HERSHEY CO 10-Q

Item 1. Financial Statements. THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited) Three Months Ended April 3, 2022 April 4, 2021 Net sales $ 2,666,221 $ 2,295,948 Cost of sales 1,420,741 1,246,997 Gross profit 1,245,480 1,048,951 Selling, marketing and administrative expense 524,216 494,665 Business realignment costs 274 1,242 Operating profit 720,990 553,044 Interest expense, net 33,179 36,436 Other (income) expense, net 10,407 2,414 Income before income taxes 677,404 514,194 Provision for income taxes 143,926 117,323 Net income including noncontrolling interest 533,478 396,871 Less: Net gain attributable to noncontrolling interest — 1,072 Net income attributable to The Hershey Company $ 533,478 $ 395,799 Net income per share—basic: Common stock $ 2.66 $ 1.96 Class B common stock $ 2.42 $ 1.78 Net income per share—diluted: Common stock $ 2.57 $ 1.90 Class B common stock $ 2.41 $ 1.77 Dividends paid per share: Common stock $ 0.901 $ 0.804 Class B common stock $ 0.819 $ 0.731 See Notes to Unaudited Consolidated Financial Statements. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 2 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited) For the Three Months Ended April 3, 2022 April 4, 2021 Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount Pre-Tax Amount Tax (Expense) Benefit After-Tax Amount Net income including noncontrolling interest $ 533,478 $ 396,871 Other comprehensive income, net of tax: Foreign currency translation adjustments: Foreign currency translation gains during period $ 14,419 $ — 14,419 $ 1,198 $ — 1,198 Reclassification to earnings due to the sale of businesses — — — 5,210 — 5,210 Pension and post-retirement benefit plans: Net actuarial (loss) gain and service cost ( 6,474 ) ( 568 ) ( 7,042 ) 2,224 ( 529 ) 1,695 Reclassification to earnings 3,960 ( 950 ) 3,010 6,853 ( 1,867 ) 4,986 Cash flow hedges: Losses on cash flow hedging derivatives ( 5,924 ) 874 ( 5,050 ) ( 1,635 ) 287 ( 1,348 ) Reclassification to earnings 2,596 ( 727 ) 1,869 3,137 ( 540 ) 2,597 Total other comprehensive income, net of tax $ 8,577 $ ( 1,371 ) 7,206 $ 16,987 $ ( 2,649 ) 14,338 Total comprehensive income including noncontrolling interest $ 540,684 $ 411,209 Comprehensive income attributable to noncontrolling interest — 6,334 Comprehensive income attributable to The Hershey Company $ 540,684 $ 404,875 See Notes to Unaudited Consolidated Financial Statements. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 3 THE HERSHEY COMPANY CONSOLIDATED BALANCE SHEETS (in thousands, except share data) April 3, 2022 December 31, 2021 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 338,055 $ 329,266 Accounts receivable—trade, net 868,426 671,464 Inventories 1,031,503 988,511 Prepaid expenses and other 219,454 256,965 Total current assets 2,457,438 2,246,206 Property, plant and equipment, net 2,592,628 2,586,187 Goodwill 2,620,594 2,633,174 Other intangibles 2,029,220 2,037,588 Other non-current assets 902,347 868,203 Deferred income taxes 42,817 40,873 Total assets $ 10,645,044 $ 10,412,231 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 825,231 $ 692,338 Accrued liabilities 784,660 855,638 Accrued income taxes 79,635 3,070 Short-term debt 873,783 939,423 Current portion of long-term debt 2,328 2,844 Total current liabilities 2,565,637 2,493,313 Long-term debt 4,088,437 4,086,627 Other long-term liabilities 781,048 787,058 Deferred income taxes 294,373 288,004 Total liabilities 7,729,495 7,655,002 Stockholders’ equity: The Hershey Company stockholders’ equity Preferred stock, shares issued: none in 2022 and 2021 — — Common stock, shares issued: 161,939,248 at April 3, 2022 and 160,939,248 at December 31, 2021 161,939 160,939 Class B common stock, shares issued: 59,613,777 at April 3, 2022 and 60,613,777 at December 31, 2021 59,614 60,614 Additional paid-in capital 1,243,240 1,260,331 Retained earnings 3,071,416 2,719,936 Treasury—common stock shares, at cost: 15,961,542 at April 3, 2022 and 15,444,011 at December 31, 2021 ( 1,378,651 ) ( 1,195,376 ) Accumulated other comprehensive loss ( 242,009 ) ( 249,215 ) Total stockholders’ equity 2,915,549 2,757,229 Total liabilities and stockholders’ equity $ 10,645,044 $ 10,412,231 See Notes to Unaudited Consolidated Financial Statements. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 4 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended April 3, 2022 April 4, 2021 Operating Activities Net income including noncontrolling interest $ 533,478 $ 396,871 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 91,036 77,897 Stock-based compensation expense 15,337 15,656 Deferred income taxes 5,064 ( 713 ) Write-down of equity investments 12,592 2,891 Other 24,043 22,027 Changes in assets and liabilities, net of business acquisitions and divestitures: Accounts receivable—trade, net ( 189,621 ) ( 22,099 ) Inventories ( 37,320 ) 53,323 Prepaid expenses and other current assets ( 11,251 ) 28,272 Accounts payable and accrued liabilities 98,027 ( 56,900 ) Accrued income taxes 127,258 104,677 Contributions to pension and other benefit plans ( 8,458 ) ( 5,013 ) Other assets and liabilities ( 3,718 ) ( 7,249 ) Net cash provided by operating activities 656,467 609,640 Investing Activities Capital additions (including software) ( 141,063 ) ( 114,471 ) Equity investments in tax credit qualifying partnerships ( 22,503 ) ( 25,064 ) Other investing activities ( 400 ) 2,530 Net cash used in investing activities ( 163,966 ) ( 137,005 ) Financing Activities Net decrease in short-term debt ( 65,640 ) ( 6,079 ) Repayment of long-term debt and finance leases ( 1,050 ) ( 85,863 ) Cash dividends paid ( 181,084 ) ( 162,739 ) Repurchase of common stock ( 203,350 ) ( 240,359 ) Proceeds from exercised stock options 16,711 15,117 Taxes withheld and paid on employee stock awards ( 29,041 ) ( 11,939 ) Net cash used in financing activities ( 463,454 ) ( 491,862 ) Effect of exchange rate changes on cash and cash equivalents ( 20,258 ) ( 3,952 ) Increase (decrease) in cash and cash equivalents, including cash classified as held for sale 8,789 ( 23,179 ) Less: Increase in cash and cash equivalents classified as held for sale — 11,434 Net increase (decrease) in cash and cash equivalents 8,789 ( 11,745 ) Cash and cash equivalents, beginning of period 329,266 1,143,987 Cash and cash equivalents, end of period $ 338,055 $ 1,132,242 Supplemental Disclosure Interest paid $ 24,782 $ 27,685 Income taxes paid 10,023 14,350 See Notes to Unaudited Consolidated Financial Statements. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 5 THE HERSHEY COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (in thousands) (unaudited) Preferred Stock Common Stock Class B Common Stock Additional Paid-in Capital Retained Earnings Treasury Common Stock Accumulated Other Comprehensive (Loss) Income Total Stockholders’ Equity Balance, December 31, 2021 $ — $ 160,939 $ 60,614 $ 1,260,331 $ 2,719,936 $ ( 1,195,376 ) $ ( 249,215 ) $ 2,757,229 Net income 533,478 533,478 Other comprehensive income 7,206 7,206 Dividends (including dividend equivalents): Common Stock, $ 0.901 per share ( 133,174 ) ( 133,174 ) Class B Common Stock, $ 0.819 per share ( 48,824 ) ( 48,824 ) Conversion of Class B Common Stock into Common Stock 1,000 ( 1,000 ) — Stock-based compensation 15,314 15,314 Exercise of stock options and incentive-based transactions ( 32,405 ) 20,075 ( 12,330 ) Repurchase of common stock ( 203,350 ) ( 203,350 ) Balance, April 3, 2022 $ — $ 161,939 $ 59,614 $ 1,243,240 $ 3,071,416 $ ( 1,378,651 ) $ ( 242,009 ) $ 2,915,549 Preferred Stock Common Stock Class B Common Stock Additional Paid-in Capital Retained Earnings Treasury Common Stock Accumulated Other Comprehensive Loss Noncontrolling Interests in Subsidiaries Total Stockholders’ Equity Balance, December 31, 2020 $ — $ 160,939 $ 60,614 $ 1,191,200 $ 1,928,673 $ ( 768,992 ) $ ( 338,082 ) $ 3,531 $ 2,237,883 Net income 395,799 1,072 396,871 Other comprehensive income 9,076 5,262 14,338 Dividends (including dividend equivalents): Common Stock, $ 0.804 per share ( 117,699 ) ( 117,699 ) Class B Common Stock, $ 0.731 per share ( 44,309 ) ( 44,309 ) Stock-based compensation 15,955 15,955 Exercise of stock options and incentive-based transactions ( 11,407 ) 14,586 3,179 Repurchase of common stock ( 240,359 ) ( 240,359 ) Divestiture of noncontrolling interest ( 1,013 ) ( 1,013 ) Balance, April 4, 2021 $ — $ 160,939 $ 60,614 $ 1,195,748 $ 2,162,464 $ ( 994,765 ) $ ( 329,006 ) $ 8,852 $ 2,264,846 See Notes to Unaudited Consolidated Financial Statements. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 6 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except share data or if otherwise indicated) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The unaudited consolidated financial statements provided in this report include the accounts of The Hershey Company (the “Company,” “Hershey,” “we” or “us”) and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock and minority shareholders do not have substantive participating rights, we have significant control through contractual or economic interests in which we are the primary beneficiary or we have the power to direct the activities that most significantly impact the entity’s economic performance. We use the equity method of accounting when we have a 20% to 50% interest in other companies and exercise significant influence. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method. Both equity and cost method investments are included as Other non-current assets in the Consolidated Balance Sheets. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. The financial statements reflect all adjustments (consisting of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods. Operating results for the quarter ended April 3, 2022 may not be indicative of the results that may be expected for the year ending December 31, 2022 because of seasonal effects on our business. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021 (our “2021 Annual Report on Form 10-K”), which provides a more complete understanding of our accounting policies, financial position, operating results and other matters. COVID-19 On March 11, 2020, the World Health Organization designated coronavirus disease 2019 (“COVID-19”) as a global pandemic. We continue to actively monitor COVID-19 and its potential impact on our operations and financial results. Employee health and safety remains our first priority while we continue our efforts to support community food supplies. Since the onset of COVID-19, there has been minimal disruption to our supply chain network, and all our manufacturing plants are currently open. However, beginning in 2021 and continuing into 2022, ongoing strong demand for consumer goods and the effects of COVID-19 mitigation strategies have led to broad-based supply chain disruptions across the U.S. and globally, including inflation on many consumer products, labor shortages and demand outpacing supply. We continue to work closely with our business units, contract manufacturers, distributors, contractors and other external business partners to minimize the potential impact on our business. The ultimate impact that COVID-19 will have on our consolidated financial statements remains uncertain and ultimately will be dictated by the length and severity of the pandemic, including broad-based supply chain disruptions, rising levels of inflation, the spread of COVID-19 variants or resurgences, as well as the economic recovery and actions taken in response by local, state and national governments around the world, including the distribution of vaccinations. We will continue to evaluate the nature and extent of these potential and evolving impacts to our business and consolidated financial statements. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In March 2020, the the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The ASU is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 7 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 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 2022. Adoption of the new standard did not have a material impact on our consolidated financial statements. Recently Issued Accounting Pronouncements Not Yet Adopted In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606) rather than adjust them to fair value at the acquisition date. ASU 2021-08 is effective for annual periods beginning after December 15, 2022 and interim periods within those annual periods. This ASU should be applied prospectively to business combinations occurring on or after the date of adoption. Evaluation of this new standard is dependent on multiple circumstances including the timing and complexity of completed business combinations. As a result, we intend to adopt the provisions of this ASU in the first quarter of 2023. No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures. 2. BUSINESS ACQUISITIONS AND DIVESTITURE 2021 Activity Pretzels Inc. On December 14, 2021, we completed the acquisition of Pretzels Inc. (“Pretzels”), previously a privately held company that manufactures and sells pretzels and other salty snacks for other branded products and private labels in the United States. Pretzels is an industry leader in the pretzel category with a product portfolio that includes filled, gluten free and seasoned pretzels, as well as extruded snacks that complements Hershey’s snacks portfolio. Based in Bluffton, Indiana, Pretzels operates three manufacturing locations in Indiana and Kansas. Pretzels provides Hershey deep pretzel category and product expertise and the manufacturing capabilities to support brand growth and future pretzel innovation. The initial cash consideration paid for Pretzels totaled $ 304,477 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the Pretzels acquisition were immaterial. The acquisition has been accounted for as a business combination and, accordingly, Pretzels has been included within the North America Salty Snacks segment from the date of acquisition. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows: Initial Allocation (1) Adjustments Updated Allocation Goodwill $ 165,301 $ 1,033 $ 166,334 Other intangible assets 32,100 ( 6,000 ) 26,100 Current assets acquired 30,717 118 30,835 Property, plant and equipment, net 96,099 4,617 100,716 Other non-current assets, primarily operating lease ROU assets 111,787 — 111,787 Deferred income taxes 541 232 773 Current liabilities assumed ( 22,713 ) — ( 22,713 ) Other long-term liabilities, primarily operating lease liabilities ( 109,355 ) — ( 109,355 ) Net assets acquired $ 304,477 $ — $ 304,477 (1) As reported in the Company’s 2021 Annual Report on Form 10-K. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 8 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The purchase price allocation presented above is preliminary. The measurement period adjustments to the initial allocation are based on more detailed information obtained about the specific assets acquired. We are in the process of evaluating additional information necessary to finalize the valuation of assets acquired and liabilities assumed as of the acquisition date including, but not limited to, post-closing adjustments to the working capital acquired including certain holdbacks. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation, including other intangible assets, goodwill and the related tax impact of such adjustments. We expect to finalize the purchase price allocation by mid-2022. Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). A portion of goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Pretzels’ products. Other intangible assets include trademarks valued at $ 5,700 and customer relationships valued at $ 20,400 . Trademarks were assigned an estimated useful life of five years and customer relationships were assigned an estimated useful life of 19 years. Dot's Pretzels, LLC On December 13, 2021, we completed the acquisition of Dot’s Pretzels, LLC (“Dot’s”), previously a privately held company that produces and sells pretzels and other snack food products to retailers and distributors in the United States, with Dot’s Homestyle Pretzels snacks as its primary product. Dot’s is the fastest-growing scale brand in the pretzel category and complements Hershey’s snacks portfolio. The initial cash consideration paid for Dot’s totaled $ 894,166 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 assets acquired and liabilities assumed based on their respective fair values as follows: Initial Allocation (1) Adjustments Updated Allocation Goodwill $ 303,345 $ ( 14,960 ) $ 288,385 Other intangible assets 526,300 16,800 543,100 Current assets acquired 51,121 — 51,121 Property, plant and equipment, net 39,256 1,010 40,266 Other non-current assets 2,201 — 2,201 Other liabilities assumed, primarily current liabilities ( 28,057 ) ( 2,850 ) ( 30,907 ) Net assets acquired $ 894,166 $ — $ 894,166 (1) As reported in the Company’s 2021 Annual Report on Form 10-K. The purchase price allocation presented above is preliminary. The measurement period adjustments, specifically to other intangible assets and resulting impact on the valuation of goodwill, are principally related to the refinement of certain assumptions in the value of customer relationships based on an analysis of historical customer-specific data. The remaining measurement period adjustments to the initial allocation are based on more detailed information obtained about the specific assets acquired and liabilities assumed. We are in the process of evaluating additional information necessary to finalize the valuation of assets acquired and liabilities assumed as of the acquisition date including, but not limited to, post-closing adjustments to the working capital acquired including certain holdbacks. The final fair value determination could result in material adjustments to the values presented in the preliminary purchase price allocation, including other intangible assets and goodwill. We expect to finalize the purchase price allocation by mid-2022. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 9 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). The goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Dot’s products. Other intangible assets include trademarks valued at $ 336,600 and customer relationships valued at $ 206,500 . Trademarks were assigned an estimated useful life of 33 years and customer relationships were assigned an estimated useful life of 18 years. Lily's Sweets, LLC On June 25, 2021, we completed the acquisition of Lily’s Sweets, LLC (“Lily’s”), previously a privately held company that sells a line of sugar-free and low-sugar confectionery foods to retailers and distributors in the United States and Canada. Lily’s products include dark and milk chocolate style bars, baking chips, peanut butter cups and other confection products that complement Hershey’s confectionery and confectionery-based portfolio. The cash consideration paid for Lily’s totaled $ 422,210 and the Company may be required to pay additional cash consideration if certain defined targets related to net sales and gross margin were exceeded during the period from the closing date through December 31, 2021. As of the acquisition date, the estimated fair value of the contingent consideration obligation was classified as a liability of $ 5,000 and was determined using a scenario-based analysis on forecasted future results. Based on financial results through December 31, 2021, the fair value was reduced during the fourth quarter of 2021 to $ 1,250 , with the adjustment to fair value recorded in the selling, marketing and administrative (“SM&A”) expense caption within the Consolidated Statements of Income. We expect to pay the contingent consideration during 2022. Acquisition-related costs for the Lily’s acquisition were immaterial. The acquisition has been accounted for as a business combination and, accordingly, Lily’s has been included within the North America Confectionery segment from the date of acquisition. The purchase consideration, inclusive of the acquisition date fair value of the contingent consideration, was allocated to assets acquired and liabilities assumed based on their respective fair values as follows: Goodwill $ 175,826 Other intangible assets 235,800 Other assets acquired, primarily current assets 33,092 Other liabilities assumed, primarily current liabilities ( 9,620 ) Deferred income taxes ( 7,888 ) Net assets acquired $ 427,210 The purchase price allocation presented above has been finalized as of the fourth quarter of 2021 and includes an immaterial amount of measurement period adjustments. The measurement period adjustments to the initial allocation were based on more detailed information obtained about the specific assets acquired and liabilities assumed. Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). The majority of goodwill derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging our brand building expertise, supply chain capabilities and retail relationships to accelerate growth and access to the portfolio of Lily’s products. Other intangible assets include trademarks valued at $ 151,600 and customer relationships valued at $ 84,200 . Trademarks were assigned an estimated useful life of 33 years and customer relationships were assigned estimated useful lives ranging from 17 to 18 years. Lotte Shanghai Foods Co., Ltd. In January 2021, we completed the divestiture of Lotte Shanghai Foods Co., Ltd., which was previously included within the International segment results in our consolidated financial statements. Total proceeds from the divestiture and the impact on our consolidated financial statements were immaterial and were recorded in the SM&A expense caption within the Consolidated Statements of Income. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 10 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 3. GOODWILL AND INTANGIBLE ASSETS The changes in the carrying value of goodwill by reportable segment for the three months ended April 3, 2022 are as follows: North America Confectionery North America Salty Snacks International Total Balance at December 31, 2021 $ 2,026,006 $ 589,798 $ 17,370 $ 2,633,174 Measurement period adjustments (see Note 2 ) — ( 13,927 ) — ( 13,927 ) Foreign currency translation 1,195 — 152 1,347 Balance at April 3, 2022 $ 2,027,201 $ 575,871 $ 17,522 $ 2,620,594 The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset: April 3, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Intangible assets subject to amortization: Trademarks $ 1,705,644 $ ( 154,417 ) $ 1,705,390 $ ( 141,760 ) Customer-related 515,827 ( 72,685 ) 504,667 ( 65,131 ) Patents 8,713 ( 8,713 ) 8,623 ( 8,623 ) Total 2,230,184 ( 235,815 ) 2,218,680 ( 215,514 ) Intangible assets not subject to amortization: Trademarks 34,851 34,422 Total other intangible assets $ 2,029,220 $ 2,037,588 Total amortization expense for the three months ended April 3, 2022 and April 4, 2021 was $ 19,859 and $ 11,621 , respectively. In 2022, our amortization expense increased as a result of our 2021 business combination activity (see Note 2 ). 4. SHORT AND LONG-TERM DEBT Short-term Debt As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. We maintain a $ 1.5 billion unsecured revolving credit facility with the option to increase borrowings by an additional $ 500 million with the consent of the lenders. This facility is scheduled to expire on July 2, 2024; however, we may extend the termination date for up to two additional one-year periods upon notice to the administrative agent under the facility. The credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of April 3, 2022, we were in compliance with all covenants pertaining to the credit agreement, and we had no significant compensating balance agreements that legally restricted these funds. For more information, refer to the Consolidated Financial Statements included in our 2021 Annual Report on Form 10-K. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 11 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. Commitment fees relating to our revolving credit facility and lines of credit are not material. Short-term debt consisted of the following: April 3, 2022 December 31, 2021 Short-term foreign bank borrowings against lines of credit $ 149,102 $ 119,038 U.S. commercial paper 724,681 820,385 Total short-term debt $ 873,783 $ 939,423 Weighted average interest rate on outstanding commercial paper 0.4 % 0.1 % Long-term Debt Long-term debt consisted of the following: Debt Type and Rate Maturity Date April 3, 2022 December 31, 2021 2.625 % Notes May 1, 2023 250,000 250,000 3.375 % Notes May 15, 2023 500,000 500,000 2.050 % Notes November 15, 2024 300,000 300,000 0.900 % Notes June 1, 2025 300,000 300,000 3.200 % Notes August 21, 2025 300,000 300,000 2.300 % Notes August 15, 2026 500,000 500,000 7.200 % Debentures August 15, 2027 193,639 193,639 2.450 % Notes November 15, 2029 300,000 300,000 1.700 % Notes June 1, 2030 350,000 350,000 3.375 % Notes August 15, 2046 300,000 300,000 3.125 % Notes November 15, 2049 400,000 400,000 2.650 % Notes June 1, 2050 350,000 350,000 Finance lease obligations (see Note 7 ) 68,601 69,146 Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts ( 21,475 ) ( 23,314 ) Total long-term debt 4,090,765 4,089,471 Less—current portion 2,328 2,844 Long-term portion $ 4,088,437 $ 4,086,627 Interest Expense Net interest expense consists of the following: Three Months Ended April 3, 2022 April 4, 2021 Interest expense $ 35,371 $ 38,763 Capitalized interest ( 1,835 ) ( 1,717 ) Interest expense 33,536 37,046 Interest income ( 357 ) ( 610 ) Interest expense, net $ 33,179 $ 36,436 Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 12 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 5. DERIVATIVE INSTRUMENTS We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures. In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchange-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults. Commodity Price Risk We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3 - to 24 -month periods. Our open commodity derivative contracts had a notional value of $ 284,752 as of April 3, 2022 and $ 313,200 as of December 31, 2021. Derivatives used to manage commodity price risk are not designated for hedge accounting treatment. Therefore, the changes in fair value of these derivatives are recorded as incurred within cost of sales. As discussed in Note 13 , we define our segment income to exclude gains and losses on commodity derivatives until the related inventory is sold, at which time the related gains and losses are reflected within segment income. This enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income. Foreign Exchange Price Risk We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, Brazilian real, Malaysian ringgit, Mexican peso and Swiss franc. We typically utilize foreign currency forward exchange contracts to hedge these exposures for periods ranging from 3 to 12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $ 149,170 at April 3, 2022 and $ 94,623 at December 31, 2021. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $ 2,098 at April 3, 2022 and $ 2,993 at December 31, 2021. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure. Interest Rate Risk In order to manage interest rate exposure, in previous years we utilized interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which were settled upon issuance of the related debt, were designated as cash flow hedges and the gains and losses that were deferred in other comprehensive income are being recognized as an adjustment to interest expense over the same period that the hedged interest payments affect earnings. Equity Price Risk We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at April 3, 2022 and December 31, 2021 was $ 24,697 and $ 24,975 , respectively. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 13 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of April 3, 2022 and December 31, 2021: April 3, 2022 December 31, 2021 Assets (1) Liabilities (1) Assets (1) Liabilities (1) Derivatives designated as cash flow hedging instruments: Foreign exchange contracts $ 44 $ 3,525 $ 2,949 $ 711 Derivatives not designated as hedging instruments: Commodities futures and options (2) 3,709 1,792 2,423 1,376 Deferred compensation derivatives — 800 2,412 — Foreign exchange contracts 262 — 550 — 3,971 2,592 5,385 1,376 Total $ 4,015 $ 6,117 $ 8,334 $ 2,087 (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 April 3, 2022, amounts reflected on a net basis in liabilities were assets of $ 62,985 and liabilities of $ 63,378 , which are associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in liabilities at December 31, 2021 were assets of $ 31,774 and liabilities of $ 32,701 . At April 3, 2022 and December 31, 2021, the remaining amount reflected in assets and liabilities related to the fair value of other non-exchange traded derivative instruments, respectively. Income Statement Impact of Derivative Instruments The effect of derivative instruments on the Consolidated Statements of Income for the three months ended April 3, 2022 and April 4, 2021 was as follows: Non-designated Hedges Cash Flow Hedges Gains (losses) recognized in income (a) Gains (losses) recognized in other comprehensive income (“OCI”) Gains (losses) reclassified from accumulated OCI (“AOCI”) into income (b) 2022 2021 2022 2021 2022 2021 Commodities futures and options $ 50,825 $ 13,679 $ — $ — $ — $ — Foreign exchange contracts ( 20 ) 138 ( 5,924 ) ( 1,635 ) 203 ( 172 ) Interest rate swap agreements — — — — ( 2,799 ) ( 2,965 ) Deferred compensation derivatives ( 800 ) 1,554 — — — — Total $ 50,005 $ 15,371 $ ( 5,924 ) $ ( 1,635 ) $ ( 2,596 ) $ ( 3,137 ) (a) Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses. (b) Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 14 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The amount of pre-tax net losses on derivative instruments, including interest rate swap agreements and foreign currency forward exchange contracts expected to be reclassified into earnings in the next 12 months was approximately $ 14,679 as of April 3, 2022. This amount is primarily associated with interest rate swap agreements. 6. FAIR VALUE MEASUREMENTS Accounting guidance on fair value measurements requires that financial assets and liabilities be classified and disclosed in one of the following categories of the fair value hierarchy: Level 1 – Based on unadjusted quoted prices for identical assets or liabilities in an active market. Level 2 – Based on observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3 – Based on unobservable inputs that reflect the entity’s own assumptions about the assumptions that a market participant would use in pricing the asset or liability. We did no t have any Level 3 financial assets or liabilities, nor were there any transfers between levels during the periods presented. The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis as of April 3, 2022 and December 31, 2021: Assets (Liabilities) Level 1 Level 2 Level 3 Total April 3, 2022: Derivative Instruments: Assets: Foreign exchange contracts (1) $ — $ 306 $ — $ 306 Commodities futures and options (3) 3,709 — — 3,709 Liabilities: Foreign exchange contracts (1) — 3,525 — 3,525 Deferred compensation derivatives (2) — 800 — 800 Commodities futures and options (3) 1,792 — — 1,792 December 31, 2021: Assets: Foreign exchange contracts (1) $ — $ 3,499 $ — $ 3,499 Deferred compensation derivatives (2) — 2,412 — 2,412 Commodities futures and options (3) 2,423 — — 2,423 Liabilities: Foreign exchange contracts (1) — 711 — 711 Commodities futures and options (3) 1,376 — — 1,376 (1) The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences. (2) The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index. (3) The fair value of commodities futures and options contracts is based on quoted market prices. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 15 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) Other Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair values as of April 3, 2022 and December 31, 2021 because of the relatively short maturity of these instruments. The estimated fair value of our long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy. The fair values and carrying values of long-term debt, including the current portion, were as follows: Fair Value Carrying Value April 3, 2022 December 31, 2021 April 3, 2022 December 31, 2021 Current portion of long-term debt $ 2,328 $ 2,844 $ 2,328 $ 2,844 Long-term debt 3,959,621 4,274,304 4,088,437 4,086,627 Total $ 3,961,949 $ 4,277,148 $ 4,090,765 $ 4,089,471 Other Fair Value Measurements In addition to assets and liabilities that are recorded at fair value on a recurring basis, GAAP requires that, under certain circumstances, we also record assets and liabilities at fair value on a nonrecurring basis. In connection with the acquisitions of Pretzels, Dot’s and Lily’s during 2021, as discussed in Note 2 , we used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and the relief-from-royalty, a form of the multi-period excess earnings, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. During the three months ended April 3, 2022 and April 4, 2021, we recorded no impairment charges. 7. LEASES We lease office and retail space, warehouse and distribution facilities, land, vehicles, and equipment. We determine if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. Right-of-use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of lease payments over the lease term and are recognized at the lease commencement date. As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants. For real estate, equipment and vehicles that support selling, marketing and general administrative activities the Company accounts for the lease and non-lease components as a single lease component. These asset categories comprise the majority of our leases. The lease and non-lease components of real estate and equipment leases supporting production activities are not accounted for as a single lease component. Consideration for such contracts are allocated to the lease and non-lease components based upon relative standalone prices either observable or estimated if observable prices are not readily available. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 16 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The components of lease expense for the three months ended April 3, 2022 and April 4, 2021 were as follows: Three Months Ended Lease expense Classification April 3, 2022 April 4, 2021 Operating lease cost Cost of sales or SM&A (1) $ 12,787 $ 11,466 Finance lease cost: Amortization of ROU assets Depreciation and amortization (1) 1,682 2,062 Interest on lease liabilities Interest expense, net 1,017 1,112 Net lease cost (2) $ 15,486 $ 14,640 (1) Supply chain-related amounts were included in cost of sales. (2) Net lease cost does not include short-term leases, variable lease costs or sublease income, all of which are immaterial. Information regarding our lease terms and discount rates were as follows: April 3, 2022 December 31, 2021 Weighted-average remaining lease term (years) Operating leases 15.0 15.4 Finance leases 30.0 30.0 Weighted-average discount rate Operating leases 3.1 % 3.1 % Finance leases 6.2 % 6.1 % Supplemental balance sheet information related to leases were as follows: Leases Classification April 3, 2022 December 31, 2021 Assets Operating lease ROU assets Other non-current assets $ 352,385 $ 351,712 Finance lease ROU assets, at cost Property, plant and equipment, gross 86,192 89,190 Accumulated amortization Accumulated depreciation ( 15,455 ) ( 16,694 ) Finance lease ROU assets, net Property, plant and equipment, net 70,737 72,496 Total leased assets $ 423,122 $ 424,208 Liabilities Current Operating Accrued liabilities $ 36,481 $ 36,292 Finance Current portion of long-term debt 3,035 3,564 Non-current Operating Other long-term liabilities 312,595 310,899 Finance Long-term debt 65,566 65,582 Total lease liabilities $ 417,677 $ 416,337 Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 17 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) The maturity of our lease liabilities as of April 3, 2022 were as follows: Operating leases Finance leases Total 2022 (rest of year) $ 33,111 $ 5,357 $ 38,468 2023 40,271 5,363 45,634 2024 37,169 4,335 41,504 2025 26,127 4,092 30,219 2026 22,287 4,005 26,292 Thereafter 284,648 146,085 430,733 Total lease payments 443,613 169,237 612,850 Less: Imputed interest 94,537 100,636 195,173 Total lease liabilities $ 349,076 $ 68,601 $ 417,677 Supplemental cash flow and other information related to leases were as follows: Three Months Ended April 3, 2022 April 4, 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 11,896 $ 10,932 Operating cash flows from finance leases 1,017 1,112 Financing cash flows from finance leases 1,050 1,148 ROU assets obtained in exchange for lease liabilities: Operating leases $ 10,266 $ 5,211 Finance leases 473 436 8. INVESTMENTS IN UNCONSOLIDATED AFFILIATES We invest in partnerships that make equity investments in projects eligible to receive federal historic and renewable energy tax credits. The tax credits, when realized, are recognized as a reduction of tax expense under the flow-through method, at which time the corresponding equity investment is written-down to reflect the remaining value of the future benefits to be realized. The equity investment write-down is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 17 ). Additionally, we acquire ownership interests in emerging snacking businesses and startup companies, which vary in method of accounting based on our percentage of ownership and ability to exercise significant influence over decisions relating to operating and financial affairs. These investments afford the Company the rights to distribute brands that the Company does not own to third-party customers primarily in North America. Net sales and expenses of our equity method investees are not consolidated into our financial statements; rather, our proportionate share of earnings or losses are recorded on a net basis within other (income) expense, net in the Consolidated Statements of Income. Both equity and cost method investments are reported within other non-current assets in our Consolidated Balance Sheets. We regularly review our investments and adjust accordingly for capital contributions, dividends received and other-than-temporary impairments. Total investments in unconsolidated affiliates were $ 109,380 and $ 93,089 as of April 3, 2022 and December 31, 2021, respectively. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 18 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 9. BUSINESS REALIGNMENT ACTIVITIES We periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of our key growth strategies. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as follows: Three Months Ended April 3, 2022 April 4, 2021 Cost of sales $ 27 $ 3,995 Selling, marketing and administrative expense 980 1,690 Business realignment costs 274 1,242 Costs associated with business realignment activities $ 1,281 $ 6,927 Costs recorded by program during the three months ended April 3, 2022 and April 4, 2021 related to these activities were as follows: Three Months Ended April 3, 2022 April 4, 2021 International Optimization Program: Severance and employee benefit costs $ 280 $ 1,624 Other program costs 1,001 5,303 Total $ 1,281 $ 6,927 Amounts classified as liabilities qualifying as exit and disposal costs primarily represent employee-related and certain third-party service provider charges, however, such amounts at April 3, 2022 are not significant. 2020 International Optimization Program In the fourth quarter of 2020, we commenced a program (“International Optimization Program”) to streamline resources and investments in select international markets, including the optimization of our China operating model that will improve our operational efficiency and provide for a strong, sustainable and simplified base going forward. The International Optimization Program is expected to be completed in early 2023, with total pre-tax costs anticipated to be $ 50,000 to $ 75,000 . Cash costs are expected to be $ 40,000 to $ 65,000 , primarily related to workforce reductions of approximately 350 positions outside of the United States, costs to consolidate and relocate production, and third-party costs incurred to execute these activities. The costs and related benefits of the International Optimization Program relate to the International segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs. For the three months ended April 3, 2022 and April 4, 2021, we recognized total costs associated with the International Optimization Program of $ 1,281 and $ 6,927 , respectively. These charges predominantly included third-party charges in support of our initiative to transform our China operating model, as well as severance and employee benefit costs. Since inception, we have incurred pre-tax charges to execute the program totaling $ 47,223 . 10. INCOME TAXES The majority of our taxable income is generated in the United States and taxed at the United States statutory rate of 21 %. The effective tax rates for the three months ended April 3, 2022 and April 4, 2021 were 21.2 % and 22.8 %, respectively. Relative to the statutory rate, the 2022 effective tax rate was impacted by state taxes, partially offset by investment tax credits and the benefit of employee share-based payments. The Company and its subsidiaries file tax returns in the United States, including various state and local returns, and in other foreign jurisdictions. We are routinely audited by taxing authorities in our filing jurisdictions, and a number of these disputes are currently underway, including multi-year controversies at various stages of review, negotiation and litigation in Malaysia, Mexico, China, Canada and the United States. The outcome of tax audits cannot be predicted with certainty, including the timing of resolution or potential settlements. If any issues addressed in our tax audits are Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 19 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income taxes in the period such resolution occurs. Based on our current assessments, we believe adequate provision has been made for all income tax uncertainties. We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $ 14,531 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits. American Rescue Plan Act On March 11, 2021, the American Rescue Plan Act (“ARPA”) was signed into law. The ARPA strengthens and extends certain federal programs enacted through the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and other COVID-19 relief measures, and establishes new federal programs, including provisions on taxes, healthcare and unemployment benefits. The ARPA did not have a material impact on our consolidated financial statements for the three months ended April 4, 2021. Coronavirus Aid, Relief, and Economic Security Act On March 27, 2020, the CARES Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on our consolidated financial statements for the three months ended April 4, 2021. 11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS Net Periodic Benefit Cost The components of net periodic benefit cost for the three months ended April 3, 2022 and April 4, 2021 were as follows: Pension Benefits Other Benefits Three Months Ended Three Months Ended April 3, 2022 April 4, 2021 April 3, 2022 April 4, 2021 Service cost $ 4,853 $ 5,489 $ 78 $ 45 Interest cost 5,365 4,190 1,155 964 Expected return on plan assets ( 12,662 ) ( 12,419 ) — — Amortization of prior service credit ( 1,413 ) ( 1,536 ) — — Amortization of net loss 2,731 5,816 26 — Settlement loss 2,616 2,508 — — Total net periodic benefit cost $ 1,490 $ 4,048 $ 1,259 $ 1,009 We made contributions of $ 3,467 and $ 4,991 to the pension plans and other benefits plans, respectively, during the first three months of 2022. In the first three months of 2021, we made contributions of $ 858 and $ 4,155 to our pension plans and other benefit plans, respectively. The contributions in 2022 and 2021 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans. The non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans is reflected within other (income) expense, net in the Consolidated Statements of Income (see Note 17 ). During the first quarter of 2022, we recognized pension settlement charges in our hourly retirement plan due to lump sum withdrawals by employees retiring or leaving the Company. The non-cash settlement charges, which represent the acceleration of a portion of the respective plan’s accumulated unrecognized actuarial loss, were triggered when the cumulative lump sum distributions exceeded the plan’s anticipated annual service and interest costs. In connection with the first quarter 2022 settlements, the related plan assets and liabilities were remeasured using a discount rate as of the remeasurement date that was 107 basis points higher than the rate as of December 31, 2021 and an expected rate of return on plan assets of 4.9 %. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 20 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 12. STOCK COMPENSATION PLANS Share-based grants for compensation and incentive purposes are made pursuant to the Equity and Incentive Compensation Plan (“EICP”). The EICP provides for grants of one or more of the following stock-based compensation awards to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent: • Non-qualified stock options (“stock options”); • Performance stock units (“PSUs”) and performance stock; • Stock appreciation rights; • Restricted stock units (“RSUs”) and restricted stock; and • Other stock-based awards. The EICP also provides for the deferral of stock-based compensation awards by participants if approved by the Compensation and Human Capital Committee of our Board and if in accordance with an applicable deferred compensation plan of the Company. Currently, the Compensation and Human Capital Committee has authorized the deferral of PSU and RSU awards by certain eligible employees under the Company’s Deferred Compensation Plan. Our Board has authorized our non-employee directors to defer any portion of their cash retainer, committee chair fees and RSUs awarded that they elect to convert into deferred stock units under our Directors’ Compensation Plan. At the time stock options are exercised or PSUs and RSUs become payable, Common Stock is issued from our accumulated treasury shares. Dividend equivalents are credited on RSUs on the same date and at the same rate as dividends paid on our Common Stock. Dividend equivalents are charged to retained earnings and included in accrued liabilities until paid. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. In addition, historical data is used to estimate forfeiture rates and record share-based compensation expense only for those awards that are expected to vest. For the periods presented, compensation expense for all types of stock-based compensation programs and the related income tax benefit recognized were as follows: Three Months Ended April 3, 2022 April 4, 2021 Pre-tax compensation expense $ 15,337 $ 15,656 Related income tax benefit 3,251 3,523 Compensation expenses for stock compensation plans are primarily included in selling, marketing and administrative expense. As of April 3, 2022, total stock-based compensation expense related to non-vested awards not yet recognized was $ 115,245 and the weighted-average period over which this amount is expected to be recognized was approximately 2.2 years. 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. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 21 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) A summary of activity relating to grants of stock options for the period ended April 3, 2022 is as follows: Stock Options Shares Weighted-Average Exercise Price (per share) Weighted-Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding at beginning of the period 1,332,956 $ 102.78 4.4 years Granted 4,025 $ 202.03 Exercised ( 175,890 ) $ 96.09 Forfeited ( 3,858 ) $ 102.97 Expired ( 1,873 ) $ 103.07 Outstanding as of April 3, 2022 1,155,360 $ 104.14 4.3 years $ 132,440 Options exercisable as of April 3, 2022 1,116,149 $ 102.49 4.2 years $ 129,789 The weighted-average fair value of options granted was $ 37.28 and $ 24.12 per share for the periods ended April 3, 2022 and April 4, 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: Three Months Ended April 3, 2022 April 4, 2021 Dividend yields 1.9 % 2.2 % Expected volatility 21.1 % 21.8 % Risk-free interest rates 1.9 % 1.0 % Expected term in years 6.3 6.3 The total intrinsic value of options exercised was $ 18,814 and $ 9,078 for the periods ended April 3, 2022 and April 4, 2021, respectively. Performance Stock Units and Restricted Stock Units Under the EICP, we grant PSUs to select executives and other key employees. Vesting is contingent upon the achievement of certain performance objectives. We grant PSUs over three-year performance cycles. If we meet targets for financial measures at the end of the applicable three-year performance cycle, we award a resulting number of shares of our Common Stock to the participants. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of these performance metrics in accordance with the terms established at the time of the award. For PSUs granted, the target award is a combination of a market-based total shareholder return and performance-based components. For market-based condition components, market volatility and other factors are taken into consideration in determining the grant date fair value and the related compensation expense is recognized regardless of whether the market condition is satisfied, provided that the requisite service has been provided. For performance-based condition components, we estimate the probability that the performance conditions will be achieved each quarter and adjust compensation expenses accordingly. The performance scores of PSU grants during the three months ended April 3, 2022 and April 4, 2021 can range from 0 % to 250 % of the targeted amounts. We recognize the compensation expenses associated with PSUs ratably over the three-year term. Compensation expenses are based on the grant date fair value because the grants can only be settled in shares of our Common Stock. The grant date fair value of PSUs is determined based on the Monte Carlo simulation model for the market-based total shareholder return component and the closing market price of the Company’s Common Stock on the date of grant for performance-based components. During the three months ended April 3, 2022 and April 4, 2021, we awarded RSUs to certain executive officers and other key employees under the EICP. We also awarded RSUs to non-employee directors. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 22 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) We recognize the compensation expenses associated with employee RSUs over a specified award vesting period based on the grant date fair value of our Common Stock. We recognize expense for employee RSUs based on the straight-line method. The compensation expenses associated with non-employee director RSUs is recognized ratably over the vesting period, net of estimated forfeitures. A summary of activity relating to grants of PSUs and RSUs for the period ended April 3, 2022 is as follows: Performance Stock Units and Restricted Stock Units Number of units Weighted-average grant date fair value for equity awards (per unit) Outstanding at beginning of year 1,303,521 $ 146.96 Granted 285,563 $ 210.42 Performance assumption change (1) 48,296 $ 306.82 Vested ( 481,554 ) $ 129.38 Forfeited ( 13,372 ) $ 151.15 Outstanding as of April 3, 2022 1,142,454 $ 180.18 (1) Reflects the net number of PSUs above and below target levels based on the performance metrics. The following table sets forth information about the fair value of the PSUs and RSUs granted for potential future distribution to employees and non-employee directors. In addition, the table provides assumptions used to determine the fair value of the market-based total shareholder return component using the Monte Carlo simulation model on the date of grant. Three Months Ended April 3, 2022 April 4, 2021 Units granted 285,563 373,331 Weighted-average fair value at date of grant $ 210.42 $ 153.13 Monte Carlo simulation assumptions: Estimated values $ 100.41 $ 66.44 Dividend yields 1.8 % 2.2 % Expected volatility 25.3 % 26.4 % The fair value of shares vested totaled $ 97,803 and $ 43,829 for the periods ended April 3, 2022 and April 4, 2021, respectively. Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 268,001 units as of April 3, 2022. Each unit is equivalent to one share of the Company’s Common Stock. 13. SEGMENT INFORMATION The Company reports its operations through three reportable segments: (i) North America Confectionery, (ii) North America Salty Snacks and (iii) International. This organizational structure aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment, and further aligns with our product categories and the key markets we serve. • North America Confectionery – This segment is responsible for our traditional chocolate and non-chocolate confectionery market position in the United States and Canada. This includes 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 City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company’s trademarks and products to third parties around the world. • 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 snacks. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 23 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) • International – International is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM as well as the measure of segment performance used for incentive compensation purposes. As discussed in Note 5 , derivatives used to manage commodity price risk are not designated for hedge accounting treatment. These derivatives are recognized at fair market value with the resulting realized and unrealized (gains) losses recognized in unallocated derivative (gains) losses outside of the reporting segment results until the related inventory is sold, at which time the related gains and losses are reallocated to segment income. This enables us to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income. Certain manufacturing, warehousing, distribution and other activities supporting our global operations are integrated to maximize efficiency and productivity. As a result, assets and capital expenditures are not managed on a segment basis and are not included in the information reported to the CODM for the purpose of evaluating performance or allocating resources. We disclose depreciation and amortization that is generated by segment-specific assets, since these amounts are included within the measure of segment income reported to the CODM. Our segment net sales and earnings were as follows: Three Months Ended April 3, 2022 April 4, 2021 Net sales: North America Confectionery $ 2,217,044 $ 1,985,416 North America Salty Snacks 226,122 121,418 International 223,055 189,114 Total $ 2,666,221 $ 2,295,948 Segment income: North America Confectionery $ 781,885 $ 642,605 North America Salty Snacks 21,301 25,378 International 41,979 27,417 Total segment income 845,165 695,400 Unallocated corporate expense (1) 150,273 137,713 Unallocated mark-to-market gains on commodity derivatives ( 27,379 ) ( 2,284 ) Costs associated with business realignment activities (see Note 9 ) 1,281 6,927 Operating profit 720,990 553,044 Interest expense, net (see Note 4 ) 33,179 36,436 Other (income) expense, net (see Note 17 ) 10,407 2,414 Income before income taxes $ 677,404 $ 514,194 (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 Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 24 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 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 adjustment for commodity derivatives is as follows: Three Months Ended April 3, 2022 April 4, 2021 Net gains on mark-to-market valuation of commodity derivative positions recognized in income $ ( 50,825 ) $ ( 13,679 ) Net gains on commodity derivative positions reclassified from unallocated to segment income 23,446 11,395 Net gains on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses $ ( 27,379 ) $ ( 2,284 ) As of April 3, 2022, 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 $ 114,293 . Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pre-tax gains on commodity derivatives of $ 87,597 to segment operating results in the next twelve months. Depreciation and amortization expense included within segment income presented above is as follows: Three Months Ended April 3, 2022 April 4, 2021 North America Confectionery $ 55,908 $ 53,150 North America Salty Snacks 16,679 6,946 International 5,660 5,840 Corporate 12,789 11,961 Total $ 91,036 $ 77,897 Additional information regarding our net sales disaggregated by geographical region is as follows: Three Months Ended April 3, 2022 April 4, 2021 Net sales: United States $ 2,340,646 $ 1,982,723 All other countries 325,575 313,225 Total $ 2,666,221 $ 2,295,948 Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 25 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 14. TREASURY STOCK ACTIVITY A summary of our treasury stock activity is as follows: Three Months Ended April 3, 2022 Shares Dollars In thousands Milton Hershey School Trust repurchase 1,000,000 $ 203,350 Shares issued for stock options and incentive compensation ( 482,469 ) ( 20,075 ) Net change 517,531 $ 183,275 In February 2022, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust, pursuant to which the Company purchased 1,000,000 shares of the Company’s Common Stock from the Milton Hershey School Trust at a price equal to $ 203.35 per share, for a total purchase price of $ 203,350 . In July 2018, our Board of Directors approved a $ 500,000 share repurchase authorization to repurchase shares of our Common Stock. As of April 3, 2022, $ 109,983 remained available for repurchases of our Common Stock under this program. In May 2021, our Board of Directors approved an additional $ 500,000 share repurchase authorization. This program is to commence after the existing 2018 authorization is completed and is to be utilized at management’s discretion. We are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The program has no expiration date and acquired shares of Common Stock will be held as treasury shares. Purchases under approved share repurchase authorizations are in addition to our practice of buying back shares sufficient to offset those issued under incentive compensation plans. 15. CONTINGENCIES The Company is subject to certain legal proceedings and claims arising out of 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, 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. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 26 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 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. Three Months Ended April 3, 2022 April 4, 2021 Common Stock Class B Common Stock Common Stock Class B Common Stock Basic earnings per share: Numerator: Allocation of distributed earnings (cash dividends paid) $ 132,260 $ 48,824 $ 118,430 $ 44,309 Allocation of undistributed earnings 257,226 95,168 169,502 63,558 Total earnings—basic $ 389,486 $ 143,992 $ 287,932 $ 107,867 Denominator (shares in thousands): Total weighted-average shares—basic 146,464 59,614 146,972 60,614 Earnings Per Share—basic $ 2.66 $ 2.42 $ 1.96 $ 1.78 Diluted earnings per share: Numerator: Allocation of total earnings used in basic computation $ 389,486 $ 143,992 $ 287,932 $ 107,867 Reallocation of total earnings as a result of conversion of Class B common stock to Common stock 143,992 — 107,867 — Reallocation of undistributed earnings — ( 562 ) — ( 306 ) Total earnings—diluted $ 533,478 $ 143,430 $ 395,799 $ 107,561 Denominator (shares in thousands): Number of shares used in basic computation 146,464 59,614 146,972 60,614 Weighted-average effect of dilutive securities: Conversion of Class B common stock to Common shares outstanding 59,614 — 60,614 — Employee stock options 599 — 590 — Performance and restricted stock units 593 — 388 — Total weighted-average shares—diluted 207,270 59,614 208,564 60,614 Earnings Per Share—diluted $ 2.57 $ 2.41 $ 1.90 $ 1.77 The earnings per share calculations for the three months ended April 3, 2022 and April 4, 2021 excluded 4 and 15 stock options, respectively, that would have been antidilutive. Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 27 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 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: Three Months Ended April 3, 2022 April 4, 2021 Write-down of equity investments in partnerships qualifying for historic and renewable energy tax credits (see Note 8 ) $ 12,592 $ 2,891 Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans (see Note 11 ) ( 2,182 ) ( 484 ) Other (income) expense, net ( 3 ) 7 Total $ 10,407 $ 2,414 Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 28 THE HERSHEY COMPANY NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (amounts in thousands, except share data or if otherwise indicated) 18. SUPPLEMENTAL BALANCE SHEET INFORMATION The components of certain Consolidated Balance Sheet accounts are as follows: April 3, 2022 December 31, 2021 Inventories: Raw materials $ 383,557 $ 395,358 Goods in process 150,722 110,008 Finished goods 685,022 649,082 Inventories at First In First Out 1,219,301 1,154,448 Adjustment to Last In First Out ( 187,798 ) ( 165,937 ) Total inventories $ 1,031,503 $ 988,511 Prepaid expenses and other: Prepaid expenses $ 86,929 $ 129,287 Other current assets 132,525 127,678 Total prepaid expenses and other $ 219,454 $ 256,965 Property, plant and equipment: Land $ 157,764 $ 154,494 Buildings 1,560,011 1,508,139 Machinery and equipment 3,521,620 3,443,500 Construction in progress 216,174 294,824 Property, plant and equipment, gross 5,455,569 5,400,957 Accumulated depreciation ( 2,862,941 ) ( 2,814,770 ) Property, plant and equipment, net $ 2,592,628 $ 2,586,187 Other non-current assets: Pension $ 67,093 $ 71,618 Capitalized software, net 280,651 260,656 Operating lease ROU assets 352,385 351,712 Investments in unconsolidated affiliates 109,380 93,089 Other non-current assets 92,838 91,128 Total other non-current assets $ 902,347 $ 868,203 Accrued liabilities: Payroll, compensation and benefits $ 183,279 $ 291,446 Advertising, promotion and product allowances 326,215 305,050 Operating lease liabilities 36,481 36,292 Other 238,685 222,850 Total accrued liabilities $ 784,660 $ 855,638 Other long-term liabilities: Post-retirement benefits liabilities $ 190,248 $ 193,604 Pension benefits liabilities 33,208 37,023 Operating lease liabilities 312,595 310,899 Other 244,997 245,532 Total other long-term liabilities $ 781,048 $ 787,058 Accumulated other comprehensive loss: Foreign currency translation adjustments $ ( 85,606 ) $ ( 100,025 ) Pension and post-retirement benefit plans, net of tax ( 120,414 ) ( 116,381 ) Cash flow hedges, net of tax ( 35,989 ) ( 32,809 ) Total accumulated other comprehensive loss $ ( 242,009 ) $ ( 249,215 ) Table of Contents The Hershey Company | Q1 2022 Form 10-Q | Page 29