Cocoa products are the most significant raw materials we use to produce our chocolate products. Cocoa products, including cocoa liquor, cocoa butter and cocoa powder processed from cocoa beans, are usedthe most significant raw materials we use to meet manufacturing requirements. Cocoaproduce our chocolate products. These cocoa products are purchased directly from third-party suppliers. These third-party suppliers, who source cocoa beans whichthat are grown principally in Far Eastern, West African and South American equatorial regions to produce the cocoa products we purchase.regions. West Africa accounts for approximately 72% of the world’s supply of cocoa beans.

Many of our brands enjoy wide consumer acceptance and are among the leading brands sold in the marketplace in North America and certain markets in Latin America. We sell our brands in highly competitive markets with many other global multinational, national, regional and local firms. Some of our competitors are much largerlarge companies that have greaterwith significant resources and more substantial international operations. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing, promotional activity, the ability to identify and satisfy consumer preferences, as well as convenience and service.

Furthermore, we have rights under license agreements with several companies to manufacture and/or sell and distribute certain products. Our rights under these agreements are extendible on a long-term basis at our option. Our most significant licensing agreements are as follows:

The manufacture and sale of consumer food products is highly regulated. In the United States, our activities are subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate our businesses outside of the United States.

As of December 31, 2013,2014, we employed approximately 12,60020,800 full-time and 2,2001,650 part-time employees worldwide. Our employee headcount has increased compared to prior years due mainly to recent acquisitions, most notably SGM. Collective bargaining agreements covered approximately 5,0255,750 employees. During 2014,2015, agreements willare expected to be negotiated for certain employees at fivefour facilities outside of the United States, comprising approximately 67%64% of total employees under collective bargaining agreements. We believe that our employee relations are good.

Our principal operations and markets are located in the United States. The percentage of total consolidated net sales for our businesses outside of the United States was 17.5% for 2014, 16.6% for 2013 and 16.2% for 2012 and 15.7% for 2011.2012. The percentage of total consolidated assets outside of the United States was 35.4% as of December 31, 2013 was2014 and 19.4% and as of December 31, 2012 was 20.5%.2013.

Our founder, Milton S. Hershey, established an enduring model of responsible citizenship while creating a successful business. Driving sustainable business practices, making a difference in our communities and operating with the highest integrity are vital parts of our heritage. Milton Hershey School, established by Milton and Catherine Hershey, lies at the center of our unique heritage. Mr. Hershey donated and bequeathed almost his entire fortune to Milton Hershey School, which remains our primary beneficiary and provides a world-class education and nurturing home to nearly 2,000 children in need annually. We continue Milton Hershey's legacy of commitment to consumers, community and children by providing high-quality products while conducting our business in a socially responsible and environmentally sustainable manner.

This Annual Report on Form 10-K, including the exhibits hereto and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to changing economic, competitive, regulatory and technological risks and uncertaintiesuncertainties. Other than statements of historical fact, information regarding activities, events and developments that could have a material impactwe expect or anticipate will or may occur in the future, including, but not limited to, information relating to our future growth and profitability targets and strategies designed to increase total shareholder value, are forward-looking statements based on management’s estimates, assumptions and projections. Forward-looking statements also include, but are not limited to, statements regarding our business,future economic and financial condition orand results of operations. In connection withoperations, the “safe harbor” provisionsplans and objectives of the Private Securities Litigation Reform Act of 1995, we note the following factors that, among others, could cause future results to differ materially from the forward-looking statements, expectationsmanagement and our assumptions expressed or implied in this report.regarding our performance and such plans and objectives. Many of the forward-looking statements contained in this document may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated” and “potential,” among others. Among the factors that could cause ourForward-looking statements contained in this Annual Report on Form 10-K are predictions only and actual results tocould differ materially from the results projected in ourmanagement’s expectations due to a variety of factors, including those described below. All forward-looking statements attributable to us or could materiallypersons working on our behalf are expressly qualified in their entirety by such risk factors. The forward-looking statements that we make in this Annual Report on Form 10-K are based on management’s current views and adversely affect our business, financial condition or resultsassumptions regarding future events and speak only as of operations are thetheir dates. We assume no obligation to update developments of these risk factors described below.or to announce publicly any revisions to any of the forward-looking statements that we make, or to make corrections to reflect future events or developments, except as required by the federal securities laws.

Issues or concerns related to the quality and safety of our products, ingredients or packaging could cause a product recall and/or result in harm to the Company’s reputation, negatively impacting our operating results.

In order to sell our iconic, branded products, we need to maintain a good reputation with our customers and consumers. Issues related to the quality and safety of our products, ingredients or packaging could jeopardize our Company’s image and reputation. Negative publicity related to these types of concerns, or related to product contamination or product tampering, whether valid or not, could decrease demand for our products or cause production and delivery disruptions. We may need to recall products if any of our products become unfit for consumption. In addition, we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. Costs associated with these potential actions could negatively affect our operating results.

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

We use many different commodities for our business, including cocoa products, sugar, dairy products, peanuts, almonds, corn sweeteners, natural gas and fuel oil.

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

We may be able to pass some or all raw material, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently, or in a timely manner, to offset increased raw material, energy or other input costs, including packaging, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our financial condition and results of operations.

We operate in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and to consumers. Our continued success is impacted by many factors, including the following:

The global confectionery packaged goods industry is intensely competitive and consolidation in this industry continues. Some of our competitors are much largerlarge companies that have greatersignificant resources and more substantial international operations. In 2014, we also experienced increased levels of in-store activity for other snack items, which pressured confectionery category growth. In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we may be required to increase expenditures for promotions and advertising, and must continue to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks because we operate in a highly competitive retail environment.

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

Approximately three-quarterstwo-thirds of our manufacturing capacity is located in the United States. Disruption to our global manufacturing operations or our supply chain could result from, among other factors, the following:

We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage suchdisruptive events if they were to occur, including our global supply chain strategies and our principle-based global labor relations strategy. If we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted if such events were to occur.

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

From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our financial condition, results of operations and cash flows.

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

Changes in laws and regulations and the manner in which they are interpreted or applied may alter our business environment. These negative impacts could result from changes in food and drug laws, laws related to advertising and marketing practices, accounting standards, taxation requirements, competition laws, employment laws and environmental laws, among others. It is possible that we could become subject to additional liabilities in the future resulting from changes in laws and regulations that could result in an adverse effect on our financial condition and results of operations.

Our operations are impacted by consumer spending levels and impulse purchases which are affected by general macroeconomic conditions, consumer confidence, employment levels, the availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in food and energy costs, sustained global recessions, rising unemployment and declines in personal spending could adversely impact our revenues, profitability and financial condition.

In 2013,2014, we derived approximately 16.6%18% of our net sales from customers located outside of the United States.States, versus 17% in 2013 and 16% in 2012. Additionally, 19.4%35% of our total consolidated assets were located outside of the United States as of December 31, 2013.2014. As part of our global growth strategy, we are increasing our investments outside of the United States, particularly in Mexico, Brazil, India and China. As a result, we are subject to numerous risks and uncertainties relating to international sales and operations, including:

If we are not able to achieve our projected international growth objectives and mitigate the numerous risks and uncertainties associated with our international operations, there could be a negative impact on our financial condition and results of operations.

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

Information technology is critically important to our business operations. We use information technology to manage all business processes including manufacturing, financial, logistics, sales, marketing and administrative functions. These processes collect, interpret and distribute business data and communicate internally and externally with employees, suppliers, customers and others.

We are a defendant in a number of civil antitrust lawsuits in the United States, including individual, class and putative class actions brought against us by purchasers of our products. The U.S. Department of Justice also notified the Company in 2007 that it had opened an inquiry into certain alleged pricing practices by members of the confectionery industry, but has not requested any information or documents. Additional information about these proceedings is contained in Item 3. Legal Proceedings of this Form 10-K.Note 13 to the Consolidated Financial Statements.

None.  

Our principal properties include the following:

                

(1) We have an agreement with the Ferrero Group for the use of a warehouse and distribution facility of which the Company has been deemed to be the owner for accounting purposes.

Not applicable.

PART II

None.

There were noThe following table shows the purchases of ourshares of Common Stock duringmade by or on behalf of Hershey, or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of Hershey, for each fiscal month in the three months ended December 31, 2013. In April 2011, our Board of Directors approved a $250 million share repurchase program. As of December 31, 2013, $125.12014:

*Hypothetical $100 invested on December 31, 20082009 in Hershey Common Stock, S&P 500 Index and S&P 500 Packaged Foods Index, assuming reinvestment of dividends.

The following table provides a reconciliation of projected 2015 earnings per share-diluted and 2014 and 2013 earnings per share-diluted, each prepared in accordance with 2012 due to sales volume increasesaccounting principles generally accepted in the United States and key international markets as we continued our focus on core brands and innovation. Advertising expense increased 21.3% for the year, supporting core brands along with new product launches. Net income andof America (“GAAP”), to non-GAAP projected adjusted earnings per share-diluted also increased at greater rates than our long-term growth targets. The investmentsfor 2015 and adjusted earnings per share-diluted for 2014 and 2013:

Cost of sales increased 2.1% in 2013 compared with 2012. The impact of sales volume increases and supply chain cost inflation together increased cost of sales by approximately 9.4%. Lower input costs, supply chain productivity improvements and a favorable sales mix reduced cost of sales by approximately 6.3%. Business realignment and impairment charges of $0.4 million were included in cost of sales in 2013, compared with $36.4 million in the prior year, reducingbenefiting 2013 cost of sales by 1.0%.

The cost of sales increase of 6.6%Selling, marketing and administrative (“SM&A”) expenses decreased $21.5 million or 1.1% in 2012 compared with 2011 was primarily2014. This includes a 3.1% reduction in advertising and related consumer marketing expenses due to the timing of new product launches, a reduction in media production costs and a decision to shift resources to other more productive areas. Excluding advertising and related consumer marketing expenses, selling and administrative expenses were relatively flat compared to 2013 due to lower incentive compensation costs and discretionary cost containment efforts, offset in part by higher inputemployee-related costs, including additional headcount in our China business and additional focused selling resources, as well as transaction costs associated with the impactacquisition of sales volume increasesSGM. Selling and higher supply chain costs which together increased cost of sales by approximately 7.1%. The Brooksideadministrative expenses in 2014 also benefited from the $4.6 million gain recorded in the first quarter on the Lotte Shanghai Food Company (“LSFC”) acquisition further increased cost of sales by approximately 2.0%. Supply chain productivity improvements reduced cost of sales by approximately 2.5%. Business realignment and impairment charges of $36.4 million were included in cost of sales in 2012, compared with $45.1the $5.6 million in foreign currency gains realized on forward contracts related to the prior year.

Selling, marketing and administrativeSM&A expenses increased $218.7 million or 12.8% in 2013. Contributing to the overall increase was a 19.7% increase in advertising, consumer promotions and other marketing expenses to support core brands and the introduction of new products in the U.S. and international markets. Advertising expenses increased 21.3% compared with 2012. Additionally,Excluding the advertising and related consumer marketing costs, selling and administrative expenses increased 8.8% primarily as a result of higher employee-related expenses, increased incentive compensation costs, legal fees and increased marketing research expenses, along with the write-off of certain assets associated with the remodeling of increased office space. There were minimal business realignment charges included in SM&A in 2013 compared with $2.5 million in 2012.

In December 2014, we entered into an agreement to accelerated depreciation of fixed assets over a reduced estimated remaining useful life associatedsell the Mauna Loa Macadamia Nut Corporation. In connection with the Next Century program. A chargeanticipated sale, we have recorded an estimated loss of $5.0$22.3 million was recorded into reflect the disposal entity at fair value, less an estimate of the selling marketing and administrative expenses during 2011 for project administration relatedcosts. See Note 2 to the Next Century program. Plant closure expenses of $8.6 million were recorded in 2011 primarily related to costs associated with the relocation of production lines. Employee separation costs were reduced by $9.5 million during 2011, which consisted of an $11.2 million credit reflecting lower expected costs related to voluntary and involuntary terminations at the two manufacturing facilities and a net benefits curtailment loss of $1.7 million also related to the employee terminations.

EBIT increased in 2013 compared with 2012 as a result of higher gross profit and lower business realignment charges, partially offset by higher selling, marketing and administrative expenses. Pre-tax net business realignment and impairment charges of $19.1 million were recorded in 2013 compared with $83.8 million recorded in 2012.

Net interest expense in 2013 was $7.2 million lower than in 2012 primarily as a result of lower short-term borrowings, partially offset by a decrease in capitalized interest and higher interest expense on long-term debt.

Our effective income tax rate was 34.4% for 2013 compared with 34.9% for 2012. The decrease in the effective income tax rate in 2013 reflected lower state income taxes, which were higher in 2012 as a result of the impact of certain state tax legislation, and an increase in deductions associated with certain foreign tax jurisdictions, partiallypartly offset by a higher benefit in 2012 resulting from the completion of tax audits.

Earnings per share-dilutedNet income increased $159.6 million, or 24.1%, while EPS-diluted increased $0.72, or 24.9%, in 2013 compared with 2012. NetThe increases in both net income in 2013 was reducedand EPS were driven by $11.8 million, or $0.05 per share-diluted,higher sales, lower input costs, favorable sales mix and lower business realignment and impairment charges.

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, as a result of netwell as business realignment and 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 and used for internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in 2012, was reduced by $57.2 million, or $0.25 per share-diluted. In 2013, netthe segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income was reduced by $6.6 million, or $0.03 per share-diluted, as a resultmeasure of non-service-related pension expenses. Non-service-related pension expenses reduced net income by $12.7 million, or $0.06 per share-dilutedoperating performance. We believe that these measures are useful to investors and other users of our financial information in 2012. Excludingevaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the impactactivities that are not integral to our ongoing operations. For further information, see the Non-GAAP Disclosures at the beginning of business realignment and impairment charges and non-service-related pension expenses from both periods and the acquisition closing, integration and transaction costs of $5.4 million, or $0.03 per share-diluted, in 2013, and $9.2 million, or $0.04 per share-diluted, in 2012, adjusted earnings per share-diluted increased $0.48 per share, or 14.8% in 2013 compared with 2012.