HERSHEY CO 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis (“MD&A”) is intended to provide an understanding of Hershey's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Unaudited Consolidated Financial Statements and accompanying notes. This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Refer to the Safe Harbor Statement below as well as the Risk Factors and other information contained in our 2020 Annual Report on Form 10-K for information concerning the key risks to achieving future performance goals. The MD&A is organized in the following sections: • Overview • Trends Affecting Our Business • Consolidated Results of Operations • Segment Results • Liquidity and Capital Resources • Safe Harbor Statement OVERVIEW Hershey is a global confectionery leader known for bringing goodness to the world through chocolate, sweets, mints, gum and other great tasting snacks. We are the largest producer of quality chocolate in North America, a leading snack maker in the United States ("U.S.") and a global leader in chocolate and non-chocolate confectionery. We market, sell and distribute our products under more than 90 brand names in approximately 85 countries worldwide. We report our operations through two segments: North America and International and Other. The majority of our products are confectionery or confectionery-based and include chocolate and non-chocolate confectionery products, gum and mint refreshment products, spreads, snack bites and mixes, as well as pantry items such as baking ingredients, toppings and sundae syrups. The confectionery and confectionery-based portfolio is predominantly sold under the renowned brands of Hershey's , Reese's and Kisses , as well as Kit Kat®, Jolly Rancher, Ice Breakers, Twizzlers, Heath, Payday, Cadbury and a variety of other popular brands. Our snacks portfolio includes ready-to-eat popcorn, baked and trans fat free snacks, protein bars and other better-for-you snacks. The snacks portfolio is predominantly sold under the brands of SkinnyPop , Pirate's Booty , ONE Bar , and Paqui . 2021 Acquisition and Divestiture In June 2021, we completed the acquisition of Lily's Sweets, LLC ("Lily's"), previously a privately held company that sells a line of sugar-free and low-sugar confectionery foods to retailers and distributors in the United States and Canada. Lily's products include dark and milk chocolate style bars, baking chips, peanut butter cups and other confection products that complement Hershey’s confectionery and confectionery-based portfolio. Lily's is expected to generate annualized net sales over $100 million. In January 2021, we completed the divestiture of Lotte Shanghai Foods Co., Ltd. ("LSFC"), which was previously included within the International and Other segment results in our consolidated financial statements. Total proceeds from the divestiture and the impact on our consolidated financial statements were immaterial. 2020 Divestitures During the second quarter of 2020, we completed the divestitures of KRAVE Pure Foods, Inc. ("Krave") and the Scharffen Berger and Dagoba brands, all of which were previously included within the North America segment results in our consolidated financial statements. Total proceeds from the divestitures and the impact on our consolidated financial statements, both individually and on an aggregate basis, were immaterial. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 34 TRENDS AFFECTING OUR BUSINESS On March 11, 2020, the World Health Organization designated coronavirus disease 2019 ("COVID-19") as a global pandemic, which has spread worldwide and impacted various markets around the world, including the U.S. Various policies and initiatives have been implemented to reduce the global transmission of COVID-19. Local, state and national governments continue to emphasize the importance of food supply during this pandemic and asked that food manufacturers and retailers remain open to meet the needs of our communities. Employee safety is our first priority, and as a result, we put preparedness plans in place at our manufacturing facilities. Our manufacturing facilities are currently open; however, we have adjusted shift schedules, enforced social distancing, increased sanitation and adjusted time and attendance policies for worker absenteeism. Our sales teams continue to support community food supplies, while adhering to social distancing guidelines, implementing flexible hours, reducing person-to-person interaction and increasing safety measures. At the onset of the pandemic, the Company temporarily closed all Hershey's Chocolate World stores in the U.S. (3 locations), Niagara Falls (Ontario) and Singapore; however, since July 2020, all locations were re-opened on a limited capacity basis with increased safety measures and enforced social distancing. In June 2020 we commenced a phased in approach to reopen our corporate headquarters in Hershey, Pennsylvania and other select offices with increased safety protocols. We have successfully onboarded several teams; however, occupancy levels remain low as we continue to monitor the latest COVID-19 related public health and government guidance. As a result, a majority of our office-based employees continue to work remotely where possible. We have crisis management teams in place to monitor the continually evolving situation and recommending risk mitigation actions as deemed necessary. To date, there has been minimal disruption to our supply chain network, including the supply of our ingredients, packaging or other sourced materials, though it is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world. We are also working closely with our business units, contract manufacturers, distributors, contractors and other external business partners to minimize the potential impact on our business. As of July 4, 2021, we believe we have sufficient liquidity to satisfy our cash needs; however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during the ongoing COVID-19 pandemic. We continue to monitor our discretionary spending across the organization (see Liquidity and Capital Resources included in this MD&A). During the second quarter of 2021, many state governments began easing COVID-19 restrictions, resulting in increased travel ahead of the summer season, approval for full capacity at major sporting and entertainment events, increased occupancy limits for indoor gathering and the removal of face covering requirements (subject to certain exceptions). Additionally, increasing availability and the rollout of vaccinations continue around the world, albeit with slower than anticipated rollouts and challenges within certain countries. We experienced an increase in our net sales and income during the three and six months ended July 4, 2021, which was primarily driven by strong everyday performance on our core U.S. confection brands and solid marketplace growth in select international markets (see Segment Results included in this MD&A). Based on the length and severity of COVID-19, including new trends in outbreaks and hotspots, the spread of COVID-19 variants, potential resurgences and the continued distribution of vaccinations, we may experience continued volatility in retail foot traffic, consumer shopping and consumption behavior. We will continue to evaluate the nature and extent of these potential impacts to our business, consolidated results of operations, segment results, liquidity and capital resources. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 35 CONSOLIDATED RESULTS OF OPERATIONS Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 Percent Change July 4, 2021 June 28, 2020 Percent Change In millions of dollars except per share amounts Net sales $ 1,989.4 $ 1,707.3 16.5 % $ 4,285.4 $ 3,744.6 14.4 % Cost of sales 1,064.0 914.8 16.3 % 2,311.0 2,085.5 10.8 % Gross profit 925.4 792.5 16.8 % 1,974.4 1,659.1 19.0 % Gross margin 46.5 % 46.4 % 46.1 % 44.3 % Selling, marketing & administrative ("SM&A") expenses 467.6 408.9 14.3 % 962.3 884.3 8.8 % SM&A expense as a percent of net sales 23.5 % 24.0 % 22.5 % 23.6 % Long-lived asset impairment charges — 1.6 NM — 9.1 NM Business realignment costs (benefits) 1.1 (1.4) NM 2.4 (0.5) NM Operating profit 456.7 383.4 19.1 % 1,009.7 766.2 31.8 % Operating profit margin 23.0 % 22.5 % 23.6 % 20.5 % Interest expense, net 31.1 38.1 (18.4) % 67.5 74.3 (9.2) % Other (income) expense, net 7.2 11.2 (35.9) % 9.6 22.8 (57.8) % Provision for income taxes 117.2 66.1 77.5 % 234.5 132.3 77.3 % Effective income tax rate 28.0% 19.8% 25.1% 19.8% Net income including noncontrolling interest 301.2 268.0 12.4 % 698.1 536.8 30.0 % Less: Net (loss) gain attributable to noncontrolling interest — (0.9) NM 1.1 (3.2) NM Net income attributable to The Hershey Company $ 301.2 $ 268.9 12.0 % $ 697.0 $ 540.0 29.1 % Net income per share—diluted $ 1.45 $ 1.29 12.4 % $ 3.35 $ 2.58 29.8 % NOTE: Percentage changes may not compute directly as shown due to rounding of amounts presented above. NM = not meaningful Results of Operations - Second Quarter 2021 vs. Second Quarter 2020 Net Sales Net sales increased 16.5% in the second quarter of 2021 compared to the same period of 2020, reflecting a volume increase of 14.5% due to an increase in everyday core U.S. confection brands, as well as favorable price realization of 1.0% due to higher prices on certain products and a favorable impact from foreign currency exchange rates of 1.0%. Key U.S. Marketplace Metrics For the second quarter of 2021, our total U.S. retail takeaway increased 2.8% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, meat snacks and grocery items. Our U.S. candy, mint and gum ("CMG") consumer takeaway increased 2.3%, resulting in a CMG market share loss of approximately 113 basis points. 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. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 36 Cost of Sales and Gross Margin Cost of sales increased 16.3% in the second quarter of 2021 compared to the same period of 2020. The increase was driven by higher sales volume, higher freight and logistics costs and additional plant costs. These drivers were partially offset by the incremental $14.3 million of favorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years' commodity purchases. Additionally, the increase was partially offset by favorable price realization and supply chain productivity. Gross margin increased by 10 basis points in the second quarter of 2021 compared to the same period of 2020. The increase was driven by the favorable year-over-year mark-to-market impact from commodity derivative instruments, favorable price realization and supply chain productivity. These factors were offset by higher freight and logistics costs and additional plant costs. SM&A Expenses SM&A expenses increased $58.7 million or 14.3% in the second quarter of 2021 driven by advertising increases and corporate expenses. Total advertising and related consumer marketing expenses increased 9.9% driven by increased investment in core brands and incremental sponsorships in North America. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 16.6% in the second quarter of 2021 driven by higher compensation costs and investments in capabilities and technology. Long-Lived Asset Impairment Charges We had no impairment charges during the second quarter of 2021. During the second quarter of 2020, we recorded long-lived asset impairment charges of $1.6 million, predominantly comprised of impairment charges to adjust long-lived asset values of our LSFC disposal group which was previously classified as held for sale. Business Realignment Activities We periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of our key growth strategies. In the second quarter of 2021, we recorded business realignment costs of $1.1 million related to the International Optimization Program, a program focused on optimizing our China operating model to improve our operational efficiency and provide for a strong, sustainable and simplified base going forward. In the second quarter of 2020, we recorded business realignment benefits of $1.4 million related to the Margin for Growth Program, a program focused on improving global efficiency and effectiveness, optimizing the Company’s supply chain, streamlining the Company’s operating model and reducing administrative expenses to generate long-term savings. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Unaudited Consolidated Financial Statements. Operating Profit and Operating Profit Margin Operating profit increased 19.1% in the second quarter of 2021 compared to the same period of 2020 predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above. Operating profit margin increased to 23.0% in 2021 from 22.5% in 2020 driven by these same factors. Interest Expense, Net Net interest expense was $7.0 million lower in the second quarter of 2021 compared to the same period of 2020. The decrease was primarily due to lower long-term debt balances in 2021 versus 2020, specifically resulting from $785 million of long-term debt repayments with varying maturity dates during the last twelve months preceding July 4, 2021. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 37 Other (Income) Expense, Net Other (income) expense, net totaled expense of $7.2 million in the second quarter of 2021 versus net expense of $11.2 million in the second quarter of 2020. The decrease in net expense was primarily due to lower write-downs on equity investments qualifying for historic and renewable energy tax credits in 2021 versus 2020 and lower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2021. Income Taxes and Effective Tax Rate The effective income tax rate was 28.0% for the second quarter of 2021 compared with 19.8% for the second quarter of 2020. Relative to the 21% statutory rate, the 2021 effective tax rate was impacted by incremental tax reserves incurred as a result of an adverse ruling in connection with a non-U.S. tax litigation matter as well as state taxes, partially offset by investment tax credits. Relative to the 21% statutory rate, the 2020 effective tax rate benefited from investment tax credits and changes in tax reserves, partially offset by state taxes. Net Income attributable to The Hershey Company and Earnings Per Share-diluted Net income increased $32.3 million, or 12.0%, while EPS-diluted increased $0.16, or 12.4%, in the second quarter of 2021 compared to the same period of 2020. The increase in both net income and EPS-diluted was driven primarily by higher gross profit, partially offset by higher SM&A expenses and higher income taxes, as noted above. Our 2021 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs. Results of Operations - First Six Months 2021 vs. First Six Months 2020 Net Sales Net sales increased 14.4% in the first six months of 2021 compared to the same period of 2020, reflecting a volume increase of 12.6% due to an increase in everyday core U.S. confection brands, as well as favorable price realization of 1.5% due to higher prices on certain products and a favorable impact from foreign currency exchange rates of 0.4%. This was partially offset by a 0.1% decrease from net acquisitions and divestitures (predominantly driven by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands). Cost of Sales and Gross Margin Cost of sales increased 10.8% in the first six months of 2021 compared to the same period of 2020. The increase was driven by higher sales volume, higher freight and logistics costs and additional plant costs. These drivers were partially offset by the incremental $105.0 million of favorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years' commodity purchases; however, were significantly impacted by financial market volatility during March 2020 amid COVID-19 fears. Additionally, the increase was partially offset by favorable price realization and supply chain productivity. Gross margin increased by 180 basis points in the first six months of 2021 compared to the same period of 2020. The increase was driven by the favorable year-over-year mark-to-market impact from commodity derivative instruments, favorable price realization and supply chain productivity. These factors were offset by higher freight and logistics costs and additional plant costs. Selling, Marketing and Administrative SM&A expenses increased $78.0 million or 8.8% in the first six months of 2021. Total advertising and related consumer marketing expenses increased 5.9% driven by increased investment in core brands and incremental sponsorships in North America. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 10.4% in the first six months of 2021 driven by higher compensation costs and investments in capabilities and technology. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 38 Long-Lived Asset Impairment Charges We had no impairment charges during the first six months of 2021. During the first six months of 2020, we recorded long-lived asset impairment charges of $9.1 million, predominantly comprised of impairment charges to adjust long-lived asset values of our LSFC disposal group which was previously classified as held for sale. Additionally, in connection with a previous sale, the Company wrote-down certain receivables deemed uncollectible. Business Realignment Activities During the first six months of 2021, we recorded business realignment costs of $2.4 million related to the International Optimization Program. During the first six months of 2020, we recorded business realignment benefits of $0.5 million related to the Margin for Growth Program. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Unaudited Consolidated Financial Statements. Operating Profit and Operating Profit Margin Operating profit increased 31.8% in the first six months of 2021 compared to the same period of 2020 predominantly due to higher gross profit and lower impairment charges, partially offset by higher SM&A expenses, as noted above. Operating profit margin increased to 23.6% in 2021 from 20.5% in 2020 driven by these same factors. Interest Expense, Net Net interest expense was $6.8 million lower in the first six months of 2021 compared to the same period of 2020. The decrease was primarily due to lower long-term debt balances in 2021 versus 2020, specifically resulting from $785 million of long-term debt repayments with varying maturity dates during the last twelve months preceding July 4, 2021. Other (Income) Expense, Net Other (income) expense, net totaled expense of $9.6 million in the first six months of 2021 versus expense of $22.8 million in the first six months of 2020. The decrease in net expense was primarily due to lower write-downs on equity investments qualifying for historic and renewable energy tax credits in 2021 versus 2020 and lower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2021. Income Taxes and Effective Tax Rate Our effective income tax rate was 25.1% for the first six months of 2021 compared with 19.8% for the first six months of 2020. Relative to the 21% statutory rate, the 2021 effective tax rate was impacted by incremental tax reserves incurred as a result of an adverse ruling in connection with a non-U.S. tax litigation matter as well as state taxes, partially offset by investment tax credits and the benefit of employee share-based payments. Relative to the 21% statutory rate, the 2020 effective tax rate was favorably impacted by investment tax credits and the benefit of employee share-based payments, partially offset by state taxes. Net Income attributable to The Hershey Company and Earnings Per Share-diluted Net income increased $157.0 million, or 29.1%, while EPS-diluted increased $0.77, or 29.8%, in the first six months of 2021 compared to the same period of 2020. The increase in both net income and EPS-diluted was driven primarily by higher gross profit and lower impairment charges, partially offset by higher SM&A expenses and higher income taxes. Our 2021 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 39 SEGMENT RESULTS The summary that follows provides a discussion of the results of operations of our two reportable segments: North America and International and Other. The segments reflect our operations on a geographic basis. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations. Our segment results, including a reconciliation to our consolidated results, were as follows: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 July 4, 2021 June 28, 2020 In millions of dollars Net Sales: North America $ 1,779.2 $ 1,583.8 $ 3,861.1 $ 3,428.6 International and Other 210.2 123.5 424.3 316.0 Total $ 1,989.4 $ 1,707.3 $ 4,285.4 $ 3,744.6 Segment Income (Loss): North America $ 565.9 $ 497.6 $ 1,227.5 $ 1,079.1 International and Other 42.2 (4.0) 76.0 12.0 Total segment income 608.1 493.6 1,303.5 1,091.1 Unallocated corporate expense (1) 151.3 106.9 289.1 231.4 Unallocated mark-to-market (gains) losses on commodity derivatives (2) (3.4) 0.5 (5.7) 82.2 Long-lived asset impairment charges — 1.6 — 9.1 Costs associated with business realignment activities 3.5 1.3 10.4 2.2 Operating profit 456.7 383.3 1,009.7 766.2 Interest expense, net 31.1 38.1 67.5 74.3 Other (income) expense, net 7.2 11.2 9.6 22.8 Income before income taxes $ 418.4 $ 334.0 $ 932.6 $ 669.1 (1) Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance. (2) Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses. See Note 13 to the Unaudited Consolidated Financial Statements. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 40 North America The North America segment is responsible for our chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. North America results, which accounted for 89.4% and 92.8% of our net sales for the three months ended July 4, 2021 and June 28, 2020, respectively, were as follows: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 Percent Change July 4, 2021 June 28, 2020 Percent Change In millions of dollars Net sales $ 1,779.2 $ 1,583.8 12.3 % $ 3,861.1 $ 3,428.6 12.6 % Segment income 565.9 497.6 13.7 % 1,227.5 1,079.1 13.8 % Segment margin 31.8 % 31.4 % 31.8 % 31.5 % Results of Operations - Second Quarter 2021 vs. Second Quarter 2020 Net sales of our North America segment increased $195.4 million or 12.3% in the second quarter of 2021 compared to the same period of 2020, reflecting a volume increase of 11.8% due to an increase in everyday core U.S. confection brands and a favorable impact from foreign currency exchange rates of 0.7%. This was partially offset by unfavorable price realization of 0.1% and a 0.1% decrease from net acquisitions and divestitures (predominantly driven by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands). Our North America segment income increased $68.3 million or 13.7% in the second quarter of 2021 compared to the same period of 2020, primarily due to volume increases, partially offset by higher supply chain-related costs, higher freight and logistics costs, higher advertising expense and unfavorable price realization. Results of Operations - First Six Months 2021 vs. First Six Months 2020 Net sales of our North America segment increased $432.5 million or 12.6% in the first six months of 2021 compared to the same period of 2020, reflecting a volume increase of 11.3% due to an increase in everyday core U.S. confection brands, favorable price realization of 0.9% attributed to higher prices on certain products and a favorable impact from foreign currency exchange rates of 0.5%. This was partially offset by a 0.1% decrease from net acquisitions and divestitures (predominantly driven by the 2020 divestitures of Krave and the Scharffen Berger and Dagoba brands). Our North America segment income increased $148.4 million or 13.8% in the first six months of 2021 compared to the same period of 2020, primarily due to volume increases and favorable price realization, partially offset by higher supply chain-related costs, higher freight and logistics costs and higher advertising expense. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 41 International and Other The International and Other segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. Currently, this includes our operations in India and other Asia markets, Latin America, Europe, Africa and the Middle East, along with exports to these regions. While a less significant component, this segment also includes our global retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain trademarks and products to third parties around the world. International and Other results, which accounted for 10.6% and 7.2% of our net sales for the three months ended July 4, 2021 and June 28, 2020, respectively, were as follows: Three Months Ended Six Months Ended July 4, 2021 June 28, 2020 Percent Change July 4, 2021 June 28, 2020 Percent Change In millions of dollars Net sales $ 210.2 $ 123.5 70.2 % $ 424.3 $ 316.0 34.3 % Segment income 42.2 (4.0) NM 76.0 12.0 533.3 % Segment margin 20.1 % (3.2) % 17.9 % 3.8 % NM = not meaningful Results of Operations - Second Quarter 2021 vs. Second Quarter 2020 Net sales of our International and Other segment increased $86.7 million or 70.2% in the second quarter of 2021 compared to the same period of 2020, reflecting a volume increase of 49.5% and favorable price realization of 15.0%. The volume increase was primarily attributed to solid marketplace growth in Mexico, Brazil, India and AEMEA Markets, where net sales increased by 137.7%, 68.7%, 57.6% and 53.1%, respectively. These increases also benefited from a favorable impact from foreign currency exchange rates of 5.7%. Our International and Other segment also includes licensing, owned retail and world travel retail, where net sales increased approximately 91.0% during the second quarter of 2021 compared to the same period of 2020. This increase is due to the Company's temporary closure of all Hershey’s Chocolate World stores at the onset of the pandemic and includes the United States (3 locations), Niagara Falls (Ontario) and Singapore. In July 2020, all locations were re-opened on a limited capacity basis with increased safety measures. Our International and Other segment generated income of $42.2 million in the second quarter of 2021 compared to $4.0 million in the second quarter of 2020 with the improvement primarily resulting from execution of our International Optimization Program in China, as we streamline and optimize our China operating model, as well as volume increases and favorable price realization. Results of Operations - First Six Months 2021 vs. First Six Months 2020 Net sales of our International and Other segment increased $108.3 million or 34.3% in the first six months of 2021 compared to the same period of 2020, reflecting a volume increase of 26.7% and favorable price realization of 7.6%. The volume increase was primarily attributed to solid marketplace growth in Mexico, Brazil, India and AEMEA Markets, where net sales increased by 40.1%, 34.7%, 53.2% and 32.0%, respectively. Our International and Other segment also includes licensing, owned retail and world travel retail, where net sales increased approximately 39.3% during the first six months of 2021 compared to the same period of 2020. This increase is due to the Company's temporary closure of all Hershey’s Chocolate World stores at the onset of the pandemic and includes the United States (3 locations), Niagara Falls (Ontario) and Singapore. In July 2020, all locations were re-opened on a limited capacity basis with increased safety measures. Our International and Other segment generated income of $76.0 million in the first six months of 2021 compared to $12.0 million in the first six months of 2020 with the improvement primarily resulting from execution of our International Optimization Program in China, as we streamline and optimize our China operating model, as well as volume increases and favorable price realization. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 42 Unallocated Corporate Expense Unallocated corporate expense includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance. In the second quarter of 2021, unallocated corporate expense totaled $151.3 million, as compared to $106.9 million in the second quarter of 2020. The increase is primarily driven by higher group insurance costs from COVID-19-related delays in preventive care, incremental investments in capabilities and technology and higher incentive compensation. In the first six months of 2021, unallocated corporate expense totaled $289.1 million, as compared to $231.4 million in the first six months of 2020. The increase is primarily driven by incremental investments in capabilities and technology and higher incentive compensation. LIQUIDITY AND CAPITAL RESOURCES Historically, our primary source of liquidity has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, are generally met by utilizing cash on hand, bank borrowings or the issuance of commercial paper. Commercial paper may also be issued, from time to time, to finance ongoing business transactions, such as the repayment of long-term debt, business acquisitions and for other general corporate purposes. At July 4, 2021, our cash and cash equivalents totaled $426.2 million, a decrease of $717.8 million compared to the 2020 year-end balance. We believe we have sufficient liquidity to satisfy our cash needs; however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during the ongoing COVID-19 pandemic. Additional detail regarding the net uses of cash are outlined in the following discussion. Approximately 85% of the balance of our cash and cash equivalents at July 4, 2021 was held by subsidiaries domiciled outside of the United States. During the first six months of 2021, previously undistributed earnings of certain international subsidiaries were no longer considered indefinitely reinvested; however, the Company had previously recognized a one-time U.S. repatriation tax due under U.S. tax reform, and as a result, only an immaterial amount of withholding tax was recognized. For the remainder of the Company’s cash held by international subsidiaries, we intend to continue to reinvest the undistributed earnings indefinitely. We believe we have sufficient liquidity to satisfy our cash needs, including our cash needs in the United States. Cash Flow Summary The following table is derived from our Consolidated Statements of Cash Flows: Six Months Ended In millions of dollars July 4, 2021 June 28, 2020 Net cash provided by (used in): Operating activities $ 1,017.7 $ 614.0 Investing activities (700.1) (209.8) Financing activities (1,041.7) 295.9 Effect of exchange rate changes on cash and cash equivalents (5.1) (17.3) Less: Cash classified as assets held for sale 11.4 (10.7) (Decrease) increase in cash and cash equivalents $ (717.8) $ 672.1 Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 43 Operating activities We generated cash of $1.0 billion from operating activities in the first six months of 2021, an increase of $403.7 million compared to $614.0 million in the same period of 2020. This increase in net cash provided by operating activities was mainly driven by the following factors: • Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, long-lived asset charges, a write-down of equity investments and other charges) resulted in $186.3 million of higher cash flow in 2021 relative to 2020. • Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) consumed cash of $13.3 million in 2021, compared to $201.9 million in 2020. This $188.6 million fluctuation was mainly driven by higher cash receipts from customers resulting in a slightly lower investment in accounts receivable at the end of the second quarter of 2021 compared to the same period of 2020, as well as strong demand of U.S. inventories, specifically our everyday core U.S. confection brands. • Accrued income taxes generated consistent levels of cash in 2021 and 2020; however, we paid cash of $139.1 million for income taxes during 2021 compared to $71.6 million in the same period of 2020. This $67.5 million increase in cash payments was primarily due to the 2020 deferral of quarterly estimated tax payments as a result of the CARES Act. Investing activities We used cash of $700.1 million for investing activities in the first six months of 2021, an increase of $490.3 million compared to $209.8 million in the same period of 2020. This increase in net cash used in investing activities was mainly driven by the following factors: • Capital spending . Capital expenditures, including capitalized software, primarily to support capacity expansion, innovation and cost savings, were $227.6 million in the first six months of 2021 compared to $185.8 million in the same period of 2020. For full year 2021, we expect capital expenditures, including capitalized software, to approximate $550 million. Our 2021 capital expenditures are largely driven by the continuation of our ERP system implementation, as well as our supply chain capacity projects. • Investments in partnerships qualifying for tax credits . We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and renewable energy tax credits. We invested approximately $57.4 million in the first six months of 2021, compared to $26.4 million in the same period of 2020. • Business Acquisition . In June 2021, we acquired Lily's for an initial cash purchase price of $418.2 million. Further details regarding our business acquisition activity is provided in Note 2 to the Unaudited Consolidated Financial Statements. Financing activities We used cash of $1.0 billion for financing activities in the first six months of 2021, compared to cash generated of $295.9 million in the same period of 2020. This fluctuation of $1.3 billion for financing activities was mainly driven by the following factors: • Short-term borrowings, net. In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. During the first six months of 2021, we generated cash flow of $137.0 million predominantly through the issuance of short-term commercial paper, partially offset by a reduction in short-term foreign borrowings. During the first six months of 2020, we generated cash flow of $166.0 million predominantly through the issuance of short-term commercial paper, as well as an increase in short-term foreign bank borrowings. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 44 • Long-term debt borrowings and repayments . During the first six months of 2021, we repaid $84.7 million of 8.800% Debentures due upon their maturity and $350.0 million of 3.100% Notes due upon their maturity. During the first six months of 2020, we issued $300 million of 0.900% Notes due in 2025, $350 million of 1.700% Notes due in 2030 and $350 million of 2.650% Notes due in 2050 (the "2020 Notes"). Proceeds from the issuance of the 2020 Notes, net of discounts and issuance costs, totaled $989.9 million. Additionally, in May 2020, we repaid $350 million of 2.900% Notes due upon their maturity. • Dividend payments . Total dividend payments to holders of our Common Stock and Class B Common Stock were $324.3 million during the first six months of 2021, an increase of $10.0 million compared to $314.3 million in the same period of 2020. Details regarding our 2021 cash dividends paid to stockholders are as follows: Quarter Ended In millions of dollars except per share amounts April 4, 2021 July 4, 2021 Dividends paid per share – Common stock $ 0.804 $ 0.804 Dividends paid per share – Class B common stock $ 0.731 $ 0.731 Total cash dividends paid $ 162.7 $ 161.6 Declaration date February 2, 2021 April 27, 2021 Record date February 19, 2021 May 21, 2021 Payment date March 15, 2021 June 15, 2021 • Share repurchases . We used cash for total share repurchases of $434.3 million and $211.2 million during the first six months of 2021 and 2020, respectively, pursuant to our practice of replenishing treasury shares available for issuance for stock options and incentive compensation, as well as our share repurchases in the open market under pre-approved share repurchase programs. In July 2018, our Board of Directors approved a $500 million share repurchase authorization. As of July 4, 2021, approximately $110 million remained available for repurchases of our Common Stock under this program. The share repurchase program does not have an expiration date. In May 2021, our Board of Directors approved an additional $500 million share repurchase authorization. This program is to commence after the existing 2018 authorization is completed and is to be utilized at management's discretion. For the remainder of 2021, we expect share repurchases to return to a more traditional buyback strategy. • Proceeds from the exercise of stock options, including tax benefits. We received $16.9 million from employee exercises of stock options, net of employee taxes withheld from share-based awards, during the first six months of 2021, a minimal decrease compared to $17.5 million in the same period of 2020. Recent Accounting Pronouncements Information on recently adopted and issued accounting standards is included in Note 1 to the Unaudited Consolidated Financial Statements. Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 45 Safe Harbor Statement We are subject to changing economic, competitive, regulatory and technological risks and uncertainties that could have a material impact on our business, financial condition or results of operations. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions that we have discussed directly or implied in this Prospectus. Many of these forward-looking statements can be identified by the use of words such as “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would,” among others. The factors that could cause our actual results to differ materially from the results projected in our forward-looking statements include, but are not limited to the following: • Our business and financial results may be negatively impacted by the failure to successfully manage a disruption in consumer and trade patterns, as well as operational challenges associated with the actual or perceived effects of a disease outbreak, including epidemics, pandemics or similar widespread public health concerns, such as, the COVID-19 pandemic; • Our Company’s reputation or brand image might be impacted as a result of issues or concerns relating to the quality and safety of our products, ingredients or packaging, human and workplace rights, and other environmental, social or governance matters, which in turn could result in litigation or otherwise negatively impact our operating results; • Disruption to our manufacturing operations or supply chain could impair our ability to produce or deliver finished products, resulting in a negative impact on our operating results; • We might not be able to hire, engage and retain the talented global workforce we need to drive our growth strategies; • Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results; • Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity; • Market demand for new and existing products could decline; • Increased marketplace competition could hurt our business; • Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures; • Our international operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations; • We may not fully realize the expected cost savings and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business; • Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products; • Political, economic and/or financial market conditions could negatively impact our financial results; Table of Contents The Hershey Company | Q2 2021 Form 10-Q | Page 46 • Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations; • Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations; and • Such other matters as discussed in our 2020 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the quarterly period ended April 4, 2021, and this Quarterly Report on Form 10-Q, including Part II, Item 1A, "Risk Factors." We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this Quarterly Report on Form 10-Q is filed.