Item 1. Financial Statements.

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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.


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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.


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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.


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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.


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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.


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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


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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.


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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.


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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.


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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.


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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 not 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.


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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.


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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


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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


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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.


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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.


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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


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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)


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