Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis (“MD&A”) is intended to provide an understanding of Hershey’s financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Unaudited Consolidated Financial Statements and accompanying notes. This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Refer to the Safe Harbor Statement below as well as the Risk Factors and other information contained in our 2021 Annual Report on Form 10-K for information concerning the key risks to achieving future performance goals.

The MD&A is organized in the following sections:

• Overview

• Trends Affecting Our Business

• Consolidated Results of Operations

• Segment Results

• Liquidity and Capital Resources

• Safe Harbor Statement

OVERVIEW

Hershey is a global confectionery leader known for making more moments of goodness through chocolate, sweets, mints and other great tasting snacks. We are the largest producer of quality chocolate in North America, a leading snack maker in the United States (“U.S.”) and a global leader in chocolate and non-chocolate confectionery. We market, sell and distribute our products under more than 100 brand names in approximately 80 countries worldwide.

Our principal product offerings include chocolate and non-chocolate confectionery products; gum and mint refreshment products and protein bars; pantry items, such as baking ingredients, toppings and beverages; and snack items such as spreads, bars, and snack bites and mixes, popcorn and pretzels.

Business Acquisitions and Divestiture

In December 2021, we completed the acquisition of Pretzels Inc. (“Pretzels”), previously a privately held company that manufactures and sells pretzels and other salty snacks for other branded products and private labels in the United States. Pretzels is an industry leader in the pretzel category with a product portfolio that includes filled, gluten free and seasoned pretzels, as well as extruded snacks that complements Hershey’s snacks portfolio. Based in Bluffton, Indiana, Pretzels operates three manufacturing locations in Indiana and Kansas. Pretzels provides Hershey deep pretzel category and product expertise and the manufacturing capabilities to support brand growth and future pretzel innovation. Additionally, we completed the acquisition of Dot’s Pretzels, LLC (“Dot’s”), previously a privately held company that produces and sells pretzels and other snack food products to retailers and distributors in the United States, with Dot’s Homestyle Pretzels snacks as its primary product. Dot’s is the fastest-growing scale brand in the pretzel category and complements Hershey’s snacks portfolio.

In June 2021, we completed the acquisition of Lily’s Sweets, LLC (“Lily’s”), previously a privately held company that sells a line of sugar-free and low-sugar confectionery foods to retailers and distributors in the United States and Canada. Lily’s products include dark and milk chocolate style bars, baking chips, peanut butter cups and other confection products that complement Hershey’s confectionery and confectionery-based portfolio.

In January 2021, we completed the divestiture of Lotte Shanghai Foods Co., Ltd., 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.

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TRENDS AFFECTING OUR BUSINESS

On March 11, 2020, the World Health Organization designated coronavirus disease 2019 (“COVID-19”) as a global pandemic, which has spread worldwide and impacted various markets around the world, including the U.S. Throughout the pandemic we have remained committed to promoting the health and safety of our employees and communities and helping to maintain the global food supply. Through the first nine months of 2022, relatively minimal COVID-19 restrictions remained as vaccination status (including vaccine boosters) continued to increase around the world, albeit with slower than anticipated rollouts and challenges within certain countries. The lifting of restrictions has resulted in daily activities and habits being more representative of pre-pandemic times. However, beginning in 2021, and continuing through the nine months ended October 2, 2022, the continued 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. As a result, during the nine months ended October 2, 2022, we continued to experience corresponding incremental costs and gross margin pressures (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 COVID-19 and broad-based supply chain disruptions, certain geopolitical events, specifically the conflict between Russia and Ukraine, have increased global economic and political uncertainty. For the nine months ended October 2, 2022, 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.

We experienced an increase in our net sales during the three months ended October 2, 2022, 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 October 2, 2022, we believe we have sufficient liquidity to satisfy our key strategic initiatives and other material cash requirements; however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can operate effectively in 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 COVID-19 and the conflict between Russia and Ukraine, including broad-based supply chain disruptions, rising levels of inflation, new trends in COVID-19 outbreaks and hotspots, the spread of and emergence of new COVID-19 variants, resurgences of COVID-19 cases and the continued distribution of vaccinations, we may experience continued volatility in retail foot traffic, consumer shopping and consumption behavior and may experience increasing supply chain costs and higher inflation. 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																		Nine Months Ended
						October 2, 2022						October 3, 2021						Percent Change						October 2, 2022						October 3, 2021						Percent Change
In millions of dollars except per share amounts
Net sales						$	2,728.2					$	2,359.8					15.6		%				$	7,767.0					$	6,645.2					16.9		%
Cost of sales						1,619.7						1,298.5						24.7		%				4,413.0						3,609.5						22.3		%
Gross profit						1,108.5						1,061.3						4.4		%				3,354.0						3,035.7						10.5		%
Gross margin						40.6		%				45.0		%										43.2		%				45.7		%
Selling, marketing & administrative (“SM&A”) expenses						551.9						486.1						13.5		%				1,619.6						1,448.4						11.8		%
SM&A expense as a percent of net sales						20.2		%				20.6		%										20.9		%				21.8		%
Business realignment activities						—						0.4						NM						0.3						2.7						(90.0)		%
Operating profit						556.6						574.8						(3.2)		%				1,734.1						1,584.6						9.4		%
Operating profit margin						20.4		%				24.4		%										22.3		%				23.8		%
Interest expense, net						35.4						30.2						17.3		%				102.0						97.7						4.4		%
Other (income) expense, net						48.1						23.0						109.3		%				78.2						32.6						139.9		%
Provision for income taxes						73.6						76.7						(4.1)		%				305.4						311.3						(1.9)		%
Effective income tax rate						15.6%						14.7%												19.7%						21.4%
Net income including noncontrolling interest						399.5						444.9						(10.2)		%				1,248.5						1,143.0						9.2		%
Less: Net gain attributable to noncontrolling interest						—						—						NM						—						1.1						NM
Net income attributable to The Hershey Company						$	399.5					$	444.9					(10.2)		%				$	1,248.5					$	1,141.9					9.3		%
Net income per share—diluted						$	1.94					$	2.14					(9.3)		%				$	6.04					$	5.49					10.0		%
NOTE: Percentage changes may not compute directly as shown due to rounding of amounts presented above.
NM = not meaningful

Results of Operations - Third Quarter 2022 vs. Third Quarter 2021

Net Sales

Net sales increased 15.6% in the third quarter of 2022 compared to the same period of 2021, reflecting a favorable price realization of 7.7% primarily due to higher list prices and favorable price elasticities across our reportable segments, a volume increase of 4.1% driven by increased consumer demand and a 4.1% benefit from the 2021 acquisitions of Pretzels and Dot’s. These increases were offset by an unfavorable impact from foreign currency exchange rates of 0.3%.

Key U.S. Marketplace Metrics

For the third quarter of 2022, our total U.S. retail takeaway increased 12.7% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks and grocery items. Our U.S. candy, mint and gum (“CMG”) consumer takeaway increased 12.2% and experienced a CMG market share gain of approximately 23 basis points.

The CMG consumer takeaway and market share information reflects measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, and convenience store channels, plus Wal-Mart Stores, Inc., partial dollar, club and military channels. These metrics are based on measured market scanned purchases as reported by Information Resources, Incorporated (“IRI”), the Company’s market insights and analytics provider, and provide a means to assess our retail takeaway and market position relative to the overall category.

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Cost of Sales and Gross Margin

Cost of sales increased 24.7% in the third quarter of 2022 compared to the same period of 2021. The increase was driven by higher sales volume, higher supply chain inflation costs, including higher logistics and labor costs, and an incremental $47.7 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases. The increase was partially offset by favorable price realization and supply chain productivity.

Gross margin decreased by 440 basis points in the third quarter of 2022 compared to the same period of 2021. 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.

SM&A Expenses

SM&A expenses increased $65.8 million, or 13.5%, in the third quarter of 2022 compared to the same period of 2021. Total advertising and related consumer marketing expenses increased 5.4% driven by advertising increases in our confectionery brands and increased investment in our salty snacks portfolio, which were partially offset by cost efficiencies related to new media partners. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 17.8% in the third quarter of 2022 driven by an increase in acquisition and integration related costs, as well as 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 third quarter of 2022, we recorded no business realignment costs versus costs of $0.4 million in the third quarter of 2021 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. 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 was $556.6 million in the third quarter of 2022 compared to $574.8 million in the same period of 2021 predominantly due to higher SM&A expenses, as noted above, partially offset by higher gross profit. Operating profit margin decreased to 20.4% in 2022 from 24.4% in 2021 driven by these same factors.

Interest Expense, Net

Net interest expense was $5.2 million higher in the third quarter of 2022 compared to the same period of 2021. The increase was primarily due to higher short-term debt balances in 2022 versus 2021, specifically outstanding commercial paper borrowings. This increase was partially offset by lower average long-term debt balances.

Other (Income) Expense, Net

Other (income) expense, net was $48.1 million in the third quarter of 2022 versus net expense of $23.0 million in the third quarter of 2021. The increase in net expense was primarily due to higher write-downs on equity investments qualifying for tax credits in 2022 versus 2021 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 15.6% for the third quarter of 2022 compared with 14.7% for the third quarter of 2021. Relative to the 21% statutory rate, the 2022 effective tax rate was impacted by investment tax credits, partially offset by state taxes. Relative to the 21% statutory rate, the 2021 effective tax rate benefited from investment tax credits and the utilization (during the third quarter of 2021) of previously generated capital losses, partially offset by state taxes.

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

Net income decreased $45.4 million, or 10.2%, while EPS-diluted decreased $0.20, or 9.3%, in the third quarter of 2022 compared to the same period of 2021. The decrease in both net income and EPS-diluted was driven primarily by higher SM&A expenses and higher other income and expenses, partially offset by higher gross profit and lower income taxes.

Results of Operations - First Nine Months 2022 vs. First Nine Months 2021

Net Sales

Net sales increased 16.9% in the first nine months of 2022 compared to the same period of 2021, reflecting a favorable price realization of 7.7% primarily due to higher list prices across our reportable segments, a volume increase of 4.7% driven by an increase in everyday core brands across our reportable segments and a 4.6% benefit from the 2021 acquisitions of Pretzels, Dot’s and Lily’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 22.3% in the first nine months of 2022 compared to the same period of 2021. The increase was driven by higher sales volume, higher supply chain inflation costs, including higher logistics and labor costs, unfavorable product mix and an incremental $36.2 million of unfavorable mark-to-market activity on our commodity derivative instruments intended to economically hedge future years’ commodity purchases. The increase was partially offset by favorable price realization and supply chain productivity.

Gross margin decreased by 250 basis points in the first nine months of 2022 compared to the same period of 2021. 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.

SM&A Expenses

SM&A expenses increased $171.1 million, or 11.8%, in the first nine months of 2022 compared to the same period of 2021. Total advertising and related consumer marketing expenses increased 2.5% driven by increases in the North America Salty Snacks and International segments to raise brand awareness. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 16.7% in the first nine months of 2022 driven by an increase in acquisition and integration related costs, as well as higher compensation costs and investments in capabilities and technology.

Business Realignment Activities

During the first nine months of 2022, we recorded business realignment costs of $0.3 million versus $2.7 million in the first nine months of 2021 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 9.4% in the first nine months of 2022 compared to the same period of 2021 predominantly due to higher gross profit, partially offset by higher SM&A expenses, as noted above. Operating profit margin was 22.3% in 2022 and 23.8% in 2021 driven by the same factors noted above that resulted in lower gross margin for the period.

Interest Expense, Net

Net interest expense was $4.3 million higher in the first nine months of 2022 compared to the same period of 2021. The increase was primarily due to higher short-term debt balances in 2022 versus 2021, specifically outstanding commercial paper borrowings. The increase was partially offset due to lower average long-term debt balances, specifically resulting from the repayment of $84.7 million of 8.800% Debentures upon their maturity in February 2021 and $350 million of 3.100% Notes upon their maturity in May 2021.

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Other (Income) Expense, Net

Other (income) expense, net was $78.2 million in the first nine months of 2022 versus expense of $32.6 million in the first nine months of 2021. The increase in net expense was primarily due to higher write-downs on equity investments qualifying for tax credits in 2022 versus 2021 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 19.7% for the first nine months of 2022 compared with 21.4% for the first nine months of 2021. Relative to the 21% statutory rate, the 2022 effective tax rate was impacted by investment tax credits, partially offset by state taxes. Relative to the 21% statutory rate, the 2021 effective tax rate was impacted by incremental tax reserves incurred as a result of an adverse ruling in connection with a non-U.S. tax litigation matter as well as state taxes, partially offset by investment tax credits and the utilization (during the third quarter of 2021) of previously generated capital losses.

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

Net income increased $106.6 million, or 9.3%, while EPS-diluted increased $0.55, or 10.0%, in the first nine months of 2022 compared to the same period of 2021. The increase in both net income and EPS-diluted was driven primarily by higher gross profit and lower income taxes, partially offset by higher SM&A expenses and higher other income and expenses. Our 2022 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases.

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SEGMENT RESULTS

The summary that follows provides a discussion of the results of operations of our three reportable segments: North America Confectionery, North America Salty Snacks and International. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition-related costs and other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the Chief Operating Decision Maker and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations.

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

						Three Months Ended												Nine Months Ended
						October 2, 2022						October 3, 2021						October 2, 2022						October 3, 2021
In millions of dollars
Net Sales:
North America Confectionery						$	2,235.6					$	2,024.2					$	6,361.7					$	5,700.0
North America Salty Snacks						275.0						147.1						757.4						396.7
International						217.6						188.5						647.8						548.5
Total						$	2,728.2					$	2,359.8					$	7,766.9					$	6,645.2
Segment Income:
North America Confectionery						$	706.8					$	655.6					$	2,107.6					$	1,852.7
North America Salty Snacks						44.5						29.6						103.2						81.1
International						35.4						19.6						108.1						74.5
Total segment income						786.7						704.8						2,318.9						2,008.3
Unallocated corporate expense (1)						179.6						145.0						518.9						434.0
Unallocated mark-to-market losses (gains) on commodity derivatives (2)						50.0						(18.4)						63.5						(24.1)
Costs associated with business realignment activities						0.4						3.4						2.4						13.8
Operating profit						556.7						574.8						1,734.1						1,584.6
Interest expense, net						35.4						30.1						102.0						97.7
Other (income) expense, net						48.2						23.0						78.2						32.6
Income before income taxes						$	473.1					$	521.7					$	1,553.9					$	1,454.3

(1)Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, (d) acquisition-related costs and (e) other gains or losses that are not integral to segment performance.

(2)Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains). See Note 13 to the Unaudited Consolidated Financial Statements.

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North America Confectionery

The North America Confectionery segment is responsible for our chocolate and non-chocolate confectionery market position in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, gum and refreshment products, protein bars, spreads, snack bites and mixes, as well as pantry and food service lines. While a less significant component, this segment also includes our retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania; New York, New York; Las Vegas, Nevada; Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain trademarks and products to third parties around the world. North America Confectionery results, which accounted for 81.9% and 85.8% of our net sales for the three months ended October 2, 2022 and October 3, 2021, respectively, were as follows:

						Three Months Ended																		Nine Months Ended
						October 2, 2022						October 3, 2021						Percent Change						October 2, 2022						October 3, 2021						Percent Change
In millions of dollars
Net sales						$	2,235.6					$	2,024.2					10.4		%				$	6,361.7					$	5,700.0					11.6		%
Segment income						706.8						655.6						7.8		%				2,107.6						1,852.7						13.8		%
Segment margin						31.6		%				32.4		%										33.1		%				32.5		%

Results of Operations - Third Quarter 2022 vs. Third Quarter 2021

Net sales of our North America Confectionery segment increased $211.4 million, or 10.4%, in the third quarter of 2022 compared to the same period of 2021, reflecting a favorable price realization of 7.7% primarily due to list price increases on certain products across our portfolio and a volume increase of 3.0% 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%.

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 9.2% during the third quarter of 2022 compared to the same period of 2021.

Our North America Confectionery segment income increased $51.2 million, or 7.8%, in the third quarter of 2022 compared to the same period of 2021, primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, higher supply chain inflation costs, as well as, unfavorable product mix.

Results of Operations - First Nine Months 2022 vs. First Nine Months 2021

Net sales of our North America Confectionery segment increased $661.7 million or 11.6% in the first nine months of 2022 compared to the same period of 2021, reflecting a favorable price realization of 7.7% due to list price increases on certain products across our portfolio, a volume increase of 3.4% due to an increase in everyday core U.S. confection brands and a 0.7% increase from the 2021 acquisition of Lily’s. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.2%.

Our North America Confectionery segment also includes licensing and owned retail. This includes our Hershey’s Chocolate World stores in the United States (3 locations), Niagara Falls (Ontario) and Singapore. Our net sales for licensing and owned retail increased approximately 10.6% during the first nine months of 2022 compared to the same period of 2021.

Our North America Confectionery segment income increased $254.9 million or 13.8% in the first nine months of 2022 compared to the same period of 2021, primarily due to favorable price realization and volume increases, partially offset by higher supply chain inflation costs, including higher logistics and labor costs, as well as, unfavorable product mix.

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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 10.1% and 6.2% of our net sales for the three months ended October 2, 2022 and October 3, 2021, respectively, were as follows:

						Three Months Ended																		Nine Months Ended
						October 2, 2022						October 3, 2021						Percent Change						October 2, 2022						October 3, 2021						Percent Change
In millions of dollars
Net sales						$	275.0					$	147.1					86.9		%				$	757.4					$	396.7					90.9		%
Segment income						44.5						29.6						50.3		%				103.2						81.1						27.3		%
Segment margin						16.2		%				20.1		%										13.6		%				20.4		%

Results of Operations - Third Quarter 2022 vs. Third Quarter 2021

Net sales of our North America Salty Snacks segment increased $127.9 million, or 86.9%, in the third quarter of 2022 compared to the same period of 2021, reflecting a 65.5% benefit from the 2021 acquisitions of Dot’s and Pretzels, a favorable price realization of 12.5% due to higher prices on certain products, in addition to lower levels of promotional activity versus the prior year period, and a volume increase of 9.0% primarily related to SkinnyPop, Pirate’s Booty, and Paqui snacks.

Our North America Salty Snacks segment income increased $14.9 million, or 50.3%, in the third quarter of 2022 compared to the same period of 2021 due to favorable price realization and volume increases, partially offset by unfavorable product mix, as well as higher supply chain inflation costs, including higher logistics and labor costs, and increased advertising and related consumer marketing costs.

Results of Operations - First Nine Months 2022 vs. First Nine Months 2021

Net sales of our North America Salty Snacks segment increased $360.7 million, or 90.9%, in the first nine months of 2022 compared to the same period of 2021, reflecting a 68.5% benefit from the 2021 acquisitions of Dot’s and Pretzels, a favorable price realization of 12.9% due to higher prices on certain products, in addition to lower levels of promotional activity versus the prior year period and a volume increase of 9.5% primarily related to SkinnyPop and Pirate’s Booty snacks.

Our North America Salty Snacks segment income increased $22.1 million, or 27.3%, in the first nine months of 2022 compared to the same period of 2021, due to favorable price realization and volume increases, partially offset by unfavorable product mix, as well as higher supply chain inflation costs and increased advertising and related consumer marketing costs.

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International

The International segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. We currently, have operations and manufacture product in Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Latin America, as well as Asia, Europe, the Middle East and Africa (“AEMEA”) and other regions. International results, which accounted for 8.0% and 8.0% of our net sales for the three months ended October 2, 2022 and October 3, 2021, respectively, were as follows:

						Three Months Ended																		Nine Months Ended
						October 2, 2022						October 3, 2021						Percent Change						October 2, 2022						October 3, 2021						Percent Change
In millions of dollars
Net sales						$	217.6					$	188.5					15.4		%				$	647.8					$	548.5					18.1		%
Segment income						35.4						19.6						80.7		%				108.1						74.5						45.1		%
Segment margin						16.3		%				10.4		%										16.7		%				13.6		%

Results of Operations - Third Quarter 2022 vs. Third Quarter 2021

Net sales of our International segment increased $29.1 million, or 15.4%, in the third quarter of 2022 compared to the same period of 2021, reflecting a volume increase of 12.2% and a favorable price realization of 4.4%. The volume increase was primarily attributable to solid marketplace growth in India, AEMEA, and Brazil, where net sales increased by 28.9%, 15.8% and 12.6%, respectively. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 1.2%.

Our International segment generated income of $35.4 million in the third quarter of 2022 compared to $19.6 million in the third quarter of 2021 driven primarily by favorable price realization and volume increases, partially offset by higher freight and logistics costs.

Results of Operations - First Nine Months 2022 vs. First Nine Months 2021

Net sales of our International segment increased $99.3 million, or 18.1%, in the first nine months of 2022 compared to the same period of 2021, reflecting a volume increase of 15.0% and a favorable price realization of 3.2%. The volume increase was primarily attributable to solid marketplace growth in Brazil, Mexico, and India, where net sales increased by 22.4%, 20.3%, and 18.8%, respectively. These increases were partially offset by an unfavorable impact from foreign currency exchange rates of 0.1%.

Our International segment generated income of $108.1 million in the first nine months of 2022 compared to $74.5 million in the first nine months of 2021 primarily resulting from volume increases, favorable price realization, and the execution of our International Optimization Program in China, as we streamline and optimize our China operating model.

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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 third quarter of 2022, unallocated corporate expense totaled $179.6 million, as compared to $145.0 million in the third quarter of 2021. The increase is primarily driven by incremental investments in capabilities and technology and higher compensation costs, as well as higher acquisition and integration related costs.

In the first nine months of 2022, unallocated corporate expense totaled $518.9 million, as compared to $434.0 million in the first nine months of 2021. 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.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our primary source of liquidity has been cash generated from operations. Domestic seasonal working capital needs, which typically peak during the summer months, are generally met by utilizing cash on hand, bank borrowings or the issuance of commercial paper. Commercial paper may also be issued, from time to time, to finance ongoing business transactions, such as the repayment of long-term debt, business acquisitions and for other general corporate purposes.

At October 2, 2022, our cash and cash equivalents totaled $327.7 million, a decrease of $1.5 million compared to the 2021 year-end balance. We believe we have sufficient liquidity to satisfy our cash needs; however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during the ongoing COVID-19 pandemic and in the current economic environment. Additional detail regarding the net uses of cash are outlined in the following discussion.

Approximately 80% of the balance of our cash and cash equivalents at October 2, 2022 was held by subsidiaries domiciled outside of the United States. We intend to continue to reinvest the remainder of the earnings outside of the United States for which there would be a material tax implication to distributing, such as withholding tax, for the foreseeable future and, therefore, have not recognized additional tax expense on these earnings. We believe that our existing sources of liquidity are adequate to meet anticipated funding needs at comparable risk-based interest rates for the foreseeable future. Acquisition spending and/or share repurchases could potentially increase our debt. Operating cash flow and access to capital markets are expected to satisfy our various short- and long-term cash flow requirements, including acquisitions and capital expenditures.

Cash Flow Summary

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

						Nine Months Ended
In millions of dollars						October 2, 2022						October 3, 2021
Net cash provided by (used in):
Operating activities						$	1,560.2					$	1,403.7
Investing activities						(510.0)						(839.7)
Financing activities						(1,076.0)						(1,037.8)
Effect of exchange rate changes on cash and cash equivalents						24.3						(6.1)
Less: Cash classified as assets held for sale						—						11.4
Decrease in cash and cash equivalents						$	(1.5)					$	(468.5)

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Operating activities

We generated cash of $1,560.2 million from operating activities in the first nine months of 2022, an increase of $156.5 million compared to $1,403.7 million in the same period of 2021. This increase in net cash provided by operating activities was mainly driven by the following factors:

• Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, a write-down of equity investments and other charges) resulted in $198.8 million of higher cash flow in 2022 relative to 2021.

• The increase in cash provided by operating activities was partially offset by the following net cash outflows:

• Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) consumed cash of $212.3 million in 2022, compared to $185.3 million in 2021. This $27.0 million fluctuation was mainly driven by a higher year-over-year build up of U.S. inventories to satisfy product requirements and maintain sufficient levels to accommodate customer requirements and an increase in cash used by accounts receivable due to the timing of customer payments, partially offset by the timing of vendor and supplier payments.

Investing activities

We used cash of $510.0 million for investing activities in the first nine months of 2022, a decrease of $329.7 million compared to $839.7 million in the same period of 2021. This decrease 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 projects, innovation and cost savings, were $360.0 million in the first nine months of 2022 compared to $347.5 million in the same period of 2021. We expect our full year 2022 capital expenditures, including capitalized software, to approximate $600 million. Our 2022 capital expenditures are largely driven by our key strategic initiatives, including expanding the agility and capacity of our supply chain and building digital infrastructure across the enterprise. We intend to use our existing cash and internally generated funds to meet our 2022 capital requirements.

• Investments in partnerships qualifying for tax credits. We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and renewable energy tax credits. We invested approximately $159.7 million in the first nine months of 2022, compared to $75.9 million in the same period of 2021.

• Business Acquisition. In June 2021, we acquired Lily's for an initial cash purchase price of $419.5 million. Further details regarding our business acquisition activity is provided in Note 2 to the Unaudited Consolidated Financial Statements.

Financing activities

We used cash of $1,076.0 million for financing activities in the first nine months of 2022, an increase of $38.2 million compared to $1,037.8 million in the same period of 2021. This increase 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 nine months of 2022, we used cash of $145.6 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 nine months of 2021, we generated cash flow of $340.0 million predominantly through the issuance of short-term commercial paper, partially offset by a reduction in short-term foreign borrowings.

• Long-term debt borrowings and repayments. During the first nine months of 2022, long-term debt activity was minimal. During the first nine months of 2021, we repaid $84.7 million of 8.800% Debentures due upon their maturity and $350.0 million of 3.100% Notes due upon their maturity.

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• Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $568.0 million during the first nine months of 2022, an increase of $62.8 million compared to $505.2 million in the same period of 2021. Details regarding our 2022 cash dividends paid to stockholders are as follows:

						Quarter Ended
In millions of dollars except per share amounts						April 3, 2022						July 3, 2022						October 2, 2022
Dividends paid per share – Common stock						$	0.901					$	0.901					$	1.036
Dividends paid per share – Class B common stock						$	0.819					$	0.819					$	0.942
Total cash dividends paid						$	181.1					$	179.9					$	207.0
Declaration date						February 2, 2022						April 27, 2022						July 27, 2022
Record date						February 18, 2022						May 20, 2022						August 19, 2022
Payment date						March 15, 2022						June 15, 2022						September 15, 2022

*•*Share repurchases. We repurchase shares of Common Stock to offset the dilutive impact of treasury shares issued under our equity compensation plans. The value of these share repurchases in a given period varies based on the volume of stock options exercised and our market price. In addition, we periodically repurchase shares of Common Stock pursuant to Board-authorized programs intended to drive additional stockholder value. Details regarding our share repurchases are as follows:

						Nine Months Ended
In millions						October 2, 2022						October 3, 2021
Milton Hershey School Trust repurchase						$	203.4					$	—
Shares repurchased in the open market under pre-approved share repurchase programs						—						150.0
Shares repurchased in the open market to replace Treasury Stock issued for stock options and incentive compensation						151.9						308.0
Cash used for total share repurchases						$	355.3					$	458.0
Total shares repurchased under pre-approved share repurchase programs						—						0.9

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 $203.4 million.

In July 2018, our Board of Directors approved a $500 million share repurchase authorization. As of October 2, 2022, approximately $110 million remained available for repurchases of our Common Stock under this program. The share repurchase program does not have an expiration date. In May 2021, our Board of Directors approved an additional $500 million share repurchase authorization. This program is to commence after the existing 2018 authorization is completed and is to be utilized at management’s discretion. We expect 2022 share repurchases to be in line with our traditional buyback strategy.

*•*Proceeds from exercised stock options and employee tax withholding. During the first nine months of 2022, we received $30.8 million from employee exercises of stock options and paid $34.7 million of employee taxes withheld from share-based awards. During the first nine months of 2021, we received $39.5 million from employee exercises of stock options and paid $16.1 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.

Recent Accounting Pronouncements

Information on recently adopted and issued accounting standards is included in Note 1 to the Unaudited Consolidated Financial Statements.

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Safe Harbor Statement

We are subject to changing economic, competitive, regulatory and technological risks and uncertainties that could have a material impact on our business, financial condition or results of operations. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions that we have discussed directly or implied in this Quarterly Report on Form 10-Q. Many of these forward-looking statements can be identified by the use of words such as “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would,” among others.

The factors that could cause our actual results to differ materially from the results projected in our forward-looking statements include, but are not limited to the following:

• Our business and financial results may be negatively impacted by the failure to successfully manage a disruption in consumer and trade patterns, as well as operational challenges associated with the actual or perceived effects of a disease outbreak, including epidemics, pandemics or similar widespread public health concerns, such as the COVID-19 pandemic;

• Our Company’s reputation or brand image might be impacted as a result of issues or concerns relating to the quality and safety of our products, ingredients or packaging, human and workplace rights, and other environmental, social or governance matters, which in turn could result in litigation or otherwise negatively impact our operating results;

• Disruption to our manufacturing operations or supply chain could impair our ability to produce or deliver finished products, resulting in a negative impact on our operating results;

• We might not be able to hire, engage and retain the talented global workforce we need to drive our growth strategies;

• Risks associated with climate change and other environmental impacts, and increased focus and evolving views of our customers, stockholders and other stakeholders on climate change issues, could negatively affect our business and operations;

• Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results;

• Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity;

• Market demand for new and existing products could decline;

• Increased marketplace competition could hurt our business;

• Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures;

• Our international operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations;

• We may not fully realize the expected cost savings and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business;

• Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products;

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• Political, economic and/or financial market conditions, including impacts on our business arising from the conflict between Russia and Ukraine, could negatively impact our financial results;

• Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations;

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

• Such other matters as discussed in our 2021 Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for the quarterly periods ended April 3, 2022 and July 3, 2022, 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.