HSY-2015 07.05 Q2

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 5, 2015
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period
from ______to_______

Commission file number 1-183

THE HERSHEY COMPANY
(Exact name of registrant as specified in its charter)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer ¨ 
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)
 
Smaller reporting company ¨

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 issuer's classes of common stock, as of the latest practicable date.
Common Stock, $1 par value – 158,765,002 shares, as of July 31, 2015.
Class B Common Stock, $1 par value – 60,619,777 shares, as of July 31, 2015.



THE HERSHEY COMPANY
INDEX

 
 
Part I. Financial Information
Page Number
 
 
Item 1. Financial Statements
 
 
Consolidated Statements of Income
Three and Six Months Ended July 5, 2015 and June 29, 2014
 
 
 
Consolidated Statements of Comprehensive Income
Three and Six Months Ended July 5, 2015 and June 29, 2014
 
 
 
Consolidated Balance Sheets
July 5, 2015 and December 31, 2014
 
 
 
Consolidated Statements of Cash Flows
Six Months Ended July 5, 2015 and June 29, 2014
 
 
 
Consolidated Statement of Stockholders' Equity
Six Months Ended July 5, 2015
 
 
 
Notes to Unaudited Consolidated Financial Statements
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
Part II. Other Information
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits

2


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
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Net sales
$
1,578,825

 
$
1,578,350

 
$
3,516,625

 
$
3,450,163

Costs and expenses:
 
 
 
 
 
 
 
Cost of sales
843,417

 
860,876

 
1,880,374

 
1,861,199

Selling, marketing and administrative
455,545

 
438,944

 
969,555

 
894,746

Goodwill impairment
249,811

 

 
249,811

 

Business realignment charges
22,552

 
1,247

 
25,219

 
4,172

Total costs and expenses
1,571,325

 
1,301,067

 
3,124,959

 
2,760,117

Operating profit
7,500

 
277,283

 
391,666

 
690,046

Interest expense, net
18,877

 
20,734

 
38,079

 
42,019

Other (income) expense, net
4,759

 
(181
)
 
(5,081
)
 
8,976

Income (loss) before income taxes
(16,136
)
 
256,730

 
358,668

 
639,051

Provision for income taxes
83,805

 
88,562

 
213,872

 
218,388

Net income (loss)
$
(99,941
)
 
$
168,168

 
$
144,796

 
$
420,663

 
 
 
 
 
 
 
 
Net income (loss) per share – basic:
 
 
 
 
 
 
 
Common stock
$
(0.47
)
 
$
0.78

 
$
0.67

 
$
1.94

Class B common stock
$
(0.42
)
 
$
0.70

 
$
0.62

 
$
1.74

 
 
 
 
 
 
 
 
Net income (loss) per share – diluted:
 
 
 
 
 
 
 
Common stock
$
(0.47
)
 
$
0.75

 
$
0.65

 
$
1.86

Class B common stock
$
(0.42
)
 
$
0.70

 
$
0.62

 
$
1.73

 
 
 
 
 
 
 
 
Dividends paid per share:
 
 
 
 
 
 
 
Common stock
$
0.535

 
$
0.485

 
$
1.070

 
$
0.97

Class B common stock
$
0.486

 
$
0.435

 
$
.972

 
$
0.87

 
 
 
 
 
 
 
 
See Notes to Unaudited Consolidated Financial Statements.


3


THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Net income (loss)
$
(99,941
)
 
$
168,168

 
$
144,796

 
$
420,663

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
2,668

 
5,773

 
(25,050
)
 
5,305

Pension and post-retirement benefit plans
5,466

 
3,600

 
10,927

 
7,160

Cash flow hedges:
 
 
 
 
 
 
 
Gains on cash flow hedging derivatives
91,029

 
7,342

 
64,937

 
27,781

Reclassification adjustments
(11,098
)
 
(10,783
)
 
(11,497
)
 
(20,022
)
Total other comprehensive income, net of tax
88,065

 
5,932

 
39,317

 
20,224

Total comprehensive income (loss)
$
(11,876
)
 
$
174,100

 
184,113

 
440,887

Comprehensive (gain) loss attributable to redeemable and noncontrolling interests
(578
)
 

 
2,931

 

Comprehensive income (loss) attributable to The Hershey Company
$
(12,454
)
 
$
174,100

 
$
187,044

 
$
440,887


See Notes to Unaudited Consolidated Financial Statements.



4


THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
 
 
July 5,
2015
 
December 31,
2014
ASSETS
 
(unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
302,659

 
$
374,854

Short-term investments
 
99,310

 
97,131

Accounts receivable – trade, net
 
443,452

 
596,940

Inventories
 
873,996

 
801,036

Deferred income taxes
 
79,676

 
100,515

Prepaid expenses and other
 
208,354

 
276,571

Total current assets
 
2,007,447

 
2,247,047

Property, plant and equipment, net
 
2,180,326

 
2,151,901

Goodwill
 
711,335

 
792,955

Other intangibles
 
402,567

 
294,841

Other assets
 
147,655

 
142,772

Total assets
 
$
5,449,330

 
$
5,629,516

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
423,379

 
$
482,017

Accrued liabilities
 
707,365

 
813,513

Accrued income taxes
 
21,101

 
4,616

Short-term debt
 
615,702

 
384,696

Current portion of long-term debt
 
250,725

 
250,805

Total current liabilities
 
2,018,272

 
1,935,647

Long-term debt
 
1,547,399

 
1,548,963

Other long-term liabilities
 
515,267

 
526,003

Deferred income taxes
 
130,124

 
99,373

Total liabilities
 
4,211,062

 
4,109,986

 
 
 
 
 
Redeemable noncontrolling interest
 
37,383

 

 
 
 
 
 
Stockholders' equity:
 
 
 
 
The Hershey Company stockholders’ equity
 
 
 
 
Preferred stock, shares issued: none at July 5, 2015 and December 31, 2014, respectively
 

 

Common stock, shares issued: 299,281,967 and
    299,281,967 at July 5, 2015 and December 31, 2014, respectively
 
299,281

 
299,281

Class B common stock, shares issued: 60,619,777 and
    60,619,777 at July 5, 2015 and December 31, 2014, respectively
 
60,620

 
60,620

Additional paid-in capital
 
752,369

 
754,186

Retained earnings
 
5,776,618

 
5,860,784

Treasury – common stock shares, at cost: 140,550,296 and
    138,856,786 at July 5, 2015 and December 31, 2014, respectively
 
(5,422,304
)
 
(5,161,236
)
Accumulated other comprehensive loss
 
(316,325
)
 
(358,573
)
The Hershey Company stockholders’ equity
 
1,150,259

 
1,455,062

Noncontrolling interests in subsidiaries
 
50,626

 
64,468

Total stockholders' equity
 
1,200,885

 
1,519,530

Total liabilities, redeemable noncontrolling interest and stockholders' equity
 
$
5,449,330

 
$
5,629,516

See Notes to Unaudited Consolidated Financial Statements.

5


THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
Operating Activities
 
 
 
Net income
$
144,796

 
$
420,663

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
118,801

 
100,133

Stock-based compensation expense
26,615

 
27,697

Excess tax benefits from stock-based compensation
(21,111
)
 
(42,965
)
Deferred income taxes
(20,044
)
 
(2,002
)
Non-cash business realignment and impairment charges
257,054

 

Contributions to pension and other benefit plans
(10,664
)
 
(12,645
)
Changes in assets and liabilities, net of effects from business acquisitions and divestitures:
 
 
 
Accounts receivable - trade
133,382

 
55,933

Inventories
(59,773
)
 
(145,913
)
Accounts payable and accrued liabilities
(125,746
)
 
(140,835
)
Other assets and liabilities
37,638

 
(88,134
)
Net cash provided by operating activities
480,948

 
171,932

Investing Activities
 
 
 
Capital additions
(141,450
)
 
(136,509
)
Capitalized software additions
(10,903
)
 
(12,581
)
Proceeds from sales of property, plant and equipment
1,010

 
469

Proceeds from sale of business
32,408

 

Business acquisitions, net of cash and cash equivalents acquired
(218,654
)
 
10,035

Purchase of short-term investments

 
(97,216
)
Net cash used in investing activities
(337,589
)
 
(235,802
)
Financing Activities
 
 
 
Net increase in short-term debt
253,978

 
19,010

Long-term borrowings
1,564

 
78

Repayment of long-term debt
(660
)
 
(789
)
Cash dividends paid
(228,962
)
 
(209,906
)
Exercise of stock options
53,079

 
89,921

Excess tax benefits from stock-based compensation
21,111

 
42,965

Contributions from noncontrolling interests

 
2,940

Repurchase of common stock
(315,664
)
 
(436,256
)
Net cash used in financing activities
(215,554
)
 
(492,037
)
Decrease in cash and cash equivalents
(72,195
)
 
(555,907
)
Cash and cash equivalents, beginning of period
374,854

 
1,118,508

Cash and cash equivalents, end of period
$
302,659

 
$
562,601

Supplemental Disclosure
 
 
 
Interest paid
$
42,568

 
$
44,064

Income taxes paid
$
214,072

 
$
266,527

See Notes to Unaudited Consolidated Financial Statements.

6


THE HERSHEY COMPANY
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)


 
 
Preferred
Stock
 
Common
Stock
 
Class B
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Common
Stock
 
Accumulated Other
Comprehensive
Loss
 
Noncontrolling
Interests in
Subsidiaries
 
Total
Stockholders’
Equity
Balance, December 31, 2014
 
$

 
$
299,281

 
$
60,620

 
$
754,186

 
$
5,860,784

 
$
(5,161,236
)
 
$
(358,573
)
 
$
64,468

 
$
1,519,530

Net income
 
 
 
 
 
 
 
 
 
144,796

 
 
 
 
 
 
 
144,796

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
42,248

 
(597
)
 
41,651

Dividends:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock, $1.07 per share
 
 
 
 
 
 
 
 
 
(170,040
)
 
 
 
 
 
 
 
(170,040
)
Class B common stock, $0.972 per share
 
 
 
 
 
 
 
 
 
(58,922
)
 
 
 
 
 
 
 
(58,922
)
Stock-based compensation
 
 
 
 
 
 
 
25,903

 
 
 
 
 
 
 
 
 
25,903

Exercise of stock options and incentive-based transactions
 
 
 
 
 
 
 
4,462

 
 
 
54,596

 
 
 
 
 
59,058

Repurchase of common stock
 
 
 
 
 
 
 
 
 
 
 
(315,664
)
 
 
 
 
 
(315,664
)
Reclassification to redeemable noncontrolling interest
 
 
 
 
 
 
 
(32,182
)
 
 
 
 
 
 
 
(13,428
)
 
(45,610
)
Income attributed to noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
183

 
183

Balance, July 5, 2015
 
$

 
$
299,281

 
$
60,620

 
$
752,369

 
$
5,776,618

 
$
(5,422,304
)
 
$
(316,325
)
 
$
50,626

 
$
1,200,885



See Notes to Unaudited Consolidated Financial Statements.



7

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)


1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements provided in this report include the accounts of The Hershey Company (the “Company,” “Hershey,” “we” or “us”) and our majority-owned subsidiaries and entities in which we have a controlling financial interest after the elimination of intercompany accounts and transactions. We have a controlling financial interest if we own a majority of the outstanding voting common stock and the noncontrolling shareholders do not have substantive participating rights, or we have significant control over an entity through contractual or economic interests in which we are the primary beneficiary.
The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. Our significant interim accounting policies include the recognition of a pro-rata share of certain estimated annual amounts primarily for raw material purchase price variances, advertising expense, incentive compensation expenses and the effective income tax rate. We have included all adjustments (consisting only of normal recurring accruals) that we believe are considered necessary for a fair presentation.
Operating results for the quarter ended July 5, 2015 may not be indicative of the results that may be expected for the year ending December 31, 2015 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, 2014 (our “2014 Annual Report on Form 10-K”), which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.
Other (Income) Expense, net
In the second quarter of 2015, we began presenting a new non-operating "other (income) expense, net" classification to report certain gains and losses associated with activities not directly related to our core operations. For the three and six month periods ended June 29, 2014, we reclassified from selling, marketing and administrative expenses to other (income) expense, net total net gains of $(181) and net expense of $8,976, respectively, to conform to the current year presentation. After considering these reclassifications, amounts reflected in other (income) expense, net include the following:
 
Three Months Ended
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Gain on sale of non-core trademark
$

 
$

 
$
(9,950
)
 
$

Write-down of equity investments in partnerships qualifying for historic tax credits (see Note 13)
4,644

 

 
4,644

 

Foreign currency exchange loss relating to strategy to cap Shanghai Golden Monkey acquisition price as denominated in U.S. dollars

 
20

 

 
13,109

Gain on acquisition of controlling interest in Lotte Shanghai Food Company

 
(652
)
 

 
(4,628
)
Other losses, net
115

 
451

 
225

 
495

Total
$
4,759

 
$
(181
)
 
$
(5,081
)
 
$
8,976

Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard was originally effective for us on January 1, 2017; however, in July 2015 the FASB decided to defer the effective date by one year. Early application is not permitted, but reporting entities may choose to adopt the standard as of the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the effect that ASU No. 2014-09 will have on our consolidated financial statements and related disclosures, our transition date and transition method.

8

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.  ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  This ASU is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015.  Retrospective application is required and early adoption is permitted.  The adoption of ASU No. 2015-03 is not expected to have a significant impact on our consolidated financial statements or 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 related disclosures.
2. BUSINESS ACQUISITIONS AND DIVESTITURES
Acquisitions of businesses are accounted for as purchases and, accordingly, their results of operations are included in the consolidated financial statements from the respective dates of the acquisitions. The purchase price for business acquisitions is allocated to the assets acquired and liabilities assumed.
2015 Acquisition
KRAVE Pure Foods
In March 2015, we completed the acquisition of all of the outstanding shares of KRAVE Pure Foods, Inc. (“Krave”), manufacturer of KRAVE jerky, a leading all-natural snack brand of premium jerky products. The transaction will allow Hershey to tap into the rapidly growing meat snacks category and further expand into the broader snacks space. Krave is headquartered in Sonoma, California and generated 2014 annual sales of approximately $35 million.
Total purchase consideration includes cash consideration paid to date of $220,016, as well as agreement to pay additional cash consideration of up to $20,000 to the Krave shareholders if certain defined targets related to net sales and gross profit margin are met or exceeded during the twelve-month periods ending December 31, 2015 or March 31, 2016. The fair value of the contingent cash consideration, estimated to be $16,800 as of the acquisition date, is recorded in accrued liabilities in the Consolidated Balance Sheet.
The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:
Goodwill
$
147,089

Trademarks
112,000

Other intangible assets
17,000

Other assets, primarily current assets, net of cash acquired totaling $1,362
9,465

Current liabilities
(2,756
)
Non-current deferred tax liabilities
(47,344
)
Net assets acquired
$
235,454

Goodwill is calculated as the excess of the purchase price over the fair value of the net assets acquired. The goodwill resulting from the acquisition is attributable primarily to the value of leveraging our brand building expertise, consumer insights, supply chain capabilities and retail relationships to accelerate growth and access to KRAVE products. The recorded goodwill is not expected to be deductible for tax purposes.
Acquired trademarks were assigned estimated useful lives of 22 years, while other intangibles, including customer relationships and covenants not to compete, were assigned estimated useful lives ranging from 5 to 16 years.

9

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Updates to 2014 Acquisitions
A more complete description of our acquisition activity for the year ended December 31, 2014 can be found in Note 2 to the Consolidated Financial Statements included in our 2014 Annual Report on Form 10-K.
Shanghai Golden Monkey Food Joint Stock Co., Ltd. (“SGM”)
At December 31, 2014, we had recorded a receivable of $37,860, reflecting our best estimate of the amount due from the selling SGM shareholders for the working capital and net debt adjustments. In addition, at December 31, 2014, we had recorded a liability of $100,067, reflecting the fair value of the future payment to be made to the SGM shareholders for the remaining 20% of the outstanding shares of SGM. Such amounts are recorded in the Consolidated Balance Sheets within prepaid expenses and other and accrued liabilities, respectively.
During the first quarter of 2015, we came to an agreement with the selling SGM shareholders to revise the aforementioned receivable and liability balances to reflect partial settlement of the receivable. As a result, in the first quarter, the receivable was adjusted to $8,685 and the liability was adjusted to $76,815. Additionally, during the first quarter of 2015, goodwill was increased by $6,623 to recognize revisions to the estimated value of assets and liabilities acquired in the acquisition. During the second quarter, based on our ongoing procedures to assess the quality of acquired trade accounts receivable, we recorded an additional adjustment to increase goodwill by $25,898 to reflect bad debt allowance for an additional amount of trade receivables considered to be uncollectible as of the acquisition date. We are continuing to refine the valuations of acquired assets and liabilities and expect to finalize the purchase price allocation in the third quarter of 2015. Most notably, we continue to conduct additional procedures to assess the valuation of working capital-related balances at the acquisition date.
Since the initial acquisition in 2014, the SGM business has performed below expectations, with net sales and earnings levels well below pre-acquisition levels. In addition, as part of our ongoing integration process, we have continued to assess the quality of SGM’s accounts receivable and existing distributor networks. Based on these recent performance levels and the results of our assessment to date, we determined that an interim impairment test of the SGM reporting unit was required by U.S. generally accepted accounting principles. We performed the first step of this test as of July 5, 2015 using an income approach based on our estimates of future performance scenarios for the business. The results of this test indicated that the fair value of the reporting unit was less than the carrying amount as of the measurement date, suggesting that a goodwill impairment was probable, which required us to perform a second step analysis to confirm that an impairment exists and to determine the amount of the impairment based on our reassessed value of the reporting unit. Although preliminary, as a result of this reassessment, in the second quarter of 2015 we recorded an estimated $249,811 non-cash goodwill impairment charge, representing a write-down of all of the goodwill related to the SGM reporting unit. After this write-down, the remaining carrying value of the long-lived assets related to the SGM reporting unit totaled $281,562.  As disclosed above, the initial purchase price allocation for the acquisition is not yet complete.  Additional changes in the purchase price allocation could result in changes to the initial balance of goodwill and the preliminary goodwill impairment charge. We expect to finalize the initial purchase price allocation and business valuation assessment in the third quarter of 2015 and additional charges, including charges related to other long-lived assets, may be required.
We currently anticipate completing the acquisition of the remaining 20% of SGM in the fourth quarter of 2015, but the timing and terms will be informed by the results of our ongoing assessment.
The Allan Candy Company Limited (“Allan”)
During the six months ended July 5, 2015, we increased goodwill by $1,820 to recognize revisions to the preliminary fair value of net assets acquired.
Pro forma results of operations have not been presented for the above-mentioned acquisitions, as the impact on our consolidated financial statements is not considered to be material.

10

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

2015 Divestiture
Mauna Loa Macadamia Nut Corporation (“Mauna Loa”)
In December 2014, we entered into an agreement to sell the Mauna Loa. The transaction closed in the first quarter of 2015, resulting in proceeds, net of selling expenses and an estimated working capital adjustment, of approximately $32,400. The sale of Mauna Loa resulted in the recording of an additional loss on sale of $2,667 in the first quarter of 2015, based on updates to the selling expenses and tax benefits.
Mauna Loa had historically been reported within our North America segment. Its operations were not material to our annual net sales, net income or earnings per share. Amounts classified as assets and liabilities held for sale at December 31, 2014 were presented within prepaid expenses and other assets and accrued liabilities, respectively, and included the following:
Assets held for sale
 
Inventories
$
21,489

Prepaid expenses and other
173

Property, plant and equipment, net
12,691

Other intangibles
12,705

 
$
47,058

Liabilities held for sale
 
Accounts payable and accrued liabilities
$
3,726

Other long-term liabilities
9,029

 
$
12,755

3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill by reportable segment for the six months ended July 5, 2015 are as follows:
 
 
North America
 
    International and Other
 
Total
Balance at December 31, 2014
 
$
533,349

 
$
259,606

 
$
792,955

Acquired during the period
 
147,334

 

 
147,334

Purchase price allocation adjustments
 
1,575

 
32,521

 
34,096

Impairment
 

 
(249,811
)
 
(249,811
)
Foreign currency translation
 
(9,492
)
 
(3,747
)
 
(13,239
)
Balance at July 5, 2015
 
$
672,766

 
$
38,569

 
$
711,335

The $249,811 impairment charge noted above resulted from our reassessment of the valuation of SGM business in the second quarter of 2015. See Note 2 for additional information.
The following table provides a summary of the major categories of intangible assets:
 
 
July 5, 2015
 
December 31, 2014
Intangible assets not subject to amortization:
 
 
 
 
Trademarks
 
$
45,211

 
$
45,000

Intangible assets subject to amortization:
 
 
 
 
Trademarks, customer relationships, patents and other finite-lived intangibles
 
413,707

 
295,375

Less: accumulated amortization
 
(56,351
)
 
(45,534
)
Total other intangible assets
 
$
402,567

 
$
294,841

Total amortization expense for the six months ended July 5, 2015 and June 29, 2014 was $11,129 and $5,043, respectively.

11

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

4. DEBT AND FINANCING ARRANGEMENTS
As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. We maintain a $1.0 billion unsecured revolving credit facility, which expires in November 2019. At July 5, 2015, we had outstanding commercial paper totaling $257,476, at a weighted average interest rate of 0.12%. At December 31, 2014, we had outstanding commercial paper totaling $54,995, at a weighted average interest rate of 0.09%.
The credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. As of July 5, 2015, 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 2014 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 $358,226 and $329,701 at July 5, 2015 and December 31, 2014, respectively.
Interest Expense
Net interest expense consisted of the following:
 
Three Months Ended
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Interest expense
$
23,259

 
$
23,085

 
$
46,283

 
$
46,399

Interest income
(1,156
)
 
(1,138
)
 
(1,961
)
 
(2,084
)
Capitalized interest
(3,226
)
 
(1,213
)
 
(6,243
)
 
(2,296
)
Interest expense, net
$
18,877

 
$
20,734

 
$
38,079

 
$
42,019

5. FINANCIAL INSTRUMENTS AND FAIR VALUE
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.
We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in the income statement. We do not hold or issue derivative instruments for trading or speculative purposes.
In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchange-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.
Commodity Price Risk
We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3- to 24-month periods. The majority of our commodity derivative instruments meet hedge accounting requirements and are designated as cash flow hedges. We account for the effective portion of mark-to-market gains and losses on commodity derivative instruments in other comprehensive income, to be recognized in cost of sales in the same period that we record the hedged raw material requirements in cost of sales. The ineffective portion of gains and losses is recorded currently in cost of sales.

12

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

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, Malaysian ringgit, Chinese renminbi, Japanese yen, Mexican peso and Brazilian real. We typically utilize foreign currency forward exchange contracts and options to hedge these exposures for periods ranging from 3 to 24 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 $12,991 at July 5, 2015 and $22,725 at December 31, 2014. 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 $35,390 at July 5, 2015 and $4,144 at December 31, 2014. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.
Interest Rate Risk
In order to manage interest rate exposure, from time to time we enter into interest rate swap agreements that effectively convert variable rate debt to a fixed interest rate. These swaps are designated as cash flow hedges, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. The notional amount of interest rate derivative instruments in cash flow hedging relationships was $750,000 at July 5, 2015 and December 31, 2014.
We also manage our targeted mix of fixed and floating rate debt with debt issuances and by entering into fixed-to-floating interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. These swaps are designated as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings as interest expense (income), net. The notional amount, interest rate and maturity date of these swaps generally match the principal, interest payment and maturity date of the related debt, and the swaps are valued using observable benchmark rates (Level 2 valuation). The notional amount of interest rate derivative instruments in fair value hedge relationships was $450,000 at July 5, 2015 and December 31, 2014.
Equity Price Risk
We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. 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 contracts outstanding was $24,643 and $26,417 at July 5, 2015 and December 31, 2014, respectively.

13

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Fair Value of Derivative Instruments
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance Sheet on a recurring basis as of July 5, 2015 and December 31, 2014 :
 
 
July 5, 2015
 
December 31, 2014
 
 
Assets (1)
 
Liabilities (1)
 
Assets (1)
 
Liabilities (1)
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
 
Commodities futures and options (2)
 
$
2,255

 
$
515

 
$

 
$
9,944

Foreign exchange contracts (3)
 
2,636

 
2,165

 
2,196

 
2,447

Interest rate swap agreements (4)
 

 
21,502

 

 
29,505

Cross-currency swap agreement (5)
 
2,737

 

 
2,016

 

 
 
7,628

 
24,182

 
4,212

 
41,896

Derivatives designated as fair value hedging instruments:
 
 
 
 
 
 
 
 
Interest rate swap agreements (4)
 
4,800

 

 
1,746

 

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Deferred compensation derivatives (6)
 
207

 

 
1,074

 

Foreign exchange contracts (3)
 
451

 
563

 
4,049

 
2,334

 
 
658

 
563

 
5,123

 
2,334

Total
 
$
13,086

 
$
24,745

 
$
11,081

 
$
44,230


(1)
Derivative assets are classified on our balance sheet within prepaid expenses and other if current and other assets if non-current. Derivative liabilities are classified on our balance sheet within accrued liabilities if current and other long-term liabilities if non-current.
(2)
The fair value of commodities futures and options contracts is based on quoted market prices and is, therefore, categorized as Level 1 within the fair value hierarchy. As of July 5, 2015, prepaid expenses and other reflects the net of assets of $89,967 and accrued liabilities of $87,712 associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in accrued liabilities at December 31, 2014 were assets of $51,225 and accrued liabilities of $56,840. At July 5, 2015, the amount reflected in accrued liabilities related to the fair value of non-exchange traded derivative instruments. At December 31, 2014, the remaining amount reflected in liabilities related to the fair value of options contracts and other non-exchange traded derivative instruments.
(3)
The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences. These contracts are classified as Level 2 within the fair value hierarchy.
(4)
The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. Such contracts are categorized as Level 2 within the fair value hierarchy.
(5)
The fair value of the cross-currency swap agreement is categorized as Level 2 within the fair value hierarchy and is estimated based on the difference between the contract and current market foreign currency exchange rates at the end of the period.
(6)
The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index and is, therefore, categorized as Level 2 within the fair value hierarchy.

14

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Fair Value of Other Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and short-term debt approximated fair value as of July 5, 2015 and December 31, 2014 because of the relatively short maturity of these instruments.
The carrying value of long-term debt, including the current portion, was $1,798,124 as of July 5, 2015, compared with a fair value of $1,947,526. The estimated fair value of long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy.
Income Statement Impact of Derivative Instruments
The effect of derivative instruments on the Consolidated Statements of Income for the three months ended July 5, 2015 and June 29, 2014 was as follows:
 
 
Non-designated Hedges
 
Cash Flow Hedges
 
 
 
 
 
Gains (losses) recognized in income (a)
 
Gains (losses) recognized in accumulated other comprehensive income (“OCI”) (effective portion)
 
Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)
 
Gains recognized in income (ineffective portion) (c)
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Commodities futures and options
 
$

 
$

 
$
112,288

 
$
19,312

 
$
19,100

 
$
12,400

 
$
1,141

 
$
320

Foreign exchange contracts
 
(209
)
 
1,676

 
(1,744
)
 
(825
)
 
(253
)
 
3,754

 

 

Interest rate swap agreements
 

 

 
36,357

 
(6,689
)
 
(1,124
)
 
(1,110
)
 

 

Deferred compensation derivatives
 
207

 
1,401

 

 

 

 

 

 

Total
 
$
(2
)
 
$
3,077

 
$
146,901

 
$
11,798

 
$
17,723

 
$
15,044

 
$
1,141

 
$
320

(a)
Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.
(b)
Gains (losses) reclassified from accumulated OCI into income were included in cost of sales for commodities futures and options contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains (losses) for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from accumulated OCI into income for interest rate swap agreements were included in interest expense.
(c)
Gains representing hedge ineffectiveness were included in cost of sales for commodities futures and options contracts.

15

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

The effect of derivative instruments on the Consolidated Statements of Income for the six months ended July 5, 2015 and June 29, 2014 was as follows:
 
 
Non-designated Hedges
 
Cash Flow Hedges
 
 
 
 
 
Gains (losses) recognized in income (a)
 
Gains (losses) recognized in accumulated other comprehensive income (“OCI”) (effective portion)
 
Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)
 
Gains (losses) recognized in income (ineffective portion) (c)
 
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Commodities futures and options
 
$
(2,777
)
 
$
2,339

 
$
97,190

 
$
59,267

 
$
20,300

 
$
28,300

 
$
854

 
$
(92
)
Foreign exchange contracts
 
(276
)
 
(8,792
)
 
(504
)
 
311

 
88

 
3,897

 

 

Interest rate swap agreements
 

 

 
8,003

 
(15,337
)
 
(2,313
)
 
(2,237
)
 

 

Deferred compensation derivatives
 
379

 
1,470

 

 

 

 

 

 

Total
 
$
(2,674
)
 
$
(4,983
)
 
$
104,689

 
$
44,241

 
$
18,075

 
$
29,960

 
$
854

 
$
(92
)
(a)
Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.
(b)
Gains reclassified from accumulated OCI into income were included in cost of sales for commodities futures and options contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from accumulated OCI into income for interest rate swap agreements were included in interest expense.
(c)
Gains (losses) representing hedge ineffectiveness were included in cost of sales for commodities futures and options contracts.
The amount of net gains on cash flow hedging derivatives, including interest rate swap agreements, foreign currency forward exchange contracts, and commodities futures and options contracts, expected to be reclassified into income in the next 12 months was approximately $18,275 after tax as of July 5, 2015. This amount was primarily associated with commodities futures contracts.
Fair Value Hedges
For the six months ended July 5, 2015, we recognized a net pretax benefit to interest expense of $4,049 relating to our fixed-to-floating interest rate swap arrangements.

16

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

6. NONCONTROLLING INTERESTS IN SUBSIDIARIES
We currently own a 50% controlling interest in Lotte Shanghai Food Company (“LSFC”), a joint venture established in 2007 in China for the purpose of manufacturing and selling product to the venture partners.
We also own a 51% controlling interest in Hershey do Brasil under a cooperative agreement with Pandurata Netherlands B.V. (“Bauducco”), a leading manufacturer of baked goods in Brazil whose primary brand is Bauducco. At the end of 2014, per the terms of the prevailing quotaholder’s agreement, Bauducco provided notice of its intent to sell its 49% interest to us at an amount equal to fair value.
Because the noncontrolling interest held by Bauducco is redeemable as a result of the put right, the presentation of the noncontrolling interest has been revised to be reflected as a redeemable noncontrolling interest within the balance sheet as of July 5, 2015. In addition, the balance was increased in the first and second quarters of 2015 by a total of $32,182, in order to reflect the balance at its estimated redemption value based on the current internal valuation for the business. The offset of this adjustment was recorded to additional paid in capital. Our purchase of the redeemable noncontrolling interest is currently expected to be finalized in the third quarter of 2015, subject to regulatory approval.
 
Noncontrolling Interests
 
Redeemable Noncontrolling Interest
Balance, December 31, 2014
$
64,468

 
$

Reclassification from Total Equity to Redeemable Noncontrolling Interest
(13,428
)
 
13,428

Net gain (loss) attributable to noncontrolling interests (1)
183

 
(3,547
)
Other comprehensive loss - foreign currency translation adjustments
(597
)
 
(2,334
)
Adjustment to redemption value

 
32,182

Other

 
(2,346
)
Balance, July 5, 2015
$
50,626

 
$
37,383

(1) Amounts are deemed to be immaterial and are presented within selling, marketing and administrative expenses.

17

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

7. COMPREHENSIVE INCOME
A summary of the components of comprehensive income is as follows:
 
Three Months Ended
 
Three Months Ended
 
July 5, 2015
 
June 29, 2014
 
Pre-Tax
Amount
 
Tax (Expense)
Benefit
 
After-Tax
Amount
 
Pre-Tax
Amount
 
Tax (Expense)
Benefit
 
After-Tax
Amount
Net (loss) income
 
 
 
 
$
(99,941
)
 
 
 
 
 
$
168,168

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
2,668

 
$

 
2,668

 
$
5,773

 
$

 
5,773

Pension and post-retirement benefit plans (a)
8,152

 
(2,686
)
 
5,466

 
5,825

 
(2,225
)
 
3,600

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gains on cash flow hedging derivatives
146,901

 
(55,872
)
 
91,029

 
11,798

 
(4,456
)
 
7,342

Reclassification adjustments (b)
(17,723
)
 
6,625

 
(11,098
)
 
(15,044
)
 
4,261

 
(10,783
)
Total other comprehensive income
$
139,998

 
$
(51,933
)
 
88,065

 
$
8,352

 
$
(2,420
)
 
5,932

Total comprehensive (loss) income
 
 
 
 
$
(11,876
)
 
 
 
 
 
$
174,100

Comprehensive income attributable to redeemable and noncontrolling interests
 
 
 
 
(578
)
 
 
 
 
 

Comprehensive (loss) income attributable to The Hershey Company
 
 
 
 
$
(12,454
)
 
 
 
 
 
$
174,100


 
Six Months Ended
 
Six Months Ended
 
July 5, 2015
 
June 29, 2014
 
Pre-Tax
Amount
 
Tax (Expense)
Benefit
 
After-Tax
Amount
 
Pre-Tax
Amount
 
Tax (Expense)
Benefit
 
After-Tax
Amount
Net income
 
 
 
 
$
144,796

 
 
 
 
 
$
420,663

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
$
(25,050
)
 
$

 
(25,050
)
 
$
5,305

 
$

 
5,305

Pension and post-retirement benefit plans (a)
16,814

 
(5,887
)
 
10,927

 
11,535

 
(4,375
)
 
7,160

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Gains on cash flow hedging derivatives
104,689

 
(39,752
)
 
64,937

 
44,241

 
(16,460
)
 
27,781

Reclassification adjustments (b)
(18,075
)
 
6,578

 
(11,497
)
 
(29,960
)
 
9,938

 
(20,022
)
Total other comprehensive income
$
78,378

 
$
(39,061
)
 
39,317

 
$
31,121

 
$
(10,897
)
 
20,224

Total comprehensive income
 
 
 
 
$
184,113

 
 
 
 
 
$
440,887

Comprehensive loss attributable to redeemable and noncontrolling interests
 
 
 
 
2,931

 
 
 
 
 

Comprehensive income attributable to The Hershey Company
 
 
 
 
$
187,044

 
 
 
 
 
$
440,887


(a)
These amounts are included in the computation of net periodic benefit costs. For more information, see Note 11.
(b)
For information on the presentation of reclassification adjustments for cash flow hedges on the Consolidated Statements of Income, see Note 5.

18

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

The components of accumulated other comprehensive loss as shown on the Consolidated Balance Sheets are as follows:
 
July 5,
2015
 
December 31,
2014
Foreign currency translation adjustments
$
(65,800
)
 
$
(43,681
)
Pension and post-retirement benefit plans, net of tax
(273,723
)
 
(284,650
)
Cash flow hedges, net of tax
23,198

 
(30,242
)
Total accumulated other comprehensive loss
$
(316,325
)
 
$
(358,573
)
8. EARNINGS PER SHARE
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
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Net (loss) income
$
(99,941
)
 
$
168,168

 
$
144,796

 
$
420,663

Weighted-average shares – basic:
 
 
 
 
 
 
 
Common stock
158,993

 
162,168

 
159,520

 
162,873

Class B common stock
60,620

 
60,620

 
60,620

 
60,620

Total weighted-average shares – basic:
219,613

 
222,788

 
220,140

 
223,493

Effect of dilutive securities: (1)
 
 
 
 
 
 
 
Employee stock options

 
1,913

 
1,514

 
2,125

Performance and restricted stock units

 
280

 
281

 
388

Weighted-average shares – diluted
219,613

 
224,981

 
221,935

 
226,006

Earnings per share – basic:
 
 
 
 
 
 
 
Common stock
$
(0.47
)
 
$
0.78

 
$
0.67

 
$
1.94

Class B common stock
$
(0.42
)
 
$
0.70

 
$
0.62

 
$
1.74

Earnings per share – diluted:
 
 
 
 
 
 
 
Common stock
$
(0.47
)
 
$
0.75

 
$
0.65

 
$
1.86

Class B common stock
$
(0.42
)
 
$
0.70

 
$
0.62

 
$
1.73

(1) For the three months ended July 5, 2015, dilutive securities are not included as they are antidilutive in the calculation of earnings per share-diluted when calculated based on a net loss.
The Class B Common Stock is convertible into Common Stock on a share for share basis at any time. The calculation of earnings per share-diluted for the Class B Common Stock was performed using the two-class method and the calculation of earnings per share-diluted for the Common Stock was performed using the if-converted method.
The earnings per share calculations for the three months ended July 5, 2015 and June 29, 2014 exclude 4,175 and 1,363 stock options, respectively, that would have been antidilutive. The earnings per share calculations for the six months ended July 5, 2015 and June 29, 2014 exclude 2,660 and 1,365 stock options, respectively, that would have been antidilutive.
9. BUSINESS REALIGNMENT ACTIVITIES
On June 19, 2015, we announced a new productivity initiative (the “2015 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 Initiative is intended 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 Initiative is expected to result in the reduction of approximately 300 positions by the end of 2015, with estimated pre-tax charges and costs of $100 million to $120 million, the majority of which are cash. During the three and six months ended July 5, 2015, we incurred charges totaling $26,054, representing employee severance and related separation benefits as

19

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

well as incremental third-party costs related to the design and implementation of the new organizational structure. The remaining costs for the 2015 Initiative are largely expected to be incurred in the second half of 2015.
The tables below provide details for charges incurred across all restructuring and cost reduction activities during the three and six month periods ended July 5, 2015 and June 29, 2014.
 
Three Months Ended
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Employee related costs
$
22,552

 
$

 
$
22,552

 
$

Asset related costs
2,309

 

 
4,576

 

Other exit costs, including Mauna Loa divestiture

 
1,239

 
2,667

 
4,265

Other implementation costs
3,964

 

 
4,170

 

Total charges associated with business realignment initiatives
$
28,825

 
$
1,239

 
$
33,965

 
$
4,265

Asset related charges presented in the table above represent accelerated depreciation and amortization charges relating to a program commenced in 2014 to rationalize certain non-U.S. manufacturing and distribution activities.
The other exit costs incurred in 2014 primarily relate to the demolition of the Company's former manufacturing facility, representing the final phase of the Project Next Century Program. This program was substantially complete as of December 31, 2014.
Charges relating to our business realignment initiatives are classified in our Consolidated Statements of Income as follows:
 
Three Months Ended
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Cost of sales
$
1,328

 
$
(8
)
 
$
2,676

 
$
93

Selling, marketing and administrative
4,945

 

 
6,070

 

Business realignment charges:
 
 
 
 
 
 
 
Business realignment and productivity initiatives
22,552

 
1,247

 
22,552

 
4,172

Divestiture of Mauna Loa (see Note 2)

 

 
2,667

 

Total business realignment charges
22,552

 
1,247

 
25,219

 
4,172

Total charges associated with business realignment initiatives
$
28,825

 
$
1,239

 
$
33,965

 
$
4,265

Segment operating results do not include business realignment and related charges because we evaluate segment performance excluding such charges.
The following table summarizes our business realignment activity for the six months ended July 5, 2015:
 
Employee related costs
 
Other exit costs
 
Other implementation costs
 
Total
Liability balance at December 31, 2014
$
79

 
$

 
$

 
$
79

2015 business realignment charges
22,552

 

 
2,870

 
25,422

Cash payments

 

 

 

Liability balance at July 5, 2015
$
22,631

 
$

 
$
2,870

 
$
25,501

The charges reflected in the liability roll-forward above do not include items charged directly to expense, such as accelerated depreciation and amortization and the loss on the Mauna Loa divestiture, as those items are not reflected in the business realignment liability in our Consolidated Balance Sheets.

20

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

10. STOCK COMPENSATION PLANS
We have various stock-based compensation programs under which awards, including stock options, performance stock units (“PSUs”) and performance stock, stock appreciation rights, restricted stock units (“RSUs”) and restricted stock may be granted to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent. These programs and the accounting treatment related thereto are described in Note 10 to the Consolidated Financial Statements included in our 2014 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
 
Six Months Ended

July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Pre-tax compensation expense
$
12,726

 
$
14,742

 
$
26,615

 
$
27,697

Related income tax benefit
$
4,481

 
$
5,056

 
$
9,342

 
$
9,500

As of July 5, 2015, total stock-based compensation cost related to non-vested awards not yet recognized was $83,544 and the weighted-average period over which this amount is expected to be recognized was approximately 2.3 years.
Stock Options
A summary of activity relating to grants of stock options for the period ended July 5, 2015 is as follows:
Stock Options
Shares
Weighted-Average
Exercise Price (per share)
Weighted-Average Remaining
Contractual Term
Aggregate Intrinsic Value
Outstanding at beginning of the period
7,319,377

$66.69
6.3 years
 
Granted
1,296,300

$105.72
 
 
Exercised
(1,077,749
)
$51.33
 
 
Forfeited
(107,659
)
$88.82
 
 
Outstanding as of July 5, 2015
7,430,269

$75.42
6.6 years
$
151,247

Options exercisable as of July 5, 2015
4,256,865

$60.62
5.1 years
134,247

The weighted-average fair value of options granted was $19.26 per share and $21.55 per share for the periods ended July 5, 2015 and June 29, 2014, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions:
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
Dividend yields
2.0
%
 
2.0
%
Expected volatility
20.2
%
 
22.3
%
Risk-free interest rates
1.9
%
 
2.1
%
Expected lives in years
6.6

 
6.7

The total intrinsic value of options exercised was $53,698 and $99,645 for the periods ended July 5, 2015 and June 29, 2014, respectively.

21

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

Performance Stock Units and Restricted Stock Units
A summary of activity relating to grants of PSUs and RSUs for the period ended July 5, 2015 is as follows:
Performance Stock Units and Restricted Stock Units
Number of Units
Weighted-average grant date fair value for equity awards or market value for liability awards (per unit)
Outstanding at beginning of year
904,306

$94.48
Granted
304,972

$108.08
Performance assumption change
(258,589
)
$106.13
Vested
(377,509
)
$73.13
Forfeited
(20,770
)
$105.15
Outstanding as of July 5, 2015
552,410

$106.03
The table above excludes PSU awards for 25,462 units as of December 31, 2014 and 22,827 units as of July 5, 2015 for which the measurement date has not yet occurred for accounting purposes.
The following table sets forth information about the fair value of the PSUs and RSUs granted during the periods indicated for potential future distribution to employees and directors. In addition, the table provides assumptions used to determine the fair value of the market-based total shareholder return component of the PSU grants using a Monte Carlo simulation model on the date of grant:
 
 
Six Months Ended
 
 
July 5,
2015
 
June 29,
2014
Units granted
 
304,972

 
301,282

Weighted-average fair value at date of grant (per unit)
 
$108.08
 
$117.41
Monte Carlo simulation assumptions:
 
 
 
 
Estimated values (per unit)
 
$61.22
 
$80.95
Dividend yields
 
2.0
%
 
1.8
%
Expected volatility
 
14.9
%
 
15.5
%
The intrinsic value of share-based liabilities paid, combined with the fair value of shares vested, totaled $39,433 and $54,933 for the periods ended July 5, 2015 and June 29, 2014, respectively.
Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 503,350 units as of July 5, 2015. Each unit is equivalent to one share of the Company’s Common Stock.

22

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

11. PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Components of net periodic benefit cost for the second quarter were as follows:
 
Pension Benefits
 
Other Benefits
 
Three Months Ended
 
Three Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Service cost
$
6,810

 
$
6,448

 
$
99

 
$
176

Interest cost
10,857

 
12,200

 
2,513

 
2,961

Expected return on plan assets
(17,158
)
 
(18,432
)
 

 

Amortization of prior service (credit) cost
(296
)
 
(167
)
 
153

 
154

Amortization of net actuarial loss (gains)
7,232

 
5,935

 
(29
)
 
(45
)
Administrative expenses
276

 
216

 
39

 
45

Net periodic benefit cost
$
7,721

 
$
6,200

 
$
2,775

 
$
3,291

We made contributions of $485 and $4,872 to the pension plans and other benefits plans, respectively, during the second quarter of 2015. In the second quarter of 2014, we made contributions of $422 and $5,532 to our pension plans and other benefits plans, respectively. These contribution amounts also include benefit payments from our unfunded, non-qualified pension plans and post-retirement benefit plans.
Components of net periodic benefit cost for the year-to-date periods were as follows:
 
Pension Benefits
 
Other Benefits
 
Six Months Ended
 
Six Months Ended
 
July 5,
2015
 
June 29,
2014
 
July 5,
2015
 
June 29,
2014
Service cost
$
14,233

 
$
13,333

 
$
271

 
$
353

Interest cost
22,162

 
24,425

 
5,101

 
5,851

Expected return on plan assets
(34,539
)
 
(37,018
)
 

 

Amortization of prior service (credit) cost
(587
)
 
(334
)
 
306

 
308

Amortization of net actuarial loss (gains)
15,304

 
11,673

 
(29
)
 
(71
)
Administrative expenses
508

 
393

 
44

 
55

Net periodic benefit cost
$
17,081

 
$
12,472

 
$
5,693

 
$
6,496

We made contributions of $1,336 and $9,328 to the pension plans and other benefits plans, respectively, during the first six months of 2015. In the first six months of 2014, we made contributions of $1,973 and $10,672 to our pension plans and other benefits plans, respectively. These contribution amounts also include benefit payments from our unfunded, non-qualified pension plans and post-retirement benefit plans.
For 2015, there are no significant minimum funding requirements for our domestic pension plans; however, we expect to make additional contributions of approximately $22,900 to maintain the funded status. Planned voluntary funding of our non-domestic pension plans in 2015 is not material.



23

THE HERSHEY COMPANY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)

12. SEGMENT INFORMATION
Our current reporting structure is designed to ensure continued focus on North America, coupled with an emphasis on accelerating growth in our international markets, as we transform into a more global company. Our business is organized around geographic regions and strategic business units. It is designed to enable us to build processes for repeatable success in our global markets. The Presidents of our geographic regions, along with the Senior Vice President responsible for our Global Retail and Licensing business, are accountable for delivering our annual financial plans and report into our Chief Executive Officer, who serves as our Chief Operating Decision Maker (“CODM”), so we have defined our operating segments on a geographic basis. Our North America business currently generates over 85% of our consolidated revenue and none of our other geographic regions are individually significant.
We currently define our reportable segments as follows:
North America - This segment is responsible for our traditional chocolate and sugar confectionery market position, as well as our growing snacks and adjacencies market position, in the United States and Canada. This includes developing and growing our business in chocolate, sugar confectionery, refreshment, pantry, food service and other snacking product lines.
International and Other - This segment includes all other countries where The Hershey Company currently manufactures, imports, markets, sells or distributes chocolate, sugar confectionery and other products. Currently, this includes our operations in Mexico, Brazil and Puerto Rico, as well as Europe, Africa, the Middle East and Asia, primarily China, India, Korea, Japan and the Philippines; along with exports to these regions. While a minor component, this segment also includes our global retail operations, including Hershey's Chocolate World stores in Hershey, Pennsylvania, New York City, Chicago, Las Vegas, Shanghai, Niagara Falls (Ontario), Dubai, and Singapore, as well as operations associated with licensing the use of certain of the Company's trademarks and products to third parties around the world.
For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, as well as charges associated with business realignment activities, goodwill impairment charges, 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 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.
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 2014 Annual Report on Form 10-K.
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.

24

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
 
Six Months Ended
 
 
July 5,
2015
 
June 29, 2014
 
July 5,
2015
 
June 29,
2014
Net sales:
 
 
 
 
 
 
 
 
North America
 
$
1,399,574

 
$
1,374,529

 
$
3,106,569

 
$
3,033,576

International and Other
 
179,251

 
203,821

 
410,056

 
416,587

Total
 
$
1,578,825

 
$
1,578,350

 
3,516,625

 
3,450,163

 
 
 
 
 
 
 
 
 
Segment income (loss):
 
 
 
 
 
 
 
 
North America
 
$
460,667

 
$
405,732

 
$
1,014,973

 
$
944,437

International and Other
 
(44,485
)
 
(1,478
)
 
(66,244
)
 
5,137

Total segment income
 
416,182

 
404,254

 
948,729

 
949,574

Unallocated corporate expense (1)
 
126,794

 
124,165

 
265,466

 
252,343

Goodwill impairment
 
249,811

 

 
249,811

 

Charges associated with business realignment initiatives
 
28,825

 
1,239

 
33,965

 
4,265

Non-service related pension expense (income)
 
931

 
(297
)
 
2,927

 
(920
)
Acquisition integration costs
 
2,321

 
1,864

 
4,894

 
3,840

Operating profit
 
7,500

 
277,283

 
391,666

 
690,046

Interest expense, net
 
18,877

 
20,734

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