SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

19 East Chocolate Avenue, Hershey, PA

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,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

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—~~150,075,619~~148,185,733 shares, as of ~~October 20, 2017.~~April 19, 2019.

Class B Common Stock, one dollar par value—~~60,619,777~~60,613,777 shares, as of ~~October 20, 2017.~~April 19, 2019.

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
	October 1, 2017		October 2, 2016		October 1, 2017			October 2, 2016		March 31, 2019			April 1, 2018
Net sales	$	2,033,121	$	2,003,454	$	5,575,790		$	5,469,937	$	2,016,488		$	1,971,959
Cost of sales	1,092,899		1,152,606		2,965,798			3,054,315		1,123,984			997,899
Gross profit	940,222		850,848		2,609,992			2,415,622		892,504			974,060
Selling, marketing and administrative expense	497,182		474,494		1,404,970			1,408,759		453,573			485,324
Long-lived asset impairment charges	—		—		208,712			—
Business realignment costs	4,020		2,330		50,018			30,568		62			8,224
Operating profit	439,020		374,024		946,292			976,295		438,869			480,512
Interest expense, net	24,589		24,387		72,456			66,730		37,458			29,339
Other (income) expense, net	13,630		21,800		23,557			8,703		5,477			1,942
Income before income taxes	400,801		327,837		850,279			900,862		395,934			449,231
Provision for income taxes	126,788		100,434		275,291			297,671		92,053			98,512
Net income including noncontrolling interest	274,013		227,403		574,988			603,191		303,881			350,719
Less: Net income (loss) attributable to noncontrolling interest	710		—		(26,860		)	—
Less: Net (loss) income attributable to noncontrolling interest										(477		)	516
Net income attributable to The Hershey Company	$	273,303	$	227,403	$	601,848		$	603,191	$	304,358		$	350,203

Net income per share—basic:
Common stock	$	1.32	$	1.09	$	2.91		$	2.88	$	1.49		$	1.71
Class B common stock	$	1.20	$	0.99	$	2.64		$	2.63	$	1.36		$	1.55

Net income per share—diluted:
Common stock	$	1.28	$	1.06	$	2.81		$	2.80	$	1.45		$	1.65
Class B common stock	$	1.20	$	0.99	$	2.64		$	2.62	$	1.36		$	1.55

Dividends paid per share:
Common stock	$	0.656	$	0.618	$	1.892		$	1.784	$	0.722		$	0.656
Class B common stock	$	0.596	$	0.562	$	1.720		$	1.622	$	0.656		$	0.596

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)


	Three Months Ended																		Nine Months Ended																		For the three months ended
	October 1, 2017									October 2, 2016									October 1, 2017									October 2, 2016									March 31, 2019									April 1, 2018
	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			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount			Pre-Tax Amount			Tax (Expense) Benefit			After-Tax Amount
Net income including noncontrolling interest							$	274,013								$	227,403								$	574,988								$	603,191								$	303,881								$	350,719
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	$	9,605		$	—		9,605			$	(8,533	)	$	—		(8,533		)	$	27,878		$	—		27,878			$	5,053		$	—		5,053
Foreign currency translation adjustments:
Foreign currency translation gains (losses) during period																																					$	3,428		$	—		3,428			$	(1,267	)	$	—		(1,267		)
Pension and post-retirement benefit plans:
Net actuarial loss and prior service cost	(9,200		)	3,487			(5,713		)	68			(54		)	14			(9,396		)	3,561			(5,835		)	(29,738		)	11,296			(18,442		)
Reclassification of tax effects relating to U.S. tax reform																																					—			—			—			—			(36,535		)	(36,535		)
Reclassification to earnings	24,300			(8,941		)	15,359			11,828			(4,447		)	7,381			38,544			(22,636		)	15,908			46,133			(17,807		)	28,326			6,718			(1,807		)	4,911			5,097			(1,025		)	4,072
Cash flow hedges:
Losses on cash flow hedging derivatives	(1,339		)	761			(578		)	1,354			(210		)	1,144			(3,545		)	1,643			(1,902		)	(53,627		)	18,838			(34,789		)
Gains (losses) on cash flow hedging derivatives																																					(789		)	718			(71		)	4,245			(990		)	3,255
Reclassification of tax effects relating to U.S. tax reform																																					—			—			—			—			(11,121		)	(11,121		)
Reclassification to earnings	1,962			(1,380		)	582			(2,288		)	1,390			(898		)	7,374			(3,827		)	3,547			(14,064		)	6,079			(7,985		)	1,438			(891		)	547			2,260			(609		)	1,651
Total other comprehensive income (loss), net of tax	$	25,328		$	(6,073	)	19,255			$	2,429		$	(3,321	)	(892		)	$	60,855		$	(21,259	)	39,596			$	(46,243	)	$	18,406		(27,837		)	$	10,795		$	(1,980	)	8,815			$	10,335		$	(50,280	)	(39,945		)
Total comprehensive income including noncontrolling interest							$	293,268								$	226,511								$	614,584								$	575,354								$	312,696								$	310,774
Comprehensive income (loss) attributable to noncontrolling interest							1,029									(751		)							(26,125		)							(2,040		)
Comprehensive income attributable to noncontrolling interest																																											78									1,300
Comprehensive income attributable to The Hershey Company							$	292,239								$	227,262								$	640,709								$	577,394								$	312,618								$	309,474

THE HERSHEY COMPANY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


							March 31, 2019			December 31, 2018
	October 1, 2017			December 31, 2016			(unaudited)
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$	275,056		$	296,967		$	465,965		$	587,998
Accounts receivable—trade, net	742,832			581,381			694,136			594,145
Inventories	938,187			745,678			791,289			784,879
Prepaid expenses and other	258,379			192,752			265,539			272,159
Total current assets	2,214,454			1,816,778			2,216,929			2,239,181
Property, plant and equipment, net	2,050,124			2,177,248			2,108,075			2,130,294
Goodwill	822,348			812,344			1,803,601			1,801,103
Other intangibles	375,455			492,737			1,267,833			1,278,292
Other assets	174,611			168,365			459,754			252,984
Deferred income taxes	18,485			56,861			1,184			1,166
Total assets	$	5,655,477		$	5,524,333		$	7,857,376		$	7,703,020
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	529,442		$	522,536		$	500,633		$	502,314
Accrued liabilities	673,435			750,986			650,657			679,163
Accrued income taxes	19,109			3,207			74,562			33,773
Short-term debt	815,588			632,471			1,168,780			1,197,929
Current portion of long-term debt	300,096			243			3,553			5,387
Total current liabilities	2,337,670			1,909,443			2,398,185			2,418,566
Long-term debt	2,054,132			2,347,455			3,236,317			3,254,280
Other long-term liabilities	402,396			400,161			618,133			446,048
Deferred income taxes	22,303			39,587			181,381			176,860
Total liabilities	4,816,501			4,696,646			6,434,016			6,295,754

Stockholders’ equity:
The Hershey Company stockholders’ equity
Preferred stock, shares issued: none at October 1, 2017 and December 31, 2016	—			—
Common stock, shares issued: 299,281,967 at October 1, 2017 and December 31, 2016	299,281			299,281
Class B common stock, shares issued: 60,619,777 at October 1, 2017 and December 31, 2016	60,620			60,620
Preferred stock, shares issued: none in 2019 and 2018							—			—
Common stock, shares issued: 299,287,967 at March 31, 2019 and December 31, 2018							299,287			299,287
Class B common stock, shares issued: 60,613,777 at March 31, 2019 and December 31, 2018							60,614			60,614
Additional paid-in capital	910,246			869,857			996,181			982,205
Retained earnings	6,325,011			6,115,961			7,193,240			7,032,020
Treasury—common stock shares, at cost: 149,232,801 at October 1, 2017 and 147,642,009 at December 31, 2016	(6,434,861		)	(6,183,975		)
Treasury—common stock shares, at cost: 151,275,897 at March 31, 2019 and 150,172,840 at December 31, 2018							(6,786,065		)	(6,618,625		)
Accumulated other comprehensive loss	(337,027		)	(375,888		)	(348,520		)	(356,780		)
Total—The Hershey Company stockholders’ equity	823,270			785,856			1,414,737			1,398,721
Noncontrolling interest in subsidiary	15,706			41,831			8,623			8,545
Total stockholders’ equity	838,976			827,687			1,423,360			1,407,266
Total liabilities and stockholders’ equity	$	5,655,477		$	5,524,333		$	7,857,376		$	7,703,020

THE HERSHEY COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended						Three Months Ended
	October 1, 2017			October 2, 2016			March 31, 2019			April 1, 2018
Operating Activities
Net income including noncontrolling interests	$	574,988		$	603,191
Net income including noncontrolling interest							$	303,881		$	350,719
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	194,313			241,901			72,329			74,416
Stock-based compensation expense	37,966			40,699			10,556			10,458
Deferred income taxes	(14,859		)	(12,703		)	1,300			2,521
Impairment of long-lived assets (see Note 7)	208,712			—
Write-down of equity investments	23,999			35,862			1,152			434
Gain on settlement of SGM liability (see Note 2)	—			(26,650		)
Other	60,129			42,499			8,497			9,055
Changes in assets and liabilities, net of business acquisitions:
Changes in assets and liabilities, net of business acquisitions and divestitures:
Accounts receivable—trade, net	(161,451		)	(157,142		)	(99,991		)	(9,882		)
Inventories	(192,509		)	(83,221		)	(6,410		)	(11,266		)
Prepaid expenses and other current assets	(33,581		)	(44,254		)	(8,740		)	7,309
Accounts payable and accrued liabilities	(15,380		)	(126,966		)	(2,798		)	(146,623		)
Accrued income taxes	18,849			1,128			56,282			82,231
Contributions to pension and other benefits plans	(57,883		)	(42,566		)
Contributions to pension and other benefit plans							(4,661		)	(7,449		)
Other assets and liabilities	(17,394		)	(21,018		)	(1,437		)	(9,866		)
Net cash provided by operating activities	625,899			450,760			329,960			352,057
Investing Activities
Capital additions (including software)	(148,923		)	(168,225		)	(92,814		)	(60,133		)
Proceeds from sales of property, plant and equipment	1,758			3,032
Proceeds from sales of property, plant and equipment and other long-lived assets							75			112
Equity investments in tax credit qualifying partnerships	(39,977		)	(35,395		)	(18,884		)	(6,281		)
Business acquisitions, net of cash and cash equivalents acquired	—			(285,374		)	—			(915,457		)
Net cash used in investing activities	(187,142		)	(485,962		)	(111,623		)	(981,759		)
Financing Activities
Net increase in short-term debt	173,110			250,573
Net (decrease) increase in short-term debt							(28,990		)	1,686,816
Long-term borrowings	—			792,923			1,370			—
Repayment of long-term debt	(204		)	(250,000		)
Payment of SGM liability (see Note 2)	—			(35,762		)
Repayment of long-term debt and finance leases							(3,135		)	(607,922		)
Repayment of tax receivable obligation							—			(42,500		)
Cash dividends paid	(391,845		)	(371,706		)	(146,463		)	(134,300		)
Repurchase of common stock	(300,312		)	(452,580		)	(198,500		)	(178,073		)
Exercise of stock options	53,532			88,093			34,573			1,884
Net cash (used in) provided by financing activities	(465,719		)	21,541			(341,145		)	725,905
Effect of exchange rate changes on cash and cash equivalents	5,051			465			775			52
Decrease in cash and cash equivalents	(21,911		)	(13,196		)
(Decrease) Increase in cash and cash equivalents							(122,033		)	96,255
Cash and cash equivalents, beginning of period	296,967			346,529			587,998			380,179
Cash and cash equivalents, end of period	$	275,056		$	333,333		$	465,965		$	476,434
Supplemental Disclosure
Interest paid	$	81,497		$	72,925		$	35,271		$	38,323
Income taxes paid	271,412			306,580			28,733			12,817

THE HERSHEY COMPANY

CONSOLIDATED ~~STATEMENT~~STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)


	Preferred Stock		Common Stock		Class B Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Common Stock			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interest in Subsidiary			Total Stockholders’ Equity			Preferred Stock		Common Stock		Class B Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Common Stock			Accumulated Other Comprehensive Income (Loss)			Noncontrolling Interests in Subsidiaries			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
Balance, December 31, 2018																								—		299,287		60,614		982,205		7,032,020			(6,618,625		)	(356,780		)	8,545			1,407,266
Net income (loss)									601,848									(26,860		)	574,988											304,358									(477		)	303,881
Other comprehensive income															38,861			735			39,596																	8,260			555			8,815
Dividends (including dividend equivalents):
Common Stock, $1.892 per share									(288,533		)										(288,533		)
Class B Common Stock, $1.720 per share									(104,265		)										(104,265		)
Common Stock, $0.722 per share																																(107,288		)										(107,288		)
Class B Common Stock, $0.656 per share																																(39,763		)										(39,763		)
Stock-based compensation							36,283														36,283									10,463														10,463
Exercise of stock options and incentive-based transactions							4,106					49,426									53,532									3,513					31,060									34,573
Repurchase of common stock												(300,312		)							(300,312		)												(198,500		)							(198,500		)
Balance, October 1, 2017	$	—	$	299,281	$	60,620	$	910,246	$	6,325,011		$	(6,434,861	)	$	(337,027	)	$	15,706		$	838,976
Impact of ASU 2016-02 related to leases																																3,913												3,913
Balance, March 31, 2019																								$	—	$	299,287	$	60,614	$	996,181	$	7,193,240		$	(6,786,065	)	$	(348,520	)	$	8,623		$	1,423,360

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. The financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the results of operations, financial position, and cash flows for the indicated periods.

Operating results for the quarter ended ~~October 1, 2017~~March 31, 2019 may not be indicative of the results that may be expected for the year ending December 31, ~~2017~~2019 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, ~~2016~~2018 (our ~~“2016~~“2018 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 have been reclassified to conform to current year presentation. Specifically, this includes amounts reclassified to conform to the current year presentation in the Consolidated Statements of Cash Flows.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board ~~(“FASB”~~("FASB") issued Accounting Standards Update ~~(“ASU”~~("ASU") No. ~~2014-09,~~ ~~Revenue from Contracts with Customers, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance.~~2016-02, Leases (Topic 842). This ~~guidance~~ASU requires ~~an entity~~lessees 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.~~most leases on their balance sheets as lease liabilities with corresponding right-of-use ("ROU") assets. 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 not permitted, but reporting entities may choose to adoptCompany adopted the standard as of January 1, 2019, using a modified retrospective approach and applying the ~~original~~standard’s transition provisions at January 1, 2019, the effective date. ~~The standard permits the use of either the full retrospective or modified retrospective transition method.~~

We ~~have substantially completed~~elected the package of practical expedients permitted under the transition guidance, which among other things, allows us to carryforward the historical lease classification. In addition, we made accounting policy elections to combine the lease and non-lease components for asset categories that support selling, marketing and general administrative activities. These asset categories comprise the majority of our ~~assessment~~leases. Finally, we made elections to exclude from balance sheet reporting those leases with initial terms of 12 months or less.

Adoption of the new standard resulted in the recording of operating lease ROU assets and lease liabilities of $227,258 and $216,966, respectively, with the difference largely due to prepaid and deferred rent that were reclassified to the ROU asset value. In addition, we doderecognized a build-to-suit arrangement in accordance with the transition requirements, which resulted in an adjustment to retained earnings of $3,913. The standard did not ~~expect our adoption of the new standard to have a material impact on~~materially affect our consolidated ~~financial statements. We intend to adopt the requirements of the new standard in the first quarter of 2018 utilizing the modified retrospective transition method.~~net income or cash flows. See Note 7 for further details.

~~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 in the process of developing an inventory of our lease arrangements in order to determine the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements and related disclosures. Based on our assessment to date, we expect adoption of this standard to result in a material increase in lease-related assets and liabilities on our Consolidated Balance Sheets; however, we do not expect it to have a significant impact on our Consolidated Statements of Income or Cash Flows.

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

~~In March 2016, the FASB issued ASU No. 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 $7,927 recognized during the nine months ended October 1, 2017. Additionally, within the Consolidated Statement of Cash Flows, the impact of the adoption resulted in a $19,916 increase in net cash flow from operating activities and a corresponding decrease in net cash flow from financing activities for the nine months ended October 1, 2017. These classification requirements were adopted retrospectively to the Consolidated Statement of Cash Flows for the nine months ended October 2, 2016, resulting in a $28,221 increase in net cash flow from operating activities and a corresponding $28,221 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 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 Statement of Income.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815. The purpose of this ASU is to better align accounting rules with a company’s risk management activities and financial reporting for hedging relationships, better reflect economic results of hedging in financial statements, simplify hedge accounting requirements and improve the disclosures of hedging arrangements. ~~The amendment should be applied~~We adopted the provisions of this ASU in the first quarter of 2019 using ~~the~~a modified retrospective ~~transition method.~~approach. Adoption of the new standard did not have a material impact on our consolidated financial statements.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

In June 2018, the FASB issued ASU ~~2017-12~~No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU permits a company to reclassify the income tax effects of the 2017 Tax Cuts and Jobs Act (“U.S. tax reform”) on items within AOCI to retained earnings. We adopted the provisions of this ASU in the first quarter of 2018. We elected to reclassify the income tax effects of U.S. tax reform from items in AOCI as of January 1, 2018 so that the tax effects of items within AOCI are reflected at the appropriate tax rate. The impact of the reclassification resulted in a $47,656 decrease to AOCI and a corresponding increase to retained earnings.

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods presented. We are currently evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently ~~plan~~evaluating the effect that ASU 2018-13 will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to ~~adopt~~the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for annual periods beginning after December 15, 2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to all periods presented. We are currently evaluating the effect that ASU 2018-14 will have on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating the ~~new standard in the first quarter of 2018. We do not expect it to~~effect that ASU 2018-15 will have ~~a significant impact~~ on our ~~Consolidated Financial Statements.~~consolidated financial statements and related disclosures.

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.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

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

2. BUSINESS ACQUISITIONS

~~Acquisitions~~2018 Activity

On October 17, 2018, we completed the acquisition of ~~businesses are~~Pirate Brands, which includes the Pirate's Booty, Smart Puffs and Original Tings brands, from B&G Foods, Inc. Pirate Brands offers baked, trans fat free and gluten free snacks and is available in a wide range of food distribution channels in the United States. The purchase consideration for Pirate Brands totaled $423,002 and consisted of short-term borrowings and cash on hand. Acquisition-related costs for the Pirate Brands acquisition were immaterial.

The acquisition has been accounted for as ~~purchases~~a purchase and, accordingly, ~~the~~Pirate Brands' results of operations ~~of the businesses acquired~~ have been included within the North America segment results in ~~the~~our consolidated financial statements since the ~~respective dates~~date of ~~the acquisitions.~~acquisition. The purchase price ~~for each~~allocation presented below has been finalized as of the ~~acquisitions is allocated to the assets acquired and liabilities assumed.~~

~~2016 Acquisition~~

~~Ripple Brand Collective, LLC~~

~~On April 26, 2016, we completed the acquisition of all~~end of the ~~outstanding shares~~fourth quarter 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. Our consolidated net sales for the year ended December 31, 2016 included approximately $35,600 attributed to ~~barkTHINS~~.

2018. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:

Goodwill ~~is calculated~~was determined as the excess of the purchase price over the fair value of the net assets ~~acquired.~~acquired (including the identifiable intangible assets). The goodwill ~~resulting~~derived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging the Company's resources to expand the distribution locations and customer base for the Pirate Brands' products.

Other intangible assets includes trademarks valued at $272,000 and customer relationships valued at $17,300. Trademarks were assigned estimated useful lives of 45 years and customer relationships were assigned estimated useful lives ranging from 16 to 18 years.

Amplify Snack Brands, Inc.

On January 31, 2018, we completed the acquisition of all of the outstanding shares of Amplify Snack Brands, Inc. (“Amplify”), previously a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPop, Oatmega and Paqui. Amplify's anchor brand, SkinnyPop, is a market-leading ready-to-eat popcorn brand and is available in a wide range of food distribution channels in the United States. Total consideration of $968,781 included payment of $12.00 per share for Amplify's outstanding common stock (for a total of $907,766), as well as payment of Amplify's transaction related expenses, including accelerated equity compensation, consultant fees and other deal costs. The business enables us to capture more consumer snacking occasions by contributing a new portfolio of brands.

The acquisition has been accounted for as a purchase and, accordingly, Amplify's results of operations have been included within the North America segment results in our consolidated financial statements since the date of acquisition. The purchase price allocation presented below has been finalized as of the end of the fourth quarter of 2018. The purchase consideration, net of cash acquired totaling $53,324, was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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



Accounts receivable	$	40,763
Other current assets	34,593
Plant, property and equipment, net	67,989
Goodwill	966,389
Other intangible assets	682,000
Other non-current assets	1,049
Accounts payable	(32,394		)
Accrued liabilities	(132,519		)
Current debt	(610,844		)
Other current liabilities	(2,931		)
Non-current deferred income taxes	(93,489		)
Non-current liabilities	(5,149		)
Net assets acquired	$	915,457

In connection with the acquisition, the Company agreed to pay in full all outstanding debt owed by Amplify under its existing credit agreement as of January 31, 2018, as well as the amount due under Amplify's existing tax receivable obligation. The Company funded the acquisition and repayment of the acquired debt utilizing proceeds from the issuance of commercial paper.

Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets) and is not expected to be deductible for tax purposes. The goodwill that resulted from the acquisition is attributable primarily to ~~the value of leveraging our brand building~~cost-reduction synergies as Amplify leverages Hershey's resources, expertise ~~consumer insights, supply chain capabilities~~ and ~~retail relationships to accelerate growth~~capability-building.

Other intangible assets includes trademarks valued at $648,000 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,~~valued at $34,000. Trademarks were assigned estimated useful lives ranging from 228 to 38 years and customer relationships were assigned estimated useful lives ranging from 14 to 18 years.

The ~~recorded goodwill, trademarks~~Company incurred acquisition-related costs of $20,577 related to the acquisition of Amplify, the majority of which were incurred during the first quarter of 2018. Acquisition-related costs consisted primarily of legal fees, consultant fees, valuation fees and other ~~intangibles~~deal costs and are ~~expected to be deductible for tax purposes.~~

~~Shanghai Golden Monkey (“SGM”)~~

~~On February 3, 2016, we completed~~recorded in 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~~marketing 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~~administrative expense caption within the ~~financing section of the Unaudited~~ Consolidated Statements of ~~Cash Flows.~~

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.Operations.

3. GOODWILL AND INTANGIBLE ASSETS

The changes in the carrying value of goodwill by reportable segment for the ~~nine~~three months ended ~~October 1, 2017~~March 31, 2019 are as follows:



	North America		International and Other		Total
Balance at December 31, 2018	1,782,845		18,258		1,801,103
Foreign currency translation	2,286		212		2,498
Balance at March 31, 2019	$	1,785,131	$	18,470	$	1,803,601

North America International and Other Total
Balance at December 31, 2016 $ 792,190
$ 20,154
$ 812,344
Foreign currency translation 8,401
1,603
10,004
Balance at October 1, 2017 800,591
21,757
822,348

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

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

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



	March 31, 2019					December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Intangible assets subject to amortization:
Trademarks	$	1,174,817	$	(70,271	)	$	1,173,770	$	(60,995	)
Customer-related	164,606		(36,485		)	163,860		(33,516		)
Patents	16,478		(16,027		)	16,306		(15,772		)
Total	1,355,901		(122,783		)	1,353,936		(110,283		)

Intangible assets not subject to amortization:
Trademarks	34,715					34,639
Total other intangible assets	$	1,267,833				$	1,278,292

October 1, 2017 December 31, 2016
Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Intangible assets subject to amortization:
Trademarks $ 272,599
$ (34,516 ) $ 317,023
$ (30,458 )
Customer-related 128,722
(33,069 ) 200,409
(36,482 )
Patents 17,059
(15,562 ) 16,426
(13,700 )
Total 418,380
(83,147 ) 533,858
(80,640 )

Intangible assets not subject to amortization:
Trademarks 40,222
39,519

Total other intangible assets $ 375,455
$ 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 impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded an impairment charge totaling $105,992 representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition.

Total amortization expense for the three months ended ~~October~~March 31, 2019 and April 1, ~~2017~~2018 was $12,238 and ~~October 2, 2016 was $5,410 and $7,666, respectively. Total amortization expense for the nine months ended October 1, 2017 and October 2, 2016 was $17,968 and $18,811,~~$8,451, respectively.

4. SHORT AND LONG-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~~$1.4 billion unsecured revolving credit facility, which currently expires in November 2020. ~~This agreement also includes an option to increase borrowings by an additional $400 million with the consent of the lenders.~~

The credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of ~~October 1, 2017,~~March 31, 2019, we were in compliance with all covenants pertaining to the credit agreement, and we had no significant compensating balance agreements that legally restricted these funds. For more information, refer to the Consolidated Financial Statements included in our ~~2016~~2018 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 ~~$175,279~~$125,226 at ~~October 1, 2017~~March 31, 2019 and ~~$158,805~~$113,189 at December 31, ~~2016.~~2018. Commitment fees relating to our revolving credit facility and lines of credit are not material.

At ~~October 1, 2017,~~March 31, 2019, we had outstanding commercial paper totaling ~~$640,309,~~$1,043,554, at a weighted average interest rate of ~~1.2%~~2.5%. At December 31, ~~2016,~~2018, we had outstanding commercial paper totaling ~~$473,666,~~$1,084,740, at a weighted average interest rate of ~~0.6%~~2.4%.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

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

Long-term debt consisted of the following:



	March 31, 2019			December 31, 2018
2.90% Notes due 2020	$	350,000		$	350,000
4.125% Notes due 2020	350,000			350,000
3.10% Notes due 2021	350,000			350,000
8.8% Debentures due 2021	84,715			84,715
3.375% Notes due 2023	500,000			500,000
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
Finance lease liabilities	78,185			101,980
Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts	(16,669		)	(20,667		)
Total long-term debt	3,239,870			3,259,667
Less—current portion	3,553			5,387
Long-term portion	$	3,236,317		$	3,254,280

December 31, October 1, 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 86,201
83,619
Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts (10,327 ) (14,275 )
Total long-term debt 2,354,228
2,347,698
Less—current portion 300,096
243
Long-term portion $ 2,054,132
$ 2,347,455

Net interest expense ~~consisted~~consists of the following:



	Three Months Ended
	March 31, 2019			April 1, 2018
Interest expense	$	40,663		$	32,853
Capitalized interest	(1,257		)	(1,299		)
Interest expense	39,406			31,554
Interest income	(1,948		)	(2,215		)
Interest expense, net	$	37,458		$	29,339

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Interest expense $ 25,955
$ 25,882
$ 76,208
$ 72,404
Capitalized interest (1,033 ) (1,141 ) (2,892 ) (4,702 )
Interest expense 24,922
24,741
73,316
67,702
Interest income (333 ) (354 ) (860 ) (972 )
Interest expense, net $ 24,589
$ 24,387
$ 72,456
$ 66,730

5. DERIVATIVE INSTRUMENTS

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

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

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

transportation services. We generally hedge commodity price risks for 3- to 24-month periods. Our open commodity derivative contracts had a notional value ~~assuming period-end market prices,~~ of ~~$408,983~~$1,166,051 as of ~~October 1, 2017~~March 31, 2019 and ~~$739,374~~$693,463 as of December 31, ~~2016.~~

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

Derivatives used to manage commodity price risk are not designated for hedge accounting treatment. Therefore, the changes in fair value of these derivatives are recorded as incurred within cost of sales. As discussed in Note ~~11,~~13, we define our segment income to exclude gains and losses on commodity derivatives until the related inventory is sold, at which time the related gains and losses are reflected within segment income. This enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.

Foreign Exchange Price Risk

We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, and Brazilian real. We typically utilize foreign currency forward exchange contracts to hedge these exposures for periods ranging from 3 to 12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was ~~$107,507~~$66,330 at ~~October 1, 2017~~March 31, 2019 and ~~$68,263~~$29,458 at December 31, ~~2016.~~2018. 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~~$7,933 at ~~October 1, 2017~~March 31, 2019 and $11,072 at December 31, ~~2016.~~2018. 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.

We 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. ~~At October 1, 2017~~We had one interest rate derivative instrument in a fair value hedging relationship with a notional amount of $350,000 at March 31, 2019 and December 31, ~~2016, we had interest rate derivative instruments in fair value hedging relationships with a total notional amount of $350,000.~~2018.

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

We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at ~~October 1, 2017~~March 31, 2019 and December 31, ~~2016~~2018 was ~~$24,164~~$23,501 and ~~$22,099,~~$33,168, respectively.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

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

The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of ~~October 1, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:



	March 31, 2019				December 31, 2018
	Assets (1)		Liabilities (1)		Assets (1)		Liabilities (1)
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts	$	2,065	$	786	$	3,394	$	485

Derivatives designated as fair value hedging instruments:
Interest rate swap agreements	504		—		—		4,832

Derivatives not designated as hedging instruments:
Commodities futures and options (2)	5,862		552		7,230		262
Deferred compensation derivatives	3,043		—		—		4,736
Foreign exchange contracts	44		169		70		484
	8,949		721		7,300		5,482
Total	$	11,518	$	1,507	$	10,694	$	10,799

December 31, October 1, 2017 December 31, 2016
Assets (1) Liabilities (1) Assets (1) Liabilities (1)
Derivatives designated as cash flow hedging instruments:
Foreign exchange contracts $ 421
$ 4,216
$ 2,229
$ 809

Derivatives designated as fair value hedging instruments:
Interest rate swap agreements 4,571
—
1,768
—

Derivatives not designated as hedging instruments:
Commodities futures and options (2) 6,222
295
2,348
10,000
Deferred compensation derivatives 994
—
717
—
Foreign exchange contracts 14
—
—
16
7,230
295
3,065
10,016
Total $ 12,222
$ 4,511
$ 7,062
$ 10,825

Income Statement Impact of Derivative Instruments

The effect of derivative instruments on the Consolidated Statements of Income for the three months ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016~~2018 was as follows:

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

~~The effect of derivative instruments on the Consolidated Statements of Income for the nine months ended October 1, 2017 and October 2, 2016 was as follows:~~

The amount of pretax net losses on derivative instruments, including interest rate swap agreements and 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 ~~$13,299~~$8,287 as of ~~October 1, 2017.~~March 31, 2019. This amount is primarily associated with ~~deferred losses relating to~~ interest rate swap agreements.

Fair Value ~~Hedges~~Hedging Relationships

The following table presents amounts that were recorded on the balance sheet related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of March 31, 2019 and December 31, 2018.



Line Item in the Consolidated Balance Sheet in Which the Hedged Item is Included	Carrying Amount of the Hedged Asset/(Liability)						Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount Assets/(Liabilities)
	March 31, 2019			December 31, 2018			March 31, 2019		December 31, 2018
Long-term debt	$	(349,496	)	$	(354,832	)	$	504	$	(4,832	)

For the three months ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016,~~2018, we recognized net incremental interest expense of $630 and a net pretax benefit to interest expense of ~~$573 and $1,022~~$278 relating to our fixed-to-floating interest swap arrangements. For the nine months ended October 1, 2017 and October 2, 2016, we recognized a net pretax benefit to interest expense of $2,203 and $3,477 relating to our fixed-to-floating interest swap arrangements.

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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 HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance ~~Sheets~~Sheet on a recurring basis as of ~~October 1, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:



	Assets (Liabilities)
	Level 1		Level 2		Level 3		Total
March 31, 2019:
Derivative Instruments:
Assets:
Foreign exchange contracts (1)	$	—	$	2,109	$	—	$	2,109
Interest rate swap agreements (2)	—		504		—		504
Deferred compensation derivatives (3)	—		3,043		—		3,043
Commodities futures and options (4)	5,862		—		—		5,862
Liabilities:
Foreign exchange contracts (1)	—		955		—		955
Commodities futures and options (4)	552		—		—		552
December 31, 2018:
Assets:
Foreign exchange contracts (1)	$	—	$	3,464	$	—	$	3,464
Commodities futures and options (4)	7,230		—		—		7,230
Liabilities:
Foreign exchange contracts (1)	—		969		—		969
Interest rate swap agreements (2)	—		4,832		—		4,832
Deferred compensation derivatives (3)	—		4,736		—		4,736
Commodities futures and options (4)	262		—		—		262

Level 1 Level 2 Level 3 Total
October 1, 2017:
Derivative Instruments:
     Assets:
           Foreign exchange contracts (1) $ —
$ 435
$ —
$ 435
           Interest rate swap agreements (2) —
4,571
—
4,571
           Deferred compensation derivatives (3) —
994
—
994
           Commodities futures and options (4) 6,222
—
—
6,222
     Liabilities:
            Foreign exchange contracts (1) —
4,216
—
4,216
            Commodities futures and options (4) 295
—
—
295
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

(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.

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

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 ~~October 1, 2017~~March 31, 2019 and ~~October 2, 2016~~December 31, 2018 because of the relatively short maturity of these instruments.

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

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Fair Value Carrying Value
October 1, 2017 December 31, 2016 October 1, 2017 December 31, 2016
Current portion of long-term debt $ 300,348
$ 243
$ 300,096
$ 243
Long-term debt 2,114,276
2,379,054
2,054,132
2,347,455
Total $ 2,414,624
$ 2,379,297
$ 2,354,228
$ 2,347,698



	Fair Value				Carrying Value
	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Current portion of long-term debt	$	3,553	$	5,387	$	3,553	$	5,387
Long-term debt	3,299,257		3,228,877		3,236,317		3,254,280
Total	$	3,302,810	$	3,234,264	$	3,239,870	$	3,259,667

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~~

In connection with the acquisitions of ~~impairment charges. During~~Amplify in the first quarter of ~~2017,~~2018 and Pirate Brands in the fourth quarter of 2018, as discussed in Note 7,2, we ~~recorded impairment charges totaling $105,992~~used various valuation techniques to ~~write-down distributor relationship and trademark intangible assets that had been recognized in connection~~determine fair value, with the ~~2014 SGM acquisition~~primary techniques being discounted cash flow analysis, relief-from-royalty, and ~~wrote-down property, plant and equipment~~a form of the multi-period excess earnings valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined 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.hierarchy.

7. LEASES

We lease office and retail space, warehouse and distribution facilities, land, vehicles, and equipment. We determine if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Right-of-use ("ROU") assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of lease payments over the lease term and are recognized at the lease commencement date.

As most of our leases do not provide an implicit rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date.

Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants.

For real estate, equipment and vehicles that support selling, marketing and general administrative activities the Company accounts for the lease and non-lease components as a single lease component. These asset categories comprise the majority of our leases. The lease and non-lease components of real estate and equipment leases supporting production activities are not accounted for as a single lease component. Consideration for such contracts are allocated to the lease component and non-lease components based upon relative standalone prices either observable or estimated if observable prices are not readily available.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The components of lease expense for the three months ended March 31, 2019 were as follows:



		Three Months Ended
Lease expense	Classification	March 31, 2019
Operating lease cost	Cost of sales or SM&A (1)	$	10,214
Finance lease cost:
Amortization of ROU assets	Depreciation and amortization (1)	1,934
Interest on lease liabilities	Interest expense, net	1,101
Net lease cost (2)		$	13,249


(1)	Supply chain-related amounts were included in cost of sales.


(2)	Net lease cost does not include short-term leases, variable lease costs or sublease income, all of which are immaterial.

Information regarding our lease terms and discount rates as of March 31, 2019 were as follows:



	March 31, 2019
Weighted-average remaining lease term (years)
Operating leases	14.8
Finance leases	32.0

Weighted-average discount rate
Operating leases	3.9	%
Finance leases	6.0	%

Supplemental balance sheet information related to leases as of March 31, 2019 was as follows:



Leases	Classification	March 31, 2019
Assets
Operating lease ROU assets	Other assets (non-current)	$	219,138

Finance lease ROU assets, at cost	Property, plant and equipment, gross	99,551
Accumulated amortization	Accumulated depreciation	(1,364		)
Finance lease ROU assets, net	Property, plant and equipment, net	$	98,187

Total leased assets		$	317,325

Liabilities
Current
Operating	Accrued liabilities	$	30,178
Finance	Current portion of long-term debt	3,688
Non-current
Operating	Other long-term liabilities	179,636
Finance	Long-term debt	74,497
Total lease liabilities		$	287,999

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The maturity of our lease liabilities as of March 31, 2019 were as follows:



	Operating leases		Finance leases		Total
2019 (remaining of year)	$	28,698	$	5,594	$	34,292
2020	24,025		6,303		30,328
2021	16,876		4,996		21,872
2022	15,514		4,491		20,005
2023	13,507		4,595		18,102
Thereafter	185,621		169,941		355,562
Total lease payments	284,241		195,920		480,161
Less: Imputed interest	74,427		117,735		192,162
Total lease liabilities	$	209,814	$	78,185	$	287,999

Supplemental cash flow and other information related to leases for the three months ended March 31, 2019 was as follows:



	Three Months Ended
	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	9,524
Operating cash flows from finance leases	1,101
Financing cash flows from finance leases	994

ROU assets obtained in exchange for lease liabilities:
Operating leases	717
Finance leases	3,172

8. ASSETS AND LIABILITIES HELD FOR SALE

As of March 31, 2019, the following disposal groups have been classified as held for sale, in each case stated at the lower of net book value or estimated sales value less costs to sell:

The Lotte Shanghai Foods Co., Ltd. joint venture, which was taken out of operation and classified as held for sale during the second quarter of 2018. We sold a portion of the joint venture's equipment in the third and fourth quarters of 2018, and expect the sale of the remaining business to be completed by mid-2019.

Other assets, which are predominantly comprised of select Pennsylvania facilities and land that met the held for sale criteria in the third quarter of 2018. We expect these long-lived assets to be sold during 2019.

The amounts classified as assets and liabilities held for sale at March 31, 2019 include the following:



Assets held for sale, included in prepaid expenses and other assets
Property, plant and equipment, net	$	20,905
Other assets	2,516
	$	23,421

Liabilities held for sale, included in accrued liabilities
Accounts payable and accrued liabilities	$	596
	$	596

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

9. BUSINESS REALIGNMENT ACTIVITIES

We ~~are currently pursuing several~~periodically undertake business realignment activities designed to increase our efficiency and focus our business ~~behind~~in support of our key growth strategies. Costs recorded during the three ~~and nine~~ months ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016~~2018 related to these activities ~~are~~were as follows:

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Margin for Growth Program:
Severance $ 2,876
$ —
$ 33,331
$ —
Accelerated depreciation —
—
6,873
—
Other program costs 5,013
—
16,216
—
Operational Optimization Program:
Accelerated depreciation and amortization —
24,470
—
57,948
Severance —
87
13,828
17,442
Other program costs 368
414
(549 ) 9,822
2015 Productivity Initiative:
Pension settlement charge —
—
—
13,669
Severance —
2,243
—
(543 )
Other program costs —
748
—
6,149
Total business realignment costs $ 8,257
$ 27,962
$ 69,699
$ 104,487

The costs and related benefits to be derived from the Margin for Growth Program relate approximately 85% to the North America segment and 15% to the International and Other segment for the three months ended October 1, 2017.

~~THE HERSHEY COMPANY~~



	Three Months Ended
	March 31, 2019		April 1, 2018
Margin for Growth Program:
Severance	$	—	$	4,048
Accelerated depreciation	—		717
Other program costs	484		10,088
Operational Optimization Program:
Other program costs	—		1,098
Total	$	484	$	15,951

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

The costs and related benefits to be derived from the Margin for Growth Program relate approximately 45% to the North America segment and 55% to the International and Other segment for the nine months ended October 1, 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 include these business realignment expenses because we evaluate segment performance excluding such costs.

Margin for Growth Program

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

~~The Company estimates~~We originally estimated that the ~~“Margin~~Margin for ~~Growth” program will~~Growth Program would result in total pre-tax charges of $375,000 to $425,000, to be incurred from 2017 to 2019. The majority of the initiatives relating to the program have been executed, with the final initiatives to be completed over approximately the next ~~three years.~~nine months. To date, we have incurred pre-tax charges to execute the program totaling $336,779. This ~~estimate~~ includes ~~plant and office closure expenses of $100,000 to $115,000, net intangible~~long-lived asset impairment charges of ~~$100,000~~$208,712 related to ~~$110,000,~~the operations supporting our China business in 2017, as well as the $16,300 incremental impairment charge resulting from the sale of Shanghai Golden Monkey Food Joint Stock Co., Ltd. ("SGM"). In addition to the impairment charges, we have incurred employee separation costs of ~~$80,000 to $100,000, contract termination costs of approximately $25,000,~~$47,932 and other business realignment costs of ~~$70,000~~$63,835. We expect the remaining spending on this program to ~~$75,000.~~be minimal in 2019, bringing total estimated project costs to approximately $340,000 to $355,000. The cash portion of the total ~~charge~~program charges is estimated to be ~~$175,000~~$97,000 to ~~$200,000. At the conclusion of the program in 2019, ongoing annual savings are expected to be approximately $150,000 to $175,000.~~$110,000. The Company ~~expects that implementation of the program will reduce~~reduced its global workforce by approximately 15%, as a result of this program, 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 flowsDuring 2019, we recognized total costs associated with the ~~asset group. Because this assessment indicated that the carrying value was not recoverable,~~Margin for Growth Program of $484. During 2018, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded impairment charges totaling $208,712, with $105,992 representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized ~~in connection~~total costs associated with the ~~2014 SGM acquisition and $102,720 representing the portion~~Margin for Growth Program of ~~the impairment loss that was allocated to property, plant and equipment.~~$14,853. These ~~impairment~~ charges ~~are recorded in the long-lived asset impairment charges caption within the Consolidated Statements of Operations.~~

~~During the three and nine months ended October 1, 2017, we recognized estimated~~include employee severance, ~~totaling $2,876 and $33,331, respectively. These charges relate~~ largely relating to ~~our initiative~~initiatives to improve the cost structure of our China business ~~as well as our initiative~~and to further streamline our corporate operating ~~model. We also recognized~~model, as well as non-cash, asset-related incremental depreciation expense ~~totaling $6,873 for the nine months ended October 1, 2017~~ as part of optimizing the ~~North America~~global supply chain. ~~During the three and nine months ended October 1, 2017,~~In addition, we ~~also recognized~~incurred other program costs, ~~totaling $5,013 and $16,216, respectively. These charges~~which relate primarily to third-party charges ~~for~~in support of our initiative ~~of improving~~to improve global efficiency and 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 ~~includes~~included select facility consolidations. The program ~~encompasses~~encompassed 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 October 1, 2017,~~first quarter of 2018, we ~~recognized~~incurred pre-tax costs totaling $1,098, relating primarily to third-party charges in support of ~~$368. During the nine months ended October 1, 2017, we recognized costs of $13,279 primarily related~~our initiative to employee severance associated with the workforce planning efforts within North America. We currently expect to incur additional cash costs of approximately $9,000 over the next 18 months to complete this program.optimize our production and supply chain network. This program was completed in 2018.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

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

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 connection with this program and 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. The 2015 Productivity 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 recorded through the nine months ended October 2, 2016 relating to lump sum withdrawals by employees retiring or leaving the Company as a result of this program.

Costs associated with business realignment activities are classified in our Consolidated Statements of Income ~~for the three and nine months ended October 1, 2017 and October 2, 2016~~ as follows:



	Three Months Ended
	March 31, 2019		April 1, 2018
Cost of sales	$	—	$	2,214
Selling, marketing and administrative expense	422		5,513
Business realignment costs	62		8,224
Costs associated with business realignment activities	$	484	$	15,951

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Cost of sales $ 213
$ 24,470
$ 6,475
$ 57,948
Selling, marketing and administrative expense 4,024
1,162
13,206
15,971
Business realignment costs 4,020
2,330
50,018
30,568
Costs associated with business realignment activities $ 8,257
$ 27,962
$ 69,699
$ 104,487
The costs and related benefits of the Margin for Growth Program relate approximately 60% to the North America segment and 40% to the International and Other segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs.

The following table presents the liability activity for costs qualifying as exit and disposal ~~costs:~~costs for the three months ended March 31, 2019:



	Total
Liability balance at December 31, 2018	$	14,605
2019 business realignment charges (1)	186
Cash payments	(5,655		)
Liability balance at March 31, 2019 (reported within accrued liabilities)	$	9,136

Total
Liability balance at December 31, 2016 $ 3,725
2017 business realignment charges (1) 61,253
Cash payments (23,742 )
Other, net (69 )
Liability balance at October 1, 2017 (reported within accrued and other long-term liabilities) $ 41,167

(1)

The costs reflected in the liability roll-forward ~~represents~~represent employee-related and certain third-party service provider charges. These costs 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.

8.10. INCOME TAXES

The majority of our taxable income is generated in the U.S. and taxed at the U.S. statutory rate of ~~35%~~21%. The effective tax rates for the ~~nine~~three months ended ~~October~~March 31, 2019 and April 1, ~~2017~~2018 were 23.2% and ~~October 2, 2016 were 32.4% and 33.0%~~21.9%, respectively. Relative to the statutory rate, the ~~2017~~2019 effective tax rate was impacted by ~~a favorable~~state taxes and an unfavorable foreign rate differential, ~~relating to foreign operations and cocoa procurement, investment tax credits and~~which were partially offset by the benefit of ASU 2016-09 ~~which were partially offset by non-benefited costs resulting from~~for the ~~Margin for Growth Program. The 2016 effective rate benefited from the impact~~accounting of ~~non-taxable income related to the settlement of the SGM liability and investment tax credits.~~

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

employee share-based payments.

Hershey and its subsidiaries file tax returns in the U.S., including various state and local returns, and in other 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 for unrecognized tax benefits of approximately ~~$7,191~~$9,807 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits.

U.S. Tax Cuts and Jobs Act of 2017

The U.S. Tax Cuts and Jobs Act, enacted in December 2017 (“U.S. tax reform”), significantly changed U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. Under GAAP (specifically, ASC Topic 740), the effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted.

During the fourth quarter of 2017, we recorded a net provisional charge of $32.5 million, which included the estimated impact of the one-time mandatory tax on previously deferred earnings of non-U.S. subsidiaries offset in part by the benefit from revaluation of net deferred tax liabilities based on the new lower corporate income tax rate. During 2018, we recorded net benefits totaling $19.5 million as measurement period adjustments to the net provisional charge. The

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

accounting for income tax effects of U.S. tax reform is complete based on additional tax regulations available as of December 31, 2018.

9.11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

Net Periodic Benefit Cost

The components of net periodic benefit cost for the ~~third quarter~~three months ended March 31, 2019 and April 1, 2018 were as follows:



	Pension Benefits						Other Benefits
	Three Months Ended						Three Months Ended
	March 31, 2019			April 1, 2018			March 31, 2019			April 1, 2018
Service cost	$	5,207		$	5,335		$	38		$	58
Interest cost	9,156			7,839			1,959			1,732
Expected return on plan assets	(13,496		)	(14,766		)	—			—
Amortization of prior service (credit) cost	(1,809		)	(1,799		)	203			209
Amortization of net loss (gain)	8,420			6,687			(96		)	—
Total net periodic benefit cost	$	7,478		$	3,296		$	2,104		$	1,999

Pension Benefits Other Benefits
Three Months Ended Three Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Service cost $ 5,262
$ 5,794
$ 66
$ 75
Interest cost 10,320
10,130
2,214
2,435
Expected return on plan assets (14,390 ) (14,700 ) —
—
Amortization of prior service (credit) cost (1,455 ) (262 ) 187
144
Amortization of net loss 8,526
8,803
(1 ) (4 )
Settlement loss 17,043
3,147
—
—
Total net periodic benefit cost $ 25,306
$ 12,912
$ 2,466
$ 2,650

We made contributions of ~~$31,512~~$898 and ~~$6,922~~$3,763 to the pension plans and other benefits plans, respectively, during the ~~third~~first quarter of ~~2017.~~2019. In the ~~third~~first quarter of ~~2016,~~2018, we made contributions of ~~$18,549~~$1,005 and ~~$7,473~~$6,444 to our pension plans and other ~~benefits~~benefit plans, respectively. The contributions in ~~2017~~2019 and ~~2016~~2018 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
Nine Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Service cost $ 15,487
$ 17,377
$ 197
$ 224
Interest cost 30,819
31,914
6,626
7,300
Expected return on plan assets (43,088 ) (44,073 ) —
—
Amortization of prior service (credit) cost (4,366 ) (785 ) 560
432
Amortization of net loss (gain) 25,308
26,411
(1 ) (10 )
Settlement loss 17,043
20,085
—
—
Total net periodic benefit cost $ 41,203
$ 50,929
$ 7,382
$ 7,946

We made contributions of $36,497 and $21,386 to the pension plans and other benefits plans, respectively, during the first nine months of 2017. In the first nine months of 2016, we made contributions of $20,385 and $22,181 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.

~~For 2017, there are no significant minimum funding requirements for our domestic pension plans and planned voluntary funding of our non-domestic pension plans in 2017 is not material.~~

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

During the third quarter of 2017, cumulative lump sum distributions from our supplemental executive retirement plan exceeded the plan’s 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. In addition, settlement charges were also triggered in the pension plan benefiting our employees in Puerto Rico as a result of lump sum distributions and the purchase of annuity contracts relating to the termination of this plan. In connection with these settlements, the related plan assets and liabilities were remeasured at September 1, 2017 using a discount rate of 3.44%, compared to 3.81% as of December 31, 2016 and an expected rate of return on plan assets of 5.8%.

During the three and nine months ended October 2, 2016, settlement charges in our salaried defined benefit pension plan were triggered by lump sum withdrawals by employees retiring or leaving the Company as a result of the 2015 Productivity Initiative.

~~10.~~12. 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 ~~2016~~2018 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
	March 31, 2019		April 1, 2018
Pre-tax compensation expense	$	10,556	$	10,458
Related income tax benefit	2,322		2,604

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Pre-tax compensation expense $ 13,409
$ 14,491
$ 37,966
$ 40,699
Related income tax benefit 4,076
4,406
11,124
13,186

Compensation costs for ~~stock-based~~stock compensation plans are primarily included in selling, marketing and administrative expense. As of ~~October 1, 2017,~~March 31, 2019, total stock-based compensation cost related to non-vested awards not yet recognized was ~~$71,908~~$92,298 and the weighted-average period over which this amount is expected to be recognized was approximately ~~2.2~~2.3 years.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(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 ~~October 1, 2017~~March 31, 2019 is as follows:



Stock Options	Shares		Weighted-Average Exercise Price (per share)	Weighted-Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at beginning of year	5,394,382		$94.28	5.6 years
Granted	1,640		$109.74
Exercised	(603,525	)	$81.10
Forfeited	(16,263	)	$104.90
Outstanding as of March 31, 2019	4,776,234		$95.91	5.6 years	$	90,361
Options exercisable as of March 31, 2019	3,589,392		$94.22	4.7 years	$	73,967

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 (966,532 ) $ 69.95

Forfeited (219,456 ) $ 103.08

Outstanding as of October 1, 2017 6,092,195
$ 88.47
6.0 years $ 115,872
Options exercisable as of October 1, 2017 3,848,894
$ 80.96
4.5 years $ 101,692

~~THE HERSHEY COMPANY~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS~~

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

The weighted-average fair value of options granted was ~~$15.77~~$15.25 and ~~$11.46~~$15.58 per share for the periods ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016,~~2018, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions:



	Three Months Ended
	March 31, 2019		April 1, 2018
Dividend yields	2.7	%	2.3	%
Expected volatility	17.0	%	16.6	%
Risk-free interest rates	2.5	%	2.8	%
Expected term in years	6.5		6.6

Nine Months Ended
October 1, 2017 October 2, 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 ~~$38,845~~$17,598 and ~~$70,009~~$9,145 for the periods ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016,~~2018, respectively.

Performance Stock Units and Restricted Stock Units

A summary of activity relating to grants of PSUs and RSUs for the period ended ~~October 1, 2017~~March 31, 2019 is as follows:



Performance Stock Units and Restricted Stock Units	Number of units		Weighted-average grant date fair value for equity awards (per unit)
Outstanding at beginning of year	999,018		$101.57
Granted	433,109		$113.65
Performance assumption change (1)	(71,694	)	$137.34
Vested	(328,136	)	$98.05
Forfeited	(9,198	)	$101.00
Outstanding as of March 31, 2019	1,023,099		$105.65

Performance Stock Units and Restricted Stock Units Number of units
Weighted-average grant date fair value
for equity awards (per unit)
Outstanding as of December 31, 2016 828,228
$102.66
Granted 441,634
$111.00
Performance assumption change 23,780
$101.40
Vested (242,011 ) $111.19
Forfeited (125,782 ) $107.73
Outstanding as of October 1, 2017 925,849
$102.36

~~The table above includes 6,410 units of PSUs awarded to participants in a prior period for which the measurement (grant) date occurred for accounting purposes in 2017.~~


(1)	Reflects the net number of PSUs above and below target levels based on the performance metrics.

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

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Nine Months Ended
October 1, 2017 October 2, 2016
Units granted 441,634
531,019
Weighted-average fair value at date of grant $ 111.00
$ 93.47
Monte Carlo simulation assumptions:
Estimated values $ 46.85
$ 38.02
Dividend yields 2.3 % 2.5 %
Expected volatility 20.4 % 17.0 %



	Three Months Ended
	March 31, 2019			April 1, 2018
Units granted	433,109			302,947
Weighted-average fair value at date of grant	$	113.65		$	98.27
Monte Carlo simulation assumptions:
Estimated values	$	48.40		$	29.17
Dividend yields	2.6		%	2.6		%
Expected volatility	20.3		%	20.4		%

The fair value of shares vested totaled ~~$26,097~~$36,003 and ~~$19,673~~$15,605 for the periods ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016,~~2018, respectively.

Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled ~~369,037~~347,073 units as of ~~October 1, 2017.~~March 31, 2019. 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)~~

~~11.~~13. SEGMENT INFORMATION

Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international 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 approximately ~~89%~~90% of our 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, 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.


•	North America - This segment is responsible for our traditional chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines.

•

International and Other - International and Other is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in China, Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. This segment also includes our global retail operations, including Hershey's Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company's trademarks and products to third parties around the world.

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~~acquisition-related 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 ~~components~~items of our operating income are managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM as well 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 2016 Annual Report on Form 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 (gains) losses recognized in unallocated derivative (gains) losses outside of the reporting segment results until the related inventory is sold, at which time the related gains and losses are reallocated to segment income. This enables us to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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
		October 1, 2017			October 2, 2016		October 1, 2017			October 2, 2016			March 31, 2019		April 1, 2018
Net sales:	Net sales:
North America	North America	$	1,792,377		$	1,764,528	$	4,946,537		$	4,842,840		$	1,806,958	$	1,751,688
International and Other	International and Other	240,744			238,926		629,253			627,097			209,530		220,271
Total	Total	$	2,033,121		$	2,003,454	$	5,575,790		$	5,469,937		$	2,016,488	$	1,971,959

Segment income (loss):
Segment income:
North America	North America	$	554,578		$	563,946	$	1,568,098		$	1,519,059		$	564,761	$	534,426
International and Other	International and Other	16,400			4,284		26,491			(12,411		)	20,243		17,680
Total segment income	Total segment income	570,978			568,230		1,594,589			1,506,648			585,004		552,106
Unallocated corporate expense (1)	Unallocated corporate expense (1)	124,115			121,828		366,938			370,622			114,504		123,967
Unallocated mark-to-market (gains) losses on commodity derivatives		(21,954		)	35,791		(27,486		)	30,851
Long-lived asset impairment charges		—			—		208,712			—
Unallocated mark-to-market losses (gains) on commodity derivatives													27,967		(96,250		)
Costs associated with business realignment activities	Costs associated with business realignment activities	8,257			27,962		69,699			104,487			484		15,951
Non-service related pension expense		21,540			6,360		30,123			20,666
Acquisition and integration costs		—			2,265		311			3,727
Acquisition-related costs													3,180		27,926
Operating profit	Operating profit	439,020			374,024		946,292			976,295			438,869		480,512
Interest expense, net	Interest expense, net	24,589			24,387		72,456			66,730			37,458		29,339
Other (income) expense, net	Other (income) expense, net	13,630			21,800		23,557			8,703			5,477		1,942
Income before income taxes	Income before income taxes	$	400,801		$	327,837	$	850,279		$	900,862		$	395,934	$	449,231

(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.

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



	Three Months Ended
	March 31, 2019		April 1, 2018
Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in income	$	26,641	$	(66,590	)
Net gains (losses) on commodity derivative positions reclassified from unallocated to segment income	1,326		(29,660		)
Net losses (gains) on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses	$	27,967	$	(96,250	)

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Net losses on mark-to-market valuation of commodity derivative positions recognized in income $ 2,445
$ 37,246
$ 40,500
$ 37,176
Net losses on commodity derivative positions reclassified from unallocated to segment income (24,399 ) (1,455 ) (67,986 ) (6,325 )
Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses $ (21,954 ) $ 35,791
$ (27,486 ) $ 30,851

As of ~~October 1, 2017,~~March 31, 2019, the cumulative amount of mark-to-market ~~losses~~gains on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was ~~$135,538.~~$12,351. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net ~~pre-tax losses~~pretax gains on commodity derivatives of ~~$93,814~~$4,265 to segment operating results in the next twelve months.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

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

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



	Three Months Ended
	March 31, 2019		April 1, 2018
North America	$	53,945	$	47,985
International and Other	7,350		14,288
Corporate (1)	11,034		12,143
Total	$	72,329	$	74,416

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
North America $ 42,544
$ 41,592
$ 125,532
$ 120,378
International and Other 9,397
13,515
32,110
37,523
Corporate (1) 10,293
30,015
36,671
84,000
Total $ 62,234
$ 85,122
$ 194,313
$ 241,901


(1)	Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note 7.9. Such amounts are not included within our measure of segment income.

~~12.~~14. TREASURY STOCK ACTIVITY

A summary of our treasury stock activity is as follows:



	Three Months Ended March 31, 2019
	Shares		Dollars
			In thousands
Shares repurchased in the open market under pre-approved share repurchase programs	1,386,193		$	150,000
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation	463,305		48,500
Total share repurchases	1,849,498		198,500
Shares issued for stock options and incentive compensation	(746,441	)	(31,060		)
Net change	1,103,057		$	167,440

Nine Months Ended October 1, 2017
Shares Dollars
In thousands
Shares repurchased in the open market under pre-approved share repurchase programs —
$ —
Milton Hershey School Trust repurchase 1,500,000
159,015
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation 1,278,675
141,297
Total share repurchases 2,778,675
300,312
Shares issued for stock options and incentive compensation (1,187,883 ) $ (49,426 )
Net change 1,590,792
$ 250,886

The $100,000 share repurchase program approved by our Board of Directors in October 2017 was completed in the first quarter of 2019. In August 2017, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “Trust”), pursuant to which the Company agreed to purchase 1,500,000 shares of the Company’s common stock from the Trust at a price equal to $106.01 per share, for a total purchase price of $159,015.

~~In January 2016,~~July 2018, our Board of Directors approved aan additional $500,000 share repurchase authorization, to ~~repurchase shares of our Common Stock.~~commence after the existing 2017 authorization was completed. As of ~~October 1, 2017, $100,000~~March 31, 2019, $410,000 remained available for repurchases of our Common Stock under this program. ~~In October 2017, our Board of Directors approved an additional $100,000 share repurchase authorization, to commence after the existing 2016 authorization is completed.~~ We are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The ~~programs have~~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.~~15. NONCONTROLLING INTEREST

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 joint venture partners.

A roll-forward showing the ~~2017~~2019 activity relating to the noncontrolling interest follows:



	Noncontrolling Interest
Balance, December 31, 2018	$	8,545
Net loss attributable to noncontrolling interest	(477		)
Other comprehensive income - foreign currency translation adjustments	555
Balance, March 31, 2019	$	8,623

Noncontrolling Interest
Balance, December 31, 2016 $ 41,831
Net loss attributable to noncontrolling interest (26,860 )
Other comprehensive income - foreign currency translation adjustments 735
Balance, October 1, 2017 $ 15,706

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 nine months ended October 2, 2016, the net loss attributable to noncontrolling interests totaled $798, which was presented within selling, marketing and administrative expense in the Consolidated Statements of Income since the amount was not considered significant.

~~14.~~

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

16. 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.

~~15.~~17. 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
	March 31, 2019					April 1, 2018
	Common Stock		Class B Common Stock			Common Stock		Class B Common Stock
Basic earnings per share:
Numerator:
Allocation of distributed earnings (cash dividends paid)	$	106,700	$	39,763		$	98,170	$	36,130
Allocation of undistributed earnings	115,223		42,672			157,952		57,951
Total earnings—basic	$	221,923	$	82,435		$	256,122	$	94,081

Denominator (shares in thousands):
Total weighted-average shares—basic	148,709		60,614			150,114		60,620

Earnings Per Share—basic	$	1.49	$	1.36		$	1.71	$	1.55

Diluted earnings per share:
Numerator:
Allocation of total earnings used in basic computation	$	221,923	$	82,435		$	256,122	$	94,081
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock	82,435		—			94,081		—
Reallocation of undistributed earnings	—		(209		)	—		(343		)
Total earnings—diluted	$	304,358	$	82,226		$	350,203	$	93,738

Denominator (shares in thousands):
Number of shares used in basic computation	148,709		60,614			150,114		60,620
Weighted-average effect of dilutive securities:
Conversion of Class B common stock to Common shares outstanding	60,614		—			60,620		—
Employee stock options	582		—			844		—
Performance and restricted stock units	422		—			377		—
Total weighted-average shares—diluted	210,327		60,614			211,955		60,620

Earnings Per Share—diluted	$	1.45	$	1.36		$	1.65	$	1.55

Three Months Ended
October 1, 2017 October 2, 2016
Common Stock Class B Common Stock Common Stock Class B Common Stock
Basic earnings per share:
Numerator:
Allocation of distributed earnings (cash dividends paid) $ 99,588
$ 36,129
$ 94,498
$ 34,068
Allocation of undistributed earnings 100,892
36,694
72,691
26,146
Total earnings—basic $ 200,480
$ 72,823
$ 167,189
$ 60,214

Denominator (shares in thousands):
Total weighted-average shares—basic 151,418
60,620
153,259
60,620

Earnings Per Share—basic $ 1.32
$ 1.20
$ 1.09
$ 0.99

Diluted earnings per share:
Numerator:
Allocation of total earnings used in basic computation $ 200,480
$ 72,823
$ 167,189
$ 60,214
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock 72,823
—
60,214
—
Reallocation of undistributed earnings —
(239 ) —
(160 )
Total earnings—diluted $ 273,303
$ 72,584
$ 227,403
$ 60,054

Denominator (shares in thousands):
Number of shares used in basic computation 151,418
60,620
153,259
60,620
Weighted-average effect of dilutive securities:
Conversion of Class B common stock to Common shares outstanding 60,620
—
60,620
—
Employee stock options 1,002
—
1,062
—
Performance and restricted stock units 352
—
220
—
Total weighted-average shares—diluted 213,392
60,620
215,161
60,620

Earnings Per Share—diluted $ 1.28
$ 1.20
$ 1.06
$ 0.99

The earnings per share calculations for the three months ended October 1, 2017 and October 2, 2016 excluded 2,374 and 2,921, respectively, of stock options (in thousands) that would have been antidilutive.

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

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

Nine Months Ended
October 1, 2017 October 2, 2016
Common Stock Class B Common Stock Common Stock Class B Common Stock
Basic earnings per share:
Numerator:
Allocation of distributed earnings (cash dividends paid) $ 287,580
$ 104,265
$ 273,380
$ 98,326
Allocation of undistributed earnings 154,128
55,875
170,458
61,027
Total earnings—basic $ 441,708
$ 160,140
$ 443,838
$ 159,353

Denominator (shares in thousands):
Total weighted-average shares—basic 152,004
60,620
153,943
60,620

Earnings Per Share—basic $ 2.91
$ 2.64
$ 2.88
$ 2.63

Diluted earnings per share:
Numerator:
Allocation of total earnings used in basic computation $ 441,708
$ 160,140
$ 443,838
$ 159,353
Reallocation of total earnings as a result of conversion of Class B common stock to Common stock 160,140
—
159,353
—
Reallocation of undistributed earnings —
(401 ) —
(347 )
Total earnings—diluted $ 601,848
$ 159,739
$ 603,191
$ 159,006

Denominator (shares in thousands):
Number of shares used in basic computation 152,004
60,620
153,943
60,620
Weighted-average effect of dilutive securities:
Conversion of Class B common stock to Common shares outstanding 60,620
—
60,620
—
Employee stock options 1,165
—
1,013
—
Performance and restricted stock units 334
—
182
—
Total weighted-average shares—diluted 214,123
60,620
215,758
60,620

Earnings Per Share—diluted $ 2.81
$ 2.64
$ 2.80
$ 2.62

The earnings per share calculations for the ~~nine~~three months ended ~~October~~March 31, 2019 and April 1, ~~2017~~2018 excluded 1,476 and ~~October 2, 2016 excluded 2,374 and 3,680, respectively, of~~3,689 stock options (in thousands), respectively, that would have been antidilutive.

~~16.~~18. OTHER (INCOME) EXPENSE, NET

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



	Three Months Ended
	March 31, 2019			April 1, 2018
Write-down of equity investments in partnerships qualifying for tax credits	$	1,152		$	434
Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans	4,337			(98		)
Other (income) expense, net	(12		)	1,606
Total	$	5,477		$	1,942

Three Months Ended Nine Months Ended
October 1, 2017 October 2, 2016 October 1, 2017 October 2, 2016
Write-down of equity investments in partnerships qualifying for tax credits $ 13,736
$ 20,801
$ 23,999
$ 35,862
Settlement of SGM liability (see Note 2) —
—
—
(26,650 )
Other (income) expense, net (106 ) 999
(442 ) (509 )
Total $ 13,630
$ 21,800
$ 23,557
$ 8,703

THE HERSHEY COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATEMENTS—(Continued)

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

~~17.~~19. SUPPLEMENTAL BALANCE SHEET INFORMATION

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



	March 31, 2019				December 31, 2018
Inventories:
Raw materials	$	245,848			$	237,086
Goods in process	147,881				107,139
Finished goods	569,486				618,798
Inventories at FIFO	963,215				963,023
Adjustment to LIFO	(171,926		)		(178,144		)
Total inventories	$	791,289			$	784,879

Prepaid expenses and other:
Prepaid expenses	$	47,735			$	68,490
Assets held for sale	23,421				23,421
Other current assets	194,383				180,248
Total prepaid expenses and other	$	265,539			$	272,159

Property, plant and equipment:
Land	$	103,116			$	102,074
Buildings	1,219,652				1,211,011
Machinery and equipment	2,981,331				2,988,027
Construction in progress	268,202				280,559
Property, plant and equipment, gross	4,572,301				4,581,671
Accumulated depreciation	(2,464,226		)		(2,451,377		)
Property, plant and equipment, net	$	2,108,075			$	2,130,294

Other assets:
Capitalized software, net	$	133,328			$	126,379
Operating lease ROU assets	219,138				—
Other non-current assets	107,288				126,605
Total other assets	$	459,754			$	252,984

Accrued liabilities:
Payroll, compensation and benefits	$	124,116			$	180,546
Advertising, promotion and product allowances	345,642				293,642
Operating lease liabilities	30,178				—
Liabilities held for sale	596				596
Other	150,125				204,379
Total accrued liabilities	$	650,657			$	679,163

Other long-term liabilities:
Post-retirement benefits liabilities	$	193,648			$	195,166
Pension benefits liabilities	65,751				66,379
Operating lease liabilities	179,636				—
Other	179,098				184,503
Total other long-term liabilities	$	618,133			$	446,048

Accumulated other comprehensive loss:
Foreign currency translation adjustments	$	(93,803	)		$	(96,678	)
Pension and post-retirement benefit plans, net of tax	(200,319		)		(205,230		)
Cash flow hedges, net of tax	(54,398		)		(54,872		)
Total accumulated other comprehensive loss	$	(348,520	)	��	$	(356,780	)

October 1, 2017 December 31, 2016
Inventories:
Raw materials $ 292,976
$ 315,239
Goods in process 102,292
88,490
Finished goods 724,754
528,587
Inventories at FIFO 1,120,022
932,316
Adjustment to LIFO (181,835 ) (186,638 )
Total inventories $ 938,187
$ 745,678

Property, plant and equipment:
Land $ 108,173
$ 103,865
Buildings 1,200,194
1,238,634
Machinery and equipment 2,910,916
3,001,552
Construction in progress 191,805
230,987
Property, plant and equipment, gross 4,411,088
4,575,038
Accumulated depreciation (2,360,964 ) (2,397,790 )
Property, plant and equipment, net $ 2,050,124
$ 2,177,248

Other assets:
Capitalized software, net $ 99,329
$ 95,301
Income tax receivable —
1,449
Other non-current assets 75,282
71,615
Total other assets $ 174,611
$ 168,365

Accrued liabilities:
Payroll, compensation and benefits $ 181,167
$ 240,080
Advertising and promotion 320,788
358,573
Other 171,480
152,333
Total accrued liabilities $ 673,435
$ 750,986

Other long-term liabilities:
Post-retirement benefits liabilities $ 213,986
$ 220,270
Pension benefits liabilities 67,681
65,687
Other 120,729
114,204
Total other long-term liabilities $ 402,396
$ 400,161

Accumulated other comprehensive loss:
Foreign currency translation adjustments $ (83,470 ) $ (110,613 )
Pension and post-retirement benefit plans, net of tax (197,095 ) (207,169 )
Cash flow hedges, net of tax (56,462 ) (58,106 )
Total accumulated other comprehensive loss $ (337,027 ) $ (375,888 )

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


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

This Management's Discussion and Analysis (“MD&A”) is intended to provide an understanding of Hershey's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Unaudited Consolidated Financial Statements and accompanying notes. This discussion contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. Refer to the Safe Harbor Statement below as well as the Risk Factors and other information contained in our ~~2016~~2018 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

OVERVIEW

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 Unaudited Consolidated Results of Operations.

~~OVERVIEW AND OUTLOOK~~

Our ~~third~~first quarter ~~2017~~2019 net sales totaled ~~$2,033.1~~$2,016.5 million, an increase of ~~1.5%~~2.3%, versus ~~$2,003.5~~$1,972.0 million for the ~~comparable period~~first quarter 2018, reflecting a volume increase of ~~2016. Excluding~~1.7%, a ~~0.4%~~benefit from the prior year Amplify and Pirate Brands acquisitions of 0.9%, and a favorable price realization of 0.2%, partially offset by unfavorable impact from ~~favorable~~ foreign currency exchange rates of 0.5%. Excluding foreign currency, our first quarter 2019 net sales increased ~~1.1%~~2.8%. ~~Net sales growth was~~Consolidated volumes increased due to improvements in the United States driven by ~~the North America segment, which benefited from core brand growth and innovation, including~~ ~~Hershey's Cookie Layer Crunch, and the launch of~~ ~~Hershey's~~ ~~and~~ ~~Reese's~~ ~~Popped Snack Mix and Chocolate Dipped Pretzels.~~a longer Easter season in 2019 versus 2018, as well as new product launches.

Our reported gross margin was ~~46.2% in~~44.3% for the ~~third~~first quarter 2019, a decrease of ~~2017, an increase of 370~~510 basis points compared to the ~~third~~first quarter ~~of 2016.~~2018. Our first quarter 2019 non-GAAP gross margin ~~decreased 30~~was 45.7%, an increase of 80 basis points incompared the ~~third~~first quarter ~~of 2017, with the benefits~~2018 due to favorable raw material costs, volume and savings from ~~supply chain~~our productivity and cost savings initiatives, as well as lower input costs, being more than offset by higher freight rates and increased levels of manufacturing and distribution costs associated with an effort to maintain customer service targets at fast growing retail customers.initiatives.

Our ~~third~~first quarter ~~2017~~2019 reported ~~net income~~operating profit and ~~earnings per share-diluted (EPS)~~reported operating profit margin totaled ~~$273.3~~$438.9 million and ~~$1.28,~~21.8%, respectively, compared to the ~~third~~first quarter ~~2016~~2018 reported ~~net income~~operating profit and ~~EPS-diluted~~reported operating profit margin of ~~$227.4~~$480.5 million and ~~$1.06,~~24.4%, respectively. From a non-GAAP perspective, ~~third~~first quarter ~~2017~~2019 adjusted operating profit and adjusted operating profit margin totaled $470.5 million and 23.3%, respectively, compared to the first quarter 2018 adjusted operating profit and adjusted operating profit margin of $428.1 million and 21.7%, respectively. The increase in our adjusted operating profit margin was primarily due to higher non-GAAP gross margin and SM&A efficiencies.

Our first quarter 2019 reported net income and reported EPS-diluted totaled $304.4 million and $1.45, respectively, compared to the first quarter 2018 reported net income and reported EPS-diluted of $350.2 million and $1.65, respectively. From a non-GAAP perspective, first quarter 2019 adjusted net income was ~~$283.6~~$333.5 million, an increase of ~~2.3%~~11.9% versus ~~$277.3~~adjusted net income of $298.0 million in ~~2016.~~the first quarter 2018. Our adjusted EPS-diluted for the ~~third~~first quarter ~~of 2017~~2019 was ~~$1.33~~$1.59 compared to ~~$1.29~~$1.41 for the same period of ~~2016, with this 3.1% increase attributable to the same factors driving the increase in non-GAAP net income.~~

Over the remainder of the year, our outlook remains unchanged and we are focused on executing the priorities we outlined earlier this year. Our seasonal business and programs are on track and the upcoming launch of ~~Hershey's Gold, a caramelized creme with peanuts and pretzels, should enable us to deliver on our objectives.~~

We currently estimate that full-year 2017 net sales growth will be approximately 1.25%. The impact of foreign currency exchange rates is expected to be minimal versus a prior estimate of 0.25% unfavorable impact. We currently expect full-year 2017 reported EPS-diluted to be in the $3.54 to $3.68 range. From a non-GAAP perspective, we

~~expect 2017 adjusted EPS-diluted to be towards the high end of our outlook of $4.72 to $4.81,~~2018, an increase of 7%12.8%. The increases in our adjusted net income and adjusted EPS-diluted in 2019 compared to ~~9%,~~2018 were primarily due to ~~strong productivity~~favorable operating profit, lower income taxes and cost savings initiatives, as well as a lower effective tax rate. The reduction in our full-year 2017 effective tax rate is primarily driven by a favorable foreign rate differential and benefit from tax credits, as well as the adoption of ASU 2016-09 for the accounting of employee share-based payments. A reconciliation of reported to adjusted projections for 2017 are reflected in the non-GAAP reconciliations that follow.fewer weighted-average shares outstanding.

NON-GAAP INFORMATION

Comparability of Certain Financial Measures

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

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
In thousands except per share data	October 1, 2017			October 2, 2016		October 1, 2017			October 2, 2016			March 31, 2019			April 1, 2018
Reported gross profit	$	940,222		$	850,848	$	2,609,992		$	2,415,622		$	892,504		$	974,060
Derivative mark-to-market (gains) losses	(21,954		)	35,791		(27,486		)	30,851
Derivative mark-to-market losses (gains)												27,967			(96,250		)
Business realignment activities	213			24,470		6,475			57,948			—			2,214
NSRPE	2,779			2,620		8,344			9,132
Acquisition-related costs												56			4,962
Non-GAAP gross profit	$	921,260		$	913,729	$	2,597,325		$	2,513,553		$	920,527		$	884,986

Reported operating profit	$	439,020		$	374,024	$	946,292		$	976,295		$	438,869		$	480,512
Derivative mark-to-market (gains) losses	(21,954		)	35,791		(27,486		)	30,851
Derivative mark-to-market losses (gains)												27,967			(96,250		)
Business realignment activities	8,257			27,962		69,699			104,487			484			15,951
Acquisition integration costs	—			2,265		311			3,727
NSRPE	21,540			6,360		30,123			20,666
Long-lived asset impairment charges	—			—		208,712			—
Acquisition-related costs												3,180			27,926
Non-GAAP operating profit	$	446,863		$	446,402	$	1,227,651		$	1,136,026		$	470,500		$	428,139

Reported provision for income taxes	$	126,788		$	100,434	$	275,291		$	297,671		$	92,053		$	98,512
Derivative mark-to-market (gains) losses *	(3,078		)	13,566		(2,726		)	11,694
Derivative mark-to-market losses (gains)*												1,367			(8,941		)
Business realignment activities*	1,112			5,576		18,312			16,409			(105		)	3,827
Acquisition integration costs*	—			859		118			1,413
NSRPE*	8,171			2,432		11,440			7,900
Long-lived asset impairment charges**	(8,710		)	—		29,264			—
Acquisition-related costs*												759			5,403
Non-GAAP provision for income taxes	$	124,283		$	122,867	$	331,699		$	335,087		$	94,074		$	98,801

Reported net income	$	273,303		$	227,403	$	601,848		$	603,191		$	304,358		$	350,203
Derivative mark-to-market (gains) losses	(18,876		)	22,225		(24,760		)	19,157
Derivative mark-to-market losses (gains)												26,600			(87,309		)
Business realignment activities	7,145			22,386		51,387			88,073			589			12,124
Acquisition integration costs	—			1,406		193			2,314
NSRPE	13,369			3,928		18,683			12,766
Long-lived asset impairment charges	8,710			—		179,448			—
Acquisition-related costs												2,421			22,523
Noncontrolling interest share of business realignment and impairment charges	(5		)	—		(27,967		)	—			(433		)	456
Settlement of SGM liability	—			—		—			(26,650		)
Non-GAAP net income	$	283,646		$	277,348	$	798,832		$	698,851		$	333,535		$	297,997

Reported EPS - Diluted	$	1.28		$	1.06	$	2.81		$	2.80		$	1.45		$	1.65
Derivative mark-to-market (gains) losses	(0.08		)	0.10		(0.11		)	0.09
Derivative mark-to-market losses (gains)												0.13			(0.41		)
Business realignment activities	0.03			0.10		0.24			0.40			—			0.06
Acquisition integration costs	—			0.01		—			0.01
NSRPE	0.06			0.02		0.08			0.06
Long-lived asset impairment charges	0.04			—		0.84			—
Noncontrolling interest share of business realignment and impairment charges	—			—		(0.13		)	—
Settlement of SGM liability	—			—		—			(0.12		)
Acquisition-related costs												0.01			0.11
Non-GAAP EPS - Diluted	$	1.33		$	1.29	$	3.73		$	3.24		$	1.59		$	1.41

* The tax effect for each adjustment is determined by calculating the tax impact of 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 October 1, 2017. However, the long-lived asset impairment charge in the first quarter of 2017 was not treated as 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
	October 1, 2017		October 2, 2016		October 1, 2017		October 2, 2016		March 31, 2019		April 1, 2018
As reported gross margin	46.2	%	42.5	%	46.8	%	44.2	%	44.3	%	49.4	%
Non-GAAP gross margin (1)	45.3	%	45.6	%	46.6	%	46.0	%	45.7	%	44.9	%

As reported operating profit margin	21.6	%	18.7	%	17.0	%	17.8	%	21.8	%	24.4	%
Non-GAAP operating profit margin (2)	22.0	%	22.3	%	22.0	%	20.8	%	23.3	%	21.7	%

As reported effective tax rate	31.6	%	30.6	%	32.4	%	33.0	%	23.2	%	21.9	%
Non-GAAP effective tax rate (3)	30.4	%	30.7	%	29.3	%	32.4	%	22.0	%	24.9	%

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) ~~losses~~ on commodity derivatives

~~Commensurate with our discontinuance of hedge accounting treatment for commodity derivatives, we are adjusting the~~The mark-to-market losses (gains) on ~~such~~ commodity derivatives are recorded as unallocated and excluded from adjusted results until such time as the related inventory is ~~sold.~~sold, at which time the corresponding losses (gains) are reclassified from unallocated to segment income. Since we often purchase commodity contracts to price inventory requirements in future years, we make this adjustment to facilitate the year-over-year comparison of cost of sales on a basis that matches the derivative gains and losses with the underlying economic exposure being hedged for the period. For the three months ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016,~~2018, the net adjustment recognized within unallocated ~~mark-to-market adjustment on commodity derivatives totaled pre-tax gains~~was a loss of ~~$22.0~~$28.0 million and ~~losses~~a gain of ~~$35.8~~$96.3 million, respectively. ~~For~~See Note 13 to the nine months ended October 1, 2017 and October 2, 2016, the net unallocated mark-to-market adjustment on commodity derivatives totaled pre-tax gains of $27.5 million and losses of $30.9 million, respectively.Unaudited Consolidated Financial Statements for more information.

Business realignment activities

We periodically undertake restructuring and cost reduction activities as part of ongoing efforts to enhance long-term profitability. For the three months ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016,~~2018, we incurred ~~$8.3~~$0.5 million and ~~$28.0 million, respectively, of pre-tax costs related to business realignment activities. For the nine months ended October 1, 2017 and October 2, 2016, we incurred $69.7 million and $104.5~~$16.0 million, respectively, of pre-tax costs related to business realignment activities. See Note 79 to the Unaudited Consolidated Financial Statements for more information.

~~Acquisition integration~~Acquisition-related costs

~~Costs incurred during~~For the three ~~and nine~~ months ended March 31, 2019 and April 1, 2018, we incurred expenses totaling $3.2 million and $27.9 million, respectively, related to the acquisitions of Amplify in January 2018 and Pirate Brands in October ~~1, 2017~~2018. This primarily includes legal and ~~2016 relate~~consultant fees, as well as severance and other costs relating to the integration of the ~~2016 acquisition of Ripple Brand Collective, LLC as we incorporate this business into our operating practices and information systems.~~

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. NSRPE can fluctuate from 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 of our business and provides for a better comparison of our operating results from year to year. Therefore, we exclude NSRPE from our internal performance measures. Our most significant defined benefit pension plans have been closed to new participants for a number of years, resulting in ongoing service costs that are stable and predictable. We recorded pre-tax NSRPE of $21.5 million and $6.4 million, respectively, for the three months ended October 1, 2017 and October 2, 2016, respectively. We recorded pre-tax NSRPE of $30.1 million and $20.7 million, respectively, for the nine months ended October 1, 2017 and October 2, 2016, respectively.

For the nine months ended October 1, 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.businesses. See Note 72 to the Unaudited 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 (income) 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.

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~~comparable 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~~comparable period of the prior fiscal year.

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

2017 (Projected) 2016
Reported EPS – Diluted $3.54 - $3.68 $3.34
Derivative mark-to-market losses — 0.66
Business realignment costs (including Margin for Growth Program costs) 0.16 - 0.21 0.42
Acquisition and integration costs — 0.02
Non-service related pension expense 0.10 0.08
Settlement of SGM liability — (0.12)
Long-lived asset impairment charges 0.87 0.01
Adjusted EPS – Diluted $4.72 - $4.81 $4.41

Our 2017 projected 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, since we are not able to forecast the impact of the market changes.

CONSOLIDATED RESULTS OF OPERATIONS

Results of Operations - ~~Third~~First Quarter ~~2017~~2019 vs. ~~Third~~First Quarter ~~2016~~2018

Net sales increased ~~1.5%~~2.3% in the ~~third~~first quarter of ~~2017~~2019 compared to the same period of ~~2016,~~2018, reflecting a volume ~~increases~~increase of ~~0.7%~~1.7%, a benefit from the prior year Amplify and Pirate Brands acquisitions of 0.9%, and a favorable price realization of ~~0.4% and a favorable~~0.2%, partially offset by unfavorable impact from foreign currency exchange rates of ~~0.4%~~0.5%. Excluding foreign currency, our first quarter 2019 net sales increased ~~1.1% in the third quarter of 2017.~~2.8%. Consolidated volumes increased ~~as a result of higher sales volume~~due to improvements in the ~~North America segment, which benefited from core brand growth and innovation, including~~ ~~Hershey's Cookie Layer Crunch, and the launch of~~ ~~Hershey's~~ ~~and~~ ~~Reese's~~ ~~Popped Snack Mix and Chocolate Dipped Pretzels. These volume increases were partially offset by volume declines in our International and Other segment, where growth,~~United States driven by ~~measured investments~~a longer Easter season in ~~Mexico, Brazil and India, was more than offset by declines in China. Favorable net price realization was attributed to higher prices in select markets within our International and Other segment~~2019 versus ~~the prior year.~~2018, as well as new product launches.

Key U.S. ~~CMG~~ Marketplace Metrics

For the 12 week period ended October 8, 2017 October 8, 2016
Hershey's Consumer Takeaway Increase (Decrease) 1.4 % (0.4 )%
Hershey's Market Share Decrease (0.3 ) (0.1 )

For the first quarter of 2019, our total U.S. retail takeaway, including Amplify, decreased 8.7% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items. Our U.S. candy, mint and gum ("CMG") consumer takeaway decreased 9.7%, resulting in a CMG market share loss of approximately 47 basis points due to the timing of Easter, which shifted into the second half of April, versus April 1, 2018.

The CMG consumer takeaway and market share information ~~provided for the twelve week period above are for~~reflect measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, and convenience store channels, plus Wal-Mart Stores, Inc., partial dollar, club and military channels. These metrics are based on measured market scanned purchases as reported by ~~Nielsen~~Information Resources, Incorporated ("IRI"), the Company's market insights and analytics provider, and provide a means to assess our retail takeaway and market position relative to the overall category. In 2017, takeaway improved relative to the prior year mainly driven by core brand growth and innovation. 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 ~~decreased 5.2%~~increased 12.6% in the ~~third~~first quarter of ~~2017~~2019 compared to the same period of ~~2016.~~2018. The ~~improvement~~increase was driven by an incremental ~~$57.7~~$93.2 million ~~favorable~~unfavorable impact from ~~marking-to-market~~mark-to-market adjustments on our commodity derivative instruments intended to economically hedge future years' commodity purchases, ~~a $24.3 million decrease in business realignment costs, and supply chain productivity and cost savings initiatives. These benefits were offset in part by unfavorable manufacturing variances and~~higher sales volume, higher freight and ~~warehousing~~logistics costs and higher plant costs. These drivers were partially offset by supply chain productivity.

Gross margin ~~increased~~decreased by ~~370~~510 basis points in the ~~third~~first quarter of ~~2017~~2019 compared to the same period of ~~2016. Favorable~~2018. The decrease was primarily due to unfavorable year-over-year mark-to-market impact from commodity derivative instruments lower commodity and business realignment costs, and supply chain productivity contributed to the improvement in gross margin. However, higher supply chain costs partially offset the increase in gross margin.

Selling, marketing and administrative (“SM&A”) expenses increased $22.7 million or 4.8% in the third quarter of 2017. Advertising and related consumer marketing expense increased 3.7% during this period. Excluding these advertising and related consumer marketing costs, selling and administrative expenses for 2017 increased by 5.4% as compared to 2016. SM&A was impacted by pension settlement charges and higher ~~costs associated with business realignment programs~~freight and ~~investments in go-to-market capabilities, partially offset by costs savings and efficiency initiatives.~~

In the third quarter of 2017 and 2016, we recorded business realignment costs of $4.0 million and $2.3 million, respectively. The 2017 costs related primarily to severance and 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, as described in Note 7 to the Unaudited Consolidated Financial Statements.

~~Operating Profit and Operating Profit Margin~~

Operating profit increased 17.4% in the third quarter of 2017 compared to the same period of 2016 due primarily to the higher gross margin as discussed above. Operating profit margin increased to 21.6% in 2017 from 18.7% in 2016 also driven by the improvement in gross margin.

~~Interest Expense, Net~~

Net interest expense was $0.2 million higher in the third quarter of 2017 compared to the same period of 2016. The increase was due to higher interest rates on higher levels of short-term debt outstanding during the 2017 quarter, as well as a decreased benefit on the fixed to floating swaps during the third quarter of 2017 as compared to the 2016 quarter.

~~Other (Income) Expense, Net~~

Other (income) expense, net totaled $13.6 million in the third quarter of 2017 compared to $21.8 million for the same period of 2016, driven in both periods by the write-down on equity investments qualifying for federal historic and energy tax credits.

~~Income Taxes and Effective Tax Rate~~

Our effective income tax rate was 31.6% for the third quarter of 2017 compared to 30.6% for the same period of 2016. Relative to the statutory rate, the 2017 effective tax rate was impacted by favorable foreign rate differential relating to our cocoa procurement operations and investment tax credits, whichlogistics costs. These factors were partially offset by ~~non-benefited costs resulting from the Margin for Growth Program. The 2016 tax rate benefited from a one time tax return amendment for research and development credits and other tax deductions.~~

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

Net income increased $45.9 million, or 20.2%, while EPS-diluted increased $0.22, or 20.8%, in the third quarter of 2017 compared to the same period of 2016. The increases in both net income and EPS-diluted were driven by the higher gross margin as discussed above.

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

~~Net sales increased 1.9% in the first nine months of 2017 compared to the same period of 2016, reflecting~~ favorable price realization of 0.8%, volume increases of 0.7% and a 0.4% benefit from acquisitions. There was no impact from foreign currency exchange rates during the period. 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, specifically from core brand growth throughout 2017 and innovation, including new product launches and stand-up packaging. These volume increases were partially offset by volume declines in our International and Other segment, where growth, driven by measured investments in Mexico, Brazil and India, was more than offset by declines in China.

Cost of sales decreased 2.9% in the first nine months of 2017 compared to the same period of 2016. The improvement was driven by lower commodity costs, including an incremental $58.3 million favorable impact from marking-to-market our commodity derivative instruments intended to economically hedge future years' commodity purchases, a $51.5 million year-over-year decrease in business realignment costs, and supply chain ~~productivity. These benefits were offset in part by unfavorable manufacturing variances~~productivity and ~~higher freight and warehousing costs.~~

Gross margin increased by 260 basis points in the first nine months of 2017 compared to the same period of 2016, driven by lower commodity and business realignment costs, and supply chain productivity. However, the increase in gross margin was partially offset by higher supply chain costs.favorable product mix.

Selling, Marketing and Administrative

Selling, marketing and administrative (“SM&A”) expenses decreased ~~$3.8~~$31.8 million or ~~0.3%~~6.5% in the first ~~nine months~~quarter of ~~2017. Advertising and related consumer marketing expense increased 1.1% during this period. Excluding these~~2019. Total advertising and related consumer marketing ~~costs, selling~~expenses declined 0.8% due mainly to spend optimization and shifts relating to our emerging brands. Selling, marketing and administrative expenses, ~~for 2017~~excluding advertising and related consumer marketing, decreased by 1.0% as compared to 2016. SM&A benefited from lower costs relating to business realignment activities as well as costs savings and efficiency initiatives, partially offset by higher pension settlement charges and investmentsapproximately 9.7% in ~~go-to-market capabilities.~~

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

lower acquisition-related costs.

Business Realignment Activities

In the first ~~nine months~~quarter of ~~2017~~2019 and ~~2016,~~2018, we recorded business realignment costs of ~~$50.0~~$0.1 million and ~~$30.6~~$8.2 million, respectively. The ~~2017~~ costs related primarily to ~~severance and other program costs associated with~~ the Margin for Growth Program, ~~that commenced~~which is discussed in ~~the first quarter of 2017. The 2016 costs related primarily to the Operational Optimization Program, as described~~more detail in Note 79 to the Unaudited Consolidated Financial Statements.

Operating Profit and Operating Profit Margin

Operating profit decreased ~~3.1%~~8.7% in the first ~~nine months~~quarter of ~~2017~~2019 compared to the same period of ~~2016~~2018 due ~~primarily~~ to ~~the long-lived asset impairment charges~~lower gross profit, partially offset by lower SM&A and ~~higher~~lower business realignment costs ~~partially offset by higher gross margin and lower SM&A expenses,~~in the 2019 period, as ~~discussed~~noted above. Operating profit margin decreased to ~~17.0%~~21.8% in ~~2017~~2019 from ~~17.8%~~24.4% in ~~2016~~2018 driven by these same factors.

Interest Expense, Net

Net interest expense was ~~$5.7~~$8.1 million higher in the first ~~nine months~~quarter of ~~2017~~2019 compared to the same period of ~~2016.~~2018. The increase was due to ~~higher levels~~$1.2 billion of ~~long-term debt outstanding and~~notes issued in May 2018, as well as higher interest rates on ~~commercial paper during the 2017 period, as well as a decreased benefit from the fixed to floating swaps during the nine months of 2017 as compared to the 2016 period.~~our short-term debt.

Other (Income) Expense, Net

Other (income) expense, net totaled expense of ~~$23.6~~$5.5 million ~~during~~in the first ~~nine months~~quarter of ~~2017~~2019 versus expense of ~~$8.7~~$1.9 million ~~for~~in the ~~same period~~first quarter of ~~2016. In 2017 we recognized a $24.0 million write-down~~2018. The increase in the net expense was primarily due to higher non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans during 2019, as well as higher write-downs on equity investments qualifying for federal historic and energy tax credits, compared to a $35.9 million write down in the first nine month of 2016. Additionally, 2016 was offset by an extinguishment gain of $26.7 million related to the settlement of the SGM liability.credits.

Income Taxes and Effective Tax Rate

Our effective income tax rate was ~~32.4%~~23.2% for the first ~~nine months~~quarter of ~~2017~~2019 compared with ~~33.0%~~21.9% for the ~~same period~~first quarter of ~~2016.~~2018. Relative to the 21% statutory rate, the ~~2017~~2019 effective tax rate was impacted by ~~a favorable~~state taxes and an unfavorable foreign rate differential, ~~relating to foreign operations and cocoa procurement, investment tax credits and~~which were partially offset by the benefit of ASU 2016-09 ~~which were partially offset by non-benefited costs resulting from~~for the ~~Margin for Growth Program. The 2016 effective rate benefited from the impact~~accounting of ~~non-taxable income related to the settlement of the SGM liability and investment tax credits.~~employee share-based payments.

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

Net income decreased ~~$1.3~~$45.8 million, or ~~0.2%~~13.1%, while EPS-diluted ~~increased $0.01,~~decreased $0.20, or ~~0.4%~~12.1%, in the first ~~nine months~~quarter of ~~2017~~2019 compared to the same period of ~~2016.~~2018. The decrease in both net income and EPS-diluted was driven primarily by ~~the long-lived asset impairment charges~~lower operating profit and higher ~~business realignment costs,~~interest expense in 2019, which were partly offset by lower income taxes, as noted ~~above, whereas, the increase in EPS was driven by lower diluted shares outstanding.~~above.

The summary that follows provides a discussion of the results of operations of our two reportable segments: North America and International and Other. The segments reflect our operations on a geographic basis. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, ~~acquisition integration~~acquisition-related costs and ~~NSRPE~~other unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the 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~~directly attributable to our ongoing segment operations. For further information, see the Non-GAAP Information section of this MD&A.

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

Results of Operations - ~~Third~~First Quarter ~~2017~~2019 vs. ~~Third~~First Quarter ~~2016~~2018

Our North America segment income ~~decreased $9.3~~increased $30.4 million or ~~1.7%~~5.7% in ~~2017~~2019 compared to ~~2016, driven~~2018, primarily due to higher sales volume, favorable price realization, and lower supply chain costs, partially offset by ~~investments in greater levels of advertising expense and go-to-market capabilities, as well as unfavorable manufacturing variances and~~ higher freight and ~~warehousing~~logistics costs and higher other plant costs.

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

Our North America segment income increased $49.0 million or 3.2% in 2017 compared to 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 recent ~~barkTHINS~~ ~~brand acquisition.~~

International and Other



Delaware		23-0691590
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
~~100 Crystal A Drive,~~ 19 East Chocolate Avenue, 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)



Large accelerated filer	x		Accelerated filer	¨	Smaller reporting company	¨

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



PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016~~2018		3
Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016~~2018		4
Consolidated Balance Sheets as of ~~October 1, 2017~~March 31, 2019 and December 31, ~~2016~~2018		5
Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~October~~March 31, 2019 and April 1, ~~2017 and October 2, 2016~~2018		6
Consolidated Statement of Stockholders' Equity for the ~~Nine~~Three Months Ended ~~October~~March 31, 2019 and April 1, ~~2017~~2018		7
Notes to Unaudited Consolidated Financial Statements		8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		3031
Item 3. Quantitative and Qualitative Disclosures About Market Risk		4843
Item 4. Controls and Procedures		4844

PART II. OTHER INFORMATION		4945
Item1. Legal Proceedings		4945
Item 1A. Risk Factors		4945
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		4945
Item 3. Defaults Upon Senior Securities		4945
Item 4. Mine Safety Disclosures		4945
Item 5. Other Information		4945
Item 6. Exhibits		5046

Signatures		5147



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



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


Inventories				$	4,663
Plant, property and equipment, net				48
Goodwill	$	128,110		129,991
Trademarks	91,200
Other intangible assets	60,900			289,300
Other assets, primarily current assets, net of cash acquired totaling $674	12,375
Current liabilities	(7,211		)
Accrued liabilities				(1,000		)
Net assets acquired	$	285,374		$	423,002



December 31,	October 1, 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	86,201			83,619
Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts	(10,327		)	(14,275		)
Total long-term debt	2,354,228			2,347,698
Less—current portion	300,096			243
Long-term portion	$	2,054,132		$	2,347,455


(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.


	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		Losses recognized in other comprehensive income (“OCI”) (effective portion)						Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)						Gains (losses) recognized in income (a)						Gains (losses) recognized in other comprehensive income (“OCI”)					Gains (losses) reclassified from accumulated OCI into income (b)

	2017			2016			2017			2016			2017			2016			2019			2018			2019			2018		2019			2018
Commodities futures and options	$	(2,445	)	$	(37,246	)	$	—		$	—		$	(488	)	$	7,780		$	(26,641	)	$	66,590		$	—		$	—	$	—		$	—
Foreign exchange contracts	11			(27		)	(1,339		)	1,628			869			(2,659		)	215			(152		)	(789		)	4,245		931			136
Interest rate swap agreements	—			—			—			(274		)	(2,343		)	(2,833		)	—			—			—			—		(2,369		)	(2,396		)
Deferred compensation derivatives	349			665			—			—			—			—			3,043			(393		)	—			—		—			—
Total	$	(2,085	)	$	(36,608	)	$	(1,339	)	$	1,354		$	(1,962	)	$	2,288		$	(23,383	)	$	66,045		$	(789	)	$	4,245	$	(1,438	)	$	(2,260	)


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


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



	Total
Liability balance at December 31, 2016	$	3,725
2017 business realignment charges (1)	61,253
Cash payments	(23,742		)
Other, net	(69		)
Liability balance at October 1, 2017 (reported within accrued and other long-term liabilities)	$	41,167



	Nine Months Ended October 1, 2017
	Shares		Dollars
			In thousands
Shares repurchased in the open market under pre-approved share repurchase programs	—		$	—
Milton Hershey School Trust repurchase	1,500,000		159,015
Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation	1,278,675		141,297
Total share repurchases	2,778,675		300,312
Shares issued for stock options and incentive compensation	(1,187,883	)	$	(49,426	)
Net change	1,590,792		$	250,886


(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).



	Three Months Ended October 1, 2017
	Percentage Change as Reported		Impact of Foreign Currency Exchange		Percentage Change on Constant Currency Basis
North America segment
Canada	12.1	%	4.6	%	7.5	%
Total North America segment	1.6	%	0.3	%	1.3	%

International and Other segment
Mexico	15.5	%	5.9	%	9.6	%
Brazil	6.4	%	3.1	%	3.3	%
India	20.9	%	4.9	%	16.0	%
Greater China	(7.3	)%	(0.2	)%	(7.1	)%
Total International and Other segment	0.8	%	1.3	%	(0.5	)%

Total Company	1.5	%	0.4	%	1.1	%



	2017 (Projected)	2016
Reported EPS – Diluted	$3.54 - $3.68	$3.34
Derivative mark-to-market losses	—	0.66
Business realignment costs (including Margin for Growth Program costs)	0.16 - 0.21	0.42
Acquisition and integration costs	—	0.02
Non-service related pension expense	0.10	0.08
Settlement of SGM liability	—	(0.12)
Long-lived asset impairment charges	0.87	0.01
Adjusted EPS – Diluted	$4.72 - $4.81	$4.41


	Three Months Ended						Percent		Nine Months Ended						Percent		Three Months Ended						Percent
	October 1, 2017			October 2, 2016			Change		October 1, 2017			October 2, 2016			Change		March 31, 2019			April 1, 2018			Change
In millions of dollars except per share amounts
Net Sales	$	2,033.1		$	2,003.5		1.5	%	$	5,575.8		$	5,469.9		1.9	%	$	2,016.5		$	1,972.0		2.3	%
Cost of Sales	1,092.9			1,152.6			(5.2	)%	2,965.8			3,054.3			(2.9	)%	1,124.0			997.9			12.6	%
Gross Profit	940.2			850.8			10.5	%	2,610.0			2,415.6			8.0	%	892.5			974.1			(8.4	)%
Gross Margin	46.2		%	42.5		%			46.8		%	44.2		%			44.3		%	49.4		%
SM&A Expense	497.2			474.5			4.8	%	1,405.0			1,408.8			(0.3	)%	453.5			485.3			(6.5	)%
SM&A Expense as a percent of net sales	24.5		%	23.7		%			25.2		%	25.8		%			22.5		%	24.6		%
Long-lived Asset Impairment Charges	—			—			—	%	208.7			—			NM
Business Realignment Costs	4.0			2.3			72.5	%	50.0			30.6			63.6	%	0.1			8.2			(99.2	)%
Operating Profit	439.0			374.0			17.4	%	946.3			976.3			(3.1	)%	438.9			480.5			(8.7	)%
Operating Profit Margin	21.6		%	18.7		%			17.0		%	17.8		%			21.8		%	24.4		%
Interest Expense, Net	24.6			24.4			0.8	%	72.5			66.7			8.6	%	37.5			29.3			27.7	%
Other (Income) Expense, Net	13.6			21.8			(37.5	)%	23.6			8.7			NM		5.5			1.9			182.0	%
Provision for Income Taxes	126.8			100.4			26.2	%	275.3			297.7			(7.5	)%	92.0			98.5			(6.6	)%
Effective Income Tax Rate	31.6		%	30.6		%			32.4		%	33.0		%			23.2		%	21.9		%
Net Income Including Noncontrolling Interest	274.0			227.4			20.5	%	575.0			603.2			(4.7	)%	303.9			350.7			(13.4	)%
Less: Net Gain (Loss) Attributable to Noncontrolling Interest	0.7			—			NM		(26.9		)	—			NM
Less: Net (Loss) Income Attributable to Noncontrolling Interest																	(0.5		)	0.5			NM
Net Income Attributable to The Hershey Company	$	273.3		$	227.4		20.2	%	$	601.8		$	603.2		(0.2	)%	$	304.4		$	350.2		(13.1	)%
Net Income Per Share—Diluted	$	1.28		$	1.06		20.8	%	$	2.81		$	2.80		0.4	%	$	1.45		$	1.65		(12.1	)%

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



For the 12 week period ended	October 8, 2017		October 8, 2016
Hershey's Consumer Takeaway Increase (Decrease)	1.4	%	(0.4	)%
Hershey's Market Share Decrease	(0.3	)	(0.1	)


(2)	Net losses (gains) ~~losses~~ on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative losses (gains) ~~losses.~~. See Note 1113 to the Unaudited Consolidated Financial Statements.


	Nine Months Ended						Three Months Ended
In millions of dollars	October 1, 2017			October 2, 2016			March 31, 2019			April 1, 2018
Net cash provided by (used in):
Operating activities	$	625.9		$	450.8		$	329.9		$	352.1
Investing activities	(187.1		)	(486.0		)	(111.6		)	(981.8		)
Financing activities	(465.7		)	21.5			(341.1		)	725.9
Effect of exchange rate changes on cash and cash equivalents	5.0			0.5			0.8			—
Decrease in cash and cash equivalents	$	(21.9	)	$	(13.2	)
Increase (decrease) in cash and cash equivalents							(122.0		)	96.2


◦	~~Increase in cash used by inventories of $109.3~~$143.8 million due to a higher year-over-year build up of U.S. inventories to satisfy seasonal product requirements and maintain sufficient levels to accommodate customer requirements, coupled with a higher investment in inventory in Brazil and Mexico, driven by volume growth in those markets.


◦	~~Reduction~~ in cash used by accounts payable and accrued liabilities, ~~of $111.6 million,~~ due to the timing of payments for trade-related and other accounts payables, as well as anprior year spending necessary to settle certain accrued liabilities acquired in conjunction with the Amplify acquisition, specifically Amplify's acquisition-related costs and accelerated equity compensation.


•	Capital spending. Capital expenditures, including capitalized software, primarily to support capacity expansion, innovation and cost savings, were $92.8 million in the first three months of 2019 compared to $60.1 million in the same period of 2018. For full year 2019, we expect capital expenditures, including capitalized software, to approximate $330 million to $350 million.


•	Business Acquisition. We had no acquisition or divestiture activity in 2019. In January 2018, we acquired Amplify for $915.5 million, net of cash acquired. Further details regarding our business acquisition 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 that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested


•	Long-term debt borrowings and repayments. During the first three months of 2019, our long-term debt borrowings and repayments activity was minimal. During the first three months of 2018, we repaid $607.9 million of debt assumed in connection with the Amplify acquisition, including all of the outstanding debt owed by Amplify under its existing credit agreement.


•	Tax receivable obligation. In connection with the Amplify acquisition in 2018, the Company agreed to make a payment to the counterparty of a tax receivable agreement. During the first three months of 2018, we paid $42.5 million of the tax receivable obligation.


•	Share repurchases. We used cash for total share repurchases of $198.5 million and $178.1 million during the first three months of 2019 and 2018, respectively, pursuant to our practice of replenishing shares issued for stock options and incentive compensation, as well as shares repurchased in the open market under pre-approved share repurchase programs.


•	Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $146.5 million during the first three months of 2019, an increase of $12.2 million compared to $134.3 million in the same period of 2018.


•	Proceeds from the exercise of stock options. We received $34.6 million from employee exercises of stock options, net of employee taxes withheld from share-based awards, during the first three months of 2019, an increase of $32.7 million compared to $1.9 million in the same period of 2018.



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)
July 3 through July 30	—	$	—	—	$	100,000
July 31 through August 27	392,000	$	105.37	—	$	100,000
August 28 through October 1	1,500,000	$	106.01	—	$	100,000
Total	1,892,000	$	105.88	—