| • | North America - This segment is responsible for our traditional chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. |
| • | International and Other - International and Other 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 China, 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. This segment also includes our global retail operations, including Hershey's Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company's trademarks and products to third parties around the world. |
Financial and other information regarding our reportable segments is provided in our Management’s Discussion and Analysis and Note 1112 to the Consolidated Financial Statements.
Business Acquisitions
In October 2018, we completed the acquisition of Pirate Brands, which includes the Pirate's Booty, Smart Puffs and Original Tings brands, from B&G Foods, Inc. Pirate Brands offers baked, trans fat free and gluten free snacks and is available in a wide range of food distribution channels in the United States.
In January 2018, we completed the acquisition of all of the outstanding shares of Amplify Snack Brands, Inc. ("Amplify"), a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPop, Oatmega, Paqui and TyrrellsPaqui. The acquisition enables us to capture more consumer snacking occasions by creating a broader portfolio of brands.
In April 2016, we completed the acquisition of all of the outstanding shares of Ripple Brand Collective, LLC, a privately held company based in Congers, New York that owns the barkTHINS mass premium chocolate snacking brand. The acquisition was undertaken in order to broaden our product offerings in the premium and portable snacking categories.
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Products and Brands
Our principal product offerings include chocolate and non-chocolate confectionery products; gum and mint refreshment products; pantry items, such as baking ingredients, toppings and beverages; and snack items such as spreads, meat snacks, bars and snack bites and mixes, popcorn and protein bars and cookies.
| • | Within our North America markets, our product portfolio includes a wide variety of chocolate offerings marketed and sold under the renowned brands of Hershey’s, Reese’s and Kisses, along with other popular chocolate and non-chocolate confectionery brands such as Jolly Rancher, Almond Joy, Brookside, barkTHINS, Cadbury,Good & Plenty, Heath, Kit Kat®, Lancaster, Payday, Rolo®, Twizzlers, Whoppers and York. We also offer premium chocolate products, primarily in the United States, through the Scharffen Berger and Dagoba brands. Our gum and mint products include Ice Breakers mints and chewing gum, Breathsavers mints and Bubble Yum bubble gum. Our pantry and snack items that are principally sold in North America include baking products, toppings and sundae syrups sold under the Hershey’s, Reese’s and Heath brands, as well as Hershey’s and Reese’s chocolate spreads, snack bites and mixes, Krave meat snack products, Popwell half-popped corn snacks, ready-to-eat SkinnyPop popcorn, baked and trans fat free Pirate's Booty snacks and other better-for-you snack brands such as Oatmega and Paqui. |
| • | Within our International and Other markets, we manufacture, market and sell many of these same brands, as well as other brands that are marketed regionally, such as Pelon Pelo Rico confectionery products in Mexico, IO-IO snack products in Brazil, and Nutrine and Maha Lacto confectionery products and Jumpin and Sofit beverage products in India. |
Principal Customers and Marketing Strategy
Our customers are mainly wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. The majority of our customers, with the exception of wholesale distributors, resell our products to end-consumers in retail outlets in North America and other locations worldwide.
In 2017,2018, approximately 29%28% of our consolidated net sales were made to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers and the primary distributor of our products to Wal-Mart Stores, Inc.
The foundation of our marketing strategy is our strong brand equities, product innovation and the consistently superior quality of our products. We devote considerable resources to the identification, development, testing, manufacturing and marketing of new products. We utilize a variety of promotional programs directed towards our customers, as well as advertising and promotional programs for consumers of our products, to stimulate sales of certain products at various times throughout the year.
In conjunction with our sales and marketing efforts, our efficient product distribution network helps us maintain sales growth and provide superior customer service by facilitating the shipment of our products from our manufacturing plants to strategically located distribution centers. We primarily use common carriers to deliver our products from these distribution points to our customers.
Raw Materials and Pricing
Cocoa products, including cocoa liquor, cocoa butter and cocoa powder processed from cocoa beans, are the most significant raw materials we use to produce our chocolate products. These cocoa products are purchased directly from third-party suppliers, who source cocoa beans that are grown principally in Far Eastern, West African, Central and South American regions. West Africa accounts for approximately 70% of the world’s supply of cocoa beans.
Adverse weather, crop disease, political unrest and other problems in cocoa-producing countries have caused price fluctuations in the past, but have never resulted in the total loss of a particular producing country’s cocoa crop and/or exports. In the event that a significant disruption occurs in any given country, we believe cocoa from other producing countries and from current physical cocoa stocks in consuming countries would provide a significant supply buffer.
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In 2016, we established a trading company in Switzerland that performs all aspects of cocoa procurement, including price risk management, physical supply procurement and sustainable sourcing oversight. The trading company was implemented to optimize the supply chain for our cocoa requirements, with a strategic focus on gaining real time access to cocoa market intelligence. It also provides us with the ability to recruit and retain world class commodities traders and procurement professionals and enables enhanced collaboration with commodities trade groups, the global cocoa community and sustainable sourcing resources.
We also use substantial quantities of sugar, Class II and IV dairy products, peanuts, almonds and energy in our production process. Most of these inputs for our domestic and Canadian operations are purchased from suppliers in the United States. For our international operations, inputs not locally available may be imported from other countries.
We change prices and weights of our products when necessary to accommodate changes in input costs, the competitive environment and profit objectives, while at the same time maintaining consumer value. Price increases and weight changes help to offset increases in our input costs, including raw and packaging materials, fuel, utilities, transportation costs and employee benefits. When we implement price increases, there is usually a time lag between the effective date of the list price increases and the impact of the price increases on net sales, in part because we typically honor previous commitments to planned consumer and customer promotions and merchandising events subsequent to the effective date of the price increases. In addition, promotional allowances may be increased subsequent to the effective date, delaying or partially offsetting the impact of price increases on net sales.
Competition
Many of our confectionery brands enjoy wide consumer acceptance and are among the leading brands sold in the marketplace in North America and certain markets in Latin America. We sell our brands in highly competitive markets with many other global multinational, national, regional and local firms. Some of our competitors are large companies with significant resources and substantial international operations. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing and promotional activity, the ability to identify and satisfy consumer preferences, as well as convenience and service. In recent years, we have also experienced increased competition from other snack items, which has pressured confectionery category growth.
Working Capital, Seasonality and Backlog
Our sales are typically higher during the third and fourth quarters of the year, representing seasonal and holiday-related sales patterns. We manufacture primarily for stock and typically fill customer orders within a few days of receipt. Therefore, the backlog of any unfilled orders is not material to our total annual sales. Additional information relating to our cash flows from operations and working capital practices is provided in our Management’s Discussion and Analysis.
Trademarks, Service Marks and License Agreements
We own various registered and unregistered trademarks and service marks. The trademarks covering our key product brands are of material importance to our business. We follow a practice of seeking trademark protection in the United States and other key international markets where our products are sold. We also grant trademark licenses to third parties to produce and sell pantry items, flavored milks and various other products primarily under the Hershey’s and Reese’s brand names.
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Furthermore, we have rights under license agreements with several companies to manufacture and/or sell and distribute certain products. Our rights under these agreements are extendible on a long-term basis at our option. Our most significant licensing agreements are as follows:
| Company | Brand | Location | Requirements | ||||
| Kraft Foods Ireland Intellectual Property Limited/Cadbury UK Limited | York Peter Paul Almond Joy Peter Paul Mounds | Worldwide | None | ||||
| Cadbury UK Limited | Cadbury Caramello | United States | Minimum sales requirement exceeded in | ||||
| Société des Produits Nestlé SA | Kit Kat® Rolo® | United States | Minimum unit volume sales exceeded in | ||||
Good & Plenty Heath Jolly Rancher Milk Duds Payday Whoppers | Worldwide | None | |||||
Research and Development
We engage in a variety of research and development activities in a number of countries, including the United States, Mexico, Brazil, India and China. We develop new products, improve the quality of existing products, improve and modernize production processes, and develop and implement new technologies to enhance the quality and value of both current and proposed product lines. Information concerning our research and development expense is contained in Note 1 to the Consolidated Financial Statements.
Food Quality and Safety Regulation
The manufacture and sale of consumer food products is highly regulated. In the United States, our activities are subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate our businesses outside of the United States.
We believe our Product Excellence Program provides us with an effective product quality and safety program. This program is integral to our global supply chain platform and is intended to ensure that all products we purchase, manufacture and distribute are safe, are of high quality and comply with applicable laws and regulations.
Through our Product Excellence Program, we evaluate our supply chain including ingredients, packaging, processes, products, distribution and the environment to determine where product quality and safety controls are necessary. We identify risks and establish controls intended to ensure product quality and safety. Various government agencies and third-party firms as well as our quality assurance staff conduct audits of all facilities that manufacture our products to assure effectiveness and compliance with our program and applicable laws and regulations.
Environmental Considerations
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Employees
As of December 31, 2017,2018, we employed approximately 15,36014,930 full-time and 1,5501,490 part-time employees worldwide. Collective bargaining agreements covered approximately 5,4505,780 employees. During 2018,2019, agreements will be negotiated for certain employees at fourthree facilities outside of the United States, comprising approximately 72%67% of total employees under collective bargaining agreements. We believe that our employee relations are generally good.
Financial Information by Geographic Area
Our principal operations and markets are located in the United States. The percentage of total consolidated net sales for our businesses outside of the United States was 16.1% for 2018, 16.7% for 2017 and 16.7% for 2016 and 17.2% for 2015.2016. The percentage of total long-lived assets outside of the United States was 21.7% as of December 31, 2018 and 25.2% as of December 31, 20172017.
Sustainability
The Hershey Company’s commitment to sustainability started with our founder’s belief in responsible citizenship. He was a purpose-driven leader who believed we could use chocolate to create goodness in the world. This belief resulted in strong investment in local communities and 29.8% asthe establishment of December 31, 2016.
Available Information
The Company's website address is www.thehersheycompany.com. We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). You may obtain a copy of any of these reports, free of charge, from the Investors section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an Internet site that also contains these reports at: www.sec.gov. In addition, copies of the Company's annual report will be made available, free of charge, on written request to the Company.
We have a Code of Conduct that applies to our Board of Directors (“Board”) and all Company officers and employees, including, without limitation, our Chief Executive Officer and “senior financial officers” (including the Chief Financial Officer, Chief Accounting Officer and persons performing similar functions). You can obtain a copy of our Code of Conduct, as well as our Corporate Governance Guidelines and charters for each of the Board’s standing committees, from the Investors section of our website. If we change or waive any portion of the Code of Conduct that applies to any of our directors, executive officers or senior financial officers, we will post that information on our website.
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| Item 1A. | RISK FACTORS |
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including the exhibits hereto and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. Other than statements of historical fact, information regarding activities, events and developments that we expect or anticipate will or may occur in the future, including, but not limited to, information relating to our future growth and profitability targets and strategies designed to increase total shareholder value, are forward-looking statements based on management’s estimates, assumptions and projections. Forward-looking statements also include, but are not limited to, statements regarding our future economic and financial condition and results of operations, the plans and objectives of management and our assumptions regarding our performance and such plans and objectives. Many of the forward-looking statements contained in this document may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated” and “potential,” among others. Forward-looking statements contained in this Annual Report on Form 10-K are predictions only and actual results could differ materially from management’s expectations due to a variety of factors, including those described below. All forward-looking statements attributable to us or persons working on our behalf are expressly qualified in their entirety by such risk factors. The forward-looking statements that we make in this Annual Report on Form 10-K are based on management’s current views and assumptions regarding future events and speak only as of their dates. We assume no obligation to update developments of these risk factors or to announce publicly any revisions to any of the forward-looking statements that we make, or to make corrections to reflect future events or developments, except as required by the federal securities laws.
Issues or concerns related to the quality and safety of our products, ingredients or packaging could cause a product recall and/or result in harm to the Company’s reputation, negatively impacting our operating results.
In order to sell our iconic, branded products, we need to maintain a good reputation with our customers and consumers. Issues related to the quality and safety of our products, ingredients or packaging could jeopardize our Company’s image and reputation. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, could decrease demand for our products or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. Costs associated with these potential actions could negatively affect our operating results.
Increases in raw material and energy costs along with the availability of adequate supplies of raw materials could affect future financial results.
We use many different commodities for our business, including cocoa products, sugar, dairy products, peanuts, almonds, corn sweeteners, natural gas and fuel oil.
Commodities are subject to price volatility and changes in supply caused by numerous factors, including:
| Ÿ | Commodity market fluctuations; |
| Ÿ | Currency exchange rates; |
| Ÿ | Imbalances between supply and demand; |
| Ÿ | The effect of weather on crop yield; |
| Ÿ | Speculative influences; |
| Ÿ | Trade agreements among producing and consuming nations; |
| Ÿ | Supplier compliance with commitments; |
| Ÿ | Political unrest in producing countries; and |
| Ÿ | Changes in governmental agricultural programs and energy policies. |
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Although we use forward contracts and commodity futures and options contracts where possible to hedge commodity prices, commodity price increases ultimately result in corresponding increases in our raw material and energy costs. If we are unable to offset cost increases for major raw materials and energy, there could be a negative impact on our financial condition and results of operations.
Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity.
We may be able to pass some or all raw material, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently, or in a timely manner, to offset increased raw material, energy or other input costs, including packaging, freight, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our financial condition and results of operations.
Market demand for new and existing products could decline.
We operate in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and to consumers. Our continued success is impacted by many factors, including the following:
| Ÿ | Effective retail execution; |
| Ÿ | Appropriate advertising campaigns and marketing programs; |
| Ÿ | Our ability to secure adequate shelf space at retail locations; |
| Ÿ | Our ability to drive sustainable innovation and maintain a strong pipeline of new products in the confectionery and broader snacking categories; |
| Ÿ | Changes in product category consumption; |
| Ÿ | Our response to consumer demographics and trends, including but not limited to, trends relating to store trips and the impact of the growing |
| Ÿ | Consumer health concerns, including obesity and the consumption of certain ingredients. |
There continues to be competitive product and pricing pressures in the markets where we operate, as well as challenges in maintaining profit margins. We must maintain mutually beneficial relationships with our key customers, including retailers and distributors, to compete effectively. Our largest customer, McLane Company, Inc., accounted for approximately 29%28% of our total net sales in 2017.2018. McLane Company, Inc. is one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers, including Wal-Mart Stores, Inc.
Increased marketplace competition could hurt our business.
The global confectionery packaged goods industry is intensely competitive and consolidation in this industry continues. Some of our competitors are large companies that have significant resources and substantial international operations. We continue to experience increased levels of in-store activity for other snack items, which has pressured confectionery category growth. In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we may be required to increase expenditures for promotions and advertising, and must continue to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks because we operate in a highly competitive retail environment.
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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.
Approximately 70%71% of our manufacturing capacity is located in the United States. Disruption to our global manufacturing operations or our supply chain could result from, among other factors, the following:
| Ÿ | Natural disaster; |
| Ÿ | Pandemic outbreak of disease; |
| Ÿ | Weather; |
| Ÿ | Fire or explosion; |
| Ÿ | Terrorism or other acts of violence; |
| Ÿ | Labor strikes or other labor activities; |
| Ÿ | Unavailability of raw or packaging materials; |
| Ÿ | Operational and/or financial instability of key suppliers, and other vendors or service providers; and |
| Ÿ | Suboptimal production planning which could impact our ability to cost-effectively meet product demand. |
We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if they were to occur, including our global supply chain strategies and our principle-based global labor relations strategy. If we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted if such events were to occur.
Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures.
From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our financial condition, results of operations and cash flows.
Changes in governmental laws and regulations could increase our costs and liabilities or impact demand for our products.
Changes in laws and regulations and the manner in which they are interpreted or applied may alter our business environment. These negative impacts could result from changes in food and drug laws, laws related to advertising and marketing practices, accounting standards, taxation requirements, competition laws, employment laws and environmental laws, among others. It is possible that we could become subject to additional liabilities in the future resulting from changes in laws and regulations that could result in an adverse effect on our financial condition and results of operations.
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Political, economic and/or financial market conditions could negatively impact our financial results.
Our operations are impacted by consumer spending levels and impulse purchases which are affected by general macroeconomic conditions, consumer confidence, employment levels, the availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in food and energy costs, sustained global recessions, broad political instability, rising unemployment and declines in personal spending could adversely impact our revenues, profitability and financial condition.
Changes in financial market conditions may make it difficult to access credit markets on commercially acceptable terms, which may reduce liquidity or increase borrowing costs for our Company, our customers and our suppliers. A significant reduction in liquidity could increase counterparty risk associated with certain suppliers and service providers, resulting in disruption to our supply chain and/or higher costs, and could impact our customers, resulting in a reduction in our revenue, or a possible increase in bad debt expense.
Our international operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations.
In 2018, 2017 2016 and 2015,2016, respectively, we derived approximately 16%, 17% and 17% of our net sales from customers located outside of the United States. Additionally, approximately 25%22% of our total long-lived assets were located outside of the United States as of December 31, 2017.2018. As part of our strategy, we have made investments outside of the United States, particularly in Canada, China, Malaysia, Mexico, Brazil and India. As a result, we are subject to risks and uncertainties relating to international sales and operations, including:
| Ÿ | Unforeseen global economic and environmental changes resulting in business interruption, supply constraints, inflation, deflation or decreased demand; |
| Ÿ | Inability to establish, develop and achieve market acceptance of our global brands in international markets; |
| Ÿ | Difficulties and costs associated with compliance and enforcement of remedies under a wide variety of complex laws, treaties and regulations; |
| Ÿ | Unexpected changes in regulatory environments; |
| Ÿ | Political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict; |
| Ÿ | Nationalization of our properties by foreign governments; |
| Ÿ | Tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation; |
| Ÿ | Potentially negative consequences from changes in tax laws; |
| Ÿ | The imposition of tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements; |
| Ÿ | Increased costs, disruptions in shipping or reduced availability of freight transportation; |
| Ÿ | The impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies; |
| Ÿ | Failure to gain sufficient profitable scale in certain international markets resulting in an inability to cover manufacturing fixed costs or resulting in losses from impairment or sale of assets; and |
| Ÿ | Failure to recruit, retain and build a talented and engaged global workforce. |
If we are not able to achieve our projected international growth objectives and mitigate the numerous risks and uncertainties associated with our international operations, there could be a negative impact on our financial condition and results of operations.
Disruptions, failures or security breaches of our information technology infrastructure could have a negative impact on our operations.
Information technology is critically important to our business operations. We use information technology to manage all business processes including manufacturing, financial, logistics, sales, marketing and administrative functions. These processes collect, interpret and distribute business data and communicate internally and externally with employees, suppliers, customers and others.
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We are regularly the target of attempted cyber and other security threats. Therefore, we continuously monitor and update our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. We invest in industry standard security technology to protect the Company’s data and business processes against risk of data security breach and cyber attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security effectiveness through industry accepted methods and remediate significant findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness. We also have processes in place to prevent disruptions resulting from the implementation of new software and systems of the latest technology.
While we have been subject to cyber attacks and other security breaches, these incidents did not have a significant impact on our business operations. We believe our security technology tools and processes provide adequate measures of protection against security breaches and in reducing cybersecurity risks. Nevertheless, despite continued vigilance in these areas, disruptions in or failures of information technology systems are possible and could have a negative impact on our operations or business reputation. Failure of our systems, including failures due to cyber attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our Company, our employees and those with whom we do business. This in turn could have a negative impact on our financial condition and results or operations. In addition, the cost to remediate any damages to our information technology systems suffered as a result of a cyber attack could be significant.
We might not be able to hire, engage and retain the talented global workforce we need to drive our growth strategies.
Our future success depends upon our ability to identify, hire, develop, engage and retain talented personnel across the globe. Competition for global talent is intense, and we might not be able to identify and hire the personnel we need to continue to evolve and grow our business. In particular, if we are unable to hire the right individuals to fill new or existing senior management positions as vacancies arise, our business performance may be impacted.
Activities related to identifying, recruiting, hiring and integrating qualified individuals require significant time and attention. We may also need to invest significant amounts of cash and equity to attract talented new employees, and we may never realize returns on these investments.
In addition to hiring new employees, we must continue to focus on retaining and engaging the talented individuals we need to sustain our core business and lead our developing businesses into new markets, channels and categories. This may require significant investments in training, coaching and other career development and retention activities. If we are not able to effectively retain and grow our talent, our ability to achieve our strategic objectives will be adversely affected, which may impact our financial condition and results of operations.
We may not fully realize the expected costs savings and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business.
We depend on our ability to evolve and grow, and as changes in our business environment occur, we may adjust our business plans by introducing new strategic initiatives or restructuring programs to meet these changes. FromRecently introduced strategic initiatives include our efforts to continue to expand our presence in digital commerce, to transform our manufacturing, commercial and corporate operations through digital technologies and to enhance our data analytics capabilities to develop new commercial insights. If we are not able to capture our share of the expanding digital commerce market, if we do not adequately leverage technology to improve operating efficiencies or if we are unable to develop the data analytics capabilities needed to generate actionable commercial insights, our business performance may be impacted, which may negatively impact our financial condition and results of operations.
Additionally, from time to time we implement business realignment activities to support key strategic initiatives designed to maintain long-term sustainable growth, such as the Margin for Growth Program we commenced in the first quarter of 2017. These programs are intended to increase our operating effectiveness and efficiency, to reduce our costs and/or to generate savings that can be reinvested in other areas of our business. We cannot guarantee that we will
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be able to successfully implement these strategic initiatives and restructuring programs, that we will achieve or sustain the intended benefits under these programs, or that the benefits, even if achieved, will be adequate to meet our long-term growth and profitability expectations, which could in turn adversely affect our business.
Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations.
We rely extensively on information systems and technology to manage our business and summarize operating results. We are in the process of a multi-year implementation of a new global enterprise resource planning (“ERP”) system. This ERP system will replace our existing operating and financial systems. The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of the business. The ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We may not be able to successfully implement the ERP system without experiencing delays, increased costs and other difficulties. If we are unable to successfully design and implement the new ERP system as planned, our financial positions, results of operations and cash flows could be negatively impacted. Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could be delayed.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
| Item 2. | PROPERTIES |
Our principal properties include the following:
| Country | Location | Type | Status (Own/Lease) | |||
| United States | Hershey, Pennsylvania (2 principal plants) | Manufacturing—confectionery products and pantry items | Own | |||
| Lancaster, Pennsylvania | Manufacturing—confectionery products | Own | ||||
| Hazleton, Pennsylvania | Manufacturing—confectionery products | Own | ||||
| Robinson, Illinois | Manufacturing—confectionery products and pantry items | Own | ||||
| Stuarts Draft, Virginia | Manufacturing—confectionery products and pantry items | Own | ||||
| Edwardsville, Illinois | Distribution | Own | ||||
| Palmyra, Pennsylvania | Distribution | Own | ||||
| Ogden, Utah | Distribution | Own | ||||
| Kennesaw, Georgia | Distribution | Lease | ||||
| New York, New York | Retail | Lease | ||||
| Canada | Brantford, Ontario | Distribution | Own (1) | |||
| Mexico | Monterrey, Mexico | Manufacturing—confectionery products | Own | |||
| Manufacturing—confectionery products and pantry items | Own | |||||
| Malaysia | Johor, Malaysia | Manufacturing—confectionery products | Own | |||
(1) We have an agreement with the Ferrero Group for the use of a warehouse and distribution facility of which the Company has been deemed to be the owner for accounting purposes.
In addition to the locations indicated above, we also own or lease several other properties and buildings worldwide which we use for manufacturing, sales, distribution and administrative functions. Our facilities are well maintained and generally have adequate capacity to accommodate seasonal demands, changing product mixes and certain additional growth. We continuallyregularly improve our facilities to incorporate the latest technologies. The largest facilities are located in Hershey, Lancaster and Lancaster,Hazleton, Pennsylvania; Monterrey and El Salto, Mexico; and Stuarts Draft,
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Virginia. The U.S., Canada and Mexico facilities in the table above primarily support our North America segment, while the China and Malaysia facilitiesfacility primarily serve our International and Other segment. As discussed in Note 1112 to the Consolidated Financial Statements, we do not manage our assets on a segment basis given the integration of certain manufacturing, warehousing, distribution and other activities in support of our global operations.
| Item 3. | LEGAL PROCEEDINGS |
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 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.
| Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions and, as of February 16, 2018,15, 2019, their ages are set forth below.
| Name | Age | Positions Held During the Last Five Years | ||
Damien Atkins (1) | 48 | Senior Vice President, General Counsel and Secretary (August 2018) | ||
| Michele G. Buck | President and Chief Executive Officer (March 2017); Executive Vice President, Chief Operating Officer (June 2016); President, North America (May 2013); Senior Vice President, Chief Growth Officer (September 2011) | |||
| Javier H. Idrovo | Chief Accounting Officer (August 2015); Senior Vice President, Finance and Planning (September 2011) | |||
Patricia A. Little | Senior Vice President, Chief Financial Officer (March 2015) | |||
| Terence L. O’Day | Senior Vice President, Chief Product Supply and Technology Officer (March 2017); Senior Vice President, Chief Supply Chain Officer (May 2013); Senior Vice President, Global Operations (December 2008) | |||
Todd W. Tillemans | President, U.S. (April 2017) | |||
| Kevin R. Walling | Senior Vice President, Chief Human Resources Officer | |||
Mary Beth West | Senior Vice President, Chief Growth Officer (May 2017) | |||
There are no family relationships among any of the above-named officers of our Company.
| (1) | Mr. Atkins was elected Senior Vice President, General Counsel and Secretary effective August 13, 2018. Prior to joining our Company he was General Counsel and Corporate Secretary at Panasonic Corporation of North America, Inc. (May 2015) and Senior Vice President, Deputy General Counsel (Corporate) and Chief Compliance Officer at AOL, Inc. (July 2010). |
| (2) | Ms. Little was elected Senior Vice President, Chief Financial Officer effective March 16, 2015. Prior to joining our Company she was Executive Vice President and Chief Financial Officer |
| Mr. Tillemans was elected President, U.S. effective April 3, 2017. Prior to joining our Company he was President, Customer Development U.S. at Unilever N.V. (December 2012). |
| Ms. West was elected Senior Vice President, Chief Growth Officer effective May 1, 2017. Prior to joining our Company she was Executive Vice President, Chief Customer and Marketing Officer at J.C. Penney (June 2015) and Executive Vice President, Chief Category and Marketing Officer at Mondelez Global Inc. (October 2012). |
Our Executive Officers are generally elected each year at the organization meeting of the Board in May.
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PART II
| Item 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Common Stock is listed and traded principally on the New York Stock Exchange under the ticker symbol “HSY.” The Class B Common Stock (“Class B Stock”) is not publicly traded.
The closing price of our Common Stock on December 31, 2017,2018, was $113.51.$107.18. There were 28,33626,532 stockholders of record of our Common Stock and 6 stockholders of record of our Class B Stock as of December 31, 2017.2018.
We paid $526.3$562.5 million in cash dividends on our Common Stock and Class B Stock in 20172018 and $499.5$526.3 million in 2016.2017. The annual dividend rate on our Common Stock in 20172018 was $2.548$2.756 per share.
Information regarding dividends paid and the quarterly high and low market prices for our Common Stock and dividends paid for our Class B Stock for the two most recent fiscal years is disclosed in Note 1718 to the Consolidated Financial Statements.
On January 31, 2018,29, 2019, our Board declared a quarterly dividend of $0.656$0.722 per share of Common Stock payable on March 15, 2018,2019, to stockholders of record as of February 23, 2018.22, 2019. It is the Company’s 353rd357th consecutive quarterly Common Stock dividend. A quarterly dividend of $0.596$0.656 per share of Class B Stock also was declared.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
In January 2016, our Board of Directors approved a $500 million share repurchase authorization. AsThis program was completed in the first quarter of December 31, 2017, approximately $100 million remained available for repurchases of our Common Stock under this program.2018. In October 2017, our Board of Directors approved an additional $100 million share repurchase authorization, to commence after the existing 2016 authorization iswas completed. Neither the 2016 nor the 2017As of December 31, 2018, approximately $60 million remained available for repurchases of our Common Stock under this program. The share repurchase programsprogram does not have an expiration date. In July 2018, our Board approved an additional $500 million share repurchase authorization (excluded from amount above). This program is to commence after the existing 2017 authorization is completed and is to be utilized at management's discretion.
In August 2017, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “Trust”), pursuant to which the Company agreed to purchase 1,500,000 shares of the Company’s common stock from the Trust at a price equal to $106.01 per share, for a total purchase price of $159 million.
In November 2018, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Trust, pursuant to which the Company agreed to purchase 450,000 shares of the Company’s common stock from the Trust at a price equal to $106.30 per share, for a total purchase price of $47.8 million.
14
Stockholder Return Performance Graph
The following graph compares our cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Standard & Poor’s 500 Index and the Standard & Poor’s Packaged Foods Index.
Comparison of 5 Year Cumulative Total Return*
Among The Hershey Company, the S&P 500 Index,
and the S&P Packaged Foods Index
*$100 invested on December 31, 20122013 in stock or index, including reinvestment of dividends.
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| Company/Index | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||||
| The Hershey Company | $ | 100 | $ | 137 | $ | 150 | $ | 132 | $ | 157 | $ | 176 | $ | 100 | $ | 109 | $ | 96 | $ | 114 | $ | 128 | $ | 124 | ||||||||||||||||||||||||
| S&P 500 Index | $ | 100 | $ | 132 | $ | 150 | $ | 153 | $ | 171 | $ | 208 | $ | 100 | $ | 114 | $ | 115 | $ | 129 | $ | 157 | $ | 150 | ||||||||||||||||||||||||
| S&P 500 Packaged Foods Index | $ | 100 | $ | 126 | $ | 146 | $ | 156 | $ | 164 | $ | 186 | $ | 100 | $ | 112 | $ | 131 | $ | 143 | $ | 145 | $ | 118 | ||||||||||||||||||||||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
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| Item 6. | SELECTED FINANCIAL DATA |
FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY
(All dollar and share amounts in thousands except market price and per share statistics)
| 2017 | 2016 | 2015 | 2014 | 2013 | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||||
| Summary of Operations | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 7,515,426 | 7,440,181 | 7,386,626 | 7,421,768 | 7,146,079 | $ | 7,791,069 | 7,515,426 | 7,440,181 | 7,386,626 | 7,421,768 | ||||||||||||||||||||
| Cost of Sales | $ | 4,070,907 | 4,282,290 | 4,003,951 | 4,085,602 | 3,865,231 | $ | 4,215,744 | 4,060,050 | 4,270,642 | 4,000,071 | 4,085,602 | ||||||||||||||||||||
| Selling, Marketing and Administrative | $ | 1,913,403 | 1,915,378 | 1,969,308 | 1,900,970 | 1,922,508 | $ | 1,874,829 | 1,885,492 | 1,891,305 | 1,945,361 | 1,900,970 | ||||||||||||||||||||
| Goodwill, Indefinite and Long-Lived Asset Impairment Charges | $ | 208,712 | 4,204 | 280,802 | 15,900 | — | ||||||||||||||||||||||||||
| Goodwill, Long-Lived & Intangible Asset Impairment Charges | $ | 57,729 | 208,712 | 4,204 | 280,802 | 15,900 | ||||||||||||||||||||||||||
| Business Realignment Costs | $ | 47,763 | 32,526 | 94,806 | 29,721 | 18,665 | $ | 19,103 | 47,763 | 18.857 | 84.628 | 29,721 | ||||||||||||||||||||
| Interest Expense, Net | $ | 98,282 | 90,143 | 105,773 | 83,532 | 88,356 | $ | 138,837 | 98,282 | 90,143 | 105,773 | 83,532 | ||||||||||||||||||||
| Provision for Income Taxes | $ | 354,131 | 379,437 | 388,896 | 459,131 | 430,849 | $ | 239,010 | 354,131 | 379,437 | 388,896 | 459,131 | ||||||||||||||||||||
| Net Income Attributable to The Hershey Company | $ | 782,981 | 720,044 | 512,951 | 846,912 | 820,470 | $ | 1,177,562 | 782,981 | 720,044 | 512,951 | 846,912 | ||||||||||||||||||||
| Net Income Per Share: | ||||||||||||||||||||||||||||||||
| —Basic—Common Stock | $ | 3.79 | 3.45 | 2.40 | 3.91 | 3.76 | $ | 5.76 | 3.79 | 3.45 | 2.40 | 3.91 | ||||||||||||||||||||
| —Diluted—Common Stock | $ | 3.66 | 3.34 | 2.32 | 3.77 | 3.61 | $ | 5.58 | 3.66 | 3.34 | 2.32 | 3.77 | ||||||||||||||||||||
| —Basic—Class B Stock | $ | 3.44 | 3.15 | 2.19 | 3.54 | 3.39 | $ | 5.24 | 3.44 | 3.15 | 2.19 | 3.54 | ||||||||||||||||||||
| —Diluted—Class B Stock | $ | 3.44 | 3.14 | 2.19 | 3.52 | 3.37 | $ | 5.22 | 3.44 | 3.14 | 2.19 | 3.52 | ||||||||||||||||||||
| Weighted-Average Shares Outstanding: | ||||||||||||||||||||||||||||||||
| —Basic—Common Stock | 151,625 | 153,519 | 158,471 | 161,935 | 163,549 | 149,379 | 151,625 | 153,519 | 158,471 | 161,935 | ||||||||||||||||||||||
| —Basic—Class B Stock | 60,620 | 60,620 | 60,620 | 60,620 | 60,627 | 60,614 | 60,620 | 60,620 | 60,620 | 60,620 | ||||||||||||||||||||||
| —Diluted—Common Stock | 213,742 | 215,304 | 220,651 | 224,837 | 227,203 | 210,989 | 213,742 | 215,304 | 220,651 | 224,837 | ||||||||||||||||||||||
| Dividends Paid on Common Stock | $ | 387,466 | 369.292 | 352,953 | 328,752 | 294,979 | $ | 412,491 | 387,466 | 369.292 | 352,953 | 328,752 | ||||||||||||||||||||
| Per Share | $ | 2.548 | 2.402 | 2.236 | 2.040 | 1.810 | $ | 2.756 | 2.548 | 2.402 | 2.236 | 2.040 | ||||||||||||||||||||
| Dividends Paid on Class B Stock | $ | 140,394 | 132,394 | 123,179 | 111,662 | 98,822 | $ | 151,789 | 140,394 | 132,394 | 123,179 | 111,662 | ||||||||||||||||||||
| Per Share | $ | 2.316 | 2.184 | 2.032 | 1.842 | 1.630 | $ | 2.504 | 2.316 | 2.184 | 2.032 | 1.842 | ||||||||||||||||||||
| Depreciation | $ | 211,592 | 231,735 | 197,054 | 176,312 | 166,544 | $ | 231,012 | 211,592 | 231,735 | 197,054 | 176,312 | ||||||||||||||||||||
| Amortization | $ | 50,261 | 70,102 | 47,874 | 35,220 | 34,489 | $ | 64,132 | 50,261 | 70,102 | 47,874 | 35,220 | ||||||||||||||||||||
| Advertising | $ | 541,293 | 521,479 | 561,644 | 570,223 | 582,354 | $ | 479,908 | 541,293 | 521,479 | 561,644 | 570,223 | ||||||||||||||||||||
| Year-End Position and Statistics | ||||||||||||||||||||||||||||||||
| Capital Additions (including software) | $ | 257,675 | 269,476 | 356,810 | 370,789 | 350,911 | $ | 328,601 | 257,675 | 269,476 | 356,810 | 370,789 | ||||||||||||||||||||
| Total Assets | $ | 5,553,726 | 5,524,333 | 5,344,371 | 5,622,870 | 5,349,724 | $ | 7,703,020 | 5,553,726 | 5,524,333 | 5,344,371 | 5,622,870 | ||||||||||||||||||||
| Short-term Debt and Current Portion of Long-term Debt | $ | 859,457 | 632,714 | 863,436 | 635,501 | 166,875 | $ | 1,203,316 | 859,457 | 632,714 | 863,436 | 635,501 | ||||||||||||||||||||
| Long-term Portion of Debt | $ | 2,061,023 | 2,347,455 | 1,557,091 | 1,542,317 | 1,787,378 | $ | 3,254,280 | 2,061,023 | 2,347,455 | 1,557,091 | 1,542,317 | ||||||||||||||||||||
| Stockholders’ Equity | $ | 931,565 | 827,687 | 1,047,462 | 1,519,530 | 1,616,052 | $ | 1,407,266 | 931,565 | 827,687 | 1,047,462 | 1,519,530 | ||||||||||||||||||||
| Full-time Employees | 15,360 | 16,300 | 19,060 | 20,800 | 12,600 | 14,930 | 15,360 | 16,300 | 19,060 | 20,800 | ||||||||||||||||||||||
| Stockholders’ Data | ||||||||||||||||||||||||||||||||
| Outstanding Shares of Common Stock and Class B Stock at Year-end | 210,861 | 212,260 | 216,777 | 221,045 | 223,895 | 209,729 | 210,861 | 212,260 | 216,777 | 221,045 | ||||||||||||||||||||||
| Market Price of Common Stock at Year-end | $ | 113.51 | 103.43 | 89.27 | 103.93 | 97.23 | $ | 107.18 | 113.51 | 103.43 | 89.27 | 103.93 | ||||||||||||||||||||
| Price Range During Year (high) | $ | 115.96 | 113.89 | 110.78 | 108.07 | 100.90 | $ | 114.06 | 115.96 | 113.89 | 110.78 | 108.07 | ||||||||||||||||||||
| Price Range During Year (low) | $ | 102.87 | 83.32 | 83.58 | 88.15 | 73.51 | $ | 89.54 | 102.87 | 83.32 | 83.58 | 88.15 | ||||||||||||||||||||
| (1) | In accordance with ASU No. 2017-07, the non-service cost components of net periodic benefit cost relating to the Company's pension and other post retirement benefit plans have been reclassified to the Other (income) expense, net caption for the years ended December 31, 2017, 2016 and 2015 to conform to the 2018 presentation. Other (income) expense, net is not presented above. |
16
| Item 7. | 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 Consolidated Financial Statements and accompanying Notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.”
The MD&A is organized in the following sections:
Business Model and Growth Strategy
Overview
Non-GAAP Information
Consolidated Results of Operations
Segment Results
Financial Condition
Critical Accounting Policies and Estimates
BUSINESS MODEL AND GROWTH STRATEGY
We are the largest producer of quality chocolate in North America, a leading snack maker in the United States and a global leader in chocolate and non-chocolate confectionery known for bringing goodness to the world through chocolate, sweets, mints, gum and other great tasting snacks. We market, sell and distribute our products under more than 80 brand names in approximately 8090 countries worldwide. We report our operations through two segments: North America and International and Other.
We believe we have a set of differentiated capabilities that when integrated, can create advantage in the marketplace. Our focus on the following key elements of our strategy should enable us to deliver top-tier growth and industry-leading shareholder returns.
| • | Reignite Core Confection and Expand Breadth in Snacking. We are taking actions to deepen our consumer connections, deliver meaningful innovation and reinvent the shopping experience, while also pursuing opportunities to diversify our portfolio and establish a strong presence across the broader snacking continuum. |
| ◦ |
| ◦ | Innovation is an important lever in this variety seeking category and we are leveraging |
| ◦ | Through our shopper insights work, we are currently |
| ◦ | To expand our breadth in snacking, we are focused on expanding the boundaries of our core confection brands to capture new snacking occasions and increasing our exposure into new snack categories through acquisitions. Our expansion into snacking is being fueled by the recent acquisitions of Amplify and Pirate Brands in January 2018 and October 2018, respectively. |
17
| • | Reallocate Resources to Expand Margins and Fuel Growth. We are focused on ensuring that we efficiently allocate our resources to the areas with the highest potential for profitable growth. We believe this will enable margin expansion and position us within the top quartile of operating income margin relative to our peers. |
| ◦ | We have reset our international investment, while |
| ◦ | We have heightened our selling, marketing and administrative expense discipline |
| ◦ | We will continue to optimize our cost of goods sold |
| • | Strengthen Capabilities & Leverage Technology for Commercial Advantage. In order to generate actionable insights, we must acquire, integrate, access and utilize vast sources of the right data in an effective manner. We are working to leverage our advanced analytical techniques to gain a deep understanding of consumers, our customers, our shoppers, our end-to-end supply chain, our retail environment and key economic drivers at both a macro and precision level. In addition, we are in the process of transforming our enterprise resource planning system, which will enable employees to work more efficiently and effectively. |
OVERVIEW
The Overview presented below is an executive-level summary highlighting the key trends and measures on which the Company’s management focuses in evaluating its financial condition and operating performance. Certain earnings and performance measures within the Overview include financial information determined on a non-GAAP basis, which aligns with how management internally evaluates the Company's results of operations, determines incentive compensation, and assesses the impact of known trends and uncertainties on the business. A detailed reconciliation of the non-GAAP financial measures referenced herein to their nearest comparable GAAP financial measures follows this summary. For a detailed analysis of the Company's operations prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), referred to as "reported" herein, refer to the discussion and analysis in the Consolidated Results of Operations.
In 2017,2018, we made solidstrong progress on our strategic initiatives, including strengthening our U.S. core chocolate brands, positioningconfection business, expanding our snacks business for successportfolio to capture incremental consumer occasions and generating operating profit margin expansion. These initiatives will benefitoptimizing the Company over the long term and enable us to achieve our sales and earnings per share-diluted ("EPS") targets.product portfolio across various international markets. We continued to generate solid operating cash flow, totaling approximately $1.2$1.6 billion in 2017,2018, which affords the Company significant financial flexibility. The recent
In January 2018, we completed the acquisition of all of the outstanding shares of Amplify Snack Brands, Inc. ("Amplify"), previously a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPop, Oatmega, Paqui and Tyrrells. Amplify's anchor brand, SkinnyPop, is an important stepa market-leading ready-to-eat popcorn brand and is available in our journey to expand our breadtha wide range of food distribution channels in snacking as it should enablethe United States. The business enables us to bring scalecapture more consumer snacking occasions by contributing a new portfolio of brands. On July 5, 2018, we sold the Tyrrells business in order to focus on the U.S. growth opportunities.
In October 2018, we completed the acquisition of Pirate Brands, which includes the Pirate's Booty, Smart Puffs and category management capabilities toOriginal Tings brands, from B&G Foods, Inc. Pirate Brands offers baked, trans fat free and gluten free snacks and is available in a key sub-segmentwide range of food distribution channels in the warehouse snack aisle.United States.
Our full year 20172018 net sales totaled $7,515.4$7,791.1 million, an increase of 1.0%3.7%, versus $7,440.2$7,515.4 million for the comparable period of 2016.2017. Excluding a 0.2% impact from favorableunfavorable foreign exchange rates, our net sales increased 0.8%3.9%. Net sales growth was driven primarily by lower levels of trade promotional spending in both the North Americarevenue contributions from Amplify and International and Other segments, as well as higher sales volume in North America, primarily from 2017 innovation and new launches, including Hershey's Cookie Layer Crunch, Hershey's Gold and Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels.Pirate Brands.
Our reported gross margin was 45.8%45.9% for the full year 2017, an increase2018, a decrease of 34010 basis points compared to the full year 2016.2017. Our 20172018 non-GAAP gross margin was 44.0%, a decrease of 45.6% was on par with160 basis points compared to the priorfull year margin, as the benefits from supply chain productivity and cost savings initiatives, as well as lower input costs, were offset by2017 due to higher freight rates and increased levels of manufacturinglogistics costs, unfavorable mix and distributionadditional plant costs associated with an effortrelated to maintain customer service targets at fast growing retail customers.new production lines.
18
Our full year 2018 reported operating profit and reported operating profit margin totaled $1,623.7 million and 20.8%, respectively, compared to full year 2017 reported operating profit and reported operating profit margin of $1,313.4 million and 17.5%, respectively. From a non-GAAP perspective, full year 2018 adjusted operating profit and adjusted operating profit margin totaled $1,607.1 million and 20.6%, respectively, compared to full year 2017 adjusted operating profit and adjusted operating profit margin of $1,556.5 million and 20.7%, respectively. The decrease in our adjusted operating profit margin was primarily due to lower non-GAAP gross margin.
Our full year 2018 reported net income and reported EPS-diluted totaled $1,177.6 million and $5.58, respectively, compared to full year 2017 reported net income and reported EPS-diluted totaledof $783.0 million and $3.66, respectively, compared to the full year 2016 reported net income and EPS-diluted of $720.0 million and $3.34, respectively. From a non-GAAP perspective, full year 20172018 adjusted net income was $1,016.9$1,130.1 million, an increase of 7.2%12.8% versus $948.5adjusted net income of $1,001.5 million in 2016.2017. Our adjusted EPS-diluted for the full year 20172018 was $4.76$5.36 compared to $4.41$4.69 for the same period of 2016,2017, an increase of 7.9%14.3%. The increases in our adjusted net income and adjusted EPS-diluted in 2018 compared to 2017 were primarily due to slightly lower selling, marketing and administrative expenses, as well as a lower 2018 tax rate as a result of U.S. tax reform, partially offset by unfavorable gross profit.
NON-GAAP INFORMATION
Comparability of Certain Financial Measures
The comparability of certain of our financial measures is impacted by unallocated mark-to-market (gains) losses on commodity derivatives, pension settlement charges relating to company-directed initiatives, costs associated with business realignment activities, costs relating to the integration of acquisitions, non-service related components of our pension expense ("NSRPE"), impairment of goodwill, indefinite and long-lived assets, the one-time impact of U.S. tax reform, the gain realized on the sale of a trademark and the gain recorded upon settlement of the SGMa liability in conjunction with the purchase of the remaining 20% of the outstanding shares of SGM, the gain realized on the sale of a trademark, costs associated with the early extinguishment of debt and other non-recurring gains and losses.Shanghai Golden Monkey Food Joint Stock Co., Ltd. ("SGM").
To provide additional information to investors to facilitate the comparison of past and present performance, we use non-GAAP financial measures within MD&A that exclude the financial impact of these activities. These non-GAAP financial measures are used internally by management in evaluating results of operations and determining incentive compensation, and in assessing the impact of known trends and uncertainties on our business, but they are not intended to replace the presentation of financial results in accordance with GAAP. A reconciliation of the non-GAAP financial measures referenced in MD&A to their nearest comparable GAAP financial measures as presented in the Consolidated Statements of Income is provided below.
Explanatory Note
In conjunction with the adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715), in the first quarter of 2018, the Company elected to discontinue its practice of excluding the non-service related components of its net periodic benefit cost in deriving its non-GAAP financial measures, with a minor exception. Historically, the Company excluded from its non-GAAP results the following components relating to its pension benefit plans: interest cost, expected return on plan assets, amortization of net loss (gain), and settlement and curtailment charges. The Company did not historically exclude from its non-GAAP results the non-service related components relating to its other post retirement benefit plans. Starting with the first quarter of 2018, the Company will continue to exclude from its non-GAAP results the portion of pension settlement and/or curtailment charges relating to Company-directed initiatives, such as significant business realignment events and benefit plan terminations or amendments. As a result of this change, the non-GAAP reconciliations presented for the years ended December 31, 2017 and 2016 that follow have been revised to conform to this updated presentation. The revision in the Company’s determination of non-GAAP earnings resulted in a reduction of $0.07 to adjusted earnings per share-diluted from $4.76 to $4.69 for 2017 and a reduction of $0.08 to adjusted earnings per share-diluted from $4.41 to $4.33 for 2016.
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| Reconciliation of Certain Non-GAAP Financial Measures | ||||||||||||||||||||||
| Consolidated results | For the years ended December 31, | For the years ended December 31, | ||||||||||||||||||||
| In thousands except per share data | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||
| Reported gross profit | $ | 3,444,519 | $ | 3,157,891 | $ | 3,382,675 | $ | 3,575,325 | $ | 3,455,376 | $ | 3,169,539 | ||||||||||
| Derivative mark-to-market (gains) losses | (35,292 | ) | 163,238 | — | (168,263 | ) | (35,292 | ) | 163,238 | |||||||||||||
| Business realignment activities | 5,147 | 58,106 | 8,801 | 11,323 | 5,147 | 58,106 | ||||||||||||||||
| Acquisition integration costs | — | — | 7,308 | |||||||||||||||||||
| NSRPE | 11,125 | 11,953 | 2,516 | |||||||||||||||||||
| Acquisition-related costs | 6,194 | — | — | |||||||||||||||||||
| Non-GAAP gross profit | $ | 3,425,499 | $ | 3,391,188 | $ | 3,401,300 | $ | 3,424,579 | $ | 3,425,231 | $ | 3,390,883 | ||||||||||
| Reported operating profit | $ | 1,274,641 | $ | 1,205,783 | $ | 1,037,759 | $ | 1,623,664 | $ | 1,313,409 | $ | 1,255,173 | ||||||||||
| Derivative mark-to-market (gains) losses | (35,292 | ) | 163,238 | — | (168,263 | ) | (35,292 | ) | 163,238 | |||||||||||||
| Business realignment activities | 69,359 | 107,571 | 120,975 | 51,827 | 69,359 | 93,902 | ||||||||||||||||
| Acquisition integration costs | 311 | 6,480 | 20,899 | |||||||||||||||||||
| NSRPE | 35,028 | 27,157 | 18,079 | |||||||||||||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 208,712 | 4,204 | 280,802 | |||||||||||||||||||
| Acquisition-related costs | 44,829 | 311 | 6,480 | |||||||||||||||||||
| Long-lived and intangible asset impairment charges | 57,729 | 208,712 | 4,204 | |||||||||||||||||||
| Gain on sale of licensing rights | (2,658 | ) | — | — | ||||||||||||||||||
| Non-GAAP operating profit | $ | 1,552,759 | $ | 1,514,433 | $ | 1,478,514 | $ | 1,607,128 | $ | 1,556,499 | $ | 1,522,997 | ||||||||||
| Reported provision for income taxes | $ | 354,131 | $ | 379,437 | $ | 388,896 | $ | 239,010 | $ | 354,131 | $ | 379,437 | ||||||||||
| Derivative mark-to-market (gains) losses* | (4,746 | ) | 20,500 | — | (15,778 | ) | (4,746 | ) | 20,500 | |||||||||||||
| Business realignment activities* | 17,903 | 19,138 | 41,648 | 12,961 | 18,337 | 13,957 | ||||||||||||||||
| Acquisition integration costs* | 118 | 2,456 | 8,264 | |||||||||||||||||||
| NSRPE* | 13,258 | 10,283 | 6,955 | |||||||||||||||||||
| Goodwill, indefinite and long-lived asset impairment charges* | 23,292 | 1,157 | — | |||||||||||||||||||
| Acquisition-related costs* | 9,105 | 118 | 2,456 | |||||||||||||||||||
| Pension settlement charges relating to Company-directed initiatives* | 1,347 | 4,148 | 5,181 | |||||||||||||||||||
| Long-lived and intangible asset impairment charges* | 15,875 | 23,292 | 1,157 | |||||||||||||||||||
| Impact of U.S. tax reform | (32,467 | ) | — | — | 7,754 | (32,467 | ) | — | ||||||||||||||
| Loss on early extinguishment of debt* | — | — | 10,736 | |||||||||||||||||||
| Gain on sale of trademark* | — | — | (3,652 | ) | ||||||||||||||||||
| Gain on sale of licensing rights* | (1,203 | ) | — | — | ||||||||||||||||||
| Non-GAAP provision for income taxes | $ | 371,489 | $ | 432,971 | $ | 452,847 | $ | 269,071 | $ | 362,813 | $ | 422,688 | ||||||||||
| Reported net income | $ | 782,981 | $ | 720,044 | $ | 512,951 | $ | 1,177,562 | $ | 782,981 | $ | 720,044 | ||||||||||
| Derivative mark-to-market (gains) losses | (30,546 | ) | 142,738 | — | (152,485 | ) | (30,546 | ) | 142,738 | |||||||||||||
| Business realignment activities | 51,456 | 88,433 | 79,327 | 38,866 | 51,022 | 79,945 | ||||||||||||||||
| Acquisition integration costs | 193 | 4,024 | 14,196 | |||||||||||||||||||
| NSRPE | 21,770 | 16,874 | 11,124 | |||||||||||||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 185,420 | 3,047 | 280,802 | |||||||||||||||||||
| Acquisition-related costs | 35,724 | 193 | 4,024 | |||||||||||||||||||
| Pension settlement charges relating to Company-directed initiatives | 4,108 | 6,796 | 8,488 | |||||||||||||||||||
| Long-lived and intangible asset impairment charges | 41,854 | 185,420 | 3,047 | |||||||||||||||||||
| Impact of U.S. tax reform | 32,467 | — | — | (7,754 | ) | 32,467 | — | |||||||||||||||
| Noncontrolling interest share of business realignment and impairment charges | (26,795 | ) | — | — | (6,348 | ) | (26,795 | ) | — | |||||||||||||
| Settlement of SGM liability | — | (26,650 | ) | — | — | — | (26,650 | ) | ||||||||||||||
| Loss on early extinguishment of debt | — | — | 17,591 | |||||||||||||||||||
| Gain on sale of trademark | — | — | (6,298 | ) | ||||||||||||||||||
| Gain on sale of licensing rights | (1,455 | ) | — | — | ||||||||||||||||||
| Non-GAAP net income | $ | 1,016,946 | $ | 948,510 | $ | 909,693 | $ | 1,130,072 | $ | 1,001,538 | $ | 931,636 | ||||||||||
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| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||||||||
| Reported EPS - Diluted | $ | 3.66 | $ | 3.34 | $ | 2.32 | $ | 5.58 | $ | 3.66 | $ | 3.34 | ||||||||||
| Derivative mark-to-market (gains) losses | (0.14 | ) | 0.66 | — | (0.72 | ) | (0.14 | ) | 0.66 | |||||||||||||
| Business realignment activities | 0.25 | 0.42 | 0.36 | 0.18 | 0.25 | 0.38 | ||||||||||||||||
| Acquisition integration costs | — | 0.02 | 0.05 | |||||||||||||||||||
| NSRPE | 0.09 | 0.08 | 0.05 | |||||||||||||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 0.87 | 0.01 | 1.28 | |||||||||||||||||||
| Acquisition-related costs | 0.18 | — | 0.02 | |||||||||||||||||||
| Pension settlement charges relating to Company-directed initiatives | 0.02 | 0.02 | 0.04 | |||||||||||||||||||
| Long-lived and intangible asset impairment charges | 0.20 | 0.87 | 0.01 | |||||||||||||||||||
| Impact of U.S. tax reform | 0.15 | — | — | (0.04 | ) | 0.15 | — | |||||||||||||||
| Noncontrolling interest share of business realignment and impairment charges | (0.12 | ) | — | — | (0.03 | ) | (0.12 | ) | — | |||||||||||||
| Settlement of SGM liability | — | (0.12 | ) | — | — | — | (0.12 | ) | ||||||||||||||
| Loss on early extinguishment of debt | — | — | 0.09 | |||||||||||||||||||
| Gain on sale of trademark | — | — | (0.03 | ) | ||||||||||||||||||
| Gain on sale of licensing rights | (0.01 | ) | — | — | ||||||||||||||||||
| Non-GAAP EPS - Diluted | $ | 4.76 | $ | 4.41 | $ | 4.12 | $ | 5.36 | $ | 4.69 | $ | 4.33 | ||||||||||
* The tax effect for each adjustment is determined by calculating the tax impact of the adjustment on the Company's quarterly effective tax rate.
In the assessment of our results, we review and discuss the following financial metrics that are derived from the reported and non-GAAP financial measures presented above:
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||
| 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | |||||||||||
| As reported gross margin | 45.8 | % | 42.4 | % | 45.8 | % | 45.9 | % | 46.0 | % | 42.6 | % | ||||
| Non-GAAP gross margin (1) | 45.6 | % | 45.6 | % | 46.0 | % | 44.0 | % | 45.6 | % | 45.6 | % | ||||
| As reported operating profit margin | 17.0 | % | 16.2 | % | 14.0 | % | 20.8 | % | 17.5 | % | 16.9 | % | ||||
| Non-GAAP operating profit margin (2) | 20.7 | % | 20.4 | % | 20.0 | % | 20.6 | % | 20.7 | % | 20.5 | % | ||||
| As reported effective tax rate | 31.9 | % | 34.5 | % | 43.1 | % | 17.0 | % | 31.9 | % | 34.5 | % | ||||
| Non-GAAP effective tax rate (3) | 26.7 | % | 31.3 | % | 33.2 | % | 19.2 | % | 26.7 | % | 31.3 | % | ||||
| (1) | Calculated as non-GAAP gross profit as a percentage of net sales for each period presented. |
| (2) | Calculated as non-GAAP operating profit as a percentage of net sales for each period presented. |
| (3) | Calculated as non-GAAP provision for income taxes as a percentage of non-GAAP income before taxes (calculated as non-GAAP operating profit minus non-GAAP interest expense, net plus or minus non-GAAP other (income) expense, net). |
Details of the activities impacting comparability that are presented as reconciling items to derive the non-GAAP financial measures in the tables above are as follows:
Mark-to-market (gains) losses on commodity derivatives
The mark-to-market (gains) losses on commodity derivatives are recorded as unallocated and excluded from adjusted results until such time as the related inventory is sold, at which time the corresponding (gains) losses are reclassified from unallocated to segment income. Since we often purchase commodity contracts to price inventory requirements in future years, we make this adjustment to facilitate the year-over-year comparison of cost of sales on a basis that matches the derivative gains and losses with the underlying economic exposure being hedged for the period. For the years ended December 31, 2018, 2017 and 2016, the net adjustment recognized within unallocated was a gain of $168.3 million, a gain of $35.3 million and a loss of $163.2 million, respectively. See Note 1112 to the Consolidated Financial Statements for more information.
21
Business realignment activities
We periodically undertake restructuring and cost reduction activities as part of ongoing efforts to enhance long-term profitability. For the years ended December 31, 2018, 2017 2016 and 2015,2016, we incurred $51.8 million, $69.4 million $107.6 million and $121.0$93.9 million, respectively, of pre-tax costs related to business realignment activities. See Note 78 to the Consolidated Financial Statements for more information.
For the year ended December 31, 2018, we incurred expenses totaling $44.8 million related to the acquisitions of Amplify and Pirate Brands. This primarily includes legal and consultant fees, as well as severance and other costs relating to the integration costs
of the businesses. For the years ended December 31, 2017 and 2016, we incurred expenses totaling $0.3 million and $6.5 million, respectively, related to integration of the 2016 acquisition of Ripple Brand Collective, LLC, as we incorporated this business into our operating practices and information systems.
Pension settlement charges related to Company-directed initiatives
In 2018, settlement charges in our hourly defined benefit plan were triggered by lump sum withdrawals by employees retiring or leaving the Company under a voluntary separation plan included within the Operational Optimization Program (as defined below). In 2017, settlement charges were triggered in the pension plan benefiting our employees in Puerto Rico as a result of lump sum distributions and the purchase of annuity contracts relating to the termination of this plan. In 2016, settlement charges in our hourly defined benefit plan were triggered by lump sum withdrawals by employees retiring or leaving the Company under a voluntary separation plan included within the 2015 Productivity Initiative (as defined below).
Long-lived and intangible asset impairment charges
For the year ended December 31, 2015,2018, we incurred costs related to the integration of the 2014 acquisitions of SGM and The Allan Candy Company and the 2015 acquisition of Krave totaling $22.5 million as we incorporated these businesses into our operating practices and information systems. These 2015 expenses included charges incurred to write-down approximately $6.4$57.7 million of expired or near-expiration work-in-process inventory at SGM, in connection with the implementation of our global quality standards and practices. In addition, integration costs for 2015 were offset by a $6.8 million reduction in the fair value of contingent consideration paid to the Krave shareholders.
to adjust the long-lived asset values of certain disposal groups, including the SGM and Tyrrells businesses, the Lotte Shanghai Foods Co., Ltd. joint venture and other assets. These charges represent the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts realized or to be realized upon completion of the sales, over the sales values less costs to sell for the respective businesses. The fair values of the disposal groups were supported by the sales prices paid by third-party buyers or estimated sales prices based on marketing of the disposal group, when the sale has not yet been completed. For the year ended December 31, 2017, we incurred $208.7 million of pre-tax long-lived asset impairment charges related to certain business realignment activities. This includesincluded a write-down of certain intangible assets that had been recognized in connection with the 2014 SGM acquisition and a write-down of property, plant and equipment. For the year ended December 31, 2016, in connection with our 2016 annual impairment testing of other indefinite lived assets, we recognized a trademark impairment charge of $4.2 million primarily resulting from plans to discontinue a brand sold in India. In the second and third quarters of 2015, we recorded a total $280.8 million non-cash goodwill impairment charge, representing a write-down of all of the goodwill resulting from the SGM acquisition, including $14.4 million relating to the portion of goodwill that had been allocated to our China chocolate reporting unit, based on synergies to be realized by this business.
Impact of U.S. tax reform
Noncontrolling interest share of business realignment and impairment charges
Certain of the business realignment and impairment charges recorded in connection with the Margin for Growth Program related to Lotte Shanghai Foods Co., Ltd., a joint venture in which we own a 50% controlling interest. Therefore, we have also adjusted for the portion of these charges included within the loss attributed to the non-controlling interest.
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Settlement of SGM liability
In the fourth quarter of 2015, we reached an agreement with the SGM selling shareholders to reduce the originally-agreed purchase price for the remaining 20% of SGM, and we completed the purchase on February 3, 2016. In the first quarter of 2016, we recorded a $26.7 million gain relating to the settlement of the SGM liability, representing the net carrying amount of the recorded liability in excess of the cash paid to settle the obligation for the remaining 20% of the outstanding shares.
Gain on sale of trademarklicensing rights
During the firstsecond quarter of 2015,2018, we recorded a $9.9$2.7 million gain relating toon the sale of licensing rights for a non-core trademark.trademark relating to a brand marketed outside of the U.S.
Constant Currency Net Sales Growth
We present certain percentage changes in net sales on a constant currency basis, which excludes the impact of foreign currency exchange. This measure is used internally by management in evaluating results of operations and determining incentive compensation. We believe that this measure provides useful information to investors because it provides transparency to underlying performance in our net sales by excluding the effect that foreign currency exchange rate fluctuations have on the year-to-year comparability given volatility in foreign currency exchange markets.
To present this information for historical periods, current period net sales for entities reporting in other than the U.S. dollar are translated into U.S. dollars at the average monthly exchange rates in effect during the correspondingcomparable period of the prior fiscal year, rather than at the actual average monthly exchange rates in effect during the current period of the current fiscal year. As a result, the foreign currency impact is equal to the current year results in local currencies multiplied by the change in average foreign currency exchange rate between the current fiscal period and the correspondingcomparable period of the prior fiscal year.
The following tables set forth a reconciliation between reported and constant currency growth rates for the years ended December 31, 20172018 and 2016:2017:
| For the Year Ended December 31, 2017 | For the Year Ended December 31, 2018 | |||||||||||||||
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis | Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis | |||||||||||
| North America segment | ||||||||||||||||
| Canada | 6.3 | % | 2.1 | % | 4.2 | % | 2.4 | % | (0.3 | )% | 2.7 | % | ||||
| Total North America segment | 1.3 | % | 0.1 | % | 1.2 | % | 4.2 | % | (0.1 | )% | 4.3 | % | ||||
| International and Other segment | ||||||||||||||||
| Mexico | 9.7 | % | (1.1 | )% | 10.8 | % | 4.3 | % | (1.9 | )% | 6.2 | % | ||||
| Brazil | 19.9 | % | 9.4 | % | 10.5 | % | (4.7 | )% | (13.1 | )% | 8.4 | % | ||||
| India | 17.0 | % | 3.2 | % | 13.8 | % | 21.5 | % | (4.8 | )% | 26.3 | % | ||||
| Greater China | (18.1 | )% | (0.8 | )% | (17.3 | )% | ||||||||||
| China | (20.5 | )% | 1.0 | % | (21.5 | )% | ||||||||||
| Total International and Other segment | (1.4 | )% | 0.6 | % | (2.0 | )% | (0.5 | )% | (1.8 | )% | 1.3 | % | ||||
| Total Company | 1.0 | % | 0.2 | % | 0.8 | % | 3.7 | % | (0.2 | )% | 3.9 | % | ||||
23
| For the Year Ended December 31, 2016 | For the Year Ended December 31, 2017 | |||||||||||||||
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis | Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis | |||||||||||
| North America segment | ||||||||||||||||
| Canada | (3.5 | )% | (3.0 | )% | (0.5 | )% | 6.3 | % | 2.1 | % | 4.2 | % | ||||
| Total North America segment | 1.0 | % | (0.2 | )% | 1.2 | % | 1.3 | % | 0.1 | % | 1.2 | % | ||||
| International and Other segment | ||||||||||||||||
| Mexico | (8.5 | )% | (16.0 | )% | 7.5 | % | 9.7 | % | (1.1 | )% | 10.8 | % | ||||
| Brazil | 15.7 | % | (6.0 | )% | 21.7 | % | 19.9 | % | 9.4 | % | 10.5 | % | ||||
| India | (26.6 | )% | (3.6 | )% | (23.0 | )% | 17.0 | % | 3.2 | % | 13.8 | % | ||||
| Greater China | (0.3 | )% | (4.9 | )% | 4.6 | % | ||||||||||
| China | (18.1 | )% | (0.8 | )% | (17.3 | )% | ||||||||||
| Total International and Other segment | (1.2 | )% | (4.4 | )% | 3.2 | % | (1.4 | )% | 0.6 | % | (2.0 | )% | ||||
| Total Company | 0.7 | % | (0.7 | )% | 1.4 | % | 1.0 | % | 0.2 | % | 0.8 | % | ||||
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CONSOLIDATED RESULTS OF OPERATIONS
| Percent Change | Percent Change | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | 2018 | 2017 | 2016 | 2018 vs 2017 | 2017 vs 2016 | ||||||||||||||||||||||||||
| In millions of dollars except per share amounts | ||||||||||||||||||||||||||||||||||||
| Net Sales | $ | 7,515.4 | $ | 7,440.2 | $ | 7,386.6 | 1.0 | % | 0.7 | % | $ | 7,791.1 | $ | 7,515.4 | $ | 7,440.2 | 3.7 | % | 1.0 | % | ||||||||||||||||
| Cost of Sales | 4,070.9 | 4,282.3 | 4,003.9 | (4.9 | )% | 7.0 | % | 4,215.7 | 4,060.0 | 4,270.6 | 3.8 | % | (4.9 | )% | ||||||||||||||||||||||
| Gross Profit | 3,444.5 | 3,157.9 | 3,382.7 | 9.1 | % | (6.6 | )% | 3,575.4 | 3,455.4 | 3,169.6 | 3.5 | % | 9.0 | % | ||||||||||||||||||||||
| Gross Margin | 45.8 | % | 42.4 | % | 45.8 | % | 45.9 | % | 46.0 | % | 42.6 | % | ||||||||||||||||||||||||
| SM&A Expense | 1,913.4 | 1,915.4 | 1,969.3 | (0.1 | )% | (2.7 | )% | 1,874.8 | 1,885.5 | 1,891.3 | (0.6 | )% | (0.3 | )% | ||||||||||||||||||||||
| SM&A Expense as a percent of net sales | 25.5 | % | 25.7 | % | 26.7 | % | 24.1 | % | 25.1 | % | 25.4 | % | ||||||||||||||||||||||||
| Goodwill, Indefinite and Long-Lived Asset Impairment Charges | 208.7 | 4.2 | 280.8 | NM | NM | |||||||||||||||||||||||||||||||
| Long-Lived and Intangible Asset Impairment Charges | 57.7 | 208.7 | 4.2 | (72.3 | )% | NM | ||||||||||||||||||||||||||||||
| Business Realignment Costs | 47.8 | 32.5 | 94.8 | 46.8 | % | (65.7 | )% | 19.1 | 47.8 | 18.9 | (60.0 | )% | 153.3 | % | ||||||||||||||||||||||
| Operating Profit | 1,274.6 | 1,205.8 | 1,037.8 | 5.7 | % | 16.2 | % | 1,623.8 | 1,313.4 | 1,255.2 | 23.6 | % | 4.6 | % | ||||||||||||||||||||||
| Operating Profit Margin | 17.0 | % | 16.2 | % | 14.0 | % | 20.8 | % | 17.5 | % | 16.9 | % | ||||||||||||||||||||||||
| Interest Expense, Net | 98.3 | 90.2 | 105.8 | 9.0 | % | (14.8 | )% | 138.8 | 98.3 | 90.2 | 41.3 | % | 9.0 | % | ||||||||||||||||||||||
| Other (Income) Expense, Net | 65.7 | 16.2 | 30.1 | 306.5 | % | (46.4 | )% | 74.8 | 104.4 | 65.6 | (28.4 | )% | 59.4 | % | ||||||||||||||||||||||
| Provision for Income Taxes | 354.1 | 379.4 | 388.9 | (6.7 | )% | (2.4 | )% | 239.0 | 354.1 | 379.4 | (32.5 | )% | (6.7 | )% | ||||||||||||||||||||||
| Effective Income Tax Rate | 31.9 | % | 34.5 | % | 43.1 | % | 17.0 | % | 31.9 | % | 34.5 | % | ||||||||||||||||||||||||
| Net Income Including Noncontrolling Interest | 756.5 | 720.0 | 513.0 | 5.1 | % | 40.4 | % | 1,171.2 | 756.6 | 720.0 | 54.8 | % | 5.1 | % | ||||||||||||||||||||||
| Less: Net Loss Attributable to Noncontrolling Interest | (26.4 | ) | — | — | NM | NM | (6.5 | ) | (26.4 | ) | — | NM | NM | |||||||||||||||||||||||
| Net Income Attributable to The Hershey Company | $ | 783.0 | $ | 720.0 | $ | 513.0 | 8.7 | % | 40.4 | % | $ | 1,177.7 | $ | 783.0 | $ | 720.0 | 50.4 | % | 8.7 | % | ||||||||||||||||
| Net Income Per Share—Diluted | $ | 3.66 | $ | 3.34 | $ | 2.32 | 9.6 | % | 44.0 | % | $ | 5.58 | $ | 3.66 | $ | 3.34 | 52.5 | % | 9.6 | % | ||||||||||||||||
| Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above. | NM = not meaningful. | |||||||||||||||||||||||||||||||||||
Net Sales
2018 compared with 2017
Net sales increased 3.7% in 2018 compared with 2017, reflecting a benefit from the recent Amplify and Pirate Brands acquisitions of 3.6% and a volume increase of 1.3%, partially offset by unfavorable price realization of 1.0% and an unfavorable impact from foreign currency exchange rates of 0.2%. Excluding the unfavorable impact from foreign currency exchange rates, our net sales increased 3.9%. Consolidated volumes increased due to the acquisitions of Amplify and Pirate Brands, as well as solid performance in select international markets, which more than offset the volume reduction resulting from the sale of SGM in July 2018. The net increase in volume was partially offset by unfavorable net price realization, which was primarily attributed to incremental trade promotional expense in the North America segment in support of 2018 programming.
2017 compared with 2016
Net sales increased 1.0% in 2017 compared with 2016, reflecting favorable price realization of 0.7%, a benefit from acquisitions of 0.3%, and a favorable impact from foreign currency exchange rates of 0.2%, partially offset by a volume decrease of 0.2%. Excluding foreign currency, our net sales increased 0.8% in 2017. The favorable net price realization was attributed to lower levels of trade promotional spending in both the North America and International and Other segments versus the prior year. Consolidated volume decreased as a result of lower sales volume in the International and Other segment, primarily attributed to our China business and the softness in the modern trade channel coupled with a focus on optimizing our product offerings. These volume decreases were partially offset by
25
higher sales volume in North America, specifically from 2017 innovation and new launches, including Hershey's Cookie Layer Crunch, Hershey's Goldand Hershey'sand Reese'sPopped Snack Mix and Chocolate Dipped Pretzels.
Key U.S. Marketplace Metrics
For the full year 2017,2018, our total U.S. retail takeaway, including Amplify, increased 0.3% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items. Our U.S. candy, mint and gum ("CMG") consumer takeaway increased 1.6%, which was in line with the category increase,prior year, resulting in a CMG market share loss of 30.6%. approximately 36 basis points due to the timing of innovation and promotional activity relative to our competitors.
The CMG consumer takeaway and market share information reflect measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, and convenience store channels, plus Wal-Mart Stores, Inc., partial dollar, club and military channels. These metrics are based on measured market scanned purchases as reported by Information Resources, Incorporated ("IRI"), the Company's market insights and analytics provider, and provide a means to assess our retail takeaway and market position relative to the overall category. The amounts presented above are solely for the U.S. CMG category which does not include revenue from our snack mixes and grocery items. For the full year 2017, our U.S. retail takeaway increased 1.2% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items.
Cost of Sales and Gross Margin
2018 compared with 2017
Cost of sales increased 3.8% in 2018 compared with 2017. The increase was driven by higher sales volume, higher freight and logistics costs and additional plant costs. These drivers were partially offset by an incremental $125.1 million favorable impact from marking-to-market our commodity derivative instruments intended to economically hedge future years' commodity purchases and supply chain productivity,
Gross margin decreased by 10 basis points in 2018 compared with 2017. The decrease was primarily due to the higher freight and logistics costs, unfavorable product mix, additional plant costs related to new production lines, and incremental trade promotional expense. These factors were partially offset by the favorable year-over-year mark-to-market impact from commodity derivative instruments and supply chain productivity.
2017 compared with 2016
Cost of sales decreased 4.9% in 2017 compared with 2016. The reduction was driven by lower commodity costs coupled with an incremental $116.0 million favorable impact from marking-to-market our commodity derivative instruments intended to economically hedge future years' commodity purchases, a $53.0 million decrease in business realignment costs, and supply chain productivity and cost savings initiatives. These benefits were offset in part by higher freight and warehousing costs and unfavorable manufacturing variances.
Gross margin increased by 340 basis points in 2017 compared with 2016. Lower commodity costs coupled with the favorable year-over-year mark-to-market impact from commodity derivative instruments, lower business realignment costs, and supply chain productivity contributed to the improvement in gross margin. However, higher supply chain costs and unfavorable product mix partially offset the increase in gross margin.
Selling, Marketing and Administrative
Selling, marketing and administrative (“SM&A”) expenses decreased $2.0$10.7 million or 0.1%0.6% in 2018. Total advertising and related consumer marketing expenses declined 10.9% due mainly to spend optimization and shifts relating to our emerging brands, as well as reductions in agency and production fees. Selling, marketing and administrative expenses, excluding advertising and related consumer marketing, increased approximately 6.2% in 2018 due to incremental expenses from Amplify and Pirate Brands and higher expenses related to the multi-year implementation of our enterprise resource planning system, which more than offset reductions in our base spending from the Margin for Growth Program.
26
2017 compared with 2016
SM&A expenses decreased $5.8 million or 0.3% in 2017. Advertising and related consumer marketing expense remaining consistent with 2016 levels, as higher spending by the North America segment was offset by reduced spending by the International and Other segment. While 2017 SM&A benefited from costs savings and efficiency initiatives, lower business realignment costs, and lower acquisition integration costs, these savings were offset in part by higher pension settlement charges and higher costs related to acquisition due diligence activities and the implementation of our new enterprise resource planning system.
In 2018, we recorded impairment charges totaling $57.7 million to adjust the long-lived asset values within certain disposal groups, including the SGM and Tyrrells businesses, the Lotte Shanghai Foods Co., Ltd. joint venture and other assets. These charges represent the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts realized or to be realized upon completion of the sales, over the sales values less costs to sell for the respective businesses. The fair values of the disposal groups were supported by the sales prices paid by third-party buyers or estimated sales prices based on marketing of the disposal group, when the sale has not yet been completed. The sales of SGM and Tyrrells were both completed in July 2018.
In 2017, in connection with the Margin for Growth Program and our initiative to optimize the manufacturing operations supporting our China business, we tested our China long-lived asset group for impairment. Our assessment indicated that the carrying value of the asset group was not recoverable, and as a result, the impairment loss was allocated to the asset group's long-lived assets. We recorded long-lived asset impairment charges totaling $106.0 million to write-down distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and wrote-down property, plant and equipment by $102.7 million.
In 2016, in connection with the annual impairment testing of indefinite lived intangible assets, we recognized a trademark impairment charge of $4.2 million, primarily resulting from plans to discontinue a brand sold in India.
The assessment of the valuation of goodwill and other long-lived assets is based on management estimates and assumptions, as discussed in our critical accounting policies included in Item 7 of this Annual Report on Form 10-K. These estimates and assumptions are subject to change due to changing economic and competitive conditions.
Business Realignment Activities
We are currently pursuing several business realignment activities designed to increase our efficiency and focus our business behind key growth strategies. Costs recorded for business realignment activities during 2018, 2017 2016 and 20152016 are as follows:
| For the years ended December 31, | 2017 | 2016 | 2015 | 2018 | 2017 | 2016 | ||||||||||||||||||
| In millions of dollars | In millions of dollars | In millions of dollars | ||||||||||||||||||||||
| Margin for Growth Program: | ||||||||||||||||||||||||
| Severance | $ | 32.6 | $ | — | $ | — | $ | 15.4 | $ | 32.6 | $ | — | ||||||||||||
| Accelerated depreciation | 6.9 | — | — | 9.1 | 6.9 | — | ||||||||||||||||||
| Other program costs | 16.4 | — | — | 30.9 | 16.4 | — | ||||||||||||||||||
| Operational Optimization Program: | ||||||||||||||||||||||||
| Severance | $ | 13.8 | $ | 17.9 | $ | — | — | 13.8 | 17.9 | |||||||||||||||
| Gain on sale of facilities | (6.6 | ) | — | — | ||||||||||||||||||||
| Accelerated depreciation | — | 48.6 | — | — | — | 48.6 | ||||||||||||||||||
| Other program costs | (0.3 | ) | 21.8 | — | 2.9 | (0.3 | ) | 21.8 | ||||||||||||||||
| 2015 Productivity Initiative: | ||||||||||||||||||||||||
| Severance | — | — | 81.3 | |||||||||||||||||||||
| Pension settlement charges | — | 13.7 | 10.2 | |||||||||||||||||||||
| Other program costs | — | 5.6 | 14.3 | — | — | 5.6 | ||||||||||||||||||
| Other international restructuring programs: | ||||||||||||||||||||||||
| Severance | — | — | 6.6 | |||||||||||||||||||||
| Accelerated depreciation and amortization | — | — | 5.9 | |||||||||||||||||||||
| Mauna Loa divestiture | — | — | 2.7 | |||||||||||||||||||||
| Total | $ | 69.4 | $ | 107.6 | $ | 121.0 | $ | 51.8 | $ | 69.4 | $ | 93.9 | ||||||||||||
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Costs associated with business realignment activities are classified in our Consolidated Statements of Income as described in Note 78 to the Consolidated Financial Statements.
Margin for Growth Program
In Februarythe first quarter 2017, the Company's Board of Directors ("Board") unanimously approved several initiatives under a single program designed to drive continued net sales, operating income and earnings per-share diluted growth over the next several years. This program will focusis focused on improving global efficiency and effectiveness, optimizing the Company’s supply chain, streamlining the Company’s operating model and reducing administrative expenses to generate long-term savings.
During 2018, we recognized total costs associated with the Margin for Growth Program of $55 million. These charges included employee severance, largely relating to initiatives to improve the cost structure of our China business and to further streamline our corporate operating model, as well as non-cash, asset-related incremental depreciation expense as part of optimizing the global supply chain. In addition, we incurred other program costs, which relate primarily to third-party charges in support of our initiative to improve global efficiency and effectiveness. During 2017, we recognized total costs associated with the Margin for Growth Program of $56 million. The 2017 charges are consistent in nature to the 2018 activity.
The program includesincluded an initiative to optimize the manufacturing operations supporting our China business. WeWhen the program was approved in 2017, we deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded impairment charges totaling $208.7$209 million, with $106.0$106 million representing the
portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and $102.7$103 million representing the portion of the impairment loss that was allocated to property, plant and equipment. These impairment charges are recorded in the long-lived asset impairment charges caption within the Consolidated Statements of Operations.
Operational Optimization Program
In the second quarter of 2016, we commenced a program (the “Operational Optimization Program”) to optimize our production and supply chain network, which includesincluded select facility consolidations. The program encompassesencompassed the continued transition of our China chocolate and SGM operations into a united Golden Hershey platform, including the integration of the China sales force, as well as workforce planning efforts and the consolidation of production within certain facilities in China and North America.
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2015 Productivity Initiative
In mid-2015, we initiated a productivity initiative (the “2015 Productivity Initiative”) intended to move decision making closer to the customer and the consumer, to enable a more enterprise-wide approach to innovation, to more swiftly advance our knowledge agenda, and to provide for a more efficient cost structure, while ensuring that we effectively allocate resources to future growth areas. Overall, the 2015 Productivity Initiative was undertaken to simplify the organizational structure to enhance the Company's ability to rapidly anticipate and respond to the changing demands of the global consumer.
The 2015 Productivity Initiative was executed throughout the third and fourth quarters of 2015, resulting in a net reduction of approximately 300 positions, with the majority of the departures taking place by the end of 2015. The 2015 Productivity Initiative was completed during the third quarter 2016. WeFinal costs incurred total costs of $125 millionin 2016 relating to this program including pension settlement charges of $13.7 million recorded in 2016 and $10.2 million recorded in 2015 relating to lump sum withdrawals by employees retiring or leaving the Company as a result of this program.
Operating Profit and Operating Profit Margin
Operating profit increased 5.7%23.6% in 2018 compared with 2017 due primarily to higher gross profit, lower impairment charges and business realignment costs, and lower SM&A in the 2018 period. Operating profit margin increased to 20.8% in 2018 from 17.5% in 2017 driven by these same factors.
2017 compared with 2016
Operating profit increased 4.6% in 2017 compared with 2016 due primarily to higher gross profit and slightly lower SM&A expenses, as discussed previously. Operating profit margin increased to 17.0%17.5% in 2017 from 16.2%16.9% in 2016 driven by the improvement in gross margin.
Interest Expense, Net
2018 compared with 2017
Net interest expense was $40.6 million higher in 2018 than in 2017. The increase was due to higher levels of commercial paper issued to fund the Amplify acquisition and higher interest rates on our short-term debt, as well as incremental interest on $1.2 billion of notes issued in May 2018.
2017 compared with 2016
Net interest expense was $8.1 million higher in 2017 than in 2016. The increase was due to higher levels of long-term debt outstanding and higher interest rates on commercial paper during the 2017 period, as well as a decreased benefit from the fixed to floating swaps.
Other (Income) Expense, Net
Other (income) expense, net totaled expense of $65.7$74.8 million in 2018 versus expense of $104.4 million 2017. The decrease in the net expense was primarily due to lower non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2018, as well as lower write-downs on equity investments qualifying for federal historic and energy tax credits.
2017 compared with 2016
Other (income) expense, net totaled expense of $104.4 million in 2017 versus expense of $16.2$65.6 million in 2016. In 2017 we recognized a $66.2 million write-down on equity investments qualifying for federal historic and energy tax credits, compared to a $43.5 million write down in 2016. In 2017, the non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans totaled $38.8 million compared to $49.4 million in 2016. Additionally, 2016 was offset by an extinguishment gain of $26.7 million related to the settlement of the SGM liability.
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Income Taxes and Effective Tax Rate
2018 compared with 2017
Our effective income tax rate was 17.0% for 2018 compared with 31.9% for 2017. Relative to the 21% statutory rate, the 2018 effective tax rate was impacted by a favorable foreign rate differential and investment tax credits, which were partially offset by the impact of state taxes. The 2017 effective rate, relative to the previous statutory rate of 35%, benefited from a favorable foreign rate differential, investment tax credits and the benefit of ASU 2016-09 for the accounting of employee share-based payments, which were partially offset by the impact of U.S. tax reform and non-benefited costs resulting from the Margin for Growth Program.
2017 compared with 2016
Our effective income tax rate was 31.9% for 2017 compared with 34.5% for 2016. Relative to the statutory rate, the 2017 effective tax rate was impacted by a favorable foreign rate differential relating to foreign operations and cocoa procurement, investment tax credits and the benefit of ASU 2016-09 for the accounting of employee share-based payments, which were partially offset by the impact of U.S. tax reform and non-benefited costs resulting from the Margin for Growth Program. The 2016 effective rate benefited from the impact of non-taxable income related to the settlement of the SGM liability and investment tax credits.
Net Income attributable to The Hershey Company and Earnings Per Share-diluted
2018 compared with 2017
Net income increased $394.6 million, or 50.4%, while EPS-diluted increased $1.92, or 52.5%, in 2018 compared with 2017. The increase in both net income and EPS-diluted was driven primarily by 2018 higher gross profit, lower impairment charges and business realignment costs, lower SM&A, and lower income taxes, which were partly offset by higher interest expense, as noted above. Our 2018 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases, including both current year and prior year repurchases from the Milton Hershey School Trust (the "Trust"), as well as current year repurchases pursuant to our Board-approved repurchase programs.
2017 compared with 2016
Net income increased $62.9 million, or 8.7%, while EPS-diluted increased $0.32, or 9.6%, in 2017 compared with 2016. The increase in both net income and EPS-diluted were driven by higher gross profit, lower SM&A and lower income taxes, partly offset by the long-lived asset impairment charges and higher write-downs relating to tax credit investments, as noted above. Our 2017 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases, including a current year repurchase from the Milton Hershey School Trust and prior year repurchases pursuant to our Board-approved repurchase programs.
SEGMENT RESULTS
The summary that follows provides a discussion of the results of operations of our two reportable segments: North America and International and Other. The segments reflect our operations on a geographic basis. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition integrationacquisition-related costs and NSRPEother unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations. For further information, see the Non-GAAP Information section of this MD&A.
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Our segment results, including a reconciliation to our consolidated results, were as follows:
| For the years ended December 31, | For the years ended December 31, | 2017 | 2016 | 2015 | For the years ended December 31, | 2018 | 2017 | 2016 | ||||||||||||||||||
| In millions of dollars | In millions of dollars | In millions of dollars | ||||||||||||||||||||||||
| Net Sales: | Net Sales: | Net Sales: | ||||||||||||||||||||||||
| North America | North America | $ | 6,621.2 | $ | 6,533.0 | $ | 6,468.1 | North America | $ | 6,901.6 | $ | 6,621.2 | $ | 6,533.0 | ||||||||||||
| International and Other | International and Other | 894.3 | 907.2 | 918.5 | International and Other | 889.5 | 894.3 | 907.2 | ||||||||||||||||||
| Total | Total | $ | 7,515.4 | $ | 7,440.2 | $ | 7,386.6 | Total | $ | 7,791.1 | $ | 7,515.4 | $ | 7,440.2 | ||||||||||||
| Segment Income (Loss): | Segment Income (Loss): | Segment Income (Loss): | ||||||||||||||||||||||||
| North America | North America | $ | 2,045.6 | $ | 2,041.0 | $ | 2,074.0 | North America | $ | 2,020.1 | $ | 2,044.2 | $ | 2,040.5 | ||||||||||||
| International and Other | International and Other | 11.5 | (29.1 | ) | (98.1 | ) | International and Other | 73.8 | 11.5 | (29.1 | ) | |||||||||||||||
| Total segment income | Total segment income | 2,057.1 | 2,011.9 | 1,975.9 | Total segment income | 2,093.9 | 2,055.7 | 2,011.4 | ||||||||||||||||||
| Unallocated corporate expense (1) | Unallocated corporate expense (1) | 504.3 | 497.4 | 497.4 | Unallocated corporate expense (1) | 486.8 | 499.2 | 488.3 | ||||||||||||||||||
| Unallocated mark-to-market (gains) losses on commodity derivatives (2) | Unallocated mark-to-market (gains) losses on commodity derivatives (2) | (35.3 | ) | 163.2 | — | Unallocated mark-to-market (gains) losses on commodity derivatives (2) | (168.3 | ) | (35.3 | ) | 163.2 | |||||||||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 208.7 | 4.2 | 280.8 | |||||||||||||||||||||||
| Long-lived and intangible asset impairment charges | Long-lived and intangible asset impairment charges | 57.8 | 208.7 | 4.2 | ||||||||||||||||||||||
| Costs associated with business realignment activities | Costs associated with business realignment activities | 69.4 | 107.6 | 121.0 | Costs associated with business realignment activities | 51.8 | 69.4 | 93.9 | ||||||||||||||||||
| Non-service related pension expense | 35.0 | 27.2 | 18.1 | |||||||||||||||||||||||
| Acquisition and integration costs | 0.3 | 6.5 | 20.9 | |||||||||||||||||||||||
| Acquisition-related costs | Acquisition-related costs | 44.8 | 0.3 | 6.5 | ||||||||||||||||||||||
| Gain on sale of licensing costs | Gain on sale of licensing costs | (2.7 | ) | — | — | |||||||||||||||||||||
| Operating profit | Operating profit | 1,274.6 | 1,205.8 | 1,037.7 | Operating profit | 1,623.7 | 1,313.4 | 1,255.3 | ||||||||||||||||||
| Interest expense, net | Interest expense, net | 98.3 | 90.1 | 105.8 | Interest expense, net | 138.8 | 98.3 | 90.2 | ||||||||||||||||||
| Other (income) expense, net | Other (income) expense, net | 65.7 | 16.2 | 30.1 | Other (income) expense, net | 74.8 | 104.4 | 65.6 | ||||||||||||||||||
| Income before income taxes | Income before income taxes | $ | 1,110.7 | $ | 1,099.5 | $ | 901.8 | Income before income taxes | $ | 1,410.1 | $ | 1,110.7 | $ | 1,099.5 | ||||||||||||
| (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 and (d) other gains or losses that are not integral to segment performance. |
| (2) | Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses. See Note |
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North America
The North America segment is responsible for our chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. North America accounted for 88.1%88.6%, 87.8%88.1% and 87.6%87.8% of our net sales in 2018, 2017 2016 and 2015,2016, respectively. North America results for the years ended December 31, 2018, 2017 2016 and 20152016 were as follows:
| Percent Change | Percent Change | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | 2018 | 2017 | 2016 | 2018 vs 2017 | 2017 vs 2016 | ||||||||||||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 6,621.2 | $ | 6,533.0 | $ | 6,468.1 | 1.3 | % | 1.0 | % | $ | 6,901.6 | $ | 6,621.2 | $ | 6,533.0 | 4.2 | % | 1.3 | % | ||||||||||||||||
| Segment income | 2,045.6 | 2,041.0 | 2,074.0 | 0.2 | % | (1.6 | )% | 2,020.1 | 2,044.2 | 2,040.5 | (1.2 | )% | 0.2 | % | ||||||||||||||||||||||
| Segment margin | 30.9 | % | 31.2 | % | 32.1 | % | 29.3 | % | 30.9 | % | 31.2 | % | ||||||||||||||||||||||||