What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-27 compared with 2023-04-27 · 170 added, 108 removed, 201 unchanged (58% of the section changed)

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Business Acquisitions

On April 14, 2023, we entered into a definitive agreement to acquire certain assets that provide additional manufacturing capacity from Weaver Popcorn Manufacturing, Inc., a leader in the production and co-packing of microwave popcorn and ready-to-eat popcorn, and a co-manufacturer of the Company’s SkinnyPop brand.

Through the transaction, the Company will mainly acquire property, plant and equipment, as well as leased manufacturing facilities in Indiana and Pennsylvania.

The purchase consideration totaled approximately $164 million and will be financed with cash on hand and short-term borrowings.

The acquisition is subject to customary regulatory approvals and is expected to close during the second quarter of 2023.

On May 31, 2023, we completed the acquisition of certain assets that provide additional manufacturing capacity from Weaver Popcorn Manufacturing, Inc.

(“Weaver”), a leader in the production and co-packing of microwave popcorn and ready-to-eat popcorn, and former co-manufacturer of the Company’s SkinnyPop brand.

The Hershey Company | Q2 2023 Form 10-Q | Page 36

TRENDS AFFECTING OUR BUSINESS

Demand for consumer goods has remained strong during the first three months of 2023, with continued positive consumer patterns identified for our products;

however, negative macroeconomic conditions, including inflation on inputs to consumer products, labor shortages and demand outpacing supply, have resulted in continued broad-based supply chain disruptions across the U.S.

and globally.

As a result, we continued to experience corresponding incremental costs and gross margin pressures during the three months ended April 2, 2023 (see Results of Operations included in this MD&A).

We are continuing to work closely with our business units, contract manufacturers, distributors, contractors and other external business partners to minimize the potential impact on our business.

In addition to broad-based supply chain disruptions, certain geopolitical events, specifically the conflict between Russia and Ukraine, have increased global economic and political uncertainty.

For the three months ended April 2, 2023, this conflict did not have a material impact on our commodity prices or supply availability.

Demand for consumer goods has remained strong during the first six months of 2023, with inflation slowing and continued positive consumer demand identified for our products;

however, negative macroeconomic conditions and future outlook, including fears of a pending recession, have negatively impacted consumer behaviors.

As a result, net sales and net income increased during the six months ended July 2, 2023;

however, this was primarily driven by price realization and minimal volume increases, as consumers are buying less during the first six months of 2023, compared to the same period in 2022.

Additionally, we continued to experience corresponding incremental costs and gross margin pressures during the six months ended July 2, 2023 (see Results of Operations included in this MD&A).

Furthermore, certain geopolitical events, specifically the conflict between Russia and Ukraine, have increased global economic and political uncertainty.

For the six months ended July 2, 2023, this conflict did not have a material impact on our commodity prices or supply availability.

However, we are continuing to monitor for any significant escalation or expansion of economic or supply chain disruptions or broader inflationary costs, which may result in material adverse effects on our results of operations.

Net sales and net income increased during the three months ended April 2, 2023, which was primarily driven by strong everyday performance on our core U.S.

confection brands and salty snack brands (see Segment Results included in this MD&A), partially offset by the aforementioned supply chain disruptions and gross margin pressures.

As of April 2, 2023, we believe we have sufficient liquidity to satisfy our key strategic initiatives and other material cash requirements in both the short-term and in the long-term;

As of July 2, 2023, we believe we have sufficient liquidity to satisfy our key strategic initiatives and other material cash requirements in both the short-term and in the long-term;

however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can operate effectively during the current economic environment.

We continue to monitor our discretionary spending across the organization (see Liquidity and Capital Resources included in this MD&A).

Based on the length and severity of broad-based supply chain disruptions, fluctuating levels of inflation, changes in consumer shopping and consumption behavior, and the conflict between Russia and Ukraine, we may experience increasing supply chain costs and higher inflation.

Based on the length and severity of fluctuating levels of inflation, the likelihood of a potential recession, changes in consumer shopping and consumption behavior, and the conflict between Russia and Ukraine, we may experience increasing supply chain costs, higher inflation and other impacts to our business.

We will continue to evaluate the nature and extent of these potential and evolving impacts on our business, consolidated results of operations, segment results, liquidity and capital resources.

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CONSOLIDATED RESULTS OF OPERATIONS

Three Months Ended

April 2, 2023 April 3, 2022 Percent Change

Three Months Ended Six Months Ended

July 2, 2023 July 3, 2022 Percent Change July 2, 2023 July 3, 2022 Percent Change

In millions of dollars except per share amounts

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SM&A expense as a percent of net sales 23.0 % 22.9 % 21.1 % 21.2 %

Business realignment activities 0.8 0.3 196.0 %

Business realignment activities (0.3) — NM 0.4 0.3 60.9 %

Operating profit 560.6 456.5 22.8 % 1,360.6 1,177.5 15.5 %

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NM = not meaningful

Results of Operations - First Quarter 2023 vs.

First Quarter 2022

Net sales increased 12.1% in the first quarter of 2023 compared to the same period of 2022, reflecting a favorable price realization of 8.9% primarily due to higher list prices, primarily within our North America Confectionery and North America Salty Snacks segments and a volume increase of 3.3% driven by increased consumer demand across reportable segments.

These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.1%.

Results of Operations - Second Quarter 2023 vs.

Second Quarter 2022

Net sales increased 5.0% in the second quarter of 2023 compared to the same period of 2022, reflecting a favorable price realization of 7.7% primarily due to higher list prices, primarily within our North America Confectionery and North America Salty Snacks segments.

This increase was offset by a volume decrease of 2.7% driven primarily by declines in everyday core U.S.

confection brands.

There was no impact from foreign currency exchange rates.

Marketplace Metrics

For the first quarter of 2023, our total U.S.

For the second quarter of 2023, our total U.S.

retail takeaway increased 2.2% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks and grocery items.

candy, mint and gum (“CMG”) consumer takeaway increased 12.3% and experienced a CMG market share decline of approximately 70 basis points.

candy, mint and gum (“CMG”) consumer takeaway increased 1.3% and experienced a CMG market share decline of 83 basis points.

The CMG consumer takeaway and market share information reflects measured channels of distribution accounting for approximately 90% of our U.S.

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Cost of Sales and Gross Margin

Cost of sales increased 13.0% in the first quarter of 2023 compared to the same period of 2022.

The increase was driven by higher sales volume, higher supply chain inflation costs, including higher logistics and labor costs and an incremental $61.4 million of unfavorable mark-to-market activity on our commodity derivative instruments intended

Cost of sales decreased 1.0% in the second quarter of 2023 compared to the same period of 2022.

The decrease was driven by an incremental $2.3 million of favorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases, price realization and favorable supply chain productivity.

These decreases were partially offset by higher logistics and labor costs.

The Hershey Company | Q2 2023 Form 10-Q | Page 38

to economically hedge future years’ commodity purchases.

The increase was partially offset by favorable price realization and supply chain productivity.

Gross margin decreased by 40 basis p oints in the first quarter of 2023 compared to the same period of 2022.

The decrease was driven by unfavorable year-over-year mark-to-market impact from commodity derivative instruments, higher supply chain inflation costs, including higher logistics and labor costs, and unfavorable product mix.

These declines were offset by favorable price realization and volume increases.

Gross margin increased by 340 basis points in the second quarter of 2023 compared to the same period of 2022.

The increase was driven by favorable year-over-year mark-to-market impact from commodity derivative instruments, favorable price realization and favorable product mix.

These increases were offset by higher logistics and labor costs.

SM&A Expenses

SM&A expenses increased $57.4 million, or 10.9%, in the first quarter of 2023 compared to the same period of 2022.

Total advertising and related consumer marketing expenses increased 8.8% driven by advertising increases across reportable segments.

SM&A expenses, excluding advertising and related consumer marketing, increased approximately 12.1% in the first quarter of 2023 driven by an increase in acquisition and integration related costs, as well as higher compensation costs, investments in capabilities and technology and broad-based marketplace inflation.

SM&A expenses increased $28.3 million, or 5.2%, in the second quarter of 2023 compared to the same period of 2022.

Total advertising and related consumer marketing expenses increased 14.9% driven by increases across reportable segments.

SM&A expenses, excluding advertising and related consumer marketing, increased approximately 1.3% in the second quarter of 2023 driven by higher compensation costs and investments in capabilities and technology.

Business Realignment Activities

We periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of our key growth strategies.

In the first quarter of 2023, we recorded $0.8 million business realignment costs versus costs of $0.3 million in the first quarter of 2022 related to the International Optimization Program.

In the second quarter of 2023, we recorded $0.3 million business realignment benefits related to the International Optimization Program.

There were no business realignment costs in the second quarter of 2022 related to the International Optimization Program.

This program is focused on optimizing our China operating model to improve our operational efficiency and provide for a strong, sustainable and simplified base going forward.

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Operating Profit and Operating Profit Margin

Operating profit was $799.9 million in the first quarter of 2023 compared to $721.0 million in the same period of 2022 predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above.

Operating profit margin decreased to 26.8% in 2023 from 27.0% in 2022 driven by the same factors noted above that resulted in lower gross margin for the period.

Operating profit was $560.7 million in the second quarter of 2023 compared to $456.5 million in the same period of 2022 predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above.

Operating profit margin increased to 22.5% in 2023 from 19.2% in 2022 driven by the same factors noted above that resulted in higher gross margin for the period.

Interest Expense, Net

Net interest expense was $4.5 million higher in the first quarter of 2023 c ompared to the same period of 2022.

Net interest expense was $3.3 million higher in the second quarter of 2023 compared to the same period of 2022.

The increase was primarily due to higher rates on short-term debt balances in 2023 versus 2022, specifically related to outstanding commercial paper borrowings.

The increase was partially offset by higher interest income.

Other (Income) Expense, Net

Other (income) expense, net was $2.9 million in the first quarter of 2023 versus net expense of $10.4 million in the first quarter of 2022.

The decrease in net expense was primarily due to lower write-downs on equity investments qualifying for tax credits in 2023 versus the first quarter of 2022 and higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.

Other (income) expense, net was $84.5 million in the second quarter of 2023 versus net expense of $19.7 million in the second quarter of 2022.

The increase in net expense was primarily due to higher write-downs on equity investments qualifying for tax credits in 2023 versus the second quarter of 2022 and higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.

Income Taxes and Effective Tax Rate

The effective income tax rate was 22.7% for the first quarter of 2023 compared with 21.2% for the first quarter of 2022.

Relative to the 21% statutory rate, the 2023 effective tax rate was impacted by state taxes, partially offset by employee share-based payments.

The effective income tax rate was 7.4% for the second quarter of 2023 compared with 21.8% for the second quarter of 2022.

Relative to the 21% statutory rate, the 2023 effective tax rate was impacted by investment tax credits and employee share-based payments partially offset by state taxes and tax reserves.

Relative to the 21% 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.

Net Income Attributable to The Hershey Company and Earnings Per Share-diluted

Net income increased $53.7 million, or 10.1%, while EPS-diluted increased $0.28, or 10.9%, in the first quarter of 2023 compared to the same period of 2022.

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.

Net income increased $91.4 million, or 29.0%, while EPS-diluted increased $0.45, or 29.4%, in the second quarter of 2023 compared to the same period of 2022.

The increase in both net income and EPS-diluted was driven primarily by higher gross profit and lower income taxes, partially offset by higher SM&A expenses and higher other income and expenses.

Our 2023 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.

The Hershey Company | Q2 2023 Form 10-Q | Page 39

Results of Operations - First Six Months 2023 vs.

First Six Months 2022

Net sales increased 8.7% in the first six months of 2023 compared to the same period of 2022, reflecting a favorable price realization of 8.6% primarily due to higher list prices across our reportable segments and a volume increase of 0.2% driven by increases in everyday core brands within the North America Salty Snacks and International segments, partially offset by a decrease in everyday core U.S.

These increases were offset by an unfavorable impact from foreign currency exchange rates of 0.1%.

Cost of Sales and Gross Margin

Cost of sales increased 6.1% in the first six months of 2023 compared to the same period of 2022.

The increase was driven by an incremental $59.1 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases, higher sales volume and higher supply chain costs, including higher logistics and labor costs.

The increase was partially offset by favorable price realization and supply chain productivity.

Gross margin increased by 130 basis points in the first six months of 2023 compared to the same period of 2022.

The increases were driven by favorable price realization and volume increases.

The increase was partially offset by unfavorable year-over-year mark-to-market impact from commodity derivative instruments, higher supply chain inflation costs, including higher logistics and labor costs and unfavorable product mix.

SM&A Expenses

SM&A expenses increased $85.7 million, or 8.0%, in the first six months of 2023 compared to the same period of 2022.

Total advertising and related consumer marketing expenses increased 11.6% driven by increased investment in core brands and sponsorships in the North America Confectionery segment..

SM&A expenses, excluding advertising and related consumer marketing, increased approximately 6.4% in the first six months of 2023 driven by an increase in compensation costs, investments in capabilities and technology and broad-based marketplace inflation.

Business Realignment Activities

During the first six months of 2023, we recorded business realignment costs of $0.4 million versus $0.3 million in the first six months of 2022 related to the International Optimization Program.

Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 9 to the Unaudited Consolidated Financial Statements.

Operating Profit and Operating Profit Margin

Operating profit increased 15.5% in the first six months of 2023 compared to the same period of 2022 predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above.

Operating profit margin was 24.8% in 2023 and 23.4% in 2022 driven by the same factors noted above that resulted in higher gross margin for the period.

Interest Expense, Net

Net interest expense was $7.8 million higher in the first six months of 2023 compared to the same period of 2022.

The increase was primarily due to higher rates on short-term debt balances in 2023 versus 2022, specifically related to outstanding commercial paper borrowings.

The increase was partially offset by higher interest income in 2023 compared to 2022.

The Hershey Company | Q2 2023 Form 10-Q | Page 40

Other (Income) Expense, Net

Other (income) expense, net was $87.5 million in the first six months of 2023 versus expense of $30.1 million in the first six months of 2022.

The increase in net expense was primarily due to higher write-downs on equity investments qualifying for tax credits in 2023 versus the first quarter of 2022 and higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans.

Income Taxes and Effective Tax Rate

Our effective income tax rate was 17.1% for the first six months of 2023 compared with 21.4% for the first six months of 2022.

Relative to the 21% statutory rate, the 2023 effective tax rate was impacted by investment tax credits and employee share-based payments partially offset by state taxes and tax reserves.

Relative to the 21% statutory rate, the 2022 effective tax rate was impacted by state taxes, tax reserves and unfavorable foreign rate differential, partially offset by investment tax credits and the benefit of employee share-based payments.

Net Income Attributable to The Hershey Company and Earnings Per Share-diluted

Net income increased $145.1 million, or 17.1%, while EPS-diluted increased $0.73, or 17.8%, in the first six months of 2023 compared to the same period of 2022.

The increase in both net income and EPS-diluted was driven primarily by higher gross profit and lower income taxes, partially offset by higher SM&A expenses and higher other income and expenses.

Our 2023 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases.

The Hershey Company | Q2 2023 Form 10-Q | Page 41

SEGMENT RESULTS

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Our segment results, including a reconciliation to our consolidated results, were as follows:

Three Months Ended

April 2, 2023 April 3, 2022

Three Months Ended Six Months Ended

July 2, 2023 July 3, 2022 July 2, 2023 July 3, 2022

In millions of dollars

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See Note 13 to the Unaudited Consolidated Financial Statements.

The Hershey Company | Q1 2023 Form 10-Q | Page 36

North America Confectionery

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Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain trademarks and products to third parties around the world.

North America Confectionery results, which accounted for 82.1% and 83.1% of our net sales for the three months ended April 2, 2023 and April 3, 2022, respectively, were as follows:

Three Months Ended

April 2, 2023 April 3, 2022 Percent Change

North America Confectionery results, which accounted for 80.0% and 80.5% of our net sales for the three months ended July 2, 2023 and July 3, 2022, respectively, were as follows:

Three Months Ended Six Months Ended

July 2, 2023 July 3, 2022 Percent Change July 2, 2023 July 3, 2022 Percent Change

In millions of dollars

2 unchanged sentences

Segment margin 33.0 % 32.4 % 34.8 % 33.9 %

Results of Operations - First Quarter 2023 vs.

First Quarter 2022

Net sales of our North America Confectionery segment increased $235.2 million, or 10.6%, in the first quarter of 2023 compared to the same period of 2022, reflecting a favorable price realization of 9.5% primarily due to list price increases on certain products across our portfolio and a volume increase of 1.4% due to an increase in everyday core U.S.

confection brands.

These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.3%.

Results of Operations - Second Quarter 2023 vs.

Second Quarter 2022

Net sales of our North America Confectionery segment increased $84.0 million, or 4.4%, in the second quarter of 2023 compared to the same period of 2022, reflecting a favorable price realization of 8.4% primarily due to list price increases on certain products across our portfolio.

This increase was partially offset by a volume decrease of 3.6% due to a decrease in everyday core U.S.

confection brands, and an unfavorable impact from foreign currency exchange rates of 0.4%.

Our North America Confectionery segment also includes licensing and owned retail.

This includes our Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore.

Our net sales for licensing and owned retail increased approximately 21.6% during the first quarter of 2023 compared to the same period of 2022.

Our North America Confectionery segment income increased $105.9 million, or 13.5%, in the first quarter of 2023 compared to the same period of 2022, primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as unfavorable product mix.

The Hershey Company | Q1 2023 Form 10-Q | Page 37

Our net sales for licensing and owned retail increased approximately 3.7% during the second quarter of 2023 compared to the same period of 2022.

Our North America Confectionery segment income increased $38.2 million, or 6.2%, in the second quarter of 2023 compared to the same period of 2022, primarily due to favorable price realization, partially offset by volume declines, higher supply chain inflation costs, including higher logistics and labor costs, as well as unfavorable product mix.

Results of Operations - First Six Months 2023 vs.

First Six Months 2022

Net sales of our North America Confectionery segment increased $319.0 million or 7.7% in the first six months of 2023 compared to the same period of 2022, reflecting a favorable price realization of 8.9% due to list price increases on certain products across our portfolio.

The increase was offset by a volume decrease of 0.8% primarily driven by a decrease in everyday core U.S.

confection brands, and an unfavorable impact from foreign currency exchange rates of 0.4%.

Our North America Confectionery segment also includes licensing and owned retail.

This includes our Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore.

Our net sales for licensing and owned retail increased approximately 23.2% during the first six months of 2023 compared to the same period of 2022.

Our North America Confectionery segment income increased $144.2 million or 10.3% in the first six months of 2023 compared to the same period of 2022, primarily due to favorable price realization, partially offset by volume declines, higher supply chain inflation costs, including higher logistics and labor costs, as well as unfavorable product mix.

North America Salty Snacks

The North America Salty Snacks segment is responsible for our grocery and snacks market positions, including our salty snacking products.

North America Salty Snacks results, which accounted for 9.0% and 8.5% of our net sales for the three months ended April 2, 2023 and April 3, 2022, respectively, were as follows:

Three Months Ended

April 2, 2023 April 3, 2022 Percent Change

North America Salty Snacks results, which accounted for 10.9% and 10.8% of our net sales for the three months ended July 2, 2023 and July 3, 2022, respectively, were as follows:

Three Months Ended Six Months Ended

July 2, 2023 July 3, 2022 Percent Change July 2, 2023 July 3, 2022 Percent Change

In millions of dollars

2 unchanged sentences

Segment margin 16.1 % 14.6 % 16.7 % 12.2 %

Results of Operations - First Quarter 2023 vs.

First Quarter 2022

Net sales of our North America Salty Snacks segment increased $43.9 million, or 19.4%, in the first quarter of 2023 compared to the same period of 2022.

This increase reflects a favorable price realization of 10.9% due to list price increases on certain products across our portfolio, primarily SkinnyPop and Dot’s Homestyle Pretzels snacks, and a volume increase of 8.5% driven primarily by SkinnyPop snacks.

Our North America Salty Snacks segment income increased $25.5 million, or 119.7%, in the first quarter of 2023 compared to the same period of 2022, primarily due to favorable price realization, volume increases and favorable freight costs, partially offset by higher supply chain costs.

Results of Operations - Second Quarter 2023 vs.

Second Quarter 2022

Net sales of our North America Salty Snacks segment increased $16.1 million, or 6.3%, in the second quarter of 2023 compared to the same period of 2022.

This increase reflects a favorable price realization of 6.6%, due to list price increases on certain products across our portfolio, primarily SkinnyPop and Dot’s Homestyle Pretzels snacks, partially offset by a volume decrease of 0.3%.

Our North America Salty Snacks segment income increased $6.4 million, or 17.1%, in the second quarter of 2023 compared to the same period of 2022, primarily due to favorable price realization, volume increases on certain products, and favorable product mix, partially offset by increased advertising and related consumer marketing costs.

Results of Operations - First Six Months 2023 vs.

First Six Months 2022

Net sales of our North America Salty Snacks segment increased $60 million, or 12.4%, in the first six months of 2023 compared to the same period of 2022, reflecting a favorable price realization of 8.6%, due to list price increases on certain products across our portfolio, and a volume increase of 3.8% primarily related to SkinnyPop and Dot’s Homestyle Pretzels snacks.

Our North America Salty Snacks segment income increased $31.8 million, or 54.2%, in the first six months of 2023 compared to the same period of 2022, due to favorable price realization, volume increases and favorable product mix, partially offset by increased advertising and related consumer marketing costs.

International

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We currently, have operations and manufacture product in Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Latin America, as well as Europe, Asia, the Middle East and Africa (“AMEA”) and other regions.

International results, which accounted for 8.9% and 8.4% of our net sales for the three months ended April 2, 2023 and April 3, 2022, respectively, were as follows:

Three Months Ended

April 2, 2023 April 3, 2022 Percent Change

International results, which accounted for 9.0% and 8.7% of our net sales for the three months ended July 2, 2023 and July 3, 2022, respectively, were as follows:

Three Months Ended Six Months Ended

July 2, 2023 July 3, 2022 Percent Change July 2, 2023 July 3, 2022 Percent Change

In millions of dollars

2 unchanged sentences

Segment margin 18.3 % 14.8 % 19.6 % 16.9 %

Results of Operations - First Quarter 2023 vs.

First Quarter 2022

Net sales of our International segment increased $42.3 million, or 19.0%, in the first quarter of 2023 compared to the same period of 2022, reflecting a volume increase of 17.4%, a favorable impact from foreign currency exchange rates of 1.5% and a favorable price realization of 0.1%.

The volume increase was primarily attributable to solid marketplace growth in Brazil, India and Mexico, where net sales increased by 27.7%, 24.2% and 18.2%, respectively.

Our International segment generated income of $55.0 million in the first quarter of 2023 compared to $42.0 million in the first quarter of 2022, driven primarily by favorable price realization and volume increases, partially offset by higher freight and logistics costs.

The Hershey Company | Q1 2023 Form 10-Q | Page 38

Results of Operations - Second Quarter 2023 vs.

Second Quarter 2022

Net sales of our International segment increased $17.6 million, or 8.5%, in the second quarter of 2023 compared to the same period of 2022, reflecting a favorable price realization of 3.4%, a volume increase of 2.8%, primarily attributable to solid marketplace growth across the segment, and a favorable impact from foreign currency exchange rates of 2.3%, primarily driven by Mexico.

The net sales increase was primarily driven by Mexico and Brazil & Latin America (“LATAM”), where net sales increased by 22.6% and 12.7%, respectively.

Our International segment generated income of $41.1 million in the second quarter of 2023 compared to $30.7 million in the second quarter of 2022, driven primarily by favorable price realization, volume increases and favorable product mix, partially offset by supply chain costs.

Results of Operations - First Six Months 2023 vs.

First Six Months 2022

Net sales of our International segment increased $60.1 million, or 14.0%, in the first six months of 2023 compared to the same period of 2022, reflecting a volume increase of 7.8%, primarily attributable to solid marketplace growth across the segment, a favorable price realization of 4.3% and a favorable impact from foreign currency exchange rates of 1.9%, primarily driven by Mexico.

The net sales increase was primarily driven by LATAM and Mexico, where net sales increased by 25.8% and 20.3%, respectively.

Our International segment generated income of $96.2 million in the first six months of 2023 compared to $72.7 million in the first six months of 2022, driven primarily by favorable price realization, volume increases and favorable product mix, partially offset by supply chain costs.

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, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.

In the first quarter of 2023, unallocated corporate expense totaled $177.1 million, as compared to $150.3 million in the first quarter of 2022.

The increase was primarily driven by an increase in acquisition and integration related costs, as well as higher compensation costs, investments in capabilities and technology and broad-based marketplace inflation.

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, (d) acquisition and integration-related costs and (e) other gains or losses that are not integral to segment performance.

In the second quarter of 2023, unallocated corporate expense totaled $186.6 million, as compared to $188.9 million in the second quarter of 2022.

The decrease was primarily driven by a loss recognized in the prior year on the sale of non-operating assets, partially offset by an increase in acquisition and integration related costs, as well as investments in capabilities and technology and higher compensation costs.

In the first six months of 2023, unallocated corporate expense totaled $363.7 million, as compared to $339.1 million in the first six months of 2022.

The increase is primarily driven by higher acquisition and integration related costs, as well as incremental investments in capabilities and technology and higher compensation costs, partially offset by a loss recognized in the prior year on the sale of non-operating assets.

LIQUIDITY AND CAPITAL RESOURCES

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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 April 2, 2023, our cash and cash equivalents totaled $460.3 million, a decrease of $3.5 million compared to the 2022 year-end balance.

Additional detail regarding the net uses of cash are outlined in the following discussion.

Additionally, at April 2, 2023, we had outstanding short- and long-term debt totaling $4.7 billion, of which $758.1 million was classified as the current portion of long-term debt.

Of the $758.1 million, $500 million of 3.375% Notes are due upon maturity on May 1, 2023 and $250 million of 2.625% Notes are due upon maturity on May 15, 2023.

We believe we can satisfy these debt obligations with cash generated from our operations, issuing new debt, and/or by borrowing on our unsecured revolving credit facility.

Approximately 90% of the balance of our cash and cash equivalents at April 2, 2023 was held by subsidiaries domiciled outside of the United States.

At July 2, 2023, our cash and cash equivalents totaled $446.2 million, a decrease of $17.7 million compared to the 2022 year-end balance.

We believe we have sufficient liquidity to satisfy our cash needs, including our new unsecured revolving credit facility which allows the Company to borrow up to $1.35 billion with the option to increase borrowings by an additional $500 million with the consent of the lenders.

Additional details 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 2, 2023 was held by subsidiaries domiciled outside of the United States.

A majority of this balance is distributable to the United States without material tax implications, such as withholding tax.

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The following table is derived from our Consolidated Statements of Cash Flows:

Three Months Ended

In millions of dollars April 2, 2023 April 3, 2022

Six Months Ended

In millions of dollars July 2, 2023 July 3, 2022

Net cash provided by (used in):

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Operating activities

We generated cash of $755.4 million from operating activities in the first three months of 2023, an increase of $98.9 million compared to $656.5 million in the same period of 2022.

This increase in net cash provided by operating activities was mainly driven by the following factors:

• Timing of income tax payments contributed to an increase in operating cash of $174.2 million in 2023, compared to $127.3 million in 2022.

We generated cash of $1,049.8 million from operating activities in the first six months of 2023, an decrease of $64.0 million compared to $1,113.8 million in the same period of 2022.

This decrease in net cash provided by operating activities was mainly driven by the following factors:

• In the aggregate, select net working capital items, specifically, trade accounts receivable, inventory, accounts payable and accrued liabilities, consumed cash of $265.7 million in 2023, compared to $77.5 million in 2022.

This $188.2 million fluctuation was mainly driven by the timing of vendor and supplier payments.

• Timing of income tax payments contributed to a decrease in operating cash of $3.7 million in 2023, compared to an increase of $51.9 million in 2022.

This $55.6 million fluctuation was primarily due to the variance in actual tax expense for 2023 relative to the timing of quarterly estimated tax payments.

We paid cash of $229.1 million for income taxes during 2023 compared to $172.9 million in the same period of 2022.

• The decrease in cash provided by operating activities was partially offset by the following net cash inflows:

◦ Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, a write-down of equity investments and other charges) resulted in $167.0 million of higher cash flow in 2023 relative to 2022.

Investing activities

We used cash of $188.3 million for investing activities in the first three months of 2023, an increase of $24.3 million compared to $164.0 million in the same period of 2022.

We used cash of $516.0 million for investing activities in the first six months of 2023, an increase of $165.0 million compared to $351.0 million in the same period of 2022.

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 our ERP system implementation, capacity expansion, innovation and cost savings, were $176.1 million in the first three months of 2023 compared to $141.1 million in the same period of 2022.

Capital expenditures, including capitalized software, primarily to support our ERP system implementation, capacity expansion, innovation and cost savings, were $330.5 million in the first six months of 2023 compared to $241.0 million in the same period of 2022.

Expenditures increased due to progress on capacity expansion projects and our ERP system implementation.

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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 $12.3 million in the first three months of 2023, compared to $22.5 million in the same period of 2022.

We invested approximately $19.1 million in the first six months of 2023, compared to $116.2 million in the same period of 2022.

• Business Acquisition .

In May 2023, we acquired Weaver for an initial cash purchase price of $165.8 million.

Further details regarding our business acquisition activity is provided in Note 2 to the Unaudited Consolidated Financial Statements.

In 2022, we had no acquisition activity.

• Other investing activities .

In 2023 and 2022, our other investing activities were minimal.

Financing activities

We used cash of $552.2 million for financing activities in the first three months of 2023, an increase of $88.7 million compared to $463.5 million in the same period of 2022.

This increase in net cash used in financing activities was mainly driven by the following factors:

We used cash of $506.7 million for financing activities in the first six months of 2023, a decrease of $248.7 million compared to $755.4 million in the same period of 2022.

This decrease in net cash used in financing activities was mainly driven by the following factors:

• Short-term borrowings, net.

In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs.

During the first three months of 2023, we used cash of $90.7 million to reduce a portion of our short-term commercial paper borrowings , partially offset by an increase in short-term foreign bank borrowings.

During the first three months of 2022, we used cash of $65.6 million to reduce a portion of our short-term commercial paper borrowings originally used to fund our 2021 acquisitions of Dot’s and Pretzels, partially offset by an increase in short-term foreign bank borrowings.

During the first six months of 2023, we generated cash of $170.0 million predominately through the issuance of short-term commercial paper, as well as an increase in short-term foreign bank borrowings.

During the first six months of 2022, we used cash of $24.5 million to reduce a portion of our short-term commercial paper borrowings originally used to fund our 2021 acquisitions of Dot’s and Pretzels, partially offset by an increase in short-term foreign bank borrowings.

The Hershey Company | Q2 2023 Form 10-Q | Page 43

• Long-term debt borrowings and repayments .

During the first three months of 2023 and the first three months of 2022, long-term debt borrowings and repayments were minimal.

During the first six months of 2023, we issued $350 million of 4.250% Notes due in May 2028 and $400 million of 4.500% Notes due in May 2033 (the “2023 Notes”).

Proceeds from the issuance of the 2023 Notes, net of discounts and issuance costs, totaled $744,092.

Additionally, in May 2023 we repaid $250 million of 2.625% Notes and $500 million of 3.375% Notes due upon their maturity During the first six months of 2022, long-term debt borrowings and repayments were minimal.

• Dividend payments .

Total dividend payments to holders of our Common Stock and Class B Common Stock were $207.4 million during the first three months of 2023, an increase of $26.3 million compared to $181.1 million in the same period of 2022.

Total dividend payments to holders of our Common Stock and Class B Common Stock were $413.5 million during the first six months of 2023, an increase of $52.5 million compared to $361.0 million in the same period of 2022.

Details regarding our 2023 cash dividends paid to stockholders are as follows:

The Hershey Company | Q1 2023 Form 10-Q | Page 40

Quarter Ended

In millions of dollars except per share amounts April 2, 2023

In millions of dollars except per share amounts April 2, 2023 July 2, 2023

Dividends paid per share – Common stock $ 1.036 $ 1.036

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Total cash dividends paid $ 207.4 $ 206.1

Declaration date January 31, 2023

Record date February 17, 2023

Payment date March 15, 2023

Declaration date January 31, 2023 April 25, 2023

Record date February 17, 2023 May 19, 2023

Payment date March 15, 2023 June 15, 2023

• Share repurchases .

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In February 2023, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “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 $239.91 per share, for a total purchase price of $239.9 million.

In February 2022, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, pursuant to which the Company purchased 1,000,000 shares of the Company’s Common Stock from the Milton Hershey School Trust at a price equal to $203.35 per share, for a total purchase price of $203.4 million.

In July 2018, our Board of Directors approved a $500 million share repurchase authorization.

In May 2021, our Board of Directors approved an additional $500 million share repurchase authorization.

As a result of the February 2023 Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, the July 2018 share repurchase authorization was completed and as of April 2, 2023, approximately $370 million remained available for repurchases under our May 2021 share repurchase authorization.

As a result of the February 2023 Stock Purchase Agreement with Hershey Trust Company, as trustee for the School Trust, the July 2018 share repurchase authorization was completed and as of July 2, 2023, approximately $370 million remained available for repurchases under our May 2021 share repurchase authorization.

The share repurchase program does not have an expiration date.

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• Proceeds from exercised stock options and employee tax withholding.

During the first three months of 2023, we received $15.2 million from employee exercises of stock options and paid $28.3 million of employee taxes withheld from share-based awards.

During the first three months of 2022, we received $16.7 million from employee exercises of stock options and paid $29.0 million of employee taxes withheld from share-based awards.

During the first six months of 2023, we received $22.0 million from employee exercises of stock options and paid $33.0 million of employee taxes withheld from share-based awards.

During the first six months of 2022, we received $21.8 million from employee exercises of stock options and paid $33.9 million of employee taxes withheld from share-based awards.

Variances are driven primarily by the number of shares exercised and the share price at the date of grant.

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• Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;

• Such other matters as discussed in our 2022 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q, including Part II, Item 1A, ”Risk Factors.”

• Such other matters as discussed in our 2022 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the quarterly period ended April 2, 2023 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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis