Enterprise Risk Management and
| | | | | | | | |
Item 2. | The Hershey Company | 2023 Form 10-K | Page 16 | PROPERTIES |
Resiliency process, which includes information security strategies and risks, as well as data privacy and protection risks and mitigation strategies (collectively, “Information Security”). At each regularly scheduled F&RM Committee meeting, management, through the Company’s Chief Information Security Officer (“CISO”), reports on Information Security controls, audits, guidelines and developments and the F&RM Committee is notified between such updates regarding significant new cybersecurity threats or incidents.
The CISO, who reports to the Chief Technology Officer (“CTO”), oversees a dedicated Information Security team that is supported by the Privacy Center of Excellence, and works in partnership with internal audit to review certain information technology-related internal controls with our independent auditors as part of the overall internal controls process. Our CTO, who reports to the Chief Executive Officer, has oversight of our Information Security team and leads the company’s global technology strategy, architecting and deploying digital capabilities that are innovative, flexible and prepared to meet the changing needs of our consumers, retail partners and employees.
The CISO’s cybersecurity experience includes over thirty years of Information Technology experience, including twenty years within the Information Security field. The CISO’s Information Security roles have included security engineering, security architecture, strategy development and execution, risk and compliance management and identity and access management and incident response. The Company’s CTO has over twenty years of experience, including deep expertise in developing cutting-edge automated systems, supply chain planning, optimization and simulation, artificial intelligence and predictive analytics. Additional experience held by the CTO is described further under Information about Our Executive Officers. To ensure our employees are educated on potential cybersecurity threats or actions, we train our executive officers and global workforce on an ongoing basis in the event of a potential cyber threat or cybersecurity incident. Our Company-wide Information Security training program includes security awareness training, including regular phishing simulations, acceptable use training, cyber wellness trainings and other targeted trainings throughout the year. These trainings provide employees the opportunity to gain an understanding of the various forms of cybersecurity incidents and enable our employees to handle and report any suspicious activity or threat.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 17 | |
Item 2. PROPERTIES
Our principal properties include the following:
|
| | | | | | | | | | | | | | | | | | | |
| Country | | Location | | Location | Type | | Status
(Own/Lease)
|
| United States | | Hershey, Pennsylvania
(2 principal plants)
| | Manufacturing—confectionery products and pantry items | | Own |
| | Lancaster, Pennsylvania | | Manufacturing—confectionery products | | Own |
| | Hazleton, Pennsylvania | | Manufacturing—confectionery products | | Own |
| | Robinson, Illinois | | Manufacturing—confectionery products and pantry items | | Own |
| | Stuarts Draft, Virginia | | Manufacturing—confectionery products and pantry items | | Own |
| | Edgerton, Kansas | | Manufacturing—salty snack products | | Edwardsville, Illinois | Distribution | | Own |
| | Bluffton, Indiana | | Manufacturing—salty snack products | | Palmyra, Pennsylvania | Distribution | | OwnLease |
| | Plymouth, Indiana | | Manufacturing—salty snack products | | Ogden, Utah | Distribution | | OwnLease |
| Canada | Lawrence, Kansas | | Manufacturing—salty snack products | | Brantford, Ontario | Distribution | | Own (1)
Lease |
| Mexico | Whitestown, Indiana | | Manufacturing—salty snack products | | Lease |
| | Annville, Pennsylvania | | Distribution | | Own |
| | Palmyra, Pennsylvania | | Distribution | | Own |
| | Edwardsville, Illinois | | Distribution | | Own |
| | Ogden, Utah | | Distribution | | Own |
| | Kennesaw, Georgia | | Distribution | | Lease |
| | Whitestown, Indiana | | Distribution | | Lease |
| | Hershey, Pennsylvania | | Corporate administrative | | Lease |
| | New York, New York | | Retail | | Lease |
| Canada | | Brantford, Ontario | | Distribution | | Own |
| Mexico | | Monterrey, Mexico | | Manufacturing—confectionery products | | Own |
| China | El Salto, Mexico | | Shanghai, China | | Manufacturing—confectionery products and pantry items | | Own |
| Malaysia | | Johor, Malaysia | | Manufacturing—confectionery products | | Own |
(1) We have an agreement with the Ferrero Group for the use of a warehouse and distribution facility of which the Company has been deemed to be the owner for accounting purposes.
In addition to the locations indicated above, we also own or lease several other properties and buildings worldwide which we use for manufacturing, sales, distribution and administrative functions. Our facilities are well maintained and generally have adequate capacity to accommodate seasonal demands, changing product mixes and certain additional growth. We continuallyregularly improve our facilities to incorporate the latest technologies. The largest facilities are located in Hershey, Lancaster and Lancaster,Hazleton, Pennsylvania; Monterrey and El Salto, Mexico; and Stuarts Draft, Virginia. The U.S., Canada and Mexico facilities in the table above primarily support our North America segment,Confectionery and North America Salty Snacks segments, while the China and Malaysia facilitiesfacility primarily serveserves our International and Other segment. As discussed in Note 1113 to the Consolidated Financial Statements, we do not manage our assets on a segment basis given the integration of certain manufacturing, warehousing, distribution and other activities in support of our global operations.
The Company is subject to certainItem 3. LEGAL PROCEEDINGS
Information on legal proceedings and claims arising out ofis included in Note 15 to the ordinary course of our business, which cover a wide range of matters including trade regulation, product liability, advertising, contracts, environmental issues, patent and trademark matters, labor and employment matters and tax. While it is not feasible to predict or determine the outcome of such proceedings and claims with certainty, in our opinion these matters, both individually and in the aggregate, are not expected to have a material effect on our financial condition, results of operations or cash flows.Consolidated Financial Statements. | |
Item 4. | MINE SAFETY DISCLOSURES |
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 18 | |
SUPPLEMENTAL ITEM. INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions and, as of February 16, 2018,2024, their ages are set forth below.
| | | | | | | | | | | | | | |
| Name | | Age | | | |
Name | | Age | | Positions Held During the Last Five Years |
Deepak Bhatia (1) | | 50 | | Senior Vice President, Chief Technology Officer (October 2023) |
| Michele G. Buck | | 62 | | 56 | Chairman of the Board, President and Chief Executive Officer (October 2019);
President and Chief Executive Officer (March 2017) |
| Rohit Grover | | 51 | | President, International (April 2019); Executive
Vice President, General Manager, General China (January 2017) |
Jennifer L. McCalman (2) | | 46 | | Vice President, Chief OperatingAccounting Officer (June 2016)(February 2021);
Senior Director, Global Controller (March 2019) |
| Charles R. Raup | | 56 | | President, North America (May 2013)U.S. Confection (November 2022); Senior
President, U.S. (January 2020);
Vice President, Chief Growth Officer (September 2011)U.S. CMG (June 2018) |
Javier H. IdrovoJason R. Reiman | | 52 | | 50 | Chief Accounting Officer (August 2015); Senior Vice President, Finance and Planning (September 2011) |
Patricia A. Little (1)
| | 57 | | Senior Vice President, Chief Financial Officer (March 2015) |
Terence L. O’Day | | 68 | | Senior Vice President, Chief Product Supply and Technology Officer (March 2017); Senior Vice President, Chief Supply Chain Officer (May 2013)(June 2019);
Vice President, Supply Chain Operations (August 2018) |
| Kristen J. Riggs | | 45 | | President, Salty Snacks (November 2022);
Senior Vice President, Global Operations (December 2008)Chief Growth Officer (January 2020);
Vice President, Innovation and Strategic Growth Platforms (September 2019);
Vice President, Commercial Planning (June 2018) |
Todd W. Tillemans (2)
Christopher M. Scalia | | 48 | | 56 | President, U.S. (April 2017) |
Leslie M. Turner | | 60 | | Senior Vice President, General Counsel and Corporate Secretary (July 2012) |
Kevin R. Walling | | 52 | | Senior Vice President, Chief Human Resources Officer (November 2011)(January 2020);
Vice President, Global Human Resources (March 2018) |
| James Turoff | | 47 | | Senior Vice President, General Counsel and Secretary (May 2021); Acting General Counsel (December 2020); Vice President, Deputy General Counsel (March 2019); Vice President, SEC, Corporate Governance & Compliance (March 2018) |
Mary Beth West Steven E. Voskuil (3)
| | 55 | | 55 | Senior Vice President, Chief GrowthFinancial Officer (February 2021);
Senior Vice President, Chief Financial Officer and Chief Accounting Officer (November 2019);
Senior Vice President, Chief Financial Officer (May 2017)2019) |
There are no family relationships among any of the above-named officers of our Company.
| |
(1) | Ms. Little was elected Senior Vice President, Chief Financial Officer effective March 16, 2015. Prior to joining our Company she was Executive Vice President and Chief Financial Officer of Kelly Services, Inc. (July 2008). |
| |
(2) | Mr. Tillemans was elected President, U.S. effective April 3, 2017. Prior to joining our Company he was President, Customer Development U.S. at Unilever N.V. (December 2012). |
| |
(3) | Ms. West was elected Senior Vice President, Chief Growth Officer effective May 1, 2017. Prior to joining our Company she was Executive Vice President, Chief Customer and Marketing Officer at J.C. Penney (June 2015) and Executive Vice President, Chief Category and Marketing Officer at Mondelez Global Inc. (October 2012). |
(1) Mr. Bhatia was appointed Senior Vice President, Chief Technology Officer effective October 23, 2023. Prior to joining our Company he was the Vice President of Supply Chain Optimization Technologies (August 2021), Vice President of Technology, Inventory Planning & Control in Supply Chain Optimization Technologies (March 2019), and Director, Inventory Optimization, Simulations, S&OP in Inventory Planning & Control (April 2014) at Amazon.com, Inc., a multinational technology company.
(2) Ms. McCalman was appointed Vice President, Chief Accounting Officer effective February 23, 2021. Prior to joining our Company she was Senior Director and Assistant Controller for Keurig Dr. Pepper (formerly Keurig Green Mountain) (May 2017), a beverage and coffeemaker company.
(3) Mr. Voskuil was appointed Senior Vice President, Chief Financial Officer effective May 13, 2019. Prior to joining our Company he was Senior Vice President and Chief Financial Officer at Avanos Medical, Inc. (November 2014), a medical technology company.
Our Executive Officers are generally electedappointed each year at the organization meeting of the Board in May.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 19 | |
PART II
| |
Item 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESItem 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Common Stock is listed and traded principally on the New York Stock Exchange under the ticker symbol “HSY.” The Class B Common Stock (“Class B Stock”) is not publicly traded.
The closing price of our Common Stock on December 31, 2017,29, 2023 (the last business day of the of the fiscal year) was $113.51.$186.44. There were 28,33623,327 stockholders of record of our Common Stock and 65 stockholders of record of our Class B Stock as of December 31, 2017.2023.
We paid $526.3$889.1 million in cash dividends on our Common Stock and Class B Stock in 20172023 and $499.5$775.0 million in 2016.2022. The annual dividend rate on our Common Stock in 20172023 was $2.548$4.456 per share.
Information regarding dividends paid and the quarterly high and low market prices for our Common Stock and dividends paid for our Class B Stock for the two most recent fiscal years is disclosed in Note 17 to the Consolidated Financial Statements.
On January 31, 2018,February 7, 2024, our Board declared a quarterly dividend of $0.656$1.370 per share of Common Stock payable on March 15, 2018,2024, to stockholders of record as of February 23, 2018.20, 2024. It is the Company’s 353rd376th consecutive quarterly Common Stock dividend. A quarterly dividend of $0.596$1.245 per share of Class B Stock also was declared.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
There were noThe following table shows the purchases of ourshares of Common Stock duringmade 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 December 31, 2017.2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| October 2 through October 29 | | — | | | $ | — | | — | | | $ | 370,073 |
| October 30 through November 26 | | 127,609 | | | $ | 196.33 | | — | | | $ | 370,073 |
| November 27 through December 31 | | — | | | $ | — | | — | | | $ | 370,073 |
| Total | | 127,609 | | | $ | — | | — | | | |
(1) During the three months ended December 31, 2023, 127,609 shares of Common Stock were purchased in open market transactions in connection with our standing authorization to buy back shares sufficient to offset those issued under incentive compensation plans, which authorization does not have a dollar or share limit and is not included in our share repurchase authorizations described in the following note (2).
(2) In January 2016,July 2018, our Board of Directors approved a $500 million share repurchase authorization. In May 2021, our Board of Directors approved an additional $500 million share repurchase authorization. As a result of the February 2023 Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “School Trust”), the July 2018 share repurchase authorization was completed and as of December 31, 2017,2023, approximately $100$370 million remained available for repurchases of our Common Stock under this program.our May 2021 share repurchase authorization. In October 2017,December 2023, our Board of Directors approved an additional $100$500 million share repurchase authorization,authorization. This program is to commence after the existing 20162021 authorization is completed. Neither the 2016 nor the 2017completed and is to be utilized at management’s discretion. The May 2021 and December 2023 share repurchase programs do not have an expiration date.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 20 | |
In August 2017,February 2023, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust, (the “Trust”), pursuant to which the Company agreed to purchase 1,500,000purchased 1,000,000 shares of the Company’s common stockCommon Stock from the School Trust at a price equal to $106.01$239.91 per share, for a total purchase price of $159$239.9 million.
In February 2022, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased 1,000,000 shares of the Company’s Common Stock from the School Trust at a price equal to $203.35 per share, for a total purchase price of $203.4 million.
Stockholder Return Performance Graph
The following graph compares our cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Standard & Poor’s 500 Index and the Standard & Poor’s 500 Packaged Foods Index.
Comparison of 5 Year Cumulative Total Return*
Among The Hershey Company, the S&P 500 Index,
and the S&P 500 Packaged Foods Index
*$100 invested on December 31, 2012 in stock or index, including reinvestment of dividends.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| Company/Index | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
| The Hershey Company | | $ | 100 | | | $ | 140 | | | $ | 148 | | | $ | 192 | | | $ | 234 | | | $ | 193 | |
| S&P 500 Index | | $ | 100 | | | $ | 131 | | | $ | 156 | | | $ | 200 | | | $ | 164 | | | $ | 207 | |
| S&P 500 Packaged Foods Index | | $ | 100 | | | $ | 131 | | | $ | 137 | | | $ | 155 | | | $ | 169 | | | $ | 156 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, |
| Company/Index | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| The Hershey Company | | $ | 100 |
| | $ | 137 |
| | $ | 150 |
| | $ | 132 |
| | $ | 157 |
| | $ | 176 |
|
| S&P 500 Index | | $ | 100 |
| | $ | 132 |
| | $ | 150 |
| | $ | 153 |
| | $ | 171 |
| | $ | 208 |
|
| S&P 500 Packaged Foods Index | | $ | 100 |
| | $ | 126 |
| | $ | 146 |
| | $ | 156 |
| | $ | 164 |
| | $ | 186 |
|
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Item 6. [RESERVED]
| | | | | | | | |
Item 6. | The Hershey Company | 2023 Form 10-K | Page 21 | SELECTED FINANCIAL DATA |
FIVE-YEAR CONSOLIDATED
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL SUMMARYCONDITION AND RESULTS OF OPERATIONS
(All dollar and share amounts in thousands except market price and per share statistics)
|
| | | | | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Summary of Operations | | | | | | | | | | |
| Net Sales | | $ | 7,515,426 |
| | 7,440,181 |
| | 7,386,626 |
| | 7,421,768 |
| | 7,146,079 |
|
| Cost of Sales | | $ | 4,070,907 |
| | 4,282,290 |
| | 4,003,951 |
| | 4,085,602 |
| | 3,865,231 |
|
| Selling, Marketing and Administrative | | $ | 1,913,403 |
| | 1,915,378 |
| | 1,969,308 |
| | 1,900,970 |
| | 1,922,508 |
|
| Goodwill, Indefinite and Long-Lived Asset Impairment Charges | | $ | 208,712 |
| | 4,204 |
| | 280,802 |
| | 15,900 |
| | — |
|
| Business Realignment Costs | | $ | 47,763 |
| | 32,526 |
| | 94,806 |
| | 29,721 |
| | 18,665 |
|
| Interest Expense, Net | | $ | 98,282 |
| | 90,143 |
| | 105,773 |
| | 83,532 |
| | 88,356 |
|
| Provision for Income Taxes | | $ | 354,131 |
| | 379,437 |
| | 388,896 |
| | 459,131 |
| | 430,849 |
|
| Net Income Attributable to The Hershey Company | | $ | 782,981 |
| | 720,044 |
| | 512,951 |
| | 846,912 |
| | 820,470 |
|
| Net Income Per Share: | | | | | | | | | | |
| —Basic—Common Stock | | $ | 3.79 |
| | 3.45 |
| | 2.40 |
| | 3.91 |
| | 3.76 |
|
| —Diluted—Common Stock | | $ | 3.66 |
| | 3.34 |
| | 2.32 |
| | 3.77 |
| | 3.61 |
|
| —Basic—Class B Stock | | $ | 3.44 |
| | 3.15 |
| | 2.19 |
| | 3.54 |
| | 3.39 |
|
| —Diluted—Class B Stock | | $ | 3.44 |
| | 3.14 |
| | 2.19 |
| | 3.52 |
| | 3.37 |
|
| Weighted-Average Shares Outstanding: | | | | | | | | | | |
| —Basic—Common Stock | | 151,625 |
| | 153,519 |
| | 158,471 |
| | 161,935 |
| | 163,549 |
|
| —Basic—Class B Stock | | 60,620 |
| | 60,620 |
| | 60,620 |
| | 60,620 |
| | 60,627 |
|
| —Diluted—Common Stock | | 213,742 |
| | 215,304 |
| | 220,651 |
| | 224,837 |
| | 227,203 |
|
| Dividends Paid on Common Stock | | $ | 387,466 |
| | 369.292 |
| | 352,953 |
| | 328,752 |
| | 294,979 |
|
| Per Share | | $ | 2.548 |
| | 2.402 |
| | 2.236 |
| | 2.040 |
| | 1.810 |
|
| Dividends Paid on Class B Stock | | $ | 140,394 |
| | 132,394 |
| | 123,179 |
| | 111,662 |
| | 98,822 |
|
| Per Share | | $ | 2.316 |
| | 2.184 |
| | 2.032 |
| | 1.842 |
| | 1.630 |
|
| Depreciation | | $ | 211,592 |
| | 231,735 |
| | 197,054 |
| | 176,312 |
| | 166,544 |
|
| Amortization | | $ | 50,261 |
| | 70,102 |
| | 47,874 |
| | 35,220 |
| | 34,489 |
|
| Advertising | | $ | 541,293 |
| | 521,479 |
| | 561,644 |
| | 570,223 |
| | 582,354 |
|
| Year-End Position and Statistics | | | | | | | | | | |
| Capital Additions (including software) | | $ | 257,675 |
| | 269,476 |
| | 356,810 |
| | 370,789 |
| | 350,911 |
|
| Total Assets | | $ | 5,553,726 |
| | 5,524,333 |
| | 5,344,371 |
| | 5,622,870 |
| | 5,349,724 |
|
| Short-term Debt and Current Portion of Long-term Debt | | $ | 859,457 |
| | 632,714 |
| | 863,436 |
| | 635,501 |
| | 166,875 |
|
| Long-term Portion of Debt | | $ | 2,061,023 |
| | 2,347,455 |
| | 1,557,091 |
| | 1,542,317 |
| | 1,787,378 |
|
| Stockholders’ Equity | | $ | 931,565 |
| | 827,687 |
| | 1,047,462 |
| | 1,519,530 |
| | 1,616,052 |
|
| Full-time Employees | | 15,360 |
| | 16,300 |
| | 19,060 |
| | 20,800 |
| | 12,600 |
|
| Stockholders’ Data | | | | | | | | | | |
| Outstanding Shares of Common Stock and Class B Stock at Year-end | | 210,861 |
| | 212,260 |
| | 216,777 |
| | 221,045 |
| | 223,895 |
|
| Market Price of Common Stock at Year-end | | $ | 113.51 |
| | 103.43 |
| | 89.27 |
| | 103.93 |
| | 97.23 |
|
| Price Range During Year (high) | | $ | 115.96 |
| | 113.89 |
| | 110.78 |
| | 108.07 |
| | 100.90 |
|
| Price Range During Year (low) | | $ | 102.87 |
| | 83.32 |
| | 83.58 |
| | 88.15 |
| | 73.51 |
|
| | | | | | | | | | | |
| |
Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management'sManagement’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of Hershey'sHershey’s financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.”
The MD&A is organized in the following sections:
BUSINESS MODEL AND GROWTH STRATEGY
We are the largest producer of quality chocolate in North America, a leading snack maker in the United States and a global leader in chocolate and non-chocolate confectionery. We report our operations through three segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International, as discussed in Note 13 to the Consolidated Financial Statements. Our vision is to be a leading snacking powerhouse. We aspire to be a leader in meeting consumers’ evolving snacking needs while strengthening the capabilities that drive our growth. We are focused on four strategic imperatives to ensure the Company’s success now and in the future:
•Drive Core Confection Business and Broaden Participation in Snacking. We continue to be the undisputed leader in U.S. confection by taking actions to deepen our consumer connections and utilize our beloved brands to deliver meaningful innovation, while also diversifying our portfolio to capture profitable and incremental growth across the broader snacking continuum.
◦Our products frequently play an important role in special moments among family and friends. Seasons are an important part of our business model and for consumers, as they are highly anticipated, cherished times, centered around traditions. For us, it’s an opportunity for our brands to be part of many connections during the year when family and friends gather.
◦Innovation is an important lever in this variety-seeking category and we are leveraging work from our proprietary demand landscape analytical tool to shape our future innovation and make it more impactful. We are becoming more disciplined in our focus on platform innovation, which should enable sustainable growth over time and significant extensions to our core.
◦To expand our breadth in snacking and become a leading snacking powerhouse, we are focused on continuing to expand the boundaries of our core confection brands to capture new snacking occasions and increasing our exposure into new snack categories through acquisitions. Our expansion into snacking was fueled by the acquisitions of Dot’s and Pretzels in December 2021 and the acquisition of Weaver in 2023, which are included in our North America Salty Snacks segment.
•Deliver Profitable International Growth. We are focused on ensuring that we efficiently allocate our resources to the areas with the highest potential for profitable growth. We have reset our international investment strategy, while holding fast to our belief that our targeted emerging market strategy will deliver long-term, profitable growth. The uncertain macroeconomic environment in many of these markets is expected to continue and we aim to ensure our investments in these international markets are appropriate relative to the size of the opportunity.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 22 | |
•Expand Competitive Advantage through Differentiated Capabilities. In order to generate actionable insights, we must acquire, integrate, access and utilize vast sources of the right data in an effective manner. We are working to leverage our advanced data and analytical techniques to gain a deep understanding of our consumers, our customers, our shoppers, our end-to-end supply chain, our retail environment and key economic drivers at both a macro and precision level, including digital transformation and new media models. In addition, we are in the process of transforming our supply chain capabilities and enterprise resource planning system, which will enable employees to work more efficiently and effectively.
•Responsibly Manage Our Operations to Ensure the Long-Term Sustainability of Our Business, Our Planet and Our People. We are a purpose-driven company and for more than a century, our iconic brands have been built on a foundation of community investment and connections between people around the world. We could not have achieved this without our remarkable employees who make our purpose a reality. We believe our long-standing values make our Company a special place to work.
◦We believe our employees are among our most important resources and are critical to our continued success. We utilize continuous listening surveys that are distributed throughout the year to all employees globally to hear their thoughts on the Company’s direction and their place in it. These continuous touchpoints allow for real-time feedback and action from the Company. These surveys are further supplemented with quarterly and informative enterprise and team town halls, which, in conjunction with the continuous listening surveys, generate stronger employee engagement with the Company’s strategy, initiatives and leadership.
◦Our diverse and inclusive culture makes the difference across all areas of the business. Our gender representation includes women occupying many of the top positions in the Company, including Chief Executive Officer and Chairman of the Board, Chief Accounting Officer and President, Salty Snacks, and approximately 50% representation across the Company. In 2023, we maintained fair and equitable pay achievements, including 1:1 aggregate people of color pay equity (2021) and 1:1 aggregate gender pay (2020) for salaried employees in the United States.
◦We continue to make progress on our ESG priorities and continue to elevate these ESG initiatives for a greater global impact. Through our focus on sustainability and social impact across our value chain, we continue to improve and focus on the lives of cocoa farmers and cocoa communities, the environmental priorities of climate change and the role of packaging in our business, responsibly and sustainably sourcing the inputs to our products and increasing investments in human rights and diversity initiatives and growing diverse representation across the organization.
OVERVIEW
Hershey is a global confectionery leader known for making more moments of goodness through chocolate, sweets, mints and other great tasting snacks. We are the largest producer of quality chocolate in North America, a leading snack maker in the United States 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 80 countries worldwide.
Our principal product offerings include chocolate and non-chocolate confectionery products; gum and mint refreshment products and protein bars; pantry items, such as baking ingredients, toppings and beverages; and snack items such as spreads, bars, and snack bites and mixes, popcorn and pretzels.
Business Acquisitions and Divestitures
On May 31, 2023, we completed the acquisition of certain assets that provide additional manufacturing capacity from Weaver Popcorn Manufacturing, Inc. (“Weaver”), a leader in the production and co-packing of microwave popcorn and ready-to-eat popcorn, and former co-manufacturer of the Company’s SkinnyPop brand.
In December 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 with deep pretzel category and product expertise and the manufacturing capabilities to support brand growth and future pretzel
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| The Hershey Company | 2023 Form 10-K | Page 23 | |
innovation. Additionally, 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, which complements Hershey’s snacks portfolio.
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.
In January 2021, we completed the divestiture of Lotte Shanghai Foods Co., Ltd. (“LSFC”), which was previously included within the International segment results in our consolidated financial statements. Total proceeds from the divestiture and the impact on our consolidated financial statements were immaterial.
TRENDS AFFECTING OUR BUSINESS
Throughout 2023, the rate of inflation has slowed; however, negative macroeconomic conditions and future outlook, including fears of a pending recession, have negatively impacted consumer behaviors. Net sales and net income increased during the year ended December 31, 2023; however, this was primarily driven by price increases on certain products across our portfolio. Additionally, we continued to experience corresponding incremental costs and gross margin pressures during the year ended December 31, 2023 (see Consolidated Results of Operations included in this MD&A). Despite specific actions taken to mitigate these gross margin pressures, higher prices for direct materials used to manufacture our products were, and continue to be, the primary incremental cost to our business. We utilize many exchange traded commodities for our business that are subject to price volatility, specifically cocoa products, which experienced an average increase in market prices of approximately 32% during 2023. We continue to monitor and use our risk management strategy where possible to hedge commodity prices in order to mitigate corresponding increases in our raw materials and energy costs.
Furthermore, certain geopolitical events, specifically the conflict between Russia and Ukraine, have increased global economic and political uncertainty. For the year ended December 31, 2023, this conflict did not have a material impact on our commodity prices or supply availability. However, we are continuing to monitor for any significant escalation or expansion of economic or supply chain disruptions or broader inflationary costs, which may result in material adverse effects on our results of operations.
As of December 31, 2023, we believe we have sufficient liquidity to satisfy our key strategic initiatives and other material cash requirements in both the short-term and in the long-term; however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can operate effectively during the current economic environment. We continue to monitor our discretionary spending across the organization (see Liquidity and Capital Resources included in this MD&A).
Based on the length and severity of fluctuating levels of inflation, including price volatility for our commodities, the likelihood of a potential recession, changes in consumer shopping and consumption behavior, and changes in geopolitical events, including the ongoing conflict between Russia and Ukraine, we may experience increasing supply chain costs, higher inflation and other impacts to our business. We will continue to evaluate the nature and extent of these potential and evolving impacts on our business, consolidated results of operations, segment results, liquidity and capital resources.
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| The Hershey Company | 2023 Form 10-K | Page 24 | |
CONSOLIDATED RESULTS OF OPERATIONS
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| | | | | | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars except per share amounts | | | | | | | | | | |
| Net sales | | $ | 11,165.0 | | | $ | 10,419.3 | | | $ | 8,971.3 | | | 7.2 | % | | 16.1 | % |
| Cost of sales | | 6,167.2 | | | 5,920.5 | | | 4,922.7 | | | 4.2 | % | | 20.3 | % |
| Gross profit | | 4,997.8 | | | 4,498.8 | | | 4,048.6 | | | 11.1 | % | | 11.1 | % |
| Gross margin | | 44.8 | % | | 43.2 | % | | 45.1 | % | | | | |
| Selling, Marketing & Administrative (“SM&A”) expense | | 2,436.5 | | | 2,236.0 | | | 2,001.4 | | | 9.0 | % | | 11.7 | % |
| SM&A expense as a percent of net sales | | 21.8 | % | | 21.5% | | 22.3% | | | | |
| | | | | | | | | | |
| Business realignment costs | | 0.4 | | | 2.0 | | | 3.5 | | | (77.8) | % | | (43.6) | % |
| Operating profit | | 2,560.9 | | | 2,260.8 | | | 2,043.7 | | | 13.3 | % | | 10.6 | % |
| Operating profit margin | | 22.9 | % | | 21.7 | % | | 22.8 | % | | | | |
| Interest expense, net | | 151.8 | | | 137.6 | | | 127.4 | | | 10.3 | % | | 8.0 | % |
| Other (income) expense, net | | 237.2 | | | 206.1 | | | 119.1 | | | 15.1 | % | | 73.1 | % |
| Provision for income taxes | | 310.1 | | | 272.3 | | | 314.4 | | | 13.9 | % | | (13.4) | % |
| Effective income tax rate | | 14.3 | % | | 14.2 | % | | 17.5 | % | | | | |
| Net income including noncontrolling interest | | 1,861.8 | | | 1,644.8 | | | 1,482.8 | | | 13.2 | % | | 10.9 | % |
| Less: Net gain (loss) attributable to noncontrolling interest | | — | | | — | | | 5.3 | | | NM | | NM |
| Net income attributable to The Hershey Company | | $ | 1,861.8 | | $ | 1,644.8 | | $ | 1,477.5 | | 13.2 | % | | 11.3 | % |
| Net income per share—diluted | | $ | 9.06 | | $ | 7.96 | | $ | 7.11 | | 13.8 | % | | 12.0 | % |
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| Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above. |
| NM = not meaningful |
Net Sales
2023 compared with 2022
Net sales were $11,165.0 million in 2023 compared to $10,419.3 million in 2022, an increase of $745.7 million, or 7.2%. The net sales increase reflects a favorable price realization of 8.3% due to higher list prices across all segments and by a favorable impact from foreign currency exchange rates of 0.2%. These increases were slightly offset by a volume decrease of 1.3% due to a decrease in consumer demand primarily in everyday core U.S. confection brands.
2022 compared with 2021
Net sales were $10,419.3 million in 2022 compared to $8,971.3 million in 2021, an increase of $1,448.0 million, or 16.1%. The net sales increase reflects a volume increase of 8.0% due to higher prices on certain products, a 4.3% benefit from net acquisitions and divestitures driven by the 2021 acquisitions of Lily’s, Dot’s and Pretzels and a volume increase of 4.0% due to an increase in consumer demand primarily in everyday core U.S. confection brands and salty snack brands. These increases were slightly offset by an unfavorable impact from foreign currency exchange rates of 0.2%.
Key U.S. Marketplace Metrics
For the full year 2023, our total U.S. retail takeaway increased 6.0% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks and grocery items. Our U.S. candy, mint and gum (“CMG”) consumer takeaway increased 6.0% and experienced a CMG market share decline of 83 basis points. Our Salty consumer takeaway increased 5.6% and experienced a Salty market share decline of 9 basis points.
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| The Hershey Company | 2023 Form 10-K | Page 25 | |
The CMG consumer takeaway and market share information reflect 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 Circana, 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
2023 compared with 2022
Cost of sales were $6,167.2 million in 2023 compared to $5,920.5 million in 2022, an increase of $246.7 million, or 4.2%. The increase included $356.2 million of unfavorable costs driven by higher supply chain costs, including higher labor costs partially offset by lower logistics costs, and unfavorable mix. The increase was further driven by an incremental $97.7 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases (See Item 7A - Quantitative and Qualitative Disclosures About Market Risk for more information). These increases were partially offset by $207.2 million of favorable supply chain productivity and price realization.
Gross margin was 44.8% in 2023 compared with 43.2% in 2022, an increase of 160 basis points. The increase was driven by favorable price realization and increased supply chain productivity. The increase was partially offset by unfavorable activity on our mark-to-market impact from commodity derivative instruments, higher supply chain costs, including higher labor costs and increased waste. The increase was further driven by unfavorable mix and foreign exchange rates.
2022 compared with 2021
Cost of sales were $5,920.5 million in 2022 compared with $4,922.7 million in 2021, an increase of $997.8 million, or 20.3%. The increase included $767.7 million of unfavorable costs driven by higher sales volume and higher supply chain inflation costs, including higher logistics and labor costs. The increase was further driven by an incremental $40.8 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases. Additionally, we incurred incremental costs of $263.3 million associated with our 2021 acquisitions of Dot’s and Pretzels. These increases were offset by $74.0 million of favorable price realization and supply chain productivity.
Gross margin was 43.2% in 2022 compared with 45.1% 2021, a decrease of 190 basis points. The decrease was driven by unfavorable year-over-year mark-to-market impact from commodity derivative instruments, higher supply chain inflation costs, including higher logistics and labor costs, and unfavorable product mix. These declines were offset by favorable price realization and volume increases.
Selling, Marketing and Administrative
2023 compared with 2022
Selling, marketing and administrative (“SM&A”) expenses were $2,436.5 million in 2023 compared to $2,236.0 million in 2022, an increase of $200.5 million, or 9.0%. The increase was driven by increased corporate expenses. Total advertising and related consumer marketing expenses increased 12.2% driven by North America Confectionery and North America Salty Snacks. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 7.5% in 2023 driven by higher compensation costs and investments in capabilities and technology across segments.
2022 compared with 2021
SM&A expenses were $2,236.0 million in 2022 compared to $2,001.4 million in 2021, an increase of $234.6 million, or 11.7%, driven by increased corporate expenses. Total advertising and related consumer marketing expenses increased 2.7% driven by advertising increases in our confectionery brands and increased investment in our salty snacks portfolio, which were partially offset by cost efficiencies related to new media partners. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 16.3% in 2022 driven by an increase in acquisition and integration related costs, as well as higher compensation costs, investments in capabilities and technology and broad-based marketplace inflation.
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| The Hershey Company | 2023 Form 10-K | Page 26 | |
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 2023, 2022 and 2021, we recorded business realignment costs of $0.4 million, $2.0 million and $3.5 million, respectively. The 2023, 2022, and 2021 costs related primarily 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. Additionally, in February 2024, the Board of Directors approved the Advancing Agility & Automation Initiative, which is a multi-year productivity program to improve supply chain and manufacturing-related spend, optimize selling, general and administrative expenses, leverage new technology and business models to further simplify and automate processes, and generate long-term savings. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Consolidated Financial Statements. Operating Profit and Operating Profit Margin
2023 compared with 2022
Operating profit was $2,560.9 million in 2023 compared to $2,260.8 million in 2022, an increase of $300.1 million, or 13.3%. The increase was predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above. Operating profit margin increased to 22.9% in 2023 from 21.7% in 2022 by the same factors noted above in gross margin.
2022 compared with 2021
Operating profit was $2,260.8 million in 2022 compared to $2,043.7 million in 2021, an increase of $217.1 million, or 10.6%. The increase was predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above. Operating profit margin decreased to 21.7% in 2022 from 22.8% in 2021 driven by these same factors.
Interest Expense, Net
2023 compared with 2022
Net interest expense was $151.8 million in 2023 compared to $137.6 million in 2022, an increase of $14.2 million, or 10.3%. The increase was primarily due to higher rates on short-term debt balances in 2023 versus 2022, specifically related to outstanding commercial paper borrowings, and higher rates on long-term debt balances, specifically related to the $350 million 4.25% Notes and $400 million 4.50% Notes issued in May 2023. The increase in the expense was partially offset by an increase in interest income.
2022 compared with 2021
Net interest expense was $137.6 million in 2022 compared to $127.4 million in 2021, an increase of $10.2 million, or 8.0%. The increase was primarily due to higher rates on short-term debt balances in 2022 versus 2021, specifically related to outstanding commercial paper borrowings. The increase was partially offset due to lower average long-term debt balances, specifically resulting from the repayment of $84.7 million of 8.800% Debentures upon their maturity in February 2021 and $350 million of 3.100% Notes upon their maturity in May 2021.
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| The Hershey Company | 2023 Form 10-K | Page 27 | |
Other (Income) Expense, Net
2023 compared with 2022
Other (income) expense, net totaled an expense of $237.2 million in 2023 versus an expense of $206.1 million in 2022, an increase of $31.1 million, or 15.1%. The increase in the net expense was primarily driven by an increase of $22.2 million of higher write-downs on equity investments qualifying for tax credits in 2023 versus 2022 and an increase of $9.5 million of higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.
2022 compared with 2021
Other (income) expense, net totaled an expense of $206.1 million in 2022 versus an expense of $119.1 million in 2021, an increase of $87.0 million, or 73.1%. The increase in the net expense was primarily driven by an increase of $75.4 million of higher write-downs on equity investments qualifying for tax credits in 2022 versus 2021 and an increase of $13.3 million of non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.
Income Taxes and Effective Tax Rate
2023 compared with 2022
Our effective income tax rate was 14.3% for 2023 compared with 14.2% for 2022. Relative to the 21% statutory rate, the 2023 effective tax rate benefited from investment tax credits, partially offset by state taxes. The 2022 effective rate, relative to the 21% statutory rate, benefited from investment tax credits, partially offset by state taxes.
2022 compared with 2021
Our effective income tax rate was 14.2% for 2022 compared with 17.5% for 2021. Relative to the 21% statutory rate, the 2022 effective tax rate benefited from investment tax credits, partially offset by state taxes. The 2021 effective rate, relative to the 21% statutory rate, benefited from investment tax credits, partially offset by incremental tax reserves incurred as a result of an adverse ruling in connection with a non-U.S. tax litigation matter, as well as state taxes.
Net Income Attributable to The Hershey Company and Earnings Per Share-diluted
2023 compared with 2022
Net income was $1,861.8 million in 2023 compared to $1,644.8 million in 2022, an increase of $217.0 million, or 13.2%. EPS-diluted was $9.06 in 2023 compared to $7.96 in 2022, an increase of $1.1, or 13.8%. The increase in both net income and EPS-diluted was driven primarily by higher gross profit, partially offset by higher SM&A expenses, higher income taxes, and higher other income and expenses. Our 2023 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs..
2022 compared with 2021
Net income was $1,644.8 million in 2022 compared to $1,477.5 million in 2021, an increase of $167.3 million, or 11.3%. EPS-diluted was $7.96 in 2022 compared to $7.11 in 2021, an increase of $0.85, or 12.0%. The increase in both net income and EPS-diluted was driven primarily by higher gross profit and lower income taxes, partially offset by higher SM&A expenses and higher other income and expenses. Our 2022 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.
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| The Hershey Company | 2023 Form 10-K | Page 28 | |
SEGMENT RESULTS
The summary that follows provides a discussion of the results of operations of our three segments: North America Confectionery, North America Salty Snacks and International. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the Chief Operating Decision Maker and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations.
Our segment results, including a reconciliation to our consolidated results, were as follows:
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| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| In millions of dollars | | | | | | |
| Net Sales: | | | | | | |
| North America Confectionery | | $ | 9,123.1 | | | $ | 8,536.5 | | | $ | 7,682.4 | |
| North America Salty Snacks | | 1,092.7 | | | 1,029.4 | | | 555.4 | |
| International | | 949.2 | | | 853.4 | | | 733.5 | |
| Total | | $ | 11,165.0 | | | $ | 10,419.3 | | | $ | 8,971.3 | |
| | | | | | |
| Segment Income: | | | | | | |
| North America Confectionery | | $ | 3,117.0 | | | $ | 2,811.1 | | | $ | 2,475.9 | |
| North America Salty Snacks | | 158.3 | | | 159.9 | | | 100.7 | |
| International | | 148.3 | | | 107.9 | | | 74.2 | |
| Total segment income | | 3,423.6 | | | 3,078.9 | | | 2,650.8 | |
| Unallocated corporate expense (1) | | 800.4 | | | 735.5 | | | 614.9 | |
| Unallocated mark-to-market losses (gains) on commodity derivatives (2) | | 58.9 | | | 78.2 | | | (24.4) | |
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| Costs associated with business realignment activities | | 3.4 | | | 4.4 | | | 16.6 | |
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| Operating profit | | 2,560.9 | | | 2,260.8 | | | 2,043.7 | |
| Interest expense, net | | 151.8 | | | 137.6 | | | 127.4 | |
| Other (income) expense, net | | 237.2 | | | 206.2 | | | 119.1 | |
| Income before income taxes | | $ | 2,171.9 | | | $ | 1,917.0 | | | $ | 1,797.2 | |
(1)Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.
(2)Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains). See Note 13 to the Consolidated Financial Statements. | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 29 | |
North America Confectionery
The North America Confectionery segment is responsible for our chocolate and non-chocolate confectionery market position in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, gum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines. While a less significant component, this segment also includes our retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania; New York, New York; Las Vegas, Nevada; 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. North America Confectionery accounted for 81.7%, 81.9% and 85.6% of our net sales in 2023, 2022 and 2021, respectively. North America Confectionery results for the years ended December 31, 2023, 2022 and 2021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 9,123.1 | | | $ | 8,536.5 | | | $ | 7,682.4 | | | 6.9 | % | | 11.1 | % |
| Segment income | | 3,117.0 | | | 2,811.1 | | | 2,475.9 | | | 10.9 | % | | 13.5 | % |
| Segment margin | | 34.2 | % | | 32.9 | % | | 32.2 | % | | | | |
2023 compared with 2022
Net sales of our North America Confectionery segment were $9,123.1 million in 2023 compared to $8,536.5 million in 2022, a increase of $586.6 million, or 6.9%. The increase reflected a favorable price realization of 9.0% due to price increases on certain products across our portfolio. The increases were partially offset by a volume decrease of 1.9% driven by a decrease in everyday core U.S. confection brands, and an unfavorable impact from foreign currency exchange rates of 0.2%.
Our North America Confectionery segment also includes licensing and owned retail. This includes our Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore. Our net sales for licensing and owned retail increased approximately 12.1% during 2023 compared to 2022.
Our North America Confectionery segment income was $3,117.0 million in 2023 compared to $2,811.1 million in 2022, a increase of $305.9 million, or 10.9%. The increase was primarily due to favorable price realization and supply chain productivity, partially offset by higher supply chain costs, including higher labor costs, as well as unfavorable product mix.
2022 compared with 2021
Net sales of our North America Confectionery segment were $8,536.5 million in 2022 compared to $7,682.4 million 2021, an increase of $854.1 million, or 11.1%. The increase reflected a favorable price realization of 8.1% due to higher prices on certain products, a volume increase of 2.8% due to an increase in everyday core U.S. confection brands, and a 0.4% benefit from the 2021 acquisition of Lily’s. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.2%.
Our North America Confectionery segment also includes licensing and owned retail. This includes our Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore. Our net sales for licensing and owned retail increased approximately 12.7% during 2022 compared to 2021.
Our North America Confectionery segment income was $2,811.1 million in 2022 compared to $2,475.9 million in 2021, an increase of $335.2 million, or 13.5%. The increase was primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as, unfavorable product mix.
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| The Hershey Company | 2023 Form 10-K | Page 30 | |
North America Salty Snacks
The North America Salty Snacks segment is responsible for our grocery and snacks market positions, including our salty snacking products. North America Salty Snacks accounted for 9.8%, 9.9% and 6.2% of our net sales in 2023, 2022 and 2021, respectively. North America Salty Snacks results for the years ended December 31, 2023, 2022 and 2021 were as follows:
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| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 1,092.7 | | | $ | 1,029.4 | | | $ | 555.4 | | | 6.1 | % | | 85.3 | % |
| Segment income | | 158.3 | | | 159.9 | | | 100.7 | | | (1.0) | % | | 58.8 | % |
| Segment margin | | 14.5 | % | | 15.5 | % | | 18.1 | % | | | | |
2023 compared with 2022
Net sales for our North America Salty Snacks segment were $1,092.7 million in 2023 compared to $1,029.4 million in 2022, an increase of $63.3 million, or 6.1%. The increase reflected a favorable price realization of 5.4% due to price increases on products across our portfolio, primarily SkinnyPop and Dot’s Homestyle Pretzels snacks, and a volume increase of 0.7%, primarily related to Dot’s Homestyle Pretzels snacks.
Our North America Salty Snacks segment income was $158.3 million in 2023 compared to $159.9 million in 2022 a decrease of $1.6 million, or 1.0%. The decrease is primarily due to increased advertising and related consumer marketing costs and costs related to the voluntary removal of certain Paqui branded items in 2023. The decrease was partially offset by favorable price realization and favorable product mix.
2022 compared with 2021
Net sales for our North America Salty Snacks segment was $1,029.4 million in 2022 compared to $555.4 million in 2021, an increase of $474.0 million, or 85.3%. The increase reflected a 64.0% benefit from the 2021 acquisitions of Dot’s and Pretzels, a favorable price realization of 12.0% due to higher prices on certain products and a volume increase of 9.3% primarily related to SkinnyPop and Pirates Booty snacks.
Our North America Salty Snacks segment income was $159.9 million in 2022 compared to $100.7 million in 2021, an increase of $59.2 million, or 58.8%. The increase is primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as, unfavorable product mix.
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| The Hershey Company | 2023 Form 10-K | Page 31 | |
International
The International segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. We currently, have operations and manufacture product in Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Latin America, as well as Europe, Asia, the Middle East and Africa (“AMEA”) and other regions. International results, which accounted for 8.5%, 8.2% and 8.2% of our net sales in 2023, 2022 and 2021, respectively. International results for the years ended December 31, 2023, 2022 and 2021 were as follows:
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| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 949.2 | | | $ | 853.4 | | | $ | 733.5 | | | 11.2 | % | | 16.3 | % |
| Segment income | | 148.3 | | | 107.9 | | | 74.2 | | | 37.4 | % | | 45.4 | % |
| Segment margin | | 15.6 | % | | 12.6 | % | | 10.1 | % | | | | |
2023 compared with 2022
Net sales of our International segment were $949.2 million in 2023 compared to $853.4 million in 2022, an increase of $95.8 million, or 11.2%. The increase reflected a favorable price realization of 4.7%, driven by price increases across the segment, a favorable impact from foreign currency exchange rates of 3.4%, primarily driven by Mexico, and a volume increase of 3.1%. The net sales increase was primarily attributable to World Travel Retail, Mexico and Brazil & Latin America, where net sales increased 15.6%, 14.3% and 13.0%, respectively.
Our International segment income was $148.3 million in 2023 compared to $107.9 million in 2022, an increase of $40.4 million, or 37.4%, primarily resulting from favorable price realization, favorable foreign currency exchange rates, and minimal volume increases, partially offset by increased supply chain costs.
2022 compared with 2021
Net sales of our International segment were $853.4 million in 2022 compared to $733.5 million in 2021, an increase of $119.9 million, or 16.3% reflecting a volume increase of 11.9%, a favorable price realization of 4.1%, and a favorable impact from foreign currency exchange rates of 0.3%. The volume increase was primarily attributed to solid marketplace growth in Brazil, Mexico and India, where net sales increased by 21.6%, 20.6% and 13.7%, respectively. Our International segment also includes world travel retail, where net sales increased approximately 28.6%.
Our International segment income was $107.9 million in 2022 compared to $74.2 million in 2021, an increase of $33.7 million, or 45.4%, primarily resulting from volume increases, favorable price realization, and the execution of our International Optimization Program in China, as we streamline and optimize our China operating model.
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| The Hershey Company | 2023 Form 10-K | Page 32 | |
Unallocated Corporate Expense
Unallocated corporate expense includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance.
Unallocated corporate expense totaled $800.4 million in 2023 as compared to $735.5 million in 2022, an increase of $64.9 or, or 8.8%. The increase was primarily driven by incremental investments in capabilities and technology, higher compensation costs, and an increase in acquisition and integration related costs.
Unallocated corporate expense totaled $735.5 million in 2022 as compared to $614.9 million in 2021, an increase of $120.6 million, or 19.6%. The increase was primarily driven by an increase in acquisition and integration related costs, as well as higher compensation costs, investments in capabilities and technology and broad-based marketplace inflation.
LIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity include cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, the adequacy of available commercial paper and bank lines of credit, and the ability to attract long-term capital with satisfactory terms. We generate substantial amounts of cash from operations and remain in a strong financial position, with sufficient liquidity available for capital reinvestment, strategic acquisitions and the payment of dividends.
Cash Flow Summary
The following table is derived from our Consolidated Statements of Cash Flows:
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| In millions of dollars | | 2023 | | 2022 | | 2021 | | | | |
| Net cash provided by (used in): | | | | | | | | | | |
| Operating activities | | $ | 2,323.2 | | $ | 2,327.8 | | $ | 2,082.9 | | | | |
| Investing activities | | (1,198.7) | | | (787.4) | | | (2,222.8) | | | | | |
| Financing activities | | (1,148.3) | | | (1,415.7) | | | (681.1) | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | (38.2) | | | 9.9 | | | (5.1) | | | | | |
| Less: Cash classified as assets held for sale | | — | | | — | | | 11.4 | | | | | |
| (Decrease) increase in cash and cash equivalents | | $ | (62.0) | | | $ | 134.6 | | | $ | (814.7) | | | | | |
Operating activities
Our principal source of liquidity is cash flow from operations. Our net income and, consequently, our cash provided by operations are impacted by sales volume, seasonal sales patterns, timing of new product introductions, profit margins and price changes. Sales are typically higher during the third and fourth quarters of the year due to seasonal and holiday-related sales patterns. Generally, working capital needs peak during the summer months. We meet these needs primarily with cash on hand, bank borrowings or the issuance of commercial paper.
We generated cash of $2.32 billion from operating activities in 2023, a decrease of $4.6 million compared to $2.33 billion in 2022. The decrease in net cash provided by operating activities was mainly driven by the following factors:
•In the aggregate, select net working capital items, specifically, trade accounts receivable, inventory, accounts payable and accrued liabilities, consumedcash of $209.0 million in 2023, compared to $8.6 million in 2022. This $200.4 million fluctuation was mainly driven by mainly driven by an increase in cash used by accounts receivable due to an increase in sales of U.S. seasonal products and the timing of vendor and supplier payments.
•Timing of income tax payments contributed to a decrease in operating cash of $32.5 million in 2023, compared to an increase of $5.0 million in 2022. This $37.5 million fluctuation was primarily due to the variance in actual tax
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| The Hershey Company | 2023 Form 10-K | Page 33 | |
expense for 2023 relative to the timing of quarterly estimated tax payments. We paid cash of $303.9 million for income taxes during 2023 compared to $221.3 million in the same period of 2022.
•Other assets and liabilities consumed cash of $100.4 million in 2023, compared to $25.7 million in 2022. This $74.7 million fluctuation was primarily due to our purchase of an irrevocable group annuity contract to settle a portion of our post retirement benefit obligation.
•The decrease in cash provided by operating activities was partially offset by the following net cash inflows:
◦Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, write-down of equity investments and other charges) resulted in $256.7 million of higher cash flow in 2023 relative to 2022.
We generated cash of $2.3 billion from operating activities in 2022, an increase of $244.9 million compared to $2.1 billion in 2021. This increase in net cash provided by operating activities was mainly driven by the following factors:
•In the aggregate, select net working capital items, specifically, trade accounts receivable, inventory, accounts payable and accrued liabilities, consumedcash of $9 million in 2022 and generated cash of $47 million in 2021. This $56 million fluctuation was mainly driven by a higher year-over-year build up of U.S. inventories to satisfy product requirements and maintain sufficient levels to accommodate customer requirements, partially offset by the timing of vendor and supplier payments.
•Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, write-down of equity investments and other charges) resulted in $348 million of higher cash flow in 2022 relative to 2021.
Pension and Post-Retirement Activity. We recorded net periodic benefit costs of $43.2 million, $36.3 million and $28.4 million in 2023, 2022 and 2021, respectively, relating to our benefit plans (including our defined benefit and other post retirement plans). The main drivers of fluctuations in expense from year to year are assumptions in formulating our long-term estimates, including discount rates used to value the service and interest costs and the amortization of actuarial gains and losses.
The funded status of our qualified defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and the level of funding. We contribute cash to our plans at our discretion, subject to applicable regulations and minimum contribution requirements. Cash contributions to our pension and post retirement plans totaled $27.6 million, $78.5 million and $51.1 million in 2023, 2022 and 2021, respectively.
Investing activities
Our principal uses of cash for investment purposes relate to purchases of property, plant and equipment and capitalized software, as well as acquisitions of businesses, partially offset by proceeds from sales of property, plant and equipment. We used cash of $1.2 billion for investing activities in 2023 compared to $0.8 billion in 2022, with the increase in cash spend driven by an increase of investments in capabilities and technology as well as a higher level of acquisition activity. We used cash of $2.2 billion for investing activities in 2021, with the decrease in 2022 in cash spend driven by lower levels of acquisition activity, partially offset by higher capital spend and investment tax credits.
Primary investing activities include the following:
•Capital spending. Capital expenditures, including capitalized software, primarily to support our ERP system implementation, capacity expansion, innovation and cost savings, were $771.1 million in 2023, $519.5 million in 2022 and $495.9 million in 2021. For each of the years presented, our expenditures increased due to progress on capacity expansion projects and our ERP system implementation. We expect 2024 capital expenditures, including capitalized software, to approximate $600 million to $650 million. The decrease in our 2024 capital expenditures is largely driven by the wind down of our key strategic initiatives, including completion of the upgrade of a new ERP system across the enterprise in 2024. We intend to use our existing cash and internally generated funds to meet our 2024 capital requirements.
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| The Hershey Company | 2023 Form 10-K | Page 34 | |
•Investments in partnerships qualifying for tax credits. We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested approximately $256.8 million in 2023, $275.5 million in 2022 and $128.4 million in 2021 in projects qualifying for tax credits.
•Business acquisitions. In 2023, we spent $165.8 million to acquire Weaver (May 2023). In 2022, we had no acquisition activity. In 2021, we spent an aggregate $1.6 billion to acquire Lily's (June 2021), as well as Dot’s and Pretzels (December 2021). Further details regarding our business acquisition activity is provided in Note 2 to the Consolidated Financial Statements. •Other investing activities. In 2023, 2022, and 2021, our other investing activities were minimal.
Financing activities
Our cash flow from financing activities generally relates to the use of cash for purchases of our Common Stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of stock options. Financing activities in 2023 used cash of $1.1 billion, compared to cash used of $1.4 billion in 2022. We used cash of $0.7 billion for financing activities in 2021.
The majority of our financing activity was attributed to the following:
•Short-term borrowings, net. In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. In 2023, our short-term borrowings increased $26.0 million predominately through the issuance of short-term commercial paper, as well as an increase in short-term foreign bank borrowings. In 2022, we used cash of $245.6 million to reduce a portion of our short-term commercial paper borrowings originally used to fund our 2021 acquisitions of Dot’s and Pretzels, partially offset by an increase in short-term foreign bank borrowings. In 2021, we generated cash flow of $869.0 million predominantly through the issuance of short-term commercial paper.
•Long-term debt borrowings and repayments. In May 2023, we repaid $250 million of 2.625% Notes and $500 million of 3.375% Notes due upon their maturities. In May 2023, we issued $350 million of 4.250% Notes due in May 2028 and $400 million of 4.500% Notes due in May 2033 (the “2023 Notes”). Proceeds from the issuance of the 2023 Notes, net of discounts and issuance costs, totaled $744.1 million. In 2022, long-term debt activity was minimal. In February 2021 and May 2021, we repaid $84.7 million of 8.800% Debentures and $350 million of 3.100% Notes due upon their maturities, respectively. In 2024, we expect our long-term debt repayments to approximate $300 million upon the maturity of $300 million of 2.050% Notes due in November 2024.
•Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $889.1 million in 2023, $775.0 million in 2022 and $686.0 million in 2021. Dividends per share of Common Stock increased 15.0% to $4.456 per share in 2023 compared to $3.874 per share in 2022, while dividends per share of Class B Common Stock increased 15.0% in 2023. Details regarding our 2023 cash dividends paid to stockholders are as follows:
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| | Quarter Ended |
| In millions of dollars except per share amounts | | April 2, 2023 | | July 2, 2023 | | October 1, 2023 | | December 31, 2023 |
| Dividends paid per share – Common stock | | $ | 1.036 | | | $ | 1.036 | | | $ | 1.192 | | | $ | 1.192 | |
| Dividends paid per share – Class B common stock | | $ | 0.942 | | | $ | 0.942 | | | $ | 1.083 | | | $ | 1.083 | |
| Total cash dividends paid | | $ | 207.4 | | | $ | 206.1 | | | $ | 237.8 | | | $ | 237.8 | |
| Declaration date | | January 31, 2023 | | April 25, 2023 | | July 27, 2023 | | October 25, 2023 |
| Record date | | February 17, 2023 | | May 19, 2023 | | August 18, 2023 | | November 17, 2023 |
| Payment date | | March 15, 2023 | | June 15, 2023 | | September 15, 2023 | | December 15, 2023 |
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| The Hershey Company | 2023 Form 10-K | Page 35 | |
•Share repurchases. We repurchase shares of Common Stock to offset the dilutive impact of treasury shares issued under our equity compensation plans. The value of these share repurchases in a given period varies based on the volume of stock options exercised and our market price. In addition, we periodically repurchase shares of Common Stock pursuant to Board-authorized programs intended to drive additional stockholder value. Details regarding our share repurchases are as follows:
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| In millions | | 2023 | | 2022 | | 2021 |
| Milton Hershey School Trust repurchase (1)(2) | | $ | 239.9 | | | $ | 203.4 | | | $ | — | |
| Shares repurchased in the open market under pre-approved share repurchase programs (2) | | — | | | — | | | 150.0 | |
| Shares repurchased in the open market to replace Treasury Stock issued for stock options and incentive compensation | | $ | 27.4 | | | $ | 185.6 | | | $ | 308.0 | |
| Cash used for total share repurchases (excluding excise tax) | | $ | 267.3 | | | $ | 389.0 | | | $ | 458.0 | |
| Total shares repurchased under pre-approved share repurchase programs | | 1.0 | | | — | | | 0.9 | |
(1) In February 2023 and 2022, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased 1,000,000 shares in 2023 and 2022 of the Company’s Common Stock from the School Trust at a price equal to $239.91 per share, for a total purchase price of $239.9 million in 2023. In 2022 the Company purchased the common stock at a price equal to $203.35 per share, for a total purchase price of $203.4 million. As a result of the 2023 share repurchase, our July 2018 share repurchase authorization program was completed, and approximately $370.1 million remains available for repurchases under our May 2021 share repurchase authorization.
(2) In July 2018, our Board of Directors approved a $500 million share repurchase authorization. In May 2021, our Board of Directors approved an additional $500 million share repurchase authorization. As a result of the February 2023 Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, the July 2018 share repurchase authorization was completed and as of December 31, 2023, approximately $370.1 million remained available for repurchases under our May 2021 share repurchase authorization. In December 2023, our Board of Directors approved an additional $500 million share repurchase authorization. This program is to commence after the existing 2021 authorization is completed and is to be utilized at management’s discretion. These share repurchase programs do not have an expiration date. We expect 2024 share repurchases to be in line with our traditional buyback strategy.
•Proceeds from the exercise of stock options, including tax benefits. In 2023 we received $26.0 million from employee exercises of stock options and paid $35.0 million of employee taxes withheld from share-based awards. In 2022 we received $34.2 million from employee exercises of stock options and paid $35.5 million of employee taxes withheld from share-based awards. In 2021 we received $33.2 million from employee exercises of stock options, net of employee taxes withheld from share-based awards. Variances are driven primarily by the number of shares exercised and the share price at the date of grant.
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| The Hershey Company | 2023 Form 10-K | Page 36 | |
Financial ConditionCost of Sales and Gross Margin
Critical Accounting Policies2023 compared with 2022
Cost of sales were $6,167.2 million in 2023 compared to $5,920.5 million in 2022, an increase of $246.7 million, or 4.2%. The increase included $356.2 million of unfavorable costs driven by higher supply chain costs, including higher labor costs partially offset by lower logistics costs, and Estimatesunfavorable mix. The increase was further driven by an incremental $97.7 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases (See Item 7A - Quantitative and Qualitative Disclosures About Market Risk for more information). These increases were partially offset by $207.2 million of favorable supply chain productivity and price realization. BUSINESS MODEL AND GROWTH STRATEGYGross margin was 44.8% in 2023 compared with 43.2% in 2022, an increase of 160 basis points. The increase was driven by favorable price realization and increased supply chain productivity. The increase was partially offset by unfavorable activity on our mark-to-market impact from commodity derivative instruments, higher supply chain costs, including higher labor costs and increased waste. The increase was further driven by unfavorable mix and foreign exchange rates.
We are the largest producer2022 compared with 2021
Cost of quality chocolatesales were $5,920.5 million in 2022 compared with $4,922.7 million in 2021, an increase of $997.8 million, or 20.3%. The increase included $767.7 million of unfavorable costs driven by higher sales volume and higher supply chain inflation costs, including higher logistics and labor costs. The increase was further driven by an incremental $40.8 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases. Additionally, we incurred incremental costs of $263.3 million associated with our 2021 acquisitions of Dot’s and Pretzels. These increases were offset by $74.0 million of favorable price realization and supply chain productivity.
Gross margin was 43.2% in 2022 compared with 45.1% 2021, a decrease of 190 basis points. The decrease was driven by unfavorable year-over-year mark-to-market impact from commodity derivative instruments, higher supply chain inflation costs, including higher logistics and labor costs, and unfavorable product mix. These declines were offset by favorable price realization and volume increases.
Selling, Marketing and Administrative
2023 compared with 2022
Selling, marketing and administrative (“SM&A”) expenses were $2,436.5 million in 2023 compared to $2,236.0 million in 2022, an increase of $200.5 million, or 9.0%. The increase was driven by increased corporate expenses. Total advertising and related consumer marketing expenses increased 12.2% driven by North America Confectionery and North America Salty Snacks. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 7.5% in 2023 driven by higher compensation costs and investments in capabilities and technology across segments.
2022 compared with 2021
SM&A expenses were $2,236.0 million in 2022 compared to $2,001.4 million in 2021, an increase of $234.6 million, or 11.7%, driven by increased corporate expenses. Total advertising and related consumer marketing expenses increased 2.7% driven by advertising increases in our confectionery brands and increased investment in our salty snacks portfolio, which were partially offset by cost efficiencies related to new media partners. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 16.3% in 2022 driven by an increase in acquisition and integration related costs, as well as higher compensation costs, investments in capabilities and technology and broad-based marketplace inflation.
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| The Hershey Company | 2023 Form 10-K | Page 26 | |
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 2023, 2022 and 2021, we recorded business realignment costs of $0.4 million, $2.0 million and $3.5 million, respectively. The 2023, 2022, and 2021 costs related primarily to the International Optimization Program, a leading snack makerprogram focused on optimizing our China operating model to improve our operational efficiency and provide for a strong, sustainable and simplified base going forward. Additionally, in February 2024, the Board of Directors approved the Advancing Agility & Automation Initiative, which is a multi-year productivity program to improve supply chain and manufacturing-related spend, optimize selling, general and administrative expenses, leverage new technology and business models to further simplify and automate processes, and generate long-term savings. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Consolidated Financial Statements. Operating Profit and Operating Profit Margin
2023 compared with 2022
Operating profit was $2,560.9 million in 2023 compared to $2,260.8 million in 2022, an increase of $300.1 million, or 13.3%. The increase was predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above. Operating profit margin increased to 22.9% in 2023 from 21.7% in 2022 by the same factors noted above in gross margin.
2022 compared with 2021
Operating profit was $2,260.8 million in 2022 compared to $2,043.7 million in 2021, an increase of $217.1 million, or 10.6%. The increase was predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above. Operating profit margin decreased to 21.7% in 2022 from 22.8% in 2021 driven by these same factors.
Interest Expense, Net
2023 compared with 2022
Net interest expense was $151.8 million in 2023 compared to $137.6 million in 2022, an increase of $14.2 million, or 10.3%. The increase was primarily due to higher rates on short-term debt balances in 2023 versus 2022, specifically related to outstanding commercial paper borrowings, and higher rates on long-term debt balances, specifically related to the $350 million 4.25% Notes and $400 million 4.50% Notes issued in May 2023. The increase in the expense was partially offset by an increase in interest income.
2022 compared with 2021
Net interest expense was $137.6 million in 2022 compared to $127.4 million in 2021, an increase of $10.2 million, or 8.0%. The increase was primarily due to higher rates on short-term debt balances in 2022 versus 2021, specifically related to outstanding commercial paper borrowings. The increase was partially offset due to lower average long-term debt balances, specifically resulting from the repayment of $84.7 million of 8.800% Debentures upon their maturity in February 2021 and $350 million of 3.100% Notes upon their maturity in May 2021.
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| The Hershey Company | 2023 Form 10-K | Page 27 | |
Other (Income) Expense, Net
2023 compared with 2022
Other (income) expense, net totaled an expense of $237.2 million in 2023 versus an expense of $206.1 million in 2022, an increase of $31.1 million, or 15.1%. The increase in the net expense was primarily driven by an increase of $22.2 million of higher write-downs on equity investments qualifying for tax credits in 2023 versus 2022 and an increase of $9.5 million of higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.
2022 compared with 2021
Other (income) expense, net totaled an expense of $206.1 million in 2022 versus an expense of $119.1 million in 2021, an increase of $87.0 million, or 73.1%. The increase in the net expense was primarily driven by an increase of $75.4 million of higher write-downs on equity investments qualifying for tax credits in 2022 versus 2021 and an increase of $13.3 million of non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.
Income Taxes and Effective Tax Rate
2023 compared with 2022
Our effective income tax rate was 14.3% for 2023 compared with 14.2% for 2022. Relative to the 21% statutory rate, the 2023 effective tax rate benefited from investment tax credits, partially offset by state taxes. The 2022 effective rate, relative to the 21% statutory rate, benefited from investment tax credits, partially offset by state taxes.
2022 compared with 2021
Our effective income tax rate was 14.2% for 2022 compared with 17.5% for 2021. Relative to the 21% statutory rate, the 2022 effective tax rate benefited from investment tax credits, partially offset by state taxes. The 2021 effective rate, relative to the 21% statutory rate, benefited from investment tax credits, partially offset by incremental tax reserves incurred as a result of an adverse ruling in connection with a non-U.S. tax litigation matter, as well as state taxes.
Net Income Attributable to The Hershey Company and Earnings Per Share-diluted
2023 compared with 2022
Net income was $1,861.8 million in 2023 compared to $1,644.8 million in 2022, an increase of $217.0 million, or 13.2%. EPS-diluted was $9.06 in 2023 compared to $7.96 in 2022, an increase of $1.1, or 13.8%. The increase in both net income and EPS-diluted was driven primarily by higher gross profit, partially offset by higher SM&A expenses, higher income taxes, and higher other income and expenses. Our 2023 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs..
2022 compared with 2021
Net income was $1,644.8 million in 2022 compared to $1,477.5 million in 2021, an increase of $167.3 million, or 11.3%. EPS-diluted was $7.96 in 2022 compared to $7.11 in 2021, an increase of $0.85, or 12.0%. The increase in both net income and EPS-diluted was driven primarily by higher gross profit and lower income taxes, partially offset by higher SM&A expenses and higher other income and expenses. Our 2022 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.
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| The Hershey Company | 2023 Form 10-K | Page 28 | |
SEGMENT RESULTS
The summary that follows provides a discussion of the results of operations of our three segments: North America Confectionery, North America Salty Snacks and International. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the Chief Operating Decision Maker and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations.
Our segment results, including a reconciliation to our consolidated results, were as follows:
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| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| In millions of dollars | | | | | | |
| Net Sales: | | | | | | |
| North America Confectionery | | $ | 9,123.1 | | | $ | 8,536.5 | | | $ | 7,682.4 | |
| North America Salty Snacks | | 1,092.7 | | | 1,029.4 | | | 555.4 | |
| International | | 949.2 | | | 853.4 | | | 733.5 | |
| Total | | $ | 11,165.0 | | | $ | 10,419.3 | | | $ | 8,971.3 | |
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| Segment Income: | | | | | | |
| North America Confectionery | | $ | 3,117.0 | | | $ | 2,811.1 | | | $ | 2,475.9 | |
| North America Salty Snacks | | 158.3 | | | 159.9 | | | 100.7 | |
| International | | 148.3 | | | 107.9 | | | 74.2 | |
| Total segment income | | 3,423.6 | | | 3,078.9 | | | 2,650.8 | |
| Unallocated corporate expense (1) | | 800.4 | | | 735.5 | | | 614.9 | |
| Unallocated mark-to-market losses (gains) on commodity derivatives (2) | | 58.9 | | | 78.2 | | | (24.4) | |
| | | | | | |
| Costs associated with business realignment activities | | 3.4 | | | 4.4 | | | 16.6 | |
| | | | | | |
| | | | | | |
| Operating profit | | 2,560.9 | | | 2,260.8 | | | 2,043.7 | |
| Interest expense, net | | 151.8 | | | 137.6 | | | 127.4 | |
| Other (income) expense, net | | 237.2 | | | 206.2 | | | 119.1 | |
| Income before income taxes | | $ | 2,171.9 | | | $ | 1,917.0 | | | $ | 1,797.2 | |
(1)Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.
(2)Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains). See Note 13 to the Consolidated Financial Statements. | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 29 | |
North America Confectionery
The North America Confectionery segment is responsible for our chocolate and non-chocolate confectionery market position in the United States and a global leaderCanada. This includes developing and growing our business in chocolate and non-chocolate confectionery, known for bringing goodnessgum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines. While a less significant component, this segment also includes our retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania; New York, New York; Las Vegas, Nevada; 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 through chocolate, sweets, mints and other great tasting snacks. We market, sell and distribute our products under more than 80 brand names in approximately 80 countries worldwide. We report our operations through two segments:world. North America Confectionery accounted for 81.7%, 81.9% and International and Other.
We believe we have a set85.6% of differentiated capabilities that when integrated, can create advantage in the marketplace. Our focus on the following key elements of our strategy should enable us to deliver top-tier growth and industry-leading shareholder returns.
Reignite Core Confection and Expand Breadth in Snacking. We are taking actions in an effort to deepen our consumer connections, deliver meaningful innovation and reinvent the shopping experience, while also pursuing opportunities to diversify our portfolio and establish a strong presence across snacking.
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◦ | We are a part of special meaningful moments with family and friends. Seasons are an important part of our business model and for consumers, they are highly anticipated, cherished special times, centered around traditions. For us, it’s an opportunity for our brands to be part of many connections during the year when family and friends gather. |
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◦ | Innovation is an important lever in this variety seeking category and we are leveraging some exciting work from our proprietary demand landscape to shape our future innovation and make it more impactful. We are becoming more disciplined in our relentless focus on platform innovation, which enables sustainable growth over time and significant extensions to our core. |
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◦ | Through our shopper insights, we are currently working with our retail partners on in-aisle strategy that will breathe life into the center of the store and transform the shopping experience by improving paths to purchase, stopping power, navigation, engagement and conversion. We have also responded to the changing retail environment by investing in e-commerce capabilities. |
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◦ | To expand our breadth in snacking, we are focused on expanding the boundaries of our core confection brands to capture new snacking occasions and increasing our exposure into new snack categories through acquisitions. |
Reallocate Resources to Expand Margins and Fuel Growth. We are focused on ensuring that we allocate our resources efficiently to the areas with the highest potential for profitable growth. We believe this will enable significant margin expansion and position us in the top quartile related to operating income margin.
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◦ | We have reset our international investment, while we still believe strongly that our targeted emerging markets will provide long-term growth. The uncertain macroeconomic environment in many of these markets is expected to continue and our investments in these international markets need to be relative to the size of the opportunity. |
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◦ | We have heightened our selling, marketing and administrative expense discipline within the Company in an effort to make improvements without jeopardizing our topline growth. Our expectation is that advertising and related marketing expense will grow roughly in line with sales. |
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◦ | We will continue cost of goods sold optimization through pricing and programs like network supply chain optimization and lean manufacturing. |
Strengthen Capabilities & Leverage Technology for Commercial Advantage. The world is changing fast and so is the data on which we rely to make decisions. In order to generate insights, we must acquire, integrate and access vast sources of the right data in an effective manner. We are working to leverage our advanced analytical techniques which will give us a deep understanding of consumers, our shoppers, our end-to-end supply chain, our retail environment and macroeconomic factors at both a broad and precision level. In addition, we are in the process of transforming our enterprise resource planning system which will allow employees to work more efficiently and effectively.
OVERVIEW
The Overview presented below is an executive-level summary highlighting the key trends and measures on which the Company’s management focuses in evaluating its financial condition and operating performance. Certain earnings and performance measures within the Overview include financial information determined on a non-GAAP basis, which aligns with how management internally evaluates the Company's results of operations, determines incentive compensation, and assesses the impact of known trends and uncertainties on the business. A detailed reconciliation of the non-GAAP financial measures referenced herein to their nearest comparable GAAP financial measures follows this summary. For a detailed analysis of the Company's operations prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), referred to as "reported" herein, refer to the discussion and analysis in the Consolidated Results of Operations.
In 2017, we made solid progress on our strategic initiatives, including strengthening our core chocolate brands, positioning our snacks business for success and generating operating profit margin expansion. These initiatives will benefit the Company over the long term and enable us to achieve our sales and earnings per share-diluted ("EPS") targets. We continued to generate solid operating cash flow, totaling approximately $1.2 billion in 2017, which affords the Company significant financial flexibility. The recent acquisition of Amplify is an important step in our journey to expand our breadth in snacking as it should enable us to bring scale and category management capabilities to a key sub-segment of the warehouse snack aisle.
Our full year 2017 net sales totaled $7,515.4 million, an increase of 1.0%, versus $7,440.2 million for the comparable period of 2016. Excluding a 0.2% impact from favorable foreign exchange rates, our net sales increased 0.8%. Net sales growth was driven by lower levels of trade promotional spending in both the2023, 2022 and 2021, respectively. North America and International and Other segments, as well as higher sales volume in North America, primarily from 2017 innovation and new launches, including Hershey's Cookie Layer Crunch, Hershey's Gold and Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels.
Our reported gross margin was 45.8% for the full year 2017, an increase of 340 basis points compared to the full year 2016. Our 2017 non-GAAP gross margin of 45.6% was on par with the prior year margin, as the benefits from supply chain productivity and cost savings initiatives, as well as lower input costs, were offset by higher freight rates and increased levels of manufacturing and distribution costs associated with an effort to maintain customer service targets at fast growing retail customers.
Our full year 2017 reported net income and EPS-diluted totaled $783.0 million and $3.66, respectively, compared to the full year 2016 reported net income and EPS-diluted of $720.0 million and $3.34, respectively. From a non-GAAP perspective, full year 2017 adjusted net income was $1,016.9 million, an increase of 7.2% versus $948.5 million in 2016. Our adjusted EPS-diluted for the full year 2017 was $4.76 compared to $4.41 for the same period of 2016, an increase of 7.9%.
NON-GAAP INFORMATION
The comparability of certain of our financial measures is impacted by unallocated mark-to-market (gains) losses on commodity derivatives, costs associated with business realignment activities, costs relating to the integration of acquisitions, non-service related components of our pension expense ("NSRPE"), impairment of goodwill, indefinite and long-lived assets, settlement of the SGM liability in conjunction with the purchase of the remaining 20% of the outstanding shares of SGM, the gain realized on the sale of a trademark, costs associated with the early extinguishment of debt and other non-recurring gains and losses.
To provide additional information to investors to facilitate the comparison of past and present performance, we use non-GAAP financial measures within MD&A that exclude the financial impact of these activities. These non-GAAP financial measures are used internally by management in evaluatingConfectionery results of operations and determining incentive compensation, and in assessing the impact of known trends and uncertainties on our business, but they are not intended to replace the presentation of financial results in accordance with GAAP. A reconciliation of the non-GAAP financial measures referenced in MD&A to their nearest comparable GAAP financial measures as presented in the Consolidated Statements of Income is provided below.
|
| | | | | | | | | | | |
| Reconciliation of Certain Non-GAAP Financial Measures |
| Consolidated results | For the years ended December 31, |
| In thousands except per share data | 2017 | | 2016 | | 2015 |
| Reported gross profit | $ | 3,444,519 |
| | $ | 3,157,891 |
| | $ | 3,382,675 |
|
| Derivative mark-to-market (gains) losses | (35,292 | ) | | 163,238 |
| | — |
|
| Business realignment activities | 5,147 |
| | 58,106 |
| | 8,801 |
|
| Acquisition integration costs | — |
| | — |
| | 7,308 |
|
| NSRPE | 11,125 |
| | 11,953 |
| | 2,516 |
|
| Non-GAAP gross profit | $ | 3,425,499 |
| | $ | 3,391,188 |
| | $ | 3,401,300 |
|
| | | | | | |
| Reported operating profit | $ | 1,274,641 |
| | $ | 1,205,783 |
| | $ | 1,037,759 |
|
| Derivative mark-to-market (gains) losses | (35,292 | ) | | 163,238 |
| | — |
|
| Business realignment activities | 69,359 |
| | 107,571 |
| | 120,975 |
|
| Acquisition integration costs | 311 |
| | 6,480 |
| | 20,899 |
|
| NSRPE | 35,028 |
| | 27,157 |
| | 18,079 |
|
| Goodwill, indefinite and long-lived asset impairment charges | 208,712 |
| | 4,204 |
| | 280,802 |
|
| Non-GAAP operating profit | $ | 1,552,759 |
| | $ | 1,514,433 |
| | $ | 1,478,514 |
|
| | | | | | |
| Reported provision for income taxes | $ | 354,131 |
| | $ | 379,437 |
| | $ | 388,896 |
|
| Derivative mark-to-market (gains) losses* | (4,746 | ) | | 20,500 |
| | — |
|
| Business realignment activities* | 17,903 |
| | 19,138 |
| | 41,648 |
|
| Acquisition integration costs* | 118 |
| | 2,456 |
| | 8,264 |
|
| NSRPE* | 13,258 |
| | 10,283 |
| | 6,955 |
|
| Goodwill, indefinite and long-lived asset impairment charges* | 23,292 |
| | 1,157 |
| | — |
|
| Impact of U.S. tax reform | (32,467 | ) | | — |
| | — |
|
| Loss on early extinguishment of debt* | — |
| | — |
| | 10,736 |
|
| Gain on sale of trademark* | — |
| | — |
| | (3,652 | ) |
| Non-GAAP provision for income taxes | $ | 371,489 |
| | $ | 432,971 |
| | $ | 452,847 |
|
| | | | | | |
| Reported net income | $ | 782,981 |
| | $ | 720,044 |
| | $ | 512,951 |
|
| Derivative mark-to-market (gains) losses | (30,546 | ) | | 142,738 |
| | — |
|
| Business realignment activities | 51,456 |
| | 88,433 |
| | 79,327 |
|
| Acquisition integration costs | 193 |
| | 4,024 |
| | 14,196 |
|
| NSRPE | 21,770 |
| | 16,874 |
| | 11,124 |
|
| Goodwill, indefinite and long-lived asset impairment charges | 185,420 |
| | 3,047 |
| | 280,802 |
|
| Impact of U.S. tax reform | 32,467 |
| | — |
| | — |
|
| Noncontrolling interest share of business realignment and impairment charges | (26,795 | ) | | — |
| | — |
|
| Settlement of SGM liability | — |
| | (26,650 | ) | | — |
|
| Loss on early extinguishment of debt | — |
| | — |
| | 17,591 |
|
| Gain on sale of trademark | — |
| | — |
| | (6,298 | ) |
| Non-GAAP net income | $ | 1,016,946 |
| | $ | 948,510 |
| | $ | 909,693 |
|
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | |
| | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Reported EPS - Diluted | $ | 3.66 |
| | $ | 3.34 |
| | $ | 2.32 |
|
| Derivative mark-to-market (gains) losses | (0.14 | ) | | 0.66 |
| | — |
|
| Business realignment activities | 0.25 |
| | 0.42 |
| | 0.36 |
|
| Acquisition integration costs | — |
| | 0.02 |
| | 0.05 |
|
| NSRPE | 0.09 |
| | 0.08 |
| | 0.05 |
|
| Goodwill, indefinite and long-lived asset impairment charges | 0.87 |
| | 0.01 |
| | 1.28 |
|
| Impact of U.S. tax reform | 0.15 |
| | — |
| | — |
|
| Noncontrolling interest share of business realignment and impairment charges | (0.12 | ) | | — |
| | — |
|
| Settlement of SGM liability | — |
| | (0.12 | ) | | — |
|
| Loss on early extinguishment of debt | — |
| | — |
| | 0.09 |
|
| Gain on sale of trademark | — |
| | — |
| | (0.03 | ) |
| Non-GAAP EPS - Diluted | $ | 4.76 |
| | $ | 4.41 |
| | $ | 4.12 |
|
* The tax effect for each adjustment is determined by calculating the tax impact of the adjustment on the Company's quarterly effective tax rate.
In the assessment of our results, we review and discuss the following financial metrics that are derived from the reported and non-GAAP financial measures presented above:
|
| | | | | | | | |
| | For the years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| As reported gross margin | 45.8 | % | | 42.4 | % | | 45.8 | % |
| Non-GAAP gross margin (1) | 45.6 | % | | 45.6 | % | | 46.0 | % |
| | | | | | |
| As reported operating profit margin | 17.0 | % | | 16.2 | % | | 14.0 | % |
| Non-GAAP operating profit margin (2) | 20.7 | % | | 20.4 | % | | 20.0 | % |
| | | | | | |
| As reported effective tax rate | 31.9 | % | | 34.5 | % | | 43.1 | % |
| Non-GAAP effective tax rate (3) | 26.7 | % | | 31.3 | % | | 33.2 | % |
| |
(1) | Calculated as non-GAAP gross profit as a percentage of net sales for each period presented. |
| |
(2) | Calculated as non-GAAP operating profit as a percentage of net sales for each period presented. |
| |
(3) | Calculated as non-GAAP provision for income taxes as a percentage of non-GAAP income before taxes (calculated as non-GAAP operating profit minus non-GAAP interest expense, net plus or minus non-GAAP other (income) expense, net). |
Details of the activities impacting comparability that are presented as reconciling items to derive the non-GAAP financial measures in the tables above are as follows:
Mark-to-market (gains) losses on commodity derivatives
The mark-to-market (gains) losses on commodity derivatives are recorded as unallocated and excluded from adjusted results until such time as the related inventory is sold, at which time the corresponding (gains) losses are reclassified from unallocated to segment income. Since we often purchase commodity contracts to price inventory requirements in future years, we make this adjustment to facilitate the year-over-year comparison of cost of sales on a basis that matches the derivative gains and losses with the underlying economic exposure being hedged for the period. For the years ended December 31, 2017 and 2016, the net adjustment recognized within unallocated was a gain of $35.3 million and a loss of $163.2 million, respectively. See Note 11 to the Consolidated Financial Statements for more information.
Business realignment activities
We periodically undertake restructuring and cost reduction activities as part of ongoing efforts to enhance long-term profitability. For the years ended December 31, 2017, 2016 and 2015, we incurred $69.4 million, $107.6 million and $121.0 million, respectively, of pre-tax costs related to business realignment activities. See Note 7 to the Consolidated Financial Statements for more information.
Acquisition integration costs
For the years ended December 31, 2017 and 2016, we incurred expenses totaling $0.3 million and $6.5 million, respectively, related to integration of the 2016 acquisition of Ripple Brand Collective, LLC, as we incorporated this business into our operating practices and information systems. For the year ended December 31, 2015, we incurred costs related to the integration of the 2014 acquisitions of SGM and The Allan Candy Company and the 2015 acquisition of Krave totaling $22.5 million as we incorporated these businesses into our operating practices and information systems. These 2015 expenses included charges incurred to write-down approximately $6.4 million of expired or near-expiration work-in-process inventory at SGM, in connection with the implementation of our global quality standards and practices. In addition, integration costs for 2015 were offset by a $6.8 million reduction in the fair value of contingent consideration paid to the Krave shareholders.
Non-service related pension expense
NSRPE includes interest costs, the expected return on pension plan assets, the amortization of actuarial gains and losses, and certain curtailment and settlement losses or credits. NSRPE can fluctuate from year to year as a result of changes in market interest rates and market returns on pension plan assets. We believe that the service cost component of our total pension benefit costs closely reflects the operating costs of our business and provides for a better comparison of our operating results from year to year. Therefore, we exclude NSRPE from our internal performance measures. Our most significant defined benefit pension plans have been closed to new participants for a number of years, resulting in ongoing service costs that are stable and predictable. We recorded pre-tax NSRPE of $35.0 million, $27.2 million and $18.1 million for the years ended December 31,
2017, 20162023, 2022 and
2015, respectively.2021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 9,123.1 | | | $ | 8,536.5 | | | $ | 7,682.4 | | | 6.9 | % | | 11.1 | % |
| Segment income | | 3,117.0 | | | 2,811.1 | | | 2,475.9 | | | 10.9 | % | | 13.5 | % |
| Segment margin | | 34.2 | % | | 32.9 | % | | 32.2 | % | | | | |
Goodwill, indefinite and long-lived asset impairment charges
For the year ended December 31, 2017, we incurred $208.7 million of pre-tax long-lived asset impairment charges related to certain business realignment activities. This includes a write-down of certain intangible assets that had been recognized in connection with the 2014 SGM acquisition and write-down of property, plant and equipment. For the year ended December 31, 2016, in connection with our 2016 annual impairment testing of other indefinite lived assets, we recognized a trademark impairment charge of $4.2 million primarily resulting from plans to discontinue a brand sold in India. In the second and third quarters of 2015, we recorded a total $280.8 million non-cash goodwill impairment charge, representing a write-down of all of the goodwill resulting from the SGM acquisition, including $14.4 million relating to the portion of goodwill that had been allocated to our China chocolate reporting unit, based on synergies to be realized by this business.
Impact of U.S. tax reform
In connection with the enactment of U.S. tax reform in December 2017, we recorded a net charge of $32.5 million during the fourth quarter of 2017, which includes the estimated impact of the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries offset in part by the benefit from revaluation of net deferred tax liabilities based on the new lower corporate income tax rate.
Noncontrolling interest share of business realignment and impairment charges
Certain of the business realignment and impairment charges recorded in connection with the Margin for Growth Program related to Lotte Shanghai Foods Co., Ltd., a joint venture in which we own a 50% controlling interest. Therefore, we have also adjusted for the portion of these charges included within the loss attributed to the non-controlling interest.
Settlement of SGM liability
In the fourth quarter of 2015, we reached an agreement with the SGM selling shareholders to reduce the originally-agreed purchase price for the remaining 20% of SGM, and we completed the purchase on February 3, 2016. In the first quarter of 2016, we recorded a $26.7 million gain relating to the settlement of the SGM liability, representing the net carrying amount of the recorded liability in excess of the cash paid to settle the obligation for the remaining 20% of the outstanding shares.
Loss on early extinguishment of debt
During the third quarter of 2015, we recorded a $28.3 million loss on the early extinguishment of debt relating to a cash tender offer. See Note 4 to the Consolidated Financial Statements for further information.
Gain on sale of trademark
During the first quarter of 2015, we recorded a $9.9 million gain relating to the sale of a non-core trademark.
Constant Currency Net Sales Growth
We present certain percentage changes in net sales on a constant currency basis, which excludes the impact of foreign currency exchange. This measure is used internally by management in evaluating results of operations and determining incentive compensation. We believe that this measure provides useful information to investors because it provides transparency to underlying performance in our net sales by excluding the effect that foreign currency exchange rate fluctuations have on the year-to-year comparability given volatility in foreign currency exchange markets.
To present this information for historical periods, current period net sales for entities reporting in other than the U.S. dollar are translated into U.S. dollars at the average monthly exchange rates in effect during the corresponding period of the prior fiscal year, rather than at the actual average monthly exchange rates in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the corresponding period of the prior fiscal year.
The following tables set forth a reconciliation between reported and constant currency growth rates for the years ended December 31, 2017 and 2016:
|
| | | | | | | | |
| | For the Year Ended December 31, 2017 |
| | Percentage Change as Reported | | Impact of Foreign Currency Exchange | | Percentage Change on Constant Currency Basis |
| North America segment | | | | | |
| Canada | 6.3 | % | | 2.1 | % | | 4.2 | % |
| Total North America segment | 1.3 | % | | 0.1 | % | | 1.2 | % |
| | | | | | |
| International and Other segment | | | | | |
| Mexico | 9.7 | % | | (1.1 | )% | | 10.8 | % |
| Brazil | 19.9 | % | | 9.4 | % | | 10.5 | % |
| India | 17.0 | % | | 3.2 | % | | 13.8 | % |
| Greater China | (18.1 | )% | | (0.8 | )% | | (17.3 | )% |
| Total International and Other segment | (1.4 | )% | | 0.6 | % | | (2.0 | )% |
| | | | | | |
| Total Company | 1.0 | % | | 0.2 | % | | 0.8 | % |
|
| | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | Percentage Change as Reported | | Impact of Foreign Currency Exchange | | Percentage Change on Constant Currency Basis |
| North America segment | | | | | |
| Canada | (3.5 | )% | | (3.0 | )% | | (0.5 | )% |
| Total North America segment | 1.0 | % | | (0.2 | )% | | 1.2 | % |
| | | | | | |
| International and Other segment | | | | | |
| Mexico | (8.5 | )% | | (16.0 | )% | | 7.5 | % |
| Brazil | 15.7 | % | | (6.0 | )% | | 21.7 | % |
| India | (26.6 | )% | | (3.6 | )% | | (23.0 | )% |
| Greater China | (0.3 | )% | | (4.9 | )% | | 4.6 | % |
| Total International and Other segment | (1.2 | )% | | (4.4 | )% | | 3.2 | % |
| | | | | | |
| Total Company | 0.7 | % | | (0.7 | )% | | 1.4 | % |
CONSOLIDATED RESULTS OF OPERATIONS
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | Percent Change |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 | | 2017 vs 2016 | | 2016 vs 2015 |
| In millions of dollars except per share amounts | | | | | | | | | | |
| Net Sales | | $ | 7,515.4 |
| | $ | 7,440.2 |
| | $ | 7,386.6 |
| | 1.0 | % | | 0.7 | % |
| Cost of Sales | | 4,070.9 |
| | 4,282.3 |
| | 4,003.9 |
| | (4.9 | )% | | 7.0 | % |
| Gross Profit | | 3,444.5 |
| | 3,157.9 |
| | 3,382.7 |
| | 9.1 | % | | (6.6 | )% |
| Gross Margin | | 45.8 | % | | 42.4 | % | | 45.8 | % | | | | |
| SM&A Expense | | 1,913.4 |
| | 1,915.4 |
| | 1,969.3 |
| | (0.1 | )% | | (2.7 | )% |
| SM&A Expense as a percent of net sales | | 25.5 | % | | 25.7 | % | | 26.7 | % | | | | |
| Goodwill, Indefinite and Long-Lived Asset Impairment Charges | | 208.7 |
| | 4.2 |
| | 280.8 |
| | NM |
| | NM |
|
| Business Realignment Costs | | 47.8 |
| | 32.5 |
| | 94.8 |
| | 46.8 | % | | (65.7 | )% |
| Operating Profit | | 1,274.6 |
| | 1,205.8 |
| | 1,037.8 |
| | 5.7 | % | | 16.2 | % |
| Operating Profit Margin | | 17.0 | % | | 16.2 | % | | 14.0 | % | | | | |
| Interest Expense, Net | | 98.3 |
| | 90.2 |
| | 105.8 |
| | 9.0 | % | | (14.8 | )% |
| Other (Income) Expense, Net | | 65.7 |
| | 16.2 |
| | 30.1 |
| | 306.5 | % | | (46.4 | )% |
| Provision for Income Taxes | | 354.1 |
| | 379.4 |
| | 388.9 |
| | (6.7 | )% | | (2.4 | )% |
| Effective Income Tax Rate | | 31.9 | % | | 34.5 | % | | 43.1 | % | | | | |
| Net Income Including Noncontrolling Interest | | 756.5 |
| | 720.0 |
| | 513.0 |
| | 5.1 | % | | 40.4 | % |
| Less: Net Loss Attributable to Noncontrolling Interest | | (26.4 | ) | | — |
| | — |
| | NM |
| | NM |
|
| Net Income Attributable to The Hershey Company | | $ | 783.0 |
| | $ | 720.0 |
| | $ | 513.0 |
| | 8.7 | % | | 40.4 | % |
| Net Income Per Share—Diluted | | $ | 3.66 |
| | $ | 3.34 |
| | $ | 2.32 |
| | 9.6 | % | | 44.0 | % |
| | | | | | | | | | | |
| Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above. |
| NM = not meaningful. |
Net Sales
20172023 compared with 20162022
Net sales increased 1.0%of our North America Confectionery segment were $9,123.1 million in 20172023 compared with 2016, reflectingto $8,536.5 million in 2022, a increase of $586.6 million, or 6.9%. The increase reflected a favorable price realization of 0.7%,9.0% due to price increases on certain products across our portfolio. The increases were partially offset by a benefit from acquisitionsvolume decrease of 0.3%,1.9% driven by a decrease in everyday core U.S. confection brands, and a favorablean unfavorable impact from foreign currency exchange rates of 0.2%.
Our North America Confectionery segment also includes licensing and owned retail. This includes our Hershey’s Chocolate World stores in the United States (3 locations), partially offset by a volume decrease of 0.2%. Excluding foreign currency, ourNiagara Falls (Ontario) and Singapore. Our net sales for licensing and owned retail increased 0.8%approximately 12.1% during 2023 compared to 2022.
Our North America Confectionery segment income was $3,117.0 million in 2017.2023 compared to $2,811.1 million in 2022, a increase of $305.9 million, or 10.9%. The increase was primarily due to favorable net price realization was attributed to lower levels of trade promotional spending in both the North America and International and Other segments versus the prior year. Consolidated volume decreased as a result of lower sales volume in the International and Other segment, primarily attributed to our China business and the softness in the modern trade channel coupled with a focus on optimizing our product offerings. These volume decreases weresupply chain productivity, partially offset by higher supply chain costs, including higher labor costs, as well as unfavorable product mix.
2022 compared with 2021
Net sales volume inof our North America specifically from 2017 innovation and new launches, including Hershey's Cookie Layer Crunch, Hershey's Gold and Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels.
2016Confectionery segment were $8,536.5 million in 2022 compared with 2015
Net sales increased 0.7%to $7,682.4 million 2021, an increase of $854.1 million, or 11.1%. The increase reflected a favorable price realization of 8.1% due to higher prices on certain products, a volume increase of 2.8% due to an increase in 2016 compared with 2015, reflecting volume increases of 0.8%everyday core U.S. confection brands, and a 0.6%0.4% benefit from net acquisitions and divestitures,the 2021 acquisition of Lily’s. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.7%0.2%. Excluding foreign currency,
Our North America Confectionery segment also includes licensing and owned retail. This includes our net sales increased 1.4% in 2016. The volume improvement was primarily driven by new chocolate and snacking productsHershey’s Chocolate World stores in the United States including Snack Mix, Snack Bites(3 locations), Niagara Falls (Ontario) and Hershey's Cookie Layer Crunch bars. While theSingapore. Our net sales for licensing and owned retail increased approximately 12.7% during 2022 compared to 2021.
Our North America Confectionery segment had unfavorableincome was $2,811.1 million in 2022 compared to $2,475.9 million in 2021, an increase of $335.2 million, or 13.5%. The increase was primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as, unfavorable product mix.
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| The Hershey Company | 2023 Form 10-K | Page 30 | |
North America Salty Snacks
The North America Salty Snacks segment is responsible for our grocery and snacks market positions, including our salty snacking products. North America Salty Snacks accounted for 9.8%, 9.9% and 6.2% of our net sales in 2023, 2022 and 2021, respectively. North America Salty Snacks results for the years ended December 31, 2023, 2022 and 2021 were as follows:
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| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 1,092.7 | | | $ | 1,029.4 | | | $ | 555.4 | | | 6.1 | % | | 85.3 | % |
| Segment income | | 158.3 | | | 159.9 | | | 100.7 | | | (1.0) | % | | 58.8 | % |
| Segment margin | | 14.5 | % | | 15.5 | % | | 18.1 | % | | | | |
2023 compared with 2022
Net sales for our North America Salty Snacks segment were $1,092.7 million in 2023 compared to $1,029.4 million in 2022, an increase of $63.3 million, or 6.1%. The increase reflected a favorable price realization of 5.4% due to price increases on products across our portfolio, primarily SkinnyPop and Dot’s Homestyle Pretzels snacks, and a volume increase of 0.7%, primarily related to Dot’s Homestyle Pretzels snacks.
Our North America Salty Snacks segment income was $158.3 million in 2023 compared to $159.9 million in 2022 a decrease of $1.6 million, or 1.0%. The decrease is primarily due to increased levelsadvertising and related consumer marketing costs and costs related to the voluntary removal of trade promotional spending, thiscertain Paqui branded items in 2023. The decrease was essentiallypartially offset by favorable price realization and favorable product mix.
2022 compared with 2021
Net sales for our North America Salty Snacks segment was $1,029.4 million in 2022 compared to $555.4 million in 2021, an increase of $474.0 million, or 85.3%. The increase reflected a 64.0% benefit from the 2021 acquisitions of Dot’s and Pretzels, a favorable price realization of 12.0% due to higher prices on certain products and a volume increase of 9.3% primarily related to SkinnyPop and Pirates Booty snacks.
Our North America Salty Snacks segment income was $159.9 million in 2022 compared to $100.7 million in 2021, an increase of $59.2 million, or 58.8%. The increase is primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as, unfavorable product mix.
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| The Hershey Company | 2023 Form 10-K | Page 31 | |
International
The International segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. We currently, have operations and manufacture product in Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Latin America, as well as Europe, Asia, the Middle East and Africa (“AMEA”) and other regions. International results, which accounted for 8.5%, 8.2% and 8.2% of our net sales in 2023, 2022 and 2021, respectively. International results for the years ended December 31, 2023, 2022 and 2021 were as follows:
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| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 949.2 | | | $ | 853.4 | | | $ | 733.5 | | | 11.2 | % | | 16.3 | % |
| Segment income | | 148.3 | | | 107.9 | | | 74.2 | | | 37.4 | % | | 45.4 | % |
| Segment margin | | 15.6 | % | | 12.6 | % | | 10.1 | % | | | | |
2023 compared with 2022
Net sales of our International segment were $949.2 million in 2023 compared to $853.4 million in 2022, an increase of $95.8 million, or 11.2%. The increase reflected a favorable price realization of 4.7%, driven by price increases across the segment, a favorable impact from foreign currency exchange rates of 3.4%, primarily driven by Mexico, and a volume increase of 3.1%. The net sales increase was primarily attributable to World Travel Retail, Mexico and Brazil & Latin America, where net sales increased 15.6%, 14.3% and 13.0%, respectively.
Our International segment income was $148.3 million in 2023 compared to $107.9 million in 2022, an increase of $40.4 million, or 37.4%, primarily resulting from favorable price realization, favorable foreign currency exchange rates, and minimal volume increases, partially offset by increased supply chain costs.
2022 compared with 2021
Net sales of our International segment were $853.4 million in 2022 compared to $733.5 million in 2021, an increase of $119.9 million, or 16.3% reflecting a volume increase of 11.9%, a favorable price realization of 4.1%, and a favorable impact from foreign currency exchange rates of 0.3%. The volume increase was primarily attributed to solid marketplace growth in Brazil, Mexico and India, where net sales increased by 21.6%, 20.6% and 13.7%, respectively. Our International segment also includes world travel retail, where net sales increased approximately 28.6%.
Our International segment income was $107.9 million in 2022 compared to $74.2 million in 2021, an increase of $33.7 million, or 45.4%, primarily resulting from volume increases, favorable price realization, and the execution of our International Optimization Program in China, as we streamline and optimize our China operating model.
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| The Hershey Company | 2023 Form 10-K | Page 32 | |
Unallocated Corporate Expense
Unallocated corporate expense includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance.
Unallocated corporate expense totaled $800.4 million in 2023 as compared to $735.5 million in 2022, an increase of $64.9 or, or 8.8%. The increase was primarily driven by incremental investments in capabilities and technology, higher compensation costs, and an increase in acquisition and integration related costs.
Unallocated corporate expense totaled $735.5 million in 2022 as compared to $614.9 million in 2021, an increase of $120.6 million, or 19.6%. The increase was primarily driven by an increase in acquisition and integration related costs, as well as higher compensation costs, investments in capabilities and technology and broad-based marketplace inflation.
LIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity include cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, the adequacy of available commercial paper and bank lines of credit, and the ability to attract long-term capital with satisfactory terms. We generate substantial amounts of cash from operations and remain in a strong financial position, with sufficient liquidity available for capital reinvestment, strategic acquisitions and the payment of dividends.
Cash Flow Summary
The following table is derived from our Consolidated Statements of Cash Flows:
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| In millions of dollars | | 2023 | | 2022 | | 2021 | | | | |
| Net cash provided by (used in): | | | | | | | | | | |
| Operating activities | | $ | 2,323.2 | | $ | 2,327.8 | | $ | 2,082.9 | | | | |
| Investing activities | | (1,198.7) | | | (787.4) | | | (2,222.8) | | | | | |
| Financing activities | | (1,148.3) | | | (1,415.7) | | | (681.1) | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | (38.2) | | | 9.9 | | | (5.1) | | | | | |
| Less: Cash classified as assets held for sale | | — | | | — | | | 11.4 | | | | | |
| (Decrease) increase in cash and cash equivalents | | $ | (62.0) | | | $ | 134.6 | | | $ | (814.7) | | | | | |
Operating activities
Our principal source of liquidity is cash flow from operations. Our net income and, consequently, our cash provided by operations are impacted by sales volume, seasonal sales patterns, timing of new product introductions, profit margins and price changes. Sales are typically higher during the third and fourth quarters of the year due to seasonal and holiday-related sales patterns. Generally, working capital needs peak during the summer months. We meet these needs primarily with cash on hand, bank borrowings or the issuance of commercial paper.
We generated cash of $2.32 billion from operating activities in 2023, a decrease of $4.6 million compared to $2.33 billion in 2022. The decrease in net cash provided by operating activities was mainly driven by the following factors:
•In the aggregate, select net working capital items, specifically, trade accounts receivable, inventory, accounts payable and accrued liabilities, consumedcash of $209.0 million in 2023, compared to $8.6 million in 2022. This $200.4 million fluctuation was mainly driven by mainly driven by an increase in cash used by accounts receivable due to an increase in sales of U.S. seasonal products and the timing of vendor and supplier payments.
•Timing of income tax payments contributed to a decrease in operating cash of $32.5 million in 2023, compared to an increase of $5.0 million in 2022. This $37.5 million fluctuation was primarily due to the variance in actual tax
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| The Hershey Company | 2023 Form 10-K | Page 33 | |
expense for 2023 relative to the timing of quarterly estimated tax payments. We paid cash of $303.9 million for income taxes during 2023 compared to $221.3 million in the Internationalsame period of 2022.
•Other assets and Other segment,liabilities consumed cash of $100.4 million in 2023, compared to $25.7 million in 2022. This $74.7 million fluctuation was primarily due to significantlyour purchase of an irrevocable group annuity contract to settle a portion of our post retirement benefit obligation.
•The decrease in cash provided by operating activities was partially offset by the following net cash inflows:
◦Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, write-down of equity investments and other charges) resulted in $256.7 million of higher cash flow in 2023 relative to 2022.
We generated cash of $2.3 billion from operating activities in 2022, an increase of $244.9 million compared to $2.1 billion in 2021. This increase in net cash provided by operating activities was mainly driven by the following factors:
•In the aggregate, select net working capital items, specifically, trade accounts receivable, inventory, accounts payable and accrued liabilities, consumedcash of $9 million in 2022 and generated cash of $47 million in 2021. This $56 million fluctuation was mainly driven by a higher year-over-year build up of U.S. inventories to satisfy product requirements and maintain sufficient levels to accommodate customer requirements, partially offset by the timing of vendor and supplier payments.
•Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, write-down of equity investments and other charges) resulted in $348 million of higher cash flow in 2022 relative to 2021.
Pension and Post-Retirement Activity. We recorded net periodic benefit costs of $43.2 million, $36.3 million and $28.4 million in 2023, 2022 and 2021, respectively, relating to our benefit plans (including our defined benefit and other post retirement plans). The main drivers of fluctuations in expense from year to year are assumptions in formulating our long-term estimates, including discount rates used to value the service and interest costs and the amortization of actuarial gains and losses.
The funded status of our qualified defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and the level of funding. We contribute cash to our plans at our discretion, subject to applicable regulations and minimum contribution requirements. Cash contributions to our pension and post retirement plans totaled $27.6 million, $78.5 million and $51.1 million in 2023, 2022 and 2021, respectively.
Investing activities
Our principal uses of cash for investment purposes relate to purchases of property, plant and equipment and capitalized software, as well as acquisitions of businesses, partially offset by proceeds from sales of property, plant and equipment. We used cash of $1.2 billion for investing activities in 2023 compared to $0.8 billion in 2022, with the increase in cash spend driven by an increase of investments in capabilities and technology as well as a higher level of acquisition activity. We used cash of $2.2 billion for investing activities in 2021, with the decrease in 2022 in cash spend driven by lower levels of tradeacquisition activity, partially offset by higher capital spend and investment tax credits.
Primary investing activities include the following:
•Capital spending. Capital expenditures, including capitalized software, primarily to support our ERP system implementation, capacity expansion, innovation and returns,cost savings, were $771.1 million in 2023, $519.5 million in 2022 and $495.9 million in 2021. For each of the years presented, our expenditures increased due to progress on capacity expansion projects and our ERP system implementation. We expect 2024 capital expenditures, including capitalized software, to approximate $600 million to $650 million. The decrease in our 2024 capital expenditures is largely driven by the wind down of our key strategic initiatives, including completion of the upgrade of a new ERP system across the enterprise in 2024. We intend to use our existing cash and internally generated funds to meet our 2024 capital requirements.
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| The Hershey Company | 2023 Form 10-K | Page 34 | |
•Investments in partnerships qualifying for tax credits. We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested approximately $256.8 million in 2023, $275.5 million in 2022 and $128.4 million in 2021 in projects qualifying for tax credits.
•Business acquisitions. In 2023, we spent $165.8 million to acquire Weaver (May 2023). In 2022, we had no acquisition activity. In 2021, we spent an aggregate $1.6 billion to acquire Lily's (June 2021), as well as Dot’s and Pretzels (December 2021). Further details regarding our business acquisition activity is provided in Note 2 to the Consolidated Financial Statements. •Other investing activities. In 2023, 2022, and 2021, our other investing activities were minimal.
Financing activities
Our cash flow from financing activities generally relates to the use of cash for purchases of our Common Stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of stock options. Financing activities in 2023 used cash of $1.1 billion, compared to cash used of $1.4 billion in 2022. We used cash of $0.7 billion for financing activities in 2021.
The majority of our financing activity was attributed to the following:
•Short-term borrowings, net. In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. In 2023, our short-term borrowings increased $26.0 million predominately through the issuance of short-term commercial paper, as well as an increase in short-term foreign bank borrowings. In 2022, we used cash of $245.6 million to reduce a portion of our short-term commercial paper borrowings originally used to fund our 2021 acquisitions of Dot’s and Pretzels, partially offset by an increase in short-term foreign bank borrowings. In 2021, we generated cash flow of $869.0 million predominantly through the issuance of short-term commercial paper.
•Long-term debt borrowings and repayments. In May 2023, we repaid $250 million of 2.625% Notes and $500 million of 3.375% Notes due upon their maturities. In May 2023, we issued $350 million of 4.250% Notes due in May 2028 and $400 million of 4.500% Notes due in May 2033 (the “2023 Notes”). Proceeds from the issuance of the 2023 Notes, net of discounts and allowances.issuance costs, totaled $744.1 million. In 2022, long-term debt activity was minimal. In February 2021 and May 2021, we repaid $84.7 million of 8.800% Debentures and $350 million of 3.100% Notes due upon their maturities, respectively. In 2024, we expect our long-term debt repayments to approximate $300 million upon the maturity of $300 million of 2.050% Notes due in November 2024.
•Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $889.1 million in 2023, $775.0 million in 2022 and $686.0 million in 2021. Dividends per share of Common Stock increased 15.0% to $4.456 per share in 2023 compared to $3.874 per share in 2022, while dividends per share of Class B Common Stock increased 15.0% in 2023. Details regarding our 2023 cash dividends paid to stockholders are as follows:
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| | Quarter Ended |
| In millions of dollars except per share amounts | | April 2, 2023 | | July 2, 2023 | | October 1, 2023 | | December 31, 2023 |
| Dividends paid per share – Common stock | | $ | 1.036 | | | $ | 1.036 | | | $ | 1.192 | | | $ | 1.192 | |
| Dividends paid per share – Class B common stock | | $ | 0.942 | | | $ | 0.942 | | | $ | 1.083 | | | $ | 1.083 | |
| Total cash dividends paid | | $ | 207.4 | | | $ | 206.1 | | | $ | 237.8 | | | $ | 237.8 | |
| Declaration date | | January 31, 2023 | | April 25, 2023 | | July 27, 2023 | | October 25, 2023 |
| Record date | | February 17, 2023 | | May 19, 2023 | | August 18, 2023 | | November 17, 2023 |
| Payment date | | March 15, 2023 | | June 15, 2023 | | September 15, 2023 | | December 15, 2023 |
Key U.S. Marketplace Metrics
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| The Hershey Company | 2023 Form 10-K | Page 35 | |
•Share repurchases. We repurchase shares of Common Stock to offset the full year 2017,dilutive impact of treasury shares issued under our U.S. candy, mintequity compensation plans. The value of these share repurchases in a given period varies based on the volume of stock options exercised and gum ("CMG") consumer takeaway increased 1.6%,our market price. In addition, we periodically repurchase shares of Common Stock pursuant to Board-authorized programs intended to drive additional stockholder value. Details regarding our share repurchases are as follows:
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| In millions | | 2023 | | 2022 | | 2021 |
| Milton Hershey School Trust repurchase (1)(2) | | $ | 239.9 | | | $ | 203.4 | | | $ | — | |
| Shares repurchased in the open market under pre-approved share repurchase programs (2) | | — | | | — | | | 150.0 | |
| Shares repurchased in the open market to replace Treasury Stock issued for stock options and incentive compensation | | $ | 27.4 | | | $ | 185.6 | | | $ | 308.0 | |
| Cash used for total share repurchases (excluding excise tax) | | $ | 267.3 | | | $ | 389.0 | | | $ | 458.0 | |
| Total shares repurchased under pre-approved share repurchase programs | | 1.0 | | | — | | | 0.9 | |
(1) In February 2023 and 2022, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased 1,000,000 shares in 2023 and 2022 of the Company’s Common Stock from the School Trust at a price equal to $239.91 per share, for a total purchase price of $239.9 million in 2023. In 2022 the Company purchased the common stock at a price equal to $203.35 per share, for a total purchase price of $203.4 million. As a result of the 2023 share repurchase, our July 2018 share repurchase authorization program was completed, and approximately $370.1 million remains available for repurchases under our May 2021 share repurchase authorization.
(2) In July 2018, our Board of Directors approved a $500 million share repurchase authorization. In May 2021, our Board of Directors approved an additional $500 million share repurchase authorization. As a result of the February 2023 Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, the July 2018 share repurchase authorization was completed and as of December 31, 2023, approximately $370.1 million remained available for repurchases under our May 2021 share repurchase authorization. In December 2023, our Board of Directors approved an additional $500 million share repurchase authorization. This program is to commence after the existing 2021 authorization is completed and is to be utilized at management’s discretion. These share repurchase programs do not have an expiration date. We expect 2024 share repurchases to be in line with our traditional buyback strategy.
•Proceeds from the category increase, resulting in marketexercise of stock options, including tax benefits. In 2023 we received $26.0 million from employee exercises of stock options and paid $35.0 million of employee taxes withheld from share-based awards. In 2022 we received $34.2 million from employee exercises of stock options and paid $35.5 million of employee taxes withheld from share-based awards. In 2021 we received $33.2 million from employee exercises of stock options, net of employee taxes withheld from share-based awards. Variances are driven primarily by the number of shares exercised and the share price at the date of 30.6%. The CMG consumer takeaway and market share information reflect 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. The amounts presented above are solely for the U.S. CMG category which does not include revenue from our snack mixes and grocery items. For the full year 2017, our U.S. retail takeaway increased 1.2% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items.grant.
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| The Hershey Company | 2023 Form 10-K | Page 36 | |
Cost of Sales and Gross Margin
20172023 compared with 20162022
Cost of sales decreased 4.9%were $6,167.2 million in 20172023 compared with 2016.to $5,920.5 million in 2022, an increase of $246.7 million, or 4.2%. The reduction wasincrease included $356.2 million of unfavorable costs driven by higher supply chain costs, including higher labor costs partially offset by lower commoditylogistics costs, coupled withand unfavorable mix. The increase was further driven by an incremental $116.0$97.7 million favorable impact from marking-to-marketof unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years'years’ commodity purchases a $53.0(See Item 7A - Quantitative and Qualitative Disclosures About Market Risk for more information). These increases were partially offset by $207.2 million decrease in business realignment costs, andof favorable supply chain productivity and cost savings initiatives. These benefits were offset in part by higher freight and warehousing costs and unfavorable manufacturing variances.price realization.
Gross margin increased by 340 basis pointswas 44.8% in 20172023 compared with 2016. Lower43.2% in 2022, an increase of 160 basis points. The increase was driven by favorable price realization and increased supply chain productivity. The increase was partially offset by unfavorable activity on our mark-to-market impact from commodity derivative instruments, higher supply chain costs, coupledincluding higher labor costs and increased waste. The increase was further driven by unfavorable mix and foreign exchange rates.
2022 compared with the2021
Cost of sales were $5,920.5 million in 2022 compared with $4,922.7 million in 2021, an increase of $997.8 million, or 20.3%. The increase included $767.7 million of unfavorable costs driven by higher sales volume and higher supply chain inflation costs, including higher logistics and labor costs. The increase was further driven by an incremental $40.8 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases. Additionally, we incurred incremental costs of $263.3 million associated with our 2021 acquisitions of Dot’s and Pretzels. These increases were offset by $74.0 million of favorable price realization and supply chain productivity.
Gross margin was 43.2% in 2022 compared with 45.1% 2021, a decrease of 190 basis points. The decrease was driven by unfavorable year-over-year mark-to-market impact from commodity derivative instruments, lower business realignment costs, andhigher supply chain productivity contributed to the improvement in gross margin. However,inflation costs, including higher supply chainlogistics and labor costs, and unfavorable product mix partially offset the increase in gross margin.
2016 compared with 2015
Cost of sales increased 7.0% in 2016 compared with 2015. Incremental business realignment costs and mark-to-market losses on commodity derivative instruments increased cost of sales by 5.3%, while the remaining increase was primarily attributed to higher volume and higher supply chain costs, in part due to higher manufacturing variances and some incremental fixed costs related to the commencement of manufacturing in the Malaysia facility.
Gross margin decreased by 340 basis points in 2016 compared with 2015. Mark-to-market losses on commodity derivative instruments and incremental depreciation expense related to business realignment activities drove a 300 basis point decline in gross margin. Higher trade promotional spending and supply chain costs also contributed to the decreased gross margin, butmix. These declines were partially offset by supply chain productivityfavorable price realization and cost savings initiatives.
volume increases.
Selling, Marketing and Administrative
20172023 compared with 20162022
Selling, marketing and administrative (“SM&A”) expenses decreased $2.0were $2,436.5 million in 2023 compared to $2,236.0 million in 2022, an increase of $200.5 million, or 0.1% in 2017. Advertising and related consumer marketing expense remaining consistent with 2016 levels, as higher spending9.0%. The increase was driven by the North America segment was offset by reduced spending by the International and Other segment. While 2017 SM&A benefited from costs savings and efficiency initiatives, lower business realignment costs, and lower acquisition integration costs, these savings were offset in part by higher pension settlement charges and higher costs related to acquisition due diligence activities and the implementation of our new enterprise resource planning system.
2016 compared with 2015
SM&A expenses decreased $53.9 million or 2.7% in 2016. Advertising and related consumer marketing expense decreased 4.0% during this period. We spent less onincreased corporate expenses. Total advertising and related consumer marketing in our International and Other segment, particularly in the China market, and our spending inexpenses increased 12.2% driven by North America declined as our marketing mix models were weighted toward higher trade promotional spending. Excluding theseConfectionery and North America Salty Snacks. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 7.5% in 2023 driven by higher compensation costs selling and administrativeinvestments in capabilities and technology across segments.
2022 compared with 2021
SM&A expenses for 2016 decreased by 2.0% aswere $2,236.0 million in 2022 compared to 2015 as a result$2,001.4 million in 2021, an increase of $234.6 million, or 11.7%, driven by increased corporate expenses. Total advertising and related consumer marketing expenses increased 2.7% driven by advertising increases in our continued focus on reducing non-essential spending.confectionery brands and increased investment in our salty snacks portfolio, which were partially offset by cost efficiencies related to new media partners. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 16.3% in 2016 were also impacted2022 driven by business realignment costs of $18.6 million, NSRPE of $15.2 million andan increase in acquisition and integration related costs, of $6.5 million. In 2015, SM&A expenses included business realignmentas well as higher compensation costs, of $17.4 million, NSRPE of $15.6 millioninvestments in capabilities and acquisitiontechnology and integration costs of $13.6 million.broad-based marketplace inflation.
Goodwill, Indefinite and Long-Lived Asset Impairment ChargesIn 2017, we recorded long-lived asset impairment charges totaling $106.0 million to write-down distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and wrote-down property, plant and equipment by $102.7 million. | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 26 | |
In 2016, in connection with the annual impairment testing of indefinite lived intangible assets, we recognized a trademark impairment charge of $4.2 million, primarily resulting from plans to discontinue a brand sold in India.
In 2015, we recorded goodwill impairment charges totaling $280.8 million resulting from our reassessment of the valuation of the SGM business, coupled with the write-down of goodwill attributed to the China chocolate business in connection with the SGM acquisition from September 2014.
The assessment of the valuation of goodwill and other long-lived assets is based on management estimates and assumptions, as discussed in our critical accounting policies included in Item 7 of this Annual Report on Form 10-K. These estimates and assumptions are subject to change due to changing economic and competitive conditions.
Business Realignment Activities
We are currently pursuing severalperiodically undertake business realignment activities designed to increase our efficiency and focus our business behindin support of our key growth strategies. CostsIn 2023, 2022 and 2021, we recorded for business realignment activities during 2017, 2016costs of $0.4 million, $2.0 million and 2015 are as follows: |
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| In millions of dollars | | | | | |
| Margin for Growth Program: | | | | | | |
| Severance | | $ | 32.6 |
| | $ | — |
| | $ | — |
|
| Accelerated depreciation | | 6.9 |
| | — |
| | — |
|
| Other program costs | | 16.4 |
| | — |
| | — |
|
| Operational Optimization Program: | | | | | | |
| Severance | | $ | 13.8 |
| | $ | 17.9 |
| | $ | — |
|
| Accelerated depreciation | | — |
| | 48.6 |
| | — |
|
| Other program costs | | (0.3 | ) | | 21.8 |
| | — |
|
| 2015 Productivity Initiative: | | | | | | |
| Severance | | — |
| | — |
| | 81.3 |
|
| Pension settlement charges | | — |
| | 13.7 |
| | 10.2 |
|
| Other program costs | | — |
| | 5.6 |
| | 14.3 |
|
| Other international restructuring programs: | | | | | | |
| Severance | | — |
| | — |
| | 6.6 |
|
| Accelerated depreciation and amortization | | — |
| | — |
| | 5.9 |
|
| Mauna Loa divestiture | | — |
| | — |
| | 2.7 |
|
| Total | | $ | 69.4 |
| | $ | 107.6 |
| | $ | 121.0 |
|
$3.5 million, respectively. The 2023, 2022, and 2021 costs related primarily 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. Additionally, in February 2024, the Board of Directors approved the Advancing Agility & Automation Initiative, which is a multi-year productivity program to improve supply chain and manufacturing-related spend, optimize selling, general and administrative expenses, leverage new technology and business models to further simplify and automate processes, and generate long-term savings. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in
Note 79 to the Consolidated Financial Statements. Margin for Growth Program
In February 2017, the Company's Board of Directors unanimously approved several initiatives under a single program designed to drive continued net sales, operating income and earnings per-share diluted growth over the next several years. This program will focus 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.
The Company estimates that the “Margin for Growth” program will result in total pre-tax charges of $375 million to $425 million from 2017 to 2019. This estimate includes plant and office closure expenses of $100 million to $115 million, net intangible asset impairment charges of $100 million to $110 million, employee separation costs of $80 million to $100 million, contract termination costs of approximately $25 million, and other business realignment costs of $70 million to $75 million. The cash portion of the total charge is estimated to be $150 million to $175 million. At the conclusion of the program in 2019, ongoing annual savings are expected to be approximately $150 million to $175 million. The Company expects that implementation of the program will reduce its global workforce by approximately 15%, with a majority of the reductions coming from hourly headcount positions outside of the United States.
The program includes an initiative to optimize the manufacturing operations supporting our China business. We deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded impairment charges totaling $208.7 million, with $106.0 million representing the
portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and $102.7 million representing the portion of the impairment loss that was allocated to property, plant and equipment. These impairment charges are recorded in the long-lived asset impairment charges caption within the Consolidated Statements of Operations.
During 2017, we recognized estimated employee severance totaling $32.6 million. These charges relate largely to our initiative to improve the cost structure of our China business, as well as our initiative to further streamline our corporate operating model. We also recognized non-cash, asset-related incremental depreciation expense totaling $6.9 million as part of optimizing the North America supply chain. During 2017, we also recognized other program costs totaling $16.4 million. These charges relate primarily to third-party charges for our initiative of improving global efficiency and effectiveness.
Operational Optimization Program
In the second quarter of 2016, we commenced a program (the “Operational Optimization Program”) to optimize our production and supply chain network, which includes select facility consolidations. The program encompasses the continued transition of our China chocolate and SGM operations into a united Golden Hershey platform, including the integration of the China sales force, as well as workforce planning efforts and the consolidation of production within certain facilities in China and North America.
For the year ended December 31, 2017, we incurred pre-tax costs totaling $13.5 million, primarily related to employee severance associated with the workforce planning efforts within North America. We currently expect to incur additional cash costs of approximately $8 million over the next twelve months to complete this program.
2015 Productivity Initiative
In mid-2015, we initiated a productivity initiative (the “2015 Productivity Initiative”) intended to move decision making closer to the customer and the consumer, to enable a more enterprise-wide approach to innovation, to more swiftly advance our knowledge agenda, and to provide for a more efficient cost structure, while ensuring that we effectively allocate resources to future growth areas. Overall, the 2015 Productivity Initiative was undertaken to simplify the organizational structure to enhance the Company's ability to rapidly anticipate and respond to the changing demands of the global consumer.
The 2015 Productivity Initiative was executed throughout the third and fourth quarters of 2015, resulting in a net reduction of approximately 300 positions, with the majority of the departures taking place by the end of 2015. The 2015 Productivity Initiative was completed during the third quarter 2016. We incurred total costs of $125 million relating to this program, including pension settlement charges of $13.7 million recorded in 2016 and $10.2 million recorded in 2015 relating to lump sum withdrawals by employees retiring or leaving the Company as a result of this program.
Other international restructuring programs
Costs incurred for the year ended December 31, 2015 related principally to accelerated depreciation and amortization and employee severance costs for minor programs commenced in 2014 to rationalize certain non-U.S. manufacturing and distribution activities and to establish our own sales and distribution teams in Brazil in connection with our exit from the Bauducco joint venture.
Operating Profit and Operating Profit Margin
20172023 compared with 20162022
Operating profit increased 5.7%was $2,560.9 million in 20172023 compared with 2016to $2,260.8 million in 2022, an increase of $300.1 million, or 13.3%. The increase was predominantly due primarily to higher gross profit, and slightly lowerpartially offset by higher SM&A expenses, as discussed previously.noted above. Operating profit margin increased to 17.0%22.9% in 20172023 from 16.2%21.7% in 2016 driven2022 by the improvementsame factors noted above in gross margin.
20162022 compared with 20152021
Operating profit increased 16.2%was $2,260.8 million in 20162022 compared with 2015to $2,043.7 million in 2021, an increase of $217.1 million, or 10.6%. The increase was predominantly due primarily to lower goodwill and intangible asset impairment charges, lowerhigher gross profit, partially offset by higher SM&A costs and lower business realignment costs, offset in part by the lower gross profit.expenses, as noted above. Operating profit margin increaseddecreased to 16.2%21.7% in 20162022 from 14.0%22.8% in 2015 due primarily to2021 driven by these same factors.
Interest Expense, Net
20172023 compared with 20162022
Net interest expense was $8.1$151.8 million higher in 2017 than2023 compared to $137.6 million in 2016.2022, an increase of $14.2 million, or 10.3%. The increase was primarily due to higher levels ofrates on short-term debt balances in 2023 versus 2022, specifically related to outstanding commercial paper borrowings, and higher rates on long-term debt outstandingbalances, specifically related to the $350 million 4.25% Notes and higher$400 million 4.50% Notes issued in May 2023. The increase in the expense was partially offset by an increase in interest rates on commercial paper during the 2017 period, as well as a decreased benefit from the fixed to floating swaps.income.
20162022 compared with 20152021
Net interest expense was $15.6$137.6 million lower in 2016 than2022 compared to $127.4 million in 2015, as the 2015 amount included the premium paid2021, an increase of $10.2 million, or 8.0%. The increase was primarily due to repurchase long-termhigher rates on short-term debt as part of a cash tender offer. This decreasebalances in 2022 versus 2021, specifically related to outstanding commercial paper borrowings. The increase was partially offset bydue to lower capitalized interest expenseaverage long-term debt balances, specifically resulting from the repayment of $84.7 million of 8.800% Debentures upon their maturity in February 2021 and lower interest income.$350 million of 3.100% Notes upon their maturity in May 2021.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 27 | |
Other (Income) Expense, Net
20172023 compared with 20162022
Other (income) expense, net totaled an expense of $65.7$237.2 million in 20172023 versus an expense of $16.2$206.1 million 2016. In 2017 we recognized a $66.2in 2022, an increase of $31.1 million, write-downor 15.1%. The increase in the net expense was primarily driven by an increase of $22.2 million of higher write-downs on equity investments qualifying for federal historic and energy tax credits comparedin 2023 versus 2022 and an increase of $9.5 million of higher non-service cost components of net periodic benefit cost relating to a $43.5 million write down in 2016. Additionally, 2016 was offset by an extinguishment gain of $26.7 million related to the settlement of the SGM liability.pension and other post-retirement benefit plans.
20162022 compared with 20152021
Other (income) expense, net totaled an expense of $16.2$206.1 million in 20162022 versus an expense of $30.1$119.1 million in 2015.2021, an increase of $87.0 million, or 73.1%. The decreaseincrease in the net expense was primarily due to the $26.7 million settlement of the SGM liability in 2016, partially offsetdriven by an increase in the write-down of $75.4 million of higher write-downs on equity investments qualifying for federal historictax credits in 2022 versus 2021 and energy tax credits.an increase of $13.3 million of non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.
Income Taxes and Effective Tax Rate
20172023 compared with 20162022
Our effective income tax rate was 14.3% for 2023 compared with 14.2% for 2022. Relative to the 21% statutory rate, the 2023 effective tax rate benefited from investment tax credits, partially offset by state taxes. The 2022 effective rate, relative to the 21% statutory rate, benefited from investment tax credits, partially offset by state taxes.
2022 compared with 2021
Our effective income tax rate was 31.9%14.2% for 20172022 compared with 34.5%17.5% for 2016.2021. Relative to the 21% statutory rate, the 20172022 effective tax rate was impacted by a favorable foreign rate differential relating to foreign operations and cocoa procurement,benefited from investment tax credits, and the benefit of ASU 2016-09 for the accounting of employee share-based payments, which were partially offset by state taxes. The 2021 effective rate, relative to the impact of U.S. tax reform and non-benefited costs resulting from the Margin for Growth Program. The 2016 effective21% statutory rate, benefited from the impact of non-taxable income related to the settlement of the SGM liability and investment tax credits.
2016 compared with 2015
Our effective income tax rate was 34.5% for 2016 compared with 43.1% for 2015. Relative to the statutory rate, the 2016 effective tax rate was impacted by greater benefits from manufacturing deductions, research and development and investment tax credits, andpartially offset by incremental tax reserves incurred as a favorable foreign rate differential relating to our cocoa procurement operations.result of an adverse ruling in connection with a non-U.S. tax litigation matter, as well as state taxes.
Net Income attributableAttributable to The Hershey Company and Earnings Per Share-diluted
20172023 compared with 20162022
Net income increased $62.9was $1,861.8 million in 2023 compared to $1,644.8 million in 2022, an increase of $217.0 million, or 8.7%, while13.2%. EPS-diluted increased $0.32,was $9.06 in 2023 compared to $7.96 in 2022, an increase of $1.1, or 9.6%, in 2017 compared with 2016.13.8%. The increase in both net income and EPS-diluted werewas driven primarily by higher gross profit, lowerpartially offset by higher SM&A and lowerexpenses, higher income taxes, partly offset by the long-lived asset impairment charges and higher write-downs relating to tax credit investments, as noted above.other income and expenses. Our 20172023 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases including a current year repurchase from the Milton Hershey School Trust and prior year repurchases pursuant to our Board-approved repurchase programs.programs..
20162022 compared with 20152021
Net income increased $207.0was $1,644.8 million in 2022 compared to $1,477.5 million in 2021, an increase of $167.3 million, or 40.4%, while11.3%. EPS-diluted increased $1.02,was $7.96 in 2022 compared to $7.11 in 2021, an increase of $0.85, or 44.0%, in 2016 compared with 2015.12.0%. The increasesincrease in both net income and EPS-diluted werewas driven primarily by the lower goodwill and intangible asset impairment charges, lower SM&A costshigher gross profit and lower business realignment costs, as noted above.income taxes, partially offset by higher SM&A expenses and higher other income and expenses. Our 20162022 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 28 | |
SEGMENT RESULTS
The summary that follows provides a discussion of the results of operations of our two reportablethree segments: North America Confectionery, North America Salty Snacks and International and Other. The segments reflect our operations on a geographic basis.International. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition integrationacquisition-related costs and NSRPEother 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 CODMChief Operating Decision Maker and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations. For further information, see the Non-GAAP Information section of this MD&A.
Our segment results, including a reconciliation to our consolidated results, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| In millions of dollars | | | | | | |
| Net Sales: | | | | | | |
| North America Confectionery | | $ | 9,123.1 | | | $ | 8,536.5 | | | $ | 7,682.4 | |
| North America Salty Snacks | | 1,092.7 | | | 1,029.4 | | | 555.4 | |
| International | | 949.2 | | | 853.4 | | | 733.5 | |
| Total | | $ | 11,165.0 | | | $ | 10,419.3 | | | $ | 8,971.3 | |
| | | | | | |
| Segment Income: | | | | | | |
| North America Confectionery | | $ | 3,117.0 | | | $ | 2,811.1 | | | $ | 2,475.9 | |
| North America Salty Snacks | | 158.3 | | | 159.9 | | | 100.7 | |
| International | | 148.3 | | | 107.9 | | | 74.2 | |
| Total segment income | | 3,423.6 | | | 3,078.9 | | | 2,650.8 | |
| Unallocated corporate expense (1) | | 800.4 | | | 735.5 | | | 614.9 | |
| Unallocated mark-to-market losses (gains) on commodity derivatives (2) | | 58.9 | | | 78.2 | | | (24.4) | |
| | | | | | |
| Costs associated with business realignment activities | | 3.4 | | | 4.4 | | | 16.6 | |
| | | | | | |
| | | | | | |
| Operating profit | | 2,560.9 | | | 2,260.8 | | | 2,043.7 | |
| Interest expense, net | | 151.8 | | | 137.6 | | | 127.4 | |
| Other (income) expense, net | | 237.2 | | | 206.2 | | | 119.1 | |
| Income before income taxes | | $ | 2,171.9 | | | $ | 1,917.0 | | | $ | 1,797.2 | |
(1)Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.
(2)Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains). See Note 13 to the Consolidated Financial Statements. |
| | | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| In millions of dollars | | | | | | |
| Net Sales: | | | | | | |
| North America | | $ | 6,621.2 |
| | $ | 6,533.0 |
| | $ | 6,468.1 |
|
| International and Other | | 894.3 |
| | 907.2 |
| | 918.5 |
|
| Total | | $ | 7,515.4 |
| | $ | 7,440.2 |
| | $ | 7,386.6 |
|
| | | | | | | |
| Segment Income (Loss): | | | | | | |
| North America | | $ | 2,045.6 |
| | $ | 2,041.0 |
| | $ | 2,074.0 |
|
| International and Other | | 11.5 |
| | (29.1 | ) | | (98.1 | ) |
| Total segment income | | 2,057.1 |
| | 2,011.9 |
| | 1,975.9 |
|
| Unallocated corporate expense (1) | | 504.3 |
| | 497.4 |
| | 497.4 |
|
| Unallocated mark-to-market (gains) losses on commodity derivatives (2) | | (35.3 | ) | | 163.2 |
| | — |
|
| Goodwill, indefinite and long-lived asset impairment charges | | 208.7 |
| | 4.2 |
| | 280.8 |
|
| Costs associated with business realignment activities | | 69.4 |
| | 107.6 |
| | 121.0 |
|
| Non-service related pension expense | | 35.0 |
| | 27.2 |
| | 18.1 |
|
| Acquisition and integration costs | | 0.3 |
| | 6.5 |
| | 20.9 |
|
| Operating profit | | 1,274.6 |
| | 1,205.8 |
| | 1,037.7 |
|
| Interest expense, net | | 98.3 |
| | 90.1 |
| | 105.8 |
|
| Other (income) expense, net | | 65.7 |
| | 16.2 |
| | 30.1 |
|
| Income before income taxes | | $ | 1,110.7 |
| | $ | 1,099.5 |
| | $ | 901.8 |
|
| | | | | | | | |
(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 and (d) other gains or losses that are not integral to segment performance.The Hershey Company | 2023 Form 10-K | Page 29 | |
| |
(2) | Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses. See Note 11 to the Consolidated Financial Statements. |
North America Confectionery
The North America Confectionery 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 servicegum and other snacking product lines. North America accounted for 88.1%, 87.8%refreshment products, protein bars, spreads, snack bites and 87.6% of our net sales in 2017, 2016 and 2015, respectively. North America results for the years ended December 31, 2017, 2016 and 2015 were as follows: |
| | | | | | | | | | | | | | | | | | |
| | | | | Percent Change |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 | | 2017 vs 2016 | | 2016 vs 2015 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 6,621.2 |
| | $ | 6,533.0 |
| | $ | 6,468.1 |
| | 1.3 | % | | 1.0 | % |
| Segment income | | 2,045.6 |
| | 2,041.0 |
| | 2,074.0 |
| | 0.2 | % | | (1.6 | )% |
| Segment margin | | 30.9 | % | | 31.2 | % | | 32.1 | % | | | | |
2017 compared with 2016
Net sales of our North America segment increased $88.2 million or 1.3% in 2017 compared to 2016, driven by increased volume of 0.5% due to a longer Easter season,mixes, as well as 2017 innovation, specifically, Hershey's Cookie Layer Crunch,pantry and the launch of Hershey's Gold and Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels. Additionally, the barkTHINS brand acquisition contributed 0.3%. Net price realization increased by 0.4% due to decreased levels of trade promotional spending. Excluding the favorable impact of foreign currency exchange rates of 0.1%, the net sales of our North America segment increased by approximately 1.2%.
Our North America segment income increased $4.6 million or 0.2% in 2017 compared to 2016, driven by higher gross profit, partially offset by investments in greater levels of advertising expense and go-to-market capabilities, as well as unfavorable manufacturing variances and higher freight and warehousing costs.
2016 compared with 2015
Net sales of our North America segment increased $64.9 million or 1.0% in 2016 compared to 2015, reflecting volume increases of 1.4% and the favorable net impact of acquisitions and divestitures of 0.7%, partially offset by unfavorable net price realization of 0.9% and an unfavorable impact from foreign currency exchange rates that reduced net sales by approximately 0.2%. Our 2016 North America performance was similar to the slower growth experienced by other CPG companies. Additionally, the U.S. CMG category and manufacturers were impacted by a shorter Easter season and merchandising and display strategies at select customers. The segment's volume increase was primarily attributable to new product introductions, partially offset by lower everyday product sales. The unfavorable net price realization resulted from increased levels of trade promotional spending necessary to support higher levels of in-store merchandising and display activity. Our Canada operations were impacted by the stronger U.S. dollar, which drove the unfavorable foreign currency impact.
Our North America segment income decreased $33.0 million or 1.6% in 2016 compared to 2015, driven by lower gross margin as higher trade promotional spending and higher supply chain costs were only partially offset by the benefit from supply chain productivity and cost savings initiatives.
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 China and other Asia markets, Latin America, Europe, Africa and the Middle East, along with exports to these regions.food service lines. While a less significant component, this segment also includes our
global retail operations, including Hershey’s Chocolate World stores in Hershey,
Pennsylvania,Pennsylvania; New York,
City,New York; Las Vegas,
Nevada; Niagara Falls (Ontario)
, Dubai and Singapore, as well as operations associated with licensing the use of certain trademarks and products to third parties around the world.
International and OtherNorth America Confectionery accounted for
11.9%81.7%,
12.2%81.9% and
12.4%85.6% of our net sales in
2017, 20162023, 2022 and
2015,2021, respectively.
International and OtherNorth America Confectionery results for the years ended December 31,
2017, 20162023, 2022 and
20152021 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 9,123.1 | | | $ | 8,536.5 | | | $ | 7,682.4 | | | 6.9 | % | | 11.1 | % |
| Segment income | | 3,117.0 | | | 2,811.1 | | | 2,475.9 | | | 10.9 | % | | 13.5 | % |
| Segment margin | | 34.2 | % | | 32.9 | % | | 32.2 | % | | | | |
2023 compared with 2022
Net sales of our North America Confectionery segment were $9,123.1 million in 2023 compared to $8,536.5 million in 2022, a increase of $586.6 million, or 6.9%. The increase reflected a favorable price realization of 9.0% due to price increases on certain products across our portfolio. The increases were partially offset by a volume decrease of 1.9% driven by a decrease in everyday core U.S. confection brands, and an unfavorable impact from foreign currency exchange rates of 0.2%.
Our North America Confectionery segment also includes licensing and owned retail. This includes our Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore. Our net sales for licensing and owned retail increased approximately 12.1% during 2023 compared to 2022.
Our North America Confectionery segment income was $3,117.0 million in 2023 compared to $2,811.1 million in 2022, a increase of $305.9 million, or 10.9%. The increase was primarily due to favorable price realization and supply chain productivity, partially offset by higher supply chain costs, including higher labor costs, as well as unfavorable product mix.
2022 compared with 2021
Net sales of our North America Confectionery segment were $8,536.5 million in 2022 compared to $7,682.4 million 2021, an increase of $854.1 million, or 11.1%. The increase reflected a favorable price realization of 8.1% due to higher prices on certain products, a volume increase of 2.8% due to an increase in everyday core U.S. confection brands, and a 0.4% benefit from the 2021 acquisition of Lily’s. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.2%.
Our North America Confectionery segment also includes licensing and owned retail. This includes our Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore. Our net sales for licensing and owned retail increased approximately 12.7% during 2022 compared to 2021.
Our North America Confectionery segment income was $2,811.1 million in 2022 compared to $2,475.9 million in 2021, an increase of $335.2 million, or 13.5%. The increase was primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as, unfavorable product mix.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 30 | |
North America Salty Snacks
The North America Salty Snacks segment is responsible for our grocery and snacks market positions, including our salty snacking products. North America Salty Snacks accounted for 9.8%, 9.9% and 6.2% of our net sales in 2023, 2022 and 2021, respectively. North America Salty Snacks results for the years ended December 31, 2023, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 1,092.7 | | | $ | 1,029.4 | | | $ | 555.4 | | | 6.1 | % | | 85.3 | % |
| Segment income | | 158.3 | | | 159.9 | | | 100.7 | | | (1.0) | % | | 58.8 | % |
| Segment margin | | 14.5 | % | | 15.5 | % | | 18.1 | % | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | | | Percent Change |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 | | 2017 vs 2016 | | 2016 vs 2015 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 894.3 |
| | $ | 907.2 |
| | $ | 918.5 |
| | (1.4 | )% | | (1.2 | )% |
| Segment income (loss) | | 11.5 |
| | (29.1 | ) | | (98.1 | ) | | NM |
| | NM |
|
| Segment margin | | 1.3 | % | | (3.2 | )% | | (10.7 | )% | | | | |
20172023 compared with 20162022
Net sales for our North America Salty Snacks segment were $1,092.7 million in 2023 compared to $1,029.4 million in 2022, an increase of $63.3 million, or 6.1%. The increase reflected a favorable price realization of 5.4% due to price increases on products across our portfolio, primarily SkinnyPop and Dot’s Homestyle Pretzels snacks, and a volume increase of 0.7%, primarily related to Dot’s Homestyle Pretzels snacks.
Our North America Salty Snacks segment income was $158.3 million in 2023 compared to $159.9 million in 2022 a decrease of $1.6 million, or 1.0%. The decrease is primarily due to increased advertising and related consumer marketing costs and costs related to the voluntary removal of certain Paqui branded items in 2023. The decrease was partially offset by favorable price realization and favorable product mix.
2022 compared with 2021
Net sales for our North America Salty Snacks segment was $1,029.4 million in 2022 compared to $555.4 million in 2021, an increase of $474.0 million, or 85.3%. The increase reflected a 64.0% benefit from the 2021 acquisitions of Dot’s and Pretzels, a favorable price realization of 12.0% due to higher prices on certain products and a volume increase of 9.3% primarily related to SkinnyPop and Pirates Booty snacks.
Our North America Salty Snacks segment income was $159.9 million in 2022 compared to $100.7 million in 2021, an increase of $59.2 million, or 58.8%. The increase is primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as, unfavorable product mix.
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| The Hershey Company | 2023 Form 10-K | Page 31 | |
International
The International segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. We currently, have operations and manufacture product in Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Latin America, as well as Europe, Asia, the Middle East and Africa (“AMEA”) and other regions. International results, which accounted for 8.5%, 8.2% and 8.2% of our net sales in 2023, 2022 and 2021, respectively. International results for the years ended December 31, 2023, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Percent Change |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| In millions of dollars | | | | | | | | | | |
| Net sales | | $ | 949.2 | | | $ | 853.4 | | | $ | 733.5 | | | 11.2 | % | | 16.3 | % |
| Segment income | | 148.3 | | | 107.9 | | | 74.2 | | | 37.4 | % | | 45.4 | % |
| Segment margin | | 15.6 | % | | 12.6 | % | | 10.1 | % | | | | |
2023 compared with 2022
Net sales of our International segment were $949.2 million in 2023 compared to $853.4 million in 2022, an increase of $95.8 million, or 11.2%. The increase reflected a favorable price realization of 4.7%, driven by price increases across the segment, a favorable impact from foreign currency exchange rates of 3.4%, primarily driven by Mexico, and a volume increase of 3.1%. The net sales increase was primarily attributable to World Travel Retail, Mexico and Brazil & Latin America, where net sales increased 15.6%, 14.3% and 13.0%, respectively.
Our International segment income was $148.3 million in 2023 compared to $107.9 million in 2022, an increase of $40.4 million, or 37.4%, primarily resulting from favorable price realization, favorable foreign currency exchange rates, and minimal volume increases, partially offset by increased supply chain costs.
2022 compared with 2021
Net sales of our International and Other segment decreased $12.9were $853.4 million in 2022 compared to $733.5 million in 2021, an increase of $119.9 million, or 1.4% in 2017 compared to 2016,16.3% reflecting a volume declinesincrease of 4.7%11.9%, partially offset bya favorable price realization of 2.7%4.1%, and a favorable impact from foreign currency exchange rates of 0.6%0.3%. Excluding the unfavorable impact of foreign currency exchange rates, theThe volume increase was primarily attributed to solid marketplace growth in Brazil, Mexico and India, where net sales increased by 21.6%, 20.6% and 13.7%, respectively. Our International segment also includes world travel retail, where net sales increased approximately 28.6%.
Our International segment income was $107.9 million in 2022 compared to $74.2 million in 2021, an increase of $33.7 million, or 45.4%, primarily resulting from volume increases, favorable price realization, and the execution of our International and Other segment decreased by approximately 2.0%.
The volume decrease is primarily attributed to our China business, driven by softness in the modern trade channel coupled with a focus on optimizing our product offerings. The favorable net price realization was driven by higher prices in select markets, as well as reduced levels of trade promotional spending, which declined significantly compared to the prior year. Constant currency net sales in Mexico and Brazil increased by 10.8% and 10.5%, respectively, driven by solid chocolate marketplace performance. India also experienced constant currency net sales growth of 13.8%.
Our International and Other segment generated income of $11.5 million in 2017 compared to a loss of $29.1 million in 2016 due to benefits from reduced trade promotional spending and lower operating expensesOptimization Program in China, as a result ofwe streamline and optimize our Margin for Growth Program. Additionally, segment income benefited from the improved combined income in Latin America and export markets versus the prior year.China operating model.
Net sales of our International and Other segment decreased $11.3 million or 1.2% in 2016 compared to 2015, reflecting an unfavorable impact from foreign currency exchange rates of 4.4%, volume declines of 3.7% and the unfavorable impact of net acquisitions and divestitures of 0.1%, substantially offset by favorable net price realization of 7.0%. Excluding the unfavorable impact of foreign currency exchange rates, the net sales of our International and Other segment increased by approximately 3.2%. | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 32 | |
The favorable net price realization was driven by lower direct trade expense as well as lower returns, discounts and allowances in China, which declined significantly compared to the prior year. The volume decrease primarily related to lower sales in India due to the discontinuance of the edible oil business as well as lower sales in our global retail and licensing business, partially offset by net sales increases in Latin America and select export markets. Constant currency net sales in Mexico and Brazil increased on a combined basis by approximately 13%, driven by solid chocolate marketplace performance.
Our International and Other segment loss decreased $69.0 million in 2016 compared to 2015. Combined income in Latin America and export markets improved versus the prior year and performance in China benefited from lower direct trade and returns, discounts and allowances that were significantly lower than the prior year.
Unallocated Corporate Expense
Unallocated corporate expense includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance.
Unallocated corporate expense totaled $504.3$800.4 million in 2017,2023 as compared to $497.4$735.5 million in 2016. While we realized savings2022, an increase of $64.9 or, or 8.8%. The increase was primarily driven by incremental investments in 2017 from our productivitycapabilities and cost savings initiatives, these savings were more than offset bytechnology, higher costs related to the multi-year implementation of our enterprise resource planning system, as well as higher due diligence costs related to merger and acquisition activity. Unallocated corporate expense in 2016 was consistent with 2015 levels, as savings realized from our productivity and cost savings initiatives were offset by higher employee-relatedcompensation costs, and an increase in acquisition and integration related costs.
Unallocated corporate depreciationexpense totaled $735.5 million in 2022 as compared to $614.9 million in 2021, an increase of $120.6 million, or 19.6%. The increase was primarily driven by an increase in acquisition and amortization.integration related costs, as well as higher compensation costs, investments in capabilities and technology and broad-based marketplace inflation.
FINANCIAL CONDITIONLIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity include cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, the adequacy of available commercial paper and bank lines of credit, and the ability to attract long-term capital with satisfactory terms. We generate substantial amounts of cash from operations and remain in a strong financial position, with sufficient liquidity available for capital reinvestment, strategic acquisitions and the payment of dividends and strategic acquisitions.dividends.
Cash Flow Summary
The following table is derived from our Consolidated StatementStatements of Cash Flows:
| | | In millions of dollars | | 2017 | | 2016 | | 2015 |
| In millions of dollars | |
| In millions of dollars | |
| Net cash provided by (used in): | |
| Net cash provided by (used in): | |
| Net cash provided by (used in): | | | | | | |
| Operating activities | | $ | 1,249.5 |
| | $ | 1,013.4 |
| | $ | 1,256.3 |
|
| Operating activities | |
| Operating activities | |
| Investing activities | |
| Investing activities | |
| Investing activities | | (328.6 | ) | | (595.4 | ) | | (477.2 | ) |
| Financing activities | | (843.8 | ) | | (464.4 | ) | | (797.0 | ) |
| Financing activities | |
| Financing activities | |
| Effect of exchange rate changes on cash and cash equivalents | | 6.1 |
| | (3.1 | ) | | (10.4 | ) |
| Increase (decrease) in cash and cash equivalents | | 83.2 |
| | (49.5 | ) | | (28.3 | ) |
| Effect of exchange rate changes on cash and cash equivalents | |
| Effect of exchange rate changes on cash and cash equivalents | |
| Less: Cash classified as assets held for sale | |
| Less: Cash classified as assets held for sale | |
| Less: Cash classified as assets held for sale | |
| (Decrease) increase in cash and cash equivalents | |
| (Decrease) increase in cash and cash equivalents | |
| (Decrease) increase in cash and cash equivalents | |
Operating activities
Our principal source of liquidity is cash flow from operations. Our net income and, consequently, our cash provided by operations are impacted by sales volume, seasonal sales patterns, timing of new product introductions, profit margins and price changes. Sales are typically higher during the third and fourth quarters of the year due to seasonal and holiday-related sales patterns. Generally, working capital needs peak during the summer months. We meet these needs primarily with cash on hand, bank borrowings or the issuance of commercial paper.
CashWe generated cash of $2.32 billion from operating activities in 2023, a decrease of $4.6 million compared to $2.33 billion in 2022. The decrease in net cash provided by operating activities in 2017 increased $236.1 million relative to 2016. This increase was mainly driven by the following factors:
•In the aggregate, select net working capital items, specifically, trade accounts receivable, inventory, accounts payable and accrued liabilities, consumedcash of $209.0 million in 2023, compared to $8.6 million in 2022. This $200.4 million fluctuation was mainly driven by mainly driven by an increase in cash used by accounts receivable due to an increase in sales of U.S. seasonal products and the timing of vendor and supplier payments.
•Timing of income tax payments contributed to a decrease in operating cash of $32.5 million in 2023, compared to an increase of $5.0 million in 2022. This $37.5 million fluctuation was primarily due to the variance in actual tax
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| The Hershey Company | 2023 Form 10-K | Page 33 | |
expense for 2023 relative to the timing of quarterly estimated tax payments. We paid cash of $303.9 million for income taxes during 2023 compared to $221.3 million in the same period of 2022.
•Other assets and liabilities consumed cash of $100.4 million in 2023, compared to $25.7 million in 2022. This $74.7 million fluctuation was primarily due to our purchase of an irrevocable group annuity contract to settle a portion of our post retirement benefit obligation.
•The decrease in cash provided by operating activities was partially offset by the following net cash inflows:
◦Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, goodwill, indefinite and long-lived asset charges, write-down of equity investments the gain on settlement of the SGM liability and other charges) contributed $329resulted in $256.7 million of additionalhigher cash flow in 20172023 relative to 2016.2022.
Prepaid expenses and other current assetsWe generated cash of $18$2.3 billion from operating activities in 2022, an increase of $244.9 million in 2017, compared to a use of cash of $43 million$2.1 billion in 2016.2021. This $61 million fluctuation was mainly driven by the timing of payments on commodity futures. In addition,increase in 2017, the volume of commodity futures held, which require margin deposits, was lower compared to 2016. We utilize commodity futures contracts to economically manage the risk of future price fluctuations associated with our purchase of raw materials.
The increase innet cash provided by operating activities was partially offset by the following net cash outflows:
| |
◦ | Working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) consumed cash of $131 million in 2017 and $28 million in 2016. This $103 million fluctuation was mainly due to a higher year-over-year build up of U.S. inventories to satisfy product requirements and maintain sufficient levels to accommodate customer requirements, coupled with a higher investment in inventory in Mexico and India, driven by volume growth in those markets. |
| |
◦ | The use of cash for income taxes increased $70 million, mainly due to the variance in actual tax expense for 2017 relative to the timing of quarterly estimated tax payments, which resulted in a higher prepaid tax position at the end of 2017 compared to 2016. |
Cash provided by operating activities in 2016 decreased $242.9 million relative to 2015. This decrease was driven by the following factors:
Working•In the aggregate, select net working capital (comprised ofitems, specifically, trade accounts receivable, inventory, accounts payable and accrued liabilities)liabilities, consumedcash of $28$9 million in 2016, while it2022 and generated cash of $37$47 million in 2015.2021. This $65$56 million fluctuation was mainly driven by an $87 million paymenta higher year-over-year build up of U.S. inventories to settle an interest rate swap in connection withsatisfy product requirements and maintain sufficient levels to accommodate customer requirements, partially offset by the issuancetiming of new debt in August 2016.vendor and supplier payments.
Prepaid expenses and other current assets consumed cash of $43 million in 2016, compared to cash generated of $118 million in 2015. This $161 million fluctuation was mainly driven by higher payments on commodity futures contracts in 2016 as the market price of cocoa declined, versus receipts in the 2015 period. We utilize commodity futures contracts to economically manage the risk of future price fluctuations associated with our purchase of raw materials.
•Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, goodwill, indefinite and long-lived asset charges, write-down of equity investments the gain on settlement of the SGM liability and other charges) decreasedresulted in $348 million of higher cash flow by $37 million in 20162022 relative to 2015.2021.
Pension and Post-Retirement Activity. We recorded net periodic benefit costs of $59.7$43.2 million, $72.8$36.3 million and $66.8$28.4 million in 2017, 20162023, 2022 and 2015,2021, respectively, relating to our benefit plans (including our defined benefit and other post retirement plans). The main drivers of fluctuations in expense from year to year are assumptions in formulating our long-term estimates, including discount rates used to value plan obligations, expected returns on plan assets, the service and interest costs and the amortization of actuarial gains and losses.
The funded status of our qualified defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and the level of funding. We contribute cash to our plans at our discretion, subject to applicable regulations and minimum contribution requirements. Cash contributions to our pension and post retirement plans totaled $56.4$27.6 million, $41.7$78.5 million and $53.3$51.1 million in 2017, 20162023, 2022 and 2015,
2021, respectively.
Investing activities
Our principal uses of cash for investment purposes relate to purchases of property, plant and equipment and capitalized software, purchases of short-term investments andas well as acquisitions of businesses, partially offset by proceeds from sales of property, plant and equipment and short-term investments.equipment. We used cash of $328.6 million$1.2 billion for investing activities in 20172023 compared to $595.4 million$0.8 billion in 2016,2022, with the decreaseincrease in cash spend driven by less businessan increase of investments in capabilities and technology as well as a higher level of acquisition activity in 2017 compared to 2016.activity. We used cash of $477.2 million$2.2 billion for investing activities in 2015, which was primarily2021, with the decrease in 2022 in cash spend driven by lower businesslevels of acquisition activity, partially offset by higher capital spend and investment and sales of short-term investments relative to 2017 and 2016.
tax credits.
Primary investing activities include the following:
•Capital spending. Capital expenditures, including capitalized software, primarily to support our ERP system implementation, capacity expansion, innovation and cost savings, were $257.7$771.1 million in 2017, $269.52023, $519.5 million in 20162022 and $356.8$495.9 million in 2015. Our 20152021. For each of the years presented, our expenditures included approximately $80 million relatingincreased due to the Malaysia plant construction. Capitalized software additions were primarily related to ongoing enhancements ofprogress on capacity expansion projects and our information systems.ERP system implementation. We expect 20182024 capital expenditures, including capitalized software, to approximate $330$600 million to $350$650 million. The increasedecrease in our 20182024 capital expenditures compared to 2017 and 2016 relates to increases in our U.S. core chocolate brand capacity, investing capabilities as partis largely driven by the wind down of our key strategic initiatives, including completion of the upgrade of a new ERP system across the enterprise resource planning system implementationin 2024. We intend to use our existing cash and incrementalinternally generated funds to meet our 2024 capital expenditures associated with our acquisition of Amplify.requirements.
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| The Hershey Company | 2023 Form 10-K | Page 34 | |
Acquisitions and divestitures. We had no acquisition or divestiture activity in 2017. In 2016, we spent $285.4 million to acquire Ripple Brand Collective, LLC. In 2015, we spent $218.7 million to acquire Krave, partially offset by net cash received of $32 million from the sale of Mauna Loa.
•Investments in partnerships qualifying for tax credits. We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested approximately $78.6$256.8 million in 2017, $44.32023, $275.5 million in 20162022 and $30.7$128.4 million in 20152021 in projects qualifying for tax credits.
Short-term investments•Business acquisitions. WeIn 2023, we spent $165.8 million to acquire Weaver (May 2023). In 2022, we had no short-term investmentacquisition activity. In 2021, we spent an aggregate $1.6 billion to acquire Lily's (June 2021), as well as Dot’s and Pretzels (December 2021). Further details regarding our business acquisition activity is provided in 2017 or 2016.Note 2 to the Consolidated Financial Statements.•Other investing activities. In 2015, we received proceeds of $95 million from the sale of short-term investments.
2023, 2022, and 2021, our other investing activities were minimal.Financing activities
Our cash flow from financing activities generally relates to the use of cash for purchases of our Common Stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of stock options. Financing activities in 2023 used cash of $1.1 billion, compared to cash used of $1.4 billion in 2022. We used cash of $843.8 million$0.7 billion for financing activities in 2017 compared to $464.4 million in 2016. We used cash of $797.0 million for financing activities in 2015, primarily to fund dividend payments and share repurchases.2021.
The majority of our financing activity was attributed to the following:
•Short-term borrowings, net. In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. In 2017,2023, our short-term borrowings increased $26.0 million predominately through the issuance of short-term commercial paper, as well as an increase in short-term foreign bank borrowings. In 2022, we used $81.4cash of $245.6 million to reduce a portion of our short-term commercial paper borrowings originally used to fund our 2021 acquisitions of Dot’s and Pretzels, partially offset by an increase in short-term foreign bank borrowings. In 2016,2021, we generated cash flow of $275.6$869.0 million predominantly through the issuance of short-term commercial paper borrowings, partially offset by payments in short-term foreign borrowings. In 2015, we generated cash flow of $10.7 million as a result of higher borrowings at certain of our international businesses.
paper.•Long-term debt borrowings and repayments. In 2017,May 2023, we had minimal incremental long-term borrowings and no repayment activity. In 2016, we used $500 million to repay long-term debt. Additionally, in 2016, we issued $500repaid $250 million of 2.30%2.625% Notes due in 2026 and $300$500 million of 3.375% Notes due upon their maturities. In May 2023, we issued $350 million of 4.250% Notes due in 2046.May 2028 and $400 million of 4.500% Notes due in May 2033 (the “2023 Notes”). Proceeds from the issuance of the 2023 Notes, net of discounts and issuance costs, totaled $744.1 million. In 2015, we used $355 million to repay2022, long-term debt including $100.2activity was minimal. In February 2021 and May 2021, we repaid $84.7 million to repurchase $71.6of 8.800% Debentures and $350 million of 3.100% Notes due upon their maturities, respectively. In 2024, we expect our long-term debt as partrepayments to approximate $300 million upon the maturity of a cash tender offer. Additionally, in 2015, we issued $300 million of 1.60%2.050% Notes due in 2018November 2024.
•Dividend payments. Total dividend payments to holders of our Common Stock and $300Class B Common Stock were $889.1 million in 2023, $775.0 million in 2022 and $686.0 million in 2021. Dividends per share of 3.20% Notes dueCommon Stock increased 15.0% to $4.456 per share in 2025.2023 compared to $3.874 per share in 2022, while dividends per share of Class B Common Stock increased 15.0% in 2023. Details regarding our 2023 cash dividends paid to stockholders are as follows:
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| | Quarter Ended |
| In millions of dollars except per share amounts | | April 2, 2023 | | July 2, 2023 | | October 1, 2023 | | December 31, 2023 |
| Dividends paid per share – Common stock | | $ | 1.036 | | | $ | 1.036 | | | $ | 1.192 | | | $ | 1.192 | |
| Dividends paid per share – Class B common stock | | $ | 0.942 | | | $ | 0.942 | | | $ | 1.083 | | | $ | 1.083 | |
| Total cash dividends paid | | $ | 207.4 | | | $ | 206.1 | | | $ | 237.8 | | | $ | 237.8 | |
| Declaration date | | January 31, 2023 | | April 25, 2023 | | July 27, 2023 | | October 25, 2023 |
| Record date | | February 17, 2023 | | May 19, 2023 | | August 18, 2023 | | November 17, 2023 |
| Payment date | | March 15, 2023 | | June 15, 2023 | | September 15, 2023 | | December 15, 2023 |
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| The Hershey Company | 2023 Form 10-K | Page 35 | |
•Share repurchases. We repurchase shares of Common Stock to offset the dilutive impact of treasury shares issued under our equity compensation plans. The value of these share repurchases in a given period varies based on the volume of stock options exercised and our market price. In addition, we periodically repurchase shares of Common Stock pursuant to Board-authorized programs intended to drive additional stockholder value. We used cash for totalDetails regarding our share repurchases are as follows:
| | | | | | | | | | | | | | | | | | | | |
| In millions | | 2023 | | 2022 | | 2021 |
| Milton Hershey School Trust repurchase (1)(2) | | $ | 239.9 | | | $ | 203.4 | | | $ | — | |
| Shares repurchased in the open market under pre-approved share repurchase programs (2) | | — | | | — | | | 150.0 | |
| Shares repurchased in the open market to replace Treasury Stock issued for stock options and incentive compensation | | $ | 27.4 | | | $ | 185.6 | | | $ | 308.0 | |
| Cash used for total share repurchases (excluding excise tax) | | $ | 267.3 | | | $ | 389.0 | | | $ | 458.0 | |
| Total shares repurchased under pre-approved share repurchase programs | | 1.0 | | | — | | | 0.9 | |
(1) In February 2023 and 2022, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased 1,000,000 shares in 2023 and 2022 of $300.3the Company’s Common Stock from the School Trust at a price equal to $239.91 per share, for a total purchase price of $239.9 million in 2017, which included2023. In 2022 the Company purchased the common stock at a privately negotiatedprice equal to $203.35 per share, for a total purchase price of $203.4 million. As a result of the 2023 share repurchase, transaction with the Milton Hershey School Trust to purchase 1.5our July 2018 share repurchase authorization program was completed, and approximately $370.1 million sharesremains available for $159.0 million. We used cash for totalrepurchases under our May 2021 share repurchasesrepurchase authorization.
(2) In July 2018, our Board of $592.6 million in 2016, which included purchases pursuant to authorized programs of $420.2 million to purchase 4.6 million shares in 2016. We used cash for total share repurchases of $582.5 million in 2015, which included purchases pursuant to authorized programs of $402.5 million to purchase 4.2 million shares. As of December 31, 2017, approximately $100 million remained available under theDirectors approved a $500 million share repurchase authorization approved by the Board in January 2016.authorization. In October 2017,May 2021, our Board of Directors
approved an additional $100$500 million share repurchase authorization. As a result of the February 2023 Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, the July 2018 share repurchase authorization was completed and as of December 31, 2023, approximately $370.1 million remained available for repurchases under our May 2021 share repurchase authorization. In December 2023, our Board of Directors approved an additional $500 million share repurchase authorization. This program is to commence after the existing 20162021 authorization is completed.completed and is to be utilized at management’s discretion. These share repurchase programs do not have an expiration date. We expect 2024 share repurchases to be in line with our traditional buyback strategy.
Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $526.3 million in 2017, $499.5 million in 2016 and $476.1 million in 2015. Dividends per share of Common Stock increased 6.1% to $2.548 per share in 2017 compared to $2.402 per share in 2016, while dividends per share of Class B Common Stock increased 6.0% in 2017.
•Proceeds from the exercise of stock options, including tax benefits. WeIn 2023 we received $63.3$26.0 million from employee exercises of stock options and paid $35.0 million of employee taxes withheld from share-based awards. In 2022 we received $34.2 million from employee exercises of stock options and paid $35.5 million of employee taxes withheld from share-based awards. In 2021 we received $33.2 million from employee exercises of stock options, net of employee taxes withheld from share-based awards in 2017, as compared to $94.8 million in 2016 and $55.7 million in 2015.awards. Variances are driven primarily by the number of shares exercised and the share price at the date of grant.
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| The Hershey Company | 2023 Form 10-K | Page 36 | |
Other. In February 2016, we used $35.8 million to purchase the remaining 20% of the outstanding shares of SGM. In September 2015, we acquired the remaining 49% interest in Hershey do Brasil Ltda. under a cooperative agreement with Bauducco for approximately $38.3 million. Additionally, in December 2015, we paid $10.0 million in contingent consideration to the shareholders of Krave.
Liquidity and Capital ResourcesFinancial Condition
At December 31, 2017,2023, our cash and cash equivalents totaled $380.2$401.9 million. At December 31, 2016,2022, our cash and cash equivalents totaled $297.0$463.9 million. Our cash and cash equivalents at the end of 2017 increased $83.22023 decreased $62.0 million compared to the 20162022 year-end balance as a result of the sourcesnet uses of net cash outlined in the previous discussion.
Approximately 75%80% of the balance of our cash and cash equivalents at December 31, 20172023 was held by subsidiaries domiciled outside of the United States. The Company recognizedA majority of this balance is distributable to the one-time U.S. repatriationUnited States without material tax due under U.S. tax reform and,implications, such as a result, repatriationwithholding tax. We intend to continue to reinvest the remainder of these amounts would not be subject to additional U.S. federal income tax but would be subject to applicable withholding taxes in the relevant jurisdiction. Our intent is to permanently reinvest these fundsearnings outside of the United States. The cashStates for which there would be a material tax implication to distributing for the foreseeable future and, therefore, have not recognized additional tax expense on these earnings. We believe that our foreign subsidiaries holdexisting sources of liquidity are adequate to meet anticipated funding needs at comparable risk-based interest rates for indefinite reinvestment isthe foreseeable future. Acquisition spending and/or share repurchases could potentially increase our debt. Operating cash flow and access to capital markets are expected to be used to finance foreign operations and investments. We believe we have sufficient liquidity to satisfy our various short- and long-term cash needs,flow requirements, including our cash needs in the United States.acquisitions and capital expenditures.
We maintain debt levels we consider prudent based on our cash flow, interest coverage ratio and percentage of debt to capital. We use debt financing to lower our overall cost of capital which increases our return on stockholders’ equity. Our total short- and long-term debt was $2.9$4.8 billion at December 31, 20172023 and $3.0 billion at December 31, 2016.2022. Our total debt decreased slightlyremained consistent in 2017 as we reduced our commercial paper2023 primarily due to the repayment of $250 million of 2.625% Notes and short-term foreign borrowings.$500 million of 3.375% Notes due upon their maturity in May 2023 offset by the issuance of $350 million of 4.250% Notes due in May 2028 and $400 million of 4.500% Notes due in May 2033.
As a source of short-term financing, we maintain a $1.0$1.35 billion unsecured revolving credit facility with anthe option to increase borrowings by an additional $400$500 million with the consent of the lenders. As of December 31, 2017,2023, the termination date of this agreement is November 2020.April 26, 2028, however, we may extend the termination date for up to two additional one-year periods upon notice to the administrative agent under the facility. We may use these funds for general corporate purposes, including commercial paper backstop and business acquisitions. As of December 31, 2017,2023, we had $551$822 million of available capacity under the agreement. The unsecured revolving credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. We were in compliance with all covenants as of December 31, 2017.2023.
In addition to the revolving credit facility, we maintain lines of credit in various currencies with domestic and international commercial banks. As of December 31, 2017,2023, we had available capacity of $329$219 million under these lines of credit.
On January 8, 2018, we entered into an additional credit facility under which the Company may borrow up to $1.5 billion on an unsecured, revolving basis. Funds borrowed may be used for general corporate purposes, including commercial paper backstop and acquisitions. This facility is scheduled to expire on January 7, 2019.
Furthermore, we have a current shelf registration statement filed with the SEC that allows for the issuance of an indeterminate amount of debt securities. Proceeds from the debt issuances and any other offerings under the current registration statement may be used for general corporate requirements, including reducing existing borrowings, financing capital additions and funding contributions to our pension plans, future business acquisitions and working capital requirements.
Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing cash-flow-to-debt and debt-to-capitalization levels as well as our current credit standing.rating.
We believe that our existing sources of liquidity are adequate to meet anticipated funding needs at comparable risk-based interest rates for the foreseeable future. Acquisition spending and/or share repurchases could potentially increase our debt. Operating cash flow and access to capital markets are expected to satisfy our various short- and long-term cash flow requirements, including acquisitions and capital expenditures.
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| The Hershey Company | 2023 Form 10-K | Page 37 | |
Equity Structure
We have two classes of stock outstanding – Common Stock and Class B Stock. Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. Holders of the Common Stock have 1 vote per share. Holders of the Class B Stock have 10 votes per share. Holders of the Common Stock, voting separately as a class, are entitled to elect one-sixth of our Board. With respect to dividend rights, holders of the Common Stock are entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.
Hershey Trust Company, as trustee for the trust established by Milton S. and Catherine S. Hershey that has as its sole beneficiary Milton Hershey School, (such trust, the "Milton Hershey School Trust"), maintains voting control over The Hershey Company. In addition, a representativethree representatives of Hershey Trust Company currently servesserve as a membermembers of the Company's Board. In performing histheir responsibilities on the Company’s Board, this representativethese representatives may from time to time exercise influence with regard to the ongoing business decisions of our Board or management. Hershey Trust Company, as trustee for the Milton Hershey School Trust, in its role as controlling stockholder of the Company, has indicated it intends to retain its controlling interest in The Hershey Company. The Company'sCompany’s Board, and not the Hershey Trust Company board, is solely responsible and accountable for the Company’s management and performance.
Pennsylvania law requires that the Office of Attorney General be provided advance notice of any transaction that would result in Hershey Trust Company, as trustee for the Milton Hershey School Trust, no longer having voting control of the Company. The law provides specific statutory authority for the Attorney General to intercede and petition the court having jurisdiction over Hershey Trust Company, as trustee for the Milton Hershey School Trust, to stop such a transaction if the Attorney General can prove that the transaction is unnecessary for the future economic viability of the Company and is inconsistent with investment and management considerations under fiduciary obligations. This legislation makes it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby may delay or prevent a change in control of the Company.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, that we believe could have a material impact on our financial condition or liquidity.
Contractual ObligationsMaterial Cash Requirements
The following table summarizes our contractual obligations atfuture material cash requirements as of December 31, 2017:2023:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by Period |
| | | In millions of dollars |
| Contractual Obligations | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Long-term notes (excluding capital leases obligations) | | $ | 2,278.4 |
| | $ | 300.1 |
| | $ | 350.0 |
| | $ | 84.7 |
| | $ | 1,543.6 |
|
| Interest expense (1) | | 725.3 |
| | 78.4 |
| | 148.9 |
| | 107.2 |
| | 390.8 |
|
| Operating lease obligations (2) | | 254.3 |
| | 16.2 |
| | 31.5 |
| | 24.2 |
| | 182.4 |
|
| Capital lease obligations (3) | | 193.5 |
| | 3.4 |
| | 7.0 |
| | 7.8 |
| | 175.3 |
|
| Minimum pension plan funding obligations (4) | | 17.8 |
| | 1.6 |
| | 6.4 |
| | 6.5 |
| | 3.3 |
|
| Unconditional purchase obligations (5) | | 1,646.6 |
| | 1,359.7 |
| | 283.7 |
| | 3.2 |
| | — |
|
| Total obligations | | $ | 5,115.9 |
| | $ | 1,759.4 |
| | $ | 827.5 |
| | $ | 233.6 |
| | $ | 2,295.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments due by Period |
| In millions of dollars | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Short-term debt (primarily U.S. commercial paper) | | $ | 719.8 | | | $ | 719.8 | | | $ | — | | | $ | — | | | $ | — | |
| Long-term notes (excluding finance lease obligations) | | 4,043.6 | | | 300.0 | | | 1,100.0 | | | 543.6 | | | 2,100.0 | |
| Interest expense (1) | | 1,244.1 | | | 122.0 | | | 218.0 | | | 162.7 | | | 741.4 | |
| Operating lease obligations (2) | | 397.1 | | | 44.7 | | | 58.1 | | | 51.1 | | | 243.2 | |
| Finance lease obligations (3) | | 170.7 | | | 10.2 | | | 14.1 | | | 8.5 | | | 137.9 | |
| Unconditional purchase obligations (4) | | 2,891.8 | | | 2,111.1 | | | 631.2 | | | 28.4 | | | 121.1 | |
| Total obligations | | $ | 9,467.1 | | $ | 3,307.8 | | $ | 2,021.4 | | $ | 794.3 | | $ | 3,343.6 |
(1) Includes the net interest payments on fixed rate debt associated with long-term notes.
(2) Includes the minimum rental commitments (including imputed interest) under non-cancelable operating leases primarily for offices, retail stores, warehouses and distribution facilities.
(3) Includes the minimum rental commitments (including interest expense)imputed interest) under non-cancelable capitalfinance leases primarily for offices and warehouse facilities.facilities, as well as machinery and equipment and vehicles.
(4) Represents future pension payments to comply with local funding requirements. Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 (“ERISA”), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans. For more information, see Note 9 to the Consolidated Financial Statements.
(5) Purchase obligations consist primarily of fixed commitments for the purchase of raw materials to be utilized in the normal course of business. Amounts presented includedinclude fixed price forward contracts and unpriced contracts that were valued using market prices as of December 31, 2017.2023. The amounts presented in the table do not include items already recorded in accounts payable or accrued liabilities at year-end 2017,2023, nor does the table reflect cash flows we are likely to incur based on our plans, but are not obligated to incur. Such amounts are part of normal operations and are reflected in historical operating cash flow trends. We do not believe such purchase obligations will adversely affect our liquidity position.
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| The Hershey Company | 2023 Form 10-K | Page 38 | |
In entering into contractual obligations, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. Our risk is limited to replacing the contracts at prevailing market rates. We do not expect any significant losses resulting from counterparty defaults.
These obligations impact our liquidity and capital resource needs. To meet those cash requirements, we intend to use our existing cash and internally generated funds. To the extent necessary, we may also borrow under our existing unsecured revolving credit facility or under other short-term borrowings, and depending on market conditions and upon the significance of the cost of a particular Note maturity or acquisition to our then-available sources of funds, to obtain additional short- and long-term financing. We believe that cash provided from these sources will be adequate to meet our future short- and long-term cash requirements.
Asset Retirement Obligations
We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations, which require that we handle or dispose of asbestos in a specified manner if such facilities undergo major renovations or are demolished. We do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos.
Income Tax Obligations
Liabilities for unrecognized income tax benefits are excluded from the table above as we are unable to reasonably predict the ultimate amount or timing of a settlement of these potential liabilities. See Note 810 to the Consolidated Financial Statements for more information. Recent Accounting Pronouncements
Information on recently adopted and issued accounting standards is included in Note 1 to the Consolidated Financial Statements. | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 39 | |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to use judgment and make estimates and assumptions. We believe that our most critical accounting policies and estimates relate to the following:
|
| |
l | Accrued Liabilities for Trade Promotion Activities |
l | Pension and Other Post-Retirement Benefits Plans |
l | Goodwill and Other Intangible Assets |
l | Income Taxes |
•Accrued Liabilities for Trade Promotion Activities•Pension and Other Post-Retirement Benefits Plans
•Business Acquisitions, Valuation and Impairment of Goodwill and Other Intangible Assets
•Income Taxes
Management has discussed the development, selection and disclosure of critical accounting policies and estimates with the Audit Committee of our Board. While we base estimates and assumptions on our knowledge of current events and
actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Other significant accounting policies are outlined in
Note 1 to the Consolidated Financial Statements.Accrued Liabilities for Trade Promotion Activities
We promote our products with advertising, trade promotions and consumer incentives. These programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. We expense advertising costs and other direct marketing expenses as incurred. We recognize the costs of trade promotion and consumer incentive activities as a reduction to net sales along with a corresponding accrued liability based on estimates at the time of revenue recognition. These estimates are based on our analysis of the programs offered, historical trends, expectations regarding customer and consumer participation, sales and payment trends and our experience with payment patterns associated with similar programs offered in the past.
Our trade promotional costs totaled $1,133.2 million, $1,157.4 million and $1,122.3 million in 2017, 2016 and 2015, respectively. The estimated costs of these programs are reasonably likely to change in the future periods due to changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. Differences between estimated expense and actual program performance are recognized as a change in estimate in a subsequent period and are normally not significant. Over the three-year period ended December 31, 2017,During 2023, 2022, and 2021, actual annual promotional costs have not deviated from the estimated amount for a given year by more than 3%. Our trade promotion and consumer incentive accrued liabilities totaled $194.0 million and $215.7 million at December 31, 2023 and 2022, respectively.
Pension and Other Post-Retirement Benefits Plans
We sponsor various defined benefit pension plans. The primary plans arewere The Hershey Company Retirement Plan (“Retirement Plan”) and Thethe Hershey Company Retirement Plan for Hourly Employees which(“Hourly Plan”). These are cash balance plans that provide pension benefits for most U.S. employees hired prior to January 1, 2007. Effective December 31, 2023, the Hourly Plan merged into the Retirement Plan and the name was changed to The Hershey Retirement Plan for Salaried and Hourly Employees. We also sponsor two primary other post-employment benefit (“OPEB”) plans, consisting of a health care plan and life insurance plan for retirees. The health care plan is contributory, with participants’ contributions adjusted annually, and the life insurance plan is non-contributory.
For accounting purposes, the defined benefit pension and OPEB plans require assumptions to estimate the projected and accumulated benefit obligations, including the following variables: discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality; expected return on assets; and health care cost trend rates. These and other assumptions affect the annual expense and obligations recognized for the underlying plans. Our assumptions reflect our historical experiences and management'smanagement’s best judgment regarding future expectations. Our related accounting policies, accounting balances and plan assumptions are discussed in Note 911 to the Consolidated Financial Statements.
Pension Plans
Changes in certain assumptions could significantly affect pension expense and benefit obligations, particularly the estimated long-term rate of return on plan assets and the discount rates used to calculate such obligations:
•Long-term rate of return on plan assets. The expected long-term rate of return is evaluated on an annual basis. We consider a number of factors when setting assumptions with respect to the long-term rate of return, including current and expected asset allocation and historical and expected returns on the plan asset categories. Actual asset
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| The Hershey Company | 2023 Form 10-K | Page 40 | |
allocations are regularly reviewed and periodically rebalanced to the targeted allocations when considered appropriate. Investment gains or losses represent the difference between the expected return estimated using the long-term rate of return and the actual return realized. For 2018,2023, we increased the expected return on plan assets assumption is 5.8%, which wasto 6.7% from the same percentage6.3% assumption used during 2017.2022. The historical average return (compounded annually) over the 20 years prior to December 31, 20172023 was approximately 6.2%6.7%.
As of December 31, 2017,2023, our primary plans had cumulative unrecognized investment and actuarial losses of approximately $345$181 million. We amortize the unrecognized net actuarial gains and losses in excess of the corridor amount, which is the greater of 10% of a respective plan’s projected benefit obligation or the fair market value of plan assets. These unrecognized net losses may increase future pension expense if not offset by (i) actual investment returns that exceed the expected long-term rate of investment returns, (ii) other factors, including reduced pension liabilities arising from higher discount rates used to calculate pension obligations or (iii) other
actuarial gains when actual plan experience is favorable as compared to the assumed experience. A 100 basis point decrease or increase in the long-term rate of return on pension assets would correspondingly increase or decrease annual net periodic pension benefit expense by approximately $10$7 million.
•Discount rate. Prior to December 31, 2017, the service and interest cost components of net periodic benefit cost were determined utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Beginning in 2018, we have elected toWe utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along thatthe yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We made this change to provideThis approach provides a more precise measurement of service and interest costs by improving the correlation between the projected cash flows to the corresponding spot rates along the yield curve. Compared toThis approach does not affect the method used in 2017, we expect this change to result in lower pension and other post-retirement benefit expensemeasurement of approximately $6 million in 2018. This change will have no impact onour pension and other post-retirement benefit liabilities and will be accounted for prospectively as a changebut generally results in accounting estimate.
lower benefit expense in periods when the yield curve is upward sloping.
A 100 basis point decrease (increase) in the weighted-average pension discount rate would increase (decrease) annual net periodic pension benefit expense by approximately $4$5 million and the December 31, 20172023 pension liability would increase by approximately $100$57 million or decrease by approximately $85$49 million, respectively.
Pension expense for defined benefit pension plans is expected to be approximately $13 million in 2018.2024. Pension expense beyond 20182024 will depend on future investment performance, our contributions to the pension trusts, changes in discount rates and various other factors related to the covered employees in the plans.
Other Post-Employment Benefit Plans
Changes in significant assumptions could affect consolidated expense and benefit obligations, particularly the discount rates used to calculate such obligations and the healthcare cost trend rate:obligations:
•Discount rate. The determination of the discount rate used to calculate the benefit obligationsobligations of the OPEB plans is discussed in the pension plans section above. A 100 basis point decrease (increase) in the discount rate assumption for these plans would not be material to the OPEB plans'plans’ consolidated expense and the December 31, 20172023 benefit liability would increase by approximately $26$9 million or decrease by approximately $22$8 million, respectively.
Healthcare cost trend rate. The healthcare cost trend rate is based on a combinationBusiness Acquisitions, Valuation and Impairment of inputs including our recent claims history and insights from external advisers regarding recent developments in the healthcare marketplace, as well as projections of future trends in the marketplace. See Note 9 to the Consolidated Financial Statements for disclosure of the effects of a one percentage point change in the healthcare cost trend rate.
Goodwill and Other Intangible Assets
We use the acquisition method of accounting for business acquisitions. Under the acquisition method, the results of operations of the acquired business have been included in the consolidated financial statements since the respective dates of the acquisitions. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets. As a result, we normally obtain the assistance of a third-party valuation specialist in estimating fair values of tangible and intangible assets. The fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.
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| The Hershey Company | 2023 Form 10-K | Page 41 | |
Goodwill and indefinite-lived intangible assets are not amortized, but instead, are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter.
We test goodwill for impairment by performing either a qualitative or quantitative assessment. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors in assessing the fair value of the related reporting unit. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required. For those reporting units tested using a quantitative approach, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge for the differential (up to the carrying value of goodwill). We test individual indefinite-lived intangible assets by comparing the estimated fair values with the book values of each asset.
We determine the fair value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to
evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to measure fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and profitability, and cash flows associated with taxes and capital spending. Additional assumptions include forecasted growth rates, estimated discount rates, which may be risk-adjusted for the operating market of the reporting unit, and estimated royalty rates that would be charged for comparable branded licenses. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions.
We also have intangible assets, consisting primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions, that are expected to have determinable useful lives. The costs of finite-lived intangible assets are amortized to expense over their estimated lives. Our estimates of the useful lives of finite-lived intangible assets consider judgments regarding the future effects of obsolescence, demand, competition and other economic factors. We conduct impairment tests when events or changes in circumstances indicate that the carrying value of these finite-lived assets may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss is calculated based on the estimated fair value of the assets.
Results of Impairment Tests
At December 31, 2017,2023, the net book value of our goodwill totaled $821.1 million and related to five reporting units. Based on our most recent quantitative testing, all of our reporting units had a percentage of excess fair value over carrying value of at least 100%. Therefore, as$2.7 billion. As it relates to our 20172023 annual testing performed at the beginning of the fourth quarter, we tested all fiveof our reporting units using a qualitative assessment and determined that no quantitative assessment. Based on our testing, was deemed necessary.all of our reporting units had an excess fair value well over their respective carrying values. There were no other events or circumstances that would indicate that impairment may exist.
In February 2017, we commenced the Margin for Growth Program which includes an initiative to optimize the manufacturing operations supporting our China business. We deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded an impairment charge totaling $105.9 million representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition.
In 2016, in connection with our annual impairment testing of indefinite lived intangible assets, we recognized a trademark impairment charge of $4.2 million, primarily resulting from plans to discontinue a brand sold in India.
In 2015, we recorded a $280.8 million impairment charge resulting from our interim reassessment of the valuation of the SGM business, coupled with the write-down of goodwill attributed to the China chocolate business in connection with the SGM acquisition. As a result of declining performance levels and our post-acquisition assessment, we determined that GAAP required an interim impairment test of the SGM reporting unit. We performed the first step of this test as of July 5, 2015 using an income approach based on our estimates of future performance scenarios for the business. The results of this test indicated that the fair value of the reporting unit was less than the carrying amount as of the measurement date, suggesting that ano goodwill impairment was probable, which required us to perform a second step analysis to confirm that an impairment existed and to determine the amount of the impairment based on our reassessed value of the reporting unit. Although preliminary, as a result of this reassessment,charges in the second quarter of 2015 we recorded an estimated $249.8 million non-cash goodwill impairment charge, representing a write-down of all of the goodwill related to the SGM reporting unit as of July 5, 2015. During the third quarter, we increased the value of acquired goodwill by $16.6 million, with the corresponding offset principally represented by the establishment of additional opening balance sheet liabilities for additional commitments and contingencies that were identified through our post-acquisition assessment. We also finalized the impairment test of the goodwill relating to the SGM reporting unit, which resulted in a write-off of this additional goodwill in the third quarter, for a total impairment of $266.4 million. As of the date of our original impairment test, we also tested the other long-lived assets of SGM for recoverability by comparing the sum of the undiscounted cash flows to the carrying value of the asset group, and no impairment was indicated.2023, 2022 or 2021.
In connection with the 2014 SGM acquisition, we had assigned approximately $15 million of goodwill to our existing China chocolate business, as this reporting unit was expected to benefit from acquisition synergies relating to the sale of Golden Monkey-branded product through its Tier 1 and hypermarket distributor networks. As the net sales and earnings of our China business continued to be adversely impacted by macroeconomic challenges and changing consumer shopping behavior through the third quarter of 2015, we determined that an interim impairment test of the goodwill in this reporting unit was also required. We performed the first step of this test in the third quarter of 2015 using an income approach based on our estimates of future performance scenarios for the business. The results of this test suggested that a goodwill impairment was probable, and the conclusions of the second step analysis resulted in a write-down of $14.4 million, representing the full value of goodwill attributed to this reporting unit as of October 4, 2015. As of the date of our original impairment test, we also tested the other long-lived assets of the China asset group for recoverability by comparing the sum of the undiscounted cash flows to the carrying value of the asset group, and no impairment was indicated.
Income Taxes
We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company, interpretation of tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are regularly audited by federal, state and foreign tax authorities, butauthorities; a number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. From time to time, these audits result in assessments of additional tax. We maintain reserves for such assessments.
We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately
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| The Hershey Company | 2023 Form 10-K | Page 42 | |
realized upon settlement. Future changes in judgments and estimates related to the expected ultimate resolution of uncertain tax positions will affect income in the quarter of such change. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome. Accrued interest and penalties related to unrecognized tax benefits are included in income tax expense. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances, such as receiving audit assessments or clearing of an item for which a reserve has been established. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution.
We believe it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation allowances. Our valuation allowances are primarily related to U.S. capital loss carryforwards and various foreign jurisdictions'jurisdictions’ net operating loss carryforwards and other deferred tax assets for which we do not expect to realize a benefit. Refer to Note 10 to the Consolidated Financial Statements for further discussion of our deferred tax assets and liabilities. | |
Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We use certain derivative instruments to manage our interest rate, foreign currency exchange rate and commodity price risks. We monitor and manage these exposures as part of our overall risk management program.
We enter into interest rate swap agreements and foreign currency forward exchange contracts for periods consistent with related underlying exposures. We enter into commodities futures and options contracts and other derivative instruments for varying periods. These commodity derivative instruments are intended to be, and are effective as, economic hedges of market price risks associated with anticipated raw material purchases, energy requirements and transportation costs. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.
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.
Refer to Note 1 and Note 5 to the Consolidated Financial Statements for further discussion of these derivative instruments and our hedging policies. Interest Rate Risk
The total notional amount of interest rate swaps outstandingshort-term debt, net of cash, amounted to net debt of $318 million and net debt of $230 million, respectively, at December 31, 20172023 and 2016 was $350 million. The notional amount relates to fixed-to-floating interest rate swaps which convert a comparable amount of fixed-rate debt to variable rate debt at December 31, 2017 and 2016.2022. A hypothetical 100 basis point increase in interest rates applied to this now variable-rate short-term debt as of December 31, 20172023 would have increasedchanged interest expense by approximately $3.5 million and $3.6$3.1 million for the full year 20172023 and 2016, respectively.$4.5 million for 2022.
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 December 31, 20172023 and December 31, 20162022 by approximately $134$203 million and $142$187 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.
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. During 2016, we had one interest rate swap agreement in a cash flow hedging relationship with a notional amount of $500 million, which was settled in connection with the issuance of debt in August 2016, resulting in a payment of approximately $87 million which is reflected as an operating cash flow within the Consolidated Statement of Cash Flows. | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 43 | |
Foreign Currency Exchange Rate Risk
We are exposed to currency fluctuations related to manufacturing or selling products in currencies other than the U.S. dollar. We may enter into foreign currency forward exchange contracts to reduce fluctuations in our long or short currency positions relating primarily to purchase commitments or forecasted purchases for equipment, raw materials and finished goods denominated in foreign currencies. We also may hedge payment of forecasted intercompany transactions with our subsidiaries outside of the United States. We generally hedge foreign currency price risks for periods from 3 to 12 months.
A summary of foreign currency forward exchange contracts and the corresponding amounts at contracted forward rates is as follows:
| | | December 31, | | 2017 | | 2016 | December 31, | | 2023 | | 2022 |
| | | Contract Amount | | Primary Currencies | | Contract Amount | | Primary Currencies |
| | Contract
Amount | | | | Contract
Amount | | Primary
Currencies | | Contract
Amount | | Primary
Currencies |
| In millions of dollars | | | | | |
| Foreign currency forward exchange contracts to purchase foreign currencies | | $ | 19.5 |
| | Euros | | $ | 9.4 |
| | Euros |
| Foreign currency forward exchange contracts to purchase foreign currencies | |
| Foreign currency forward exchange contracts to purchase foreign currencies | | | $ | 88.8 | | Euros
Malaysian ringgit
British pound | | $ | 58.3 | | Euros
Malaysian ringgit |
| Foreign currency forward exchange contracts to sell foreign currencies | | $ | 158.2 |
| | Canadian dollars
Brazilian reals
Japanese yen | | $ | 80.4 |
| | Canadian dollars
Brazilian reals
Japanese yen | Foreign currency forward exchange contracts to sell foreign currencies | | $ | 155.3 | | Canadian dollars
Brazilian reals
Japanese yen | | $ | 119.6 | | Canadian dollars
Brazilian reals
Japanese yen
Mexican pesos |
The fair value of foreign currency forward exchange contracts represents the difference between the contracted 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. At December 31, 20172023 and 2016,2022, the net fair value of these instruments was a liabilityan asset of $1.0$0.7 million and an asset of $1.4$3.9 million, respectively. AssumingIn addition, assuming an
unfavorable 10% change in year-end foreign currency exchange rates, the fair value of these instruments would have declined by $19.7$20.2 million and $9.6$18.4 million, respectively.respectively, generally offset by a reduction in foreign exchange associated with our transactional activities.
Commodities—Price Risk Management and Futures Contracts
Our most significant raw material requirements include cocoa products, sugar, corn products, dairy products, wheat, peanuts and almonds. The cost of cocoa products and prices for related futures contracts and costs for certain other raw materials historically have been subject to wide fluctuations attributable to a variety of factors. These factors include:
•Commodity market fluctuations;
•Currency exchange rates;
•Imbalances between supply and demand;
•Rising levels of inflation and interest rates related to domestic and global economic conditions or supply chain issues;
•The effects of climate change and extreme weather on crop yield and quality;
•Speculative influences;
•Trade agreements among producing and consuming nations;
•Supplier compliance with commitments;
•Import/export requirements for raw materials and finished goods;
•Political unrest in producing countries;
•Introduction of living income premiums or similar requirements;
•Changes in governmental agricultural programs and energy policies; and
•Other events beyond our control such as the impacts on the business or supply chain arising from the ongoing conflict between Russia and Ukraine.
| | | | | | | | |
| |
l | Commodity market fluctuations; |
l | Foreign currency exchange rates; |
l | Imbalances between supply and demand; |
l | The effect of weather on crop yield; |
lHershey Company | 2023 Form 10-K | Page 44 | Speculative influences; |
l | Trade agreements among producing and consuming nations; |
l | Supplier compliance with commitments; |
l | Political unrest in producing countries; and |
l | Changes in governmental agricultural programs and energy policies. |
We use futures and options contracts and other commodity derivative instruments in combination with forward purchasing of cocoa products, sugar, corn sweeteners,products, certain dairy products, wheat products, natural gas and certain dairy productsdiesel fuel primarily to reduce the risk of futuremitigate price increasesvolatility and provide visibility to future costs.costs within our supply chain. Currently, active futures contracts are not available for use in pricing our other major raw material requirements, primarily peanuts and almonds. We attempt to minimize the effect of future raw material and energy price fluctuations related to the purchase of raw materials by using derivatives and forward purchasing to cover future manufacturing requirements generally for 3 to 24 months. However, dairy futures liquidity is not as developed as many of the other commoditiescommodity futures markets and, therefore, it can be difficult to hedge ourdairy costs for dairy products by entering into futures contracts or other derivative instruments to extend coverage for longextended periods of time. We use diesel swapfuel futures contracts to minimize price fluctuations associated with our transportation costs. Our commodity procurement practices are intended to reduce the risk of futuremitigate price increasesvolatility and provide visibility to future costs, but also may potentially limit our ability to benefit from possible price decreases. Our costs for major raw materials will not necessarily reflect market price fluctuations primarily because of our forward purchasing and hedging practices.
Cocoa Products
During 2017,2023, average cocoa futures contract prices decreasedincreased 31.9% compared with 20162022 and traded in a range between $0.87higher every month from January to December from $1.19 and $0.99$1.90 per pound, based on the Intercontinental Exchange futures contract. CocoaThe production was higher duringforecast for the 2016 to 2017 crop year2023 – 2024 season is down significantly in Ghana and outpaced the increases in global demand, which ledIvory Coast by over 20% combined, due to a rebuild in global cocoa stocks over the past year. As a result,combination of inclement weather, lower inputs and marginally increased farmer prices versus inflation. Despite higher cocoa prices declined in 2017 versus 2016 due to excess supply relativeconsumers, consumption remained consistent, leading to demand.predictions of a large deficit, the third consecutive one by some accounts. The table below shows annual average cocoa futures prices and the highest and lowest monthly averages for each of the calendar years indicated. The prices reflect the monthly averages of the quotations at noon of the three active futures trading contracts closest to maturity on the Intercontinental Exchange.
| | | | | | | | | | | | | |
| | | Cocoa Futures Contract Prices (dollars per pound) |
| | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | Cocoa Futures Contract Prices
(dollars per pound) | |
| | Cocoa Futures Contract Prices
(dollars per pound) | |
| | Cocoa Futures Contract Prices
(dollars per pound) | |
| | 2023 | | | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 |
| Annual Average | | $ | 0.91 |
| | $ | 1.29 |
| | $ | 1.40 |
| | $ | 1.36 |
| | $ | 1.09 |
|
| High | | 0.99 |
| | 1.38 |
| | 1.53 |
| | 1.45 |
| | 1.26 |
|
| Low | | 0.87 |
| | 1.03 |
| | 1.28 |
| | 1.25 |
| | 0.97 |
|
Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics
Our costs for cocoa products will not necessarily reflect market price fluctuations because of our forward purchasing and hedging practices, premiums and discounts reflective of varying delivery times, and supply and demand for our specific varieties and grades of cocoa liquor, cocoa butter and cocoa powder. As a result, the average futures contract prices are not necessarily indicative of our average costs.
During 2017, prices for fluid dairy milk ranged from a low of $0.14 per pound to a high of $0.16 per pound, on a Class IV milk basis. Dairy prices were higher than 2016, driven by a decline in milk production in Europe and New Zealand. Additionally, in 2017, dairy butter prices reached record highs at $2.50 per pound as European Union inventories were strained by a supply shortage and adverse weather.Sugar
The price of sugar is subject to price supports under U.S. farm legislation. Such legislation, which establishes import quotas and duties to support the price of sugar. As a result, sugar prices paid by users in the United StatesU.S. are currently higher than prices on the world sugar market. United StatesThe U.S. delivered east coast refined sugar prices traded in a range from $0.38$0.62 to $0.40$0.68 per pound during 2017.2023. Prices were historically high throughout 2023 due to lack of imports by the U.S. government resulting in an extremely tight domestic raw sugar market and continued strong demand which resulted in a scarcity market for much of the year.
Corn Products
We use corn futures to price our corn sweetener product requirements. A record crop from both Brazil and the U.S. in 2023 drove prices down throughout the year. Corn prices traded in the range from $4.74 to $6.83 per bushel during 2023. Corn sweetener prices remained elevated due to tight capacity utilization throughout the industry.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 45 | |
Dairy Products
During 2023 prices for fluid dairy milk ranged from a low of $0.176 per pound to a high of $0.214 per pound, on a Class IV milk basis. Fluid dairy milk prices were lower than 2022, driven by increases in global milk production linked to improved farmer margins, and exacerbated by a decline in U.S. dairy ingredient exports.
Wheat Products
In 2023 we continued utilizing soft and hard wheat futures as a risk management tool for our flour purchasing. For the second year in a row, the conflict between Russia and Ukraine, in addition to poor U.S. weather, continued to result in volatility in the wheat market and impacted global availability of supplies. Despite annual volatility, U.S. wheat remains uncompetitive in the world market, anchoring prices to their historical 5-year averages. Hard wheat prices traded in the range of $6.20 to $8.94 per bushel during 2023, while soft wheat prices traded in the range of $5.78 to $7.86 per bushel during 2023.
Peanuts and Almonds
Peanut prices in the United States beganU.S. ranged from a low of $0.59 per pound to a high of $0.71 per pound during 2023. Prices increased in 2023 due to higher export demand in the latter half of the year around $0.65and a smaller peanut crop. Almond prices traded in the range of $1.75 per pound to $2.15 per pound during 2023. Prices increased towards the end of 2023, driven by smaller than expected crop and closed the year at $0.47 per pound. Higher planted acreage and optimal growing conditions throughout 2017lower availability of small sized almonds.
Changes in the key U.S. peanut growing regions resulted in an estimated 21% larger crop versus the 2016 crop and drove price decreases. Almond prices began the year at $2.84 per pound and closed the year at $2.84 per pound. Almond supply is ample to support U.S. demand heading into 2018 as the 2017 crop is expected to be approximately 5.1% larger than the 2016 crop. (Source: Almond BoardValue of California)Futures Contracts
We make or receive cash transfers to or from commodity futures brokers on a daily basis reflecting changes in the value of futures contracts on the Intercontinental Exchange or various other exchanges. These changes in value represent unrealized gains and losses. The cash transfers offset higher or lower cash requirements for the payment of future invoice prices of raw materials, energy requirements and transportation costs.
Commodity Sensitivity Analysis
Our open commodity derivative contracts had a notional value of $405.3$94.9 million as of December 31, 20172023 and $739.4$243.0 million as of December 31, 2016.2022. At the end of 2017,2023, 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 in 20172023 by $38.6$5.4 million, generally offset by a reduction in the cost of the underlying commodity purchases.
| | | | | | | | |
Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAThe Hershey Company | 2023 Form 10-K | Page 46 | |
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Hershey Company is responsible for the financial statements and other financial information contained in this report. We believe that the financial statements have been prepared in conformity with U.S. generally accepted accounting principles appropriate under the circumstances to reflect in all material respects the substance of applicable events and transactions. In preparing the financial statements, it is necessary that management make informed estimates and judgments. The other financial information in this annual report is consistent with the financial statements.
We maintain a system of internal accounting controls designed to provide reasonable assurance that financial records are reliable for purposes of preparing financial statements and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that the cost of the system must be related to the benefits to be derived. We believe our system provides an appropriate balance in this regard. We maintain an Internal Audit Department which reviews the adequacy and tests the application of internal accounting controls.
The 2017 financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm. The 2016 and 2015 financial statements have been audited by KPMG LLP, an independent registered public accounting firm. Ernst & Young LLP's reports on our financial statements and internal controls over financial reporting as of December 31, 2017 are included herein.
The Audit Committee of the Board of Directors of the Company, consisting solely of independent, non-management directors, meets regularly with the independent auditors, internal auditors and management to discuss, among other things, the audit scope and results. Ernst & Young LLP and the internal auditors both have full and free access to the Audit Committee, with and without the presence of management.
|
| | |
| /s/ MICHELE G. BUCK | | /s/ PATRICIA A. LITTLE | |
Michele G. Buck
Chief Executive Officer
| The Hershey Company | 2023 Form 10-K | Page 47 | Patricia A. Little
Chief Financial Officer
(Principal Financial Officer) |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Hershey Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of The Hershey Company (the Company) as of December 31, 2017,2023 and 2022, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the yearthree years in the period ended December 31, 2017,2023, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017,2023 and 2022, and the results of its operations and its cash flows for each of the yearthree years in the period ended December 31, 2017,2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control-IntegratedControl–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 27, 201820, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit.audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 48 | |
| | | | | | | | |
| Valuation of Accrued Liabilities for Trade Promotion Activities |
| | |
| Description of the Matter | | The unsettled portion of the Company’s obligation for trade promotion activities at December 31, 2023 was $194.0 million. As discussed in Note 1 of the consolidated financial statements, the Company promotes its products through programs such as, but not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. The Company recognizes the estimated costs of these trade promotion activities as a component of variable consideration when determining the transaction price. The unsettled portion of the Company’s obligation for trade promotion activities is included in accrued liabilities in the consolidated balance sheet.
Auditing management’s calculation of the unsettled portion of the Company’s obligation for trade promotion activities was subjective and required judgment as a result of the nature of the required estimates and assumptions. In particular, the estimates required an analysis of the programs offered, expectations regarding customer and consumer participation, and experience with historical payment patterns.
|
| How We Addressed the Matter in Our Audit | | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls related to the Company’s calculation of the accrued liabilities for trade promotion activities. For example, we tested controls over management’s review of the completeness of the promotional activities as well as the significant assumptions and the data inputs utilized in the calculations.
To test the unsettled portion of the Company’s obligation for trade promotion activities, we performed audit procedures that included, among others, assessing (1) the expected value estimation methodology used by management, (2) whether all material trade promotion activities were properly included in management’s estimate, and (3) the assumptions discussed above and the underlying data used in its analyses. Specifically, when evaluating the assumptions, we compared them to historical trends, third party data, and assumptions used in prior periods, and inspected management’s retrospective review of actual trade promotion activities compared to previous estimates. We also performed sensitivity analyses of assumptions to evaluate the changes in the estimate that would result from changes in the assumptions.
|
| | |
/s/ ERNSTErnst & YOUNGYoung LLP |
|
We have served as the Company‘sCompany’s auditor since 2016. |
|
| Philadelphia, Pennsylvania |
February 27, 201820, 2024 |
.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 49 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Hershey Company
Opinion on Internal Control overOver Financial Reporting
We have audited The Hershey Company’s internal control over financial reporting as of December 31, 2017,2023, based on criteria established in Internal Control-IntegratedControl–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Hershey Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the acquisition of certain assets that provide additional manufacturing capacity from Weaver Popcorn Manufacturing, Inc. (“Weaver”) on May 31, 2023, which is included in the 2023 consolidated financial statements of the Company and constituted 1.4% of total assets as of December 31, 2023. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Weaver.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetsheets of The Hersheythe Company (the Company) as of December 31, 2017,2023 and 2022, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the yearthree years in the period ended December 31, 2017,2023, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated February 27, 201820, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 50 | |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
| |
/s/ ERNSTErnst & YOUNGYoung LLP |
|
| Philadelphia, Pennsylvania |
February 27, 201820, 2024 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
The Hershey Company:
We have audited the accompanying consolidated balance sheet of The Hershey Company and subsidiaries (the “Company”) as of December 31, 2016, and the related consolidated statements of income, comprehensive income, cash flows and stockholders’ equity for each of the years in the two-year period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we also have audited the related consolidated financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Hershey Company and subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
|
|
| /s/ KPMG LLP
|
| New York, New York | | | |
| The Hershey Company | 2023 Form 10-K | Page 51 | |
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Net sales | | $ | 11,164,992 | | | $ | 10,419,294 | | | $ | 8,971,337 | |
| Cost of sales | | 6,167,176 | | | 5,920,509 | | | 4,922,739 | |
| Gross profit | | 4,997,816 | | | 4,498,785 | | | 4,048,598 | |
| Selling, marketing and administrative expense | | 2,436,508 | | | 2,236,009 | | | 2,001,351 | |
| | | | | | |
| Business realignment costs | | 441 | | | 1,989 | | | 3,525 | |
| Operating profit | | 2,560,867 | | | 2,260,787 | | | 2,043,722 | |
| Interest expense, net | | 151,785 | | | 137,557 | | | 127,417 | |
| Other (income) expense, net | | 237,218 | | | 206,159 | | | 119,081 | |
| Income before income taxes | | 2,171,864 | | | 1,917,071 | | | 1,797,224 | |
| Provision for income taxes | | 310,077 | | | 272,254 | | | 314,405 | |
| Net income including noncontrolling interest | | 1,861,787 | | | 1,644,817 | | | 1,482,819 | |
| Less: Net gain attributable to noncontrolling interest | | — | | | — | | | 5,307 | |
| Net income attributable to The Hershey Company | | $ | 1,861,787 | | | $ | 1,644,817 | | | $ | 1,477,512 | |
| | | | | | |
| Net income per share—basic: | | | | | | |
| Common stock | | $ | 9.31 | | | $ | 8.22 | | | $ | 7.34 | |
| Class B common stock | | $ | 8.52 | | | $ | 7.47 | | | $ | 6.68 | |
| | | | | | |
| Net income per share—diluted: | | | | | | |
| Common stock | | $ | 9.06 | | | $ | 7.96 | | | $ | 7.11 | |
| Class B common stock | | $ | 8.50 | | | $ | 7.45 | | | $ | 6.66 | |
| | | | | | |
| Dividends paid per share: | | | | | | |
| Common stock | | $ | 4.456 | | | $ | 3.874 | | | $ | 3.410 | |
| Class B common stock | | $ | 4.050 | | | $ | 3.522 | | | $ | 3.100 | |
|
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Net sales | | $ | 7,515,426 |
| | $ | 7,440,181 |
| | $ | 7,386,626 |
|
| Cost of sales | | 4,070,907 |
| | 4,282,290 |
| | 4,003,951 |
|
| Gross profit | | 3,444,519 |
| | 3,157,891 |
| | 3,382,675 |
|
| Selling, marketing and administrative expense | | 1,913,403 |
| | 1,915,378 |
| | 1,969,308 |
|
| Long-lived asset impairment charges | | 208,712 |
| | — |
| | — |
|
| Goodwill and indefinite-lived intangible asset impairment charges | | — |
| | 4,204 |
| | 280,802 |
|
| Business realignment costs | | 47,763 |
| | 32,526 |
| | 94,806 |
|
| Operating profit | | 1,274,641 |
| | 1,205,783 |
| | 1,037,759 |
|
| Interest expense, net | | 98,282 |
| | 90,143 |
| | 105,773 |
|
| Other (income) expense, net | | 65,691 |
| | 16,159 |
| | 30,139 |
|
| Income before income taxes | | 1,110,668 |
| | 1,099,481 |
| | 901,847 |
|
| Provision for income taxes | | 354,131 |
| | 379,437 |
| | 388,896 |
|
| Net income including noncontrolling interest | | 756,537 |
| | 720,044 |
| | 512,951 |
|
| Less: Net loss attributable to noncontrolling interest | | (26,444 | ) | | — |
| | — |
|
| Net income attributable to The Hershey Company | | $ | 782,981 |
| | $ | 720,044 |
| | $ | 512,951 |
|
| | | | | | | |
| Net income per share—basic: | | | | | | |
| Common stock | | $ | 3.79 |
| | $ | 3.45 |
| | $ | 2.40 |
|
| Class B common stock | | $ | 3.44 |
| | $ | 3.15 |
| | $ | 2.19 |
|
| | | | | | | |
| Net income per share—diluted: | | | | | | |
| Common stock | | $ | 3.66 |
| | $ | 3.34 |
| | $ | 2.32 |
|
| Class B common stock | | $ | 3.44 |
| | $ | 3.14 |
| | $ | 2.19 |
|
| | | | | | | |
| Dividends paid per share: | | | | | | |
| Common stock | | $ | 2.548 |
| | $ | 2.402 |
| | $ | 2.236 |
|
| Class B common stock | | $ | 2.316 |
| | $ | 2.184 |
| | $ | 2.032 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 52 | |
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
| | 2023 | | 2022 | | 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 |
| Net income including noncontrolling interest | | | | | | $ | 1,861,787 | | | | | | | $ | 1,644,817 | | | | | | | $ | 1,482,819 | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments: | | | | | | | | | | | | | | | | | | |
| Foreign currency translation gains (losses) during period | | $ | 22,659 | | | $ | — | | | 22,659 | | | $ | (10,340) | | | $ | — | | | (10,340) | | | $ | (1,500) | | | $ | — | | | (1,500) | |
| Reclassification to earnings due to the sale of businesses | | — | | | — | | | — | | | — | | | — | | | — | | | 5,249 | | | — | | | 5,249 | |
| Pension and post-retirement benefit plans: | | | | | | | | | | | | | | | | | | |
| Net actuarial (loss) gain | | (39,454) | | | 9,191 | | | (30,263) | | | (32,970) | | | 7,481 | | | (25,489) | | | 67,728 | | | (13,929) | | | 53,799 | |
| Reclassification to earnings | | 28,612 | | | (6,895) | | | 21,717 | | | 31,009 | | | (7,392) | | | 23,617 | | | 32,092 | | | (8,067) | | | 24,025 | |
| Cash flow hedges: | | | | | | | | | | | | | | | | | | |
| (Losses) gains on cash flow hedging derivatives | | 954 | | | (30) | | | 924 | | | 2,056 | | | (74) | | | 1,982 | | | (1,551) | | | (2,989) | | | (4,540) | |
| Reclassification to earnings | | 10,866 | | | (3,648) | | | 7,218 | | | 10,200 | | | (3,088) | | | 7,112 | | | 18,117 | | | (1,034) | | | 17,083 | |
| Total other comprehensive income (loss), net of tax | | $ | 23,637 | | | $ | (1,382) | | | 22,255 | | | $ | (45) | | | $ | (3,073) | | | (3,118) | | | $ | 120,135 | | | $ | (26,019) | | | 94,116 | |
| Total comprehensive income including noncontrolling interest | | | | | | $ | 1,884,042 | | | | | | | $ | 1,641,699 | | | | | | | $ | 1,576,935 | |
| Comprehensive gain attributable to noncontrolling interest | | | | | | — | | | | | | | — | | | | | | | 10,556 | |
| Comprehensive income attributable to The Hershey Company | | | | | | $ | 1,884,042 | | | | | | | $ | 1,641,699 | | | | | | | $ | 1,566,379 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the years ended December 31, |
| | | 2017 | | 2016 | | 2015 |
| | | 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 | | | | | | $ | 756,537 |
| | | | | | $ | 720,044 |
| | | | | | $ | 512,951 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | $ | 19,616 |
| | $ | — |
| | 19,616 |
| | $ | (13,041 | ) | | $ | — |
| | (13,041 | ) | | $ | (59,707 | ) | | $ | — |
| | (59,707 | ) |
| Pension and post-retirement benefit plans: | | | | | | | | | | | | | | | | | | |
| Net actuarial gain (loss) and prior service cost | | 28,718 |
| | (10,883 | ) | | 17,835 |
| | 20,304 |
| | (7,776 | ) | | 12,528 |
| | (5,559 | ) | | 2,002 |
| | (3,557 | ) |
| Reclassification to earnings | | 46,305 |
| | (26,497 | ) | | 19,808 |
| | 56,604 |
| | (21,653 | ) | | 34,951 |
| | 52,469 |
| | (18,910 | ) | | 33,559 |
|
| Cash flow hedges: | | | | | | | | | | | | | | | | | | |
| Gains (losses) on cash flow hedging derivatives | | (4,931 | ) | | 73 |
| | (4,858 | ) | | (52,708 | ) | | 18,701 |
| | (34,007 | ) | | 61,839 |
| | (23,520 | ) | | 38,319 |
|
| Reclassification to earnings | | 14,434 |
| | (3,853 | ) | | 10,581 |
| | (16,482 | ) | | 7,524 |
| | (8,958 | ) | | (36,634 | ) | | 13,416 |
| | (23,218 | ) |
| Total other comprehensive income (loss), net of tax | | $ | 104,142 |
| | $ | (41,160 | ) | | 62,982 |
| | $ | (5,323 | ) | | $ | (3,204 | ) | | (8,527 | ) | | $ | 12,408 |
| | $ | (27,012 | ) | | (14,604 | ) |
| Total comprehensive income including noncontrolling interest | | | | | | $ | 819,519 |
| | | | | | $ | 711,517 |
| | | | | | $ | 498,347 |
|
| Comprehensive loss attributable to noncontrolling interest | | | | | | (25,604 | ) | | | | | | (3,664 | ) | | | | | | (2,152 | ) |
| Comprehensive income attributable to The Hershey Company | | | | | | $ | 845,123 |
| | | | | | $ | 715,181 |
| | | | | | $ | 500,499 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 53 | |
THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | | | | | | | |
| December 31, | | 2023 | | 2022 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 401,902 | | | $ | 463,889 | |
| Accounts receivable—trade, net | | 823,617 | | | 711,203 | |
| Inventories | | 1,340,996 | | | 1,173,119 | |
| Prepaid expenses and other | | 345,588 | | | 272,195 | |
| Total current assets | | 2,912,103 | | | 2,620,406 | |
| Property, plant and equipment, net | | 3,309,678 | | | 2,769,702 | |
| Goodwill | | 2,696,050 | | | 2,606,956 | |
| Other intangibles | | 1,879,229 | | | 1,966,269 | |
| Other non-current assets | | 1,061,427 | | | 944,989 | |
| Deferred income taxes | | 44,454 | | | 40,498 | |
| Total assets | | $ | 11,902,941 | | | $ | 10,948,820 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 1,086,183 | | | $ | 970,558 | |
| Accrued liabilities | | 867,815 | | | 832,518 | |
| Accrued income taxes | | 29,457 | | | 6,710 | |
| Short-term debt | | 719,839 | | | 693,790 | |
| Current portion of long-term debt | | 305,058 | | | 753,578 | |
| Total current liabilities | | 3,008,352 | | | 3,257,154 | |
| Long-term debt | | 3,789,132 | | | 3,343,977 | |
| Other long-term liabilities | | 660,673 | | | 719,742 | |
| Deferred income taxes | | 345,698 | | | 328,403 | |
| Total liabilities | | 7,803,855 | | | 7,649,276 | |
| | | | |
| Stockholders’ equity: | | | | |
| The Hershey Company stockholders’ equity | | | | |
| Preferred stock, shares issued: none in 2023 and 2022 | | — | | | — | |
| Common stock, shares issued: 166,939,511 in 2023 and 163,439,248 in 2022 | | 166,939 | | | 163,439 | |
| Class B common stock, shares issued: 54,613,514 in 2023 and 58,113,777 in 2022 | | 54,614 | | | 58,114 | |
| Additional paid-in capital | | 1,345,580 | | | 1,296,572 | |
| Retained earnings | | 4,562,263 | | | 3,589,781 | |
| Treasury—common stock shares, at cost: 17,160,099 in 2023 and 16,588,308 in 2022 | | (1,800,232) | | | (1,556,029) | |
| Accumulated other comprehensive loss | | (230,078) | | | (252,333) | |
| | | | |
| | | | |
| Total stockholders’ equity | | 4,099,086 | | | 3,299,544 | |
| Total liabilities and stockholders’ equity | | $ | 11,902,941 | | | $ | 10,948,820 | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 380,179 |
| | $ | 296,967 |
|
| Accounts receivable—trade, net | | 588,262 |
| | 581,381 |
|
| Inventories | | 752,836 |
| | 745,678 |
|
| Prepaid expenses and other | | 280,633 |
| | 192,752 |
|
| Total current assets | | 2,001,910 |
| | 1,816,778 |
|
| Property, plant and equipment, net | | 2,106,697 |
| | 2,177,248 |
|
| Goodwill | | 821,061 |
| | 812,344 |
|
| Other intangibles | | 369,156 |
| | 492,737 |
|
| Other assets | | 251,879 |
| | 168,365 |
|
| Deferred income taxes | | 3,023 |
| | 56,861 |
|
| Total assets | | $ | 5,553,726 |
| | $ | 5,524,333 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current liabilities: | | | | |
| Accounts payable | | $ | 523,229 |
| | $ | 522,536 |
|
| Accrued liabilities | | 676,134 |
| | 750,986 |
|
| Accrued income taxes | | 17,723 |
| | 3,207 |
|
| Short-term debt | | 559,359 |
| | 632,471 |
|
| Current portion of long-term debt | | 300,098 |
| | 243 |
|
| Total current liabilities | | 2,076,543 |
| | 1,909,443 |
|
| Long-term debt | | 2,061,023 |
| | 2,347,455 |
|
| Other long-term liabilities | | 438,939 |
| | 400,161 |
|
| Deferred income taxes | | 45,656 |
| | 39,587 |
|
| Total liabilities | | 4,622,161 |
| | 4,696,646 |
|
| | | | | |
| Stockholders’ equity: | | | | |
| The Hershey Company stockholders’ equity | | | | |
| Preferred stock, shares issued: none in 2017 and 2016 | | — |
| | — |
|
| Common stock, shares issued: 299,281,967 in 2017 and 2016 | | 299,281 |
| | 299,281 |
|
| Class B common stock, shares issued: 60,619,777 in 2017 and 2016 | | 60,620 |
| | 60,620 |
|
| Additional paid-in capital | | 924,978 |
| | 869,857 |
|
| Retained earnings | | 6,371,082 |
| | 6,115,961 |
|
| Treasury—common stock shares, at cost: 149,040,927 in 2017 and 147,642,009 in 2016 | | (6,426,877 | ) | | (6,183,975 | ) |
| Accumulated other comprehensive loss | | (313,746 | ) | | (375,888 | ) |
| Total—The Hershey Company stockholders’ equity | | 915,338 |
| | 785,856 |
|
| Noncontrolling interest in subsidiary | | 16,227 |
| | 41,831 |
|
| Total stockholders’ equity | | 931,565 |
| | 827,687 |
|
| Total liabilities and stockholders’ equity | | $ | 5,553,726 |
| | $ | 5,524,333 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 54 | |
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Operating Activities | | | | | | |
| Net income including noncontrolling interest | | $ | 1,861,787 | | | $ | 1,644,817 | | | $ | 1,482,819 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 419,815 | | | 378,959 | | | 315,002 | |
| Stock-based compensation expense | | 81,021 | | | 65,991 | | | 66,711 | |
| Deferred income taxes | | 16,233 | | | 36,889 | | | 13,374 | |
| | | | | | |
| Write-down of equity investments | | 210,484 | | | 188,286 | | | 113,756 | |
| Other | | 103,287 | | | 120,818 | | | 96,016 | |
| Changes in assets and liabilities, net of business acquisitions and divestitures: | | | | | | |
| Accounts receivable—trade, net | | (102,080) | | | (38,165) | | | (14,642) | |
| Inventories | | (157,153) | | | (186,963) | | | 21,457 | |
| Prepaid expenses and other current assets | | (22,444) | | | (14,507) | | | 8,619 | |
| Accounts payable and accrued liabilities | | 50,234 | | | 216,479 | | | 39,732 | |
| Accrued income taxes | | (32,481) | | | 5,005 | | | (29,682) | |
| Contributions to pension and other benefit plans | | (27,581) | | | (78,547) | | | (51,100) | |
| Other assets and liabilities | | (77,932) | | | (11,225) | | | 20,822 | |
| Net cash provided by operating activities | | 2,323,190 | | | 2,327,837 | | | 2,082,884 | |
| Investing Activities | | | | | | |
| Capital additions (including software) | | (771,109) | | | (519,481) | | | (495,877) | |
| | | | | | |
| Equity investments in tax credit qualifying partnerships | | (256,815) | | | (275,534) | | | (128,417) | |
| Business acquisitions, net of cash and cash equivalents acquired | | (165,818) | | | — | | | (1,601,073) | |
| Other investing activities | | (4,934) | | | 7,639 | | | 2,539 | |
| Net cash used in investing activities | | (1,198,676) | | | (787,376) | | | (2,222,828) | |
| Financing Activities | | | | | | |
| Net increase (decrease) in short-term debt | | 26,049 | | | (245,633) | | | 869,030 | |
| Long-term borrowings, net of debt issuance costs | | 744,092 | | | — | | | — | |
| Repayment of long-term debt and finance leases | | (755,414) | | | (4,741) | | | (439,444) | |
| Cash dividends paid | | (889,071) | | | (775,030) | | | (685,987) | |
| Repurchase of common stock | | (264,913) | | | (388,964) | | | (457,946) | |
| Exercise of stock options | | 26,015 | | | 34,158 | | | 49,821 | |
| Taxes withheld and paid on employee stock awards | | (35,009) | | | (35,515) | | | (16,610) | |
| Net cash used in financing activities | | (1,148,251) | | | (1,415,725) | | | (681,136) | |
| Effect of exchange rate changes on cash and cash equivalents | | (38,250) | | | 9,887 | | | (5,075) | |
| (Decrease) increase in cash and cash equivalents, including cash classified as held for sale | | (61,987) | | | 134,623 | | | (826,155) | |
| Less: Decrease in cash and cash equivalents classified as held for sale | | — | | | — | | | 11,434 | |
| Net (decrease) increase in cash and cash equivalents | | (61,987) | | | 134,623 | | | (814,721) | |
| Cash and cash equivalents, beginning of period | | 463,889 | | | 329,266 | | | 1,143,987 | |
| Cash and cash equivalents, end of period | | $ | 401,902 | | | $ | 463,889 | | | $ | 329,266 | |
| Supplemental Disclosure | | | | | | |
| Interest paid | | $ | 160,729 | | | $ | 131,757 | | | $ | 127,726 | |
| Income taxes paid | | 303,942 | | | 221,321 | | | 275,171 | |
|
| | | | | | | | | | | |
| For the years ended December 31, | 2017 | | 2016 | | 2015 |
| Operating Activities | | | | | |
| Net income including noncontrolling interest | $ | 756,537 |
| | $ | 720,044 |
| | $ | 512,951 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 261,853 |
| | 301,837 |
| | 244,928 |
|
| Stock-based compensation expense | 51,061 |
| | 54,785 |
| | 51,533 |
|
| Deferred income taxes | 18,582 |
| | (38,097 | ) | | (38,537 | ) |
| Impairment of goodwill, indefinite and long-lived assets (see Notes 3 and 7) | 208,712 |
| | 4,204 |
| | 280,802 |
|
| Loss on early extinguishment of debt (see Note 4) | — |
| | — |
| | 28,326 |
|
| Write-down of equity investments | 66,209 |
| | 43,482 |
| | 39,489 |
|
| Gain on settlement of SGM liability (see Note 2) | — |
| | (26,650 | ) | | — |
|
| Other | 77,291 |
| | 51,375 |
| | 28,467 |
|
| Changes in assets and liabilities, net of business acquisitions and divestitures: | | | | | |
| Accounts receivable—trade, net | (6,881 | ) | | 21,096 |
| | (24,440 | ) |
| Inventories | (71,404 | ) | | 13,965 |
| | 52,049 |
|
| Prepaid expenses and other current assets | 18,214 |
| | (42,955 | ) | | 118,007 |
|
| Accounts payable and accrued liabilities | (52,960 | ) | | (63,467 | ) | | 9,574 |
|
| Accrued income taxes | (71,027 | ) | | (937 | ) | | 36,848 |
|
| Contributions to pension and other benefit plans | (56,433 | ) | | (41,697 | ) | | (53,273 | ) |
| Other assets and liabilities | 49,761 |
| | 16,443 |
| | (30,413 | ) |
| Net cash provided by operating activities | 1,249,515 |
| | 1,013,428 |
| | 1,256,311 |
|
| Investing Activities | | | | | |
| Capital additions (including software) | (257,675 | ) | | (269,476 | ) | | (356,810 | ) |
| Proceeds from sales of property, plant and equipment | 7,609 |
| | 3,651 |
| | 1,205 |
|
| Proceeds from sale of business | — |
| | — |
| | 32,408 |
|
| Equity investments in tax credit qualifying partnerships | (78,598 | ) | | (44,255 | ) | | (30,720 | ) |
| Business acquisitions, net of cash and cash equivalents acquired | — |
| | (285,374 | ) | | (218,654 | ) |
| Sale of short-term investments | — |
| | — |
| | 95,316 |
|
| Net cash used in investing activities | (328,664 | ) | | (595,454 | ) | | (477,255 | ) |
| Financing Activities | | | | | |
| Net (decrease) increase in short-term debt | (81,426 | ) | | 275,607 |
| | 10,720 |
|
| Long-term borrowings | 954 |
| | 792,953 |
| | 599,031 |
|
| Repayment of long-term debt | — |
| | (500,000 | ) | | (355,446 | ) |
| Payment of SGM liability (see Note 2) | — |
| | (35,762 | ) | | — |
|
| Cash dividends paid | (526,272 | ) | | (499,475 | ) | | (476,132 | ) |
| Repurchase of common stock | (300,312 | ) | | (592,550 | ) | | (582,623 | ) |
| Exercise of stock options | 63,288 |
| | 94,831 |
| | 55,703 |
|
| Other | — |
| | — |
| | (48,270 | ) |
| Net cash used in financing activities | (843,768 | ) | | (464,396 | ) | | (797,017 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 6,129 |
| | (3,140 | ) | | (10,364 | ) |
| Increase (decrease) in cash and cash equivalents | 83,212 |
| | (49,562 | ) | | (28,325 | ) |
| Cash and cash equivalents, beginning of period | 296,967 |
| | 346,529 |
| | 374,854 |
|
| Cash and cash equivalents, end of period | $ | 380,179 |
| | $ | 296,967 |
| | $ | 346,529 |
|
| Supplemental Disclosure | | | | | |
| Interest paid (excluding loss on early extinguishment of debt in 2015) | $ | 101,874 |
| | $ | 90,951 |
| | $ | 88,448 |
|
| Income taxes paid | 351,832 |
| | 425,539 |
| | 368,926 |
|
See Notes to Consolidated Financial Statements.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 55 | |
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred
Stock | | Common
Stock | | Class B
Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury
Common
Stock | | Accumulated Other
Comprehensive
Income (Loss) | | Noncontrolling
Interests in
Subsidiaries | | Total
Stockholders’
Equity |
| Balance, January 1, 2015 | | $ | — |
| | $ | 299,281 |
| | $ | 60,620 |
| | $ | 754,186 |
| | $ | 5,860,784 |
| | $ | (5,161,236 | ) | | $ | (358,573 | ) | | $ | 64,468 |
| | $ | 1,519,530 |
|
| Net income | | | | | | | | | | 512,951 |
| | | | | | | | 512,951 |
|
| Other comprehensive loss | | | | | | | | | | | | | | (12,452 | ) | | (2,152 | ) | | (14,604 | ) |
| Dividends: | | | | | | | | | | | | | | | | | | |
| Common Stock, $2.236 per share | | | | | | | | | | (352,953 | ) | | | | | | | | (352,953 | ) |
| Class B Common Stock, $2.032 per share | | | | | | | | | | (123,179 | ) | | | | | | | | (123,179 | ) |
| Stock-based compensation | | | | | | | | 50,722 |
| | | | | | | | | | 50,722 |
|
| Exercise of stock options and incentive-based transactions | | | | | | | | 8,204 |
| | | | 71,500 |
| | | | | | 79,704 |
|
| Repurchase of common stock | | | | | | | | | | | | (582,623 | ) | | | | | | (582,623 | ) |
| Impact of reclassifications to and purchase of redeemable noncontrolling interest | | | | | | | | (29,235 | ) | | | | | | | | (13,428 | ) | | (42,663 | ) |
| Earnings of noncontrolling interests | | | | | | | | | | | | | | | | 577 |
| | 577 |
|
| Balance, December 31, 2015 | | — |
| | 299,281 |
| | 60,620 |
| | 783,877 |
| | 5,897,603 |
| | (5,672,359 | ) | | (371,025 | ) | | 49,465 |
| | 1,047,462 |
|
| Net income | | | | | | | | | | 720,044 |
| | | | | | | | 720,044 |
|
| Other comprehensive loss | | | | | | | | | | | | | | (4,863 | ) | | (3,664 | ) | | (8,527 | ) |
| Dividends (including dividend equivalents): | | | | | | | | | | | | | | | | | | |
| Common Stock, $2.402 per share | | | | | | | | | | (369,292 | ) | | | | | | | | (369,292 | ) |
| Class B Common Stock, $2.184 per share | | | | | | | | | | (132,394 | ) | | | | | | | | (132,394 | ) |
| Stock-based compensation | | | | | | | | 54,429 |
| | | | | | | | | | 54,429 |
|
| Exercise of stock options and incentive-based transactions | | | | | | | | 31,551 |
| | | | 80,934 |
| | | | | | 112,485 |
|
| Repurchase of common stock | | | | | | | | | | | | (592,550 | ) | | | | | | (592,550 | ) |
| Loss of noncontrolling interest | | | | | | | | | | | | | | | | (3,970 | ) | | (3,970 | ) |
| Balance, December 31, 2016 | | — |
| | 299,281 |
| | 60,620 |
| | 869,857 |
| | 6,115,961 |
| | (6,183,975 | ) | | (375,888 | ) | | 41,831 |
| | 827,687 |
|
| Net income (loss) | | | | | | | | | | 782,981 |
| | | | | | (26,444 | ) | | 756,537 |
|
| Other comprehensive income | | | | | | | | | | | | | | 62,142 |
| | 840 |
| | 62,982 |
|
| Dividends (including dividend equivalents): | | | | | | | | | | | | | | | | | | |
| Common Stock, $2.548 per share | | | | | | | | | | (387,466 | ) | | | | | | | | (387,466 | ) |
| Class B Common Stock, $2.316 per share | | | | | | | | | | (140,394 | ) | | | | | | | | (140,394 | ) |
| Stock-based compensation | | | | | | | | 49,243 |
| | | | | | | | | | 49,243 |
|
| Exercise of stock options and incentive-based transactions | | | | | | | | 5,878 |
| | | | 57,410 |
| | | | | | 63,288 |
|
| Repurchase of common stock | | | | | | | | | | | | (300,312 | ) | | | | | | (300,312 | ) |
| Balance, December 31, 2017 | | $ | — |
| | $ | 299,281 |
| | $ | 60,620 |
| | $ | 924,978 |
| | $ | 6,371,082 |
| | $ | (6,426,877 | ) | | $ | (313,746 | ) | | $ | 16,227 |
| | $ | 931,565 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred
Stock | | Common
Stock | | Class B
Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury
Common
Stock | | Accumulated Other
Comprehensive
Income (Loss) | | Noncontrolling
Interests in
Subsidiaries | | Total
Stockholders’
Equity |
| Balance, January 1, 2021 | | $ | — | | | $ | 160,939 | | | $ | 60,614 | | | $ | 1,191,200 | | | $ | 1,928,673 | | | $ | (768,992) | | | $ | (338,082) | | | $ | 3,531 | | | $ | 2,237,883 | |
| Net income | | | | | | | | | | 1,477,512 | | | | | | | 5,307 | | | 1,482,819 | |
| Other comprehensive income | | | | | | | | | | | | | | 88,867 | | | 5,249 | | | 94,116 | |
| Dividends (including dividend equivalents): | | | | | | | | | | | | | | | | | | |
| Common Stock, $3.410 per share | | | | | | | | | | (498,346) | | | | | | | | | (498,346) | |
| Class B Common Stock, $3.100 per share | | | | | | | | | | (187,903) | | | | | | | | | (187,903) | |
| Stock-based compensation | | | | | | | | 67,482 | | | | | | | | | | | 67,482 | |
| Exercise of stock options and incentive-based transactions | | | | | | | | 1,649 | | | | | 31,562 | | | | | | | 33,211 | |
| Repurchase of common stock | | | | | | | | | | | | (457,946) | | | | | | | (457,946) | |
| Divestiture of noncontrolling interest | | | | | | | | | | | | | | | | (1,436) | | | (1,436) | |
| Distributions to joint venture partner | | | | | | | | | | | | | | | | (8,750) | | | (8,750) | |
| Other | | | | | | | | | | | | | | | | (3,901) | | | (3,901) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2021 | | — | | | 160,939 | | | 60,614 | | | 1,260,331 | | | 2,719,936 | | | (1,195,376) | | | (249,215) | | | — | | | 2,757,229 | |
| Net income | | | | | | | | | | 1,644,817 | | | | | | | — | | | 1,644,817 | |
| Other comprehensive loss | | | | | | | | | | | | | | (3,118) | | | — | | | (3,118) | |
| Dividends (including dividend equivalents): | | | | | | | | | | | | | | | | | | |
| Common Stock, $3.874 per share | | | | | | | | | | (567,839) | | | | | | | | | (567,839) | |
| Class B Common Stock, $3.522 per share | | | | | | | | | | (207,133) | | | | | | | | | (207,133) | |
| Conversion of Class B Common Stock into Common Stock | | | | 2,500 | | | (2,500) | | | | | | | | | | | | | — | |
| Stock-based compensation | | | | | | | | 65,909 | | | | | | | | | | | 65,909 | |
| Exercise of stock options and incentive-based transactions | | | | | | | | (29,668) | | | | | 28,311 | | | | | | | (1,357) | |
| Repurchase of common stock | | | | | | | | | | | | (388,964) | | | | | | | (388,964) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2022 | | — | | | 163,439 | | | 58,114 | | | 1,296,572 | | | 3,589,781 | | | (1,556,029) | | | (252,333) | | | — | | | 3,299,544 | |
| Net income | | | | | | | | | | 1,861,787 | | | | | | | — | | | 1,861,787 | |
| Other comprehensive income | | | | | | | | | | | | | | 22,255 | | | — | | | 22,255 | |
| Dividends (including dividend equivalents): | | | | | | | | | | | | | | | | | | |
| Common Stock, $4.456 per share | | | | | | | | | | (663,410) | | | | | | | | | (663,410) | |
| Class B Common Stock, $4.050 per share | | | | | | | | | | (225,895) | | | | | | | | | (225,895) | |
| Conversion of Class B Common Stock into Common Stock | | | | 3,500 | | | (3,500) | | | | | | | | | | | | | — | |
| Stock-based compensation | | | | | | | | 81,130 | | | | | | | | | | | 81,130 | |
| Exercise of stock options and incentive-based transactions | | | | | | | | (32,122) | | | | | 23,128 | | | | | | | (8,994) | |
| Repurchase of common stock (including excise tax) | | | | | | | | | | | | (267,331) | | | | | | | (267,331) | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Balance, December 31, 2023 | | $ | — | | | $ | 166,939 | | | $ | 54,614 | | | $ | 1,345,580 | | | $ | 4,562,263 | | | $ | (1,800,232) | | | $ | (230,078) | | | $ | — | | | $ | 4,099,086 | |
See Notes to Consolidated Financial Statements.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 56 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Hershey Company together with its wholly-owned subsidiaries and entities in which it has a controlling interest,(the (the “Company,” “Hershey,” “we” or “us”) is a global confectionery leader known for its branded portfolio of chocolate, sweets, mints and other great-tastinggreat tasting snacks. The Company has more than 8090 brands worldwide including such iconic brand names as Hershey’s, Reese’s, Kisses, Jolly Rancher and Ice Breakers, which are marketed, sold and distributed in approximately 80 countries worldwide. HersheyHershey’s structure is focuseddesigned to ensure continued focus on growing its presenceNorth America, coupled with an emphasis on profitable growth in keyour focus international markets while continuing to build its competitive advantage in North America.markets. The Company currently operates through two reportablethree segments that are aligned with its management structure and the key markets it serves: (i) North America Confectionery, (ii) North America Salty Snacks and International and Other.(iii) International. For additional information on our segment presentation, see Note 11.13. Basis of Presentation
Our consolidated financial statements include the accounts of The Hershey Company and its majority-owned or controlled subsidiaries. Intercompany transactions and balances have been eliminated. 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. Net income (loss) attributable to noncontrolling interests in 2016 and 2015 was not considered significant and was recorded within selling, marketing and administrative expense in the Consolidated Statements of Income. See Note 12 for additional information on our noncontrolling interest. We use the equity method of accounting when we have a 20% to 50% interest in other companies and exercise significant influence. In addition, we use the equity method of accounting for our investments in partnership entities which make equity investments in projects eligible to receive federal historic and energy tax credits. See Note 810 for additional information on our equity investments in partnership entities qualifying for tax credits. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for at cost, less impairments. Both equity method and cost, less impairment investments are included as Other non-current assets in the Consolidated Balance Sheets. For additional information on our investments in unconsolidated affiliates, see Note 8.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Our significant estimates and assumptions include, among others, pension and other post-retirement benefit plan assumptions, valuation assumptions of goodwill and other intangible assets, useful lives of long-lived assets, marketing and trade promotion accruals and income taxes. These estimates and assumptions are based on management’s best judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and the effects of any revisions are reflected in the consolidated financial statements in the period that they are determined. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Revenue Recognition
We record sales when allThe majority of our revenue contracts represent a single performance obligation related to the following criteria have been met:
|
| |
l | A valid customer order with a fixed price has been received; |
l | The product has been delivered to the customer; |
l | There is no further significant obligation to assist in the resale of the product; and |
l | Collectability is reasonably assured. |
fulfillment of customer orders for the purchase of our products, including chocolate, sweets, mints and other grocery and snack offerings. Net sales include revenue fromreflect the sale of finished goods and royalty income, net of allowancestransaction prices for these contracts based on our selling list price which is then reduced by estimated costs for trade promotions,promotional programs, consumer coupon programs and other sales incentives, and allowances and discounts associated with aged or potentially unsaleable products. Trade promotionsWe recognize revenue at the point in time that control of the ordered product(s) is transferred to the customer, which is typically upon delivery to the customer or other customer-designated delivery point. Amounts billed and salesdue from our customers are classified as accounts receivables on the balance sheet and require payment on a short-term basis.
Our trade promotional programs and consumer incentives primarilyare used to promote our products and include, reduced price features,but are not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. The estimated costs
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 57 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
associated with these programs and incentives are based upon our analysis of the programs offered, expectations regarding customer and consumer participation, historical sales and payment trends, and our experience with payment patterns associated with similar programs offered in the past. The estimated costs of these programs are reasonably likely to change in future periods due to changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. Differences between estimated expense and actual program performance are recognized as a change in estimate in a subsequent period and are normally not significant. During 2023, 2022 and 2021, actual promotional costs have not deviated from the estimated amount by more than 3%. The Company’s unsettled portion remaining in accrued liabilities at year-end for these activities was $194,032 and $215,688 at December 31, 2023 and 2022, respectively.
merchandising displays,We also recognize a minor amount of royalty income (less than 1% of our consolidated net sales) from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales growth incentives, new item allowancesoccur. Shipping and cooperative advertising.handling costs incurred to deliver product to the customer are recorded within cost of sales. Sales, use, value-addedvalue add and other excise taxes we collect concurrent with revenue producing activities are not recognized inexcluded from revenue.
The majority of our products are confectionery or confectionery-based and, therefore, exhibit similar economic characteristics, as they are based on similar ingredients and are marketed and sold through the same channels to the same customers. In 2017, 2016connection with our recent acquisitions, we have expanded our portfolio of salty snacking products, which also exhibit similar economic characteristics to our confectionery products and 2015,are sold through the same channels to the same customers. See Note 13 for revenues reported by geographic segment, which is consistent with how we organize and manage our operations, as well as product line net sales information. In 2023, 2022 and 2021, approximately 29%28%, 25%28% and 26%30%, respectively, of our consolidated net sales were made to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers and the primary distributor of our products to Wal-Mart Stores, Inc.
Cost of Sales
Cost of sales represents costs directly related to the manufacture and distribution of our products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling, warehousing and the depreciation of manufacturing, warehousing and distribution facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes.
Selling, Marketing and Administrative Expense
Selling, marketing and administrative expense (“SM&A”) represents costs incurred in generating revenues and in managing our business. Such costs include advertising and other marketing expenses, selling expenses, research and development costs, administrative and other indirect overhead costs, amortization of capitalized software and intangible assets and depreciation of administrative facilities. Research and development costs, charged to expense as incurred, totaled $45,850$50,030 in 2017, $47,2682023, $46,943 in 20162022 and $49,281$40,107 in 2015.2021. Advertising expense is also charged to expense as incurred and totaled $541,293$604,853 in 2017, $521,4792023, $517,677 in 20162022 and $561,644$511,798 in 2015.2021. There was no prepaid advertising expense as of December 31, 2023. Prepaid advertising expense was $56 and $651$241 as of December 31, 2017 and 2016, respectively.2022.
Cash Equivalents
Cash equivalents consist of highly liquid debt instruments, time deposits and money market funds with original maturities of three months or less. The fair value of cash and cash equivalents approximates the carrying amount.
Short-term Investments
Short-term investments consist of bank term deposits that have original maturity dates ranging from greater than three months to twelve months. Short-term investments are carried at cost, which approximates fair value.
Accounts Receivable—Trade
In the normal course of business, we extend credit to customers that satisfy pre-defined credit criteria, based upon the results of our recurring financial account reviews and our evaluation of current and projected economic conditions. Our primary concentrationsconcentration of credit risk areis associated with McLane Company, Inc. and Target Corporation, two customers, one customer served principally by our North America Confectionery segment. As of December 31, 2017,2023, McLane Company, Inc. accounted for approximately 24% of our total accounts receivable. Target Corporation accounted for approximately 11% of our total accounts receivable as of December 31, 2017. No other customer accounted for more than 10% of our year-end accounts receivable. We believe that we have little concentration of credit risk associated with the remainder of our customer base. Accounts receivable-trade in the Consolidated Balance Sheets is presented net of allowances for bad debts and anticipated discounts of $41,792$31,663 and $40,153$26,001 at December 31, 20172023 and 2016,2022, respectively.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 58 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Inventories
Inventories are valued at the lower of cost or marketnet realizable value, adjusted for the value of inventory that is estimated to be excess, obsolete or otherwise unsaleable. As of December 31, 2017,2023, approximately 59%55% of our inventories, representing the majority of our United States (“U.S.”) inventories, were valued under the last-in, first-out (“LIFO”) method. TheFor the remainder of our inventories in the U.S. and inventories for our international businesses, are valued at the lower ofcost is determined by either first-in, first-out (“FIFO”("FIFO") cost or market.average cost. LIFO cost of inventories valued using the LIFO method was $443,492$741,040 as of December 31, 20172023 and $402,919$621,614 as of December 31, 2016.2022. The adjustment to LIFO, as shown in Note 16,19, approximates the excess of replacement cost over the stated LIFO inventory value. The net impact of LIFO acquisitions and liquidations was not material to 2017, 20162023, 2022 or 2015. THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
2021.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: 3 to 15 years for machinery and equipment; and 25 to 40 years for buildings and related improvements. At December 31, 20172023 and December 31, 2016,2022, property, plant and equipment includesincluded assets under capitalfinance lease arrangements with net book values totaling $116,843$69,863 and $104,503,$72,160, respectively. Total depreciation expense for the years ended December 31, 2017, 20162023, 2022 and 20152021 was $211,592, $231,735$265,604, $253,582 and $197,054,$230,638, respectively, and includesincluded depreciation on assets recorded under capitalfinance lease arrangements. Maintenance and repairs are expensed as incurred. We capitalize applicable interest charges incurred during the construction of new facilities and production lines and amortize these costs over the assets’ estimated useful lives.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated. If these assets are considered to be impaired, we measure impairment as the amount by which the carrying amount of the assets exceeds the fair value of the assets. We report assets held for sale or disposal at the lower of the carrying amount or fair value less cost to sell.
We assess asset retirement obligations on a periodic basis and recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We capitalize associated asset retirement costs as part of the carrying amount of the long-lived asset.
Computer Software
We capitalize costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and it is probable the software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project and (iii) interest costs incurred, when material, while developing internal-use software. We cease capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose.
The unamortized amount of capitalized software totaled $104,881$360,205 and $95,301$320,034 at December 31, 20172023 and 2016,2022, respectively. We amortize software costs using the straight-line method over the expected life of the software, generally 3 to 7 years. Accumulated amortization of capitalized software was $296,042$395,410 and $322,807$350,620 as of December 31, 20172023 and 2016,2022, respectively. Such amounts are recorded within other assets in the Consolidated Balance Sheets.
We review the carrying value of software and development costs for impairment in accordance with our policy pertaining to the impairment of long-lived assets.
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter. We test goodwill for impairment by performing either a qualitative or quantitative assessment. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors in assessing the fair value of the related reporting unit. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 59 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
required. For those reporting units tested using a quantitative approach, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge for the differential (up to the carrying value of goodwill). We test individual indefinite-lived intangible assets by comparing the estimated fair values with the book values of each asset.
We determine the fair value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to measure fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and profitability, and cash flows associated with taxes and capital spending. Additional assumptions include forecasted growth rates, estimated discount rates, which may be risk-adjusted for the operating market of the reporting unit, and estimated royalty rates that would be charged for comparable branded licenses. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions. See Note 3 for additional information regarding the results of impairment tests.
The cost of intangible assets with finite useful lives is amortized on a straight-line basis. Our finite-lived intangible assets consist primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions,acquisitions. The weighted-average amortization period for our finite-lived intangible assets is approximately 28 years, which are amortized over estimated useful lives of approximately 25 years, 15 years, and 5 years, respectively.is primarily driven by recently acquired trademarks. If certain events or changes in operating conditions indicate that the carrying value of these assets, or related asset groups, may not be recoverable, we perform an impairment assessment and may adjust the remaining useful lives. See Note 3 for additional information regarding the results of impairment tests. Supplier Finance Program Obligations
During 2020, we entered into an agreement with two third-party financial institutions to facilitate a supplier finance program which allows qualifying suppliers to sell their receivables from the Company to the financial institution. These participating suppliers negotiate their outstanding receivable arrangements directly with the financial institution, and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier’s decision to enter into these agreements. Once a qualifying supplier elects to participate in the supplier finance program and reaches an agreement with a financial institution, they elect which individual Company invoices they sell to the financial institution. However, all Company payments to participating suppliers are paid to the financial institution on the invoice due date, regardless of whether the individual invoice is sold by the supplier to the financial institution. The financial institution pays the supplier on the invoice due date for any invoices that were not previously sold under the supplier finance program. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers’ decisions to sell amounts under these arrangements. The payment of these obligations is included in cash provided by operating activities in the Consolidated Statements of Cash Flows. The rollforward of the Company’s outstanding obligations confirmed as valid under its supplier finance program, which are included in Accounts Payable in the Consolidated Balance Sheets, for year ended December 31, 2023 are as follows:
| | | | | | | | | | |
| | 2023 | | |
| Supplier finance program obligations outstanding at beginning of the year | | $ | 105,293 | | | |
| Invoice amounts added during the year | | 585,872 | | | |
| Invoice amounts paid during the year | | (541,904) | | | |
| Supplier finance program obligations outstanding at end of the year | | $ | 149,261 | | | |
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 60 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Currency Translation
The financial statements of our foreign entities with functional currencies other than the U.S. dollar are translated into U.S. dollars, with the resulting translation adjustments recorded as a component of other comprehensive income (loss). Assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, while income and expense items are translated using the average exchange rates during the period.
Derivative Instruments
We use derivative instruments principally to offset exposure to market risks arising from changes in commodity prices, foreign currency exchange rates and interest rates. See Note 5 for additional information on our risk management strategy and the types of instruments we use. Derivative instruments are recognized on the balance sheetConsolidated Balance Sheets at their fair values. When we become party to a derivative instrument and intend to apply hedge accounting, we designate the instrument for financial reporting purposes as a cash flow or fair value hedge. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether we have designated it and it qualified as part of a hedging relationship, as noted below:
•Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in accumulated other comprehensive income (“AOCI”) to the extent effective and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings.
•Changes in the fair value of a derivative that is designated as a fair value hedge, along with the offsetting loss or gain on the hedged asset or liability that is attributable to the risk being hedged, are recorded in earnings, thereby reflecting in earnings the net extent to which the hedge is not effective in achieving offsetting changes in fair value.
•Changes in the fair value of a derivative not designated as a hedging instrument are recognized in earnings in cost of sales or SM&A, consistent with the related exposure.
For derivatives designated as hedges, we assess, both at the hedge'shedge’s inception and on an ongoing basis, whether they are highly effective in offsetting changes in fair values or cash flows of hedged items. The ineffective portion, if any, is recorded directly in earnings. In addition, if we determine that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively.
We do not hold or issue derivative instruments for trading or speculative purposes and are not a party to any instruments with leverage or prepayment features.
Cash flows related to the derivative instruments we use to manage interest, commodity or other currency exposures are classified as operating activities.
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Reclassifications
Certain prior period amounts have been reclassified to conform to current year presentation. Specifically, this includes amounts reclassified to conform to the current year presentation in the Consolidated Statements of Cash Flows.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In March 2016,2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation—Stock Compensation2020-04, Reference Rate Reform (Topic 718)848): ImprovementsFacilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU is intended to Employee Share-Based Payment Accounting.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 early adopted the provisions of this ASU in the first quarter of 2017. This update principally affects the recognition of excess tax benefits and deficiencies and the cash flow classification of share-based compensation-related transactions. The requirement to recognize excess tax benefits and deficiencies as income tax expense or benefit in the income statement was applied prospectively, with a benefit of $11,745 recognized during the year ended December 31, 2017. Additionally, within the Consolidated Statement of Cash Flows, the impact of the adoption resulted in a $24,901 increase in net cash flow from operating activities and a corresponding decrease in net cash flow from financing activities for the year ended December 31, 2017. These classification requirements were adopted retrospectively to the Consolidated Statement of Cash Flows. As a result, for the year ended December 31, 2016, the impact resulted in a $29,953 increase in net cash flow from operating activities and a corresponding $29,953 decrease in net cash flow from financing activities. For the year ended December 31, 2015, the impact resulted in a $41,855 increase in net cash flow from operating activities and a corresponding $41,855 decrease in net cash flow from financing activities.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU eliminated Step 2 from the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Entities are permitted to adopt the standard early for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We early-adopted the provisions of this ASU in the fourth quarter of 2017 in conjunction with our annual impairment testing. The adoption had no impact on our Consolidated Financial Statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The new standard was originally effective for us on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one year. Early application is not permitted, but reporting entities may choose to adopt the standard as of the original effective date. The standard permits the use of either the full retrospective or modified retrospective transition method. We have concluded our assessment2022. Adoption of the new standard and will be adopting the provisions of this ASU in the first quarter of 2018 utilizing the modified retrospective transition method. The adoption of the new standard willdid not have a material impact on our Consolidated Financial Statements.consolidated financial statements.
In February 2016,September 2022, the FASB issued ASU No. 2016-02, Leases (Topic 842)2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50):
Disclosure of Supplier Finance Program Obligations. This ASU will require lesseesrequires a buyer in a supplier finance program to recognize a right-of-use assetdisclose qualitative and lease liability for all leases with terms of more than 12 months. Recognition, measurementquantitative information about the program including the program’s nature, activity during the period, changes from period to period and presentation of expenses will depend on classification as a finance or operating lease. Thispotential magnitude. ASU also requires certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The amendments should be applied on a modified retrospective basis. ASU 2016-022022-04 is effective for usannual periods beginning January 1, 2019. We are inafter December 15, 2022 and interim periods within those annual periods. A rollforward of obligations during the processannual period, including the amount of developing an inventory of our lease arrangements in order to determine the impact that theobligations confirmed and obligations subsequently paid, is effective for annual periods beginning after December 15, 2023 with early adoption ofpermitted. This ASU 2016-02 will have on our consolidated financial statements and related disclosures. Based on our assessment to date, we expect adoption of this standard to result in a material increase in lease-related assets andshould be applied
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| The Hershey Company | 2023 Form 10-K | Page 61 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
liabilitiesretrospectively to each period in which a balance sheet is presented, except for the amendment on our Consolidated Balance Sheets; however,rollforward information, which should be applied prospectively. We early adopted provisions of this ASU in the fourth quarter of 2022, with the exception of the amendment on rollforward information, which we doadopted in the fourth quarter of 2023. Adoption of the new standard did not expect it to have a significantmaterial impact on our Consolidated Statements of Income or Cash Flows.consolidated financial statements.
In March 2017,October 2021, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits2021-08, Business Combinations (Topic 715). 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU will requirerequires an employeracquirer to reportrecognize 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 service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost componentacquisition date. ASU 2021-08 is effective for annual periods beginning after December 15, 2022 and outside a subtotal of income from operations, if presented, or disclosed separately. In addition, only the service cost component may be eligible for capitalization where applicable. The amendmentsinterim periods within those annual periods. This ASU should be applied prospectively to business combinations occurring on or after the date of adoption. As a retrospective basis. ASU 2017-07 is effective for us beginning January 1, 2018, with early adoption permitted as of the beginning of a financial year. We will adoptresult, we adopted the provisions of this ASU in the first quarter of 2018. Adoption of the2023. This new standard was not applicable to our May 2023 acquisition of Weaver Popcorn Manufacturing, Inc. (“Weaver”) due to no contract assets or liabilities (as discussed in Note 2); however, will only impact classification within our Consolidated Statements of Income.be applied in relevant future acquisitions. Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2017,March 2023, the FASB issued ASU No. 2017-12, Derivatives2023-02, Investments - Equity Method and HedgingJoint Ventures (Topic 815)323): Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815. The purposeInvestments in tax credit structures using the proportional amortization method. This ASU allows entities to elect the proportional amortization method for all tax equity investments, regardless of thishow the tax credits are received as long as certain criteria are met. This ASU is to better align accounting rules with a company’s risk management activities and financial reporting for hedging relationships, better reflect economic results of hedging in financial statements, simplify hedge accounting requirements and improve the disclosures of hedging arrangements. The amendment shouldmay be applied using thein a modified retrospective transition method.or retrospective basis and an entity must evaluate the investments in which it still expects to receive tax credits or other income tax benefits as of the beginning of the earliest period presented. ASU 2017-122023-02 is effective for annual periods beginning after December 15, 20182023 and interim periods within those annual periods. We are currently evaluating the impact of the new standard on our consolidated financial statements and related disclosures.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), an amount for other segment items with a description of the composition, and disclosure of the title and position of the CODM. ASU 2023-07 is effective for annual periods with earlybeginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption permitted.is permitted and the update should be applied retrospectively to each period presented in the financial statements. We are currently evaluating the impact of the new standard on our consolidated financial statements and related disclosures. As a result, we intend to adopt the provisions of this ASU in the firstfourth quarter of 2018.2024.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires public business entities on an annual basis to disclose specific categories in a tabular rate reconciliation and provide additional information for reconciling items that meet a five percent quantitative threshold. Additionally, the ASU requires all entities to disclose the amount of income taxes paid disaggregated by federal, state, and foreign taxes, as well as individual jurisdictions where income taxes paid are equal to or greater than five percent of total income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted and the updated should be applied on a prospective basis, with a retrospective application permitted in the financial statements. We believeare currently evaluating the adoptionimpact of the new standard will not have a material impact on our Consolidated Financial Statements.consolidated financial statements and related disclosures. As a result, we intend to adopt the provisions of this ASU in the fourth quarter of 2025.
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.
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| The Hershey Company | 2023 Form 10-K | Page 62 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
2. BUSINESS ACQUISITIONS AND DIVESTITURES
Acquisitions of businesses are accounted for as purchasesbusiness combinations and, accordingly, the results of operations of the businesses acquired have been included in the consolidated financial statements since the respective dates of the acquisitions. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed.
2016In conjunction with acquisitions noted below, we used various valuation techniques to determine fair value of the assets acquired, with the primary techniques being discounted cash flow analysis, relief-from-royalty, a form of the multi-period excess earnings and the with-and-without valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. Inputs to these valuation approaches require significant judgment including: (i) forecasted sales, growth rates and customer attrition rates, (ii) forecasted operating margins, (iii) royalty rates and discount rates used to present value future cash flows, (iv) the amount of synergies expected from the acquisition, (v) the economic useful life of assets and (vi) the evaluation of historical tax positions. In certain acquisitions, historical data is limited; therefore, we base our estimates and assumptions on budgets, business plans, economic projections, anticipated future cash flows and marketplace data.
2023 Activity
Ripple Brand Collective, LLCManufacturing Capacity
On April 26, 2016,May 31, 2023, we completed the acquisition of allcertain assets that provide additional manufacturing capacity from Weaver, a leader in the production and co-packing of microwave popcorn and ready-to-eat popcorn, and former co-manufacturer of the outstanding shares of Ripple Brand Collective, LLC, a privately held company that owned the barkTHINS mass premium chocolate snackingCompany’s SkinnyPop brand. The barkTHINS brand is largely sold incash consideration paid for Weaver totaled $165,818 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the United States in take-home resealable packagesWeaver acquisition were immaterial.
The acquisition has been accounted for as a business combination and, is available inaccordingly, Weaver has been included within the club channel, as well as select natural and conventional grocers.
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 and consisted of $85,231 to goodwill, $79,136 to property, plant and equipment, net and $1,451 to other net assets acquired. The purchase price allocation has been finalized as follows:of the fourth quarter of 2023 and did not include measurement period adjustments.
|
| | | |
| Goodwill | $ | 128,110 |
|
| Trademarks | 91,200 |
|
| Other intangible assets | 60,900 |
|
| Other assets, primarily current assets, net of cash acquired totaling $674 | 12,375 |
|
| Current liabilities | (7,211 | ) |
| Net assets acquired | $ | 285,374 |
|
Goodwill is calculatedwas determined as the excess of the purchase price over the fair value of the net assets acquired. The goodwill resultingderived from thethis acquisition is attributable primarily todeductible for tax purposes and reflects the value of leveraging our brand building expertise, consumer insights, supply chain capabilities and retail relationships to accelerate growth and access to barkTHINSour portfolio of salty snacks products. Acquired trademarks were assigned estimated useful lives
2021 Activity
Pretzels Inc.
On December 14, 2021, we completed the acquisition of 27 years, while other intangibles, including customer relationshipsPretzels Inc. (“Pretzels”), previously a privately held company that manufactures and covenants not to compete, were assigned estimated useful lives ranging from 2 to 14 years. The recorded goodwill, trademarkssells pretzels and other intangibles are expectedsalty 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 with deep pretzel category and product expertise and the manufacturing capabilities to be deductiblesupport brand growth and future pretzel innovation. The cash consideration paid for tax purposes.Pretzels totaled $304,334 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the Pretzels acquisition were immaterial.
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| The Hershey Company | 2023 Form 10-K | Page 63 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Shanghai Golden Monkey
In September 2014, we completed the acquisition of 80% of the outstanding shares of Shanghai Golden Monkey Food Joint Stock Co., Ltd. (“SGM”), a confectionery company based in Shanghai, China, whose product line is primarily sold through traditional trade channels. The acquisition was undertaken in order to leverage these traditional trade channels, which complemented our traditional China chocolatehas been accounted for as a business thatcombination and, accordingly, Pretzels has historically been primarily distributed through Tier 1 or hypermarket channels.
On February 3, 2016, we completed the purchase of the remaining 20% of the outstanding shares of SGM for cash consideration totaling $35,762, pursuant to a new agreement entered into during the fourth quarter of 2015 with the selling SGM shareholders which revised the originally-agreed purchase price for these shares. For accounting purposes, we treated the acquisition as if we had acquired 100% at the initial acquisition date in 2014 and financed the payment for the remaining 20% of the outstanding shares. Therefore, the cash settlement of the liability for the purchase of these remaining shares is reflectedincluded within the financing sectionNorth America Salty Snacks segment from the date of the Consolidated Statements of Cash Flows.
The final settlement also resulted in an extinguishment gain of $26,650 representing the net carrying amount of the recorded liability in excess of the cash paid to settle the obligation for the remaining 20% of the outstanding shares. This gain is recorded within non-operating other (income) expense, net within the Consolidated Statements of Income.
2015 Activity
KRAVE Pure Foods
In March 2015, we completed the acquisition of all of the outstanding shares of KRAVE Pure Foods, Inc. (“Krave”), the Sonoma, California based manufacturer of Krave, a leading all-natural brand of premium meat snack products. The transaction was undertaken to allow Hershey to tap into the rapidly growing meat snacks category and further expand into the broader snacks space.
Total purchase consideration included cash consideration of $220,016, as well as agreement to pay additional cash consideration of up to $20,000 to the Krave shareholders if certain defined targets related to net sales and gross profit margin are met or exceeded during the twelve-month periods ending December 31, 2015 or March 31, 2016. The fair value of the contingent cash consideration was classified as a liability of $16,800 as of the acquisition date. Based on revised targets in a subsequent agreement with the Krave shareholders, the fair value was reduced over the second and third quarters of 2015 to $10,000, with the adjustment to fair value recorded within selling, marketing and administrative expenses. The remaining $10,000 was paid in December 2015.
acquisition. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:
| | | | | |
| Goodwill | $ | 166,191 | |
| Other intangible assets | 26,100 | |
| Current assets acquired | 30,835 | |
| Property, plant and equipment, net | 100,716 | |
| Other non-current assets, primarily operating lease ROU assets | 111,787 | |
| Deferred income taxes | 773 | |
| Current liabilities acquired | (22,713) | |
| Other long-term liabilities, primarily operating lease liabilities | (109,355) | |
| Net assets acquired | $ | 304,334 | |
|
| | | |
| Goodwill | $ | 147,089 |
|
| Trademarks | 112,000 |
|
| Other intangible assets | 17,000 |
|
| Other assets, primarily current assets, net of cash acquired totaling $1,362 | 9,465 |
|
| Current liabilities | (2,756 | ) |
| Non-current deferred tax liabilities | (47,344 | ) |
| Net assets acquired | $ | 235,454 |
|
Goodwill was calculateddetermined as the excess of the purchase price over the fair value of the net assets acquired. Theacquired (including the identifiable intangible assets). A portion of goodwill resultingderived from thethis acquisition was attributable primarily tois deductible for tax purposes and reflects the value of leveraging our brand building expertise, consumer insights, supply chain capabilities and retail relationships to accelerate growth and access to Kravethe 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, which complements Hershey’s snacks portfolio. The recorded goodwill is not expectedcash 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 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 be deductible for tax purposes.assets acquired and liabilities assumed based on their respective fair values as follows:
| | | | | |
| Goodwill | $ | 284,427 | |
| Other intangible assets | 543,100 | |
| Current assets acquired | 51,121 | |
| Property, plant and equipment, net | 40,266 | |
| Other non-current assets | 2,201 | |
| Other liabilities assumed, primarily current liabilities | (29,946) | |
| Net assets acquired | $ | 891,169 | |
The purchase price allocation presented above has been finalized as of the third quarter of 2022 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, specifically, the refinement of certain assumptions in the value of customer relationships based on an analysis of
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| The Hershey Company | 2023 Form 10-K | Page 64 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
historical customer-specific data and post-closing adjustments to the working capital acquired including certain holdbacks.
Mauna LoaGoodwill 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.
In December 2014,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 estimated useful life of 18 years.
Lily's Sweets, LLC
On June 25, 2021, we entered into an agreement to sellcompleted the Mauna Loa Macadamia Nut Corporationacquisition of Lily’s Sweets, LLC (“Mauna Loa”Lily’s”), previously a businessprivately held company that had historically been reported within our North America segment. The transaction closedsells a line of sugar-free and low-sugar confectionery foods to retailers and distributors in the firstUnited 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 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. Based on financial results through December 31, 2021, the fair value was reduced during the fourth quarter of 2015, resulting in proceeds, net of selling expenses and an estimated working capital2021 to $1,250, with the adjustment of $32,408. The sale of Mauna Loa resultedto fair value recorded in the recording of an additional loss on sale of $2,667 in the first quarter of 2015, based on updates to the selling expenses and tax benefits. The loss on the sale is reflectedSM&A expense caption within business realignment costs in 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.
3. GOODWILL AND INTANGIBLE ASSETS
The changes inacquisition has been accounted for as a business combination and, accordingly, Lily’s has been included within the carryingNorth America Confectionery segment from the date of acquisition. The purchase consideration, inclusive of the acquisition date fair value of goodwill by reportable segment for the years ended December 31, 2017contingent consideration, was allocated to assets acquired and 2016 areliabilities assumed based on their respective fair values as follows:
|
| | | | | | | | | | | | |
| | | North America | | International and Other | | Total |
| Goodwill | | $ | 667,056 |
| | $ | 379,544 |
| | $ | 1,046,600 |
|
| Accumulated impairment loss | | (4,973 | ) | | (357,375 | ) | | (362,348 | ) |
| Balance at January 1, 2016 | | 662,083 |
| | 22,169 |
| | 684,252 |
|
| Acquired during the period (see Note 2) | | 128,110 |
| | — |
| | 128,110 |
|
| Foreign currency translation | | 1,997 |
| | (2,015 | ) | | (18 | ) |
| Balance at December 31, 2016 | | 792,190 |
| | 20,154 |
| | 812,344 |
|
| Foreign currency translation | | 7,739 |
| | 978 |
| | 8,717 |
|
| Balance at December 31, 2017 | | $ | 799,929 |
| | $ | 21,132 |
| | $ | 821,061 |
|
| | | | | |
| 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 | |
We had no goodwill impairment charges in 2017 or 2016. In 2015, we recorded goodwill impairment charges totaling $280,802, which resulted from our interim reassessment
The purchase price allocation presented above has been finalized as of the valuationfourth 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 SGM business, coupled with a write-down of goodwill attributed to the China chocolate business in connection with the SGM acquisition, as discussed below.
In 2015, since the SGM business had been performing below expectations, with net sales and earnings levels well below pre-acquisition levels, we performed an interim impairment test of the SGM reporting unit as of July 5, 2015 using an income approach based on our estimates of future performance scenarios for the business. The results of this test indicated thatpurchase price over the fair value of the reporting unit was less thannet assets acquired (including the carrying amount asidentifiable intangible assets). The majority of the measurement date, suggesting that a goodwill impairment was probable, which required usderived from this acquisition is expected to perform a second step analysis to confirm that an impairment existsbe deductible for tax purposes and to determine the amount of the impairment based on our reassessed value of the reporting unit. Although preliminary, as a result of this reassessment, in the second quarter of 2015 we recorded an estimated $249,811 non-cash goodwill impairment charge, representing a write-down of all of the goodwill related to the SGM reporting unit as of July 5, 2015. During the third quarter of 2015, we increasedreflects the value of acquired goodwill by $16,599, with the corresponding offset principally represented by the establishment of additional opening balance sheet liabilities. We also finalized the impairment test of the goodwill relatingleveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the SGM reporting unit, which resulted in a write-offportfolio of this additional goodwill in the third quarter, for a total impairmentLily’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 $266,409. At this time, we also tested the other long-lived assets of SGM for recoverability by comparing the sum of the undiscounted cash flows33 years and customer relationships were assigned estimated useful lives ranging from 17 to the carrying value of the asset group, and no impairment was indicated.18 years.
In connection with the 2014 SGM acquisition, we assigned approximately $15,000 of goodwill to our existing China chocolate business, as this reporting unit was expected to benefit from acquisition synergies relating to the sale of Golden Monkey-branded product through its Tier 1 and hypermarket distributor networks. As the net sales and earnings of our China business continued to be adversely impacted by macroeconomic challenges and changing consumer shopping behavior through the third quarter of 2015, we determined that an interim impairment test of the goodwill in this reporting unit was also required. We performed the first step of this test in the third quarter of 2015 using an income approach based on our estimates of future performance scenarios for the business. The results of this test suggested that a goodwill impairment was probable, and the conclusions of the second step analysis resulted in a write-down of $14,393, representing the full value of goodwill attributed to this reporting unit as of October 4, 2015.
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| The Hershey Company | 2023 Form 10-K | Page 65 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
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 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 segment for the years ended December 31, 2023 and 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | North America Confectionery | | North America Salty Snacks | | International | | Total |
| Goodwill | | $ | 2,030,979 | | | $ | 589,798 | | | $ | 374,745 | | | $ | 2,995,522 | |
| Accumulated impairment loss | | (4,973) | | | — | | | (357,375) | | | (362,348) | |
| Balance at January 1, 2022 | | 2,026,006 | | | 589,798 | | | 17,370 | | | 2,633,174 | |
| | | | | | | | |
| Measurement period adjustments | | — | | | (18,028) | | | — | | | (18,028) | |
| | | | | | | | |
| Foreign currency translation | | (7,576) | | | — | | | (614) | | | (8,190) | |
| Balance at December 31, 2022 | | 2,018,430 | | | 571,770 | | | 16,756 | | | 2,606,956 | |
Acquired during the period (see Note 2) | | — | | | 85,231 | | | — | | | 85,231 | |
| | | | | | | | |
| | | | | | | | |
| Foreign currency translation | | 2,401 | | | — | | | 1,462 | | | 3,863 | |
| Balance at December 31, 2023 | | $ | 2,020,831 | | | $ | 657,001 | | | $ | 18,218 | | | $ | 2,696,050 | |
We had no goodwill impairment charges in 2023, 2022 or 2021.
The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2023 | | 2022 |
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Intangible assets subject to amortization: | | | | | | | | |
| Trademarks | | $ | 1,703,029 | | | $ | (249,947) | | | $ | 1,701,932 | | | $ | (190,045) | |
| Customer-related | | 513,910 | | | (123,282) | | | 513,188 | | | (93,495) | |
| Patents | | 8,233 | | | (8,233) | | | 8,053 | | | (8,053) | |
| | | | | | | | |
| Total | | 2,225,172 | | | (381,462) | | | 2,223,173 | | | (291,593) | |
| | | | | | | | |
| Intangible assets not subject to amortization: | | | | | | | | |
| Trademarks | | 35,519 | | | | | 34,689 | | | |
| Total other intangible assets | | $ | 1,879,229 | | | | | $ | 1,966,269 | | | |
|
| | | | | | | | | | | | | | | | |
| December 31, | | 2017 | | 2016 |
| | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Intangible assets subject to amortization: | | | | | | | | |
| Trademarks | | $ | 277,473 |
| | $ | (37,510 | ) | | $ | 317,023 |
| | $ | (30,458 | ) |
| Customer-related | | 128,182 |
| | (34,659 | ) | | 200,409 |
| | (36,482 | ) |
| Patents | | 17,009 |
| | (15,975 | ) | | 16,426 |
| | (13,700 | ) |
| Total | | 422,664 |
| | (88,144 | ) | | 533,858 |
| | (80,640 | ) |
| | | | | | | | | |
| Intangible assets not subject to amortization: | | | | | | | | |
| Trademarks | | 34,636 |
| | | | 39,519 |
| | |
| Total other intangible assets | | $ | 369,156 |
| | | | $ | 492,737 |
| | |
As discussed in Note 7, in February 2017, we commenced the Margin for Growth Program which includes an initiative to optimize the manufacturing operations supporting our China business. We deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded an impairment charge totaling $105,992 representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition.
In connection with our annual impairment testing of indefinite lived intangible assets for 2016, we recognized a trademark impairment charge of $4,204, primarily resulting from plans to discontinue a brand sold in India.
Total amortization expense for the years ended December 31, 2017, 20162023, 2022 and 20152021 was $23,376, $26,687$88,771, $79,690 and $22,306,$52,124, respectively.
Amortization expense for the next five years, based on current intangible asset balances, is estimated to be as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year ending December 31, | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 |
| Amortization expense | | $ | 78,276 | | | $ | 78,276 | | | $ | 78,276 | | | $ | 77,136 | | | $ | 77,136 | |
|
| | | | | | | | | | | | | | | | | | | | |
| Year ending December 31, | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Amortization expense | | $ | 20,529 |
| | $ | 19,599 |
| | $ | 19,360 |
| | $ | 19,345 |
| | $ | 19,345 |
|
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 66 | |
THE HERSHEY COMPANY
NOTES TO 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 $1.0$1.35 billion unsecured revolving credit facility which currently expires in November 2020. This agreement also includes anwith the option to increase borrowings by an additional $400$500 million with the consent of the lenders. This facility is scheduled to expire on April 26, 2028; 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 unsecured committed revolving credit agreement contains a financial covenant whereby the ratio of (a) pre-tax income from operations from the most recent four fiscal quarters to (b) consolidated interest expense for the most recent four fiscal quarters may not be less than 2.0 to 1.0 at the end of each fiscal quarter. The credit agreement also contains customary representations, warranties and events of default. Payment of outstanding advances may be accelerated, at the option of the lenders, should we default in our obligation under the credit agreement. As of December 31, 2017,2023, we compliedare in compliance with all customary affirmative and negative covenants and the financial covenant pertaining to our credit agreement. There were no significant compensating balance agreements that legally restricted these funds.
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. Our credit limit in various currencies was $440,148$411,553 at December 31, 20172023 and $504,237$313,195 at December 31, 2016.2022. These lines permit us to borrow at the respective banks’ prime commercial interest rates, or lower. We had short-term foreign bank loans against these lines of credit for $110,684 at December 31, 2017 and $158,805 at December 31, 2016. Commitment fees relating to our revolving credit facility and lines of credit are not material. Short-term debt consisted of the following:
At December 31, 2017, we had outstanding commercial paper totaling $448,675, at a weighted average interest rate of 1.4%. At December 31, 2016, we had outstanding commercial paper totaling $473,666, at a weighted average interest rate of 0.6%. | | | | | | | | | | | |
| December 31, 2023 | | December 31, 2022 |
| Short-term foreign bank borrowings against lines of credit | $ | 192,278 | | $ | 135,555 |
| U.S. commercial paper | 527,561 | | 558,235 |
| Total short-term debt | $ | 719,839 | | $ | 693,790 |
| Weighted average interest rate on outstanding commercial paper | 5.4 | % | | 4.3 | % |
The maximum amount of short-term borrowings outstanding during 20172023 and 2022 was $815,588.$859,773 and $937,593, respectively. The weighted-average interest rate on short-term borrowings outstanding was 1.7%5.8% as of December 31, 20172023 and 1.0%4.4% as of December 31, 2016.2022.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 67 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Long-term Debt
Long-term debt consisted of the following: | | | | | | | | | | | | | | | | | | | | |
| December 31, | | Maturity Date | | 2023 | | 2022 |
| 2.625% Notes (1) | | May 1, 2023 | | — | | | 250,000 | |
| 3.375% Notes (1) | | May 15, 2023 | | — | | | 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 | |
| 4.250% Notes (2) | | May 4, 2028 | | 350,000 | | | — | |
| 2.450% Notes | | November 15, 2029 | | 300,000 | | | 300,000 | |
| 1.700% Notes | | June 1, 2030 | | 350,000 | | | 350,000 | |
| 4.500% Notes (2) | | May 4, 2033 | | 400,000 | | | — | |
| 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) | | | | 76,385 | | 73,479 |
| Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts | | | | (25,834) | | (19,563) |
| Total long-term debt | | | | 4,094,190 | | | 4,097,555 | |
| Less—current portion | | | | 305,058 | | 753,578 |
| Long-term portion | | | | $ | 3,789,132 | | | $ | 3,343,977 | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| 1.60% Notes due 2018 | | $ | 300,000 |
| | $ | 300,000 |
|
| 4.125% Notes due 2020 | | 350,000 |
| | 350,000 |
|
| 8.8% Debentures due 2021 | | 84,715 |
| | 84,715 |
|
| 2.625% Notes due 2023 | | 250,000 |
| | 250,000 |
|
| 3.20% Notes due 2025 | | 300,000 |
| | 300,000 |
|
| 2.30% Notes due 2026 | | 500,000 |
| | 500,000 |
|
| 7.2% Debentures due 2027 | | 193,639 |
| | 193,639 |
|
| 3.375% Notes due 2046 | | 300,000 |
| | 300,000 |
|
| Capital lease obligations | | 99,194 |
| | 83,619 |
|
| Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts | | (16,427 | ) | | (14,275 | ) |
| Total long-term debt | | 2,361,121 |
| | 2,347,698 |
|
| Less—current portion | | 300,098 |
| | 243 |
|
| Long-term portion | | $ | 2,061,023 |
| | $ | 2,347,455 |
|
(1) In September 2016,May 2023, we repaid $250,000 of 5.45%2.625% Notes due in 2016 upon their maturity. In November 2016, we repaid $250,000 of 1.50% Notes due in 2016 upon their maturity. In August 2016, we issuedand $500,000 of 2.30% Notes due in 2026 and $300,000 of 3.375% Notes due upon their maturity.
(2) During the second quarter of 2023, we issued $350,000 of 4.250% Notes due in 2046May 2028 and $400,000 of 4.500% Notes due in May 2033 (the "Notes"“2023 Notes”). Proceeds from the issuance of the 2023 Notes, net of discounts and issuance costs, totaled $792,953.$744,092. The 2023 Notes were issued under a shelf registration statement on Form S-3 filed in June 2015May 2021 that registered an indeterminate amount of debt securities.
In August 2015, we paid $100,165 to repurchase $71,646 of our long-term debt as part of a cash tender offer, consisting of $15,285 of our 8.80% Debentures due in 2021 and $56,361 of our 7.20% Debentures due in 2027. We used a portion of the proceeds from the Notes issued in August 2015 to fund the repurchase. As a result of the repurchase, we recorded interest expense of $28,326 which represented the premium paid for the tender offer as well as the write-off of the related unamortized debt discount and debt issuance costs. Upon extinguishment of the debt, we unwound the fixed-to-floating interest rate swaps related to the tendered bonds and recognized a gain of $278 currently in interest expense resulting from the hedging instruments.
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Aggregate annual maturities of our long-term Notes (excluding capitalfinance lease obligations and net impact of interest rate swaps, debt issuance costs and unamortized debt discounts) are as follows for the years ending December 31:
|
| | | |
| 2018 | $ | 300,098 |
|
| 2019 | — |
|
| 2020 | 350,000 |
|
| 2021 | 84,715 |
|
| 2022 | — |
|
| Thereafter | 1,543,639 |
|
| | | | | |
| 2024 | $ | 300,000 | |
| 2025 | 600,000 | |
| 2026 | 500,000 | |
| 2027 | 193,639 | |
| 2028 | 350,000 | |
| Thereafter | 2,100,000 | |
Our debt is principally unsecured and of equal priority. None of our debt is convertible into our Common Stock.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 68 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Interest Expense
Net interest expense consists of the following:
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Interest expense | | $ | 176,066 | | | $ | 148,226 | | | $ | 139,156 | |
| Capitalized interest | | (14,555) | | | (8,131) | | | (9,310) | |
| Interest expense | | 161,511 | | | 140,095 | | | 129,846 | |
| Interest income | | (9,726) | | | (2,538) | | | (2,429) | |
| Interest expense, net | | $ | 151,785 | | | $ | 137,557 | | | $ | 127,417 | |
|
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Interest expense | | $ | 104,232 |
| | $ | 97,851 |
| | $ | 93,520 |
|
| Capitalized interest | | (4,166 | ) | | (5,903 | ) | | (12,537 | ) |
| Loss on extinguishment of debt | | — |
| | — |
| | 28,326 |
|
| Interest expense | | 100,066 |
| | 91,948 |
| | 109,309 |
|
| Interest income | | (1,784 | ) | | (1,805 | ) | | (3,536 | ) |
| Interest expense, net | | $ | 98,282 |
| | $ | 90,143 |
| | $ | 105,773 |
|
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 $405,288$94,917 as of December 31, 20172023 and $739,374$243,009 as of December 31, 2016.2022.
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 11,13, 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. THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
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 Brazilian real.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 $135,962$80,068 at December 31, 20172023 and $68,263$59,448 at December 31, 2016.2022. 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 $2,791$13,665 at December 31, 20172023 and $1,843 at December 31, 2016, respectively.2022. 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 | 2023 Form 10-K | Page 69 | |
THE HERSHEY COMPANY
NOTES TO 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. We had one interest rate derivative instrument in a fair value hedging relationship with a notional amount of $350,000 at December 31, 2017 and 2016.
In order to manage interest rate exposure, in previous yearsfrom time to time, we utilizedenter into interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which wereare settled upon issuance of the related debt, wereare designated as cash flow hedges and the gains and losses that wereare 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. During 2016, we had one interest rate swap agreement in a cash flow hedging relationship with a notional amount of $500,000, which was settled in connection with the issuance of debt in August 2016, resulting in a payment of approximately $87,000 which is reflected as an operating cash flow within the Consolidated Statement of Cash Flows.
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 administrativeSM&A expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at December 31, 20172023 and 20162022 was $25,246$22,867 and $22,099,$18,803, respectively.
The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | 2023 | | 2022 |
| | Assets (1) | | Liabilities (1) | | Assets (1) | | Liabilities (1) |
| Derivatives designated as cash flow hedging instruments: | | | | | | | | |
| | | | | | | | |
| Foreign exchange contracts | | $ | 1,219 | | | $ | 1,670 | | | $ | 3,921 | | | $ | 261 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | |
| Commodities futures and options (2) | | 66 | | | 679 | | | 685 | | | 662 | |
| Deferred compensation derivatives | | 2,343 | | | — | | | 1,222 | | | — | |
| Foreign exchange contracts | | 1,123 | | | — | | | 246 | | | — | |
| | 3,532 | | | 679 | | | 2,153 | | | 662 | |
| Total | | $ | 4,751 | | | $ | 2,349 | | | $ | 6,074 | | | $ | 923 | |
(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.
(2)As of December 31, 2023, amounts reflected on a net basis in liabilities were assets of $29,881 and liabilities of $30,493, 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 assets at December 31, 2022 were assets of $25,308 and liabilities of $25,296. At December 31, 2023 and 2022, the remaining amount reflected in assets and liabilities related to the fair value of other non-exchange traded derivative instruments, respectively.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 70 | |
THE HERSHEY COMPANY
NOTES TO 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 December 31, 2017 and 2016:
|
| | | | | | | | | | | | | | | | |
| December 31, | | 2017 | | 2016 |
| | | Assets (1) | | Liabilities (1) | | Assets (1) | | Liabilities (1) |
| Derivatives designated as cash flow hedging instruments: | | | | | | | | |
| Foreign exchange contracts | | $ | 423 |
| | $ | 1,427 |
| | $ | 2,229 |
| | $ | 809 |
|
| | | | | | | | | |
| Derivatives designated as fair value hedging instruments: | | | | | | | | |
| Interest rate swap agreements | | — |
| | 1,897 |
| | 1,768 |
| | — |
|
| | | | | | | | | |
| Derivatives not designated as hedging instruments: | | | | | | | | |
| Commodities futures and options (2) | | 390 |
| | 3,054 |
| | 2,348 |
| | 10,000 |
|
| Deferred compensation derivatives | | 1,581 |
| | — |
| | 717 |
| | — |
|
| Foreign exchange contracts | | 31 |
| | — |
| | — |
| | 16 |
|
| | | 2,002 |
| | 3,054 |
| | 3,065 |
| | 10,016 |
|
| Total | | $ | 2,425 |
| | $ | 6,378 |
| | $ | 7,062 |
| | $ | 10,825 |
|
| |
(1) | Derivatives assets are classified on our balance sheet within prepaid expenses and other as well as other assets. Derivative liabilities are classified on our balance sheet within accrued liabilities and other long-term liabilities. |
| |
(2) | As of December 31, 2017, amounts reflected on a net basis in liabilities were assets of $48,505 and liabilities of $50,179, 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, 2016 were assets of $140,885 and liabilities of $150,872. At December 31, 2017 and 2016, 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 years ended December 31, 20172023 and December 31, 20162022 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 AOCI into income (b) | | |
| | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 | | | | |
| Commodities futures and options | | $ | (53,085) | | | $ | 44,569 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | | | |
| Foreign exchange contracts | | 1,111 | | | (274) | | | (4,860) | | | 2,056 | | | (1,150) | | | 636 | | | | | |
| Interest rate swap agreements | | — | | | — | | | 5,814 | | | — | | | (9,716) | | | (10,836) | | | | | |
| Deferred compensation derivatives | | 4,119 | | | (4,920) | | | — | | | — | | | — | | | — | | | | | |
| Total | | $ | (47,855) | | | $ | 39,375 | | | $ | 954 | | | $ | 2,056 | | | $ | (10,866) | | | $ | (10,200) | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Non-designated Hedges | | Cash Flow Hedges |
| | | |
| | | Gains (losses) recognized in income (a) | | Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion) | | Gains (losses) reclassified from accumulated OCI into income (effective portion) (b) |
| | | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Commodities futures and options | | $ | (55,734 | ) | | $ | (171,753 | ) | | $ | — |
| | $ | — |
| | $ | (1,774 | ) | | $ | 30,783 |
|
| Foreign exchange contracts | | (23 | ) | | (46 | ) | | (4,931 | ) | | (5,485 | ) | | (3,180 | ) | | (5,625 | ) |
| Interest rate swap agreements | | — |
| | — |
| | — |
| | (47,223 | ) | | (9,480 | ) | | (8,676 | ) |
| Deferred compensation derivatives | | 4,497 |
| | 2,203 |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | (51,260 | ) | | $ | (169,596 | ) | | $ | (4,931 | ) | | $ | (52,708 | ) | | $ | (14,434 | ) | | $ | 16,482 |
|
(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.
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts(b)Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in thousands, except share data or if otherwise indicated)selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.
| |
(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 were included in cost of sales for commodities futures and options contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains (losses) 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 pretax 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 $10,484$9,659 as of December 31, 2017.2023. This amount wasis primarily associated with interest rate swap agreements.
Fair Value Hedges
For the years ended December 31, 2017 and 2016, we recognized a net pretax benefit to interest expense of $2,660 and $4,365 relating to our fixed-to-floating interest swap arrangements.
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'sentity’s own assumptions about the assumptions that a market participant would use in pricing the asset or liability. |
We did not have any levelLevel 3 financial assets or liabilities, nor were there any transfers between levels during the periods presented.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 71 | |
THE HERSHEY COMPANY
NOTES TO 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 SheetSheets on a recurring basis as of December 31, 20172023 and 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Assets / Liabilities |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2023: | | | | | | | | |
| Derivative Instruments: | | | | | | | | |
| Assets: | | | | | | | | |
| Foreign exchange contracts (1) | | $ | — | | | $ | 2,342 | | | $ | — | | | $ | 2,342 | |
| | | | | | | | |
| Deferred compensation derivatives (2) | | — | | | 2,343 | | | — | | | 2,343 | |
| Commodities futures and options (3) | | 66 | | | — | | | — | | | 66 | |
| Liabilities: | | | | | | | | |
| Foreign exchange contracts (1) | | — | | | 1,670 | | | — | | | 1,670 | |
| | | | | | | | |
| | | | | | | | |
| Commodities futures and options (3) | | 679 | | | — | | | — | | | 679 | |
| December 31, 2022: | | | | | | | | |
| Assets: | | | | | | | | |
| Foreign exchange contracts (1) | | $ | — | | | $ | 4,167 | | | $ | — | | | $ | 4,167 | |
| | | | | | | | |
| Deferred compensation derivatives (2) | | — | | | 1,222 | | | — | | | 1,222 | |
| Commodities futures and options (3) | | 685 | | | — | | | — | | | 685 | |
| Liabilities: | | | | | | | | |
| Foreign exchange contracts (1) | | — | | | 261 | | | — | | | 261 | |
| | | | | | | | |
| | | | | | | | |
| Commodities futures and options (3) | | 662 | | | — | | | — | | | 662 | |
|
| | | | | | | | | | | | | | | | |
| | | Assets (Liabilities) |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| December 31, 2017: | | | | | | | | |
| Derivative Instruments: | | | | | | | | |
| Assets: | | | | | | | | |
| Foreign exchange contracts (1) | | $ | — |
| | $ | 454 |
| | $ | — |
| | $ | 454 |
|
| Deferred compensation derivatives (3) | | — |
| | 1,581 |
| | — |
| | 1,581 |
|
| Commodities futures and options (4) | | 390 |
| | — |
| | — |
| | 390 |
|
| Liabilities: | | | | | | | | |
| Foreign exchange contracts (1) | | — |
| | 1,427 |
| | — |
| | 1,427 |
|
| Interest rate swap agreements (2) | | — |
| | 1,897 |
| | — |
| | 1,897 |
|
| Commodities futures and options (4) | | 3,054 |
| | — |
| | — |
| | 3,054 |
|
| December 31, 2016: | | | | | | | | |
| Assets: | | | | | | | | |
| Foreign exchange contracts (1) | | $ | — |
| | $ | 2,229 |
| | $ | — |
| | $ | 2,229 |
|
| Interest rate swap agreements (2) | | — |
| | 1,768 |
| | — |
| | 1,768 |
|
| Deferred compensation derivatives (3) | | — |
| | 717 |
| | — |
| | 717 |
|
| Commodities futures and options (4) | | 2,348 |
| | — |
| | — |
| | 2,348 |
|
| Liabilities: | | | | | | | | |
| Foreign exchange contracts (1) | | — |
| | 825 |
| | — |
| | 825 |
|
| Commodities futures and options (4) | | 10,000 |
| | — |
| | — |
| | 10,000 |
|
| |
(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 interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. |
| |
(3) | The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index. |
| |
(4) | The fair value of commodities futures and options contracts is based on quoted market prices. |
(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, short-term investments, accounts receivable, accounts payable and short-term debt approximated fair values as of December 31, 20172023 and December 31, 20162022 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 issuesissuances 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 |
| At December 31, | | 2023 | | 2022 | | 2023 | | 2022 |
| Current portion of long-term debt | | $ | 297,842 | | | $ | 749,345 | | | $ | 305,058 | | | $ | 753,578 | |
| Long-term debt | | 3,413,411 | | | 2,854,165 | | | 3,789,132 | | | 3,343,977 | |
| Total | | $ | 3,711,253 | | | $ | 3,603,510 | | | $ | 4,094,190 | | | $ | 4,097,555 | |
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 72 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
|
| | | | | | | | | | | | | | | | |
| | | Fair Value | | Carrying Value |
| At December 31, | | 2017 | | 2016 | | 2017 | | 2016 |
| Current portion of long-term debt | | $ | 299,430 |
| | $ | 243 |
| | $ | 300,098 |
| | $ | 243 |
|
| Long-term debt | | 2,113,296 |
| | 2,379,054 |
| | 2,061,023 |
| | 2,347,455 |
|
| Total | | $ | 2,412,726 |
| | $ | 2,379,297 |
| | $ | 2,361,121 |
| | $ | 2,347,698 |
|
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. Generally, assets are recorded at fair value on a nonrecurring basis as a result
2023 Activity
In connection with the acquisition of impairment charges. During the first quarter of 2017,Weaver during 2023, as discussed in Note 7,2, we recorded impairment charges totaling $105,992used various valuation techniques to write-down distributor relationship and trademark intangible assets that had been recognized indetermine fair value, with the primary technique being the cost approach to value personal property, which uses significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. 2021 Activity
In connection with the 2014 SGM acquisitionacquisitions of Lily’s, Dot’s and wrote-down property, plantPretzels 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 equipmentthe relief-from-royalty, a form of the multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by $102,720. These charges were determined by comparing the fair value hierarchy. 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.
ROU assets represent our right to their carrying value. The fairuse 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 assets were derived using a combination of an estimated market liquidation approachlease term and discounted cash flow analyses based on Level 3 inputs.are recognized at the lease commencement date.
7. BUSINESS REALIGNMENT ACTIVITIES
We are currently pursuing several business realignment activities designed to increase our efficiency and focus our business in supportAs most of our key growth strategies. Costs recordedleases do not provide an implicit rate, we use our estimated incremental borrowing rate in 2017, 2016determining 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 2015 related to thesevehicles 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 is 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 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Lease expense | | Classification | | 2023 | | 2022 |
| Operating lease cost | | Cost of sales or SM&A (1) | | $ | 48,577 | | | $ | 48,988 | |
| Finance lease cost: | | | | | | |
| Amortization of ROU assets | | Depreciation and amortization (1) | | 8,140 | | | 7,043 | |
| Interest on lease liabilities | | Interest expense, net | | 4,593 | | | 4,192 | |
| Net lease cost (2) | | | | $ | 61,310 | | | $ | 60,223 | |
|
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Margin for Growth Program: | | | | | | |
| Severance | | $ | 32,554 |
| | $ | — |
| | $ | — |
|
| Accelerated depreciation | | 6,873 |
| | — |
| | — |
|
| Other program costs | | 16,407 |
| | — |
| | — |
|
| Operational Optimization Program: | | | | | | |
| Severance | | 13,828 |
| | 17,872 |
| | — |
|
| Accelerated depreciation | | — |
| | 48,590 |
| | — |
|
| Other program costs | | (303 | ) | | 21,831 |
| | — |
|
| 2015 Productivity Initiative: | | | | | | |
| Severance | | — |
| | — |
| | 81,290 |
|
| Pension settlement charges | | — |
| | 13,669 |
| | 10,178 |
|
| Other program costs | | — |
| | 5,609 |
| | 14,285 |
|
| Other international restructuring programs: | | | | | | |
| Severance | | — |
| | — |
| | 6,651 |
|
| Accelerated depreciation and amortization | | — |
| | — |
| | 5,904 |
|
| Mauna Loa Divestiture (see Note 2) | | — |
| | — |
| | 2,667 |
|
| Total | | $ | 69,359 |
| | $ | 107,571 |
| | $ | 120,975 |
|
The costs and related benefits of the Margin for Growth Program relate approximately 45% to the North America segment and 55% to the International and Other segment. The costs and related benefits of the Operational Optimization Program relate approximately 35% to the North America segment and 65% to the International and Other segment on a cumulative program to date basis. The costs and related benefits to be derived from the 2015 Productivity Initiative relate primarily to the North American segment. However, segment operating results do(2)Net lease cost does not include these business realignment expenses because we evaluate segment performance excluding such costs.short-term leases, variable lease costs or sublease income, all of which are immaterial.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 73 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Information regarding our lease terms and discount rates were as follows:
Margin for Growth Program | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| Weighted-average remaining lease term (years) | | | | |
| Operating leases | | 14.4 | | 15.0 |
| Finance leases | | 25.9 | | 27.7 |
| | | | |
| Weighted-average discount rate | | | | |
| Operating leases | | 3.5 | % | | 3.2 | % |
| Finance leases | | 6.2 | % | | 6.1 | % |
In February 2017, the Company's Board of Directors unanimously approved several initiatives under a single program designed to drive continued net sales, operating income and earnings per-share diluted growth over the next several years. This program will focus 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.
The Company estimates that the “Margin for Growth” program will result in total pre-tax charges of $375,000 to $425,000 from 2017 to 2019. This estimate includes plant and office closure expenses of $100,000 to $115,000, net intangible asset impairment charges of $100,000 to $110,000, employee separation costs of $80,000 to $100,000, contract termination costs of approximately $25,000, and other business realignment costs of $70,000 to $75,000. The cash portion of the total charge is estimated to be $150,000 to $175,000. The Company expects that implementation of the program will reduce its global workforce by approximately 15%, with a majority of the reductions coming from hourly headcount positions outside of the United States.
The program includes an initiative to optimize the manufacturing operations supporting our China business. We deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded impairment charges totaling $208,712, with $105,992 representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and $102,720 representing the portion of the impairment loss that was allocated to property, plant and equipment. These impairment charges are recorded in the long-lived asset impairment charges caption within the Consolidated Statements of Operations.
During 2017, we recognized estimated employee severance totaling $32,554. These charges relate largely to our initiative to improve the cost structure of our China business, as well as our initiative to further streamline our corporate operating model. We also recognized non-cash, asset-related incremental depreciation expense totaling $6,873 as part of optimizing the North America supply chain. During 2017, we also incurred other program costs totaling $16,407, which relate primarily to third-party charges in support of our initiative to improve global efficiency and effectiveness.
2016 Operational Optimization Program
In the second quarter of 2016, we commenced a program (the “Operational Optimization Program”) to optimize our production and supply chain network, which includes select facility consolidations. The program encompasses the continued transition of our China chocolate and SGM operations into a united Golden Hershey platform, including the integration of the China sales force, as well as workforce planning efforts and the consolidation of production within certain facilities in China and North America.
For the year ended December 31, 2017, we incurred pre-tax costs totaling $13,525, primarilySupplemental balance sheet information related to employee severance associated with the workforce planning efforts within North America. We currently expect to incur additional cash costs of approximately $8,000 over the next twelve months to complete the remaining facility consolidation efforts relating to this program.leases were as follows:
2015 Productivity Initiative | | | | | | | | | | | | | | | | | | | | |
| Leases | | Classification | | 2023 | | 2022 |
| Assets | | | | | | |
| Operating lease ROU assets | | Other non-current assets | | $ | 307,976 | | | $ | 326,472 | |
| | | | | | |
| Finance lease ROU assets, at cost | | Property, plant and equipment, gross | | 89,335 | | | 86,703 | |
| Accumulated amortization | | Accumulated depreciation | | (19,472) | | | (14,543) | |
| Finance lease ROU assets, net | | Property, plant and equipment, net | | 69,863 | | | 72,160 | |
| | | | | | |
| Total leased assets | | | | $ | 377,839 | | | $ | 398,632 | |
| | | | | | |
| Liabilities | | | | | | |
| Current | | | | | | |
| Operating | | Accrued liabilities | | $ | 34,494 | | | $ | 31,787 | |
| Finance | | Current portion of long-term debt | | 5,900 | | | 4,285 | |
| Non-current | | | | | | |
| Operating | | Other long-term liabilities | | 277,089 | | | 294,849 | |
| Finance | | Long-term debt | | 70,485 | | | 69,194 | |
| Total lease liabilities | | | | $ | 387,968 | | | $ | 400,115 | |
In mid-2015, we initiated a productivity initiative (the “2015 Productivity Initiative”) intended to move decision making closer to the customer and the consumer, to enable a more enterprise-wide approach to innovation, to more swiftly advance our knowledge agenda, and to provide for a more efficient cost structure, while ensuring that we effectively allocate resources to future growth areas. Overall, the 2015 Productivity Initiative was undertaken to simplify the organizational structure to enhance the Company's ability to rapidly anticipate and respond to the changing demands of the global consumer.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 74 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
The maturity of our lease liabilities as of December 31, 2023 were as follows:
| | | | | | | | | | | | | | | | | |
| Operating leases | | Finance leases | | Total |
| 2024 | $ | 44,708 | | | $ | 10,240 | | | $ | 54,948 | |
| 2025 | 31,395 | | | 8,651 | | | 40,046 | |
| 2026 | 26,669 | | | 5,442 | | | 32,111 | |
| 2027 | 26,063 | | | 4,288 | | | 30,351 | |
| 2028 | 25,064 | | | 4,189 | | | 29,253 | |
| Thereafter | 243,161 | | | 137,877 | | | 381,038 | |
| Total lease payments | 397,060 | | | 170,687 | | | 567,747 | |
| Less: Imputed interest | 85,477 | | | 94,302 | | | 179,779 | |
| Total lease liabilities | $ | 311,583 | | | $ | 76,385 | | | $ | 387,968 | |
Supplemental cash flow and other information related to leases were as follows:
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | 45,176 | | | $ | 45,179 | |
| Operating cash flows from finance leases | | $ | 4,593 | | | $ | 4,192 | |
| Financing cash flows from finance leases | | $ | 5,381 | | | $ | 4,717 | |
| | | | |
| ROU assets obtained in exchange for lease liabilities: | | | | |
| Operating leases | | $ | 18,469 | | | $ | 13,998 | |
| Finance leases | | $ | 7,448 | | | $ | 9,617 | |
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 2015 Productivity Initiative was executed throughout the third and fourth quarters of 2015, resulting intax credits, when realized, are recognized as a net reduction of approximately 300 positions, withtax expense under the majorityflow-through method, at which time the corresponding equity investment is written-down to reflect the remaining value of the departures taking place byfuture benefits to be realized. The equity investment write-down is reflected within other (income) expense, net in the end of 2015. The 2015 Productivity Initiative was completed during the third quarter 2016. We incurred total costs of $125,031 relating to this program, including pension settlement charges of $13,669 recorded in 2016 and $10,178 recorded in 2015 relating to lump sum withdrawals by employees retiring or leaving the Company as a result of this program.
Other international restructuring programs
Costs incurred for the year ended December 31, 2015 related principally to accelerated depreciation and amortization and employee severance costs for minor programs commenced in 2014 to rationalize certain non-U.S. manufacturing and distribution activities and to establish our own sales and distribution teams in Brazil in connection with our exit from the Bauducco joint venture.
Costs associated with business realignment activities are classified in our 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 method investments and cost, less impairment, 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 $207,177 and $133,029 as follows:of December 31, 2023 and December 31, 2022, respectively.
|
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Cost of sales | | $ | 5,147 |
| | $ | 58,106 |
| | $ | 8,801 |
|
| Selling, marketing and administrative expense | | 16,449 |
| | 16,939 |
| | 17,368 |
|
| Business realignment costs | | 47,763 |
| | 32,526 |
| | 94,806 |
|
| Costs associated with business realignment activities | | $ | 69,359 |
| | $ | 107,571 |
| | $ | 120,975 |
|
The following table presents the liability activity for costs qualifying as exit and disposal costs for the year ended December 31, 2017:
|
| | | |
| | Total |
| Liability balance at December 31, 2016 | $ | 3,725 |
|
| 2017 business realignment charges (1) | 61,872 |
|
| Cash payments | (26,536 | ) |
| Other, net | (69 | ) |
| Liability balance at December 31, 2017 (reported within accrued and other long-term liabilities) | $ | 38,992 |
|
| | | | | | | | |
(1) | The costs reflected in the liability roll-forward represent employee-related and certain third-party service provider charges. These costs do not include items charged directly to expense, such as accelerated depreciation and amortization and certain of the third-party charges associated with various programs, as those items are not reflected in the business realignment liability in our Consolidated Balance Sheets.Hershey Company | 2023 Form 10-K | Page 75 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
9. BUSINESS REALIGNMENT ACTIVITIES
8. INCOME TAXES
The componentsWe periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of income (loss) before income taxesour key growth strategies. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Cost of sales | | $ | 527 | | | $ | 3 | | | $ | 5,220 | |
| Selling, marketing and administrative expense | | 2,472 | | | 2,425 | | | 7,854 | |
| Business realignment costs | | 441 | | | 1,989 | | | 3,525 | |
| Costs associated with business realignment activities | | $ | 3,440 | | | $ | 4,417 | | | $ | 16,599 | |
|
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Domestic | | $ | 1,187,825 |
| | $ | 1,395,440 |
| | $ | 1,357,618 |
|
| Foreign | | (77,157 | ) | | (295,959 | ) | | (455,771 | ) |
| Income before income taxes | | $ | 1,110,668 |
| | $ | 1,099,481 |
| | $ | 901,847 |
|
The components of our provision for income taxes areCosts recorded by program in 2023, 2022 and 2021 related to these activities were as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| International Optimization Program: | | | | | | |
| Severance and employee benefit costs | | $ | 441 | | | $ | 2,001 | | | $ | 3,982 | |
| Other program costs | | 2,999 | | | 2,416 | | | 12,617 | |
| Total | | $ | 3,440 | | | $ | 4,417 | | | $ | 16,599 | |
|
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Current: | | | | | | |
| Federal | | $ | 314,277 |
| | $ | 391,705 |
| | $ | 409,060 |
|
| State | | 37,628 |
| | 51,706 |
| | 47,978 |
|
| Foreign | | (16,356 | ) | | (25,877 | ) | | (29,605 | ) |
| | | 335,549 |
| | 417,534 |
| | 427,433 |
|
| Deferred: | | | | | | |
| Federal | | 19,204 |
| | (7,706 | ) | | (31,153 | ) |
| State | | 7,573 |
| | (452 | ) | | (2,346 | ) |
| Foreign | | (8,195 | ) | | (29,939 | ) | | (5,038 | ) |
| | | 18,582 |
| | (38,097 | ) | | (38,537 | ) |
| Total provision for income taxes | | $ | 354,131 |
| | $ | 379,437 |
| | $ | 388,896 |
|
U.S. Tax CutsAdvancing Agility & Automation Initiative
On February 2, 2024, the Board of Directors of the Company approved a multi-year productivity initiative (“Advancing Agility & Automation” or "AAA") to improve supply chain and Jobs Act of 2017manufacturing-related spend, optimize selling, general and administrative expenses, leverage new technology and business models to further simplify and automate processes, and generate long-term savings.
The U.S. Tax CutsCompany estimates that the AAA Initiative will result in total pre-tax costs of $200,000 to $250,000 from inception through 2026. This estimate primarily includes program office execution and Jobs Act, enacted in December 2017, (“U.S. tax reform”) significantly changes U.S. corporate income tax laws by, among other things, reducingthird-party costs supporting the U.S. corporate income tax rate to 21% starting in 2018design and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earningsimplementation of U.S. subsidiaries. Under GAAP (specifically, ASC Topic 740), the effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted.
In responseorganizational structure of $100,000 to U.S. tax reform,$120,000, as well as implementation and technology capability costs of $55,000 to $70,000. Additionally, we expect to incur employee severance and related separation benefits of $45,000 to $60,000 as we facilitate workforce reductions and reallocate resources to further drive the StaffCompany’s strategic priorities. The cash portion of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB No. 118”)total cost is estimated to provide guidancebe $175,000 to registrants in applying ASC Topic 740 in connection with U.S. tax reform. SAB No. 118 provides that in$225,000. At the period of enactment, the income tax effects of U.S. tax reform may be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “measurement period.” The measurement period begins in the reporting period of U.S. tax reform’s enactment and ends when a registrant has obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740. SAB No. 118 also describes supplemental disclosure that should accompany the provisional amounts.
U.S. tax reform represents the first significant change in U.S. tax law in over 30 years. As permitted by SAB No. 118, some elementsconclusion of the tax expense recordedprogram in 2026, ongoing annual savings are expected to be approximately $300,000.
2020 International Optimization Program
In the fourth quarter of 2017 due2020, 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 was originally expected to total pre-tax costs of $50,000 to $75,000, with cash costs in the range of $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 enactment of U.S. tax reform are considered “provisional,” based on reasonable estimates. The Company is continuing to collect and analyze detailed information about deferred income taxes, the earnings and profits of its non-U.S. subsidiaries, the related taxes paid, the amounts which could be repatriated, the foreign taxes which may be incurred on repatriation and the associated impact ofInternational segment. However, segment operating results do not include these items under U.S. tax reform. The Company may record adjustments to refine those estimates during the measurement period, as additional analysis is completed.business realignment expenses because we evaluate segment performance excluding such costs. This program was completed in 2023.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 76 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
For the year ended December 31, 2023 and 2022, we recognized total costs associated with the International Optimization Program of $3,440 and $4,417. 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 $53,799.
As a result, we recorded a net charge
10. INCOME TAXES
The components of $32.5 million during the fourth quarterincome before income taxes were as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Domestic | | $ | 1,832,771 | | | $ | 1,816,622 | | $ | 1,775,361 |
| Foreign | | 339,093 | | | 100,449 | | | 21,863 | |
| Income before income taxes | | $ | 2,171,864 | | | $ | 1,917,071 | | $ | 1,797,224 |
The components of 2017. This amount, which is reflected within theour provision for income taxes in the Consolidated Statement of Income, includes the estimated impact of the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries offset in part by the benefit from revaluation of net deferred tax liabilities based on the new lower corporate income tax rate. The impact of the U.S. tax reform may differ from this estimate, possibly materially, due to, among other things, changes in interpretations and assumptions made, additional guidance that may be issued and actions taken by Hershey as a result of the U.S. tax reform.
Deferred taxes reflect temporary differences between the tax basis and financial statement carrying value of assets and liabilities. The significant temporary differences that comprised the deferred tax assets and liabilities arewere as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Current: | | | | | | |
| Federal | | $ | 141,753 | | | $ | 121,968 | | | $ | 161,402 | |
| State | | 83,802 | | | 85,741 | | | 60,979 | |
| Foreign | | 68,289 | | | 27,656 | | | 78,650 | |
| | 293,844 | | | 235,365 | | | 301,031 | |
| Deferred: | | | | | | |
| Federal | | 28,191 | | | 34,848 | | | 26,726 | |
| State | | (9,531) | | | 3,393 | | | 8,253 | |
| Foreign | | (2,427) | | | (1,352) | | | (21,605) | |
| | 16,233 | | | 36,889 | | | 13,374 | |
| Total provision for income taxes | | $ | 310,077 | | | $ | 272,254 | | | $ | 314,405 | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| Deferred tax assets: | | | | |
| Post-retirement benefit obligations | | $ | 58,306 |
| | $ | 90,584 |
|
| Accrued expenses and other reserves | | 103,769 |
| | 141,228 |
|
| Stock-based compensation | | 31,364 |
| | 48,500 |
|
| Derivative instruments | | 27,109 |
| | 44,010 |
|
| Pension | | — |
| | 14,662 |
|
| Lease financing obligation | | 12,310 |
| | 18,950 |
|
| Accrued trade promotion reserves | | 26,028 |
| | 50,463 |
|
| Net operating loss carryforwards | | 226,142 |
| | 143,085 |
|
| Capital loss carryforwards | | 23,215 |
| | 38,691 |
|
| Other | | 7,748 |
| | 14,452 |
|
| Gross deferred tax assets | | 515,991 |
| | 604,625 |
|
| Valuation allowance | | (312,148 | ) | | (235,485 | ) |
| Total deferred tax assets | | 203,843 |
| | 369,140 |
|
| Deferred tax liabilities: | | | | |
| Property, plant and equipment, net | | 132,443 |
| | 202,300 |
|
| Acquired intangibles | | 68,476 |
| | 113,074 |
|
| Inventories | | 20,769 |
| | 27,608 |
|
| Pension | | 969 |
| | — |
|
| Other | | 23,819 |
| | 8,884 |
|
| Total deferred tax liabilities | | 246,476 |
| | 351,866 |
|
| Net deferred tax (liabilities) assets | | $ | (42,633 | ) | | $ | 17,274 |
|
| Included in: | | | | |
| Non-current deferred tax assets, net | | 3,023 |
| | 56,861 |
|
| Non-current deferred tax liabilities, net | | (45,656 | ) | | (39,587 | ) |
| Net deferred tax (liabilities) assets | | $ | (42,633 | ) | | $ | 17,274 |
|
Changes in deferred taxes includes the impact of remeasurement on U.S. deferred taxes at the lower enacted corporate tax rates resulting from the U.S. tax reform. Changes in deferred tax assets for net operating loss carryforwards resulted primarily from current year losses in foreign jurisdictions. | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 77 | |
The valuation allowances as of December 31, 2017 and 2016 are primarily related to U.S. capital loss carryforwards and various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets that we do not expect to realize.
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Deferred taxes reflect temporary differences between the tax basis and financial statement carrying value of assets and liabilities.The significant temporary differences that comprised the deferred tax assets and liabilities are as follows:
| | | | | | | | | | | | | | |
| December 31, | | 2023 | | 2022 |
| Deferred tax assets: | | | | |
| Post-retirement benefit obligations | | $ | 24,969 | | | $ | 40,100 | |
| Accrued expenses and other reserves | | 85,601 | | | 78,523 | |
| Stock-based compensation | | 21,656 | | | 19,847 | |
| Derivative instruments | | 12,268 | | | 3,983 | |
| | | | |
| Lease liabilities | | 90,405 | | | 91,099 | |
| Accrued trade promotion reserves | | 18,796 | | | 23,082 | |
| Net operating loss carryforwards | | 110,342 | | | 130,944 | |
| Capital loss carryforwards | | — | | | 1,999 | |
| | | | |
| Other | | 83,011 | | | 52,802 | |
| Gross deferred tax assets | | 447,048 | | | 442,379 | |
| Valuation allowance | | (114,149) | | | (137,531) | |
| Total deferred tax assets | | 332,899 | | | 304,848 | |
| Deferred tax liabilities: | | | | |
| Property, plant and equipment, net | | 271,465 | | | 247,964 | |
| Acquired intangibles | | 228,711 | | | 193,160 | |
| Lease ROU assets | | 71,150 | | | 72,602 | |
| Inventories | | 13,250 | | | 28,573 | |
| | | | |
| Pension | | 10,001 | | | 11,038 | |
| Other | | 39,566 | | | 39,416 | |
| Total deferred tax liabilities | | 634,143 | | | 592,753 | |
| Net deferred tax liabilities | | $ | (301,244) | | | $ | (287,905) | |
| Included in: | | | | |
| Non-current deferred tax assets, net | | $ | 44,454 | | | $ | 40,498 | |
| Non-current deferred tax liabilities, net | | (345,698) | | | (328,403) | |
| Net deferred tax liabilities | | $ | (301,244) | | | $ | (287,905) | |
Changes in deferred taxes were primarily due to acquired intangibles and accelerated tax depreciation on property, plant and equipment.
The valuation allowances as of December 31, 2023 and 2022 were primarily related to various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets that we do not expect to realize.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 78 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
The following table reconciles the federal statutory income tax rate with our effective income tax rate:
| | | For the years ended December 31, | | 2017 | | 2016 | | 2015 | For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Federal statutory income tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % | Federal statutory income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
| Increase (reduction) resulting from: | | | | | | |
| State income taxes, net of Federal income tax benefits | | 2.6 |
| | 3.4 |
| | 4.2 |
|
| Qualified production income deduction | | (2.9 | ) | | (3.8 | ) | | (4.4 | ) |
| Business realignment and impairment charges and gain on sale of trademark licensing rights | | 4.3 |
| | 0.4 |
| | 10.8 |
|
| State income taxes, net of Federal income tax benefits | |
| State income taxes, net of Federal income tax benefits | |
| | Foreign rate differences | |
| | Foreign rate differences | |
| | Foreign rate differences | | (4.3 | ) | | 3.6 |
| | 2.2 |
|
| Historic and solar tax credits | | (4.8 | ) | | (3.3 | ) | | (3.3 | ) |
| U.S. tax reform | | 2.9 |
| | — |
| | — |
|
| | Tax contingencies | |
| Tax contingencies | |
| Tax contingencies | |
| Stock compensation | |
| | Other, net | |
| Other, net | |
| Other, net | | (0.9 | ) | | (0.8 | ) | | (1.4 | ) |
| Effective income tax rate | | 31.9 | % | | 34.5 | % | | 43.1 | % | Effective income tax rate | | 14.3 | % | | 14.2 | % | | 17.5 | % |
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | December 31, | | 2017 | | 2016 | December 31, | | 2023 | | 2022 |
| Balance at beginning of year | | $ | 36,002 |
| | $ | 33,411 |
|
| Additions for tax positions taken during prior years | | 2,492 |
| | 2,804 |
|
| Reductions for tax positions taken during prior years | | (1,689 | ) | | (4,080 | ) |
| Additions for tax positions taken during the current year | | 10,018 |
| | 9,100 |
|
| Settlements | | (1,481 | ) | | — |
|
| Expiration of statutes of limitations | | (3,260 | ) | | (5,233 | ) |
| Balance at end of year | | $ | 42,082 |
| | $ | 36,002 |
|
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $37,587$122,706 as of December 31, 20172023 and $27,691$120,699 as of December 31, 2016.2022.
We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized a net tax expense of $795$12,027, $4,862 and $8,924 in 2017, a net tax benefit of $75 in 20162023, 2022 and a net tax expense of $1,153 in 20152021, respectively, for interest and penalties. Accrued net interest and penalties were $4,966$37,355 as of December 31, 20172023 and $3,716$25,328 as of December 31, 2016.2022.
WeThe Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction andUnited States, including various state and local returns, and in other foreign jurisdictions. AWe are routinely audited by taxing authorities in our filing jurisdictions, and a number of years may elapse before an uncertainthese disputes are currently underway, including multi-year controversies at various stages of review, negotiation and litigation in Mexico, Canada, Switzerland and the United States. The outcome of tax position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome oraudits cannot be predicted with certainty, including the timing of resolution ofor potential settlements. If any particular uncertainissues addressed in our tax position,audits are resolved in a manner not consistent with management’s expectations, we believe thatcould be required to adjust our unrecognized tax benefits reflect the most likely outcome. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to our effectiveprovision for income tax ratetaxes in the period of resolution.
The Company’s major taxing jurisdictions currently include the United States (federal and state), as well as various foreign jurisdictions such as Canada, China, Mexico, Brazil, India, Malaysia and Switzerland. The number of years with open tax audits varies dependingresolution occurs. Based on the tax jurisdiction, with 2013 representing the earliest tax year that remains openour current assessments, we believe adequate provision has been made for examination by certain taxing authorities. In 2017, the U.S. Internal Revenue Service began an examination of our U.S. federalall income tax returns for 2013 and 2014.uncertainties.
We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $8,089$51,355 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits.
As of December 31, 2023, we had approximately $656,389 of undistributed earnings of our international subsidiaries. We continue to reinvest the remainder of the earnings outside of the United States for which there would be a material tax implication to distributing, such as withholding tax, for the foreseeable future and, therefore, have not recognized additional tax expense on these earnings beyond the one-time U.S. repatriation tax due under the 2017 Tax Cuts and Jobs Act.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 79 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
As of December 31, 2017, we had approximately $370,027 of undistributed earnings of our international subsidiaries. We intend to continue to reinvest earnings outside the United States for the foreseeable future and, therefore, have not recognized additional tax expense (e.g., foreign withholding taxes) on these earnings beyond the one-time U.S. repatriation tax due under the Tax Cuts and Jobs Act.
Investments in Partnerships Qualifying for Tax Credits
We invest in partnerships which make equity investments in projects eligible to receive federal historic and energy tax credits. The investments are accounted for under the equity method and reported within other non-current assets in our Consolidated Balance Sheets. 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. For the years ended December 31, 20172023, 2022 and 2016,2021 we recognized investment tax credits and related outside basis difference benefitbenefits totaling $74,600$251,827, $228,819 and $52,342,$136,243, respectively, and we wrote-down the equity investment by $66,209$210,484, $188,286 and $43,482,$113,756, respectively, to reflect the realization of these benefits. The equity investment write-down is reflected within other (income) expense, net in the Consolidated Statements of Income.Income (see Note 17). 9.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. For the year ended December 31, 2023, the tax-related provisions of the IRA did not have a material impact on our consolidated financial statements, including our annual effective tax rate, or on our liquidity.
11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
We sponsor a number of defined benefit pension plans. The primary plans arewere The Hershey Company Retirement Plan (“Retirement Plan”) and Thethe Hershey Company Retirement Plan for Hourly Employees.Employees (“Hourly Plan”). These are cash balance plans that provide pension benefits for most domesticU.S. employees hired prior to January 1, 2007. Effective December 31, 2023, the Hourly Plan merged into the Retirement Plan and the name was changed to The Hershey Retirement Plan for Salaried and Hourly Employees. We also sponsor two post-retirement benefit plans: health care and life insurance. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan is non-contributory.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 80 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Obligations and Funded Status
A summary of the changes in benefit obligations, plan assets and funded status of these plans is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| December 31, | | 2023 | | 2022 | | 2023 | | 2022 |
| Change in benefit obligation | | | | | | | | |
| Projected benefit obligation at beginning of year | | $ | 830,285 | | | $ | 1,076,180 | | | $ | 164,889 | | | $ | 211,490 | |
| Service cost | | 14,991 | | | 17,500 | | | 221 | | | 302 | |
| Interest cost | | 41,205 | | | 30,491 | | | 7,171 | | | 4,603 | |
| | | | | | | | |
| Actuarial (gain) loss | | 23,187 | | | (184,775) | | | 38,789 | | | (28,145) | |
| Curtailment | | — | | | — | | | (740) | | | — | |
| Settlement | | (66,132) | | | (82,907) | | | (88,689) | | | — | |
| Currency translation and other | | 2,466 | | | (3,268) | | | (324) | | | (613) | |
| Benefits paid | | (23,967) | | | (22,936) | | | (21,006) | | | (22,748) | |
| Projected benefit obligation at end of year | | 822,035 | | | 830,285 | | | 100,311 | | | 164,889 | |
| Change in plan assets | | | | | | | | |
| Fair value of plan assets at beginning of year | | 848,432 | | | 1,098,191 | | | — | | | — | |
| Actual return on plan assets | | 70,096 | | | (196,969) | | | — | | | — | |
| Employer contributions | | 6,576 | | | 55,799 | | | 21,006 | | | 22,748 | |
| Settlement | | (66,132) | | | (82,907) | | | (88,689) | | | — | |
| Annuity purchase | | — | | | — | | | 88,689 | | | — | |
| Currency translation and other | | 1,838 | | | (2,746) | | | — | | | — | |
| Benefits paid | | (23,967) | | | (22,936) | | | (21,006) | | | (22,748) | |
| Fair value of plan assets at end of year | | 836,843 | | | 848,432 | | | — | | | — | |
| Funded status at end of year | | $ | 14,808 | | | $ | 18,147 | | | $ | (100,311) | | | $ | (164,889) | |
| | | | | | | | |
| Amounts recognized in the Consolidated Balance Sheets: | | | | | | | | |
| Other assets | | $ | 48,506 | | | $ | 53,495 | | | $ | — | | | $ | — | |
| Accrued liabilities | | (4,749) | | | (7,652) | | | (9,593) | | | (17,715) | |
| Other long-term liabilities | | (28,949) | | | (27,696) | | | (90,718) | | | (147,174) | |
| Total | | $ | 14,808 | | | $ | 18,147 | | | $ | (100,311) | | | $ | (164,889) | |
| | | | | | | | |
| Amounts recognized in Accumulated Other Comprehensive Income (Loss), net of tax: | | | | | | | | |
| Actuarial net (loss) gain | | $ | (129,184) | | | $ | (150,378) | | | $ | (7,704) | | | $ | 19,689 | |
| Net prior service credit | | 8,561 | | | 12,435 | | | 527 | | | — | |
| Net amounts recognized in AOCI | | $ | (120,623) | | | $ | (137,943) | | | $ | (7,177) | | | $ | 19,689 | |
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| December 31, | | 2017 | | 2016 | | 2017 | | 2016 |
| Change in benefit obligation | | | | | | | | |
| Projected benefit obligation at beginning of year | | $ | 1,118,318 |
| | $ | 1,169,424 |
| | $ | 242,846 |
| | $ | 255,617 |
|
| Service cost | | 20,657 |
| | 23,075 |
| | 263 |
| | 299 |
|
| Interest cost | | 40,996 |
| | 41,875 |
| | 8,837 |
| | 9,731 |
|
| Plan amendments | | (8,473 | ) | | (43,065 | ) | | — |
| | — |
|
| Actuarial (gain) loss | | 40,768 |
| | 15,804 |
| | 2,207 |
| | (2,998 | ) |
| Settlement | | (44,978 | ) | | (59,784 | ) | | — |
| | — |
|
| Currency translation and other | | 6,749 |
| | 1,416 |
| | 889 |
| | 314 |
|
| Benefits paid | | (56,473 | ) | | (30,427 | ) | | (18,930 | ) | | (20,117 | ) |
| Projected benefit obligation at end of year | | 1,117,564 |
| | 1,118,318 |
| | 236,112 |
| | 242,846 |
|
| Change in plan assets | | | | | | | | |
| Fair value of plan assets at beginning of year | | 1,023,676 |
| | 1,041,902 |
| | — |
| | — |
|
| Actual return on plan assets | | 121,241 |
| | 49,012 |
| | — |
| | — |
|
| Employer contributions | | 37,503 |
| | 21,580 |
| | 18,930 |
| | 20,117 |
|
| Settlement | | (44,978 | ) | | (59,784 | ) | | — |
| | — |
|
| Currency translation and other | | 5,257 |
| | 1,393 |
| | — |
| | — |
|
| Benefits paid | | (56,473 | ) | | (30,427 | ) | | (18,930 | ) | | (20,117 | ) |
| Fair value of plan assets at end of year | | 1,086,226 |
| | 1,023,676 |
| | — |
| | — |
|
| Funded status at end of year | | $ | (31,338 | ) | | $ | (94,642 | ) | | $ | (236,112 | ) | | $ | (242,846 | ) |
| | | | | | | | | |
| Amounts recognized in the Consolidated Balance Sheets: | | | | | | | | |
| Other assets | | $ | 14,988 |
| | $ | 39 |
| | $ | — |
| | $ | — |
|
| Accrued liabilities | | (6,916 | ) | | (28,994 | ) | | (20,792 | ) | | (22,576 | ) |
| Other long-term liabilities | | (39,410 | ) | | (65,687 | ) | | (215,320 | ) | | (220,270 | ) |
| Total | | $ | (31,338 | ) | | $ | (94,642 | ) | | $ | (236,112 | ) | | $ | (242,846 | ) |
| | | | | | | | | |
| Amounts recognized in Accumulated Other Comprehensive Income (Loss), net of tax: | | | | | | | | |
| Actuarial net (loss) gain | | $ | (207,659 | ) | | $ | (243,228 | ) | | $ | 8,313 |
| | $ | 9,264 |
|
| Net prior service credit (cost) | | 30,994 |
| | 28,360 |
| | (1,174 | ) | | (1,565 | ) |
| Net amounts recognized in AOCI | | $ | (176,665 | ) | | $ | (214,868 | ) | | $ | 7,139 |
| | $ | 7,699 |
|
The projected benefit obligation during 2023 was impacted by actuarial loss of $23,187 which was mainly the result of the discount rate assumption decreasing from 5.5% at December 31, 2022 to 5.1% at December 31, 2023. The accumulated benefit obligation for all defined benefit pension plans was $1,077,112$789,257 as of December 31, 20172023 and $1,081,261$799,635 as of December 31, 2016.2022.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 81 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Plans with accumulated benefit obligations in excess of plan assets were as follows:
| | | | | | | | | | | | | | |
| December 31, | | 2023 | | 2022 |
| Projected benefit obligation | | $ | 40,278 | | | $ | 36,669 | |
| Accumulated benefit obligation | | 33,812 | | | 32,167 | |
| Fair value of plan assets | | 6,695 | | | 3,606 | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| Projected benefit obligation | | $ | 711,767 |
| | $ | 1,118,294 |
|
| Accumulated benefit obligation | | 675,660 |
| | 1,081,254 |
|
| Fair value of plan assets | | 665,441 |
| | 1,023,613 |
|
| | | | | | | | | | | | | | |
| December 31, | | 2023 | | 2022 |
| Projected benefit obligation | | $ | 84,416 | | | $ | 79,932 | |
| Accumulated benefit obligation | | 71,046 | | | 68,665 | |
| Fair value of plan assets | | 50,718 | | | 44,584 | |
Net Periodic Benefit Cost
The components of net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| Amounts recognized in net periodic benefit cost | | | | | | | | | | | | |
| Service cost | | $ | 14,991 | | | $ | 17,500 | | | $ | 21,361 | | | $ | 221 | | | $ | 302 | | | $ | 1,879 | |
| Interest cost | | 41,205 | | | 30,491 | | | 18,320 | | | 7,171 | | | 4,603 | | | 3,857 | |
| Expected return on plan assets | | (48,978) | | | (47,637) | | | (49,091) | | | — | | | — | | | — | |
| Amortization of prior service credit | | (5,658) | | | (5,651) | | | (6,142) | | | (50) | | | — | | | — | |
| Amortization of net (gain) loss | | 19,846 | | | 16,060 | | | 20,556 | | | (966) | | | (92) | | | 1,593 | |
| Curtailment credit | | — | | | — | | | — | | | (740) | | | — | | | — | |
| Settlement loss | | 15,254 | | | 20,692 | | | 16,085 | | | 926 | | | — | | | — | |
| Total net periodic benefit cost | | $ | 36,660 | | | $ | 31,455 | | | $ | 21,089 | | | $ | 6,562 | | | $ | 4,813 | | | $ | 7,329 | |
| | | | | | | | | | | | |
| Change in plan assets and benefit obligations recognized in AOCI, pre-tax | | | | | | | | | | | | |
| Actuarial net (gain) loss | | $ | (32,720) | | | $ | 22,609 | | | $ | (80,047) | | | $ | 38,698 | | | $ | (26,212) | | | $ | (16,374) | |
| Prior service cost (credit) | | 5,670 | | | 5,601 | | | 6,447 | | | (736) | | | — | | | — | |
| Total recognized in other comprehensive (income) loss, pre-tax | | $ | (27,050) | | | $ | 28,210 | | | $ | (73,600) | | | $ | 37,962 | | | $ | (26,212) | | | $ | (16,374) | |
| Net amounts recognized in periodic benefit cost and AOCI | | $ | 9,610 | | | $ | 59,665 | | | $ | (52,511) | | | $ | 44,524 | | | $ | (21,399) | | | $ | (9,045) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Amounts recognized in net periodic benefit cost | | | | | | | | | | | | |
| Service cost | | $ | 20,657 |
| | $ | 23,075 |
| | $ | 28,300 |
| | $ | 263 |
| | $ | 299 |
| | $ | 542 |
|
| Interest cost | | 40,996 |
| | 41,875 |
| | 44,179 |
| | 8,837 |
| | 9,731 |
| | 10,187 |
|
| Expected return on plan assets | | (57,370 | ) | | (58,820 | ) | | (68,830 | ) | | — |
| | — |
| | — |
|
| Amortization of prior service (credit) cost | | (5,822 | ) | | (1,555 | ) | | (1,178 | ) | | 748 |
| | 575 |
| | 611 |
|
| Amortization of net loss (gain) | | 33,648 |
| | 34,940 |
| | 30,510 |
| | (1 | ) | | (13 | ) | | (57 | ) |
| Curtailment credit | | — |
| | — |
| | (688 | ) | | — |
| | — |
| | 204 |
|
| Settlement loss | | 17,732 |
| | 22,657 |
| | 23,067 |
| | — |
| | — |
| | — |
|
| Total net periodic benefit cost | | $ | 49,841 |
| | $ | 62,172 |
| | $ | 55,360 |
| | $ | 9,847 |
| | $ | 10,592 |
| | $ | 11,487 |
|
| | | | | | | | | | | | | |
| Change in plan assets and benefit obligations recognized in AOCI, pre-tax | | | | | | | | | | | | |
| Actuarial net (gain) loss | | $ | (73,768 | ) | | $ | (31,772 | ) | | $ | (21,554 | ) | | $ | 2,139 |
| | $ | (3,047 | ) | | $ | (26,270 | ) |
| Prior service (credit) cost | | (2,650 | ) | | (41,517 | ) | | 1,748 |
| | (744 | ) | | (572 | ) | | (834 | ) |
| Total recognized in other comprehensive (income) loss, pre-tax | | $ | (76,418 | ) | | $ | (73,289 | ) | | $ | (19,806 | ) | | $ | 1,395 |
| | $ | (3,619 | ) | | $ | (27,104 | ) |
| Net amounts recognized in periodic benefit cost and AOCI | | $ | (26,577 | ) | | $ | (11,117 | ) | | $ | 35,554 |
| | $ | 11,242 |
| | $ | 6,973 |
| | $ | (15,617 | ) |
Amounts expected to be amortized from AOCI intoThe non-service cost components of net periodic benefit cost during 2018 are as follows: 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). |
| | | | | | | |
| | Pension Plans | | Post-Retirement Benefit Plans |
| Amortization of net actuarial loss | $ | 26,735 |
| | $ | — |
|
| Amortization of prior service (credit) cost | $ | (7,197 | ) | | $ | 836 |
|
Assumptions | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 82 | |
The weighted-average assumptions used in computing the benefit obligations were as follows:
|
| | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| December 31, | | 2017 | | 2016 | | 2017 | | 2016 |
| Discount rate | | 3.4 | % | | 3.8 | % | | 3.5 | % | | 3.8 | % |
| Rate of increase in compensation levels | | 3.8 | % | | 3.8 | % | | N/A |
| | N/A |
|
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Assumptions
The weighted-average assumptions used in computing the year end benefit obligations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| December 31, | | 2023 | | 2022 | | 2023 | | 2022 |
| Discount rate | | 5.1 | % | | 5.5 | % | | 5.2 | % | | 5.5 | % |
| Rate of increase in compensation levels | | 3.6 | % | | 3.4 | % | | 4.0 | % | | 4.0 | % |
| Interest crediting rate | | 4.8 | % | | 4.7 | % | | N/A | | N/A |
The weighted-average assumptions used in computing net periodic benefit cost were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 | | 2023 | | 2022 | | 2021 |
| Discount rate | | 5.5 | % | | 2.7 | % | | 2.3 | % | | 5.5 | % | | 2.9 | % | | 2.5 | % |
| Expected long-term return on plan assets | | 6.2 | % | | 4.9 | % | | 4.8 | % | | N/A | | N/A | | N/A |
| Rate of compensation increase | | 3.4 | % | | 3.5 | % | | 3.5 | % | | N/A | | N/A | | N/A |
|
| | | | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Other Benefits |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| Discount rate | | 3.8 | % | | 4.0 | % | | 3.7 | % | | 3.8 | % | | 4.0 | % | | 3.7 | % |
| Expected long-term return on plan assets | | 5.8 | % | | 6.1 | % | | 6.3 | % | | N/A |
| | N/A |
| | N/A |
|
| Rate of compensation increase | | 3.8 | % | | 3.8 | % | | 4.1 | % | | N/A |
| | N/A |
| | N/A |
|
The Company’s discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. We base the asset return assumption on current and expected asset allocations, as well as historical and expected returns on the plan asset categories.
Prior to December 31, 2017, the service and interest cost components of net periodic benefit cost were determined utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Beginning in 2018, we have elected toWe utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We made this change to provideThis approach provides a more precise measurement of service and interest costs by improving the correlation between the projected cash flows to the corresponding spot rates along the yield curve. This changeapproach does not affect the measurement of our pension and other post-retirement benefit liabilities, but generally results in lower benefit expense in periods when the yield curve is upward sloping. Compared to the method used in 2017, we expect this change to result in lower pension and other post-retirement benefit expense of approximately $5,800 in 2018. We are accounting for this change prospectively as a change in accounting estimate that is inseparable from a change in accounting principle.
For purposes of measuring our post-retirement benefit obligation at December 31, 2017,2023, we assumed a 7.0%6.4% annual rate of increase in the per capita cost of covered health care benefits for 2018,2024, grading down to 5.0% by 2023.2030. For measurement purposes as of measuring our post-retirement benefit obligation at December 31, 2016,2022, we assumed a 7.0%6.7% annual rate of increase in the per capita cost of covered health care benefits for 2017,2023, grading down to 5.0% by 2021. Assumed health care cost trend rates could have a significant effect on the amounts reported for the post-retirement health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
|
| | | | | | | | |
| Impact of assumed health care cost trend rates | | One-Percentage
Point Increase | | One-Percentage
Point Decrease |
| Effect on total service and interest cost components | | $ | 148 |
| | $ | (129 | ) |
| Effect on accumulated post-retirement benefit obligation | | 3,133 |
| | (2,758 | ) |
The valuations and assumptions reflect adoption of the Society of Actuaries updated RP-2014Pri-2012 mortality tables with MP-2017MP-2021 generational projection scales, which we adopted as of December 31, 2017.2021. The Society of Actuaries did not update the Pri-2012 mortality tables in 2022 or 2023. Adoption of the updated scalescales did not have a significant impact on our current pension obligations or net period benefit cost since our primary plans are cash balance plans and most participants take lump-sum settlements upon retirement.
Plan Assets
We broadly diversify our pension plan assets across public equity, fixed income, diversified credit strategies and diversified alternative strategies asset classes. Our target asset allocation for our major domestic pension plans as of December 31, 20172023 was as follows:
| | | | | | | | |
| | |
| Asset Class | | Target Asset Allocation |
| Cash | | 1% |
| Equity securities | | 25%27% |
| Fixed income securities | | 49%48% |
| Alternative investments, including real estate, listed infrastructure and other | | 25%24% |
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 83 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
As of December 31, 2017,2023, actual allocations were consistent with the targets and within our allowable ranges. We expect the level of volatility in pension plan asset returns to be in line with the overall volatility of the markets within each asset class.
The following table sets forth by level, within the fair value hierarchy (as defined in Note 6)6), pension plan assets at their fair values as of December 31, 2017:2023: | | | | Quoted prices in active markets of identical assets
(Level 1) | | Significant other observable inputs
(Level 2) | | Significant other unobservable inputs (Level 3) | | Investments Using NAV as a Practical Expedient (1) | | Total |
| | Quoted prices in active
markets of identical assets
(Level 1) | | | | Quoted prices in active
markets of identical assets
(Level 1) | | Significant other observable inputs
(Level 2) | | Significant other unobservable inputs
(Level 3) | | Investments Using NAV as a Practical Expedient
(1) | |
Total |
| Cash and cash equivalents | $ | 1,179 |
| | $ | 18,161 |
| | $ | — |
| | $ | 730 |
| | $ | 20,070 |
|
| Equity securities: | | | | | | | | | |
| International all-cap | |
| International all-cap | |
| International all-cap | |
| Global all-cap (a) | — |
| | — |
| | — |
| | 276,825 |
| | 276,825 |
|
| Fixed income securities: | | | | | | | | | |
| U.S. government/agency | — |
| | — |
| | — |
| | 239,686 |
| | 239,686 |
|
| U.S. government/agency | |
| U.S. government/agency | |
| Corporate bonds (b) | — |
| | 33,019 |
| | — |
| | 162,633 |
| | 195,652 |
|
| Collateralized obligations (c) | — |
| | 40,350 |
| | — |
| | 34,538 |
| | 74,888 |
|
| International government/corporate bonds (d) | — |
| | — |
| | — |
| | 32,447 |
| | 32,447 |
|
| International government/corporate bonds (c) | |
| Diversified credit (d) | |
| Alternative investments: | | | | | | | | | |
| Global diversified assets (e) | — |
| | — |
| | — |
| | 149,030 |
| | 149,030 |
|
| Global real estate investment trusts (f) | — |
| | — |
| | — |
| | 50,213 |
| | 50,213 |
|
| Global infrastructure (g) | — |
| | — |
| | — |
| | 47,415 |
| | 47,415 |
|
| Global diversified assets (e) | |
| Global diversified assets (e) | |
| Real assets fund (f) | |
| | Total pension plan assets | $ | 1,179 |
| | $ | 91,530 |
| | $ | — |
| | $ | 993,517 |
| | $ | 1,086,226 |
|
| Total pension plan assets | |
| Total pension plan assets | |
The following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair values as of December 31, 2016:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quoted prices in active
markets of identical assets
(Level 1) | | Significant other observable inputs
(Level 2) | | Significant other unobservable inputs
(Level 3) | | Investments Using NAV as a Practical Expedient
(1) | | | | Total |
| Cash and cash equivalents | | $ | 327 | | | $ | 29,595 | | | $ | — | | | $ | 566 | | | | | $ | 30,488 | |
| Equity securities: | | | | | | | | | | | | |
| Global all-cap (a) | | — | | | — | | | — | | | 206,636 | | | | | 206,636 | |
| Fixed income securities: | | | | | | | | | | | | |
| U.S. government/agency | | — | | | — | | | — | | | 173,122 | | | | | 173,122 | |
| Corporate bonds (b) | | — | | | — | | | — | | | 58,646 | | | | | 58,646 | |
| International government/corporate bonds (c) | | — | | | — | | | — | | | 26,489 | | | | | 26,489 | |
| Diversified credit (d) | | — | | | — | | | — | | | 109,926 | | | | | 109,926 | |
| Alternative investments: | | | | | | | | | | | | |
| Global diversified assets (e) | | — | | | — | | | — | | | 95,243 | | | | | 95,243 | |
| Real assets fund (f) | | — | | | — | | | — | | | 147,882 | | | | | 147,882 | |
| | | | | | | | | | | | |
| Total pension plan assets | | $ | 327 | | | $ | 29,595 | | | $ | — | | | $ | 818,510 | | | | | $ | 848,432 | |
|
| | | | | | | | | | | | | | | |
| | Quoted prices in active markets of identical assets
(Level 1) | | Significant other observable inputs (Level 2) | | Significant other unobservable inputs (Level 3) | | Total |
| Cash and cash equivalents | $ | 576 |
| | $ | 9,540 |
| | $ | — |
| | $ | 10,116 |
|
| Equity securities: | | | | | | | |
| Global all-cap (a) | 20,216 |
| | 242,214 |
| | — |
| | 262,430 |
|
| Fixed income securities: | | | | | | | |
| U.S. government/agency | — |
| | 228,648 |
| | — |
| | 228,648 |
|
| Corporate bonds (b) | — |
| | 199,634 |
| | — |
| | 199,634 |
|
| Collateralized obligations (c) | — |
| | 50,532 |
| | — |
| | 50,532 |
|
| International government/corporate bonds (d) | — |
| | 30,928 |
| | — |
| | 30,928 |
|
| Alternative investments: | | | | | | | |
| Global diversified assets (e) | — |
| | 146,975 |
| | — |
| | 146,975 |
|
| Global real estate investment trusts (f) | — |
| | 48,000 |
| | — |
| | 48,000 |
|
| Global infrastructure (g) | — |
| | 46,413 |
| | — |
| | 46,413 |
|
| Total pension plan assets | $ | 20,792 |
| | $ | 1,002,884 |
| | $ | — |
| | $ | 1,023,676 |
|
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 84 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| |
(1) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in our Obligations and Funded Status table. |
(1)Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in our Obligations and Funded Status table. | | | | | |
| (a) | |
(a) | This category comprises equity funds that primarily track the MSCI World Index or MSCI All Country World Index. |
| (b) | This category comprises fixed income funds primarily invested in investment grade and high yield bonds. |
| (c) | This category comprises fixed income funds primarily invested in high quality mortgage-backed securities and other asset-backed obligations. |
(d) | This category comprises fixed income funds primarily invested in Canadian and other international bonds. |
(e)(d) | This category comprises fixed income funds primarily invested in high yield bonds, loans, securitized debt and emerging market debt. |
| (e) | This category comprises diversified funds invested across alternative asset classes. |
| (f) | This category comprises equity funds primarily invested in publicly traded real estate securities. |
(g) | This category comprises equity funds primarily invested insecurities, publicly traded listed infrastructure securities.securities and real estate debt. |
The fair value of the Level 1 assets was based on quoted prices in active markets for the identical assets. The fair value of the Level 2 assets was determined by management based on an assessment of valuations provided by asset management entities and was calculated by aggregating market prices for all underlying securities.
Investment objectives for our domestic plan assets are:
|
| |
l | To ensure high correlation between the value of plan assets and liabilities; |
l | To maintain careful control of the risk level within each asset class; and |
l | To focus on a long-term return objective. |
•To ensure high correlation between the value of plan assets and liabilities;•To maintain careful control of the risk level within each asset class; and
•To focus on a long-term return objective.
We believe that there are no significant concentrations of risk within our plan assets as of December 31, 2017.2023. We comply with the rules and regulations promulgated under the Employee Retirement Income Security Act of 1974 (“ERISA”) and we prohibit investments and investment strategies not allowed by ERISA. We do not permit direct purchases of our Company’s securities or the use of derivatives for the purpose of speculation. We invest the assets of non-domestic plans in compliance with laws and regulations applicable to those plans.
Cash Flows and Plan Termination
Our policy is to fund domestic pension liabilities in accordance with the limits imposed by the ERISA, federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans.
We made total contributions to the pension plans of $37,503$6,576 during 2017. This included contributions totaling $29,201 to fund payouts from the unfunded supplemental retirement plans and $6,461 to complete the termination of the Hershey Company Puerto Rico Hourly Pension Plan, which was approved in 2016 by the Company's Board Compensation and Executive Organization Committee.2023. In 2016,2022, we made total contributions of $21,580$55,799 to the pension plans. For 2018,2024, minimum funding requirements for our pension plans are approximately $1,591.$1,943.
Total benefit payments expected to be paid to plan participants, including pension benefits funded from the plans and other benefits funded from Company assets, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expected Benefit Payments |
| 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | 2029-2033 |
| Pension Benefits | $ | 113,052 | | | $ | 89,810 | | | $ | 93,596 | | | $ | 75,694 | | | $ | 74,212 | | | $ | 312,386 | |
| Other Benefits | 9,589 | | | 9,107 | | | 8,619 | | | 8,050 | | | 7,461 | | | 32,107 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Expected Benefit Payments |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023-2027 |
| Pension Benefits | $ | 126,392 |
| | $ | 78,614 |
| | $ | 85,804 |
| | $ | 87,159 |
| | $ | 107,005 |
| | $ | 407,769 |
|
| Other Benefits | 20,773 |
| | 19,026 |
| | 17,768 |
| | 16,863 |
| | 15,767 |
| | 69,003 |
|
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 85 | |
During the third quarter of 2017, cumulative lump sum distributions from our supplemental executive retirement plan exceeded the plan’s anticipated annual service and interest costs, triggering the recognition of non-cash pension settlement charges due to the acceleration of a portion of the accumulated unrecognized actuarial loss. In addition,
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Annuitization of Other Post Employment Benefits
settlement charges were also triggered inOn August 21, 2023, the pension plan benefiting our employees in Puerto Rico asHershey Employee Benefits Committee approved the purchase of an irrevocable group annuity contract with an insurance company for eligible retirees of The Hershey Company Retiree Medical and Life Insurance Plan to cover their medical benefits. On August 31, 2023, we paid $88,689 for the irrevocable group annuity contract. As a result of lump sum distributionsthis transaction, we remeasured the projected benefit obligation and the purchase of annuity contracts relating to the termination of this plan.
Multiemployer Pension Plan
During 2016, we exitedrecognized a facility as part of the 2016 Operational Optimization Program (see Note 7) and no longer participate in the BCTGM Union and Industry Canadian Pension Plan, a trustee-managed multiemployer defined benefit pension plan. Our obligation$926 non-cash pre-tax settlement charge during the term of the collective bargaining agreement was limited to remitting the required contributions to the plan and contributions made were not significant during 2015 through 2016.quarter ended October 1, 2023.
Savings Plans
The Company sponsors several defined contribution plans to provide retirement benefits to employees. Contributions to The Hershey Company 401(k) Plan and similar plans for non-domestic employees are based on a portion of eligible pay up to a defined maximum. All matching contributions were made in cash. Expense associated with the defined contribution plans was $46,154$67,763 in 2017, $43,5452023, $61,477 in 20162022 and $44,285$58,883 in 2015.2021.
10.12. 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:
|
| |
l | Non-qualified stock options (“stock options”); |
l | Performance stock units (“PSUs”) and performance stock; |
l | Stock appreciation rights; |
l | Restricted stock units (“RSUs”) and restricted stock; and |
l | Other stock-based awards. |
•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.
As of December 31, 2017, 65.82023, 68.5 million shares were authorized and approved by our stockholders for grants under the EICP. The EICP also provides for the deferral of stock-based compensation awards by participants if approved by the Compensation and Executive OrganizationHuman Capital Committee of our Board and if in accordance with an applicable deferred compensation plan of the Company. Currently, the Compensation and Executive OrganizationHuman 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 RSUsPSUs and PSUsRSUs become payable, common stockCommon 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 are paid on Hershey’s common stock. These dividendour Common Stock. Dividend equivalents are charged to retained earnings.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:
| | | For the years ended December 31, | | 2017 | | 2016 | | 2015 | For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Pre-tax compensation expense | | $ | 51,061 |
| | $ | 54,785 |
| | $ | 51,533 |
|
| Related income tax benefit | | 13,684 |
| | 17,148 |
| | 17,109 |
|
Compensation costsexpenses for stock compensation plans are primarily included in selling, marketing and administrativeSM&A expense. As of December 31, 2017,2023, total stock-based compensation costexpense related to non-vested awards not yet recognized was $62,274$91,479 and the weighted-average period over which this amount is expected to be recognized was approximately 2.11.8 years.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 86 | |
THE HERSHEY COMPANY
NOTES TO 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 year ended December 31, 20172023 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 | 976,634 | | $104.36 | 3.8 years | |
| Granted | 5,215 | | $240.90 | | |
| Exercised | (255,148) | | $103.41 | | |
| Forfeited | — | | $0.00 | | |
| Expired | — | | $0.00 | | |
| Outstanding as of December 31, 2023 | 726,701 | | $105.67 | 3.3 years | $ | 59,044 |
| Options exercisable as of December 31, 2023 | 700,646 | | $103.12 | 3.1 years | $ | 58,394 | |
|
| | | | | | | |
| Stock Options | Shares | Weighted-Average
Exercise Price (per share) | Weighted-Average Remaining
Contractual Term | Aggregate Intrinsic Value |
| Outstanding at beginning of the period | 6,192,008 |
| $82.67 | 6.2 years | |
| Granted | 1,094,155 |
| $108.06 | | |
| Exercised | (1,133,511 | ) | $69.64 | | |
| Forfeited | (231,590 | ) | $103.03 | | |
| Outstanding as of December 31, 2017 | 5,921,062 |
| $89.06 | 5.8 years | $ | 141,893 |
|
| Options exercisable as of December 31, 2017 | 3,699,469 |
| $81.65 | 4.3 years | $ | 116,067 |
|
The weighted-average fair value of options granted was $15.76, $11.46$57.65, $37.28 and $18.99$24.12 per share in 2017, 20162023, 2022 and 2015,2021, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions: | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Dividend yields | | 1.7 | % | | 1.9 | % | | 2.2 | % |
| Expected volatility | | 20.9 | % | | 21.1 | % | | 21.8 | % |
| Risk-free interest rates | | 4.1 | % | | 1.9 | % | | 1.0 | % |
| Expected term in years | | 6.3 | | 6.3 | | 6.3 |
|
| | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Dividend yields | | 2.4 | % | | 2.4 | % | | 2.1 | % |
| Expected volatility | | 17.2 | % | | 16.8 | % | | 20.7 | % |
| Risk-free interest rates | | 2.2 | % | | 1.5 | % | | 1.9 | % |
| Expected term in years | | 6.8 |
| | 6.8 |
| | 6.7 |
|
•“Expected volatility” means the historical volatility of our Common Stock over the expected term of each grant; |
| |
l | “Dividend yields” means the sum of dividends declared for the four most recent quarterly periods, divided by the average price of our Common Stock for the comparable periods; |
l | “Expected volatility” means the historical volatility of our Common Stock over the expected term of each grant; |
l | “Risk-free interest rates” means the U.S. Treasury yield curve rate in effect at the time of grant for periods within the contractual life of the stock option; and |
l | “Expected term” means the period of time that stock options granted are expected to be outstanding based primarily on historical data. |
•“Risk-free interest rates” means the U.S. Treasury yield curve rate in effect at the time of grant for periods within the contractual life of the stock option; and•“Expected term” means the period of time that stock options granted are expected to be outstanding based on historical data.
The total intrinsic value of options exercised was $45,998, $73,944$35,474, $40,882 and $66,161$38,645 in 2017, 20162023, 2022 and 2015,2021, respectively.
As of December 31, 2017,2023, there was $15,849$832 of total unrecognized compensation costexpense related to non-vested stock option awards granted under the EICP, which we expect to recognize over a weighted-average period of 2.40.8 years.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 87 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
The following table summarizes information about stock options outstanding as of December 31, 2017: 2023:
|
| | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable |
| Range of Exercise Prices | | Number
Outstanding as
of 12/31/17 | | Weighted-
Average
Remaining
Contractual
Life in Years | | Weighted-
Average
Exercise Price | | Number
Exercisable as of
12/31/17 | | Weighted-
Average
Exercise Price |
| $33.40 - $81.73 | | 1,985,084 |
| | 3.4 | | $63.53 | | 1,985,084 |
| | $63.53 |
| $81.74 - $105.91 | | 2,060,833 |
| | 6.9 | | $97.25 | | 929,199 |
| | $99.72 |
| $105.92 - $111.76 | | 1,875,145 |
| | 7.1 | | $107.06 | | 785,186 |
| | $106.04 |
| $33.40 - $111.76 | | 5,921,062 |
| | 5.8 | | $89.06 | | 3,699,469 |
| | $81.65 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| Range of Exercise Prices | | Number Outstanding as of 12/31/23 | | Weighted-Average Remaining Contractual Life in Years | | Weighted-Average Exercise Price | | Number Exercisable as of 12/31/23 | | Weighted-Average Exercise Price |
| $60.68 - $99.90 | | 388,522 | | | 3.4 | | $96.78 | | 388,522 | | | $96.78 |
| $99.91 - $107.95 | | 210,214 | | | 2.2 | | $107.09 | | 210,214 | | | $107.09 |
| $107.96 - $240.90 | | 127,965 | | | 4.7 | | $130.31 | | 101,910 | | | $119.09 |
| $60.68 - $240.90 | | 726,701 | | | 3.3 | | $105.67 | | 700,646 | | | $103.12 |
Performance Stock Units and Restricted Stock Units
Under the EICP, we grant PSUs to selected executives and other key employees. Vesting is contingent upon the achievement of certain performance objectives. We grant PSUs over 3-year performance cycles. If we meet targets for financial measures at the end of the applicable 3-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 for 2015 through 2017 grants of PSUs granted in 2023, 2022, and 2021 can range from 0% to 250% of the targeted amounts.
We recognize the compensation costexpense associated with PSUs ratably over the 3-year term. Compensation costexpense is 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.
In 2017, 20162023, 2022 and 2015,2021, we awarded RSUs to certain executive officers and other key employees under the EICP. We also awarded RSUs quarterly to non-employee directors.
We recognize the compensation costexpense 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. We recognize theThe compensation costexpense associated with non-employee director RSUs is recognized ratably over the vesting period, net of estimated forfeitures.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 88 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
A summary of activity relating to grants of PSUs and RSUs for the period ended December 31, 20172023 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 | | 1,141,679 | | | $181.91 |
| Granted | | 341,374 | | | $241.41 |
| Performance assumption change (1) | | 24,325 | | | $(88.67) |
| Vested | | (443,502) | | | $173.02 |
| Forfeited | | (24,185) | | | $207.81 |
| Outstanding at end of year | | 1,039,691 | | | $198.31 |
|
| | | | | |
| 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 | | 828,228 |
| | $102.66 |
| Granted | | 478,044 |
| | $110.97 |
| Performance assumption change | | 21,305 |
| | $96.71 |
| Vested | | (277,261 | ) | | $109.35 |
| Forfeited | | (126,952 | ) | | $107.91 |
| Outstanding at end of year | | 923,364 |
| | $103.11 |
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. | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Units granted | | 341,374 | | | 313,285 | | | 404,517 | |
| Weighted-average fair value at date of grant | | $ | 241.41 | | | $ | 211.85 | | | $ | 154.83 | |
| Monte Carlo simulation assumptions: | | | | | | |
| Estimated values | | $ | 118.90 | | | $ | 100.41 | | | $ | 66.44 | |
| Dividend yields | | 1.7 | % | | 1.8 | % | | 2.2 | % |
| Expected volatility | | 19.2 | % | | 25.3 | % | | 26.4 | % |
•“Estimated values” means the fair value for the market-based total shareholder return component of each PSU at the date of grant using a Monte Carlo simulation model;
•“Dividend yields” means the sum of dividends declared for the four most recently quarterly periods, divided by the average price of our Common Stock for the comparable periods;
•“Expected volatility” means the historical volatility of our Common Stock over the expected term of each grant.
The fair value of shares vested totaled $106,243, $105,668 and $52,008 in 2023, 2022 and 2021, respectively.
Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 257,942 units as of December 31, 2023. Each unit is equivalent to one share of the Company’s Common Stock.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 89 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
|
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Units granted | | 478,044 |
| | 545,750 |
| | 381,407 |
|
| Weighted-average fair value at date of grant | | $ | 110.97 |
| | $ | 93.55 |
| | $ | 104.68 |
|
| Monte Carlo simulation assumptions: | | | | | | |
| Estimated values | | $ | 46.85 |
| | $ | 38.02 |
| | $ | 61.22 |
|
| Dividend yields | | 2.3 | % | | 2.5 | % | | 2.0 | % |
| Expected volatility | | 20.4 | % | | 17.0 | % | | 14.9 | % |
|
| |
l | “Estimated values” means the fair value for the market-based total shareholder return component of each PSU at the date of grant using a Monte Carlo simulation model; |
l | “Dividend yields” means the sum of dividends declared for the four most recent quarterly periods, divided by the average price of our Common Stock for the comparable periods; |
l | “Expected volatility” means the historical volatility of our Common Stock over the expected term of each grant. |
The fair value of shares vested totaled $29,981, $22,062 and $46,113 in 2017, 2016 and 2015, respectively.
Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 369,278 units as of December 31, 2017. Each unit is equivalent to one share of the Company’s Common Stock.
11.13. SEGMENT INFORMATION
Our
The Company reports its operations through three segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International. This 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 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”)CODM manages our business, including resource allocation and performance assessment. Our assessment, and further aligns with our product categories and the key markets we serve.
•North America business, which generates approximately 88% of our consolidated revenue, is our only reportable segment. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other.
North America - Confectionery – 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, gum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines. This segment also includes our retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania; New York, New York; Las Vegas, Nevada; 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.
•North America Salty Snacks– This segment is responsible for our salty snacking products in the United States. This includes ready-to-eat popcorn, baked and trans fat free snacks, pretzels and other snacking product lines.
snacks.•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 China, 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), Dubai, 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 integrationacquisition-related costs the non-service related portion of pension expense 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 the measure of segment performance used for incentive compensation purposes.
Accounting policies associated with our operating segments are generally the same as those described in Note 1.1. THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amountsAs discussed in thousands, except share data or if otherwise indicated)
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.
Our segment net sales and earnings were as follows:
|
| | | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Net sales: | | | | | | |
| North America | | $ | 6,621,173 |
| | $ | 6,532,988 |
| | $ | 6,468,158 |
|
| International and Other | | 894,253 |
| | 907,193 |
| | 918,468 |
|
| Total | | $ | 7,515,426 |
| | $ | 7,440,181 |
| | $ | 7,386,626 |
|
| | | | | | | |
| Segment income (loss): | | | | | | |
| North America | | $ | 2,045,550 |
| | $ | 2,040,995 |
| | $ | 2,073,967 |
|
| International and Other | | 11,532 |
| | (29,139 | ) | | (98,067 | ) |
| Total segment income | | 2,057,082 |
| | 2,011,856 |
| | 1,975,900 |
|
| Unallocated corporate expense (1) | | 504,323 |
| | 497,423 |
| | 497,386 |
|
| Unallocated mark-to-market (gains) losses on commodity derivatives | | (35,292 | ) | | 163,238 |
| | — |
|
| Goodwill, indefinite and long-lived asset impairment charges | | 208,712 |
| | 4,204 |
| | 280,802 |
|
| Costs associated with business realignment activities | | 69,359 |
| | 107,571 |
| | 120,975 |
|
| Non-service related pension expense | | 35,028 |
| | 27,157 |
| | 18,079 |
|
| Acquisition and integration costs | | 311 |
| | 6,480 |
| | 20,899 |
|
| Operating profit | | 1,274,641 |
| | 1,205,783 |
| | 1,037,759 |
|
| Interest expense, net | | 98,282 |
| | 90,143 |
| | 105,773 |
|
| Other (income) expense, net | | 65,691 |
| | 16,159 |
| | 30,139 |
|
| Income before income taxes | | $ | 1,110,668 |
| | $ | 1,099,481 |
| | $ | 901,847 |
|
| | | | | | | | |
(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, and (d) other gains or losses that are not integral to segment performance.The Hershey Company | 2023 Form 10-K | Page 90 | |
Activity within the unallocated mark-to-market (gains) losses on commodity derivatives is as follows:
|
| | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 |
| Net losses on mark-to-market valuation of commodity derivative positions recognized in income | | $ | 55,734 |
| | $ | 171,753 |
|
| Net losses on commodity derivative positions reclassified from unallocated to segment income | | (91,026 | ) | | (8,515 | ) |
| Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses | | $ | (35,292 | ) | | $ | 163,238 |
|
As of December 31, 2017, the cumulative amount of mark-to-market losses on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was $127,946. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pretax losses on commodity derivatives of $94,449 to segment operating results in the next twelve months.
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Our segment net sales and earnings were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Net sales: | | | | | | |
| North America Confectionery | | $ | 9,123,139 | | | $ | 8,536,480 | | | $ | 7,682,416 | |
| North America Salty Snacks | | 1,092,689 | | 1,029,405 | | 555,424 |
| International | | 949,164 | | 853,409 | | 733,497 |
| Total | | $ | 11,164,992 | | | $ | 10,419,294 | | | $ | 8,971,337 | |
| | | | | | |
| Segment income: | | | | | | |
| North America Confectionery | | $ | 3,117,044 | | $ | 2,811,066 | | $ | 2,475,873 |
| North America Salty Snacks | | 158,333 | | | 159,935 | | | 100,777 | |
| International | | 148,259 | | | 107,927 | | | 74,170 | |
| Total segment income | | 3,423,636 | | 3,078,928 | | 2,650,820 |
| Unallocated corporate expense (1) | | 800,390 | | | 735,542 | | | 614,875 | |
| Unallocated mark-to-market losses (gains) on commodity derivatives | | 58,939 | | 78,182 | | (24,376) |
| | | | | | |
Costs associated with business realignment activities (see Note 9) | | 3,440 | | | 4,417 | | | 16,599 | |
| | | | | | |
| | | | | | |
| Operating profit | | 2,560,867 | | 2,260,787 | | 2,043,722 |
Interest expense, net (see Note 4) | | 151,785 | | | 137,557 | | | 127,417 | |
Other (income) expense, net (see Note 17) | | 237,218 | | 206,159 | | 119,081 |
| Income before income taxes | | $ | 2,171,864 | | | $ | 1,917,071 | | | $ | 1,797,224 | |
(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.
Activity within the unallocated mark-to-market losses (gains) on commodity derivatives is as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in income | | $ | 53,085 | | | $ | (44,569) | | | $ | (85,402) | |
| Net gains on commodity derivative positions reclassified from unallocated to segment income | | 5,854 | | | 122,751 | | | 61,026 | |
| Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains) | | $ | 58,939 | | | $ | 78,182 | | | $ | (24,376) | |
As of December 31, 2023, 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 $50,207. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pretax gains on commodity derivatives of $39,333 to segment operating results in the next twelve months.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 91 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Depreciation and amortization expense included within segment income presented above is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| North America Confectionery | | $ | 238,786 | | | $ | 228,399 | | | $ | 213,113 | |
| North America Salty Snacks | | 85,566 | | 68,600 | | 29,744 |
| International | | 23,699 | | 23,148 | | 22,754 |
| Corporate | | 71,764 | | 58,812 | | 49,391 |
| Total | | $ | 419,815 | | | $ | 378,959 | | | $ | 315,002 | |
|
| | | | | | | | | | | | |
| For the years ended December 31, | 2017 | | 2016 | | 2015 |
| North America | $ | 171,265 |
| | $ | 162,211 |
| | $ | 153,185 |
|
| International and Other | 42,542 |
| | 50,753 |
| | 46,342 |
|
| Corporate (1) | 48,046 |
| | 88,873 |
| | 45,401 |
|
| Total | $ | 261,853 |
| | $ | 301,837 |
| | $ | 244,928 |
|
| |
(1) | Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note 7. Such amounts are not included within our measure of segment income. |
Additional geographic information regarding our net sales and long-lived assets disaggregated by geographical region is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Net sales: | | | | | | |
| United States | | $ | 9,752,314 | | | $ | 9,121,166 | | | $ | 7,807,606 | |
| Other | | 1,412,678 | | | 1,298,128 | | | 1,163,731 | |
| Total | | $ | 11,164,992 | | | $ | 10,419,294 | | | $ | 8,971,337 | |
| | | | | | |
| Long-lived assets: | | | | | | |
| United States | | $ | 2,732,787 | | | $ | 2,272,811 | | | $ | 2,099,786 | |
| Other | | 576,891 | | | 496,891 | | | 486,401 | |
| Total | | $ | 3,309,678 | | | $ | 2,769,702 | | | $ | 2,586,187 | |
|
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| Net sales: | | | | | |
| United States | $ | 6,263,703 |
| | $ | 6,196,723 |
| | $ | 6,116,490 |
|
| Other | 1,251,723 |
| | 1,243,458 |
| | 1,270,136 |
|
| Total | $ | 7,515,426 |
| | $ | 7,440,181 |
| | $ | 7,386,626 |
|
| | | | | | |
| Long-lived assets: | | | | | |
| United States | $ | 1,575,496 |
| | $ | 1,528,255 |
| | $ | 1,528,723 |
|
| Other | 531,201 |
| | 648,993 |
| | 711,737 |
|
| Total | $ | 2,106,697 |
| | $ | 2,177,248 |
| | $ | 2,240,460 |
|
12.14. EQUITY AND NONCONTROLLING INTERESTTREASURY STOCK ACTIVITY
We had 1,055,000,000 authorized shares of capital stock as of December 31, 2017.2023. Of this total, 900,000,000 shares were designated as Common Stock, 150,000,000 shares were designated as Class B Common Stock (“Class B Stock”) and 5,000,000 shares were designated as Preferred Stock. Each class has a par value of one dollar per share.
Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. The holders of Common Stock have 1 vote per share and the holders of Class B Common Stock have 10 votes per share. However, the Common Stock holders, voting separately as a class, are entitled to elect one-sixth of the Board. With respect to dividend rights, the Common Stock holders are entitled to cash dividends 10% higher than those declared and paid on the Class B Common Stock.
Class B Stock can be converted into Common Stock on a share-for-share basis at any time. During 2017, 2016,2023 and 20152022, 3,500,000 shares and 2,500,000 shares, respectively, of Class B Common Stock were converted to Common Stock by Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “School Trust”). During 2021, no shares of Class B Stock were converted into Common Stock.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 92 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Changes in the outstanding shares of Common Stock for the past three years were as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| Shares issued | | 221,553,025 | | | 221,553,025 | | | 221,553,025 | |
| Treasury shares at beginning of year | | (16,588,308) | | | (15,444,011) | | | (13,325,898) | |
| Stock repurchases: | | | | | | |
| Shares repurchased in the open market under pre-approved share repurchase programs | | — | | | — | | | (871,144) | |
| Milton Hershey School Trust repurchase | | (1,000,000) | | | (1,000,000) | | | — | |
| Shares repurchased in the open market to replace Treasury Stock issued for stock options and incentive compensation | | (127,609) | | | (824,701) | | | (2,005,500) | |
| Stock issuances: | | | | | | |
| Shares issued for stock options and incentive compensation | | 555,818 | | | 680,404 | | | 758,531 | |
| | | | | | |
| Treasury shares at end of year | | (17,160,099) | | | (16,588,308) | | | (15,444,011) | |
| | | | | | |
| Net shares outstanding at end of year | | 204,392,926 | | | 204,964,717 | | | 206,109,014 | |
|
| | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Shares issued | | 359,901,744 |
| | 359,901,744 |
| | 359,901,744 |
|
| Treasury shares at beginning of year | | (147,642,009 | ) | | (143,124,384 | ) | | (138,856,786 | ) |
| Stock repurchases: | | | | | | |
| Shares repurchased in the open market under pre-approved share repurchase programs | | — |
| | (4,640,964 | ) | | (4,209,112 | ) |
| Milton Hershey School Trust repurchase | | (1,500,000 | ) | | — |
| | — |
|
| Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation | | (1,278,675 | ) | | (1,820,766 | ) | | (1,776,838 | ) |
| Stock issuances: | | | | | | |
| Shares issued for stock options and incentive compensation | | 1,379,757 |
| | 1,944,105 |
| | 1,718,352 |
|
| Treasury shares at end of year | | (149,040,927 | ) | | (147,642,009 | ) | | (143,124,384 | ) |
| Net shares outstanding at end of year | | 210,860,817 |
| | 212,259,735 |
| | 216,777,360 |
|
In July 2018, our Board of Directors approved a $500 million share repurchase authorization to repurchase shares of our Common Stock. In May 2021, our Board of Directors approved an additional $500 million share repurchase authorization. As a result of the February 2023 Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, the July 2018 share repurchase authorization was completed and as of December 31, 2023, approximately $370 million remains available for repurchases under our May 2021 share repurchase authorization. In December 2023, our Board of Directors approved an additional $500 million share repurchase authorization. This program is to commence after the existing 2021 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 programs haveprogram 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.
Hershey Trust Company
Hershey Trust Company, as trustee for the Milton Hershey School Trust (the "Trust") and as direct owner of investment shares, held 8,403,1212,105,749 shares of our Common Stock as of December 31, 2017.2023. As trustee for the School Trust, Hershey Trust Company held 60,612,01254,612,012 shares of the Class B Common Stock as of December 31, 2017,2023, and was entitled to cast approximately 80%79% of all of the votes entitled to be cast on matters requiring the vote of both classes of our common stock voting together. Hershey Trust Company, as trustee for the School Trust, or any successor trustee, or Milton Hershey School, as appropriate, must approve any issuance of shares of Common Stock or other action that would result in it not continuing to have voting control of our Company.
Stock Purchase Agreements
In August 2017,February 2023, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company agreed to purchase 1,500,000purchased 1,000,000 shares of the Company’s common stockCommon Stock from the School Trust at a price equal to $106.01$239.91 per share, for a total purchase price of $159,015.$239,910. As a result of this repurchase, our July 2018 share repurchase authorization program was completed in February 2023.
Noncontrolling Interest in Subsidiary
We currently ownIn February 2022, the Company entered into a 50% controlling interest in Lotte Shanghai Foods Co., Ltd. (“LSFC”), a joint venture established in 2007 in ChinaStock Purchase Agreement with Hershey Trust Company, as trustee for the purposeSchool Trust, pursuant to which the Company purchased 1,000,000 shares of manufacturing and selling productthe Company’s Common Stock from the School Trust at a price equal to the venture partners.$203.35 per share, for a total purchase price of $203,350.
A roll-forward showing the 2017 activity relating to the noncontrolling interest follows: |
| | | |
| | Noncontrolling Interest |
| Balance, December 31, 2016 | $ | 41,831 |
|
| Net loss attributable to noncontrolling interest | (26,444 | ) |
| Other comprehensive income - foreign currency translation adjustments | 840 |
|
| Balance, December 31, 2017 | $ | 16,227 |
|
The 2017 net loss attributable to the noncontrolling interest reflects the 50% allocation of LSFC-related business realignment and impairment costs (see Note 7). The 2016 net loss attributable to noncontrolling interests totaled $3,970, which was presented within selling, marketing and administrative expense in the Consolidated Statements of Income since the amount was not considered significant. | | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 93 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
13.15. COMMITMENTS AND CONTINGENCIES
Purchase obligations
We enter into certain obligations for the purchase of raw materials. These obligations are primarily in the form of forward contracts for the purchase of raw materials from third-party brokers and dealers. These contracts minimize the effect of future price fluctuations by fixing the price of part or all of these purchase obligations. Total obligations consisted of fixed price contracts for the purchase of commodities and unpriced contracts that were valued using market prices as of December 31, 2017.2023.
The cost of commodities associated with the unpriced contracts is variable as market prices change over future periods. We mitigate the variability of these costs to the extent that we have entered into commodities futures contracts or other commodity derivative instruments to hedge our costs for those periods. Increases or decreases in market prices are offset by gains or losses on commodities futures contracts or other commodity derivative instruments. Taking delivery of and making payments for the specific commodities for use in the manufacture of finished goods satisfies our obligations under the forward purchase contracts. For each of the three years in the period ended December 31, 2017,2023, we satisfied these obligations by taking delivery of and making payment for the specific commodities.
As of December 31, 2017,2023, we had entered into agreements for the purchase of raw materials with various suppliers. Subject to meeting our quality standards, the purchase obligations covered by these agreements were as follows as of December 31, 2017:2023:
|
| | | | | | | | | | | | | | | | | | | | |
| in millions | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Purchase obligations | | $ | 1,359.7 |
| | $ | 272.3 |
| | $ | 11.4 |
| | $ | 2.5 |
| | $ | 0.7 |
|
Lease commitments
We also have commitments under various operating and capital lease arrangements. Future minimum payments under lease arrangements with a remaining term in excess of one year were as follows as of December 31, 2017:
|
| | | | | | | | |
| | | Operating leases (1) | | Capital leases (2) |
| 2018 | | $ | 16,241 |
| | $ | 3,401 |
|
| 2019 | | 16,784 |
| | 3,469 |
|
| 2020 | | 14,763 |
| | 3,538 |
|
| 2021 | | 12,914 |
| | 3,609 |
|
| 2022 | | 11,267 |
| | 4,216 |
|
| Thereafter | | 182,368 |
| | 175,313 |
|
| |
(1) | Future minimum rental payments reflect commitments under non-cancelable operating leases primarily for offices, retail stores, warehouse and distribution facilities. Total rent expense for the years ended December 31, 2017, 2016 and 2015 was $25,525, $20,330 and $19,754, respectively, including short-term rentals. |
| |
(2) | Future minimum rental payments reflect commitments under non-cancelable capital leases primarily for offices and warehouse facilities. |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| in millions | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 |
| Purchase obligations | | $ | 2,111.1 | | | $ | 614.8 | | | $ | 16.4 | | | $ | 14.2 | | | $ | 14.2 | |
Environmental contingencies
We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations, which require that we handle or dispose of asbestos in a special manner if such facilities undergo major renovations or are demolished. We do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos.
Legal contingencies
We areThe Company is subject to various pending or threatenedcertain legal proceedings and claims that arise inarising out of the ordinary course of our business.business, which cover a wide range of matters including trade regulation, product liability, advertising, contracts, environmental issues, patent and trademark matters, labor and employment matters, human and workplace rights matters and tax. While it is not feasible to predict or determine the outcome of such proceedings and claims with certainty, in our opinion these matters, both individually and in the aggregate, are not expected to have a material effect on our financial condition, results of operations or cash flows.
Collective Bargaining
As of December 31, 2017,2023, the Company employed approximately 15,36018,650 full-time and 1,5501,855 part-time employees worldwide. Collective bargaining agreements covered approximately 5,4506,295 employees, or approximately 32%31% of the Company’s employees worldwide. During 2018,2024, agreements will be negotiated for certain employees at five facilities, four facilitiesof which are outside of the United States, comprising approximately 72% of total employees under collective bargaining agreements. We currently expect that we will be able to renegotiate such agreements on satisfactory terms when they expire.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 94 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
14.16. 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.
We compute basic and diluted earnings per share based on the weighted-average number of shares of Common Stock and Class B common stock outstanding as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| | | Common Stock | | Class B Common Stock | | Common Stock | | Class B Common Stock | | Common Stock | | Class B Common Stock |
| Basic earnings per share: | | | | | | | | | | | | |
| Numerator: | | | | | | | | | | | | |
| Allocation of distributed earnings (cash dividends paid) | | $ | 385,878 |
| | $ | 140,394 |
| | $ | 367,081 |
| | $ | 132,394 |
| | $ | 352,953 |
| | $ | 123,179 |
|
| Allocation of undistributed earnings | | 188,286 |
| | 68,423 |
| | 162,299 |
| | 58,270 |
| | 27,324 |
| | 9,495 |
|
| Total earnings—basic | | $ | 574,164 |
| | $ | 208,817 |
| | $ | 529,380 |
| | $ | 190,664 |
| | $ | 380,277 |
| | $ | 132,674 |
|
| | | | | | | | | | | | | |
| Denominator (shares in thousands): | | | | | | | | | | | | |
| Total weighted-average shares—basic | | 151,625 |
| | 60,620 |
| | 153,519 |
| | 60,620 |
| | 158,471 |
| | 60,620 |
|
| | | | | | | | | | | | | |
| Earnings Per Share—basic | | $ | 3.79 |
| | $ | 3.44 |
| | $ | 3.45 |
| | $ | 3.15 |
| | $ | 2.40 |
| | $ | 2.19 |
|
| | | | | | | | | | | | | |
| Diluted earnings per share: | | | | | | | | | | | | |
| Numerator: | | | | | | | | | | | | |
| Allocation of total earnings used in basic computation | | $ | 574,164 |
| | $ | 208,817 |
| | $ | 529,380 |
| | $ | 190,664 |
| | $ | 380,277 |
| | $ | 132,674 |
|
| Reallocation of total earnings as a result of conversion of Class B common stock to Common stock | | 208,817 |
| | — |
| | 190,664 |
| | — |
| | 132,674 |
| | — |
|
| Reallocation of undistributed earnings | | — |
| | (492 | ) | | — |
| | (324 | ) | | — |
| | (69 | ) |
| Total earnings—diluted | | $ | 782,981 |
| | $ | 208,325 |
| | $ | 720,044 |
| | $ | 190,340 |
| | $ | 512,951 |
| | $ | 132,605 |
|
| | | | | | | | | | | | | |
| Denominator (shares in thousands): | | | | | | | | | | | | |
| Number of shares used in basic computation | | 151,625 |
| | 60,620 |
| | 153,519 |
| | 60,620 |
| | 158,471 |
| | 60,620 |
|
| Weighted-average effect of dilutive securities: | | | | | | | | | | | | |
| Conversion of Class B common stock to Common shares outstanding | | 60,620 |
| | — |
| | 60,620 |
| | — |
| | 60,620 |
| | — |
|
| Employee stock options | | 1,144 |
| | — |
| | 964 |
| | — |
| | 1,335 |
| | — |
|
| Performance and restricted stock units | | 353 |
| | — |
| | 201 |
| | — |
| | 225 |
| | — |
|
| Total weighted-average shares—diluted | | 213,742 |
| | 60,620 |
| | 215,304 |
| | 60,620 |
| | 220,651 |
| | 60,620 |
|
| | | | | | | | | | | | | |
| Earnings Per Share—diluted | | $ | 3.66 |
| | $ | 3.44 |
| | $ | 3.34 |
| | $ | 3.14 |
| | $ | 2.32 |
| | $ | 2.19 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
| | Common Stock | | Class B Common Stock | | Common Stock | | Class B Common Stock | | Common Stock | | Class B Common Stock |
| Basic earnings per share: | | | | | | | | | | | | |
| Numerator: | | | | | | | | | | | | |
| Allocation of distributed earnings (cash dividends paid) | | $ | 663,176 | | | $ | 225,895 | | | $ | 567,897 | | | $ | 207,133 | | | $ | 498,084 | | | $ | 187,903 | |
| Allocation of undistributed earnings | | 728,175 | | | 244,541 | | | 637,438 | | | 232,349 | | | 574,772 | | | 216,753 | |
| Total earnings—basic | | $ | 1,391,351 | | | $ | 470,436 | | | $ | 1,205,335 | | | $ | 439,482 | | | $ | 1,072,856 | | | $ | 404,656 | |
| | | | | | | | | | | | |
| Denominator (shares in thousands): | | | | | | | | | | | | |
| Total weighted-average shares—basic | | 149,499 | | | 55,239 | | | 146,713 | | | 58,822 | | | 146,120 | | | 60,614 | |
| | | | | | | | | | | | |
| Earnings Per Share—basic | | $ | 9.31 | | | $ | 8.52 | | | $ | 8.22 | | | $ | 7.47 | | | $ | 7.34 | | | $ | 6.68 | |
| | | | | | | | | | | | |
| Diluted earnings per share: | | | | | | | | | | | | |
| Numerator: | | | | | | | | | | | | |
| Allocation of total earnings used in basic computation | | $ | 1,391,351 | | | $ | 470,436 | | | $ | 1,205,335 | | | $ | 439,482 | | | $ | 1,072,856 | | | $ | 404,656 | |
| Reallocation of total earnings as a result of conversion of Class B common stock to Common stock | | 470,436 | | | — | | | 439,482 | | | — | | | 404,656 | | | — | |
| Reallocation of undistributed earnings | | — | | | (987) | | | — | | | (1,201) | | | — | | | (1,098) | |
| Total earnings—diluted | | $ | 1,861,787 | | | $ | 469,449 | | | $ | 1,644,817 | | | $ | 438,281 | | | $ | 1,477,512 | | | $ | 403,558 | |
| | | | | | | | | | | | |
| Denominator (shares in thousands): | | | | | | | | | | | | |
| Number of shares used in basic computation | | 149,499 | | | 55,239 | | | 146,713 | | | 58,822 | | | 146,120 | | | 60,614 | |
| Weighted-average effect of dilutive securities: | | | | | | | | | | | | |
| Conversion of Class B common stock to Common shares outstanding | | 55,239 | | | — | | | 58,822 | | | — | | | 60,614 | | | — | |
| Employee stock options | | 424 | | | — | | | 571 | | | — | | | 609 | | | — | |
| Performance and restricted stock units | | 385 | | | — | | | 469 | | | — | | | 415 | | | — | |
| Total weighted-average shares—diluted | | 205,547 | | | 55,239 | | | 206,575 | | | 58,822 | | | 207,758 | | | 60,614 | |
| | | | | | | | | | | | |
| Earnings Per Share—diluted | | $ | 9.06 | | | $ | 8.50 | | | $ | 7.96 | | | $ | 7.45 | | | $ | 7.11 | | | $ | 6.66 | |
The earnings per share calculations for the years ended December 31, 2017, 20162023, 2022 and 20152021 excluded 2,374, 3,68015, 5 and 2,66043 stock options (in thousands), respectively, that would have been antidilutive.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 95 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
15.17. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net reports certain gains and losses associated with activities not directly related to our core operations. A summary of the components of other (income) expense, net is as follows:
| | | | | | | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2023 | | 2022 | | 2021 |
Write-down of equity investments in partnerships qualifying for historic and renewable energy tax credits (see Note 8) | | $ | 210,484 | | | $ | 188,286 | | | $ | 113,756 | |
Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans (see Note 11) | | 28,010 | | | 18,466 | | | 5,177 | |
| | | | | | |
| Other (income) expense, net | | (1,276) | | | (593) | | | 148 | |
| Total | | $ | 237,218 | | | $ | 206,159 | | | $ | 119,081 | |
18. RELATED PARTY TRANSACTIONS
Hershey Trust Company, as trustee for the trust established by Milton S. and Catherine S. Hershey that has as its sole beneficiary the School Trust, maintains voting control over The Hershey Company.
In any given year, we may engage in certain transactions with Hershey Trust Company, Milton Hershey School, the Milton Hershey School Trust and companies owned by and/or affiliated with any of the foregoing. Most transactions with these related parties are immaterial and do not require disclosure, but certain transactions are more significant in nature and have been deemed material for disclosure.
A summary of material related party transactions with Hershey Trust Company and/or its affiliates for the years ended December 31, 2023 and 2022 is noted below. There were no material related party transactions with Hershey Trust Company and/or its affiliates for the year ended December 31, 2021.
Sale and Donation of Property, Plant and Equipment
In May 2022, the Company entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company agreed to sell certain real and personal property consisting of approximately six acres of land located in Hershey, Pennsylvania, together with portions of a building located on the land. Additionally, in June 2022, the Company entered into a Donation Agreement with Hershey Trust Company, as trustee for The M.S. Hershey Foundation, pursuant to which the Company agreed to donate a portion of the building concurrently with the closing of the Purchase Agreement. The sale and donation transactions closed in June 2022. Total proceeds from the sale were approximately $6,300 (net of transaction and closing costs), resulting in a loss of $13,568, which was recorded in the SM&A expense caption within the Consolidated Statements of Income. The fair values of the disposed assets were supported by a proposed sales price submitted by a third-party buyer received prior to executing the Purchase Agreement.
Stock Purchase Agreements
In February 2023 and February 2022, the Company entered into Stock Purchase Agreements with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased shares of its Common Stock from the School Trust (see Note 14).
|
| | | | | | | | | | | | |
| For the years ended December 31, | | 2017 | | 2016 | | 2015 |
| Write-down of equity investments in partnerships qualifying for tax credits | | $ | 66,209 |
| | $ | 43,482 |
| | $ | 39,489 |
|
| Settlement of SGM liability (see Note 2) | | — |
| | (26,650 | ) | | — |
|
| Gain on sale of non-core trademark | | — |
| | — |
| | (9,950 | ) |
| Other (income) expense, net | | (518 | ) | | (673 | ) | | 600 |
|
| Total | | $ | 65,691 |
| | $ | 16,159 |
| | $ | 30,139 |
|
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 96 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
16.19. SUPPLEMENTAL BALANCE SHEET INFORMATION
The components of certain asset accounts included within our Consolidated Balance Sheet accountsSheets are as follows:
| | | | | | | | | | | | | | |
| December 31, | | 2023 | | 2022 |
| Inventories: | | | | |
| Raw materials | | $ | 481,111 | | | $ | 372,612 | |
| Goods in process | | 192,232 | | | 137,298 | |
| Finished goods | | 948,974 | | | 855,217 | |
| Inventories at FIFO | | 1,622,317 | | | 1,365,127 | |
| Adjustment to LIFO | | (281,321) | | | (192,008) | |
| Total inventories | | $ | 1,340,996 | | | $ | 1,173,119 | |
| | | | |
| Prepaid expenses and other: | | | | |
| Prepaid expenses | | $ | 227,567 | | | $ | 143,888 | |
| | | | |
| Other current assets | | 118,021 | | | 128,307 | |
| Total prepaid expenses and other | | $ | 345,588 | | | $ | 272,195 | |
| | | | |
| Property, plant and equipment: | | | | |
| Land | | $ | 180,751 | | | $ | 155,963 | |
| Buildings | | 1,763,070 | | | 1,545,053 | |
| Machinery and equipment | | 3,861,006 | | | 3,592,251 | |
| Construction in progress | | 644,244 | | | 416,220 | |
| Property, plant and equipment, gross | | 6,449,071 | | | 5,709,487 | |
| Accumulated depreciation | | (3,139,393) | | | (2,939,785) | |
| Property, plant and equipment, net | | $ | 3,309,678 | | | $ | 2,769,702 | |
| | | | |
| Other non-current assets: | | | | |
| Pension | | $ | 48,506 | | | $ | 53,495 | |
| Capitalized software, net | | 360,205 | | 320,034 | |
| | | | |
| Operating lease ROU assets | | 307,976 | | | 326,472 | |
| Investments in unconsolidated affiliates | | 207,177 | | | 133,029 | |
| Other non-current assets | | 137,563 | | | 111,959 | |
| Total other non-current assets | | $ | 1,061,427 | | | $ | 944,989 | |
| | | | |
|
| | | | | | | | |
| December 31, | | 2017 | | 2016 |
| Inventories: | | | | |
| Raw materials | | $ | 224,940 |
| | $ | 315,239 |
|
| Goods in process | | 93,627 |
| | 88,490 |
|
| Finished goods | | 614,945 |
| | 528,587 |
|
| Inventories at FIFO | | 933,512 |
| | 932,316 |
|
| Adjustment to LIFO | | (180,676 | ) | | (186,638 | ) |
| Total inventories | | $ | 752,836 |
| | $ | 745,678 |
|
| | | | | |
| Property, plant and equipment: | | | | |
| Land | | $ | 108,300 |
| | $ | 103,865 |
|
| Buildings | | 1,214,158 |
| | 1,238,634 |
|
| Machinery and equipment | | 2,925,353 |
| | 3,001,552 |
|
| Construction in progress | | 212,912 |
| | 230,987 |
|
| Property, plant and equipment, gross | | 4,460,723 |
| | 4,575,038 |
|
| Accumulated depreciation | | (2,354,026 | ) | | (2,397,790 | ) |
| Property, plant and equipment, net | | $ | 2,106,697 |
| | $ | 2,177,248 |
|
| | | | | |
| Other assets: | | | | |
| Capitalized software, net | | $ | 104,881 |
| | $ | 95,301 |
|
| Income tax receivable | | — |
| | 1,449 |
|
| Other non-current assets | | 146,998 |
| | 71,615 |
|
| Total other assets | | $ | 251,879 |
| | $ | 168,365 |
|
| | | | | |
| Accrued liabilities: | | | | |
| Payroll, compensation and benefits | | $ | 190,863 |
| | $ | 240,080 |
|
| Advertising and promotion | | 305,107 |
| | 358,573 |
|
| Other | | 180,164 |
| | 152,333 |
|
| Total accrued liabilities | | $ | 676,134 |
| | $ | 750,986 |
|
| | | | | |
| Other long-term liabilities: | | | | |
| Post-retirement benefits liabilities | | $ | 215,320 |
| | $ | 220,270 |
|
| Pension benefits liabilities | | 39,410 |
| | 65,687 |
|
| Other | | 184,209 |
| | 114,204 |
|
| Total other long-term liabilities | | $ | 438,939 |
| | $ | 400,161 |
|
| | | | | |
| Accumulated other comprehensive loss: | | | | |
| Foreign currency translation adjustments | | $ | (91,837 | ) | | $ | (110,613 | ) |
| Pension and post-retirement benefit plans, net of tax | | (169,526 | ) | | (207,169 | ) |
| Cash flow hedges, net of tax | | (52,383 | ) | | (58,106 | ) |
| Total accumulated other comprehensive loss | | $ | (313,746 | ) | | $ | (375,888 | ) |
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 97 | |
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| | | | | | | | | | | | | | |
| The components of certain liability and stockholders’ equity accounts included within our Consolidated Balance Sheet accounts are as follows: |
| December 31, | | 2023 | | 2022 |
| Accounts Payable: | | | | |
| Accounts Payable—trade | | $ | 630,536 | | | $ | 636,472 | |
| Supplier finance program obligations | | 149,261 | | 105,293 |
| Other | | 306,386 | | 228,793 |
| Total accounts payable | | $ | 1,086,183 | | | $ | 970,558 | |
| | | | |
| Accrued liabilities: | | | | |
| Payroll, compensation and benefits | | $ | 261,961 | | | $ | 293,865 | |
| Advertising, promotion and product allowances | | 343,444 | | | 337,024 | |
| Operating lease liabilities | | 34,494 | | | 31,787 | |
| | | | |
| Other | | 227,916 | | | 169,842 | |
| Total accrued liabilities | | $ | 867,815 | | | $ | 832,518 | |
| | | | |
| Other long-term liabilities: | | | | |
| Post-retirement benefits liabilities | | $ | 90,718 | | | $ | 147,174 | |
| Pension benefits liabilities | | 28,949 | | | 27,696 | |
| Operating lease liabilities | | 277,089 | | | 294,849 | |
| Other | | 263,917 | | | 250,023 | |
| Total other long-term liabilities | | $ | 660,673 | | | $ | 719,742 | |
| | | | |
| Accumulated other comprehensive loss: | | | | |
| Foreign currency translation adjustments | | $ | (87,706) | | | $ | (110,364) | |
| Pension and post-retirement benefit plans, net of tax | | (126,800) | | | (118,254) | |
| Cash flow hedges, net of tax | | (15,572) | | | (23,715) | |
| Total accumulated other comprehensive loss | | $ | (230,078) | | | $ | (252,333) | |
17. QUARTERLY DATA (Unaudited)
Summary quarterly results were as follows:
|
| | | | | | | | | | | | | | | | |
| Year 2017 | | First | | Second | | Third | | Fourth |
| Net sales | | $ | 1,879,678 |
| | $ | 1,662,991 |
| | $ | 2,033,121 |
| | $ | 1,939,636 |
|
| Gross profit | | 906,560 |
| | 763,210 |
| | 940,222 |
| | 834,527 |
|
| Net income attributable to The Hershey Company | | 125,044 |
| | 203,501 |
| | 273,303 |
| | 181,133 |
|
| Common stock: | | | | | | | | |
Net income per share—Basic(a) | | 0.60 |
| | 0.98 |
| | 1.32 |
| | 0.88 |
|
Net income per share—Diluted(a) | | 0.58 |
| | 0.95 |
| | 1.28 |
| | 0.85 |
|
| Dividends paid per share | | 0.618 |
| | 0.618 |
| | 0.656 |
| | 0.656 |
|
| Class B common stock: | | | | | | | | |
Net income per share—Basic(a) | | 0.55 |
| | 0.89 |
| | 1.20 |
| | 0.80 |
|
Net income per share—Diluted(a) | | 0.55 |
| | 0.89 |
| | 1.20 |
| | 0.80 |
|
| Dividends paid per share | | 0.562 |
| | 0.562 |
| | 0.596 |
| | 0.596 |
|
| Market price—common stock: | | | | | | | | |
| High | | 109.61 |
| | 115.96 |
| | 110.50 |
| | 115.45 |
|
| Low | | 103.45 |
| | 106.41 |
| | 104.06 |
| | 102.87 |
|
|
| | | | | | | | | | | | | | | | |
| Year 2016 | | First | | Second | | Third | | Fourth |
| Net sales | | $ | 1,828,812 |
| | $ | 1,637,671 |
| | $ | 2,003,454 |
| | $ | 1,970,244 |
|
| Gross profit | | 817,376 |
| | 747,398 |
| | 850,848 |
| | 742,269 |
|
| Net income attributable to The Hershey Company | | 229,832 |
| | 145,956 |
| | 227,403 |
| | 116,853 |
|
| Common stock: | | | | | | | | |
Net income per share—Basic(a) | | 1.09 |
| | 0.70 |
| | 1.09 |
| | 0.56 |
|
Net income per share—Diluted(a) | | 1.06 |
| | 0.68 |
| | 1.06 |
| | 0.55 |
|
| Dividends paid per share | | 0.583 |
| | 0.583 |
| | 0.618 |
| | 0.618 |
|
| Class B common stock: | | | | | | | | |
Net income per share—Basic(a) | | 0.99 |
| | 0.64 |
| | 0.99 |
| | 0.51 |
|
Net income per share—Diluted(a) | | 0.99 |
| | 0.64 |
| | 0.99 |
| | 0.51 |
|
| Dividends paid per share | | 0.530 |
| | 0.530 |
| | 0.562 |
| | 0.562 |
|
| Market price—common stock: | | | | | | | | |
| High | | 93.71 |
| | 113.49 |
| | 113.89 |
| | 104.44 |
|
| Low | | 83.32 |
| | 89.60 |
| | 94.64 |
| | 94.63 |
|
| | | | | | | | |
| Quarterly income per share amounts do not total to the annual amount due to changes in weighted-average shares outstanding during the year. |
18. SUBSEQUENT EVENTS
Short-term Debt
On January 8, 2018, we entered into an additional credit facility under which the Company may borrow up to $1.5 billion on an unsecured, revolving basis. Funds borrowed may be used for general corporate purposes, including commercial paper backstop and acquisitions. This facility is scheduled to expire on January 7, 2019.
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Business Acquisition
On January 31, 2018, we completed the acquisition of all of the outstanding shares of Amplify Snack Brands, Inc. (“Amplify”), a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPop, Oatmega, Paqui and Tyrrells. Amplify's anchor brand, SkinnyPop, is a market-leading ready-to-eat popcorn brand and is available in a wide range of food distribution channels in the United States. The business enables us to capture more consumer snacking occasions by creating a broader portfolio of brands and is expected to generate 2018 post-acquisition net sales of approximately $375,000 to $385,000.
The purchase consideration for the outstanding shares totaled approximately $908,000, or $12.00 per outstanding share. In connection with acquisition, the Company paid a total amount of approximately $607,000 to pay in full all outstanding debt owed by Amplify under its existing credit agreement as of January 31, 2018. Funding for the acquisition and repayment of the acquired debt consisted of cash borrowings under the Company's new revolving credit facility. We are currently in the process of determining the allocation of the purchase price, which will include the recognition of identifiable intangible assets and goodwill. We anticipate that the value of Amplify's acquired net assets will be minimal. Goodwill is being determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets) and is not expected to be deductible for tax purposes. The goodwill that will result from the acquisition is attributable primarily to cost-reduction synergies as Amplify leverages Hershey's resources, expertise and capability-building.
| |
Item 9.The Hershey Company | 2023 Form 10-K | Page 98 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
| |
Item 9A. | CONTROLS AND PROCEDURES
|
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s 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”), as of December 31, 2017.2023. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017.2023.
Design and Evaluation of Internal Control Over Financial ReportingDisclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s 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. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Management'sManagement’s report on the Company'sCompany’s internal control over financial reporting appears on the following page. There wereWe are in the process of a multi-year implementation of a new global enterprise resource planning (“ERP”) system, which replaces 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. During the third quarter of 2022, we completed the implementation of one operating segment that is included in our International segment. In July 2023, we completed the transition to the new ERP system as the consolidated book of record. During October 2023, we completed the implementation of our new ERP system in the North America Salty Snacks segment. We updated our internal controls to reflect changes to the financial reporting business processes impacted by the implementation. Additionally, the Company acquired certain assets that provide additional manufacturing capacity from Weaver Popcorn Manufacturing, Inc. (“Weaver”) (May 2023). Other than the implementation of the new ERP system in North America Salty Snacks and the ongoing integration of the Weaver acquisition, there have been no changes into the Company’s internal control over financial reporting during the fourth quarter of 20172023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Further, the final implementation phase will occur in 2024 for the remainder of the business. The implementation will result in changes to our internal controls over financial reporting. As implementation occurs, we will evaluate quarterly whether such changes materially affect our internal control over financial reporting.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 99 | |
MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of The Hershey Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017.2023. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control–Integrated Framework (2013 edition). Based on this assessment, management concluded that, as of December 31, 2017,2023, the Company’s internal control over financial reporting was effective based on those criteria.
Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the acquisition of certain assets that provide additional manufacturing capacity from Weaver, which is included in the 2023 consolidated financial statements of the Company and constituted 1.4% of total assets as of December 31, 2023. This exclusion is in accordance with the guidance issued by the U.S. Securities and Exchange Commission that allows companies to exclude acquisitions from management’s report on internal control over financial reporting for the first year after the acquisition.
The Company’s independent auditors have audited, and reported on, the Company’s internal control over financial reporting as of December 31, 2017.2023.
Item 9B. OTHER INFORMATION
Director and Executive Officer Trading
A portion of our directors’ and officers’ compensation is in the form of equity awards and, from time to time, they may engage in open-market transactions with respect to their Company securities for diversification or other personal reasons. All such transactions in Company securities by directors and officers must comply with the Company’s Insider Trading Policy, which requires that transactions be in accordance with applicable U.S. federal securities laws that prohibit trading while in possession of material nonpublic information. Rule 10b5-1 under the Exchange Act provides an affirmative defense that enables directors and officers to prearrange transactions in the Company’s securities in a manner that avoids concerns about initiating transactions while in possession of material nonpublic information.
The following table describes the contracts, instructions or written plans for the purchase or sale of securities adopted by our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) during the three months ended December 31, 2023, that are intended to satisfy the affirmative defense conditions of Rule 10b5-1(c). No other Rule 10b5-1 trading arrangements or “non-Rule 10b5–1 trading arrangements” (as defined by S-K Item 408(c)) were entered into or terminated by our directors or officers during such period.
| | | | | | | | | | | | | | | | | | | | |
| Name and Title | | Date of Adoption of 10b5-1 Plan | | Duration of 10b5-1 Plan(1) | | Aggregate Number of Securities to be Sold or Purchased |
Jennifer L. McCalman VP, Chief Accounting Officer | | 11/3/2023 | | 2/24/2024 | | Sell 453 shares |
(1) The plan duration is until the date listed in this column or such earlier date upon the completion of all trades under the plan (or the expiration of the orders relating to such trades without execution) or the occurrence of such other termination events as specified in the plan.
Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
None.
|
| | |
| /s/ MICHELE G. BUCK | | /s/ PATRICIA A. LITTLE | |
Michele G. Buck
Chief Executive Officer
| The Hershey Company | 2023 Form 10-K | Page 100 | Patricia A. Little
Chief Financial Officer
(Principal Financial Officer) |
| |
Item 9B. | OTHER INFORMATION
|
None.
PART III
| |
Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The information regarding executive officers of the Company required by Item 401 of SEC Regulation S-K is incorporated herein by reference from the disclosure included under the caption “Supplemental Item. Information About Out Executive Officers of the Registrant”Officers” at the end of Part I of this Annual Report on Form 10-K.
The information required by Item 401 of SEC Regulation S-K concerning the directors and nominees for director of the Company, together with a discussion of the specific experience, qualifications, attributes and skills that led the Board to conclude that the director or nominee should serve as a director at this time, will be located in the Proxy Statement in the section entitled “Proposal No. 1 – Election of Directors,” which information is incorporated herein by reference.
Information regarding the identification of the Audit Committee as a separately-designated standing committee of the Board and information regarding the status of one or more members of the Audit Committee as an “audit committee financial expert” will be located in the Proxy Statement in the section entitled “Meetings and Committees of the Board“Corporate Governance – Committees of the Board,” which information is incorporated herein by reference.
Reporting of any inadvertent late filings under Section 16(a) of the Securities Exchange Act of 1934, as amended, will be located in the Proxy Statement in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is incorporated herein by reference.
Information regarding our Code of Conduct applicable to our directors, officers and employees is located in Part I of this Annual Report on Form 10-K, under the heading “Available Information.”
To the extent disclosure of any delinquent form under Section 16(a) of the Securities Exchange Act of 1934 is made by the Company, such disclosure will be set forth in our Proxy Statement under the caption “Delinquent Section 16(a) Reports” and is incorporated herein by reference. | |
Item 11. | EXECUTIVE COMPENSATIONItem 11. EXECUTIVE COMPENSATION. |
Information regarding the compensation of each of our named executive officers, including our Chief Executive Officer that is required by this Item 11 will be located in the Proxy Statement in the section entitled “Compensation Discussion & Analysis,” which informationAnalysis” and is incorporated herein by reference. Information regarding the compensation of our directors will be located in the Proxy Statement in the section entitled “Non-Employee Director Compensation,” which information is incorporated herein by reference.
The information required by Item 407(e)(4) of SEC Regulation S-K will be located in the Proxy Statement in the section entitled “Compensation Committee Interlocks and Insider Participation,” which information is incorporated herein by reference.
The information required by Item 407(e)(5) of SEC Regulation S-K will be located in the Proxy Statement in the section entitled “Compensation Committee Report,” which information is incorporated herein by reference.
| |
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
Information concerning ownership of our voting securities by certain beneficial owners, individual nominees for director, the named executive officers, including persons serving as our Chief Executive Officer and Chief Financial Officer, and directors and executive officers as a group, will be located in the Proxy Statement in the section entitled “Share Ownership of Directors, Management and Certain Beneficial Owners,” which information is incorporated herein by reference.
Information regarding all of the Company’s equity compensation plans will be located in the Proxy Statement in the section entitled “Equity“Compensation Committee Report – Equity Compensation Plan Information,” which information is incorporated herein by reference.
| | | | | | | | |
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe Hershey Company | 2023 Form 10-K | Page 101 | |
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Information regarding transactions with related persons will be located in the Proxy Statement in the section entitled “Certain Transactions and Relationships,” which information is incorporated herein by reference. Information regarding director independence will be located in the Proxy Statement in the section entitled “Corporate Governance – Director Independence,” which information is incorporated herein by reference.
| |
Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICESItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Information regarding “Principal Accounting Fees and Services,” including the policy regarding pre-approval of audit and non-audit services performed by our Company’s independent auditors, will be located in the Proxy Statement in the section entitled “Information about ourOur Independent Auditors,” which information is incorporated herein by reference.
| | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 102 | |
PART IV
| |
Item 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULESItem 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Item 15(a)(1): Financial Statements
The audited consolidated financial statements of The Hershey Company and its subsidiaries and the Report of Independent Registered Public Accounting Firm thereon, as required to be filed, are located under Item 8 of this Annual Report on Form 10-K.
Item 15(a)(2): Financial Statement Schedule
Schedule II—Valuation and Qualifying Accounts for The Hershey Company and its subsidiaries for the years ended December 31, 2017, 20162023, 2022 and 20152021 is filed as part of this Annual Report on Form 10-K as required by Item 15(c).
We omitted other schedules because they are not applicable or the required information is set forth in the consolidated financial statements or notes thereto.
Item 15(a)(3): Exhibits
The information called for by this Item isfollowing exhibits are filed as part of, or incorporated by reference from the Exhibit Index included ininto, this Annual Report on Form 10-K.
| |
Item 16. | FORM 10-K SUMMARY |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 27th day of February, 2018.
| | | | | | | | |
| EXHIBIT INDEX |
| | |
| | THE HERSHEY COMPANY |
| | (Registrant) |
| | |
By: | | /s/ PATRICIA A. LITTLE |
| | Patricia A. Little |
| | Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.
|
| | | | |
Signature | | Title | | Date |
| | | | |
/s/ MICHELE G. BUCK | | Chief Executive Officer and Director | | February 27, 2018 |
Michele G. Buck | | (Principal Executive Officer) | | |
| | | | |
/s/ PATRICIA A. LITTLE | | Chief Financial Officer | | February 27, 2018 |
Patricia A. Little | | (Principal Financial Officer) | | |
| | | | |
/s/ JAVIER H. IDROVO | | Chief Accounting Officer | | February 27, 2018 |
Javier H. Idrovo | | (Principal Accounting Officer) | | |
| | | | |
/s/ JOHN P. BILBREY | | Chairman of the Board | | February 27, 2018 |
John P. Bilbrey | | | | |
| | | | |
/s/ PAMELA M. ARWAY | | Director | | February 27, 2018 |
Pamela M. Arway | | | | |
| | | | |
/s/ JAMES W. BROWN | | Director | | February 27, 2018 |
James W. Brown | | | | |
| | | | |
/s/ CHARLES A. DAVIS | | Director | | February 27, 2018 |
Charles A. Davis | | | | |
| | | | |
/s/ MARY KAY HABEN | | Director | | February 27, 2018 |
Mary Kay Haben | | | | |
| | | | |
/s/ M. DIANE KOKEN | | Director | | February 27, 2018 |
M. Diane Koken | | | | |
| | | | |
/s/ ROBERT M. MALCOLM | | Director | | February 27, 2018 |
Robert M. Malcolm | | | | |
| | | | |
/s/ JAMES M. MEAD | | Director | | February 27, 2018 |
James M. Mead | | | | |
| | | | |
/s/ ANTHONY J. PALMER | | Director | | February 27, 2018 |
Anthony J. Palmer | | | | |
| | | | |
/s/ THOMAS J. RIDGE | | Director | | February 27, 2018 |
Thomas J. Ridge | | | | |
| | | | |
/s/ WENDY L. SCHOPPERT | | Director | | February 27, 2018 |
Wendy L. Schoppert | | | | |
| | | | |
/s/ DAVID L. SHEDLARZ | | Director | | February 27, 2018 |
David L. Shedlarz | | | | |
Schedule II
THE HERSHEY COMPANY AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2017, 2016 and 2015
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Additions | | | | |
| Description | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged
to Other Accounts | | Deductions
from
Reserves | | Balance
at End of Period |
| In thousands of dollars | | | | | | | | | | |
| | | | | | | | | | | |
| For the year ended December 31, 2017 | | | | | | | | | | |
| Allowances deducted from assets | | | | | | | | | | |
| Accounts receivable—trade, net (a) | | $ | 40,153 |
| | $ | 166,993 |
| | $ | — |
| | $ | (165,354 | ) | | $ | 41,792 |
|
| Valuation allowance on net deferred taxes (b) | | 235,485 |
| | 92,139 |
| | — |
| | (15,476 | ) | | 312,148 |
|
| Inventory obsolescence reserve (c) | | 20,043 |
| | 35,666 |
| | — |
| | (36,361 | ) | | 19,348 |
|
| Total allowances deducted from assets | | $ | 295,681 |
| | $ | 294,798 |
| | $ | — |
| | $ | (217,191 | ) | | $ | 373,288 |
|
| | | | | | | | | | | |
| For the year ended December 31, 2016 | | | | | | | | | | |
| Allowances deducted from assets | | | | | | | | | | |
| Accounts receivable—trade, net (a) | | $ | 32,638 |
| | $ | 174,314 |
| | $ | — |
| | $ | (166,799 | ) | | $ | 40,153 |
|
| Valuation allowance on net deferred taxes (b) | | 207,055 |
| | 28,430 |
| | — |
| | — |
| | 235,485 |
|
| Inventory obsolescence reserve (c) | | 22,632 |
| | 30,053 |
| | — |
| | (32,642 | ) | | 20,043 |
|
| Total allowances deducted from assets | | $ | 262,325 |
| | $ | 232,797 |
| | $ | — |
| | $ | (199,441 | ) | | $ | 295,681 |
|
| | | | | | | | | | | |
| For the year ended December 31, 2015 | | | | | | | | | | |
| Allowances deducted from assets | | | | | | | | | | |
| Accounts receivable—trade, net (a) | | $ | 15,885 |
| | $ | 172,622 |
| | $ | — |
| | $ | (155,869 | ) | | $ | 32,638 |
|
| Valuation allowance on net deferred taxes (b) | | 147,223 |
| | 59,832 |
| | — |
| | — |
| | 207,055 |
|
| Inventory obsolescence reserve (c) | | 11,748 |
| | 32,434 |
| | — |
| | (21,550 | ) | | 22,632 |
|
| Total allowances deducted from assets | | $ | 174,856 |
| | $ | 264,888 |
| | $ | — |
| | $ | (177,419 | ) | | $ | 262,325 |
|
| | | | | | | | | | | |
(a) Includes allowances for doubtful accounts, anticipated discounts and write-offs of uncollectible accounts receivable.
(b) Includes adjustments to the valuation allowance for deferred tax assets that we do not expect to realize. The 2017 deductions from reserves reflects the change in valuation allowance due to the remeasurement of corresponding U.S. deferred tax assets at the lower enacted corporate tax rates resulting from the U.S. tax reform.
(c) Includes adjustments to the inventory reserve, transfers, disposals and write-offs of obsolete inventory.
|
| | |
EXHIBIT INDEX |
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| Exhibit Number | | Description |
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| 4.1 | | The Company has issued certain long-term debt instruments, no one class of which creates indebtedness exceeding 10% of the total assets of the Company and its subsidiaries on a consolidated basis. These classes consist of the following: |
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| | 3) 8.8% Debentures due 2021# |
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| 9) | 13) Other Obligations |
| | The Company undertakes to furnish copies of the agreements governing these debt instruments to the Securities and Exchange Commission upon its request. |
10.1(a) | | |
| 10.1(a) | | Kit Kat® and Rolo® License Agreement (the “License Agreement”) between the Company and Rowntree Mackintosh Confectionery Limited is incorporated by reference from Exhibit 10(a) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1980.# |
| 10.1(b) | | | | | | | |
| The Hershey Company | 2023 Form 10-K | Page 103 | |
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| 10.1(b) | | Amendment to the License Agreement is incorporated by reference from Exhibit 19 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 3, 1988.# |
| 10.1(c) | | Assignment of the License Agreement by Rowntree Mackintosh Confectionery Limited to Société des Produits Nestlé SA as of January 1, 1990 is incorporated by reference from Exhibit 19 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990.# |
| 10.2 | | Peter Paul/York Domestic Trademark & Technology License Agreement between the Company and Cadbury Schweppes Inc. (now Kraft Foods Ireland Intellectual Property Limited) dated August 25, 1988, is incorporated by reference from Exhibit 2(a) to the Company’s Current Report on Form 8-K dated September 8, 1988.# |
| 10.3 | | Cadbury Trademark & Technology License Agreement between the Company and Cadbury Limited (now Cadbury UK Limited) dated August 25, 1988, is incorporated by reference from Exhibit 2(a) to the Company’s Current Report on Form 8-K dated September 8, 1988.# |
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| | Five Year Credit Agreement dated as of October 14, 2011,April 26, 2023, among the Company and the banks, financial institutions and other institutional lenders listed on the respective signature pages thereof (“Lenders”), Bank of America, N.A., as administrative agent for the Lenders, JPMorgan Chase Bank, N.A.and Citibank, N.A., as syndication agents, Royal Bank of Canada, as documentation agent, and BofA Securities, Inc., JPMorgan Chase Bank, N.A., Citibank, N.A.,RBC Capital Markets, and PNCU.S. Bank National Association as documentation agents, and Bank of America Merrill Lynch, J.P. Morgan Securities LLC, Citigroup Global Markets, Inc. and PNC Capital Markets LLC,, as joint lead arrangers and joint book managers, is incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K filed OctoberApril 26, 20 2011.23. |
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| | Stock Purchase Agreement, dated August 24, 2017,February 13, 2023, between Milton Hershey School Trust, by its trustee, Hershey Trust Company, and theThe Hershey Company, is incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 28, 2017.February 15, 2023. |
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| The Hershey Company | 2023 Form 10-K | Page 104 | |
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| `The Hershey Company | 2023 Form 10-K | Page 105 | |
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| 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. |
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| 104 | | The cover page from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, formatted in Inline XBRL and contained in Exhibit 101. |
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| * | | Filed herewith |
| ** | | Furnished herewith |
| + | | Management contract, compensatory plan or arrangement |
#† | | Portions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K |
| # | | Pursuant to Instruction 1 to Regulation S-T Rule 105(d), no hyperlink is required for any exhibit incorporated by reference that has not been filed with the SEC in electronic format |
Item 16. FORM 10-K SUMMARY
None.
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| The Hershey Company | 2023 Form 10-K | Page 106 | |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, this 20th day of February, 2024.
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| | THE HERSHEY COMPANY |
| | (Registrant) |
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| By: | | /s/ STEVEN E. VOSKUIL |
| | Steven E. Voskuil |
| | Senior Vice President, Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.
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| Signature | | Title | | Date |
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| /s/ MICHELE G. BUCK | | Chairman of the Board, President and Chief Executive Officer | | February 20, 2024 |
| Michele G. Buck | | (Principal Executive Officer) | | |
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| /s/ STEVEN E. VOSKUIL | | Senior Vice President, Chief Financial Officer | | February 20, 2024 |
| Steven E. Voskuil | | (Principal Financial Officer) | | |
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| /s/ JENNIFER L. MCCALMAN | | Vice President, Chief Accounting Officer | | February 20, 2024 |
| Jennifer L. McCalman | | (Principal Accounting Officer) | | |
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| /s/ ANTHONY J. PALMER | | Lead Independent Director | | February 20, 2024 |
| Anthony J. Palmer | | | | |
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| /s/ PAMELA M. ARWAY | | Director | | February 20, 2024 |
| Pamela M. Arway | | | | |
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| /s/ VICTOR L. CRAWFORD | | Director | | February 20, 2024 |
| Victor L. Crawford | | | | |
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| /s/ ROBERT M. DUTKOWSKY | | Director | | February 20, 2024 |
| Robert M. Dutkowsky | | | | |
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| /s/ MARY KAY HABEN | | Director | | February 20, 2024 |
| Mary Kay Haben | | | | |
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| /s/ JAMES C. KATZMAN | | Director | | February 20, 2024 |
| James C. Katzman | | | | |
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| /s/ M. DIANE KOKEN | | Director | | February 20, 2024 |
| M. Diane Koken | | | | |
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| /s/ HUONG MARIA T. KRAUS | | Director | | February 20, 2024 |
| Huong Maria T. Kraus | | | | |
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| /s/ ROBERT M. MALCOLM | | Director | | February 20, 2024 |
| Robert M. Malcolm | | | | |
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| /s/ JUAN R. PEREZ | | Director | | February 20, 2024 |
| Juan R. Perez | | | | |
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| The Hershey Company | 2023 Form 10-K | Page 107 | |
THE HERSHEY COMPANY AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2023, 2022 and 2021
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| Description | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions from Reserves | | Balance at End of Period |
| In thousands of dollars | | | | | | | | | | |
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| For the year ended December 31, 2023 | | | | | | | | | | |
| Allowances deducted from assets | | | | | | | | | | |
| Accounts receivable—trade, net (a) | | $ | 26,001 | | | $ | 248,022 | | | $ | — | | | $ | (242,360) | | | $ | 31,663 | |
| Valuation allowance on net deferred taxes (b) | | 137,531 | | | 6,927 | | | — | | | (30,309) | | | 114,149 | |
| Inventory obsolescence reserve (c) | | 29,354 | | | 73,687 | | | — | | | (61,202) | | | 41,839 | |
| Total allowances deducted from assets | | $ | 192,886 | | | $ | 328,636 | | | $ | — | | | $ | (333,871) | | | $ | 187,651 | |
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| For the year ended December 31, 2022 | | | | | | | | | | |
| Allowances deducted from assets | | | | | | | | | | |
| Accounts receivable—trade, net (a) | | $ | 28,837 | | | $ | 228,463 | | | $ | — | | | $ | (231,299) | | | $ | 26,001 | |
| Valuation allowance on net deferred taxes (b) | | 184,896 | | | 9,578 | | | — | | | (56,943) | | | 137,531 | |
| Inventory obsolescence reserve (c) | | 19,472 | | | 44,497 | | | — | | | (34,615) | | | 29,354 | |
| Total allowances deducted from assets | | $ | 233,205 | | | $ | 282,538 | | | $ | — | | | $ | (322,857) | | | $ | 192,886 | |
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| For the year ended December 31, 2021 | | | | | | | | | | |
| Allowances deducted from assets | | | | | | | | | | |
| Accounts receivable—trade, net (a) | | $ | 24,975 | | | $ | 198,608 | | | $ | — | | | $ | (194,746) | | | $ | 28,837 | |
| Valuation allowance on net deferred taxes (b) | | 193,310 | | | 9,759 | | | — | | | (18,173) | | | 184,896 | |
| Inventory obsolescence reserve (c) | | 17,703 | | | 27,657 | | | — | | | (25,888) | | | 19,472 | |
| Total allowances deducted from assets | | $ | 235,988 | | | $ | 236,024 | | | $ | — | | | $ | (238,807) | | | $ | 233,205 | |
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(a) Includes allowances for doubtful accounts, anticipated discounts and write-offs of uncollectible accounts receivable.
(b) Includes adjustments to the valuation allowance for deferred tax assets that we do not expect to realize, as well as the release of valuation allowances.
(c) Includes adjustments to the inventory reserve, transfers, disposals and write-offs of obsolete inventory.
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| The Hershey Company | 2023 Form 10-K | Page 108 | |
