UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October~~July 2, ~~2016~~2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period

from ______to_______

Commission file number 1-183

THE HERSHEY COMPANY

(Exact name of registrant as specified in its charter)



Delaware		23-0691590
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
100 Crystal A Drive, Hershey, PA 17033
(Address of principal executive offices) (Zip Code)
717-534-4200
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated ~~filer” and~~filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	x		Accelerated filer	¨	~~Non-accelerated filer~~	¨	Smaller reporting company	¨

Non-accelerated filer	¨	(Do not check if a smaller reporting company)			Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.

Common Stock, one dollar par value—~~151,609,649~~151,827,032 shares, as of ~~October~~July 21, ~~2016.~~2017.

Class B Common Stock, one dollar par value—60,619,777 shares, as of ~~October~~July 21, ~~2016.~~2017.

THE HERSHEY COMPANY

Quarterly Report on Form 10-Q

For the Period Ended ~~October~~July 2, ~~2016~~2017

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Statements of Income for the Three and ~~Nine~~Six Months Ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015~~July 3, 2016		3
Consolidated Statements of Comprehensive Income for the Three and ~~Nine~~Six Months Ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015~~July 3, 2016		4
Consolidated Balance Sheets as of ~~October~~July 2, ~~2016~~2017 and December 31, ~~2015~~2016		5
Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015~~July 3, 2016		6
Consolidated Statement of Stockholders' Equity for the ~~Nine~~Six Months Ended ~~October~~July 2, ~~2016~~2017		7
Notes to Unaudited Consolidated Financial Statements		8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		3029
Item 3. Quantitative and Qualitative Disclosures About Market Risk		4847
Item 4. Controls and Procedures		4847

PART II. OTHER INFORMATION		4948
Item1. Legal Proceedings		4948
Item 1A. Risk Factors		4948
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4948
Item 3. Defaults Upon Senior Securities		49
Item 4. Mine Safety Disclosures		49
Item 5. Other Information		49
Item 6. Exhibits		5049

Signatures		5150

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended					Six Months Ended
	October 2, 2016		October 4, 2015		October 2, 2016		October 4, 2015		July 2, 2017			July 3, 2016		July 2, 2017			July 3, 2016
Net sales	$	2,003,454	$	1,960,779	$	5,469,937	$	5,477,404	$	1,662,991		$	1,637,671	$	3,542,669		$	3,466,483
Costs and expenses:
Cost of sales	1,152,606		1,068,715		3,054,315		2,949,089		899,781			890,273		1,872,899			1,901,709
Selling, marketing and administrative	474,494		500,306		1,408,759		1,469,861
Goodwill impairment	—		30,991		—		280,802
Business realignment charges	2,330		57,753		30,568		82,972
Total costs and expenses	1,629,430		1,657,765		4,493,642		4,782,724
Gross profit									763,210			747,398		1,669,770			1,564,774
Selling, marketing and administrative expense									445,888			462,531		907,788			934,265
Long-lived asset impairment charges									—			—		208,712			—
Business realignment costs									1,981			22,105		45,998			28,238
Operating profit	374,024		303,014		976,295		694,680		315,341			262,762		507,272			602,271
Interest expense, net	24,387		46,967		66,730		85,046		24,126			21,338		47,867			42,343
Other (income) expense, net	21,800		9,409		8,703		4,328		10,098			8,128		9,927			(13,097		)
Income before income taxes	327,837		246,638		900,862		605,306		281,117			233,296		449,478			573,025
Provision for income taxes	100,434		91,867		297,671		305,739		78,390			87,340		148,503			197,237
Net income	$	227,403	$	154,771	$	603,191	$	299,567
Net income including noncontrolling interest									202,727			145,956		300,975			375,788
Less: Net loss attributable to noncontrolling interest									(774		)	—		(27,570		)	—
Net income attributable to The Hershey Company									$	203,501		$	145,956	$	328,545		$	375,788

Net income per share—basic:
Common stock	$	1.09	$	0.73	$	2.88	$	1.40	$	0.98		$	0.70	$	1.58		$	1.79
Class B common stock	$	0.99	$	0.66	$	2.63	$	1.27	$	0.89		$	0.64	$	1.44		$	1.64

Net income per share—diluted:
Common stock	$	1.06	$	0.70	$	2.80	$	1.35	$	0.95		$	0.68	$	1.53		$	1.74
Class B common stock	$	0.99	$	0.66	$	2.62	$	1.28	$	0.89		$	0.64	$	1.44		$	1.63

Dividends paid per share:
Common stock	$	0.618	$	0.583	$	1.784	$	1.653	$	0.618		$	0.583	$	1.236		$	1.166
Class B common stock	$	0.562	$	0.530	$	1.622	$	1.502	$	0.562		$	0.530	$	1.124		$	1.060

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

Three Months Ended Nine Months Ended
October 2, 2016 October 4, 2015 October 2, 2016 October 4, 2015
Net income $ 227,403
$ 154,771
$ 603,191
$ 299,567
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (8,533 ) (26,631 ) 5,053
(51,681 )
Pension and post-retirement benefit plans 7,395
9,969
9,884
20,896
Cash flow hedges:
Gains (losses) on cash flow hedging derivatives 1,144
(43,914 ) (34,789 ) 21,023
Reclassification adjustments (898 ) (6,214 ) (7,985 ) (17,711 )
Total other comprehensive income (loss), net of tax (892 ) (66,790 ) (27,837 ) (27,473 )
Total comprehensive income $ 226,511
$ 87,981
$ 575,354
$ 272,094
Comprehensive loss (income) attributable to noncontrolling interests 751
(820 ) 2,040
2,111
Comprehensive income attributable to The Hershey Company $ 227,262
$ 87,161
$ 577,394
$ 274,205



	Three Months Ended																		Six Months Ended
	July 2, 2017									July 3, 2016									July 2, 2017									July 3, 2016
	Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount
Net income including noncontrolling interest							$	202,727								$	145,956								$	300,975								$	375,788
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	$	4,322		$	—		4,322			$	1,420		$	—		1,420			$	18,273		$	—		18,273			$	13,586		$	—		13,586
Pension and post-retirement benefit plans:
Net actuarial loss and prior service cost	—			—			—			(29,806		)	11,350			(18,456		)	(196		)	74			(122		)	(29,806		)	11,350			(18,456		)
Reclassification to earnings	7,091			(10,984		)	(3,893		)	25,625			(9,781		)	15,844			14,244			(13,695		)	549			34,305			(13,360		)	20,945
Cash flow hedges:
Losses on cash flow hedging derivatives	(707		)	703			(4		)	(21,072		)	7,283			(13,789		)	(2,206		)	882			(1,324		)	(54,981		)	19,048			(35,933		)
Reclassification to earnings	2,379			(1,282		)	1,097			(3,867		)	1,692			(2,175		)	5,412			(2,448		)	2,964			(11,776		)	4,689			(7,087		)
Total other comprehensive income (loss), net of tax	$	13,085		$	(11,563	)	1,522			$	(27,700	)	$	10,544		(17,156		)	$	35,527		$	(15,187	)	20,340			$	(48,672	)	$	21,727		(26,945		)
Total comprehensive income including noncontrolling interest							$	204,249								$	128,800								$	321,315								$	348,843
Comprehensive loss attributable to noncontrolling interest							(698		)							(213		)							(27,154		)							(1,289		)
Comprehensive income attributable to The Hershey Company							$	204,947								$	129,013								$	348,469								$	350,132

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	October 2, 2016			December 31, 2015			July 2, 2017			December 31, 2016
ASSETS	(unaudited)						(unaudited)
Current assets:
Cash and cash equivalents	$	333,333		$	346,529		$	214,062		$	296,967
Accounts receivable—trade, net	759,619			599,073			417,457			581,381
Inventories	843,519			750,970			936,437			745,678
Prepaid expenses and other	194,046			152,026			343,573			192,752
Total current assets	2,130,517			1,848,598			1,911,529			1,816,778
Property, plant and equipment, net	2,159,589			2,240,460			2,033,790			2,177,248
Goodwill	816,133			684,252			818,068			812,344
Other intangibles	510,291			379,305			378,271			492,737
Other assets	169,753			155,366			182,980			168,365
Deferred income taxes	59,130			36,390			55,590			56,861
Total assets	$	5,845,413		$	5,344,371		$	5,380,228		$	5,524,333
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	458,028		$	474,266		$	471,545		$	522,536
Accrued liabilities	683,012			856,967			641,743			750,986
Accrued income taxes	13,588			23,243			6,863			3,207
Short-term debt	612,383			363,513			621,965			632,471
Current portion of long-term debt	250,024			499,923			89			243
Total current liabilities	2,017,035			2,217,912			1,742,205			1,909,443
Long-term debt	2,362,466			1,557,091			2,349,756			2,347,455
Other long-term liabilities	478,707			468,718			397,204			400,161
Deferred income taxes	45,133			53,188			21,081			39,587
Total liabilities	4,903,341			4,296,909			4,510,246			4,696,646

Stockholders’ equity:
The Hershey Company stockholders’ equity
Preferred stock, shares issued: none at October 2, 2016 and December 31, 2015, respectively	—			—
Common stock, shares issued: 299,281,967 at October 2, 2016 and December 31, 2015, respectively	299,281			299,281
Class B common stock, shares issued: 60,619,777 at October 2, 2016 and December 31, 2015, respectively	60,620			60,620
Preferred stock, shares issued: none at July 2, 2017 and December 31, 2016							—			—
Common stock, shares issued: 299,281,967 at July 2, 2017 and December 31, 2016							299,281			299,281
Class B common stock, shares issued: 60,619,777 at July 2, 2017 and December 31, 2016							60,620			60,620
Additional paid-in capital	852,675			783,877			904,588			869,857
Retained earnings	6,129,088			5,897,603			6,187,409			6,115,961
Treasury—common stock shares, at cost: 146,305,207 at October 2, 2016 and 143,124,384 at December 31, 2015	(6,049,397		)	(5,672,359		)
Treasury—common stock shares, at cost: 147,487,088 at July 2, 2017 and 147,642,009 at December 31, 2016							(6,240,629		)	(6,183,975		)
Accumulated other comprehensive loss	(396,822		)	(371,025		)	(355,964		)	(375,888		)
The Hershey Company stockholders’ equity	895,445			997,997
Noncontrolling interests in subsidiaries	46,627			49,465
Total—The Hershey Company stockholders’ equity							855,305			785,856
Noncontrolling interest in subsidiary							14,677			41,831
Total stockholders’ equity	942,072			1,047,462			869,982			827,687
Total liabilities and stockholders’ equity	$	5,845,413		$	5,344,371		$	5,380,228		$	5,524,333

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended						Six Months Ended
	October 2, 2016			October 4, 2015			July 2, 2017			July 3, 2016
Operating Activities
Net income	$	603,191		$	299,567
Net income including noncontrolling interests							$	300,975		$	375,788
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	241,901			182,855			132,079			156,779
Stock-based compensation expense	40,699			39,989			24,557			26,208
Excess tax benefits from stock-based compensation	(20,978		)	(22,966		)
Deferred income taxes	(12,703		)	(10,385		)	(44,484		)	(5,615		)
Goodwill impairment	—			280,802
Contributions to pension and other benefits plans	(42,566		)	(45,187		)
Loss on early extinguishment of debt	—			28,326
Impairment of long-lived assets (see Note 7)							208,712			—
Write-down of equity investments	35,862			13,895			10,263			15,061
Gain on settlement of SGM liability (see Note 2)	(26,650		)	—			—			(26,650		)
Changes in assets and liabilities, net of effects from business acquisitions and divestitures:
Other							26,418			32,479
Changes in assets and liabilities, net of business acquisitions:
Accounts receivable—trade, net	(157,142		)	(186,156		)	163,924			118,932
Inventories	(83,221		)	(2,064		)	(190,759		)	(110,987		)
Prepaid expenses and other current assets							(40,162		)	(32,909		)
Accounts payable and accrued liabilities	(159,871		)	(55,890		)	(174,004		)	(140,937		)
Accrued income taxes							(74,638		)	(38,301		)
Contributions to pension and other benefits plans							(19,449		)	(16,544		)
Other assets and liabilities	4,017			72,299			12,302			15,406
Net cash provided by operating activities	422,539			595,085			335,734			368,710
Investing Activities
Capital additions (including software)	(168,225		)	(237,893		)	(84,687		)	(104,109		)
Proceeds from sales of property, plant and equipment	3,032			1,184			865			1,657
Proceeds from sale of business	—			32,408
Equity investments in tax credit qualifying partnerships	(35,395		)	(3,775		)	(22,415		)	(16,763		)
Business acquisitions, net of cash and cash equivalents acquired	(285,374		)	(218,654		)	—			(285,374		)
Sale of short-term investments	—			95,316
Net cash used in investing activities	(485,962		)	(331,414		)	(106,237		)	(404,589		)
Financing Activities
Net increase in short-term debt	250,573			336,851
Long-term borrowings	792,923			599,031
Net (decrease) increase in short-term debt							(13,696		)	630,121
Repayment of long-term debt	(250,000		)	(351,042		)	(150		)	—
Payment of SGM liability (see Note 2)	(35,762		)	—			—			(35,762		)
Cash dividends paid	(371,706		)	(353,070		)	(256,128		)	(243,139		)
Repurchase of common stock							(99,992		)	(452,580		)
Exercise of stock options	95,336			63,623			54,826			39,147
Excess tax benefits from stock-based compensation	20,978			22,966
Purchase of noncontrolling interest	—			(38,270		)
Repurchase of common stock	(452,580		)	(567,480		)
Net cash provided by (used in) financing activities	49,762			(287,391		)
Net cash used in financing activities							(315,140		)	(62,213		)
Effect of exchange rate changes on cash and cash equivalents	465			(7,221		)	2,738			1,748
Decrease in cash and cash equivalents	(13,196		)	(30,941		)	(82,905		)	(96,344		)
Cash and cash equivalents, beginning of period	346,529			374,854			296,967			346,529
Cash and cash equivalents, end of period	$	333,333		$	343,913		$	214,062		$	250,185
Supplemental Disclosure
Interest paid (excluding loss on early extinguishment of debt in 2015)	$	72,925		$	71,124
Interest paid							$	49,565		$	42,005
Income taxes paid	306,580			256,610			265,756			239,501

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)

Preferred
Stock Common
Stock Class B
Common
Stock Additional
Paid-in
Capital Retained
Earnings Treasury
Common
Stock Accumulated Other
Comprehensive
Loss Noncontrolling
Interests in
Subsidiaries Total
Stockholders’
Equity
Balance, December 31, 2015 $ —
$ 299,281
$ 60,620
$ 783,877
$ 5,897,603
$ (5,672,359 ) $ (371,025 ) $ 49,465
$ 1,047,462
Net income 603,191
603,191
Other comprehensive loss (25,797 ) (2,040 ) (27,837 )
Dividends:
Common Stock, $1.784 per share (273,380 ) (273,380 )
Class B Common Stock, $1.622 per share (98,326 ) (98,326 )
Stock-based compensation 39,621
39,621
Exercise of stock options and incentive-based transactions 29,177
75,542
104,719
Repurchase of common stock (452,580 ) (452,580 )
Net loss attributable to noncontrolling interests (798 ) (798 )
Balance, October 2, 2016 $ —
$ 299,281
$ 60,620
$ 852,675
$ 6,129,088
$ (6,049,397 ) $ (396,822 ) $ 46,627
$ 942,072



	Preferred Stock		Common Stock		Class B Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Common Stock			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest in Subsidiary			Total Stockholders’ Equity
Balance, December 31, 2016	$	—	$	299,281	$	60,620	$	869,857	$	6,115,961		$	(6,183,975	)	$	(375,888	)	$	41,831		$	827,687
Net income (loss)									328,545									(27,570		)	300,975
Other comprehensive income															19,924			416			20,340
Dividends (including dividend equivalents):
Common Stock, $1.236 per share									(188,961		)										(188,961		)
Class B Common Stock, $1.124 per share									(68,136		)										(68,136		)
Stock-based compensation							23,243														23,243
Exercise of stock options and incentive-based transactions							11,488					43,338									54,826
Repurchase of common stock												(99,992		)							(99,992		)
Balance, July 2, 2017	$	—	$	299,281	$	60,620	$	904,588	$	6,187,409		$	(6,240,629	)	$	(355,964	)	$	14,677		$	869,982

See Notes to Unaudited Consolidated Financial Statements.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements provided in this report include the accounts of The Hershey Company (the “Company,” “Hershey,” “we” or “us”) and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock and the noncontrolling shareholders do not have substantive participating rights, or we have significant control over an entity through contractual or economic interests in which we are the primary beneficiary.

The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. Our significant interim accounting policies include the recognition of a pro-rata share of certain estimated annual amounts primarily for raw material purchase price variances, advertising expense, incentive compensation expenses and the effective income tax rate. We have includedThe financial statements reflect all adjustments ~~(consisting only of normal recurring accruals) that we believe~~which are, ~~considered~~in our opinion, necessary for a fair ~~presentation.~~presentation of the results of operations, financial position, and cash flows for the indicated periods.

Operating results for the quarter ended ~~October~~July 2, ~~2016~~2017 may not be indicative of the results that may be expected for the year ending December 31, ~~2016~~2017 because of seasonal effects on our business. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016 (our ~~“2015~~“2016 Annual Report on Form 10-K”), which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.

Reclassifications

Certain prior period amounts ~~presented in the Consolidated Statements of Cash Flows~~ have been reclassified to conform to current year presentation. Specifically, this includes amounts reclassified to conform to the current year ~~presentation.~~presentation in the Consolidated Statements of Cash Flows.

Recent Accounting Pronouncements

In ~~March 2016,~~May 2014, the Financial Accounting Standards Board ~~("FASB"~~(“FASB”) issued Accounting Standards Update ~~("ASU"~~(“ASU”) No. ~~2016-09,~~2014-09, ~~Compensation—Stock Compensation (Topic 718): Improvements~~Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to ~~Employee Share-Based Payment Accounting~~.use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. This ~~ASU~~guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional financial statement disclosures that will enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows relating to customer contracts. The new standard was originally effective for us on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one year. Early application is ~~part~~not permitted, but reporting entities may choose to adopt the standard as of the ~~FASB's simplification initiative.~~original effective date. The ~~areas for simplification in this ASU involve several aspects~~standard permits the use of either the full retrospective or modified retrospective transition method.

In 2017, we have substantially completed our assessment of the ~~accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities~~new standard and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. We are currently evaluating the impact that thewe do not expect our adoption of ~~ASU 2016-09 will~~the new standard to have a material impact on our consolidated financial ~~statements and related disclosures.~~statements. We currently plan to adopt the requirements of the new standard in the first quarter of 2018 utilizing the modified retrospective transition method.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU will require lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. This ASU also requires certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The amendments should be applied on a modified retrospective basis. ASU 2016-02 is effective for us beginning January 1, 2019. We are ~~beginning~~in the process of developing an inventory of our lease arrangements in order to ~~evaluate~~determine the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures.

~~In May 2014, the FASB issued ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers, which requires an entity~~ Based on our assessment to ~~recognize the amount~~date, we expect adoption of ~~revenue~~this standard to ~~which~~result in a material increase in lease-related assets and liabilities on our Consolidated Balance Sheets; however, we do not expect it ~~expects~~ to ~~be entitled for the transfer~~have a significant impact on our Consolidated Statements of ~~promised goods~~Income or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard was originally effective for us on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one year. Early application is not permitted, but reporting entities may choose to adopt the standard as of the original effective date. The standard permits the use of either the retrospective orCash Flows.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

~~cumulative effect transition method. We are currently evaluating~~In March 2016, the ~~effect that~~FASB issued ASU No. ~~2014-09~~2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. We adopted the provisions of this ASU in the first quarter of 2017. This update principally affects the recognition of excess tax benefits and deficiencies and the cash flow classification of share-based compensation-related transactions. The requirement to recognize excess tax benefits and deficiencies as income tax expense or benefit in the income statement was applied prospectively, with a benefit of $7,228 recognized during the six months ended July 2, 2017. Additionally, within the Consolidated Statement of Cash Flows, the impact of the adoption resulted in a $14,551 increase in net cash flow from operating activities and a corresponding decrease in net cash flow from financing activities for the six months ended July 2, 2017. These classification requirements were adopted retrospectively to the Consolidated Statement of Cash Flows for the six months ended July 3, 2016, resulting in a $21,612 increase in net cash flow from operating activities and a corresponding $21,612 decrease in net cash flow from financing activities.

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715). This ASU will ~~have~~require an employer to report the service cost component of net benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if presented, or disclosed separately. In addition, only the service cost component may be eligible for capitalization where applicable. The amendments should be applied on a retrospective basis. ASU 2017-07 is effective for us beginning January 1, 2018, with early adoption permitted as of the beginning of a financial year. We currently plan to adopt the requirements of the new standard in the first quarter of 2018 and expect the adoption to impact only classification within our ~~consolidated financial statements and related disclosures, our transition date and transition method.~~Consolidated Statement of Income.

No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.

2. BUSINESS ACQUISITIONS ~~AND DIVESTITURES~~

Acquisitions of businesses are accounted for as purchases and, accordingly, the results of operations of the businesses acquired have been included in the consolidated financial statements since the respective dates of the acquisitions. The purchase price for each of the acquisitions is allocated to the assets acquired and liabilities assumed.

2016 ~~Activity~~Acquisition

Ripple Brand Collective, LLC

On April 26, 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 barkTHINS brand is largely sold in the United States in take-home resealable packages and is available in the club channel, as well as select natural and conventional grocers. ~~The business enables us to expand our mass premium offerings and is expected to generate 2016 annual~~Our consolidated net sales offor the year ended December 31, 2016 included approximately ~~$65 million~~$35,600 attributed to ~~$75 million.~~barkTHINS.

The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:


Goodwill	$	127,455		$	128,110
Trademarks	91,200			91,200
Other intangible assets	60,900			60,900
Other assets, primarily current assets, net of cash acquired totaling $674	13,030			12,375
Current liabilities	(7,211		)	(7,211		)
Net assets acquired	$	285,374		$	285,374

The purchase price allocation presented above is preliminary. We are in the process of refining the valuation of acquired assets and liabilities and expect to finalize the purchase price allocation by the end of 2016.

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill resulting from the acquisition is attributable primarily to the value of leveraging our brand building expertise, consumer insights, supply chain capabilities and retail relationships to accelerate growth and access to barkTHINS products.

Acquired trademarks were assigned estimated useful lives of 27 years, while other intangibles, including customer relationships and covenants not to compete, were assigned estimated useful lives ranging from 2 to 14 years.

The recorded goodwill, trademarks and other intangibles are expected to be deductible for tax purposes.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

Shanghai Golden Monkey (“SGM”)

On February 3, 2016, we completed the purchase of the remaining 20% of the outstanding shares of SGM for cash consideration totaling $35,762, pursuant to a new agreement entered into during the fourth quarter of 2015 with the SGM selling shareholders which revised the originally-agreed purchase price for these shares. For accounting purposes, we treated the acquisition as if we had acquired 100% at the initial acquisition date in 2014 and financed the payment for the remaining 20% of the outstanding shares. Therefore, the cash settlement of the liability for the purchase of these remaining shares is reflected within the financing section of the Unaudited Consolidated Statements of Cash Flows.

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(amounts in thousands, except share data or if otherwise indicated)~~

The final settlement also resulted in an extinguishment gain of $26,650 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. This gain is recorded within non-operating other (income) expense, net within the Unaudited Consolidated Statements of Income.

~~2015 Acquisition~~

~~KRAVE Pure Foods~~3. GOODWILL AND INTANGIBLE ASSETS

~~In March 2015, we completed~~The changes in the acquisition of all of the outstanding shares of KRAVE Pure Foods, Inc. (“Krave”), manufacturer of KRAVE jerky, a leading all-natural snack brand of premium jerky products. The transaction was undertaken to allow Hershey to tap into the rapidly growing meat snacks category and further expand into the broader snacks space. Krave is headquartered in Sonoma, California and generated 2014 annual sales of approximately $35 million.

Total purchase consideration included cash consideration of $220,016, as well as agreement to pay additional cash consideration of up to $20,000 to the Krave shareholders if certain defined targets related to net sales and gross profit margin are met or exceeded during the twelve-month periods ending December 31, 2015 or March 31, 2016. The faircarrying value of goodwill by reportable segment for the contingent cash consideration was appropriately classified as a liability of $16,800 as of the acquisition date. Based on revised targets in a subsequent agreement with the Krave shareholders, the fair value was reduced over the second and third quarters of 2015 to $10,000, with the adjustment to fair value recorded within selling, marketing and administrative expenses. The remaining $10,000 was paid in December 2015.

~~The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values~~six months ended July 2, 2017 are as follows:

Goodwill $ 147,089
Trademarks 112,000
Other intangible assets 17,000
Other assets, primarily current assets, net of cash acquired totaling $1,362 9,465
Current liabilities (2,756 )
Non-current deferred tax liabilities (47,344 )
Net assets acquired $ 235,454



	North America		International and Other		Total
Balance at December 31, 2016	$	792,190	$	20,154	$	812,344
Foreign currency translation	3,975		1,749		5,724
Balance at July 2, 2017	796,165		21,903		818,068

The ~~goodwill~~following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset:



	July 2, 2017					December 31, 2016
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Intangible assets subject to amortization:
Trademarks	$	270,383	$	(30,953	)	$	317,023	$	(30,458	)
Customer-related	127,414		(30,729		)	200,409		(36,482		)
Patents	16,725		(14,822		)	16,426		(13,700		)
Total	414,522		(76,504		)	533,858		(80,640		)

Intangible assets not subject to amortization:
Trademarks	40,253					39,519
Total other intangible assets	$	378,271				$	492,737

As discussed in Note 7, in February 2017, we commenced the Margin for Growth Program which includes an initiative to optimize the manufacturing operations supporting our China business. 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 ~~from the acquisition is attributable primarily~~impairment loss was allocated to the ~~value~~asset group's long-lived assets. Therefore, as a result of leveraging our brand building expertise, consumer insights, supply chain capabilities and retail relationships to accelerate growth and access to KRAVE products. The recorded goodwill is not expected to be deductible for tax purposes. The purchase price allocation for Krave was concluded in the third quarter of 2015.

Acquired trademarks were assigned estimated useful lives of 22 years, while other intangibles, including customer relationships and covenants not to compete, were assigned estimated useful lives ranging from 5 to 16 years.

~~2015 Divestiture~~

~~In December 2014, we entered into an agreement to sell the Mauna Loa Macadamia Nut Corporation (“Mauna Loa”). The transaction closed in~~this testing, during the first quarter of ~~2015, resulting in proceeds, net of selling expenses and an estimated working capital adjustment, of approximately $32,400. As a result of the expected sale, in 2014,~~2017, we recorded an ~~estimated loss on~~impairment charge totaling $105,992 representing the ~~anticipated sale of $22,256 to reflect the disposal entity at fair value, less an estimate~~portion of the ~~selling costs. This amount included~~ impairment ~~charges totaling $18,531~~loss that was allocated to ~~write down goodwill~~the distributor relationship and ~~the indefinite-lived~~ trademark intangible ~~asset, based on~~assets that had been recognized in connection with the valuation of these assets as implied by the agreed-upon sales price. The sale of Mauna Loa resulted in the recording of an additional loss on sale of $2,667 in the first quarter of 2015, based on updates to the selling expenses and tax benefits. The loss on the sale is reflected within business realignment charges in the Unaudited Consolidated Statements of Income.2014 SGM acquisition.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

~~3. GOODWILL AND INTANGIBLE ASSETS~~

~~The changes in the carrying value of goodwill by reportable segment for the nine months ended October 2, 2016 are as follows:~~

North America International and Other Total
Balance at December 31, 2015 $ 662,083
$ 22,169
$ 684,252
Acquired during the period (see Note 2) 127,455
—
127,455
Foreign currency translation 5,709
(1,283 ) 4,426
Balance at October 2, 2016 $ 795,247
$ 20,886
$ 816,133

~~The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset:~~

October 2, 2016 December 31, 2015
Intangible assets not subject to amortization:
Trademarks 43,072
43,775
Intangible assets subject to amortization:
Trademarks, customer relationships, patents and other finite-lived intangibles 538,753
390,900
Less: accumulated amortization (71,534 ) (55,370 )
Total other intangible assets $ 510,291
$ 379,305

Total amortization expense for the three months ended ~~October~~July 2, 2017 and July 3, 2016 was $5,407 and ~~October 4, 2015 was $7,666 and $5,340,~~$5,964, respectively. Total amortization expense for the ~~nine~~six months ended ~~October~~July 2, 2017 and July 3, 2016 was $12,558 and ~~October 4, 2015 was $18,811 and $16,469,~~$11,144, respectively.

4. SHORT AND LONG-TERM DEBT

Short-term Debt

As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. We maintain a $1.0 billion unsecured revolving credit facility, which currently expires in November 2020. This agreement also includes an option to increase borrowings by an additional ~~$400,000~~$400 million with the consent of the lenders. On June 16, 2016, we entered into an additional unsecured revolving credit facility that provided for borrowings up to $500,000. We terminated this facility, which was scheduled to expire on June 15, 2017, effective October 24, 2016.

The credit agreement contains ~~(and the credit agreement terminated effective October 24, 2016)~~ certain financial and other covenants, customary representations, warranties and events of default. As of ~~October~~July 2, ~~2016,~~2017, we were in compliance with all covenants pertaining to the credit ~~agreements,~~agreement, and we had no significant compensating balance agreements that legally restricted these funds. For more information, refer to the Consolidated Financial Statements included in our ~~2015~~2016 Annual Report on Form 10-K.

In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. We had short-term foreign bank loans against these lines of credit for ~~$217,017~~$142,521 at July 2, 2017 and ~~$313,520~~$158,805 at ~~October 2, 2016 and~~ December 31, ~~2015, respectively.~~2016. Commitment fees relating to our revolving credit facility and lines of credit are not material.

At ~~October~~July 2, 2017, we had outstanding commercial paper totaling $479,444, at a weighted average interest rate of 1.1%. At December 31, 2016, we had outstanding commercial paper totaling ~~$395,366,~~$473,666, at a weighted average interest rate of ~~0.45%~~0.6%. ~~At December 31, 2015, we had outstanding commercial paper totaling $49,993, at a weighted average interest rate~~

Long-term Debt

Long-term debt consisted of ~~0.40%.~~the following:



December 31,	July 2, 2017			December 31, 2016
1.60% Notes due 2018	300,000			300,000
4.125% Notes due 2020	350,000			350,000
8.8% Debentures due 2021	84,715			84,715
2.625% Notes due 2023	250,000			250,000
3.20% Notes due 2025	300,000			300,000
2.30% Notes due 2026	500,000			500,000
7.2% Debentures due 2027	193,639			193,639
3.375% Notes due 2046	300,000			300,000
Lease obligations	84,890			83,619
Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts	(13,399		)	(14,275		)
Total long-term debt	2,349,845			2,347,698
Less—current portion	89			243
Long-term portion	$	2,349,756		$	2,347,455

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

~~Long-term Debt~~

~~Long-term debt consisted of the following:~~

October 2, 2016 December 31, 2015
5.45% Notes due 2016 (1) $ —
$ 250,000
1.50% Notes due 2016 250,000
250,000
1.60% Notes due 2018 300,000
300,000
4.125% Notes due 2020 350,000
350,000
8.8% Debentures due 2021 84,715
84,715
2.625% Notes due 2023 250,000
250,000
3.20% Notes due 2025 300,000
300,000
2.30% Notes due 2026 (2) 500,000
—
7.2% Debentures due 2027 193,639
193,639
3.375% Notes due 2046 (2) 300,000
—
Other obligations, net of debt issuance costs and unamortized debt discount 84,136
78,660
Total long-term debt 2,612,490
2,057,014
Less—current portion 250,024
499,923
Long-term portion $ 2,362,466
$ 1,557,091


~~(1)~~	~~In September 2016, we repaid $250,000 of 5.45% Notes due in 2016 upon their maturity.~~


~~(2)~~	In August 2016, we issued $500,000 of 2.30% Notes due in 2026 and $300,000 of 3.375% Notes due in 2046 (the "Notes"). Proceeds from the issuance of the Notes, net of discounts and issuance costs, totaled $792,923. The Notes were issued under a shelf registration statement on Form S-3 filed in June 2015 that registered an indeterminate amount of debt securities.

Interest Expense

Net interest expense consisted of the following:


	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 2, 2016			October 4, 2015			October 2, 2016			October 4, 2015			July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016
Interest expense	$	25,882		$	22,590		$	72,404		$	68,874		$	25,299		$	22,997		$	50,253		$	46,522
Less: Capitalized interest	(1,141		)	(3,071		)	(4,702		)	(9,314		)
Loss on extinguishment of debt	—			28,326			—			28,326
Capitalized interest													(875		)	(1,386		)	(1,859		)	(3,561		)
Interest expense	24,741			47,845			67,702			87,886			24,424			21,611			48,394			42,961
Interest income	(354		)	(878		)	(972		)	(2,840		)	(298		)	(273		)	(527		)	(618		)
Interest expense, net	$	24,387		$	46,967		$	66,730		$	85,046		$	24,126		$	21,338		$	47,867		$	42,343

5. DERIVATIVE INSTRUMENTS ~~AND FAIR VALUE MEASUREMENTS~~

We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts and options to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures.

In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchanged-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(amounts in thousands, except share data or if otherwise indicated)~~

Commodity Price Risk

We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3- to 24-month periods. ~~Through 2015, we designated the majority of our~~Our open commodity derivative ~~instruments~~contracts had a notional value of $423,345 as ~~cash flow hedges under the hedge accounting requirements. Under hedge accounting, we account for the effective portion~~ of ~~mark-to-market gains~~July 2, 2017 and ~~losses on~~$739,374 as of December 31, 2016.

Derivatives used to manage commodity derivative instruments in other comprehensive income, to be recognized in cost of sales in the same period that we record the hedged raw material requirements in cost of sales. The ineffective portion of gains and losses is recorded currently in cost of sales.

Effective July 6, 2015 for cocoa commodity derivatives and January 1, 2016 for other commodity derivatives, we discontinued the designation of any of our existing or new cocoa or other commodity derivativesprice risk are not designated for hedge accounting treatment. ~~Since such dates,~~Therefore, the changes in ~~the~~ fair value of these derivatives ~~have been~~are recorded as incurred within cost of sales. ~~Effective as of such dates,~~As discussed in Note 11, we ~~also revised~~define our ~~definition of~~ segment income to exclude gains and losses on commodity derivatives until the related inventory is ~~sold.~~sold, at which time the related gains and losses are reflected within segment income. This ~~change to our definition of segment income~~ enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.

Foreign Exchange Price Risk

We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, and Brazilian real. We typically utilize foreign currency forward exchange contracts and options to hedge these exposures for 3-periods ranging from 3 to ~~12-month periods.~~12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was ~~$86,896~~$114,870 at ~~October~~July 2, ~~2016~~2017 and ~~$10,752~~$68,263 at December 31, ~~2015.~~2016. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $2,791 at ~~October~~July 2, ~~2016~~2017 and December 31, ~~2015, respectively.~~2016. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

Interest Rate Risk

In order to manage interest rate exposure, we enter into interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps are designated as cash flow hedges, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. We had one interest rate swap agreement in a cash flow hedging relationship with a notional amount of $500,000 at December 31, 2015. This interest rate swap agreement was settled in connection with the issuance of debt in August 2016, resulting in a payment of approximately $87,000, which is reflected as an operating outflow within the Consolidated Statement of Cash Flows.

~~We also~~ manage our targeted mix of fixed and floating rate debt with debt issuances and by entering into fixed-to-floating interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. These swaps are designated as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings as interest expense (income), net. ~~The notional amount, interest payment~~At July 2, 2017 and maturity date of these swaps generally match the principal, interest payment and maturity date of the related debt, and the swaps are valued using observable benchmark rates (Level 2 valuation). The notional amount ofDecember 31, 2016, we had interest rate derivative instruments in fair value ~~hedge~~hedging relationships ~~was $350,000 at October 2, 2016~~with a total notional amount of $350,000.

In order to manage interest rate exposure, in previous years we utilized interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which were settled upon issuance of the related debt, were designated as cash flow hedges and ~~December 31, 2015, respectively.~~the gains and losses that were deferred in other comprehensive income are being recognized as an adjustment to interest expense over the same period that the hedged interest payments affect earnings.

Equity Price Risk

We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. WeTo mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for 3-periods of 3 to ~~12-month periods.~~12 months. The change in fair value of these derivatives is recorded in selling, marketing and

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(amounts in thousands, except share data or if otherwise indicated)~~

administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding ~~was $19,740~~ at ~~October~~July 2, ~~2016~~2017 and ~~$22,230 at~~ December 31, ~~2015.~~

~~Fair Value~~

~~Accounting guidance on fair value measurements requires that financial assets~~2016 was $23,440 and ~~liabilities be classified and disclosed in one of the following categories of the fair value hierarchy:~~

~~Level 1~~ ~~– Based on unadjusted quoted prices for identical assets or liabilities in an active market.~~

~~Level 2~~ ~~– Based on observable market-based inputs or unobservable inputs that are corroborated by market data.~~

~~Level 3~~ ~~– Based on unobservable inputs that reflect the entity's own assumptions about the assumptions that a market participant would use in pricing the asset or liability.~~

~~We did not have any level 3 financial assets or liabilities, nor were there any transfers between levels during the periods presented.~~$22,099, respectively.

The following table presents the classification of derivative assets and liabilities ~~that were measured at fair value in~~within the Consolidated Balance ~~Sheet on a recurring basis~~Sheets as of ~~October~~July 2, ~~2016~~2017 and December 31, ~~2015:~~2016:


	October 2, 2016				December 31, 2015
December 31,									July 2, 2017				December 31, 2016
	Assets (1)		Liabilities (1)		Assets (1)		Liabilities (1)		Assets (1)		Liabilities (1)		Assets (1)		Liabilities (1)
Derivatives designated as cash flow hedging instruments:
Commodities futures and options (2)	$	—	$	—	$	—	$	479
Foreign exchange contracts (3)	944		2,419		367		475
Interest rate swap agreements (4)	—		—		—		40,299
Foreign exchange contracts									$	398	$	1,853	$	2,229	$	809
	944		2,419		367		41,253
Derivatives designated as fair value hedging instruments:
Interest rate swap agreements (4)	15,349		—		4,313		—
Interest rate swap agreements									1,941		—		1,768		—

Derivatives not designated as hedging instruments:
Commodities futures and options (2)	425		730		—		1,574		14,050		179		2,348		10,000
Deferred compensation derivatives (5)	665		—		1,198		—
Foreign exchange contracts (3)	—		454		69		—
Deferred compensation derivatives									645		—		717		—
Foreign exchange contracts									3		—		—		16
	1,090		1,184		1,267		1,574		14,698		179		3,065		10,016
Total	$	17,383	$	3,603	$	5,947	$	42,827	$	17,037	$	2,032	$	7,062	$	10,825


(1)	Derivatives assets are classified on our balance sheet within prepaid expenses and other as well as other assets. Derivative liabilities are classified on our balance sheet within accrued liabilities and other long-term liabilities.

(2)

~~The fair value of commodities futures and options contracts is based on quoted market prices and is, therefore, categorized as Level 1 within the fair value hierarchy.~~ As of ~~October~~July 2, ~~2016,~~2017, assets ~~included~~and liabilities include the net of assets of ~~$35,999~~$52,895 and liabilities of ~~$35,574~~$41,337 associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in liabilities at December 31, ~~2015~~2016 were assets of ~~$54,090~~$140,885 and liabilities of ~~$54,860.~~$150,872. At ~~October~~July 2, ~~2016~~2017 and December 31, ~~2015,~~2016, the remaining amount reflected in assets and liabilities ~~related~~relates to the fair value of other non-exchange traded derivative ~~instruments.~~


~~(3)~~	The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates forinstruments, respectively.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

~~contracts with similar terms, adjusted where necessary for maturity differences. These contracts are classified as Level 2 within the fair value hierarchy.~~

~~(4)~~

The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. Such contracts are categorized as Level 2 within the fair value hierarchy.


~~(5)~~	The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index and is, therefore, categorized as Level 2 within the fair value hierarchy.

~~Other Financial Instruments~~

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and short-term debt approximated fair value as of October 2, 2016 and December 31, 2015 because of the relatively short maturity of these instruments.

The estimated fair value of our long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy. The fair values and carrying values of long-term debt, including the current portion, was as follows:

Fair Value Carrying Value
October 2, 2016 December 31, 2015 October 2, 2016 December 31, 2015
Current portion of long-term debt $ 250,130
$ 509,580
$ 250,024
$ 499,923
Long-term debt 2,510,841
1,668,379
2,362,466
1,557,091
Total $ 2,760,971
$ 2,177,959
$ 2,612,490
$ 2,057,014

Income Statement Impact of Derivative Instruments

The effect of derivative instruments on the Consolidated Statements of Income for the three months ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015~~July 3, 2016 was as follows:


	Non-designated Hedges						Cash Flow Hedges																	Non-designated Hedges						Cash Flow Hedges
																								Non-designated Hedges						Cash Flow Hedges
	Non-designated Hedges	Gains (losses) recognized in income (a)					Cash Flow Hedges		Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion)						Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)						Gains recognized in income (ineffective portion) (c)					Gains (losses) recognized in income (a)						Losses recognized in other comprehensive income (“OCI”) (effective portion)						Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)

	2016			2015			2016			2015			2016			2015			2016			2015		2017			2016			2017			2016			2017			2016
Commodities futures and options	$	(37,246	)	$	—		$	—		$	(34,571	)	$	7,780		$	11,000		$	—		$	1,288	$	(32,519	)	$	39,011		$	—		$	—		$	(399	)	$	6,139
Foreign exchange contracts	(27		)	750			1,628			662			(2,659		)	185			—			—		44			(253		)	(707		)	(3,916		)	390			(761		)
Interest rate swap agreements	—			—			(274		)	(36,187		)	(2,833		)	(1,166		)	—			—		—			—			—			(17,156		)	(2,370		)	(1,511		)
Deferred compensation derivatives	665			(1,403		)	—			—			—			—			—			—		(632		)	418			—			—			—			—
Total	$	(36,608	)	$	(653	)	$	1,354		$	(70,096	)	$	2,288		$	10,019		$	—		$	1,288	$	(33,107	)	$	39,176		$	(707	)	$	(21,072	)	$	(2,379	)	$	3,867


(a)	~~Losses recognized in income for non-designated commodities futures and options contracts were included in cost of sales.~~ Gains (losses) ~~recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.~~


~~(b)~~	Gains (losses) reclassified from accumulated OCI ("AOCI") into income were included in cost of sales for commodities futures and options contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains (losses) for foreign currency forward

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(amounts in thousands, except share data or if otherwise indicated)~~

~~exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.~~


~~(c)~~	~~Gains representing hedge ineffectiveness were included in cost of sales for commodities futures and options contracts.~~

~~The effect of derivative instruments on the Consolidated Statements of Income for the nine months ended October 2, 2016 and October 4, 2015 was as follows:~~

Non-designated Hedges Cash Flow Hedges

Gains (losses) recognized in income (a) Gains (losses) recognized in OCI (effective portion) Gains (losses) reclassified from AOCI into income (effective portion) (b) Gains recognized in income (ineffective portion) (c)

2016 2015 2016 2015 2016 2015 2016 2015
Commodities futures and options $ (37,176 ) $ (2,777 ) $ —
$ 62,619
$ 23,648
$ 31,300
$ —
$ 2,142
Foreign exchange contracts (484 ) 474
(6,404 ) 158
(3,681 ) 273
—
—
Interest rate swap agreements —
—
(47,223 ) (28,184 ) (5,903 ) (3,479 ) —
—
Deferred compensation derivatives 1,486
(1,024 ) —
—
—
—
—
—
Total $ (36,174 ) $ (3,327 ) $ (53,627 ) $ 34,593
$ 14,064
$ 28,094
$ —
$ 2,142


~~(a)~~	~~Losses~~ recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.

(b)

Gains (losses) reclassified from AOCI into income were included in cost of sales for commodities futures and options contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains (losses) for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.

The effect of derivative instruments on the Consolidated Statements of Income for the six months ended July 2, 2017 and July 3, 2016 was as follows:



	Non-designated Hedges						Cash Flow Hedges
	Non-designated Hedges						Cash Flow Hedges
	Gains (losses) recognized in income (a)						Losses recognized in other comprehensive income (“OCI”) (effective portion)						Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)

	2017			2016			2017			2016			2017			2016
Commodities futures and options	$	(38,055	)	$	70		$	—		$	—		$	(837	)	$	15,869
Foreign exchange contracts	(51		)	(457		)	(2,206		)	(8,032		)	218			(1,022		)
Interest rate swap agreements	—			—			—			(46,949		)	(4,793		)	(3,071		)
Deferred compensation derivatives	645			821			—			—			—			—
Total	$	(37,461	)	$	434		$	(2,206	)	$	(54,981	)	$	(5,412	)	$	11,776


~~(c)~~(a)	Gains ~~representing hedge ineffectiveness~~(losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.

(b)

Gains (losses) reclassified from AOCI into income were included in cost of sales for commodities futures and options ~~contracts.~~contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains (losses) for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

The amount of pretax net losses on derivative instruments, including interest rate swap agreements, foreign currency forward exchange contracts and options, commodities futures and options contracts, and other commodity derivative instruments expected to be reclassified from AOCI into earnings in the next 12 months was approximately ~~$5,270 after tax~~$11,017 as of ~~October~~July 2, ~~2016.~~2017. This amount is primarily associated with deferred losses onrelating to interest rate swap ~~agreements and foreign currency forward exchange contracts, which more than offset gains on commodities futures contracts.~~agreements.

Fair Value Hedges

For the three months ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015,~~July 3, 2016, we recognized a net pretax benefit to interest expense of ~~$1,022~~$732 and ~~$1,548, respectively,~~$1,137 relating to our fixed-to-floating interest swap ~~agreements.~~arrangements. For the ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015,~~July 3, 2016, we recognized a net pretax benefit to interest expense of ~~$3,477~~$1,630 and ~~$5,597, respectively,~~$2,454 relating to our fixed-to-floating interest swap arrangements.

6. FAIR VALUE MEASUREMENTS

Accounting guidance on fair value measurements requires that financial assets and liabilities be classified and disclosed in one of the following categories of the fair value hierarchy:

Level 1 – Based on unadjusted quoted prices for identical assets or liabilities in an active market.

Level 2 – Based on observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3 – Based on unobservable inputs that reflect the entity's own assumptions about the assumptions that a market participant would use in pricing the asset or liability.

We did not have any level 3 financial assets or liabilities, nor were there any transfers between levels during the periods presented.

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheets on a recurring basis as of July 2, 2017 and December 31, 2016:



	Assets (Liabilities)
	Level 1		Level 2		Level 3		Total
July 2, 2017:
Derivative Instruments:
Assets:
Foreign exchange contracts (1)	$	—	$	401	$	—	$	401
Interest rate swap agreements (2)	—		1,941		—		1,941
Deferred compensation derivatives (3)	—		645		—		645
Commodities futures and options (4)	14,050		—		—		14,050
Liabilities:
Foreign exchange contracts (1)	—		1,853		—		1,853
Commodities futures and options (4)	179		—		—		179
December 31, 2016:
Assets:
Foreign exchange contracts (1)	$	—	$	2,229	$	—	$	2,229
Interest rate swap agreements (2)	—		1,768		—		1,768
Deferred compensation derivatives (3)	—		717		—		717
Commodities futures and options (4)	2,348		—		—		2,348
Liabilities:
Foreign exchange contracts (1)	—		825		—		825
Commodities futures and options (4)	10,000		—		—		10,000

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

(1)

The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences.


(2)	The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments.


(3)	The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index.


(4)	The fair value of commodities futures and options contracts is based on quoted market prices.

Other Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and short-term debt approximated fair values as of July 2, 2017 and July 3, 2016 because of the relatively short maturity of these instruments.



	Fair Value				Carrying Value
	July 2, 2017		December 31, 2016		July 2, 2017		December 31, 2016
Current portion of long-term debt	$	89	$	243	$	89	$	243
Long-term debt	2,410,521		2,379,054		2,349,756		2,347,455
Total	2,410,610		$	2,379,297	2,349,845		$	2,347,698

Other Fair Value Measurements

In addition to assets and liabilities that are recorded at fair value on a recurring basis, GAAP requires that, under certain circumstances, we also record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. During the first quarter of 2017, as discussed in Note 7, we recorded impairment charges totaling $105,992 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 $102,720. These charges were determined by comparing the fair value of the assets to their carrying value. The fair value of the assets were derived using a combination of an estimated market liquidation approach and discounted cash flow analyses based on Level 3 inputs.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

~~6. NONCONTROLLING INTEREST IN SUBSIDIARY~~

We currently own a 50% controlling interest in Lotte Shanghai Foods Co., Ltd. (“LSFC”), a joint venture established in 2007 in China for the purpose of manufacturing and selling product to the venture partners.7. BUSINESS REALIGNMENT ACTIVITIES

~~A roll-forward showing~~We are currently pursuing several business realignment activities designed to increase our efficiency and focus our business behind our key growth strategies. Costs recorded during the three and six months ended July 2, 2017 and July 3, 2016 ~~activity relating~~related to ~~the noncontrolling interest~~these activities are as follows:

Noncontrolling Interests
Balance, December 31, 2015 $ 49,465
Net loss attributable to noncontrolling interests (1) (798 )
Other comprehensive loss - foreign currency translation adjustments (2,040 )
Balance, October 2, 2016 $ 46,627



	Three Months Ended					Six Months Ended
	July 2, 2017		July 3, 2016			July 2, 2017			July 3, 2016
Margin for Growth Program:
Severance	$	888	$	—		$	30,455		$	—
Accelerated depreciation	6,873		—			6,873			—
Other program costs	6,381		—			11,203			—
Operational Optimization Program:
Accelerated depreciation and amortization	—		33,965			—			33,478
Severance	—		9,928			13,828			17,355
Other program costs	312		3,376			(917		)	9,408
2015 Productivity Initiative:
Pension settlement charge	—		12,646			—			12,646
Severance	—		(469		)	—			(1,763		)
Other program costs	—		2,649			—			5,401
Total business realignment costs	$	14,454	$	62,095		$	61,442		$	76,525

~~(1) Amount is~~The costs and related benefits to be derived from the Margin for Growth Program relate approximately 80% to the North America segment and 20% to the International and Other segment for the three months ended July 2, 2017. The costs and related benefits to be derived from the Margin for Growth Program relate approximately 40% to the North America segment and 60% to the International and Other segment for the six months ended July 2, 2017. The costs and related benefits to be derived from the Operational Optimization Program primarily relate to the North America segment in 2017 and to the International and Other segment in 2016. The costs and related benefits to be derived from the 2015 Productivity Initiative relate primarily to the North American segment. However, segment operating results do not ~~considered significant~~include these business realignment expenses because we evaluate segment performance excluding such costs.

Margin for Growth Program

In February 2017, the Company's Board of Directors unanimously approved several initiatives under a single program designed to drive continued net sales, operating income and ~~is presented within selling, marketing~~earnings per-share diluted growth over the next several years. This program will focus on improving global efficiency and effectiveness, optimizing the Company’s supply chain, streamlining the Company’s operating model and reducing administrative ~~expenses.~~expenses to generate long-term savings.

~~7. COMPREHENSIVE INCOME~~

~~A summary~~The Company estimates that the “Margin for Growth” program will result in total pre-tax charges of $375,000 to $425,000 over the next three years. This estimate includes plant and office closure expenses of $100,000 to $115,000, net intangible asset impairment charges of $100,000 to $110,000, employee separation costs of $80,000 to $100,000, contract termination costs of approximately $25,000, and other business realignment costs of $70,000 to $75,000. The cash portion of the ~~components~~total charge is estimated to be $175,000 to $200,000. At the conclusion of ~~comprehensive income is~~the program in 2019, ongoing annual savings are expected to be approximately $150,000 to $175,000. The Company expects that implementation of the program will reduce its global workforce by approximately 15%, with a majority of the reductions coming from hourly headcount positions outside of the United States.

The program includes an initiative to optimize the manufacturing operations supporting our China business. 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 ~~follows:~~

Three Months Ended Three Months Ended
October 2, 2016 October 4, 2015
Pre-Tax
Amount Tax
(Expense)
Benefit After-Tax
Amount Pre-Tax
Amount Tax
(Expense)
Benefit After-Tax
Amount
Net income $ 227,403
$ 154,771
Other comprehensive income (loss):
Foreign currency translation adjustments $ (8,533 ) $ —
(8,533 ) $ (26,631 ) $ —
(26,631 )
Pension and post-retirement benefit plans (a) 11,896
(4,501 ) 7,395
15,962
(5,993 ) 9,969
Cash flow hedges:
Gains (losses) on cash flow hedging derivatives 1,354
(210 ) 1,144
(70,096 ) 26,182
(43,914 )
Reclassification adjustments (b) (2,288 ) 1,390
(898 ) (10,019 ) 3,805
(6,214 )
Total other comprehensive loss $ 2,429
$ (3,321 ) (892 ) $ (90,784 ) $ 23,994
(66,790 )
Total comprehensive income $ 226,511
$ 87,981
Comprehensive loss (gain) attributable to noncontrolling interests 751
(820 )
Comprehensive income attributable to The Hershey Company $ 227,262
$ 87,161

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

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

Nine Months Ended Nine Months Ended
October 2, 2016 October 4, 2015
Pre-Tax
Amount Tax
(Expense)
Benefit After-Tax
Amount Pre-Tax
Amount Tax
(Expense)
Benefit After-Tax
Amount
Net income $ 603,191
$ 299,567
Other comprehensive income (loss):
Foreign currency translation adjustments $ 5,053
$ —
5,053
$ (51,681 ) $ —
(51,681 )
Pension and post-retirement benefit plans (a) 16,395
(6,511 ) 9,884
32,776
(11,880 ) 20,896
Cash flow hedges:
Gains (losses) on cash flow hedging derivatives (53,627 ) 18,838
(34,789 ) 34,593
(13,570 ) 21,023
Reclassification adjustments (b) (14,064 ) 6,079
(7,985 ) (28,094 ) 10,383
(17,711 )
Total other comprehensive loss $ (46,243 ) $ 18,406
(27,837 ) $ (12,406 ) $ (15,067 ) (27,473 )
Total comprehensive income $ 575,354
$ 272,094
Comprehensive loss attributable to noncontrolling interests 2,040
2,111
Comprehensive income attributable to The Hershey Company $ 577,394
$ 274,205


~~(a)~~	~~These amounts are included in the computation of net periodic benefit costs. For more information, see Note 11.~~


~~(b)~~	~~For information on the presentation of reclassification adjustments for cash flow hedges on the Consolidated Statements of Income, see Note 5.~~

~~The components~~first quarter of ~~accumulated other comprehensive~~2017, we recorded impairment charges totaling $208,712, with $105,992 representing the portion of the impairment loss ~~as shown on~~that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and $102,720 representing the portion of the impairment loss that was allocated to property, plant and equipment. These impairment charges are recorded within the long-lived asset impairment charges caption within the Consolidated ~~Balance Sheets, are as follows:~~Statements of Operations.

October 2, 2016 December 31, 2015
Foreign currency translation adjustments $ (94,143 ) $ (101,236 )
Pension and post-retirement benefit plans, net of tax (244,764 ) (254,648 )
Cash flow hedges, net of tax (57,915 ) (15,141 )
Total accumulated other comprehensive loss $ (396,822 ) $ (371,025 )

~~8. OTHER (INCOME) EXPENSE, NET~~

~~Other (income) expense, net reports certain gains~~During the three and ~~losses associated with activities not directly related~~six months ended July 2, 2017, we recognized estimated employee severance totaling $888 and $30,455, respectively. These charges relate largely to our ~~core operations. A summary of~~initiative to improve the ~~components of other (income) expense, net include the following:~~

Three Months Ended Nine Months Ended
October 2, 2016 October 4, 2015 October 2, 2016 October 4, 2015
Write-down of equity investments in partnerships qualifying for tax credits $ 20,801
$ 9,249
$ 35,862
$ 13,893
Settlement of SGM (see Note 2) —
—
(26,650 ) —
Gain on sale of non-core trademark —
—
—
(9,950 )
Other (income) expense, net 999
160
(509 ) 385
Total $ 21,800

$ 9,409
$ 8,703
$ 4,328

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(amounts in thousands, except share data or if otherwise indicated)~~

~~9. INCOME TAXES~~

~~The majority~~cost structure of our ~~taxable income is generated in the U.S. and taxed at the U.S. statutory rate of 35%. The effective tax rates~~China business, as well as our initiative to further streamline our corporate operating model. We also recognized non-cash, asset-related incremental depreciation expense totaling $6,873 for the ~~nine~~three and six months ended ~~October~~July 2, ~~2016~~2017 as part of optimizing the North America supply chain. During the three and ~~October 4, 2015 were 33.0%~~six months ended July 2, 2017, we also recognized other program costs totaling $6,381 and ~~50.5%,~~$11,203, respectively. ~~Adjusting~~These charges relate primarily to third-party charges for ~~the impact~~our initiative of the 2015 non-deductible goodwill impairment charge, the 2015 year to date effective income tax rate was 34.5%. The 2016 effective tax rate benefited from the impact of non-taxable income related to the settlement of the SGM liabilityimproving global efficiency and ~~investment and research and development tax credits, which were partially offset by the current period SGM valuation allowance.~~

~~10. BUSINESS REALIGNMENT ACTIVITIES~~effectiveness.

2016 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 ~~will result in~~includes select facility consolidations. The program encompasses 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.

During the three months ended July 2, 2017, we recognized costs of $312. During the six months ended July 2, 2017, we recognized costs of $12,911 primarily related to employee severance associated with the workforce planning efforts within North America. We currently expect to incur ~~pre-tax~~additional cash costs of approximately ~~$120 million~~$9,000 over ~~three~~the next two years ~~including approximately $65 million~~to complete this program.

During the first quarter of 2017, we reclassified property, plant and equipment and land use rights with a total book value of $20,303 to prepaid and other current assets within the Consolidated Balance Sheets. These represent select China facilities that were taken out of operation in ~~non-cash asset-related incremental depreciation costs,~~connection with ~~the remainder relating to severance~~this program and employee benefit costs, costs to consolidate and relocate production, and third-party costs incurred to execute these activities. The program is expected to drive annual savings of approximately $45 million by 2018.are currently being marketed for sale.

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. For the three and nine months ended October 2, 2016, we incurred charges totaling $2,991 and $19,278, respectively, representing pension settlement charges, adjustments to estimated severance benefits and incremental third-party costs related to the design and implementation of the new organizational structure. As of October 2, 2016, we have completed theThe 2015 Productivity ~~Initiative.~~Initiative was completed during the third quarter 2016. We incurred total costs of $125,031 relating to this program, including pension settlement charges of ~~$13,669~~$12,646 recorded inthrough the six months ended July 3, 2016 ~~and $10,178 recorded in 2015~~ relating to lump sum withdrawals by employees retiring or leaving the Company as a result of this program.

~~Other international programs~~

Costs ~~incurred~~associated with business realignment activities are classified in our Consolidated Statements of Income for the three and ~~nine~~six months ended ~~October 4, 2015 related principally to accelerated depreciation~~July 2, 2017 and amortization and employee severance costs for a couple of programs commenced in 2014 to rationalize certain non-U.S. manufacturing and distribution activities and to establish our own sales and distribution teams in Brazil in connection with our exit from the Bauducco joint venture.July 3, 2016 as follows:



	Three Months Ended				Six Months Ended
	July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Cost of sales	$	5,772	$	33,965	$	6,262	$	33,478
Selling, marketing and administrative expense	6,701		6,025		9,182		14,809
Business realignment costs	1,981		22,105		45,998		28,238
Costs associated with business realignment activities	$	14,454	$	62,095	$	61,442	$	76,525

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

~~Expenses recorded for business realignment activities during the three and nine months ended October 2, 2016 and October 4, 2015 were classified as follows:~~

Three Months Ended Nine Months Ended
October 2, 2016 October 4, 2015 October 2, 2016 October 4, 2015
Cost of sales (1):
Operational optimization program $ 24,470
$ —
$ 57,948
$ —
Other international restructuring programs —
2,529
—
5,205
Total cost of sales 24,470
2,529
57,948
5,205
Selling, marketing and administrative (2):
Operational optimization program 414
—
9,822
—
2015 productivity initiative 748
6,515
6,149
10,017
Other international restructuring programs —
666
—
3,234
Total selling, marketing and administrative 1,162
7,181
15,971
13,251
Business realignment charges (3):
Operational optimization program 87
—
17,442
—
2015 productivity initiative 2,243
57,753
13,126
80,305
Divestiture of Mauna Loa (see Note 2) —
—
—
2,667
Total business realignment charges 2,330
57,753
30,568
82,972
Total charges associated with business realignment activities $ 27,962
$ 67,463
$ 104,487
$ 101,428


~~(1)~~	~~Charges primarily relate to non-cash asset-related accelerated depreciation and amortization.~~


~~(2)~~	~~Charges primarily relate to third-party costs incurred to execute the restructuring initiatives.~~


~~(3)~~	~~Charges largely relate to employee severance and benefits, including pension settlement costs for the 2015 Productivity Initiative.~~

The costs and related benefits of the Operational Optimization Program relate approximately 15% to the North America segment and 85% to the International and Other segment. The costs and related benefits to be derived from the 2015 Productivity Initiative relate primarily to the North American segment, while the costs and related benefits of the other international programs relate primary to the International and Other segment. However, segment operating results do not include these business realignment and related charges because we evaluate segment performance excluding such charges.

The following table presents the liability activity for employee-related costs qualifying as exit and disposal costs:

Total
Liability balance at December 31, 2015 $ 16,310
2016 business realignment charges 16,899
Cash payments (28,150 )
Other, net (206 )
Liability balance at October 2, 2016 $ 4,853



	Total
Liability balance at December 31, 2016	$	3,725
2017 business realignment charges (1)	53,591
Cash payments	(13,394		)
Other, net	(171		)
Liability balance at July 2, 2017 (reported within accrued and other long-term liabilities)	$	43,751


(1)	The costs reflected in the liability roll-forward above do not include items charged directly to expense, such as accelerated depreciation and amortization and certain of the third-party charges associated with various programs, as those items are not reflected in the business realignment liability in our Consolidated Balance Sheets.

8. INCOME TAXES

The ~~charges reflected~~majority of our taxable income is generated in the U.S. and taxed at the U.S. statutory rate of 35%. The effective tax rates for the six months ended July 2, 2017 and July 3, 2016 were 33.0% and 34.4%, respectively. Relative to the statutory rate, the 2017 effective tax rate was impacted by favorable foreign rate differential relating to our cocoa procurement operations, investment tax credits and the benefit of ASU 2016-09, which were partially offset by non-benefited costs resulting from the Margin for Growth Program. The 2016 effective rate benefited from investment tax credits and from the impact of non-taxable income related to the settlement of the SGM liability.

Hershey and its subsidiaries file tax returns in the U.S., including various state and local returns, and in foreign jurisdictions. We believe adequate provision has been made for all income tax uncertainties. We are routinely audited by taxing authorities in our filing jurisdictions, and a number of these audits are currently underway. We reasonably expect reductions in the liability ~~roll-forward above do not include items charged directly to expense, such as accelerated depreciation and amortization and~~for unrecognized tax benefits of approximately $3,910 within the ~~loss on the Mauna Loa divestiture and certain~~next 12 months because of the ~~third-party charges associated with various programs, as those items are not reflected in the business realignment liability in our Consolidated Balance Sheets.~~expiration of statutes of limitations and settlements of tax audits.

9. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

The components of net periodic benefit cost for the second quarter were as follows:



	Pension Benefits						Other Benefits
	Three Months Ended						Three Months Ended
	July 2, 2017			July 3, 2016			July 2, 2017		July 3, 2016
Service cost	$	5,051		$	5,699		$	66	$	75
Interest cost	10,200			10,999			2,204		2,429
Expected return on plan assets	(14,344		)	(14,832		)	—		—
Amortization of prior service (credit) cost	(1,455		)	(261		)	186		144
Amortization of net loss	8,360			8,801			—		6
Settlement loss	—			16,938			—		—
Total net periodic benefit cost	$	7,812		$	27,344		$	2,456	$	2,654

We made contributions of $293 and $7,580 to the pension plans and other benefits plans, respectively, during the second quarter of 2017. In the second quarter of 2016, we made contributions of $661 and $7,044 to our pension plans and other benefits plans, respectively. The contributions in 2017 and 2016 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

~~11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS~~

~~The components of net periodic benefit cost for the third quarter were as follows:~~

Pension Benefits Other Benefits
Three Months Ended Three Months Ended
October 2, 2016 October 4, 2015 October 2, 2016 October 4, 2015
Service cost $ 5,794
$ 7,068
$ 75
$ 135
Interest cost 10,130
11,025
2,435
2,516
Expected return on plan assets (14,700 ) (17,146 ) —
—
Amortization of prior service (credit) cost (262 ) (294 ) 144
151
Amortization of net loss (gains) 8,803
7,595
(4 ) (11 )
Net periodic benefit cost 9,765
8,248
2,650
2,791
Settlement cost 3,147
2,583
—
—
Total net periodic benefit cost $ 12,912
$ 10,831
$ 2,650
$ 2,791

We made contributions of $18,549 and $7,473 to the pension plans and other benefits plans, respectively, during the third quarter of 2016. In the third quarter of 2015, we made contributions of $29,349 and $5,174 to our pension plans and other benefits plans, respectively. The contributions in 2016 and 2015 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.

The components of net periodic benefit cost for the year-to-date periods were as follows:


	Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
	Nine Months Ended						Nine Months Ended						Six Months Ended						Six Months Ended
	October 2, 2016			October 4, 2015			October 2, 2016			October 4, 2015			July 2, 2017			July 3, 2016			July 2, 2017		July 3, 2016
Service cost	$	17,377		$	21,301		$	224		$	406		$	10,225		$	11,583		$	131	$	149
Interest cost	31,914			33,187			7,300			7,617			20,499			21,834			4,412		4,865
Expected return on plan assets	(44,073		)	(51,685		)	—			—			(28,698		)	(29,373		)	—		—
Amortization of prior service (credit) cost	(785		)	(881		)	432			457			(2,911		)	(523		)	373		288
Amortization of net loss (gains)	26,411			22,899			(10		)	(40		)
Net periodic benefit cost	30,844			24,821			7,946			8,440
Settlement cost	20,085			2,583			—			—
Amortization of net loss (gain)													16,782			17,608			—		(6		)
Settlement loss													—			16,938			—		—
Total net periodic benefit cost	$	50,929		$	27,404		$	7,946		$	8,440		$	15,897		$	38,067		$	4,916	$	5,296

We made contributions of ~~$20,385~~$4,985 and ~~$22,181~~$14,464 to the pension plans and other benefits plans, respectively, during the first ~~nine~~six months of ~~2016.~~2017. In the first ~~nine~~six months of ~~2015,~~2016, we made contributions of ~~$30,685~~$1,836 and ~~$14,502~~$14,708 to our pension plans and other benefits plans, respectively. The contributions in ~~2016~~2017 and ~~2015~~2016 also included benefit payments from our non-qualified pension plans and post-retirement benefit plans.

~~During the second quarter~~For 2017, there are no significant minimum funding requirements for our domestic pension plans and planned voluntary funding of ~~2016, the cumulative lump sum settlement distributions~~our non-domestic pension plans in the salaried defined benefit pension plan exceeded the anticipated annual service and interest costs, triggering the recognition of non-cash pension settlement charges due to the acceleration of a portion of the accumulated unrecognized actuarial loss. We recorded additional pension settlement charges of $3,147 in the third quarter of 2016, bringing the total to $20,085 for the first nine months of 2016. This includes lump sum withdrawals by employees retiring or leaving the Company as a result of the 2015 Productivity Initiative (see Note 10). As a result of the lump sum settlements, certain U.S. pension plan assets and liabilities were remeasured at July 3, 2016 using a discount rate of 3.25%, compared to 4.0% as of December 31, 2015 and an expected rate of return on plan assets of 6.1%.2017 is not material.

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(amounts in thousands, except share data or if otherwise indicated)~~

~~12.~~10. STOCK COMPENSATION PLANS

We have various stock-based compensation programs under which awards, including stock options, performance stock units (“PSUs”) and performance stock, stock appreciation rights, restricted stock units (“RSUs”) and restricted stock may be granted to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent. These programs and the accounting treatment related thereto are described in Note 10 to the Consolidated Financial Statements included in our ~~2015~~2016 Annual Report on Form 10-K.

For the periods presented, compensation expense for all types of stock-based compensation programs and the related income tax benefit recognized were as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	October 2, 2016		October 4, 2015		October 2, 2016		October 4, 2015		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
Pre-tax compensation expense	$	14,491	$	13,374	$	40,699	$	39,989	$	12,435	$	14,530	$	24,557	$	26,208
Related income tax benefit	4,406		4,334		13,186		13,676		3,230		4,693		7,048		8,780

Compensation costs for stock compensation plans are primarily included in selling, marketing and administrative expense. As of ~~October~~July 2, ~~2016,~~2017, total stock-based compensation cost related to non-vested awards not yet recognized was ~~$74,083~~$84,616 and the weighted-average period over which this amount is expected to be recognized was approximately ~~2.2~~2.3 years.

~~Stock Options~~

~~A summary of activity relating to grants of stock options for the period ended October 2, 2016 is as follows:~~

Stock Options Shares Weighted-Average
Exercise Price (per share) Weighted-Average Remaining
Contractual Term Aggregate Intrinsic Value
Outstanding at beginning of the period 6,842,563
$75.48 5.8 years
Granted 1,354,390
$90.72
Exercised (1,649,402 ) $58.19
Forfeited (189,933 ) $100.65
Outstanding as of October 2, 2016 6,357,618
$82.46 6.5 years $ 113,418
Options exercisable as of October 2, 2016 3,597,028
$71.87 4.9 years $ 100,042

The weighted-average fair value of options granted was $11.46 and $19.18 per share for the periods ended October 2, 2016 and October 4, 2015, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions:

Nine Months Ended
October 2, 2016 October 4, 2015
Dividend yields 2.4 % 2.0 %
Expected volatility 16.8 % 20.2 %
Risk-free interest rates 1.5 % 1.9 %
Expected lives in years 6.8
6.6

~~The total intrinsic value of options exercised was $70,009 and $60,425 for the periods ended October 2, 2016 and October 4, 2015, respectively.~~

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

Stock Options

A summary of activity relating to grants of stock options for the period ended July 2, 2017 is as follows:



Stock Options	Shares		Weighted-Average Exercise Price (per share)		Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding as of December 31, 2016	6,192,008		$	82.67	6.2 years
Granted	1,086,175		$	108.05
Exercised	(908,712	)	$	70.13
Forfeited	(186,032	)	$	103.43
Outstanding as of July 2, 2017	6,183,439		$	88.35	6.2 years	$	150,493
Options exercisable as of July 2, 2017	3,870,198		$	80.60	4.7 years	$	124,202

The weighted-average fair value of options granted was $15.77 and $11.42 per share for the periods ended July 2, 2017 and July 3, 2016, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions:



	Six Months Ended
	July 2, 2017		July 3, 2016
Dividend yields	2.4	%	2.4	%
Expected volatility	17.2	%	16.8	%
Risk-free interest rates	2.2	%	1.5	%
Expected term in years	6.8		6.8

The total intrinsic value of options exercised was $36,507 and $49,091 for the periods ended July 2, 2017 and July 3, 2016, respectively.

Performance Stock Units and Restricted Stock Units

A summary of activity relating to grants of PSUs and RSUs for the period ended ~~October~~July 2, ~~2016~~2017 is as follows:


Performance Stock Units and Restricted Stock Units	Number of units		Weighted-average grant date fair value for equity awards (per unit)	Number of units		Weighted-average grant date fair value for equity awards (per unit)
Outstanding at beginning of year	495,207		$106.40
Outstanding as of December 31, 2016				828,228		$102.66
Granted	531,019		$93.47	418,369		$111.06
Performance assumption change	5,276		$97.32	19,671		$99.42
Vested	(214,577	)	$94.95	(205,327	)	$113.05
Forfeited	(32,512	)	$100.45	(109,328	)	$108.44
Outstanding as of October 2, 2016	784,413		$102.53
Outstanding as of July 2, 2017				951,613		$102.89

The table above ~~excludes PSU awards for~~includes 6,410 units as of ~~October 2, 2016 and 20,586 units as of December 31, 2015~~PSUs awarded to participants in a prior period for which the measurement (grant) date ~~has not yet~~ occurred for accounting ~~purposes.~~purposes in 2017.

The following table sets forth information about the fair value of the PSUs and RSUs granted for potential future distribution to employees and non-employee directors. In addition, the table provides assumptions used to determine the fair value of the market-based total shareholder return component using the Monte Carlo simulation model on the date of grant.

Nine Months Ended
October 2, 2016 October 4, 2015
Units granted 531,019
315,443
Weighted-average fair value at date of grant $ 93.47
$ 107.53
Monte Carlo simulation assumptions:
Estimated values $ 38.02
$ 61.22
Dividend yields 2.5 % 2.0 %
Expected volatility 17.0 % 14.9 %

~~The fair value of shares vested totaled $19,673 and $40,220 for the periods ended October 2, 2016 and October 4, 2015, respectively.~~

~~Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 483,286 units as of October 2, 2016. Each unit is equivalent to one share of the Company’s Common Stock.~~

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

~~13.~~



	Six Months Ended
	July 2, 2017			July 3, 2016
Units granted	418,369			514,089
Weighted-average fair value at date of grant	$	111.06		$	92.95
Monte Carlo simulation assumptions:
Estimated values	$	46.85		$	38.02
Dividend yields	2.3		%	2.5		%
Expected volatility	20.4		%	17.0		%

The fair value of shares vested totaled $22,206 and $18,079 for the periods ended July 2, 2017 and July 3, 2016, respectively.

Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 468,845 units as of July 2, 2017. Each unit is equivalent to one share of the Company’s Common Stock.

11. SEGMENT INFORMATION

Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on ~~accelerating~~profitable growth in our focus international ~~markets, as we transform into a more global company.~~markets. Our business is organized around geographic regions, which enables us to build processes for repeatable success in our global markets. As a result, we have defined our operating segments on a geographic basis, as this aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment. Our North America business, which generates ~~over 85%~~approximately 89% of our ~~annual~~ consolidated revenue, is our only reportable segment. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other.

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, ~~Chicago,~~ Las Vegas, Shanghai, Niagara Falls (Ontario), Dubai, 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.

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 integration costs, the non-service related portion of pension expense and other unusual gains or losses that are not part of our measurement of segment performance. These ~~items~~components of our operating income are managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM as well the measure of segment performance used for incentive compensation purposes.

Accounting policies associated with our operating segments are generally the same as those described in Note 1 to the Consolidated Financial Statements included in our ~~2015~~2016 Annual Report on Form ~~10-K, with the exception of our accounting methodology for commodities derivatives.~~ 10-K.

As discussed in Note 5, derivatives used to manage commodity price risk are not designated for hedge accounting treatment. These derivatives are recognized at fair market value with the resulting realized and unrealized losses recognized in unallocated derivative (gains) losses outside of the reporting segment ~~results. The~~results until the related inventory is sold, at which time the related gains and losses are ~~subsequently recognized~~reallocated to segment income. This enables us to align the

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in ~~the operating results of the segments in the period in which~~thousands, except share data or if otherwise indicated)

derivative gains and losses with the underlying ~~transaction~~economic exposure being ~~economically~~ hedged ~~is included in earnings.~~and thereby eliminate the mark-to-market volatility within our reported segment income.

Certain manufacturing, warehousing, distribution and other activities supporting our global operations are integrated to maximize efficiency and productivity. As a result, assets and capital expenditures are not managed on a segment basis and are not included in the information reported to the CODM for the purpose of evaluating performance or allocating resources. We disclose depreciation and amortization that is generated by segment-specific assets, since these amounts are included within the measure of segment income reported to the CODM.

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(amounts in thousands, except share data or if otherwise indicated)~~

Our segment net sales and earnings were as follows:


	Three Months Ended					Nine Months Ended							Three Months Ended					Six Months Ended
	October 2, 2016		October 4, 2015			October 2, 2016			October 4, 2015				July 2, 2017		July 3, 2016			July 2, 2017			July 3, 2016
Net sales:												Net sales:
North America	$	1,764,528	$	1,733,869		$	4,842,840		$	4,840,438		North America	$	1,477,014	$	1,444,841		$	3,154,160		$	3,078,312
International and Other	238,926		226,910			627,097			636,966			International and Other	185,977		192,830			388,509			388,171
Total	$	2,003,454	$	1,960,779		$	5,469,937		$	5,477,404		Total	$	1,662,991	$	1,637,671		$	3,542,669		$	3,466,483

Segment Income (Loss):
Segment income (loss):												Segment income (loss):
North America	$	563,946	$	546,080		$	1,519,059		$	1,561,053		North America	$	460,382	$	425,723		$	1,013,520		$	955,113
International and Other	4,284		(13,509		)	(12,411		)	(79,754		)	International and Other	8,368		(3,462		)	10,091			(16,695		)
Total segment income	568,230		532,571			1,506,648			1,481,299			Total segment income	468,750		422,261			1,023,611			938,418
Unallocated corporate expense (1)	121,828		117,695			370,622			383,160			Unallocated corporate expense (1)	123,173		126,623			242,823			248,794
Unallocated mark-to-market losses on commodity derivatives (2)	35,791		—			30,851			—
Goodwill impairment	—		30,991			—			280,802
Charges associated with business realignment activities	27,962		67,463			104,487			101,428
Unallocated mark-to-market losses (gains) on commodity derivatives												Unallocated mark-to-market losses (gains) on commodity derivatives	11,556		(39,886		)	(5,532		)	(4,940		)
Long-lived asset impairment charges												Long-lived asset impairment charges	—		—			208,712			—
Costs associated with business realignment activities												Costs associated with business realignment activities	14,454		62,095			61,442			76,525
Non-service related pension expense	6,360		4,049			20,666			6,976			Non-service related pension expense	4,215		9,205			8,583			14,306
Acquisition integration costs	2,265		9,359			3,727			14,253
Acquisition and integration costs												Acquisition and integration costs	11		1,462			311			1,462
Operating profit	374,024		303,014			976,295			694,680			Operating profit	315,341		262,762			507,272			602,271
Interest expense, net	24,387		46,967			66,730			85,046			Interest expense, net	24,126		21,338			47,867			42,343
Other (income) expense, net	21,800		9,409			8,703			4,328			Other (income) expense, net	10,098		8,128			9,927			(13,097		)
Income before income taxes	$	327,837	$	246,638		$	900,862		$	605,306		Income before income taxes	$	281,117	$	233,296		$	449,478		$	573,025

(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)~~	~~Reflects gains and losses on commodity derivative instruments that are excluded from segment income until the related inventory is sold. See Note 5.~~

~~Activity within the unallocated mark-to-market (gains) losses on commodity derivatives for the three and nine months ended October 2, 2016 included:~~

Three Months Ended Nine Months Ended
October 2, 2016 October 2, 2016
Net losses on mark-to-market valuation of unallocated commodity derivative positions $ 37,246
$ 37,176
Net losses on commodity derivative positions allocated to segment income 1,455
6,325
Net losses on mark-to-market valuation of commodity derivative positions remaining in unallocated derivative (gains) losses $ 35,791
$ 30,851

Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify losses on commodity derivatives of $11 million after tax to segment operating results in the next twelve months.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

Activity within the unallocated mark-to-market (gains) losses on commodity derivatives is as follows:



	Three Months Ended					Six Months Ended
	July 2, 2017		July 3, 2016			July 2, 2017			July 3, 2016
Net losses (gains) on mark-to-market valuation of commodity derivative positions	$	32,519	$	(39,011	)	$	38,055		$	(70	)
Net losses on commodity derivative positions allocated to segment income	20,963		875			43,587			4,870
Net losses (gains) on mark-to-market valuation of commodity derivative positions remaining in unallocated derivative losses (gains)	$	11,556	$	(39,886	)	$	(5,532	)	$	(4,940	)

As of July 2, 2017, the cumulative amount of mark-to-market losses on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was $157,492. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pre-tax losses on commodity derivatives of $91,119 to segment operating results in the next twelve months.

Depreciation and amortization expense included within segment income presented above is as follows:


	Three Months Ended				Nine Months Ended					Three Months Ended				Six Months Ended
	October 2, 2016		October 4, 2015		October 2, 2016		October 4, 2015			July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
North America	$	41,592	$	38,887	$	120,378	$	113,837	North America	$	41,751	$	39,844	$	82,988	$	78,786
International and Other	13,515		13,993		37,523		34,136		International and Other	9,747		13,085		22,713		24,008
Corporate (1)	30,015		11,174		84,000		34,882		Corporate (1)	15,629		43,937		26,378		53,985
Total	$	85,122	$	64,054	$	241,901	$	182,855	Total	$	67,127	$	96,866	$	132,079	$	156,779


(1)	Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note ~~10.~~7. Such amounts are not included within our measure of segment income.

~~14.~~12. TREASURY STOCK ACTIVITY

A summary of our treasury stock activity is as follows:

Nine Months Ended October 2, 2016
Shares Dollars
In thousands
Shares repurchased in the open market under pre-approved share repurchase programs 4,640,964
$ 420,249
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation 354,320
32,331
Total share repurchases 4,995,284
452,580
Shares issued for stock options and incentive compensation (1,814,461 ) (75,542 )
Net change 3,180,823
$ 377,038

~~The $250 million share repurchase program approved by our Board of Directors in February 2015 was completed in the first quarter of 2016.~~



	Six Months Ended July 2, 2017
	Shares		Dollars
			In thousands
Shares repurchased in the open market under pre-approved share repurchase programs	—		$	—
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation	886,675		99,992
Total share repurchases	886,675		99,992
Shares issued for stock options and incentive compensation	(1,041,596	)	$	(43,338	)
Net change	(154,921	)	$	56,654

In ~~February~~January 2016, our Board of Directors approved ~~an additional $500 million~~a $500,000 authorization to repurchase shares of our Common Stock. As of ~~October~~July 2, ~~2016, $100 million~~2017, $100,000 remained available for repurchases of our Common Stock under this program. We are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The program has no expiration date and acquired shares of Common Stock will be held as treasury shares. Purchases under approved share repurchase authorizations are in addition to our practice of buying back shares sufficient to offset those issued under incentive compensation plans.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

13. NONCONTROLLING INTEREST

A roll-forward showing the 2017 activity relating to the noncontrolling interest follows:



	Noncontrolling Interest
Balance, December 31, 2016	$	41,831
Net loss attributable to noncontrolling interest	(27,570		)
Other comprehensive income - foreign currency translation adjustments	416
Balance, July 2, 2017	$	14,677

The 2017 net loss attributable to the noncontrolling interest reflects the 50% allocation of LSFC-related business realignment and impairment costs (see Note 7). For the six months ended July 3, 2016, the net loss attributable to noncontrolling interests totaled $1,465, which was presented within selling, marketing and administrative expense in the Consolidated Statements of Income since the amount was not considered significant.

~~15.~~14. CONTINGENCIES

We are subject to various pending or threatened legal proceedings and claims that arise in the ordinary course of our business. 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.

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(amounts in thousands, except share data or if otherwise indicated)~~

~~16.~~15. EARNINGS PER SHARE

We compute basic earnings per share for Common Stock and Class B common stock using the two-class method. The Class B common stock is convertible into Common Stock on a share-for-share basis at any time. With respect to dividend rights, the Common Stock holders are entitled to cash dividends 10% higher than those declared and paid on the Class B common stock. The computation of diluted earnings per share for Common Stock assumes the conversion of Class B common stock using the if-converted method, while the diluted earnings per share of Class B common stock does not assume the conversion of those shares.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

We compute basic and diluted earnings per share based on the weighted-average number of shares of Common Stock and Class B common stock outstanding as follows:


	Three Months Ended										Three Months Ended
	October 2, 2016					October 4, 2015					July 2, 2017					July 3, 2016
	Common Stock		Class B Common Stock			Common Stock		Class B Common Stock			Common Stock		Class B Common Stock			Common Stock		Class B Common Stock
Basic earnings per share:
Numerator:
Allocation of distributed earnings (cash dividends paid)	$	94,498	$	34,068		$	92,041	$	32,128		$	94,043	$	34,068		$	88,615	$	32,129
Allocation of undistributed earnings	72,691		26,146			22,693		7,909			55,370		20,020			18,528		6,684
Total earnings—basic	$	167,189	$	60,214		$	114,734	$	40,037		$	149,413	$	54,088		$	107,143	$	38,813

Denominator (shares in thousands):
Total weighted-average shares—basic	153,259		60,620			158,111		60,620			152,466		60,620			152,774		60,620

Earnings Per Share—basic	$	1.09	$	0.99		$	0.73	$	0.66		$	0.98	$	0.89		$	0.70	$	0.64

Diluted earnings per share:
Numerator:
Allocation of total earnings used in basic computation	$	167,189	$	60,214		$	114,734	$	40,037		$	149,413	$	54,088		$	107,143	$	38,813
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock	60,214		—			40,037		—			54,088		—			38,813		—
Reallocation of undistributed loss	—		(160		)	—		(27		)
Reallocation of undistributed earnings											—		(149		)	—		(36		)
Total earnings—diluted	$	227,403	$	60,054		$	154,771	$	40,010		$	203,501	$	53,939		$	145,956	$	38,777

Denominator (shares in thousands):
Number of shares used in basic computation	153,259		60,620			158,111		60,620			152,466		60,620			152,774		60,620
Weighted-average effect of dilutive securities:
Conversion of Class B common stock to Common shares outstanding	60,620		—			60,620		—			60,620		—			60,620		—
Employee stock options	1,062		—			1,192		—			1,229		—			973		—
Performance and restricted stock units	220		—			152		—
Performance and restricted stock options											325		—			137		—
Total weighted-average shares—diluted	215,161		60,620			220,075		60,620			214,640		60,620			214,504		60,620

Earnings Per Share—diluted	$	1.06	$	0.99		$	0.70	$	0.66		$	0.95	$	0.89		$	0.68	$	0.64

The earnings per share calculations for the three months ended ~~October~~July 2, 2017 and July 3, 2016 excluded 1,808 and ~~October 4, 2015 excluded 2,921 and 2,552,~~3,601, respectively, of stock options (in thousands) that would have been antidilutive.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)


	Nine Months Ended											Six Months Ended
	October 2, 2016					October 4, 2015						July 2, 2017					July 3, 2016
	Common Stock		Class B Common Stock			Common Stock			Class B Common Stock			Common Stock		Class B Common Stock			Common Stock		Class B Common Stock
Basic earnings per share:
Numerator:
Allocation of distributed earnings (cash dividends paid)	$	273,380	$	98,326		$	262,032		$	91,051		$	187,992	$	68,136		$	178,882	$	64,257
Allocation of undistributed earnings (loss)	170,458		61,027			(39,750		)	(13,766		)
Allocation of undistributed earnings												53,180		19,237			97,737		34,912
Total earnings—basic	$	443,838	$	159,353		$	222,282		$	77,285		$	241,172	$	87,373		$	276,619	$	99,169

Denominator (shares in thousands):
Total weighted-average shares—basic	153,943		60,620			159,058			60,620			152,393		60,620			154,283		60,620

Earnings Per Share—basic	$	2.88	$	2.63		$	1.40		$	1.27		$	1.58	$	1.44		$	1.79	$	1.64

Diluted earnings per share:
Numerator:
Allocation of total earnings used in basic computation	$	443,838	$	159,353		$	222,282		$	77,285		$	241,172	$	87,373		$	276,619	$	99,169
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock	159,353		—			77,285			—			87,373		—			99,169		—
Reallocation of undistributed (loss) earnings	—		(347		)	—			132
Reallocation of undistributed earnings												—		(145		)	—		(191		)
Total earnings—diluted	$	603,191	$	159,006		$	299,567		$	77,417		$	328,545	$	87,228		$	375,788	$	98,978

Denominator (shares in thousands):
Number of shares used in basic computation	153,943		60,620			159,058			60,620			152,393		60,620			154,283		60,620
Weighted-average effect of dilutive securities:
Conversion of Class B common stock to Common shares outstanding	60,620		—			60,620			—			60,620		—			60,620		—
Employee stock options	1,013		—			1,406			—			1,248		—			989		—
Performance and restricted stock units	182		—			238			—
Performance and restricted stock options												324		—			162		—
Total weighted-average shares—diluted	215,758		60,620			221,322			60,620			214,585		60,620			216,054		60,620

Earnings Per Share—diluted	$	2.80	$	2.62		$	1.35		$	1.28		$	1.53	$	1.44		$	1.74	$	1.63

The earnings per share calculations for the ~~nine~~six months ended ~~October~~July 2, 2017 and July 3, 2016 excluded 2,067 and ~~October 4, 2015 excluded~~ 3,680, ~~and 2,660,~~ respectively, of stock options (in thousands) that would have been antidilutive.

~~17. SUPPLEMENTAL BALANCE SHEET INFORMATION~~16. OTHER (INCOME) EXPENSE, NET

~~The~~Other (income) expense, net reports certain gains and losses associated with activities not directly related to our core operations. A summary of the components of ~~certain Consolidated Balance Sheet accounts are~~other (income) expense, net is as follows:

Inventories: October 2, 2016 December 31, 2015
Raw materials $ 321,781
$ 353,451
Goods in process 99,685
67,745
Finished goods 610,929
534,983
Inventories at FIFO 1,032,395
956,179
Adjustment to LIFO (188,876 ) (205,209 )
Total inventories $ 843,519
$ 750,970



	Three Months Ended						Six Months Ended
	July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016
Write-down of equity investments in partnerships qualifying for tax credits	$	10,263		$	9,468		$	10,263		$	15,061
Settlement of SGM liability (see Note 2)	—			—			—			(26,650		)
Other (income) expense, net	(165		)	(1,340		)	(336		)	(1,508		)
Total	$	10,098		$	8,128		$	9,927		$	(13,097	)

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(amounts in thousands, except share data or if otherwise indicated)

17. SUPPLEMENTAL BALANCE SHEET INFORMATION

Property, plant and equipment: October 2, 2016 December 31, 2015
Land $ 101,197
$ 96,666
Buildings 1,257,869
1,084,958
Machinery and equipment 2,985,841
2,886,723
Construction in progress 235,274
448,956
Property, plant and equipment, gross 4,580,181
4,517,303
Accumulated depreciation (2,420,592 ) (2,276,843 )
Property, plant and equipment, net $ 2,159,589
$ 2,240,460

The components of certain Consolidated Balance Sheet accounts are as follows:


					July 2, 2017			December 31, 2016
Inventories:
Raw materials					$	303,553		$	315,239
Goods in process					123,386			88,490
Finished goods					691,334			528,587
Inventories at FIFO					1,118,273			932,316
Adjustment to LIFO					(181,836		)	(186,638		)
Total inventories					$	936,437		$	745,678

Property, plant and equipment:
Land					$	106,662		$	103,865
Buildings					1,191,483			1,238,634
Machinery and equipment					2,871,889			3,001,552
Construction in progress					200,411			230,987
Property, plant and equipment, gross					4,370,445			4,575,038
Accumulated depreciation					(2,336,655		)	(2,397,790		)
Property, plant and equipment, net					$	2,033,790		$	2,177,248

Other assets:	October 2, 2016		December 31, 2015
Capitalized software, net	$	85,352	$	68,004	$	100,867		$	95,301
Income tax receivable	1,468		1,428		—			1,449
Other non-current assets	82,933		85,934		82,113			71,615
Total other assets	$	169,753	$	155,366	$	182,980		$	168,365

Accrued liabilities:
Payroll, compensation and benefits					$	194,368		$	240,080
Advertising and promotion					280,645			358,573
Other					166,730			152,333
Total accrued liabilities					$	641,743		$	750,986

Other long-term liabilities:
Post-retirement benefits liabilities					$	215,802		$	220,270
Pension benefits liabilities					61,748			65,687
Other					119,654			114,204
Total other long-term liabilities					$	397,204		$	400,161

Accumulated other comprehensive loss:
Foreign currency translation adjustments					$	(92,756	)	$	(110,613	)
Pension and post-retirement benefit plans, net of tax					(206,742		)	(207,169		)
Cash flow hedges, net of tax					(56,466		)	(58,106		)
Total accumulated other comprehensive loss					$	(355,964	)	$	(375,888	)

Accrued liabilities: October 2, 2016 December 31, 2015
Payroll, compensations and benefits $ 202,131
$ 215,638
Advertising and promotion 334,902
337,945
Due to SGM shareholders —
72,025
Other 145,979
231,359
Total accrued liabilities $ 683,012
$ 856,967

Other long-term liabilities: October 2, 2016 December 31, 2015
Post-retirement benefits liabilities $ 224,974
$ 231,412
Pension benefits liabilities 137,530
122,681
Other 116,203
114,625
Total other long-term liabilities $ 478,707
$ 468,718

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

This Management's Discussion and Analysis (“MD&A”) is intended to provide an understanding of Hershey's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Consolidated Financial Statements and accompanying notes. This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Refer to the Safe Harbor Statement below as well as the Risk Factors and other information contained in our ~~2015~~2016 Annual Report on Form 10-K for information concerning the key risks to achieving future performance goals.

The MD&A is organized in the following sections:

Overview and Outlook

Non-GAAP Information

Consolidated Results of Operations

Segment Results

Liquidity and Capital Resources

The Overview and Outlook 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 and Outlook 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.

OVERVIEW AND OUTLOOK

Our ~~2016 third~~second quarter 2017 net sales totaled ~~$2,003.5~~$1,663.0 million, an increase of ~~2.2%~~1.5%, versus ~~our 2015 third quarter net sales~~$1,637.7 million for the comparable period of ~~$1,960.8 million.~~2016. Excluding a ~~0.2%~~0.3% impact from unfavorable foreign ~~currency~~ exchange rates, our net sales increased ~~2.4%~~1.8%. ~~The increase~~Net sales growth was driven by ~~higher~~the North America ~~volumes, mostly due to positive investments in our brands during~~segment, which benefited from innovation and the ~~quarter. Specifically, our marketplace results were driven by greater levels~~barkTHINS brand acquisition. Additionally, net sales growth benefited from the timing of ~~in-store merchandising and displays as we leveraged large promotional events such as the Summer Olympics and~~ ~~Reese's~~ ~~NCAA Football College Game Day,~~new stand-up packaging as well as ~~new product innovation. In addition, net price realization was favorable as direct trade and returns, discounts and allowances~~distributor changes by several retailers resulting in ~~our International and Other segment were less than prior year. The acquisition of Ripple Brand Collective, LLC was also a favorable benefit to the quarter's performance.~~increased retail inventory.

Our reported gross margin ~~decreased 300~~was 45.9% in the second quarter of 2017, an increase of 30 basis points compared to the second quarter of 2016. Our non-GAAP gross margin increased 160 basis points in the ~~third~~second quarter of 2016, primarily driven by mark-to-market losses on commodity derivatives and higher charges related to business realignment activities. Our non-GAAP gross margin (as defined in the Non-GAAP Information section of this MD&A) decreased 40 basis points in the third quarter of 2016,2017, primarily due to ~~higher net~~lower commodity input costs, supply chain ~~costs (net of~~ productivity and cost savings ~~initiatives) and unfavorable sales mix.~~initiatives.

Our ~~2016 third~~second quarter reported operating profit increased to $374.0 million from $303.0 million for the same period of 2015. The 2015 period included incrementally higher expenses, including the $31.0 million non-cash goodwill impairment charge recognized in the third quarter of 2015, as well as charges related to the 2015 Productivity Initiative. Our 2016 third quarter operating profit margin increased to 18.7% from 15.5% for the same period of 2015, with the 2015 operating profit margin reflecting the impact of the aforementioned goodwill impairment and 2015 Productivity Initiative charges. Our 2016 third quarter2017 reported net income and earnings per share-diluted (EPS) totaled ~~$227.4~~$203.5 million and ~~$1.06,~~$0.95, respectively, compared to ~~2015 third~~the second quarter 2016 reported net income and ~~earnings per share-diluted~~EPS-diluted of ~~$154.8~~$146.0 million and ~~$0.70,~~$0.68, respectively. ~~The lower level of net income and earnings per share-diluted in the 2015 third quarter also resulted from the goodwill impairment and 2015 Productivity Initiative charges.~~ From a non-GAAP perspective, ~~2016 third~~second quarter 2017 adjusted net income ~~increased 7.8%~~was $233.1 million, an increase of 27.7% versus $182.6 million in 2016, primarily driven by the improvement in our non-GAAP gross margin, as well as a lower non-GAAP effective tax rate, due mainly to a favorable foreign tax rate differential, discrete items and the benefit from the adoption of Accounting Standards Update ("ASU") 2016-09 for the accounting of employee share-based payments. Our adjusted ~~earnings per share-diluted increased 10.3%.~~EPS-diluted for the second quarter of 2017 was $1.09 compared to $0.85 for the same period of 2016, with this 28.2% increase attributable to the same factors driving the increase in non-GAAP net income.

Over the remainder of the year, ~~our priorities and outlook remain unchanged and~~ we ~~are focused on delivering on~~expect to continue the objectives we outlined earlier this year. We are making the necessary investments we believe will strengthen Hershey's leadership position and build upon our latest marketplace results. Our seasonal business and programs are on track and the launchrollout of ~~Hershey's~~Hershey’s Cookie Layer Crunch ~~should enable us~~bars, Reese’s and Hershey’s Crunchers candies and Reese’s Crunchy Cookie Cups. Additionally, we have solid Halloween and Holiday plans, and advertising and related consumer marketing expense is expected to ~~end~~be meaningfully higher over the ~~year with momentum.~~remainder of the year. Despite the inconsistent shopping patterns and behavior that have resulted in a recent slowdown in retail trips, we believe CMG and snacks have inherent advantages such as impulsivity, seasons, and multiple pack

types, or usage occasions. This facilitates merchandising and display within different parts of the box where there is foot traffic, like the perimeter and at checkout.

However, we expect that the broader industry challenges at the retail level will persist over the remainder of the year. Therefore, we currently estimate that full-year ~~2016~~2017 net sales growth ofwill be approximately ~~1.0%, which includes a 0.5% net benefit from acquisitions and divestitures and a 0.75% unfavorable~~1%. The impact ~~from foreign currency exchange rates. Excluding the unfavorable impact from~~of foreign currency exchange rates ~~our full-year net sales are expected to increase approximately 1.75%. Our 2016 productivity and cost savings programs are on track, with the related savings in line~~

~~with our estimates, and we continue to focus on non-essential spending. Additionally, our effective tax rate~~ is expected to be ~~slightly favorable versus our previous expectations. As a result, we~~minimal. We currently expect ~~2016~~ full-year 2017 reported ~~earnings per share-diluted~~EPS-diluted to ~~improve significantly, on the basis of lower unusual charges as compared to 2015, and~~ be in the ~~$3.82~~$3.41 to ~~$3.90~~$3.60 range. From a non-GAAP perspective, we ~~currently~~ expect 2017 adjusted ~~earnings per share-diluted for 2016~~EPS-diluted to be towards the high end of our outlook of $4.72 to $4.81, an increase ~~4.0%~~of 7% to ~~5.0%~~9%, ~~including dilution~~primarily due to gross margin expansion from ~~the barkTHINS acquisition of $0.05 to $0.06 per share,~~lower input costs, and ~~be in the $4.28 to $4.32 range.~~strong productivity and cost savings initiatives, as well as a lower effective tax rate driven by a favorable foreign rate differential and benefit from tax credits. A reconciliation of reported to adjusted projections for ~~2016~~2017 are reflected in the non-GAAP reconciliations that follow.

NON-GAAP INFORMATION

The comparability of certain of our financial measures is impacted by unallocated mark-to-market ~~gains and~~(gains) losses on commodity derivatives, costs associated with business realignment ~~charges,~~activities, costs relating to the integration of acquisitions, non-service related components of our pension expense ("NSRPE"), ~~goodwill~~ impairment ~~charges,~~of long-lived assets, and settlement of the SGM liability ~~the gain realized on the sale of a trademark, costs associated~~in conjunction with the ~~early extinguishment~~purchase of ~~debt and other non-recurring gains and losses.~~the remaining 20% of the outstanding shares of 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.

																							Reconciliation of Certain Non-GAAP Financial Measures
Consolidated results	Three Months Ended				Nine Months Ended						Three Months Ended						Six Months Ended
In thousands except per share data	October 2, 2016		October 4, 2015		October 2, 2016			October 4, 2015			July 2, 2017			July 3, 2016			July 2, 2017			July 3, 2016
Reported gross profit	$	850,848	$	892,064	$	2,415,622		$	2,528,315		$	763,210		$	747,398		$	1,669,770		$	1,564,774
Derivative mark-to-market losses	35,791		—		30,851			—
Derivative mark-to-market losses (gains)											11,556			(39,886		)	(5,532		)	(4,940		)
Business realignment activities	24,470		2,529		57,948			5,205			5,772			33,965			6,262			33,478
Acquisition integration costs	—		6,035		—			6,343
NSRPE	2,620		628		9,132			1,887			2,705			3,271			5,565			6,512
Non-GAAP gross profit	$	913,729	$	901,256	$	2,513,553		$	2,541,750		$	783,243		$	744,748		$	1,676,065		$	1,599,824

Reported operating profit	$	374,024	$	303,014	$	976,295		$	694,680		$	315,341		$	262,762		$	507,272		$	602,271
Derivative mark-to-market losses	35,791		—		30,851			—
Derivative mark-to-market losses (gains)											11,556			(39,886		)	(5,532		)	(4,940		)
Business realignment activities	27,962		67,463		104,487			101,428			14,454			62,095			61,442			76,525
Acquisition integration costs	2,265		9,359		3,727			14,253			11			1,462			311			1,462
NSRPE	6,360		4,049		20,666			6,976			4,215			9,205			8,583			14,306
Goodwill impairment	—		30,991		—			280,802
Long-lived asset impairment charges											—			—			208,712			—
Non-GAAP operating profit	$	446,402	$	414,876	$	1,136,026		$	1,098,139		$	345,577		$	295,638		$	780,788		$	689,624

Reported provision for income taxes	$	100,434	$	91,867	$	297,671		$	305,739		$	78,390		$	87,340		$	148,503		$	197,237
Derivative mark-to-market losses*	13,566		—		11,694			—
Derivative mark-to-market losses (gains)*											(847		)	(15,117		)	352			(1,872		)
Business realignment activities*	5,576		24,124		16,409			35,995			5,783			7,295			17,200			10,833
Acquisition integration costs*	859		1,300		1,413			2,959			4			554			118			554
NSRPE*	2,432		1,560		7,900			2,725			1,605			3,515			3,269			5,468
Loss on early extinguishment of debt*	—		10,735		—			10,735
Gain on sale of trademark*	—		—		—			(3,662		)
Long-lived asset impairment charges**											(7,227		)	—			37,974			—
Non-GAAP provision for income taxes	$	122,867	$	129,586	$	335,087		$	354,491		$	77,708		$	83,587		$	207,416		$	212,220

Reported net income	$	227,403	$	154,771	$	603,191		$	299,567		$	203,501		$	145,956		$	328,545		$	375,788
Derivative mark-to-market losses	22,225		—		19,157			—
Derivative mark-to-market losses (gains)											12,403			(24,769		)	(5,884		)	(3,068		)
Business realignment activities	22,386		43,339		88,073			65,433			8,671			54,827			44,242			65,687
Acquisition integration costs	1,406		8,059		2,314			11,294			7			908			193			908
NSRPE	3,928		2,489		12,766			4,251			2,610			5,690			5,314			8,838
Long-lived asset impairment charges											7,227			—			170,738			—
Noncontrolling interest share of business realignment and impairment charges											(1,296		)	—			(27,962		)	—
Settlement of SGM liability	—		—		(26,650		)	—			—			—			—			(26,650		)
Goodwill impairment	—		30,991		—			280,802
Loss on early extinguishment of debt	—		17,591		—			17,591
Gain on sale of trademark	—		—		—			(6,288		)
Non-GAAP net income	$	277,348	$	257,240	$	698,851		$	672,650		$	233,123		$	182,612		$	515,186		$	421,503

Reported EPS - Diluted	$	1.06	$	0.70	$	2.80		$	1.35		$	0.95		$	0.68		$	1.53		$	1.74
Derivative mark-to-market losses	0.10		—		0.09			—
Derivative mark-to-market losses (gains)											0.06			(0.11		)	(0.03		)	(0.01		)
Business realignment activities	0.10		0.20		0.40			0.30			0.04			0.25			0.21			0.30
Acquisition integration costs	0.01		0.03		0.01			0.04
NSRPE	0.02		0.01		0.06			0.02			0.01			0.03			0.02			0.04
Long-lived asset impairment charges											0.04			—			0.80			—
Noncontrolling interest share of business realignment and impairment charges											(0.01		)	—			(0.13		)	—
Settlement of SGM liability	—		—		(0.12		)	—			—			—			—			(0.12		)
Goodwill impairment	—		0.15		—			1.28
Loss on early extinguishment of debt	—		0.08		—			0.08
Gain on sale of trademark	—		—		—			(0.03		)
Non-GAAP EPS - Diluted	$	1.29	$	1.17	$	3.24		$	3.04		$	1.09		$	0.85		$	2.40		$	1.95

* The tax ~~impact~~effect for each adjustment is determined by ~~multiplying each pre-tax reconciling adjustment by~~calculating the ~~applicable statutory income~~ tax ~~rates, taking into consideration the~~ impact of ~~valuation allowances,~~the adjustment on the Company's quarterly effective tax rate.

** There were no pre-tax impairment charges associated with long-lived assets during the three months ended July 2, 2017. However, the long-lived asset impairment charge in the first quarter of 2017 was not treated as ~~applicable.~~a discrete tax item. Therefore, the tax impact was included in the estimated annual effective tax rate resulting in an EPS-diluted impact for each of the quarters throughout 2017.

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:


	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	October 2, 2016		October 4, 2015		October 2, 2016		October 4, 2015		July 2, 2017		July 3, 2016		July 2, 2017		July 3, 2016
As reported gross margin	42.5	%	45.5	%	44.2	%	46.2	%	45.9	%	45.6	%	47.1	%	45.1	%
Non-GAAP gross margin (1)	45.6	%	46.0	%	46.0	%	46.4	%	47.1	%	45.5	%	47.3	%	46.2	%

As reported operating profit margin	18.7	%	15.5	%	17.8	%	12.7	%	19.0	%	16.0	%	14.3	%	17.4	%
Non-GAAP operating profit margin (2)	22.3	%	21.2	%	20.8	%	20.0	%	20.8	%	18.1	%	22.0	%	19.9	%

As reported effective tax rate	30.6	%	37.2	%	33.0	%	50.5	%	27.9	%	37.4	%	33.0	%	34.4	%
Non-GAAP effective tax rate (3)	30.7	%	33.5	%	32.4	%	34.5	%	25.0	%	31.4	%	28.7	%	33.5	%


(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 losses (gains) on commodity derivatives

Commensurate with our discontinuance of hedge accounting treatment for commodity derivatives, we are adjusting the mark-to-market losses (gains) on such commodity derivatives, until such time as the related inventory is sold. 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 three ~~and nine~~ months ended ~~October~~July 2, 2017 and July 3, 2016, unallocated mark-to-market adjustment on commodity derivatives totaled pre-tax losses ~~on derivative commodities totaled $35.8~~of $11.6 million and ~~$30.9~~gains of $39.9 million, respectively. For the six months ended July 2, 2017 and July 3, 2016, unallocated mark-to-market adjustment on commodity derivatives totaled pre-tax gains of $5.5 million and $4.9 million, respectively.

Business realignment activities

We periodically undertake restructuring and cost reduction activities as part of ongoing efforts to enhance long-term profitability. For the three ~~and nine~~ months ended ~~October~~July 2, 2017 and July 3, 2016, we incurred ~~$28.0~~$14.5 million and ~~$104.5~~$62.1 million, respectively, of pre-tax ~~charges~~costs related to business realignment activities. For the ~~three and nine~~six months ended ~~October 4, 2015,~~July 2, 2017 and July 3, 2016, we incurred ~~$67.5~~$61.4 million and ~~$101.4~~$76.5 million, respectively, of pre-tax ~~charges~~costs related to business realignment activities. During 2016, we recognized pension settlement costs totaling $20.1 million, of which $13.7 million is included within business realignment activity, as the charges related to individuals electing lump sum pension distributions that exited in connection with the 2015 Productivity Initiative. The remaining $6.4 million in 2016 settlement charges related to individuals that left the Company in normal course and elected lump sum pension distributions. See Note 107 to the ~~Unaudited~~ Consolidated Financial Statements for more information.

Acquisition integration costs

~~For~~Costs incurred during the three and ~~nine~~six months ended ~~October~~July 2, 2017 and 2016 ~~we incurred pre-tax costs of $2.3 million and $3.7 million, respectively, related~~relate to the integration of the 2016 acquisition of Ripple Brand Collective, LLC as we incorporate this business into our operating practices and information systems. For the three and nine months ended October 4, 2015, we incurred pre-tax costs related to integration of the 2014 acquisitions of SGM and Allan Candy and the 2015 acquisition of Krave totaling $9.4 million and $14.3 million, respectively.

Non-service related pension expense

~~Non-service related pension expense~~NSRPE includes interest costs, the expected return on pension plan assets, the amortization of actuarial gains and losses, and certain curtailment and settlement losses or credits. ~~The non-service related pension expense~~NSRPE can fluctuate from ~~year-to-year~~year to year as a result of changes in market interest rates and market returns on pension plan assets. We believe that the service cost component of our total pension benefit costs closely reflects the operating costs toof our business and provides for a better comparison of our operating results from ~~year-to-year.~~year to year. Therefore, we exclude ~~the non-service-related pension expense~~NSRPE from our internal performance measures. Our most significant defined benefit pension plans ~~were~~have been closed to ~~most~~ new participants ~~in 2007,~~for a number of years, resulting in ongoing service costs that are stable and predictable. We recorded pre-tax ~~non-service related pension expense~~NSRPE of ~~$6.3~~$4.2 million and ~~$20.7~~$9.2 million, respectively, for the three ~~and nine~~ months ended ~~October~~July 2, ~~2016, respectively. This includes $2.1 million~~2017 and ~~$6.4 million related to settlement charges that were recorded for the three and nine months ended October 2,~~July 3, 2016, respectively. We recorded pre-tax ~~non-service related pension expense~~NSRPE of ~~$4.0~~$8.6 million and ~~$7.0~~$14.3 million, respectively, for the ~~three and nine~~six months ended ~~October 4, 2015,~~July 2, 2017 and July 3, 2016, respectively.

Long-lived asset impairment charges

For the six months ended July 2, 2017, we incurred $208.7 million of pre-tax long-lived asset impairment charges related to certain business realignment activities. This includes a write-down of certain intangible assets that had been recognized in connection with the 2014 SGM acquisition and write-down of property, plant and equipment. See Note 7 to the Consolidated Financial Statements for more information.

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.

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.

~~Goodwill impairment~~

During the second quarter of 2015, we recorded an estimated $249.8 million non-cash goodwill impairment charge, representing a write-down of all of the goodwill related to the SGM reporting unit. During the third quarter of 2015, we finalized the assessment of the goodwill generated by the SGM acquisition, resulting in additional non-cash goodwill impairment charges of $31.0 million.

~~Loss on Early Extinguishment of Debt~~

~~During the third quarter of 2015, we recorded a $28.3 million loss on the early extinguishment of debt relating to a cash tender offer.~~

~~Gain on sale of trademark~~

~~During the first quarter of 2015, we recorded a $10.0 million gain relating to the sale of a non-core trademark.~~

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 corresponding 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 corresponding period of the prior fiscal year.

A reconciliation between reported and constant currency growth rates is provided below:


	Three Months Ended October 2, 2016						Three Months Ended July 2, 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	(7.2	)%	0.5	%	(7.7	)%	6.8	%	(5.6	)%	12.4	%
Total North America segment	1.8	%	0.1	%	1.7	%	2.2	%	(0.3	)%	2.5	%

International and Other segment
Mexico	—	%	(13.3	)%	13.3	%	13.9	%	(3.0	)%	16.9	%
Brazil	37.8	%	10.8	%	27.0	%	12.4	%	9.6	%	2.8	%
India	(22.7	)%	(2.1	)%	(20.6	)%	5.4	%	3.7	%	1.7	%
Greater China	9.6	%	(5.0	)%	14.6	%	(31.2	)%	(2.4	)%	(28.8	)%
Total International and Other segment	5.3	%	(2.2	)%	7.5	%	(3.6	)%	(0.1	)%	(3.5	)%

Total Company	2.2	%	(0.2	)%	2.4	%	1.5	%	(0.3	)%	1.8	%


	Nine Months Ended October 2, 2016						Six Months Ended July 2, 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	(6.1	)%	(4.1	)%	(2.0	)%	6.1	%	(1.0	)%	7.1	%
Total North America segment	—	%	(0.2	)%	0.2	%	2.5	%	—	%	2.5	%

International and Other segment
Mexico	(7.8	)%	(16.0	)%	8.2	%	6.3	%	(8.5	)%	14.8	%
Brazil	5.4	%	(13.9	)%	19.3	%	31.3	%	20.4	%	10.9	%
India	(32.8	)%	(3.7	)%	(29.1	)%	11.0	%	2.3	%	8.7	%
Greater China	14.0	%	(4.9	)%	18.9	%	(14.4	)%	(2.8	)%	(11.6	)%
Total International and Other segment	(1.5	)%	(4.9	)%	3.4	%	0.1	%	(0.3	)%	0.4	%

Total Company	(0.1	)%	(0.7	)%	0.6	%	2.2	%	(0.1	)%	2.3	%

~~2016~~2017 Outlook

The following table provides a reconciliation of projected ~~2016 earnings per share-diluted,~~2017 EPS-diluted, prepared in accordance with GAAP, to projected non-GAAP ~~earnings per share-diluted~~EPS-diluted for ~~2016,~~2017, prepared on a non-GAAP basis, with adjustments consistent to those discussed previously. The reconciliation of ~~2015 earnings per share-diluted,~~2016 EPS-diluted, prepared in accordance with GAAP, to ~~2015~~2016 non-GAAP ~~earnings per share-diluted~~EPS-diluted is provided below for comparison.



	~~2016 (Projected)~~	~~2015~~
~~Reported EPS – Diluted~~	~~$3.82 - $3.90~~	~~$2.32~~
~~Business realignment activities~~	~~0.45 - 0.47~~	~~0.36~~
~~Acquisition integration costs~~	~~0.02 - 0.03~~	~~0.05~~
~~Non-service related pension expense~~	~~0.07 - 0.08~~	~~0.05~~
~~Settlement of SGM liability~~	~~(0.12)~~	—
~~Goodwill impairment~~	—	~~1.28~~
~~Loss on early extinguishment of debt~~	—	~~0.09~~
~~Gain on sale of trademark~~	—	~~(0.03)~~
~~Adjusted EPS – Diluted~~	~~$4.28 - $4.32~~	~~$4.12~~



	2017 (Projected)	2016
Reported EPS – Diluted	$3.41 - $3.60	$3.34
Derivative mark-to-market losses	—	0.66
Business realignment costs (including Margin for Growth Program costs)	0.30 - 0.40	0.42
Acquisition and integration costs	—	0.02
Non-service related pension expense	0.06	0.08
Settlement of SGM liability	—	(0.12)
Long-lived asset impairment charges	0.85	0.01
Adjusted EPS – Diluted	$4.72 - $4.81	$4.41

Our ~~2016~~2017 projected ~~earnings per share-diluted,~~EPS-diluted, as presented above, does not include the impact of mark-to-market gains and losses on our commodity derivative contracts that will be reflected within corporate unallocated expenses in our segment results until the related inventory is sold, ~~pursuant~~since we are not able to ~~our revised accounting policy for commodity derivatives as discussed in Note 5 to~~forecast the ~~Unaudited Consolidated Financial Statements.~~

impact of the market changes.

CONSOLIDATED RESULTS OF OPERATIONS


	Three Months Ended								Nine Months Ended									Three Months Ended						Percent		Six Months Ended						Percent
	October 2, 2016			October 4, 2015			Percent Change		October 2, 2016			October 4, 2015			Percent Change			July 2, 2017			July 3, 2016			Change		July 2, 2017			July 3, 2016			Change
In millions of dollars except per share amounts
Net Sales	$	2,003.5		$	1,960.8		2.2	%	$	5,469.9		$	5,477.4		(0.1	)%		$	1,663.0		$	1,637.7		1.5	%	$	3,542.7		$	3,466.5		2.2	%
Cost of Sales	1,152.6			1,068.7			7.9	%	3,054.3			2,949.1			3.6	%		899.8			890.3			1.1	%	1,872.9			1,901.7			(1.5	)%
Gross Profit	850.8			892.1			(4.6	)%	2,415.6			2,528.3			(4.5	)%		763.2			747.4			2.1	%	1,669.8			1,564.8			6.7	%
Gross Margin	42.5		%	45.5		%			44.2		%	46.2		%				45.9		%	45.6		%			47.1		%	45.1		%
SM&A Expense	474.5			500.3			(5.2	)%	1,408.8			1,469.8			(4.2	)%		445.9			462.5			(3.6	)%	907.8			934.3			(2.8	)%
SM&A Expense as a percent of Net Sales	23.7		%	25.5		%			25.8		%	26.8		%
Goodwill Impairment	—			31.0			NM		—			280.8			NM
Business Realignment Charges	2.3			57.8			(96.0	)%	30.6			83.0			(63.1	)%
SM&A Expense as a percent of net sales																		26.8		%	28.2		%			25.6		%	27.0		%
Long-lived Asset Impairment Charges																		—			—			NM		208.7			—			NM
Business Realignment Costs																		2.0			22.1			(91.0	)%	46.0			28.2			62.9	%
Operating Profit	374.0			303.0			23.4	%	976.3			694.7			40.5	%		315.3			262.8			20.0	%	507.3			602.3			(15.8	)%
Operating Profit Margin	18.7		%	15.5		%			17.8		%	12.7		%				19.0		%	16.0		%			14.3		%	17.4		%
Interest Expense, Net	24.4			47.0			(48.1	)%	66.7			85.1			(21.6	)%		24.1			21.3			13.1	%	47.9			42.3			13.0	%
Other (Income) Expense, Net	21.8			9.4			131.9	%	8.7			4.3			102.3	%		10.1			8.2			24.2	%	9.9			(13.0		)	NM
Provision for Income Taxes	100.4			91.8			9.4	%	297.7			305.7			(2.6	)%		78.4			87.3			(10.2	)%	148.5			197.2			(24.7	)%
Effective Income Tax Rate	30.6		%	37.2		%			33.0		%	50.5		%				27.9		%	37.4		%			33.0		%	34.4		%
Net Income	$	227.4		$	154.8		46.9	%	$	603.2		$	299.6		101.3	%
Net Income Including Noncontrolling Interest																		202.7			146.0			38.9	%	301.0			375.8			(19.9	)%
Less: Net Loss Attributable to Noncontrolling Interest																		(0.8		)	—			NM		(27.5		)	—			NM
Net Income Attributable to The Hershey Company																		$	203.5		$	146.0		39.4	%	$	328.5		$	375.8		(12.6	)%
Net Income Per Share—Diluted	$	1.06		$	0.70		51.4	%	$	2.80		$	1.35		107.4	%		$	0.95		$	0.68		39.7	%	$	1.53		$	1.74		(12.1	)%

Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above. NM - not meaningful
Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above.																	Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above.
NM = not meaningful.																	NM = not meaningful.

Results of Operations - ~~Third~~Second Quarter ~~2016~~2017 vs. ~~Third~~Second Quarter ~~2015~~2016

Net Sales

Net sales increased ~~2.2%~~1.5% in the ~~third~~second quarter of ~~2016~~2017 compared to the same period of ~~2015,~~2016, reflecting volume increases of ~~1.0%~~1.2%, favorable ~~net~~ price realization of ~~0.7%,~~0.1% and a ~~0.7%~~0.5% benefit from ~~net~~ acquisitions, ~~and divestitures,~~ partially offset by an unfavorable impact from foreign currency exchange rates of ~~0.2%~~0.3%. The volume increase was primarily attributed to the U.S., driven by greater levels of in-store merchandising and displays as we leveraged large promotional events, as well as new product innovation. The favorable net price realization was substantially related to lower direct trade and returns, discounts and allowances in the International and Other segment versus the prior year. Excluding foreign currency, our net sales increased ~~2.4%~~1.8% in the ~~quarter.~~second quarter of 2017. Consolidated volumes increased as a result of higher sales volume in the United States, which benefited from innovation and the barkTHINS brand acquisition. Additionally, net sales growth benefited from the timing of new stand-up packaging as well as distributor changes by several retailers resulting in increased retail inventory. These volume increases were partially offset by volume declines in our International and Other segment primarily due to macroeconomic challenges in China. Favorable net price realization was attributed to lower levels of trade promotional spending in the North America segment versus the prior year.

Key U.S. CMG Marketplace Metrics

~~For the 12-week period ended October 8, 2016, our U.S. candy, mint & gum retail~~



For the 12 week period ended	July 8, 2017		July 9, 2016
Hershey's Consumer Takeaway Increase (Decrease)	5.2	%	(1.1	)%
Hershey's Market Share Increase (Decrease)	0.2		(0.7	)

The consumer takeaway ~~decreased 0.4%. For the same 12-week period, our U.S.~~and market share ~~was 30.9%, a decline of 0.1 share points as compared with~~information provided for the ~~same~~twelve week period ~~of 2015. Consumer takeaway and the change in market share~~above are ~~provided~~ for 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 Nielsen and provide a means to assess our retail takeaway and market position relative to the overall category.

In 2017, takeaway improved relative to the prior year mainly driven by our core brands at Easter. The amounts presented above are solely for the U.S. CMG category which does not include revenue from our snack mixes and grocery items.

Cost of Sales and Gross Margin

Cost of sales increased ~~7.9%~~1.1% in the ~~third~~second quarter of ~~2016~~2017 compared to the same period of ~~2015. Incremental depreciation expense related to business realignment activities~~2016. The increase was driven by higher sales volume and ~~mark-to-market losses on~~an incremental $51 million unfavorable impact from marking-to-market our commodity derivative instruments ~~increased cost of sales~~intended to economically hedge future years' commodity purchases, offset in part by ~~5.9%, while the remaining increase was due to higher supply chain costs and higher sales volumes, which more than offset the benefit from~~ supply chain productivity and ~~cost~~costs savings ~~initiatives. As described in Note 5 to the Unaudited Consolidated Financial Statements, our commodity derivative instruments are no longer designated for hedge accounting treatment and,~~initiatives as well as a ~~result, the changes~~$28.2 million decrease in ~~fair market value are recognized currently in cost of sales.~~business realignment costs.

Gross margin ~~decreased~~increased by ~~300~~30 basis points in the ~~third~~second quarter of ~~2016~~2017 compared to the same period of ~~2015. Mark-to-market losses on~~2016. Lower business realignment costs and supply chain productivity contributed to the improvement in gross margin. However, higher commodity costs, driven by the unfavorable mark-to-market impact from commodity derivative instruments, and ~~incremental depreciation expense related to business realignment activities drove a 280 basis point decline~~higher supply chain costs partially offset the increase in gross margin. Higher supply chain costs and unfavorable sales mix also contributed to the decreased gross margin and were partially offset by the benefit from supply chain productivity and cost savings initiatives. On a non-GAAP basis, excluding the losses on commodity derivative instruments as well as business realignment charges, 2016 adjusted gross margin decreased by 40 basis points.

Selling, Marketing and Administrative

Selling, marketing and administrative (“SM&A”) expenses decreased ~~$25.8~~$16.6 million or ~~5.2%~~3.6% in the ~~third~~second quarter of ~~2016, due primarily to a 9.6% decline in advertising~~2017. Advertising and related consumer marketing ~~expense.~~expense decreased 0.2% during this period. Excluding these advertising and related consumer marketing costs, selling and administrative expenses for ~~2016~~2017 decreased by ~~2.4%~~5.2% as compared to ~~2015, driven by productivity and cost savings initiatives, which more than offset higher employee-related costs.~~2016. SM&A ~~expenses in 2016 were also impacted by charges for~~benefited from lower business realignment ~~activities of $1.7 million, acquisition integration~~ costs ~~of $2.3 million,~~as well as costs savings and ~~NSRPE of $3.7 million. In 2015, SM&A expenses included $7.2 million for business realignment activities, acquisition integration costs of $3.3 million, and NSRPE of $3.4 million.~~efficiency initiatives, partially offset by higher investments in go-to-market capabilities.

Business Realignment ~~Charges~~Activities

In the ~~third quarters~~second quarter of ~~2016~~2017 and ~~2015,~~2016, we recorded business realignment ~~charges~~costs of ~~$2.3~~$2.0 million and ~~$57.8~~$22.1 million, respectively. The ~~2016 charges~~2017 costs related primarily to severance and ~~benefits attributed~~other program costs associated with the Margin for Growth Program that commenced in the first quarter of 2017. The 2016 costs related primarily to the Operational Optimization Program, that commenced in the second quarter of 2016, as well as additional pension settlement costs resulting from the 2015 Productivity Initiative. The 2015 charges related to the 2015 Productivity Initiative, as described in Note 107 to the Unaudited Consolidated Financial Statements.

Operating Profit and Operating Profit Margin

Operating profit increased ~~$71.0 million~~20.0% in the ~~third~~second quarter of 2017 compared to the same period of 2016 ~~while operating~~due primarily to the higher gross margin, lower business realignment costs and lower SM&A expenses, as discussed above. Operating profit margin increased to ~~18.7%~~19.0% in ~~the third quarter of~~2017 from 16.0% in 2016 ~~from 15.5% in the third quarter of 2015. Excluding the $31.0 million non-cash goodwill impairment charge recorded in the third quarter of 2015, operating profit increased~~driven by ~~12.0%, reflecting the benefit of higher sales coupled with lower SM&A expenses and business realignment charges, while operating profit margin increased by 170 basis points.~~

~~On a non-GAAP basis, third quarter 2016 adjusted operating profit increased 7.6%, while adjusted operating profit margin increased 110 basis points, in each case as compared with the~~these same ~~period of 2015.~~factors.

Interest Expense, Net

Net interest expense was ~~$22.6~~$2.8 million ~~lower~~higher in the ~~third~~second quarter of ~~2016 than in~~2017 compared to the same period of ~~2015, primarily~~2016. The increase was due to ~~the premium paid to repurchase~~higher levels of long-term debt as part of a cash tender offer in 2015. Excluding the impact of the loss on the early extinguishment of debt in 2015, net interest expense increased $5.7 million as a result of incremental interest on bonds issued in 2016 as well as ~~lower capitalized~~higher interest ~~expense.~~rates on commercial paper during the second quarter of 2017 as compared to the 2016 quarter.

Other (Income) Expense, Net

Other (income) expense, net ~~was $12.4~~totaled $10.1 million ~~higher~~ in the ~~third~~second quarter of ~~2016 than in~~2017 compared to $8.2 million for the same period of ~~2015, primarily attributed to an increase~~2016, driven in both periods by the write-down ofon equity investments qualifying for federal historic and energy tax ~~credits in 2016 as compared to the prior year.~~credits.

Income Taxes and Effective Tax Rate

Our effective income tax rate was ~~30.6%~~27.9% for the ~~third~~second quarter of ~~2016~~2017 compared ~~with 37.2%~~to 37.4% for the same period of ~~2015. The 2015~~2016. Relative to the statutory rate, ~~was significantly impacted by~~ the ~~non-deductible goodwill impairment charge. Excluding the impact of the goodwill impairment charge, the 2015 third quarter~~2017 effective ~~income~~ tax rate was ~~33.1%. The 2016 effective~~impacted by a favorable foreign rate differential relating to our cocoa procurement operations, investment tax ~~rate benefited from~~credits, and the ~~impact~~benefit of ~~investment and research and development tax credits,~~ASU 2016-09, which were partially offset by non-benefited costs resulting from the ~~current period~~Margin for Growth Program. The higher 2016 effective rate reflected the SGM valuation ~~allowance.~~allowance impact.

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

Net income increased ~~$72.6~~$57.5 million, or ~~46.9%~~39.4%, while ~~earnings per share-diluted (“EPS”)~~EPS-diluted increased ~~$0.36,~~$0.27, or ~~51.4%~~39.7%, in the ~~third~~second quarter of ~~2016~~2017 compared to the same period of ~~2015.~~2016. The increases in both net income and ~~EPS primarily resulted from~~EPS-diluted were driven by the ~~non-recurring goodwill impairment charge~~higher gross margin, lower business realignment costs and ~~the loss on the early extinguishment~~lower SM&A expenses, as discussed above.

Results of ~~debt recorded~~Operations - First Six Months 2017 vs. First Six Months 2016

Net Sales

Net sales increased 2.2% in the ~~third quarter~~first six months of 2015, higher sales volume and SM&A spending, and the reduction in the 2016 effective income tax rate. Our third quarter 2016 EPS also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.

~~On a non-GAAP basis, adjusted net income increased $20.1 million in the third quarter of 2016, or 7.8%, and adjusted EPS increased $0.12, or 10.3%, as~~2017 compared to the same period of ~~2015. The~~2016, reflecting favorable price realization of 1.1%, volume increases ~~in 2016 non-GAAP net income~~of 0.5% and ~~EPS were also due primarily to higher sales volume and SM&A spending, and the reduction in the 2016 effective income tax rate. Our 2016 non-GAAP EPS also benefited~~a 0.7% benefit from ~~lower weighted-average shares outstanding, as noted above.~~

~~Results of Operations - First Nine Months 2016 vs. First Nine Months 2015~~

~~Net Sales~~

~~Net sales decreased 0.1% in the first nine months of 2016 compared to the same period of 2015, reflecting~~acquisitions, partially offset by an unfavorable impact from foreign currency exchange rates of ~~0.7% and volume declines of~~ 0.1%~~, substantially offset by a 0.5% benefit from net acquisitions and divestitures as well as favorable net price realization of 0.2%~~. Excluding foreign currency, our net sales increased ~~0.6%~~2.3% in first ~~nine~~six months of ~~2016.~~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 volumes increased as a result of higher sales volume in North America, driven by a stronger Easter season, as well as benefits from innovation and the barkTHINS brand acquisition. Additionally, net sales growth benefited from the timing of new stand-up packaging as well as distributor changes by several retailers resulting in increased retail inventory. These volume increases were partially offset by volume declines in our International and Other segment primarily due to macroeconomic challenges in China.

Cost of Sales and Gross Margin

Cost of sales ~~increased 3.6%~~decreased 1.5% in the first ~~nine~~six months of ~~2016~~2017 compared to the same period of ~~2015. Incremental depreciation expense related to~~2016. The improvement was driven by favorable commodity costs, a $27.2 million year-over-year decrease in business realignment ~~activities~~costs, and ~~mark-to-market losses on commodity derivative instruments increased cost of sales by 3.2%, while the remaining increase was due to higher~~ supply chain ~~costs, which more than~~productivity. These benefits were offset ~~the benefit from supply chain productivity initiatives as well as sales volume declines. As described~~ in ~~Note 5 to the Unaudited Consolidated Financial Statements, our commodity derivative instruments are no longer designated for hedge accounting treatment~~part by unfavorable manufacturing variances and ~~as a result, the changes in fair market value are recognized currently in cost of sales.~~higher freight and warehousing costs.

Gross margin ~~decreased~~increased by 200 basis points in the first ~~nine~~six months of ~~2016~~2017 compared to the same period of ~~2015.~~ ~~Mark-to-market losses on~~2016, driven by lower trade promotional spending, lower commodity ~~derivative instruments~~ and ~~incremental depreciation expense related to~~ business realignment ~~activities drove a 160 basis point decline in gross margin.~~ ~~Higher~~costs and supply chain ~~costs and unfavorable sales mix also contributed to the decreased gross margin and were~~productivity, partially offset by ~~the benefit from~~higher supply chain productivity and cost savings initiatives. On a non-GAAP basis, excluding the losses on commodity derivative instruments as well as business realignment charges, 2016 adjusted gross margin decreased by 40 basis points.costs.

Selling, Marketing and Administrative

Selling, marketing and administrative (“SM&A&A”) expenses decreased ~~$61.1~~$26.5 million or ~~4.2%~~2.8% in the first ~~nine~~six months of ~~2016, due primarily to a 5.7% decline in advertising~~2017. Advertising and related consumer marketing ~~expense.~~expense decreased 0.3% during this period. Excluding these advertising and related consumer marketing costs, selling and administrative expenses for ~~2016~~2017 decreased by ~~3.3%~~4.1% as compared to ~~2015, due primarily to savings~~2016. SM&A benefited from ~~the 2015 Productivity Initiative~~lower business realignment costs as well as ~~our continued focus on non-essential spending. SM&A expenses~~costs savings and efficiency initiatives, partially offset by higher investments in ~~2016 were also impacted by charges for business realignment activities of $15.7 million, NSRPE of $11.5 million, and~~go-to-market capabilities.

acquisition integration costs of $3.7 million. In 2015, SM&A expenses included $13.3 million for business realignment activities, acquisition integration costs of $7.9 million, and NSRPE of $5.1 million.

~~Business Realignment~~Long-lived Asset Impairment Charges

In the first ~~nine~~six months of ~~2016 and 2015,~~2017, we recorded ~~total~~long-lived asset impairment charges of $208.7 million. This relates to a first quarter write-down of certain intangible assets that had been recognized in connection with the 2014 SGM acquisition and write-down of property, plant and equipment. See Note 7 to the Unaudited Consolidated Financial Statements.

Business Realignment Activities

In the first six months of 2017 and 2016, we recorded business realignment ~~charges~~costs of ~~$30.6~~$46.0 million and ~~$83.0~~$28.2 million, respectively. The ~~2016 charges~~2017 costs related primarily to severance and ~~benefits attributed~~other program costs associated with the Margin for Growth Program that commenced in the first quarter of 2017. The 2016 costs related primarily to the Operational Optimization Program, that commenced in the second quarter of 2016, as well as additional pension settlement costs resulting from the 2015 Productivity Initiative. The 2015 charges primarily related to the 2015 Productivity Initiative, as described in Note 107 to the Unaudited Consolidated Financial Statements.

Operating Profit and Operating Profit Margin

Operating profit ~~increased 40.5%~~decreased 15.8% in the first ~~nine~~six months of ~~2016~~2017 compared to the same period of ~~2015, primarily reflecting the impact of the $280.8 million non-recurring goodwill impairment charge recorded in 2015.~~

~~Operating profit margin increased to 17.8% in the first nine months of~~ 2016 ~~from 12.7% in the same period of 2015~~ due primarily to the ~~impact of the non-recurring goodwill~~long-lived asset impairment ~~charge recorded in 2015.~~

~~On a non-GAAP basis, adjusted operating profit for the first nine months of 2016 increased 3.5%~~charges and ~~adjusted operating~~higher business realignment costs, partially offset by higher gross margin and lower SM&A expenses, as discussed above. Operating profit margin ~~improved 80 basis points,~~decreased to 14.3% in ~~each case as compared with the~~2017 from 17.4% in 2016 driven by these same ~~period of 2015.~~factors.

Interest Expense, Net

Net interest expense was ~~$18.3~~$5.5 million ~~lower~~higher in the first ~~nine~~six months of ~~2016~~2017 compared to the same period of ~~2015,~~2016. The increase was due ~~primarily~~ to ~~the premium paid to repurchase~~higher levels of long-term debt as part of a cash tender offer in 2015. Excluding the impact of the loss on the early extinguishment of debt in 2015, the net expense increased $10.0 million as a result of incremental interest on bonds issued in 2016 as well as ~~lower capitalized~~higher interest ~~expense.~~rates on commercial paper during the second six months of 2017 as compared to the 2016 period.

Other (Income) Expense, Net

Other (income) expense, net ~~was $4.4~~totaled expense of $9.9 million ~~higher in~~during the first ~~nine~~six months of ~~2016 compared to~~2017 versus income of $13.1 million for the same period of ~~2015, primarily duez~~2016. The 2016 income included an extinguishment gain of $26.7 million related to ~~an increase~~the settlement of the SGM liability. Additionally, in ~~the~~2016, we recognized a $15.1 million write-down ofon equity investments qualifying for federal historic and energy tax credits, ~~partially offset by~~compared to a $10.3 million write-down in the ~~$26.7 million settlement~~first six months of ~~the SGM liability in 2016. In 2015, other (income) expense, net also included the gain on the sale of a non-core trademark.~~2017.

Income Taxes and Effective Tax Rate

Our effective income tax rate was 33.0% for the first ~~nine~~six months of ~~2016~~2017 compared with ~~50.5%~~34.4% for the same period of ~~2015. The 2015~~2016. Relative to the statutory rate, ~~was significantly impacted by~~ the ~~non-deductible goodwill impairment charge. Excluding the impact of the goodwill impairment charge, the 2015 year-to-date~~2017 effective ~~income~~ tax rate was ~~34.5%.~~impacted by a favorable foreign rate differential relating to our cocoa procurement operations, investment tax credits and the benefit of ASU 2016-09, which were partially offset by non-benefited costs resulting from the Margin for Growth Program. The 2016 effective ~~tax~~ rate benefited from the impact of non-taxable income related to the settlement of the SGM liability and investment ~~and research and development~~ tax ~~credits, which were partially offset by the current period SGM valuation allowance.~~credits.

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

Net income ~~increased $303.6~~decreased $47.2 million, or ~~101.3%~~12.6%, while ~~EPS increased $1.45,~~EPS-diluted decreased $0.21, or ~~107.4%~~12.1%, in the first ~~nine~~six months of ~~2016~~2017 compared to the same period of ~~2015.~~2016. The ~~increases~~decreases in both net income and ~~EPS~~EPS-diluted were ~~primarily attributed to~~driven by the ~~non-recurring goodwill~~long-lived asset impairment ~~charge recorded in 2015,~~charges and higher business realignment costs, as noted above. ~~Our 2016 EPS also benefited from lower weighted-average shares outstanding as a result of share repurchases pursuant to our Board-approved repurchase programs.~~

On a non-GAAP basis, adjusted net income increased $26.2 million in the first nine months of 2016, or 3.9%, and adjusted EPS increased $0.20, or 6.6%, as compared with the same period of 2015. The changes in 2016 non-GAAP net income and EPS were primarily driven by lower SM&A expenses as a percent of sales and the lower effective tax rate. Our 2016 EPS also benefited from lower weighted-average shares outstanding, as noted above.

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, ~~as well as~~ business realignment and impairment charges, acquisition integration costs ~~the non-service related portion of pension expense~~ and ~~other unusual gains or losses~~NSRPE 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 integral to our ongoing operations. For further information, see the Non-GAAP Information section ~~at the beginning~~ of this ~~Item 2.~~MD&A.

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


	Three Months Ended					Nine Months Ended
	October 2, 2016		October 4, 2015			October 2, 2016			October 4, 2015				Three Months Ended					Six Months Ended
													July 2, 2017		July 3, 2016			July 2, 2017			July 3, 2016
Net Sales:												Net Sales:
North America	$	1,764,528	$	1,733,869		$	4,842,840		$	4,840,438		North America	$	1,477,014	$	1,444,841		$	3,154,160		$	3,078,312
International and Other	238,926		226,910			627,097			636,966			International and Other	185,977		192,830			388,509			388,171
Total	$	2,003,454	$	1,960,779		$	5,469,937		$	5,477,404		Total	$	1,662,991	$	1,637,671		$	3,542,669		$	3,466,483

Segment Income (Loss):												Segment Income (Loss):
North America	$	563,946	$	546,080		$	1,519,059		$	1,561,053		North America	$	460,382	$	425,723		$	1,013,520		$	955,113
International and Other	4,284		(13,509		)	(12,411		)	(79,754		)	International and Other	8,368		(3,462		)	10,091			(16,695		)
Total segment income	568,230		532,571			1,506,648			1,481,299			Total segment income	468,750		422,261			1,023,611			938,418
Unallocated corporate expense (1)	121,828		117,695			370,622			383,160			Unallocated corporate expense (1)	123,173		126,623			242,823			248,794
Unallocated mark-to-market losses on commodity derivatives (2)	35,791		—			30,851			—
Goodwill impairment	—		30,991			—			280,802
Charges associated with business realignment activities	27,962		67,463			104,487			101,428
Unallocated mark-to-market losses (gains) on commodity derivatives (2)												Unallocated mark-to-market losses (gains) on commodity derivatives (2)	11,556		(39,886		)	(5,532		)	(4,940		)
Long-lived asset impairment charges												Long-lived asset impairment charges	—		—			208,712			—
Costs associated with business realignment activities												Costs associated with business realignment activities	14,454		62,095			61,442			76,525
Non-service related pension expense	6,360		4,049			20,666			6,976			Non-service related pension expense	4,215		9,205			8,583			14,306
Acquisition integration costs	2,265		9,359			3,727			14,253
Acquisition and integration costs												Acquisition and integration costs	11		1,462			311			1,462
Operating profit	374,024		303,014			976,295			694,680			Operating profit	315,341		262,762			507,272			602,271
Interest expense, net	24,387		46,967			66,730			85,046			Interest expense, net	24,126		21,338			47,867			42,343
Other (income) expense, net	21,800		9,409			8,703			4,328			Other (income) expense, net	10,098		8,128			9,927			(13,097		)
Income before income taxes	$	327,837	$	246,638		$	900,862		$	605,306		Income before income taxes	$	281,117	$	233,296		$	449,478		$	573,025

(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)	Reflects gains and losses on commodity derivative instruments that are excluded from segment income until the related inventory is sold. See Note 511 to the ~~Unaudited~~ Consolidated Financial Statements.

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%~~88.8% and ~~88.4%~~88.2% of our net sales for the three months ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015,~~July 3, 2016, respectively. North America results for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015~~July 3, 2016 were as follows:


	Three Months Ended								Nine Months Ended								Three Months Ended						Percent		Six Months Ended						Percent
	October 2, 2016			October 4, 2015			Percent Change		October 2, 2016			October 4, 2015			Percent Change		July 2, 2017			July 3, 2016			Change		July 2, 2017			July 3, 2016			Change
In millions of dollars
Net sales	$	1,764.5		$	1,733.9		1.8	%	$	4,842.8		$	4,840.4		—	%	$	1,477.0		$	1,444.8		2.2	%	$	3,154.2		$	3,078.3		2.5	%
Segment income	563.9			546.1			3.3	%	1,519.1			1,561.1			(2.7	)%	460.4			425.7			8.1	%	1,013.5			955.1			6.1	%
Segment margin	32.0		%	31.5		%			31.4		%	32.3		%			31.2		%	29.5		%			32.1		%	31.0		%

Results of Operations - ~~Third~~Second Quarter ~~2016~~2017 vs. ~~Third~~Second Quarter ~~2015~~2016

Net sales of our North America segment increased ~~$30.6~~$32.2 million or ~~1.8%~~2.2% in ~~the third quarter of 2016~~2017 compared to 2016, driven by increased volume of 1.7% due to benefits from innovation and 0.6% from the ~~third quarter~~barkTHINS brand acquisition. Additionally, net sales growth benefited from the timing of ~~2015, reflecting volume increases of 1.1% and the favorable net impact of acquisitions and divestitures of 0.8%, partially offset~~new stand-up packaging as well as distributor changes by ~~unfavorable net~~several retailers resulting in increased retail inventory. Net price realization ~~of 0.1%. The volume increase was primarily attributed~~increased by 0.2% due to ~~sales in the U.S., which increased 1.7%, partially offset by lower volumes in Canada. The unfavorable net price realization resulted from increased~~decreased levels of trade promotional ~~spending necessary to support higher levels~~spending. Excluding a 0.3% unfavorable impact of ~~in-store merchandising and displays as well as~~foreign currency exchange rates, the ~~related promotional price points.~~net sales of our North America segment increased by approximately 2.5%.

Our North America segment income increased ~~$17.8~~$34.7 million or ~~3.3%~~8.1% in ~~the third quarter of 2016~~2017 compared to ~~the third quarter of 2015,~~2016, driven by higher ~~net sales as well as a decline~~gross profit, partially offset by investments in ~~advertising~~greater levels of selling expense and ~~related consumer marketing expenses.~~go-to-market capabilities and increased depreciation and amortization resulting from the recent barkTHINS brand acquisition.

Results of Operations - First ~~Nine~~Six Months ~~2016~~2017 vs. First ~~Nine~~Six Months ~~2015~~2016

Net sales of our North America segment increased ~~$2.4~~$75.9 million or 2.5% in ~~the first nine months of 2016~~2017 compared to ~~the same period~~2016, driven by increased volume of ~~2015, reflecting volume increases of 0.5%~~0.9% due to a strong Easter season, as well as benefits from innovation and the ~~favorable~~barkTHINS brand acquisition. Additionally, net ~~impact~~sales growth benefited from the timing of ~~acquisitions and divestitures of 0.6%, entirely offset~~new stand-up packaging as well as distributor changes by ~~unfavorable net~~several retailers resulting in increased retail inventory. Net price realization ~~of 0.9% and an unfavorable impact from foreign currency exchange rates that reduced net sales~~increased by ~~0.2%. The unfavorable net price realization resulted from increased~~0.8% due to decreased levels of trade promotional spending necessary to support higher levels of in-store merchandising and displays as well as the related promotional price points. Our Canada operations were impacted by the stronger U.S. dollar, which drove the unfavorable foreign currency impact.spending.

Our North America segment income ~~decreased $42.0~~increased $58.4 million or ~~2.7%~~6.1% in ~~the first nine months of 2016~~2017 compared to ~~the same period of 2015, primarily~~2016, driven by higher gross profit, partially offset by investments in greater levels of selling expense and go-to-market capabilities and increased depreciation and amortization resulting from the ~~lower gross margin.~~recent barkTHINS brand acquisition.

International and Other

The International and Other segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. ~~We currently have~~Currently, this includes our 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~~other Asia markets, ~~of Asia,~~ Latin America, ~~Middle East,~~ Europe, Africa and ~~other~~the Middle East, along with exports to these regions. ~~This~~While a less significant component, this segment also includes our global retail operations, including ~~Hershey's~~Hershey’s Chocolate World stores in Hershey, Pennsylvania, New York City, ~~Chicago,~~ Las Vegas, Shanghai, Niagara Falls (Ontario), Dubai 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. International and Other accounted for ~~11.9%~~11.2% and ~~11.6%~~11.8% of our net sales for the three months ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015,~~July 3, 2016, respectively. International and Other results for the three and ~~nine~~six months ended ~~October~~July 2, ~~2016~~2017 and ~~October 4, 2015~~July 3, 2016 were as follows:


	Three Months Ended								Nine Months Ended								Three Months Ended						Percent		Six Months Ended						Percent
	October 2, 2016			October 4, 2015			Percent Change		October 2, 2016			October 4, 2015			Percent Change		July 2, 2017			July 3, 2016			Change		July 2, 2017			July 3, 2016			Change
In millions of dollars
Net sales	$	238.9		$	226.9		5.3	%	$	627.1		$	637.0		(1.5	)%	$	186.0		$	192.8		(3.6	)%	$	388.5		$	388.2		0.1	%
Segment income (loss)	4.3			(13.5		)	131.9	%	(12.4		)	(79.8		)	84.5	%	8.4			(3.5		)	NM		10.1			(16.7		)	NM
Segment margin	1.8		%	(5.9		)%			(2.0		)%	(12.5		)%			4.5		%	(1.8		)%			2.6		%	(4.3		)%

Results of Operations - ~~Third~~Second Quarter 2017 vs. Second Quarter 2016

Net sales of our International and Other segment decreased $6.8 million or 3.6% in 2017 compared to 2016, reflecting volume declines of 2.1%, unfavorable price realization of 1.4% and an unfavorable impact from foreign currency exchange rates of 0.1%. Excluding the unfavorable impact of foreign currency exchange rates, the net sales of our International and Other segment decreased by approximately 3.5%.

The volume decrease primarily related to continued softness in the China chocolate category due to macroeconomic challenges, partially offset by net sales increases in Latin America and select export markets. Constant currency net sales in Mexico and Brazil increased by 16.9% and 2.8%, respectively, driven by solid chocolate marketplace performance. India also experienced constant currency net sales growth of 1.7%. The unfavorable net price realization was mainly driven by increased levels of returns, discounts and allowances in China compared to the prior year.

Our International and Other segment generated income of $8.4 million in 2017 compared to a loss of $3.5 million in 2016. Combined income in Latin America and export markets improved versus the prior year and lower operating expenses in China as a result of our Margin for Growth Program contributed to the positive segment income.

Results of Operations - First Six Months 2017 vs. ~~Third Quarter 2015~~First Six Months 2016

Net sales of our International and Other segment increased ~~$12.0~~$0.3 million or ~~5.3%~~0.1% in ~~the third quarter of 2016~~2017 compared to ~~the third quarter of 2015,~~2016, reflecting favorable ~~net~~ price realization of ~~7.4% and volume increases of 0.1%~~3.6%, partially offset by volume declines of 3.2% and an unfavorable impact from foreign currency exchange rates of ~~2.2%~~0.3%. Excluding the unfavorable impact of foreign currency exchange rates, the net sales of our International and Other segment increased by approximately ~~7.5%~~0.4%.

The favorable net price realization was driven by ~~lower direct~~decreased levels of trade ~~as well as returns, discounts and allowances in China,~~promotional spending, which declined significantly compared to the prior year. The volume ~~increase~~decrease primarily related to continued softness in the China chocolate category due to macroeconomic challenges, partially offset by net sales increases in Latin America and select export markets, partially offset by lower sales in China, the discontinuance of the edible oil business in India and lower sales in our global retail and licensing business. Sales in China continue to be impacted by the challenging macroeconomic environment and competitive activity. In the third quarter of 2016, China chocolate category retail sales declined by about 4%.markets. Constant currency net sales in Mexico and Brazil ~~collectively~~ increased by ~~approximately 18%~~14.8% and 10.9%, respectively, driven by solid ~~Hershey's~~ chocolate marketplace performance. India also experienced constant currency net sales growth of 8.7%.

Our International and Other segment generated income ~~was $4.3~~of $10.1 million in ~~the third quarter of 2016~~2017 compared to a ~~segment~~ loss of ~~13.5~~$16.7 million in ~~the comparable period of 2015.~~2016. Combined income in Latin America and export markets improved versus the prior year and ~~performance~~lower operating expenses in China ~~benefited from lower direct trade~~ as ~~well as returns, discounts and allowances than in the prior year.~~

~~Results of Operations - First Nine Months 2016 vs. First Nine Months 2015~~

~~Net sales~~a result of our ~~International and Other segment decreased $9.9 million or 1.5% in the first nine months of 2016 compared~~Margin for Growth Program contributed to the same period of 2015, reflecting volume declines of 5.0%, an unfavorable impact from foreign currency exchange rates of 4.9% and an unfavorable impact from the Mauna Loa divestiture of 0.3%, substantially offset by favorable net price realization of 8.7%. Excluding the unfavorable impact of foreign currency exchange rates, the net sales of our International and Otherpositive segment ~~increased by approximately 3.4%.~~

The net sales decline was driven by lower sales in India due to the discontinuance of the edible oil business, as well as lower sales in our global retail and licensing business. Constant currency net sales in Mexico and Brazil collectively increased by approximately 12%, driven by solid ~~Hershey's~~ ~~marketplace performance.~~

Our International and Other segment loss decreased by $67.4 million in the first nine months of 2016 compared to the same period in 2015. Combined income in Latin America and export markets improved versus the prior year andincome.

~~performance in China benefited from lower direct trade as well as returns, discounts and allowances which were lower than the prior year.~~

Unallocated Corporate Expense

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

In the ~~third~~second quarter of ~~2016,~~2017, unallocated corporate expense totaled ~~$121.8~~$123.2 million, as compared to ~~$117.7~~$126.6 million in the same period of ~~2015. Savings~~2016, primarily due to savings realized in 2017 from ~~the 2015 Productivity Initiative~~our productivity and ~~disciplined discretionary spending were partially offset by higher employee-related costs and higher expense from the allocation of earnings and losses attributed to noncontrolling interests.~~cost savings initiatives. In the first ~~nine~~six months of ~~2016,~~2017, unallocated corporate ~~items~~expense totaled ~~$370.6~~$242.8 million, as compared to ~~$383.2~~$248.8 million in the same period of ~~2015, with the reduction~~2016, primarily due ~~primarily~~ to savings realized in 2017 from our productivity and cost savings ~~from the 2015 Productivity Initiative discussed previously.~~

initiatives.

Liquidity and Capital Resources

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

At ~~October~~July 2, 2017, our cash and cash equivalents totaled $214.1 million. At December 31, 2016, our cash and cash equivalents totaled ~~$333.3 million. At December 31, 2015, our cash and cash equivalents totaled $346.5~~$297.0 million. Our cash and cash equivalents during the first ~~nine~~six months of ~~2016~~2017 declined ~~$13.2~~$82.9 million compared to the ~~2015~~2016 year-end balance as a result of the ~~sources and~~net uses of cash outlined in the ~~discussion that follows.~~following discussion.

Approximately two-thirds of the balance of our cash and cash equivalents at ~~October~~July 2, ~~2016~~2017 was held by subsidiaries domiciled outside of the United States. If these amounts held outside of the United States were to be repatriated, under current law they would be subject to U.S. federal income taxes, less applicable foreign tax credits. However, our intent is to ~~indefinitely~~permanently reinvest these funds outside of the United States. The cash that our foreign subsidiaries hold for indefinite reinvestment is expected to be used to finance foreign operations and investments. We believe we have sufficient liquidity to satisfy our cash needs, including our cash needs in the United States.

Cash Flow Summary

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



	Six Months Ended
In millions of dollars	July 2, 2017			July 3, 2016
Net cash provided by (used in):
Operating activities	$	335.7		$	368.7
Investing activities	(106.2		)	(404.5		)
Financing activities	(315.1		)	(62.2		)
Effect of exchange rate changes on cash and cash equivalents	2.7			1.7
Decrease in cash and cash equivalents	$	(82.9	)	$	(96.3	)

Operating activities

We generated net cash from operating activities of ~~$422.5~~$335.7 million in the first ~~nine~~six months of ~~2016,~~2017, a decrease of ~~$172.6~~$33.0 million compared to ~~the $595.1~~$368.7 million ~~generated~~ in the same period of ~~2015. The~~2016. This decrease in net cash from operating activities was mainly driven by the following factors:

Working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities) used cash of ~~$400~~$200.8 million in the ~~2016~~2017 period ~~versus $244~~compared to $133.0 million during the same period of ~~2015.~~2016. This ~~resulted in $156~~$67.8 million fluctuation was mainly driven by:


◦	$45.0 million increase in cash generated by accounts receivable, primarily attributed to higher net sales during the first six months of 2017 versus 2016.


◦	$79.8 million increase in cash used by inventories, due to a higher year-over-year build up of U.S. inventories to satisfy seasonal core and variety product requirements, coupled with a higher investment in inventory in Brazil, driven by volume and pricing growth in that market.


◦	$33.1 million increase in cash used by accounts payable and accrued liabilities, mainly due to the timing of payments for trade-related and other accounts payables.

Cash used by accrued income taxes increased $36.3 million, mainly due to the timing of ~~lower cash flow~~estimated tax payments in the ~~2016~~2017 period ~~relative~~compared to 2015, which was driven by a greater investment in inventory in the 2016 period in anticipation of upcoming product launches, coupled with lower purchases of raw material inventory in the 2015 period, since certain inventory levels had been built up at the preceding year-end to take advantage of favorable pricing. Additionally, derivative activity in 2016 included an $87 million payment to settle an interest rate swap in connection with the issuance of new debt in August 2016.

~~Other assets and liabilities provided cash of $4 million in the 2016 period versus $72 million during~~ the same period of ~~2015. This $68 million reduction was largely driven~~2016.

The net uses of cash noted above were offset in part by higher ~~tax payments in 2016 versus 2015 and higher investment in commodity margin balances necessary to support derivative trading activity.~~

~~These decreases were partially offset by the following~~ net ~~cash inflow:~~

~~Net~~ income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, ~~expense, excess tax benefit from stock-based compensation,~~ deferred income taxes, ~~business realignment and~~long-lived asset impairment charges, write-down of equity investments, ~~and~~ the gain on settlement of the SGM ~~liability) resulted in $52~~liability and other charges). Our incremental net income adjusted for non-cash charges increased by $84.5 million ~~of higher cash flow~~ in the ~~2016~~2017 period relative to ~~2015.~~the same period of 2016.

Investing activities

We used net cash infor investing activities of ~~$486.0~~$106.2 million in the first ~~nine~~six months of ~~2016, an increase~~2017, a decrease of ~~$154.6~~$298.3 million compared to ~~$331.4~~$404.5 million in the same period of ~~2015. The increase~~2016. This decrease in net cash used in investing activities was mainly driven by the following factors:

Capital spending. We spent ~~approximately $70~~$19.4 million less ~~in capital expenditures,~~for property, plant and equipment, including capitalized software, during the first ~~nine~~six months of ~~2016~~2017 compared to the same period of ~~2015. The reduction was largely due to completion of the Malaysia plant construction in early~~ 2016. For the full year ~~2016,~~2017, we expect capital expenditures, including capitalized software, to approximate ~~$265~~$270 million to ~~$275~~$290 million.

~~Acquisitions and divestitures~~. In 2016, we spent an incremental $66 million related to business acquisition activity, as we acquired Ripple Brand Collective, LLC for $285 million in 2016 versus Krave for $219 million in 2015, while the 2015 spending was partly offset by proceeds of $32 million from the sale of Mauna Loa. Further details regarding our acquisition and disposition activity are provided in Note 2 to the Unaudited Consolidated Financial Statements.

Investments in partnerships qualifying for tax credits. We make investments in partnership entities ~~which~~that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested approximately ~~$32~~$5.7 million more in projects qualifying for tax credits during the first ~~nine~~six months of ~~2016~~2017 compared to the same period of ~~2015.~~2016.

~~Short-term investments~~Business acquisitions. In ~~2015,~~April 2016, we ~~received proceeds of $95 million from~~acquired Ripple Brand Collective, LLC for $285 million. Further details regarding our business acquisition activity are provided in Note 2 to the ~~sale of short-term investments.~~Unaudited Consolidated Financial Statements.

Financing activities

We ~~generated~~used net cash ~~from~~for financing activities of ~~$49.8~~$315.1 million in the first ~~nine~~six months of ~~2016,~~2017, an increase of ~~$337.2~~$252.9 million compared to ~~$287.4~~$62.2 million ~~of net cash used~~ in the same period of ~~2015. The majority of our~~2016. This increase in net cash used in financing ~~activity~~activities was ~~attributed to~~mainly driven by the ~~following:~~following factors:

Short-term borrowings, ~~net~~net. . In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. During the first ~~nine~~six months of 2017, we had a net reduction in short-term borrowings of $14 million primarily due to repayments on short-term foreign bank borrowings. During the first six months of 2016, we generated ~~$345~~cash flow of $742 million offrom proceeds ~~from~~on short-term commercial paper ~~borrowings,~~issuances, partially offset by a ~~$97~~$112 million reduction in short-term foreign bank borrowings. ~~During the first nine months of 2015, we generated $337 million primarily from short-term commercial paper borrowings.~~

~~Long-term borrowings and repayments~~. During the first nine months of 2016, we used $250 million to repay long-term debt. Additionally, in 2016, we issued $500 million of 2.30% Notes due in 2026 and $300 million of 3.375% Notes due in 2046. During the first nine months of 2015, we used $351 million to repay long-term debt, including $100.2 million to repurchase $71.6 million of our long-term debt as part of a cash tender offer. Additionally, in 2015, we issued $300 million of 1.60% Notes due in 2018 and $300 million of 3.20% Notes due in 2025.

Share repurchases. We used cash for total share repurchases of ~~$452.6~~$100 million during the first ~~nine~~six months of 2017 pursuant to our practice of replenishing shares issued for stock options and incentive compensation. We used cash for total share repurchases of $453 million during the first six months of 2016, ~~a decrease of $114.9 million compared to $567.5 million~~which also included shares repurchased in the ~~same period of 2015. The decrease was due to lower repurchases made to offset the dilutive impact of treasury shares issued~~open market under ~~our equity compensation plans.~~pre-approved share repurchase programs.

Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were ~~$371.7~~$256.1 million during the first ~~nine~~six months of ~~2016,~~2017, an increase of ~~$18.6~~$13.0 million compared to ~~$353.1~~$243.1 million in the same period of ~~2015.~~2016.

Proceeds from the exercise of stock ~~options, including tax benefits~~options. . We received ~~$116.3~~$54.8 million from employee ~~exercise~~exercises of stock options, ~~including excess tax benefits~~net of payments of employee taxes withheld from share-based awards, during the first ~~nine~~six months of ~~2016,~~2017, an increase of ~~$29.7~~$15.7 million compared to ~~$86.6~~$39.1 million in the same period of ~~2015.~~2016.

~~Other~~Other.. In February 2016, we used ~~$36~~$35.8 million to purchase the remaining 20% of ~~SGM on February 3, 2016. In 2015, we used $38 million to purchase~~ the ~~remaining 49% interest in Hershey do Brasil.~~outstanding shares of SGM.

~~Contractual Obligation~~

In July 2016, we entered into a fully executed retail lease for a new, expanded location of our Hershey's Chocolate World store in New York City. Commencing in 2017, the new retail location lease has a base lease term of 20 years and will require total future minimum lease payments over the life of the lease of approximately $228 million.

Recent Accounting Pronouncements

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

Safe Harbor Statement

We are subject to changing economic, competitive, regulatory and technological risks and uncertainties that could have a material impact on our business, financial condition or results of operations. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions that we have discussed directly or implied in this report. Many of the forward-looking statements contained in this report may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated,” and “potential,” among others.

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

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;

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

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

Market demand for new and existing products could decline;

Increased marketplace competition could hurt our business;

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;

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

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

Political, economic and/or financial market conditions could negatively impact our financial results;

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

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

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

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; and

Such other matters as discussed in our ~~2015~~2016 Annual Report on Form 10-K.

We undertake no obligation to publicly update or revise any forward-looking statements to reflect actual results, changes in expectations or events or circumstances after the date this Quarterly Report on Form 10-Q is filed.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The total notional amount of interest rate swaps outstanding was $350 million at ~~October~~July 2, ~~2016~~2017 and ~~$850 million at~~ December 31, ~~2015.~~2016. The notional amount ~~includes $350 million of~~relates to fixed-to-floating interest rate swaps which convert a comparable amount of fixed-rate debt to variable rate debt at ~~October~~July 2, ~~2016~~2017 and December 31, ~~2015, respectively.~~2016. A hypothetical 100 basis point increase in interest rates applied to this now variable rate debt as of ~~October~~July 2, ~~2016~~2017 would have increased interest expense by approximately ~~$2.7~~$1.8 million for the first ~~nine~~six months of ~~2016~~2017 and $3.6 million for the full year ~~2015.~~2016.

We consider our current risk related to market fluctuations in interest rates on our remaining debt portfolio, excluding fixed-rate debt converted to variable with fixed-to-floating instruments, to be minimal since this debt is largely long-term and fixed-rate in nature. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A 100 basis point increase in market interest rates would decrease the fair value of our fixed-rate long-term debt at ~~October~~July 2, ~~2016~~2017 and December 31, ~~2015~~2016 by approximately ~~$158~~$140 million and ~~$76~~$142 million, respectively. However, since we currently have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position.

The potential decline in fair value of foreign currency forward exchange contracts resulting from a hypothetical near-term adverse change in market rates of 10% was ~~$11.7~~$14.7 million as of ~~October~~July 2, ~~2016~~2017 and ~~$3.2~~$9.6 million as of December 31, ~~2015.~~2016. Our open commodity contracts had a notional value of ~~$199.7~~$423.3 million as of ~~October~~July 2, ~~2016~~2017 and ~~$374.8~~$739.4 million as of December 31, ~~2015.~~2016. At the end of the ~~third~~second quarter of ~~2016,~~2017, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased our net unrealized losses by ~~$20.0~~$42.3 million, generally offset by a reduction in the cost of the underlying commodity purchases.

Other than as described above, market risks have not changed significantly from those described in our ~~2015~~2016 Annual Report on Form 10-K.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of ~~October~~July 2, ~~2016.~~2017. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~October~~July 2, ~~2016.~~2017.

There have been no changes in our internal control over financial reporting during the quarter ended ~~October~~July 2, ~~2016~~2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

Information on legal proceedings is included in Note 1514 to the Unaudited Consolidated Financial Statements.

Item 1A. Risk Factors.

~~Risk Factors as of October 2, 2016 have not changed materially from those described~~When evaluating an investment in our Common Stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part 1,I, Item 1A, “Risk Factors,” of our ~~2015~~2016 Annual Report on Form ~~10-K.~~10-K, as well as the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements filed with the SEC. There have been no material changes in our risk factors since the filing of our 2016 Annual Report on Form 10-K, other than to include the following risk factor related to our implementation of a new enterprise resource planning system.

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 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

~~There were no~~he following table shows the purchases of ~~our~~shares of Common Stock ~~during~~made by or on behalf of Hershey, or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of Hershey, for each fiscal month in the three months ended ~~October~~July 2, ~~2016.~~2017:



Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
					(in thousands of dollars)
April 3 through April 30	—	$	—	—	$	100,000
May 1 through May 28	600,000	$	111.99	—	$	100,000
May 29 through July 2	286,675	$	114.42	—	$	100,000
Total	886,675	$	112.77	—

(1) During the three months ended July 2, 2017, 886,675 shares of Common Stock were purchased in connection with our practice of buying back shares sufficient to offset those issued under incentive compensation plans. All of the shares of Common Stock purchased during the period were purchased in open market transactions.

(2) In ~~February 2015, our Board of Directors approved a $250 million share repurchase authorization. This program was completed in the first quarter of 2016. In February~~January 2016, our Board of Directors approved an additional $500 million share repurchase authorization. As of ~~October~~July 2, ~~2016,~~2017, approximately $100 million remained available for repurchases of our Common Stock under this program. The share repurchase program does not have an expiration date.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Effective October 24, 2016, the Company terminated its 364 Day Credit Agreement (the “Credit Agreement”) with Citibank, N.A., as lender and administrative agent, pursuant to which the Company had the right to borrow up to $500 million on an unsecured, revolving basis. The Credit Agreement had been put in place on June 16, 2016 to provide additional borrowings to be used for general corporate purposes, including commercial paper backstop and acquisitions. The Company made no borrowings under this facility while it was outstanding. No early termination penalties were incurred as a result of the termination.Not applicable.

In the ordinary course of their respective businesses, Citibank, N.A., and its affiliates have engaged, and may in the future engage, in commercial banking and/or investment banking transactions with the Company and its affiliates for which they have in the past received, and may in the future receive, customary fees.

Item 6. Exhibits.

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:



Exhibit Number		Description
10.1		~~Letter Agreement,~~Form of Notice of Special Award of Performance Stock Units is incorporate by ~~and between The Hershey Company and Citibank, N.A., terminating~~reference from Exhibit 10.1 to the ~~364 Day Credit Agreement effective October 24, 2016.~~Company’s Current Report on Form 8-K filed May 5, 2017*+
12.1		Computation of Ratio of Earnings to Fixed Charges.*
31.1		Certification of ~~John P. Bilbrey,~~Michele G. Buck, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2		Certification of Patricia A. Little, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Certification of ~~John P. Bilbrey,~~Michele G. Buck, Chief Executive Officer, and Patricia A. Little, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase

*		Filed herewith
**		Furnished herewith
+		Management contract, compensatory plan or arrangement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		THE HERSHEY COMPANY
		(Registrant)

Date: ~~October~~	July 28, ~~2016~~2017	/s/ Patricia A. Little
		Patricia A. Little
		Senior Vice President, Chief Financial Officer
		(Principal Financial Officer)

Date: ~~October~~	July 28, ~~2016~~2017	/s/ Javier H. Idrovo
		Javier H. Idrovo
		Chief Accounting Officer
		(Principal Accounting Officer)

5150



	Preferred Stock		Common Stock		Class B Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Common Stock			Accumulated Other Comprehensive Loss			Noncontrolling Interests in Subsidiaries			Total Stockholders’ Equity
Balance, December 31, 2015	$	—	$	299,281	$	60,620	$	783,877	$	5,897,603		$	(5,672,359	)	$	(371,025	)	$	49,465		$	1,047,462
Net income									603,191												603,191
Other comprehensive loss															(25,797		)	(2,040		)	(27,837		)
Dividends:
Common Stock, $1.784 per share									(273,380		)										(273,380		)
Class B Common Stock, $1.622 per share									(98,326		)										(98,326		)
Stock-based compensation							39,621														39,621
Exercise of stock options and incentive-based transactions							29,177					75,542									104,719
Repurchase of common stock												(452,580		)							(452,580		)
Net loss attributable to noncontrolling interests																		(798		)	(798		)
Balance, October 2, 2016	$	—	$	299,281	$	60,620	$	852,675	$	6,129,088		$	(6,049,397	)	$	(396,822	)	$	46,627		$	942,072



Goodwill	$	147,089
Trademarks	112,000
Other intangible assets	17,000
Other assets, primarily current assets, net of cash acquired totaling $1,362	9,465
Current liabilities	(2,756		)
Non-current deferred tax liabilities	(47,344		)
Net assets acquired	$	235,454



	October 2, 2016		December 31, 2015
5.45% Notes due 2016 (1)	$	—	$	250,000
1.50% Notes due 2016	250,000		250,000
1.60% Notes due 2018	300,000		300,000
4.125% Notes due 2020	350,000		350,000
8.8% Debentures due 2021	84,715		84,715
2.625% Notes due 2023	250,000		250,000
3.20% Notes due 2025	300,000		300,000
2.30% Notes due 2026 (2)	500,000		—
7.2% Debentures due 2027	193,639		193,639
3.375% Notes due 2046 (2)	300,000		—
Other obligations, net of debt issuance costs and unamortized debt discount	84,136		78,660
Total long-term debt	2,612,490		2,057,014
Less—current portion	250,024		499,923
Long-term portion	$	2,362,466	$	1,557,091



	Noncontrolling Interests
Balance, December 31, 2015	$	49,465
Net loss attributable to noncontrolling interests (1)	(798		)
Other comprehensive loss - foreign currency translation adjustments	(2,040		)
Balance, October 2, 2016	$	46,627



	Total
Liability balance at December 31, 2015	$	16,310
2016 business realignment charges	16,899
Cash payments	(28,150		)
Other, net	(206		)
Liability balance at October 2, 2016	$	4,853