UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172019
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to______to_______
Commission File Number file number 1-183
THE HERSHEY COMPANYCOMPANY
(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.) | |
19 East Chocolate Avenue, Hershey, PA17033
(Address of principal executive offices and Zip Code)
(717) 534-4200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, one dollar par value | HSY | New York Stock Exchange | ||
Securities registered pursuant to Section 12(g) of the Act: Class B Common Stock, one dollar par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨No x
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 xNo ¨
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 xNo ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | x | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ☐ | ||||
| Emerging growth company | ☐ | ||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐No x
As of June 30, 201728, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the voting and non-voting common equity held by non-affiliates was $14,885,931,198.$19,932,748,865. Class B Common Stock is not listed for public trading on any exchange or market system. However, Class B shares are convertible into shares of Common Stock at any time on a share-for-share basis. Determination of aggregate market value assumes all outstanding shares of Class B Common Stock were converted to Common Stock as of June 30, 2017.28, 2019. The market value indicated is calculated based on the closing price of the Common Stock on the New York Stock Exchange on June 30, 201728, 2019 ($107.37134.03 per share).
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, one dollar par value—149,863,997148,135,834 shares, as of February 16, 2018.14, 2020.
Class B Common Stock, one dollar par value—60,619,77761,613,777 shares, as of February 16, 2018.14, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 20182020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
THE HERSHEY COMPANY
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 20172019
TABLE OF CONTENTS
| PART I | ||||
| PART II | ||||
| PART III | ||||
| PART IV | ||||
PART I
| Item 1. | BUSINESS |
The Hershey Company was incorporated under the laws of the State of Delaware on October 24, 1927 as a successor to a business founded in 1894 by Milton S. Hershey. In this report, the terms “Hershey,” “Company,” “we,” “us” or “our” mean The Hershey Company and its wholly-owned subsidiaries and entities in which it has a controlling financial interest, unless the context indicates otherwise.
Hershey is a global confectionery leader known for bringing goodness to the world through chocolate, sweets, mints, gum and other great tasting snacks. We are the largest producer of quality chocolate in North America, a leading snack maker in the United States and a global leader in chocolate and non-chocolate confectionery. We market, sell and distribute our products under more than 80 brand names in approximately 8085 countries worldwide.
Reportable Segments
Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international markets. Our business is primarily organized around geographic regions, which enables us to build processes for repeatable success in our global markets. As a result, we have defined our operating segments on a geographic basis, as this aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment. Our North America business, which generates approximately 88%89% of our consolidated revenue, is our only reportable segment. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other.
| • | North America - This segment is responsible for our traditional chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. |
| • | International and Other - International and Other is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in China, Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. This segment also includes our global retail operations, including Hershey's Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company's trademarks and products to third parties around the world. |
Financial and other information regarding our reportable segments is provided in our Management’s Discussion and Analysis and Note 1113 to the Consolidated Financial Statements.
Business Acquisitions
In September 2019, we completed the acquisition of ONE Brands, LLC ("ONE Brands"), previously a privately
held company that sells a line of low-sugar, high-protein nutrition bars to retailers and distributors in the United States,
with the ONE Bar as its primary product.
In October 2018, we completed the acquisition of Pirate Brands, which includes the Pirate's Booty, Smart Puffs and Original Tings brands, from B&G Foods, Inc. Pirate Brands offers baked, trans fat free and gluten free snacks and is available in a wide range of food distribution channels in the United States.
In January 2018, we completed the acquisition of all of the outstanding shares of Amplify Snack Brands, Inc. ("Amplify"), a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPop, Oatmega, Paqui and TyrrellsPaqui. The acquisition enables us to capture more consumer snacking occasions by creating a broader portfolio of brands.
The acquisition was undertaken in order to broaden our product offerings in the premium and portable snacking categories.Hershey Company | 2019 Form 10-K | Page 1
Products and Brands
Our principal product offerings include chocolate and non-chocolate confectionery products; gum and mint refreshment products; snack items such as popcorn, protein bars and cookies, spreads, bars and snack bites/mixes, and meat snacks; and pantry items, such as baking ingredients, toppings and beverages; and snack items such as spreads, meat snacks, bars and snack bites and mixes, popcorn and protein bars and cookies.beverages.
| • | Within our North America markets, our product portfolio includes a wide variety of chocolate offerings marketed and sold under the renowned brands of Hershey’s, Reese’s and Kisses, along with other popular chocolate and non-chocolate confectionery brands such as Jolly Rancher, Almond Joy, Brookside, barkTHINS, Cadbury,Good & Plenty, Heath, Kit Kat®, Lancaster, Payday, Rolo®, Twizzlers, Whoppers and York. We also offer premium chocolate products, primarily in the United States, through the Scharffen Berger and Dagoba brands. Our gum and mint products include Ice Breakers mints and chewing gum, Breathsavers mints and Bubble Yum bubble gum. Our pantry and snack items that are principally sold in North America include ready-to-eat SkinnyPop popcorn, baked and trans fat free Pirate's Booty snacks and other better-for-you snack brands such as Oatmega, Paqui and ONE Bar, baking products, toppings and sundae syrups sold under the Hershey’s, Reese’s and Heath brands, as well as Hershey’s and Reese’s chocolate spreads, snack bites and mixes, and Krave meat snack products. |
| • | Within our International and Other markets, we manufacture, market and sell many of these same brands, as well as other brands that are marketed regionally, such as Pelon Pelo Rico confectionery products in Mexico, IO-IO snack products in Brazil, and Nutrine and Maha Lacto confectionery products and Jumpin and Sofit beverage products in India. |
Principal Customers and Marketing Strategy
Our customers are mainly wholesale distributors, chain grocery stores, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, dollar stores, concessionaires and department stores. The majority of our customers, with the exception of wholesale distributors, resell our products to end-consumers in retail outlets in North America and other locations worldwide.
In 2017,2019, approximately 29%30% of our consolidated net sales were made to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers and the primary distributor of our products to Wal-Mart Stores, Inc.
The foundation of our marketing strategy is our strong brand equities, product innovation and the consistently superior quality of our products. We devote considerable resources to the identification, development, testing, manufacturing and marketing of new products. We utilize a variety of promotional programs directed towards our customers, as well as advertising and promotional programs for consumers of our products, to stimulate sales of certain products at various times throughout the year.
In conjunction with our sales and marketing efforts, our efficient product distribution network helps us maintain sales growth and provide superior customer service by facilitating the shipment of our products from our manufacturing plants to strategically located distribution centers. We primarily use common carriers to deliver our products from these distribution points to our customers.
Raw Materials and Pricing
Cocoa products, including cocoa liquor, cocoa butter and cocoa powder processed from cocoa beans, are the most significant raw materials we use to produce our chocolate products. These cocoa products are purchased directly from third-party suppliers, who source cocoa beans that are grown principally in Far Eastern, West African, Central and South American regions. West Africa accounts for approximately 70% of the world’s supply of cocoa beans.
Adverse weather, crop disease, political unrest and other problems in cocoa-producing countries have caused price fluctuations in the past, but have never resulted in the total loss of a particular producing country’s cocoa crop and/or exports. In the event that a significant disruption occurs in any given country, we believe cocoa from other producing countries and from current physical cocoa stocks in consuming countries would provide a significant supply buffer.
Our trading company in Switzerland that performs all aspects of cocoa procurement, including price risk management, physical supply procurement and sustainable sourcing oversight. The trading company was implemented to optimize the supply chain for our cocoa requirements, with a strategic focus on gaining real time access to cocoa market intelligence. It also provides us with the ability to recruit and retain world class commodities traders and procurement professionals and enables enhanced collaboration with commodities trade groups, the global cocoa community and sustainable sourcing resources.
We also use substantial quantities of sugar, Class II and IV dairy products, peanuts, almonds and energy in our production process. Most of these inputs for our domestic and Canadian operations are purchased from suppliers in the United States. For our international operations, inputs not locally available may be imported from other countries.
We change prices and weights of our products when necessary to accommodate changes in input costs, the competitive environment and profit objectives, while at the same time maintaining consumer value. Price increases and weight changes help to offset increases in our input costs, including raw and packaging materials, fuel, utilities, transportation costs and employee benefits. When we implement price increases, there is usually a time lag between the effective date of the list price increases and the impact of the price increases on net sales, in part because we typically honor previous commitments to planned consumer and customer promotions and merchandising events subsequent to the effective date of the price increases. In addition, promotional allowances may be increased subsequent to the effective date, delaying or partially offsetting the impact of price increases on net sales.
Competition
Many of our confectionery brands enjoy wide consumer acceptance and are among the leading brands sold in the marketplace in North America and certain markets in Latin America. We sell our brands in highly competitive markets with many other global multinational, national, regional and local firms. Some of our competitors are large companies with significant resources and substantial international operations. Competition in our product categories is based on product innovation, product quality, price, brand recognition and loyalty, effectiveness of marketing and promotional activity, the ability to identify and satisfy consumer preferences, as well as convenience and service. In recent years, weWe have also experienced increased competition from other snack items, which has pressured confectionery category growth.we are focused on expanding the boundaries of our core confection brands to capture new snacking occasions.
Working Capital, Seasonality and Backlog
Our sales are typically higher during the third and fourth quarters of the year, representing seasonal and holiday-related sales patterns. We manufacture primarily for stock and typically fill customer orders within a few days of receipt. Therefore, the backlog of any unfilled orders is not material to our total annual sales. Additional information relating to our cash flows from operations and working capital practices is provided in our Management’s Discussion and Analysis.
Trademarks, Service Marks and License Agreements
We own various registered and unregistered trademarks and service marks. The trademarks covering our key product brands are of material importance to our business. We follow a practice of seeking trademark protection in the United States and other key international markets where our products are sold. We also grant trademark licenses to third parties to produce and sell pantry items, flavored milks and various other products primarily under the Hershey’s and Reese’s brand names.
The Hershey Company | 2019 Form 10-K | Page 3
Furthermore, we have rights under license agreements with several companies to manufacture and/or sell and distribute certain products. Our rights under these agreements are extendible on a long-term basis at our option. Our most significant licensing agreements are as follows:
| Company | Brand | Location | Requirements | ||||
| Kraft Foods Ireland Intellectual Property Limited/Cadbury UK Limited | York Peter Paul Almond Joy Peter Paul Mounds | Worldwide | None | ||||
| Cadbury UK Limited | Cadbury Caramello | United States | Minimum sales requirement exceeded in | ||||
| Société des Produits Nestlé SA | Kit Kat® Rolo® | United States | Minimum unit volume sales exceeded in | ||||
Good & Plenty Heath Jolly Rancher Milk Duds Payday Whoppers | Worldwide | None | |||||
Research and Development
We engage in a variety of research and development activities in a number of countries, including the United States, Mexico, Brazil, India and China. We develop new products, improve the quality of existing products, improve and modernize production processes, and develop and implement new technologies to enhance the quality and value of both current and proposed product lines. Information concerning our research and development expense is contained in Note 1 to the Consolidated Financial Statements.
Food Quality and Safety Regulation
The manufacture and sale of consumer food products is highly regulated. In the United States, our activities are subject to regulation by various government agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Department of Commerce and the Environmental Protection Agency, as well as various state and local agencies. Similar agencies also regulate our businesses outside of the United States.
We believe our Product Excellence Program provides us with an effective product quality and safety program. This program is integral to our global supply chain platform and is intended to ensure that all products we purchase, manufacture and distribute are safe, are of high quality and comply with applicable laws and regulations.
Through our Product Excellence Program, we evaluate our supply chain including ingredients, packaging, processes, products, distribution and the environment to determine where product quality and safety controls are necessary. We identify risks and establish controls intended to ensure product quality and safety. Various government agencies and third-party firms as well as our quality assurance staff conduct audits of all facilities that manufacture our products to assure effectiveness and compliance with our program and applicable laws and regulations.
Environmental Considerations
The Hershey Company | 2019 Form 10-K | Page 4
Employees
As of December 31, 2017, we2019, the Company employed approximately 15,36014,520 full-time and 1,5501,620 part-time employees worldwide. Collective bargaining agreements covered approximately 5,450 employees.5,500 employees, or approximately 34% of the Company’s employees worldwide. During 2018,2020, agreements will be negotiated for certain employees at fourthree facilities outside of the United States and one United States facility, comprising approximately 72%74% of total employees under collective bargaining agreements. We believe that our employee relations are generally good.
Financial Information by Geographic Area
Our principal operations and markets are located in the United States. The percentage of total consolidated net sales for our businesses outside of the United States was 15.8% for 2019, 16.1% for 2018 and 16.7% for 2017, 16.7% for 2016 and 17.2% for 2015.2017. The percentage of total long-lived assets outside of the United States was 25.2%20.2% as of December 31, 20172019 and 29.8%21.7% as of December 31, 2016.2018.
Available Information
The Company's website address is www.thehersheycompany.com. We file or furnish annual, quarterly and current reports, proxy statements and other information with the United States Securities and Exchange Commission (“SEC”). You may obtain a copy of any of these reports, free of charge, from the Investors section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an Internet site that also contains these reports at: www.sec.gov. In addition, copies of the Company's annual report will be made available, free of charge, on written request to the Company.
We have a Code of Conduct that applies to our Board of Directors (“Board”) and all Company officers and employees, including, without limitation, our Chief Executive Officer and “senior financial officers” (including the Chief Financial Officer, Chief Accounting Officer and persons performing similar functions). You can obtain a copy of our Code of Conduct, as well as our Corporate Governance Guidelines and charters for each of the Board’s standing committees, from the Investors section of our website. If we change or waive any portion of the Code of Conduct that applies to any of our directors, executive officers or senior financial officers, we will post that information on our website.
The Hershey Company | 2019 Form 10-K | Page 5
| Item 1A. | RISK FACTORS |
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including the exhibits hereto and the information incorporated by reference herein, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. Other than statements of historical fact, information regarding activities, events and developments that we expect or anticipate will or may occur in the future, including, but not limited to, information relating to our future growth and profitability targets and strategies designed to increase total shareholder value, are forward-looking statements based on management’s estimates, assumptions and projections. Forward-looking statements also include, but are not limited to, statements regarding our future economic and financial condition and results of operations, the plans and objectives of management and our assumptions regarding our performance and such plans and objectives. Many of the forward-looking statements contained in this document may be identified by the use of words such as “intend,” “believe,” “expect,” “anticipate,” “should,” “planned,” “projected,” “estimated” and “potential,” among others. Forward-looking statements contained in this Annual Report on Form 10-K are predictions only and actual results could differ materially from management’s expectations due to a variety of factors, including those described below. All forward-looking statements attributable to us or persons working on our behalf are expressly qualified in their entirety by such risk factors. The forward-looking statements that we make in this Annual Report on Form 10-K are based on management’s current views and assumptions regarding future events and speak only as of their dates. We assume no obligation to update developments of these risk factors or to announce publicly any revisions to any of the forward-looking statements that we make, or to make corrections to reflect future events or developments, except as required by the federal securities laws.
In order to sell our iconic, branded products, we need to maintain a good reputation with our customers, consumers, suppliers, vendors and consumers.employees, among others. 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,consumption, and we could potentially be subject to litigation or government actions, which could result in payments of fines or damages. In addition, negative publicity related to our environmental, social or governance practices could also impact our reputation with customers, consumers, suppliers and vendors. Costs associated with these potential actions, as well as the potential impact on our ability to sell our products, could negatively affect our operating results.
The Hershey Company | 2019 Form 10-K | Page 6
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, corn products, dairy products, peanuts, almonds, corn sweeteners, natural gas and fuel oil.diesel fuel.
Commodities are subject to price volatility and changes in supply caused by numerous factors, including:
| Commodity market fluctuations; | |
Currency exchanges rates;
Imbalances between supply and demand;
The effect of weather on crop yield and quality;
Speculative influences;
Trade agreements among producing and consuming nations;
Supplier compliance with commitments;
Import/export requirements for raw materials and finished goods;
Political unrest in producing countries; and
Changes in governmental agricultural programs and energy policies.
Although we use forward contracts and commodity futures and options contracts where possible to hedge commodity prices, commodity price increases ultimately result in corresponding increases in our raw material and energy costs. If we are unable to offset cost increases for major raw materials and energy, there could be a negative impact on our financial condition and results of operations.
Price increases may not be sufficient to offset cost increases and maintain profitability or may result in sales volume declines associated with pricing elasticity.
We may be able to pass some or all raw material, energy and other input cost increases to customers by increasing the selling prices of our products or decreasing the size of our products; however, higher product prices or decreased product sizes may also result in a reduction in sales volume and/or consumption. If we are not able to increase our selling prices or reduce product sizes sufficiently, or in a timely manner, to offset increased raw material, energy or other input costs, including packaging, freight, direct labor, overhead and employee benefits, or if our sales volume decreases significantly, there could be a negative impact on our financial condition and results of operations.
Market demand for new and existing products could decline.
We operate in highly competitive markets and rely on continued demand for our products. To generate revenues and profits, we must sell products that appeal to our customers and to consumers. Our continued success is impacted by many factors, including the following:
Appropriate advertising campaigns and marketing programs;
Our ability to secure adequate shelf space at retail locations;
Our ability to drive sustainable innovation and maintain a strong pipeline of new products in the confectionery and broader snacking categories;
Changes in product category consumption;
Our response to consumer demographics and trends, including but not limited to, trends relating to store trips and the impact of the growing digital commerce channel; and
Consumer health concerns, including obesity and the consumption of certain ingredients.
There continues to be competitive product and pricing pressures in the markets where we operate, as well as challenges in maintaining profit margins. We must maintain mutually beneficial relationships with our key customers, including retailers and distributors, to compete effectively. Our largest customer, McLane Company, Inc., accounted for approximately 29%30% of our total net sales in 2017.2019. McLane Company, Inc. is one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers, including Wal-Mart Stores, Inc.
The Hershey Company | 2019 Form 10-K | Page 7
Increased marketplace competition could hurt our business.
The global confectionery packaged goods industry is intensely competitive and consolidation in this industry continues. Some of our competitors are large companies that have significant resources and substantial international operations. We continue to experience increased levels of in-store activity for other snack items, which has pressured confectionery category growth. In order to protect our existing market share or capture increased market share in this highly competitive retail environment, we may be required to increase expenditures for promotions and advertising, and must continue to introduce and establish new products. Due to inherent risks in the marketplace associated with advertising and new product introductions, including uncertainties about trade and consumer acceptance, increased expenditures may not prove successful in maintaining or enhancing our market share and could result in lower sales and profits. In addition, we may incur increased credit and other business risks because we operate in a highly competitive retail environment.
Disruption to our manufacturing operations or supply chain could impair our ability to produce or deliver finished products, resulting in a negative impact on our operating results.
Approximately 70% 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:
Pandemic outbreak of disease;
Weather;
Fire or explosion;
Terrorism or other acts of violence;
Labor strikes or other labor activities;
Unavailability of raw or packaging materials;
Operational and/or financial instability of key suppliers, and other vendors or service providers; and
Suboptimal production planning which could impact our ability to cost-effectively meet product demand.
We believe that we take adequate precautions to mitigate the impact of possible disruptions. We have strategies and plans in place to manage disruptive events if they were to occur, including our global supply chain strategies and our principle-based global labor relations strategy. If we are unable, or find that it is not financially feasible, to effectively plan for or mitigate the potential impacts of such disruptive events on our manufacturing operations or supply chain, our financial condition and results of operations could be negatively impacted if such events were to occur.
Our financial results may be adversely impacted by the failure to successfully execute or integrate acquisitions, divestitures and joint ventures.
From time to time, we may evaluate potential acquisitions, divestitures or joint ventures that align with our strategic objectives. The success of such activity depends, in part, upon our ability to identify suitable buyers, sellers or business partners; perform effective assessments prior to contract execution; negotiate contract terms; and, if applicable, obtain government approval. These activities may present certain financial, managerial, staffing and talent, and operational risks, including diversion of management’s attention from existing core businesses; difficulties integrating or separating businesses from existing operations; and challenges presented by acquisitions or joint ventures which may not achieve sales levels and profitability that justify the investments made. If the acquisitions, divestitures or joint ventures are not successfully implemented or completed, there could be a negative impact on our financial condition, results of operations and cash flows.
The Hershey Company | 2019 Form 10-K | Page 8
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, import/export requirements 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.
Political, economic and/or financial market conditions could negatively impact our financial results.
Our operations are impacted by consumer spending levels and impulse purchases which are affected by general macroeconomic conditions, consumer confidence, employment levels, the availability of consumer credit and interest rates on that credit, consumer debt levels, energy costs and other factors. Volatility in food and energy costs, sustained global recessions, broad political instability, rising unemployment, pandemic outbreak of disease, weather, natural and other disasters and declines in personal spending could adversely impact our revenues, profitability and financial condition.
Changes in financial market conditions may make it difficult to access credit markets on commercially acceptable terms, which may reduce liquidity or increase borrowing costs for our Company, our customers and our suppliers. A significant reduction in liquidity could increase counterparty risk associated with certain suppliers and service providers, resulting in disruption to our supply chain and/or higher costs, and could impact our customers, resulting in a reduction in our revenue, or a possible increase in bad debt expense.
Our international operations may not achieve projected growth objectives, which could adversely impact our overall business and results of operations.
In 2017, 20162019, 2018 and 2015,2017, respectively, we derived approximately 16%, 16% and 17% of our net sales from customers located outside of the United States. Additionally, approximately 25%20% of our total long-lived assets were located outside of the United States as of December 31, 2017.2019. As part of our strategy, we have made investments outside of the United States, particularly in Canada, China, Malaysia, Mexico, Brazil and India. As a result, we are subject to risks and uncertainties relating to international sales and operations, including:
Inability to establish, develop and achieve market acceptance of our global brands in international markets;
Difficulties and costs associated with compliance and enforcement of remedies under a wide variety of complex laws, treaties and regulations;
Unexpected changes in regulatory environments;
Political and economic instability, including the possibility of civil unrest, terrorism, mass violence or armed conflict;
Nationalization of our properties by foreign governments;
Tax rates that may exceed those in the United States and earnings that may be subject to withholding requirements and incremental taxes upon repatriation;
Potentially negative consequences from changes in tax laws;
The imposition of tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements;
Increased costs, disruptions in shipping or reduced availability of freight transportation;
The impact of currency exchange rate fluctuations between the U.S. dollar and foreign currencies;
Failure to gain sufficient profitable scale in certain international markets resulting in an inability to cover manufacturing fixed costs or resulting in losses from impairment or sale of assets; and
Failure to recruit, retain and build a talented and engaged global workforce.
If we are not able to achieve our projected international growth objectives and mitigate the numerous risks and uncertainties associated with our international operations, there could be a negative impact on our financial condition and results of operations.
The Hershey Company | 2019 Form 10-K | Page 9
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 regularly the target of attempted cyber and other security threats. Therefore, we continuously monitor and update our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access, misuse, computer viruses and other events that could have a security impact. We invest in industry standard security technology to protect the Company’s data and business processes against risk of data security breach and cyber attack. Our data security management program includes identity, trust, vulnerability and threat management business processes as well as adoption of standard data protection policies. We measure our data security effectiveness through industry accepted methods and remediate significant findings. Additionally, we certify our major technology suppliers and any outsourced services through accepted security certification standards. We maintain and routinely test backup systems and disaster recovery, along with external network security penetration testing by an independent third party as part of our business continuity preparedness. We also have processes in place to prevent disruptions resulting from the implementation of new software and systems of the latest technology.
While we have been subject to cyber attacks and other security breaches, these incidents did not have a significant impact on our business operations. We believe our security technology tools and processes provide adequate measures of protection against security breaches and in reducing cybersecurity risks. Nevertheless, despite continued vigilance in these areas, disruptions in or failures of information technology systems are possible and could have a negative impact on our operations or business reputation. Failure of our systems, including failures due to cyber attacks that would prevent the ability of systems to function as intended, could cause transaction errors, loss of customers and sales, and could have negative consequences to our Company, our employees and those with whom we do business. This in turn could have a negative impact on our financial condition and results or operations. In addition, the cost to remediate any damages to our information technology systems suffered as a result of a cyber attack could be significant.
We might not be able to hire, engage and retain the talented global workforce we need to drive our growth strategies.
Our future success depends upon our ability to identify, hire, develop, engage and retain talented personnel across the globe. Competition for global talent is intense, and we might not be able to identify and hire the personnel we need to continue to evolve and grow our business. In particular, if we are unable to hire the right individuals to fill new or existing senior management positions as vacancies arise, our business performance may be impacted.
Activities related to identifying, recruiting, hiring and integrating qualified individuals require significant time and attention. We may also need to invest significant amounts of cash and equity to attract talented new employees, and we may never realize returns on these investments.
In addition to hiring new employees, we must continue to focus on retaining and engaging the talented individuals we need to sustain our core business and lead our developing businesses into new markets, channels and categories. This may require significant investments in training, coaching and other career development and retention activities. If we are not able to effectively retain and grow our talent, our ability to achieve our strategic objectives will be adversely affected, which may impact our financial condition and results of operations.
The Hershey Company | 2019 Form 10-K | Page 10
We may not fully realize the expected costs savings and/or operating efficiencies associated with our strategic initiatives or restructuring programs, which may have an adverse impact on our business.
We depend on our ability to evolve and grow, and as changes in our business environment occur, we may adjust our business plans by introducing new strategic initiatives or restructuring programs to meet these changes. FromRecently introduced strategic initiatives include our efforts to continue to expand our presence in digital commerce, to transform our manufacturing, commercial and corporate operations through digital technologies and to enhance our data analytics capabilities to develop new commercial insights. If we are not able to capture our share of the expanding digital commerce market, if we do not adequately leverage technology to improve operating efficiencies or if we are unable to develop the data analytics capabilities needed to generate actionable commercial insights, our business performance may be impacted, which may negatively impact our financial condition and results of operations.
Additionally, from time to time we implement business realignment activities to support key strategic initiatives designed to maintain long-term sustainable growth, such as the Margin for Growth Program we commenced in the first quarter of 2017. These programs are intended to increase our operating effectiveness and efficiency, to reduce our costs and/or to generate savings that can be reinvested in other areas of our business. We cannot guarantee that we will be able to successfully implement these strategic initiatives and restructuring programs, that we will achieve or sustain the intended benefits under these programs, or that the benefits, even if achieved, will be adequate to meet our long-term growth and profitability expectations, which could in turn adversely affect our business.
Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations.
We rely extensively on information systems and technology to manage our business and summarize operating results. We are in the process of a multi-year implementation of a new global enterprise resource planning (“ERP”) system. This ERP system will replace our existing operating and financial systems. The ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of the business. The ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We may not be able to successfully implement the ERP system without experiencing delays, increased costs and other difficulties. If we are unable to successfully design and implement the new ERP system as planned, our financial positions, results of operations and cash flows could be negatively impacted. Additionally, if we do not effectively implement the ERP system as planned or the ERP system does not operate as intended, the effectiveness of our internal control over financial reporting could be adversely affected or our ability to assess those controls adequately could be delayed.
| Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
The Hershey Company | 2019 Form 10-K | Page 11
| Item 2. | PROPERTIES |
Our principal properties include the following:
| Country | Location | Type | Status (Own/Lease) | |||
| United States | Hershey, Pennsylvania (2 principal plants) | Manufacturing—confectionery products and pantry items | Own | |||
| Lancaster, Pennsylvania | Manufacturing—confectionery products | Own | ||||
| Hazleton, Pennsylvania | Manufacturing—confectionery products | Own | ||||
| Robinson, Illinois | Manufacturing—confectionery products and pantry items | Own | ||||
| Stuarts Draft, Virginia | Manufacturing—confectionery products and pantry items | Own | ||||
| Edwardsville, Illinois | Distribution | Own | ||||
| Palmyra, Pennsylvania | Distribution | Own | ||||
| Ogden, Utah | Distribution | Own | ||||
| Kennesaw, Georgia | Distribution | Lease | ||||
| New York, New York | Retail | Lease | ||||
| Canada | Brantford, Ontario | Distribution | ||||
| Mexico | Monterrey, Mexico | Manufacturing—confectionery products | Own | |||
| Manufacturing—confectionery products and pantry items | Own | |||||
| Malaysia | Johor, Malaysia | Manufacturing—confectionery products | Own | |||
In addition to the locations indicated above, we also own or lease several other properties and buildings worldwide which we use for manufacturing, sales, distribution and administrative functions. Our facilities are well maintained and generally have adequate capacity to accommodate seasonal demands, changing product mixes and certain additional growth. We continuallyregularly improve our facilities to incorporate the latest technologies. The largest facilities are located in Hershey, Lancaster and Lancaster,Hazleton, Pennsylvania; Monterrey and El Salto, Mexico; and Stuarts Draft, Virginia. The U.S., Canada and Mexico facilities in the table above primarily support our North America segment, while the China and Malaysia facilitiesfacility primarily serve our International and Other segment. As discussed in Note 1113 to the Consolidated Financial Statements, we do not manage our assets on a segment basis given the integration of certain manufacturing, warehousing, distribution and other activities in support of our global operations.
| Item 3. | LEGAL PROCEEDINGS |
The Company is subject to certain legal proceedings and claims arising out of the ordinary course of our business, which cover a wide range of matters including trade regulation, product liability, advertising, contracts, environmental issues, patent and trademark matters, labor and employment matters and tax. While it is not feasible to predict or determine the outcome of such proceedings and claims with certainty, in our opinion these matters, both individually and in the aggregate, are not expected to have a material effect on our financial condition, results of operations or cash flows.
| Item 4. | MINE SAFETY DISCLOSURES |
Not applicable.
The Hershey Company | 2019 Form 10-K | Page 12
SUPPLEMENTAL ITEM. INFORMATION ABOUT OUR EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions and, as of February 16, 2018,14, 2020, their ages are set forth below.
| Name | Age | Positions Held During the Last Five Years | ||
Damien Atkins (1) | 49 | Senior Vice President, General Counsel and Secretary (August 2018) | ||
| Michele G. Buck | Chairman of the Board, President and Chief Executive Officer (October 2019); President and Chief Executive Officer (March 2017); Executive Vice President, Chief Operating Officer (June 2016); President, North America (May 2013) | |||
| Senior Vice President, Chief | ||||
| (June 2019); Senior Vice President, Chief Product Supply and Technology Officer (March 2017); Senior Vice President, Chief Supply Chain Officer (May 2013) | ||||
| President, U.S. | ||||
| Senior Vice President, | ||||
| Senior Vice President, Chief Growth Officer (January 2020); Vice President, Innovation and Strategic Growth Platforms (September 2019); Vice President, Commercial Planning (June 2018); Vice President, Brand Commercialization (July 2017); Senior Director, Reese’s (October 2015); Team Lead, Sam’s Club (September 2013) | ||||
| Christopher M. Scalia | 44 | Senior Vice President, Chief Human Resources Officer | ||
| Senior Vice President, Chief | ||||
There are no family relationships among any of the above-named officers of our Company.
| (1) |
| (2) | On December 18, 2019, the Company announced the planned retirement of Mr. O'Day, to be effective March 31, 2020. |
| (3) | Mr. Voskuil was elected Senior Vice President, Chief Financial Officer effective |
Our Executive Officers are generally elected each year at the organization meeting of the Board in May.
The Hershey Company | 2019 Form 10-K | Page 13
PART II
| Item 5. | MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our Common Stock is listed and traded principally on the New York Stock Exchange under the ticker symbol “HSY.” The Class B Common Stock (“Class B Stock”) is not publicly traded.
The closing price of our Common Stock on December 31, 2017,2019, was $113.51.$146.98. There were 28,33625,773 stockholders of record of our Common Stock and 6 stockholders of record of our Class B Stock as of December 31, 2017.2019.
We paid $526.3$610.3 million in cash dividends on our Common Stock and Class B Stock in 20172019 and $499.5$562.5 million in 2016.2018. The annual dividend rate on our Common Stock in 20172019 was $2.548$2.990 per share.
Information regarding dividends paid and the quarterly high and low market prices for our Common Stock and dividends paid for our Class B Stock for the two most recent fiscal years is disclosed in Note 1719 to the Consolidated Financial Statements.
On January 31, 2018,28, 2020, our Board declared a quarterly dividend of $0.656$0.773 per share of Common Stock payable on March 15, 2018,16, 2020, to stockholders of record as of February 23, 2018.21, 2020. It is the Company’s 353rd361st consecutive quarterly Common Stock dividend. A quarterly dividend of $0.596$0.702 per share of Class B Stock also was declared.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Issuer Purchases of Equity Securities
2019. In January 2016,July 2018, our Board of Directors approved aan additional $500 million share repurchase authorization.authorization, to commence after the existing 2017 authorization was completed. As of December 31, 2017,2019, approximately $100$410 million remained available for repurchases of our Common Stock under this program. In October 2017, our Board of Directors approved an additional $100 millionThe share repurchase authorization, to commence after the existing 2016 authorization is completed. Neither the 2016 nor the 2017 share repurchase programsprogram does not have an expiration date.
In August 2017, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Milton Hershey School Trust (the “Trust”), pursuant to which the Company agreed to purchase 1,500,000 shares of the Company’s common stock from the Trust at a price equal to $106.01 per share, for a total purchase price of $159 million.
In November 2018, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Trust, pursuant to which the Company agreed to purchase 450,000 shares of the Company’s common stock from the Trust at a price equal to $106.30 per share, for a total purchase price of $47.8 million.
The Hershey Company | 2019 Form 10-K | Page 14
Stockholder Return Performance Graph
The following graph compares our cumulative total stockholder return (Common Stock price appreciation plus dividends, on a reinvested basis) over the last five fiscal years with the Standard & Poor’s 500 Index and the Standard & Poor’s Packaged Foods Index.
Comparison of 5 Year Cumulative Total Return*
Among The Hershey Company, the S&P 500 Index,
and the S&P Packaged Foods Index
*$100 invested on December 31, 20122014 in stock or index, including reinvestment of dividends.
| December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| Company/Index | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||||||||||||
| The Hershey Company | $ | 100 | $ | 137 | $ | 150 | $ | 132 | $ | 157 | $ | 176 | $ | 100 | $ | 88 | $ | 104 | $ | 117 | $ | 114 | $ | 160 | ||||||||||||||||||||||||
| S&P 500 Index | $ | 100 | $ | 132 | $ | 150 | $ | 153 | $ | 171 | $ | 208 | $ | 100 | $ | 101 | $ | 113 | $ | 138 | $ | 132 | $ | 174 | ||||||||||||||||||||||||
| S&P 500 Packaged Foods Index | $ | 100 | $ | 126 | $ | 146 | $ | 156 | $ | 164 | $ | 186 | $ | 100 | $ | 117 | $ | 128 | $ | 130 | $ | 105 | $ | 138 | ||||||||||||||||||||||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The Hershey Company | 2019 Form 10-K | Page 15
| Item 6. | SELECTED FINANCIAL DATA |
FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY
(All dollar and share amounts in thousands except market price and per share statistics)
| 2017 | 2016 | 2015 | 2014 | 2013 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||
| Summary of Operations | ||||||||||||||||||||||||||||||||
| Net Sales | $ | 7,515,426 | 7,440,181 | 7,386,626 | 7,421,768 | 7,146,079 | $ | 7,986,252 | 7,791,069 | 7,515,426 | 7,440,181 | 7,386,626 | ||||||||||||||||||||
| Cost of Sales | $ | 4,070,907 | 4,282,290 | 4,003,951 | 4,085,602 | 3,865,231 | $ | 4,363,774 | 4,215,744 | 4,060,050 | 4,270,642 | 4,000,071 | ||||||||||||||||||||
| Selling, Marketing and Administrative | $ | 1,913,403 | 1,915,378 | 1,969,308 | 1,900,970 | 1,922,508 | $ | 1,905,929 | 1,874,829 | 1,885,492 | 1,891,305 | 1,945,361 | ||||||||||||||||||||
| Goodwill, Indefinite and Long-Lived Asset Impairment Charges | $ | 208,712 | 4,204 | 280,802 | 15,900 | — | ||||||||||||||||||||||||||
| Goodwill, Long-Lived & Intangible Asset Impairment Charges | $ | 112,485 | 57,729 | 208,712 | 4,204 | 280,802 | ||||||||||||||||||||||||||
| Business Realignment Costs | $ | 47,763 | 32,526 | 94,806 | 29,721 | 18,665 | $ | 8,112 | 19,103 | 47,763 | 18,857 | 84,628 | ||||||||||||||||||||
| Interest Expense, Net | $ | 98,282 | 90,143 | 105,773 | 83,532 | 88,356 | $ | 144,125 | 138,837 | 98,282 | 90,143 | 105,773 | ||||||||||||||||||||
| Provision for Income Taxes | $ | 354,131 | 379,437 | 388,896 | 459,131 | 430,849 | $ | 234,032 | 239,010 | 354,131 | 379,437 | 388,896 | ||||||||||||||||||||
| Net Income Attributable to The Hershey Company | $ | 782,981 | 720,044 | 512,951 | 846,912 | 820,470 | $ | 1,149,692 | 1,177,562 | 782,981 | 720,044 | 512,951 | ||||||||||||||||||||
| Net Income Per Share: | ||||||||||||||||||||||||||||||||
| —Basic—Common Stock | $ | 3.79 | 3.45 | 2.40 | 3.91 | 3.76 | $ | 5.64 | 5.76 | 3.79 | 3.45 | 2.40 | ||||||||||||||||||||
| —Diluted—Common Stock | $ | 3.66 | 3.34 | 2.32 | 3.77 | 3.61 | $ | 5.46 | 5.58 | 3.66 | 3.34 | 2.32 | ||||||||||||||||||||
| —Basic—Class B Stock | $ | 3.44 | 3.15 | 2.19 | 3.54 | 3.39 | $ | 5.12 | 5.24 | 3.44 | 3.15 | 2.19 | ||||||||||||||||||||
| —Diluted—Class B Stock | $ | 3.44 | 3.14 | 2.19 | 3.52 | 3.37 | $ | 5.10 | 5.22 | 3.44 | 3.14 | 2.19 | ||||||||||||||||||||
| Weighted-Average Shares Outstanding: | ||||||||||||||||||||||||||||||||
| —Basic—Common Stock | 151,625 | 153,519 | 158,471 | 161,935 | 163,549 | 148,841 | 149,379 | 151,625 | 153,519 | 158,471 | ||||||||||||||||||||||
| —Basic—Class B Stock | 60,620 | 60,620 | 60,620 | 60,620 | 60,627 | 60,614 | 60,614 | 60,620 | 60,620 | 60,620 | ||||||||||||||||||||||
| —Diluted—Common Stock | 213,742 | 215,304 | 220,651 | 224,837 | 227,203 | 210,702 | 210,989 | 213,742 | 215,304 | 220,651 | ||||||||||||||||||||||
| Dividends Paid on Common Stock | $ | 387,466 | 369.292 | 352,953 | 328,752 | 294,979 | $ | 445,618 | 412,491 | 387,466 | 369.292 | 352,953 | ||||||||||||||||||||
| Per Share | $ | 2.548 | 2.402 | 2.236 | 2.040 | 1.810 | $ | 2.990 | 2.756 | 2.548 | 2.402 | 2.236 | ||||||||||||||||||||
| Dividends Paid on Class B Stock | $ | 140,394 | 132,394 | 123,179 | 111,662 | 98,822 | $ | 164,627 | 151,789 | 140,394 | 132,394 | 123,179 | ||||||||||||||||||||
| Per Share | $ | 2.316 | 2.184 | 2.032 | 1.842 | 1.630 | $ | 2.716 | 2.504 | 2.316 | 2.184 | 2.032 | ||||||||||||||||||||
| Depreciation | $ | 211,592 | 231,735 | 197,054 | 176,312 | 166,544 | $ | 218,096 | 231,012 | 211,592 | 231,735 | 197,054 | ||||||||||||||||||||
| Amortization | $ | 50,261 | 70,102 | 47,874 | 35,220 | 34,489 | $ | 73,448 | 64,132 | 50,261 | 70,102 | 47,874 | ||||||||||||||||||||
| Advertising | $ | 541,293 | 521,479 | 561,644 | 570,223 | 582,354 | $ | 513,302 | 479,908 | 541,293 | 521,479 | 561,644 | ||||||||||||||||||||
| Year-End Position and Statistics | ||||||||||||||||||||||||||||||||
| Capital Additions (including software) | $ | 257,675 | 269,476 | 356,810 | 370,789 | 350,911 | $ | 318,192 | 328,601 | 257,675 | 269,476 | 356,810 | ||||||||||||||||||||
| Total Assets | $ | 5,553,726 | 5,524,333 | 5,344,371 | 5,622,870 | 5,349,724 | $ | 8,140,395 | 7,703,020 | 5,553,726 | 5,524,333 | 5,344,371 | ||||||||||||||||||||
| Short-term Debt and Current Portion of Long-term Debt | $ | 859,457 | 632,714 | 863,436 | 635,501 | 166,875 | $ | 735,672 | 1,203,316 | 859,457 | 632,714 | 863,436 | ||||||||||||||||||||
| Long-term Portion of Debt | $ | 2,061,023 | 2,347,455 | 1,557,091 | 1,542,317 | 1,787,378 | $ | 3,530,813 | 3,254,280 | 2,061,023 | 2,347,455 | 1,557,091 | ||||||||||||||||||||
| Stockholders’ Equity | $ | 931,565 | 827,687 | 1,047,462 | 1,519,530 | 1,616,052 | $ | 1,744,994 | 1,407,266 | 931,565 | 827,687 | 1,047,462 | ||||||||||||||||||||
| Full-time Employees | 15,360 | 16,300 | 19,060 | 20,800 | 12,600 | 14,520 | 14,930 | 15,360 | 16,300 | 19,060 | ||||||||||||||||||||||
| Stockholders’ Data | ||||||||||||||||||||||||||||||||
| Outstanding Shares of Common Stock and Class B Stock at Year-end | 210,861 | 212,260 | 216,777 | 221,045 | 223,895 | 208,829 | 209,729 | 210,861 | 212,260 | 216,777 | ||||||||||||||||||||||
| Market Price of Common Stock at Year-end | $ | 113.51 | 103.43 | 89.27 | 103.93 | 97.23 | $ | 146.98 | 107.18 | 113.51 | 103.43 | 89.27 | ||||||||||||||||||||
| Price Range During Year (high) | $ | 115.96 | 113.89 | 110.78 | 108.07 | 100.90 | $ | 161.40 | 114.06 | 115.96 | 113.89 | 110.78 | ||||||||||||||||||||
| Price Range During Year (low) | $ | 102.87 | 83.32 | 83.58 | 88.15 | 73.51 | $ | 104.30 | 89.54 | 102.87 | 83.32 | 83.58 | ||||||||||||||||||||
The Hershey Company | 2019 Form 10-K | Page 16
| Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Management's Discussion and Analysis (“MD&A”) is intended to provide an understanding of Hershey's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A should be read in conjunction with our Consolidated Financial Statements and accompanying Notes included in Item 8 of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report on Form 10-K, particularly in Item 1A. “Risk Factors.”
The MD&A is organized in the following sections:
Business Model and Growth Strategy
Overview
Consolidated Results of Operations
Segment Results
Financial Condition
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
BUSINESS MODEL AND GROWTH STRATEGY
We are the largest producer of quality chocolate in North America, a leading snack maker in the United States and a global leader in chocolate and non-chocolate confectionery known for bringing goodness to the world through chocolate, sweets, mints and other great tasting snacks. We market, sell and distribute our products under more than 80 brand names in approximately 80 countries worldwide.confectionery. We report our operations through two segments: North America and International and Other.
We believe we have a set of differentiated assets and capabilities that when integrated, can create advantage in the marketplace.marketplace and secure our future. Our focus on the following key elements of our strategystrategic imperatives should enable us to drive shareholder value and deliver top-tier growth and industry-leading shareholder returns.on our financial commitments.
| • | Undisputed Leader in US Confection and Capturing Incremental Snacking Occasions. We are taking actions to deepen our consumer connections, utilize our beloved brands to deliver meaningful innovation and reinvent the shopping experience, while also pursuing opportunities to diversify our portfolio and establish a strong presence across the broader snacking continuum. |
| ◦ |
| ◦ | Innovation is an important lever in this variety seeking category and we are leveraging |
| ◦ | Through our shopper insights work, we are currently |
| ◦ | To expand our breadth in snacking, we are focused on expanding the boundaries of our core confection brands to capture new snacking occasions and increasing our exposure into new snack categories through acquisitions. Our expansion into snacking is being fueled by the recent acquisitions of ONE Brands in September 2019, Pirate Brands in October 2018 and Amplify in January 2018, respectively. |
The Hershey Company | 2019 Form 10-K | Page 17
| • | Driving Profitable Growth, Allocating Capital Resources and Optimizing Cost Structure. We are focused on ensuring that we efficiently allocate our resources to the areas with the highest potential for profitable growth. We believe this will enable margin expansion and position us within the top quartile of operating income margin relative to our peers. |
| ◦ | We have reset our international investment, while |
| ◦ | We have heightened our selling, marketing and administrative expense discipline |
| ◦ | We will continue to optimize our cost of goods sold |
| • | Expanding Competitive Advantage Through Differentiated Capabilities. In order to generate actionable insights, we must acquire, integrate, access and utilize vast sources of the right data in an effective manner. We are working to leverage our advanced analytical techniques to gain a deep understanding of consumers, our customers, our shoppers, our end-to-end supply chain, our retail environment and key economic drivers at both a macro and precision level, including digital transformation and new media models. In addition, we are in the process of transforming our enterprise resource planning system, which will enable employees to work more efficiently and effectively. |
OVERVIEW
Our principal product offerings include chocolate and non-chocolate confectionery products; gum and mint refreshment products; pantry items, such as baking ingredients, toppings and beverages; and snack items such as spreads, meat snacks, bars and snack bites and mixes, popcorn and protein bars and cookies.
Recent Developments
The Company is closely monitoring an outbreak of America ("GAAP"), referredrespiratory illness caused by a novel coronavirus that was first detected in Wuhan City, Hubei Province, China and which continues to as "reported" herein, referexpand. The virus has impacted a host of sectors within China including retail, manufacturing, travel and hospitality. The financial and business impacts are currently unknown at this time; however, we believe will be limited to the discussion and analysis in the Consolidated Resultsour China business which is part of Operations.
Business Acquisitions
In September 2019, we completed the acquisition of ONE Brands, LLC ("ONE Brands"), previously a privately held company that sells a line of low-sugar, high-protein nutrition bars to retailers and distributors in North America, primarily from 2017 innovation and new launches, including Hershey's Cookie Layer Crunch, Hershey's Gold and Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels.
In October 2018, we completed the full year 2016 reported net incomeacquisition of Pirate Brands, which includes the Pirate's Booty, Smart Puffs and EPS-dilutedOriginal Tings brands, from B&G Foods, Inc. Pirate Brands offers baked, trans fat free and gluten free snacks and is available in a wide range of $720.0 million and $3.34, respectively. From a non-GAAP perspective, full year 2017 adjusted net income was $1,016.9 million, an increasefood distribution channels in the United States.
In January 2018, we completed the acquisition of 7.2% versus $948.5 million in 2016. Our adjusted EPS-diluted for the full year 2017 was $4.76 compared to $4.41 for the same period of 2016, an increase of 7.9%.
| Reconciliation of Certain Non-GAAP Financial Measures | |||||||||||
| Consolidated results | For the years ended December 31, | ||||||||||
| In thousands except per share data | 2017 | 2016 | 2015 | ||||||||
| Reported gross profit | $ | 3,444,519 | $ | 3,157,891 | $ | 3,382,675 | |||||
| Derivative mark-to-market (gains) losses | (35,292 | ) | 163,238 | — | |||||||
| Business realignment activities | 5,147 | 58,106 | 8,801 | ||||||||
| Acquisition integration costs | — | — | 7,308 | ||||||||
| NSRPE | 11,125 | 11,953 | 2,516 | ||||||||
| Non-GAAP gross profit | $ | 3,425,499 | $ | 3,391,188 | $ | 3,401,300 | |||||
| Reported operating profit | $ | 1,274,641 | $ | 1,205,783 | $ | 1,037,759 | |||||
| Derivative mark-to-market (gains) losses | (35,292 | ) | 163,238 | — | |||||||
| Business realignment activities | 69,359 | 107,571 | 120,975 | ||||||||
| Acquisition integration costs | 311 | 6,480 | 20,899 | ||||||||
| NSRPE | 35,028 | 27,157 | 18,079 | ||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 208,712 | 4,204 | 280,802 | ||||||||
| Non-GAAP operating profit | $ | 1,552,759 | $ | 1,514,433 | $ | 1,478,514 | |||||
| Reported provision for income taxes | $ | 354,131 | $ | 379,437 | $ | 388,896 | |||||
| Derivative mark-to-market (gains) losses* | (4,746 | ) | 20,500 | — | |||||||
| Business realignment activities* | 17,903 | 19,138 | 41,648 | ||||||||
| Acquisition integration costs* | 118 | 2,456 | 8,264 | ||||||||
| NSRPE* | 13,258 | 10,283 | 6,955 | ||||||||
| Goodwill, indefinite and long-lived asset impairment charges* | 23,292 | 1,157 | — | ||||||||
| Impact of U.S. tax reform | (32,467 | ) | — | — | |||||||
| Loss on early extinguishment of debt* | — | — | 10,736 | ||||||||
| Gain on sale of trademark* | — | — | (3,652 | ) | |||||||
| Non-GAAP provision for income taxes | $ | 371,489 | $ | 432,971 | $ | 452,847 | |||||
| Reported net income | $ | 782,981 | $ | 720,044 | $ | 512,951 | |||||
| Derivative mark-to-market (gains) losses | (30,546 | ) | 142,738 | — | |||||||
| Business realignment activities | 51,456 | 88,433 | 79,327 | ||||||||
| Acquisition integration costs | 193 | 4,024 | 14,196 | ||||||||
| NSRPE | 21,770 | 16,874 | 11,124 | ||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 185,420 | 3,047 | 280,802 | ||||||||
| Impact of U.S. tax reform | 32,467 | — | — | ||||||||
| Noncontrolling interest share of business realignment and impairment charges | (26,795 | ) | — | — | |||||||
| Settlement of SGM liability | — | (26,650 | ) | — | |||||||
| Loss on early extinguishment of debt | — | — | 17,591 | ||||||||
| Gain on sale of trademark | — | — | (6,298 | ) | |||||||
| Non-GAAP net income | $ | 1,016,946 | $ | 948,510 | $ | 909,693 | |||||
| For the years ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Reported EPS - Diluted | $ | 3.66 | $ | 3.34 | $ | 2.32 | |||||
| Derivative mark-to-market (gains) losses | (0.14 | ) | 0.66 | — | |||||||
| Business realignment activities | 0.25 | 0.42 | 0.36 | ||||||||
| Acquisition integration costs | — | 0.02 | 0.05 | ||||||||
| NSRPE | 0.09 | 0.08 | 0.05 | ||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 0.87 | 0.01 | 1.28 | ||||||||
| Impact of U.S. tax reform | 0.15 | — | — | ||||||||
| Noncontrolling interest share of business realignment and impairment charges | (0.12 | ) | — | — | |||||||
| Settlement of SGM liability | — | (0.12 | ) | — | |||||||
| Loss on early extinguishment of debt | — | — | 0.09 | ||||||||
| Gain on sale of trademark | — | — | (0.03 | ) | |||||||
| Non-GAAP EPS - Diluted | $ | 4.76 | $ | 4.41 | $ | 4.12 | |||||
| For the years ended December 31, | ||||||||
| 2017 | 2016 | 2015 | ||||||
| As reported gross margin | 45.8 | % | 42.4 | % | 45.8 | % | ||
| Non-GAAP gross margin (1) | 45.6 | % | 45.6 | % | 46.0 | % | ||
| As reported operating profit margin | 17.0 | % | 16.2 | % | 14.0 | % | ||
| Non-GAAP operating profit margin (2) | 20.7 | % | 20.4 | % | 20.0 | % | ||
| As reported effective tax rate | 31.9 | % | 34.5 | % | 43.1 | % | ||
| Non-GAAP effective tax rate (3) | 26.7 | % | 31.3 | % | 33.2 | % | ||
The mark-to-market (gains) losses on commodity derivatives are recorded as unallocated and excluded from adjusted results until such time as the related inventory is sold, at which time the corresponding (gains) losses are reclassified from unallocated to segment income. Since we often purchase commodity contracts to price inventory requirements in future years, we make this adjustment to facilitate the year-over-year comparison of cost of sales on a basis that matches the derivative gains and losses with the underlying economic exposure being hedged for the period. For the years ended December 31, 2017 and 2016, the net adjustment recognized within unallocated was a gain of $35.3 million and a loss of $163.2 million, respectively. See Note 11 to the Consolidated Financial Statements for more information.
| For the Year Ended December 31, 2017 | ||||||||
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis | ||||||
| North America segment | ||||||||
| Canada | 6.3 | % | 2.1 | % | 4.2 | % | ||
| Total North America segment | 1.3 | % | 0.1 | % | 1.2 | % | ||
| International and Other segment | ||||||||
| Mexico | 9.7 | % | (1.1 | )% | 10.8 | % | ||
| Brazil | 19.9 | % | 9.4 | % | 10.5 | % | ||
| India | 17.0 | % | 3.2 | % | 13.8 | % | ||
| Greater China | (18.1 | )% | (0.8 | )% | (17.3 | )% | ||
| Total International and Other segment | (1.4 | )% | 0.6 | % | (2.0 | )% | ||
| Total Company | 1.0 | % | 0.2 | % | 0.8 | % | ||
| For the Year Ended December 31, 2016 | ||||||||
| Percentage Change as Reported | Impact of Foreign Currency Exchange | Percentage Change on Constant Currency Basis | ||||||
| North America segment | ||||||||
| Canada | (3.5 | )% | (3.0 | )% | (0.5 | )% | ||
| Total North America segment | 1.0 | % | (0.2 | )% | 1.2 | % | ||
| International and Other segment | ||||||||
| Mexico | (8.5 | )% | (16.0 | )% | 7.5 | % | ||
| Brazil | 15.7 | % | (6.0 | )% | 21.7 | % | ||
| India | (26.6 | )% | (3.6 | )% | (23.0 | )% | ||
| Greater China | (0.3 | )% | (4.9 | )% | 4.6 | % | ||
| Total International and Other segment | (1.2 | )% | (4.4 | )% | 3.2 | % | ||
| Total Company | 0.7 | % | (0.7 | )% | 1.4 | % | ||
CONSOLIDATED RESULTS OF OPERATIONS
| Percent Change | Percent Change | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | 2019 | 2018 | 2017 | 2019 vs 2018 | 2018 vs 2017 | ||||||||||||||||||||||||||
| In millions of dollars except per share amounts | ||||||||||||||||||||||||||||||||||||
| Net Sales | $ | 7,515.4 | $ | 7,440.2 | $ | 7,386.6 | 1.0 | % | 0.7 | % | $ | 7,986.3 | $ | 7,791.1 | $ | 7,515.4 | 2.5 | % | 3.7 | % | ||||||||||||||||
| Cost of Sales | 4,070.9 | 4,282.3 | 4,003.9 | (4.9 | )% | 7.0 | % | 4,363.8 | 4,215.7 | 4,060.0 | 3.5 | % | 3.8 | % | ||||||||||||||||||||||
| Gross Profit | 3,444.5 | 3,157.9 | 3,382.7 | 9.1 | % | (6.6 | )% | 3,622.5 | 3,575.4 | 3,455.4 | 1.3 | % | 3.5 | % | ||||||||||||||||||||||
| Gross Margin | 45.8 | % | 42.4 | % | 45.8 | % | 45.4 | % | 45.9 | % | 46.0 | % | ||||||||||||||||||||||||
| SM&A Expense | 1,913.4 | 1,915.4 | 1,969.3 | (0.1 | )% | (2.7 | )% | 1,905.9 | 1,874.8 | 1,885.5 | 1.7 | % | (0.6 | )% | ||||||||||||||||||||||
| SM&A Expense as a percent of net sales | 25.5 | % | 25.7 | % | 26.7 | % | 23.9 | % | 24.1 | % | 25.1 | % | ||||||||||||||||||||||||
| Goodwill, Indefinite and Long-Lived Asset Impairment Charges | 208.7 | 4.2 | 280.8 | NM | NM | |||||||||||||||||||||||||||||||
| Long-Lived and Intangible Asset Impairment Charges | 112.5 | 57.7 | 208.7 | 94.9 | % | (72.3 | )% | |||||||||||||||||||||||||||||
| Business Realignment Costs | 47.8 | 32.5 | 94.8 | 46.8 | % | (65.7 | )% | 8.1 | 19.1 | 47.8 | (57.5 | )% | (60.0 | )% | ||||||||||||||||||||||
| Operating Profit | 1,274.6 | 1,205.8 | 1,037.8 | 5.7 | % | 16.2 | % | 1,596.0 | 1,623.8 | 1,313.4 | (1.7 | )% | 23.6 | % | ||||||||||||||||||||||
| Operating Profit Margin | 17.0 | % | 16.2 | % | 14.0 | % | 20.0 | % | 20.8 | % | 17.5 | % | ||||||||||||||||||||||||
| Interest Expense, Net | 98.3 | 90.2 | 105.8 | 9.0 | % | (14.8 | )% | 144.1 | 138.8 | 98.3 | 3.8 | % | 41.3 | % | ||||||||||||||||||||||
| Other (Income) Expense, Net | 65.7 | 16.2 | 30.1 | 306.5 | % | (46.4 | )% | 71.1 | 74.8 | 104.4 | (5.0 | )% | (28.4 | )% | ||||||||||||||||||||||
| Provision for Income Taxes | 354.1 | 379.4 | 388.9 | (6.7 | )% | (2.4 | )% | 234.0 | 239.0 | 354.1 | (2.1 | )% | (32.5 | )% | ||||||||||||||||||||||
| Effective Income Tax Rate | 31.9 | % | 34.5 | % | 43.1 | % | 16.9 | % | 17.0 | % | 31.9 | % | ||||||||||||||||||||||||
| Net Income Including Noncontrolling Interest | 756.5 | 720.0 | 513.0 | 5.1 | % | 40.4 | % | 1,146.8 | 1,171.2 | 756.6 | (2.1 | )% | 54.8 | % | ||||||||||||||||||||||
| Less: Net Loss Attributable to Noncontrolling Interest | (26.4 | ) | — | — | NM | NM | (2.9 | ) | (6.5 | ) | (26.4 | ) | (54.8 | )% | (75.4 | )% | ||||||||||||||||||||
| Net Income Attributable to The Hershey Company | $ | 783.0 | $ | 720.0 | $ | 513.0 | 8.7 | % | 40.4 | % | $ | 1,149.7 | $ | 1,177.7 | $ | 783.0 | (2.4 | )% | 50.4 | % | ||||||||||||||||
| Net Income Per Share—Diluted | $ | 3.66 | $ | 3.34 | $ | 2.32 | 9.6 | % | 44.0 | % | $ | 5.46 | $ | 5.58 | $ | 3.66 | (2.2 | )% | 52.5 | % | ||||||||||||||||
| Note: Percentage changes may not compute directly as shown due to rounding of amounts presented above. | ||||||||||||||||||||||||||||||||||||
| NM = not meaningful. | ||||||||||||||||||||||||||||||||||||
Net Sales
Net sales increased 1.0%2.5% in 20172019 compared with 2016,2018, reflecting a favorable price realization of 0.7%,1.7% due to higher prices on certain products, a benefit from acquisitions of 0.3%, and a favorable impact from foreign currency exchange rates of 0.2%, partially offset by a volume decrease of 0.2%. Excluding foreign currency, our net sales increased 0.8% in 2017. The favorable net price realization was attributed to lower levels of trade promotional spending in both the North America and International and Other segments versus the prior year. Consolidated volume decreased as a result of lower sales volume in the International and Other segment, primarily attributed to our China business and the softness in the modern trade channel coupled with a focus on optimizing our product offerings. These volume decreases were partially offset by higher sales volume in North America, specifically from 2017 innovation and new launches, including Hershey's Cookie Layer Crunch, Hershey's Gold and Hershey's and Reese's Popped Snack Mix and Chocolate Dipped Pretzels.
2018 compared with 2017
Net sales increased 3.7% in 2018 compared with 2017, reflecting a benefit from the recent Amplify and Pirate Brands acquisitions of 3.6% and a volume increase of 1.3%, partially offset by unfavorable price realization of 1.0% and an unfavorable impact from foreign currency exchange rates of 0.2%. Excluding the unfavorable impact from foreign currency exchange rates, our net sales increased 3.9%. Consolidated volumes increased due to the acquisitions of Amplify and Pirate Brands, as well as solid performance in select international markets, which more than offset the volume reduction resulting from the sale of Shanghai Golden Monkey ("SGM") in July 2018. The net increase in volume improvementwas partially offset by unfavorable net price realization, which was primarily driven by new chocolate and snacking productsattributed to incremental trade promotional expense in the United States, including Snack Mix, Snack Bites and Hershey's Cookie Layer Crunch bars. While the North America segment had unfavorable price realization due to increased levelsin support of trade promotional spending, this was essentially offset by favorable price realization in the International and Other segment, due to significantly lower levels of trade spending and returns, discounts and allowances.2018 programming.
The Hershey Company | 2019 Form 10-K | Page 19
Key U.S. Marketplace Metrics
For the full year 2017,2019, our total U.S. retail takeaway increased 2.5% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, meat snacks and grocery items. Our U.S. candy, mint and gum ("CMG") consumer takeaway increased 1.6%2.6%, which was in line with the category increase, resulting in a slight CMG market share of 30.6%. gain.
The CMG consumer takeaway and market share information reflect measured channels of distribution accounting for approximately 90% of our U.S. confectionery retail business. These channels of distribution primarily include food, drug, mass merchandisers, and convenience store channels, plus Wal-Mart Stores, Inc., partial dollar, club and military channels. These metrics are based on measured market scanned purchases as reported by Information Resources, Incorporated ("IRI"), the Company's market insights and analytics provider, and provide a means to assess our retail takeaway and market position relative to the overall category. The amounts presented above are solely for the U.S. CMG category which does not include revenue from our snack mixes and grocery items. For the full year 2017, our U.S. retail takeaway increased 1.2% in the expanded multi-outlet combined plus convenience store channels (IRI MULO + C-Stores), which includes candy, mint, gum, salty snacks, snack bars, meat snacks and grocery items.
Cost of Sales and Gross Margin
Cost of sales decreased 4.9%increased 3.5% in 20172019 compared with 2016.2018. The reductionincrease was driven by lower commodityhigher freight and logistics costs, coupled withadditional plant costs, and an incremental $116.0$33.9 million unfavorable impact from marking-to-market our commodity derivative instruments intended to economically hedge future years' commodity purchases. These drivers were partially offset by favorable supply chain productivity.
Gross margin decreased by 50 basis points in 2019 compared with 2018. The decrease was primarily due to the higher freight and logistics costs, additional plant costs, and the unfavorable year-over-year mark-to-market impact from commodity derivative instruments. These factors were partially offset by supply chain productivity, price realization, and favorable product mix.
2018 compared with 2017
Cost of sales increased 3.8% in 2018 compared with 2017. The increase was driven by higher sales volume, higher freight and logistics costs and additional plant costs. These drivers were partially offset by an incremental $125.1 million favorable impact from marking-to-market our commodity derivative instruments intended to economically hedge future years' commodity purchases a $53.0 million decrease in business realignment costs, and supply chain productivity, and cost savings initiatives. These benefits were offset
Gross margin decreased by 10 basis points in part by2018 compared with 2017. The decrease was primarily due to the higher freight and warehousinglogistics costs, unfavorable product mix, additional plant costs related to new production lines, and unfavorable manufacturing variances.
productivity.
Selling, Marketing and Administrative
Selling, marketing and administrative (“SM&A”) expenses decreased $2.0increased $31.1 million or 0.1%1.7% in 2017. Advertising and related consumer marketing expense remaining consistent with 2016 levels, as higher spending by the North America segment was offset by reduced spending by the International and Other segment. While 2017 SM&A benefited from costs savings and efficiency initiatives, lower business realignment costs, and lower acquisition integration costs, these savings were offset in part by higher pension settlement charges and higher costs related to acquisition due diligence activities and the implementation of our new enterprise resource planning system.
2018 compared with 2017
SM&A expenses decreased $10.7 million or 0.6% in 2018. Total advertising and related consumer marketing expenses declined 10.9% due mainly to spend optimization and shifts relating to our emerging brands, as well as reductions in agency and production fees. SM&A expenses, excluding advertising and related consumer marketing, increased approximately 6.2% in 2018 due to incremental expenses from Amplify and Pirate Brands and higher expenses related to the multi-year implementation of our enterprise resource planning system, which more than offset reductions in our base spending from the Margin for Growth Program.
The Hershey Company | 2019 Form 10-K | Page 20
Long-Lived and Intangible Asset Impairment Charges
In 2019, we recorded the following impairment charges:
| For the year ended December 31, | 2019 | |||
| In millions of dollars | ||||
| Customer relationship and trademark intangible assets (1) | $ | 100.1 | ||
| Other long-lived assets not held for sale (2) | 9.7 | |||
| Adjustment to disposal group (3) | 2.7 | |||
| Long-lived and intangible asset impairment charges | $ | 112.5 | ||
| (1) | During the fourth quarter of 2019, we recorded impairment charges to write down customer relationship and trademark intangible assets associated with KRAVE Pure Foods, Inc. (“Krave”). These charges were determined by comparing the fair value of the asset group to its carrying value. We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and relief-from-royalty valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. |
| (2) | During 2019, we recorded impairment charges predominantly comprised of select long-lived assets that had not yet met the held for sale criteria. The fair value of these assets was supported by potential sales prices with third-party buyers and market analysis. |
| (3) | In connection with our disposal group classified as held for sale, during 2019, we recorded impairment charges to adjust long-lived asset values. The fair value of the disposal group was supported by potential sales prices with third-party buyers. We expect the sale of the disposal group to be completed in the first half of 2020. |
In 2018, we recorded impairment charges totaling $57.7 million to adjust the long-lived asset values within certain disposal groups, including the SGM and Tyrrells businesses, the Lotte Shanghai Foods Co., Ltd. joint venture and other assets. These charges represent the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts realized or to be realized upon completion of the sales, over the sales values less costs sellingto sell for the respective businesses. The fair values of the disposal groups were supported by the sales prices paid by third-party buyers or estimated sales prices based on marketing of the disposal group, when the sale has not yet been completed. The sales of SGM and administrative expensesTyrrells were both completed in July 2018.
In 2017, in connection with the Margin for 2016 decreased by 2.0% as comparedGrowth Program and our initiative to 2015optimize the manufacturing operations supporting our China business, we tested our China long-lived asset group for impairment. Our assessment indicated that the carrying value of the asset group was not recoverable, and as a result, of our continued focus on reducing non-essential spending. SM&A expenses in 2016 were also impacted by business realignment costs of $18.6 million, NSRPE of $15.2 million and acquisition and integration costs of $6.5 million. In 2015, SM&A expenses included business realignment costs of $17.4 million, NSRPE of $15.6 million and acquisition and integration costs of $13.6 million.
The assessment of the valuation of goodwill and other long-lived assets is based on management estimates and assumptions, as discussed in our critical accounting policies included in Item 7 of this Annual Report on Form 10-K. These estimates and assumptions are subject to change due to changing economic and competitive conditions.
Business Realignment Activities
We are currently pursuing severalperiodically undertake business realignment activities designed to increase our efficiency and focus our business behindin support of our key growth strategies. CostsIn 2019, 2018 and 2017, we recorded for business realignment activities during 2017, 2016costs of $8.1 million, $19.1 million and 2015 are as follows:
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| In millions of dollars | ||||||||||||
| Margin for Growth Program: | ||||||||||||
| Severance | $ | 32.6 | $ | — | $ | — | ||||||
| Accelerated depreciation | 6.9 | — | — | |||||||||
| Other program costs | 16.4 | — | — | |||||||||
| Operational Optimization Program: | ||||||||||||
| Severance | $ | 13.8 | $ | 17.9 | $ | — | ||||||
| Accelerated depreciation | — | 48.6 | — | |||||||||
| Other program costs | (0.3 | ) | 21.8 | — | ||||||||
| 2015 Productivity Initiative: | ||||||||||||
| Severance | — | — | 81.3 | |||||||||
| Pension settlement charges | — | 13.7 | 10.2 | |||||||||
| Other program costs | — | 5.6 | 14.3 | |||||||||
| Other international restructuring programs: | ||||||||||||
| Severance | — | — | 6.6 | |||||||||
| Accelerated depreciation and amortization | — | — | 5.9 | |||||||||
| Mauna Loa divestiture | — | — | 2.7 | |||||||||
| Total | $ | 69.4 | $ | 107.6 | $ | 121.0 | ||||||
Margin for Growth Program,
The Company estimates that2017 costs related to the “MarginMargin for Growth”Growth Program and the Operational Optimization Program, a program will resultwhich was completed in total pre-tax charges of $375 million to $425 million from 2017 to 2019. This estimate includes plant and office closure expenses of $100 million to $115 million, net intangible asset impairment charges of $100 million to $110 million, employee separation costs of $80 million to $100 million, contract termination costs of approximately $25 million, and other2018. Costs associated with business realignment costs of $70 million to $75 million. The cash portion of the total charge is estimated to be $150 million to $175 million. At the conclusion of the programactivities are classified in 2019, ongoing annual savings are expected to be approximately $150 million to $175 million. The Company expects that implementation of the program will reduce its global workforce by approximately 15%, with a majority of the reductions coming from hourly headcount positions outside of the United States.
The 2015 Productivity Initiative was executed throughout the third and fourth quarters of 2015, resulting in a net reduction of approximately 300 positions, with the majority of the departures taking place by the end of 2015. The 2015 Productivity Initiative was completed during the third quarter 2016. We incurred total costs of $125 million relating to this program, including pension settlement charges of $13.7 million recorded in 2016 and $10.2 million recorded in 2015 relating to lump sum withdrawals by employees retiring or leaving theHershey Company as a result of this program.| 2019 Form 10-K | Page 21
Operating Profit and Operating Profit Margin
Operating profit decreased 1.7% in 2019 compared with 2018 due primarily to higher impairment charges and higher SM&A, partially offset by higher gross profit and lower business realignment costs in the 2019 period, as noted above. Operating profit margin decreased to 20.0% in 2019 from 20.8% in 2018 driven by these same factors.
2018 compared with 2017
Operating profit increased 5.7%23.6% in 20172018 compared with 20162017 due primarily to higher gross profit, lower impairment charges and slightlybusiness realignment costs, and lower SM&A expenses, as discussed previously.in the 2018 period. Operating profit margin increased to 17.0%20.8% in 2018 from 17.5% in 2017 from 16.2% in 2016 driven by the improvement in gross margin.
Interest Expense, Net
Net interest expense was $8.1$5.3 million higher in 20172019 than in 2016.2018. The increase was due to a higher average long-term debt balance in 2019 verses 2018.
2018 compared with 2017
Net interest expense was $40.6 million higher in 2018 than in 2017. The increase was due to higher levels of long-term debt outstandingcommercial paper issued to fund the Amplify acquisition and higher interest rates on commercial paper during the 2017 period,our short-term debt, as well as a decreased benefit from the fixed to floating swaps.
Other (Income) Expense, Net
Other (income) expense, net totaled expense of $65.7$71.1 million in 20172019 versus expense of $16.2$74.8 million 2016. In 2017 we recognized a $66.2 million write-down on equity investments qualifying for federal historic and energy tax credits,2018. The decrease in the net expense was primarily due to lower other non-operating losses during 2019 compared to a $43.5 million write down in 2016. Additionally, 2016 was offset by an extinguishment gain of $26.7 million related to the settlement of the SGM liability.2018 period.
Other (income) expense, net totaled expense of $16.2$74.8 million in 20162018 versus expense of $30.1$104.4 million in 2015.2017. The decrease in the net expense was primarily due to the $26.7 million settlementlower non-service cost components of the SGM liability in 2016, partially offset by an increase in the write-down ofnet periodic benefit cost relating to pension and other post-retirement benefit plans during 2018, as well as lower write-downs on equity investments qualifying for federal historic and energy tax credits.
Income Taxes and Effective Tax Rate
Our effective income tax rate was 31.9%16.9% for 20172019 compared with 34.5%17.0% for 2016.2018. Relative to the 21% statutory rate, the 2019 effective tax rate was impacted by changes to foreign valuation allowances, a favorable foreign rate differential, investment tax credits and the benefit of ASU 2016-09 for accounting of employee share-based payment, which were partially offset by the impact of state taxes. The 2018 effective rate, relative to the 21% statutory rate, benefited from a favorable foreign rate differential and investment tax credits, which were partially offset by the impact of state taxes.
2018 compared with 2017
Our effective income tax rate was 17.0% for 2018 compared with 31.9% for 2017. Relative to the 21% statutory rate, the 2018 effective tax rate was impacted by a favorable foreign rate differential relatingand investment tax credits, which were partially offset by the impact of state taxes. The 2017 effective rate, relative to the previous statutory rate of 35%, benefited from a favorable foreign operations and cocoa procurement,rate differential, investment tax credits and the benefit of ASU 2016-09 for the accounting of employee share-based payments, which were partially offset by the impact of U.S. tax reform and non-benefited costs resulting from the Margin for Growth Program.
The 2016 effective rate benefited from the impact of non-taxable income related to the settlement of the SGM liability and investment tax credits.Hershey Company | 2019 Form 10-K | Page 22
Net Income attributable to The Hershey Company and Earnings Per Share-diluted
Net income increased $62.9decreased $27.9 million, or 8.7%2.4%, while EPS-diluted increased $0.32,decreased $0.12, or 9.6%2.2%, in 20172019 compared with 2016.2018. The increasedecrease in both net income and EPS-diluted werewas driven primarily by higher impairment charges and SM&A in 2019, partially offset by higher gross profit, lower SM&Abusiness realignment costs and lower income taxes, partly offset by the long-lived asset impairment charges and higher write-downs relating to tax credit investments, as noted above.taxes. Our 2017 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases, including a current year repurchase from the Milton Hershey School Trust and prior year repurchases pursuant to our Board-approved repurchase programs.
2018 compared with 2017
Net income increased $394.6 million, or 50.4%, while EPS-diluted increased $1.92, or 52.5%, in 2018 compared with 2017. The increase in both net income and EPS-diluted was driven primarily by 2018 higher gross profit, lower impairment charges and business realignment costs, lower SM&A, and lower income taxes, which were partly offset by higher interest expense, as noted above. Our 2018 EPS-diluted also benefited from lower weighted-average shares outstanding as a result of share repurchases, including both current year and prior year repurchases from the Milton Hershey School Trust (the "Trust"), as well as current year repurchases pursuant to our Board-approved repurchase programs.
The Hershey Company | 2019 Form 10-K | Page 23
SEGMENT RESULTS
The summary that follows provides a discussion of the results of operations of our two reportable segments: North America and International and Other. The segments reflect our operations on a geographic basis. For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition integrationacquisition-related costs and NSRPEother unusual gains or losses that are not part of our measurement of segment performance. These items of our operating income are largely managed centrally at the corporate level and are excluded from the measure of segment income reviewed by the CODM and used for resource allocation and internal management reporting and performance evaluation. Segment income and segment income margin, which are presented in the segment discussion that follows, are non-GAAP measures and do not purport to be alternatives to operating income as a measure of operating performance. We believe that these measures are useful to investors and other users of our financial information in evaluating ongoing operating profitability as well as in evaluating operating performance in relation to our competitors, as they exclude the activities that are not directly attributable to our ongoing segment operations. For further information, see the Non-GAAP Information section of this MD&A.
Our segment results, including a reconciliation to our consolidated results, were as follows:
| For the years ended December 31, | For the years ended December 31, | 2017 | 2016 | 2015 | For the years ended December 31, | 2019 | 2018 | 2017 | ||||||||||||||||||
| In millions of dollars | In millions of dollars | In millions of dollars | ||||||||||||||||||||||||
| Net Sales: | Net Sales: | Net Sales: | ||||||||||||||||||||||||
| North America | North America | $ | 6,621.2 | $ | 6,533.0 | $ | 6,468.1 | North America | $ | 7,081.8 | $ | 6,901.6 | $ | 6,621.2 | ||||||||||||
| International and Other | International and Other | 894.3 | 907.2 | 918.5 | International and Other | 904.5 | 889.5 | 894.3 | ||||||||||||||||||
| Total | Total | $ | 7,515.4 | $ | 7,440.2 | $ | 7,386.6 | Total | $ | 7,986.3 | $ | 7,791.1 | $ | 7,515.5 | ||||||||||||
| Segment Income (Loss): | ||||||||||||||||||||||||||
| Segment Income: | Segment Income: | |||||||||||||||||||||||||
| North America | North America | $ | 2,045.6 | $ | 2,041.0 | $ | 2,074.0 | North America | $ | 2,125.9 | $ | 2,020.1 | $ | 2,044.2 | ||||||||||||
| International and Other | International and Other | 11.5 | (29.1 | ) | (98.1 | ) | International and Other | 95.7 | 73.8 | 11.5 | ||||||||||||||||
| Total segment income | Total segment income | 2,057.1 | 2,011.9 | 1,975.9 | Total segment income | 2,221.6 | 2,093.9 | 2,055.7 | ||||||||||||||||||
| Unallocated corporate expense (1) | Unallocated corporate expense (1) | 504.3 | 497.4 | 497.4 | Unallocated corporate expense (1) | 533.6 | 486.8 | 499.2 | ||||||||||||||||||
| Unallocated mark-to-market (gains) losses on commodity derivatives (2) | (35.3 | ) | 163.2 | — | ||||||||||||||||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 208.7 | 4.2 | 280.8 | |||||||||||||||||||||||
| Unallocated mark-to-market gains on commodity derivatives (2) | Unallocated mark-to-market gains on commodity derivatives (2) | (28.6 | ) | (168.3 | ) | (35.3 | ) | |||||||||||||||||||
| Long-lived and intangible asset impairment charges | Long-lived and intangible asset impairment charges | 112.5 | 57.8 | 208.7 | ||||||||||||||||||||||
| Costs associated with business realignment activities | Costs associated with business realignment activities | 69.4 | 107.6 | 121.0 | Costs associated with business realignment activities | 9.2 | 51.8 | 69.4 | ||||||||||||||||||
| Non-service related pension expense | 35.0 | 27.2 | 18.1 | |||||||||||||||||||||||
| Acquisition and integration costs | 0.3 | 6.5 | 20.9 | |||||||||||||||||||||||
| Acquisition-related costs | Acquisition-related costs | 10.2 | 44.8 | 0.3 | ||||||||||||||||||||||
| Gain on sale of other assets | Gain on sale of other assets | (11.2 | ) | (2.7 | ) | — | ||||||||||||||||||||
| Operating profit | Operating profit | 1,274.6 | 1,205.8 | 1,037.7 | Operating profit | 1,595.9 | 1,623.7 | 1,313.4 | ||||||||||||||||||
| Interest expense, net | Interest expense, net | 98.3 | 90.1 | 105.8 | Interest expense, net | 144.1 | 138.8 | 98.3 | ||||||||||||||||||
| Other (income) expense, net | Other (income) expense, net | 65.7 | 16.2 | 30.1 | Other (income) expense, net | 71.0 | 74.8 | 104.4 | ||||||||||||||||||
| Income before income taxes | Income before income taxes | $ | 1,110.7 | $ | 1,099.5 | $ | 901.8 | Income before income taxes | $ | 1,380.8 | $ | 1,410.1 | $ | 1,110.7 | ||||||||||||
| (1) | Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance. |
| (2) | Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses. See Note |
The Hershey Company | 2019 Form 10-K | Page 24
North America
The North America segment is responsible for our chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. North America accounted for 88.1%88.7%, 87.8%88.6% and 87.6%88.1% of our net sales in 2017, 20162019, 2018 and 2015,2017, respectively. North America results for the years ended December 31, 2017, 20162019, 2018 and 20152017 were as follows:
| Percent Change | Percent Change | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | 2019 | 2018 | 2017 | 2019 vs 2018 | 2018 vs 2017 | ||||||||||||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 6,621.2 | $ | 6,533.0 | $ | 6,468.1 | 1.3 | % | 1.0 | % | $ | 7,081.8 | $ | 6,901.6 | $ | 6,621.2 | 2.6 | % | 4.2 | % | ||||||||||||||||
| Segment income | 2,045.6 | 2,041.0 | 2,074.0 | 0.2 | % | (1.6 | )% | 2,125.9 | 2,020.1 | 2,044.2 | 5.2 | % | (1.2 | )% | ||||||||||||||||||||||
| Segment margin | 30.9 | % | 31.2 | % | 32.1 | % | 30.0 | % | 29.3 | % | 30.9 | % | ||||||||||||||||||||||||
Net sales of our North America segment increased $64.9$180.2 million or 1.0%2.6% in 20162019 compared to 2015,2018, reflecting volume increasesa favorable price realization of 1.4%2.0% attributed to higher prices on certain products and the favorablea benefit from net impact of acquisitions and divestitures of 0.7%,1.4%. This was partially offset by unfavorable net price realizationa volume decrease of 0.9%0.7% and an unfavorable impact from foreign currency exchange rates that reducedof 0.1%. Our volume decline was primarily elasticity-driven, as well as the introduction of new packaging formats during 2019. Excluding the Amplify, Pirate Brands and ONE Brands acquisitions and Tyrrells divestiture, our North America segment net sales by approximately 0.2%. increased 1.2%
Our 2016 North America performance was similarsegment income increased $105.8 million or 5.2% in 2019 compared to the slower growth experienced by other CPG companies. Additionally, the U.S. CMG category2018, primarily due to favorable price realization, favorable sales mix and manufacturers were impacted by a shorter Easter season and merchandising and display strategies at select customers. The segment's volume increase was primarily attributable to new product introductions,favorable commodity costs, partially offset by lower everyday product sales. The unfavorablehigher freight and logistics costs, higher supply chain-related costs, and higher advertising expense.
2018 compared with 2017
Net sales of our North America segment increased $280.4 million or 4.2% in 2018 compared to 2017, which includes a 4.6% benefit from the Amplify and Pirate Brands acquisitions. Excluding the Amplify and Pirate Brands acquisitions, our North America segment net sales decreased 0.4%. Net price realization resulted from increased levels ofdeclined 1.3% due to incremental trade promotional spending necessaryexpense in support of 2018 programming, partially offset by volume increases of 0.9% due to support higher levels of in-store merchandisinginnovation, specifically driven by Reese's Outrageous bars and display activity. Our Canada operations were impacted by the stronger U.S. dollar, which drove the unfavorable foreign currency impact.Hershey's Gold.
Our North America segment income decreased $33.0$24.1 million or 1.6%1.2% in 20162018 compared to 2015, driven by lower gross margin as2017, primarily due to higher trade promotional spendingexpense, higher logistics costs, unfavorable sales mix and additional plant costs, as well as incremental SM&A expense, including amortization expense, from the Amplify and Pirate Brands acquisitions. These higher supply chain costs were only partiallyexpenses more than offset reductions in advertising and related consumer marketing expense, which declined 11.2% versus the 2017 period, with the reduction driven by spend optimization and shifts relating to our emerging brands, as advertising and related consumer marketing on our core U.S. brands increased during the benefit from supply chain productivity and cost savings initiatives.year.
The Hershey Company | 2019 Form 10-K | Page 25
International and Other
The International and Other segment includes all other countries where we currently manufacture, import, market, sell or distribute chocolate and non-chocolate confectionery and other products. Currently, this includes our operations in China and other Asia markets, Latin America, Europe, Africa and the Middle East, along with exports to these regions. While a less significant component, this segment also includes our global retail operations, including Hershey’s Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario), Dubai and Singapore, as well as operations associated with licensing the use of certain trademarks and products to third parties around the world. International and Other accounted for 11.9%11.3%, 12.2%11.4% and 12.4%11.9% of our net sales in 2017, 20162019, 2018 and 2015,2017, respectively. International and Other results for the years ended December 31, 2017, 20162019, 2018 and 20152017 were as follows:
| Percent Change | Percent Change | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | 2019 | 2018 | 2017 | 2019 vs 2018 | 2018 vs 2017 | ||||||||||||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||||||||||||||
| Net sales | $ | 894.3 | $ | 907.2 | $ | 918.5 | (1.4 | )% | (1.2 | )% | $ | 904.5 | $ | 889.5 | $ | 894.3 | 1.7 | % | (0.5 | )% | ||||||||||||||||
| Segment income (loss) | 11.5 | (29.1 | ) | (98.1 | ) | NM | NM | |||||||||||||||||||||||||||||
| Segment income | 95.7 | 73.8 | 11.5 | 29.7 | % | 541.7 | % | |||||||||||||||||||||||||||||
| Segment margin | 1.3 | % | (3.2 | )% | (10.7 | )% | 10.6 | % | 8.3 | % | 1.3 | % | ||||||||||||||||||||||||
Net sales of our International and Other segment increased $15.0 million or 1.7% in 2019 compared to 2018, reflecting a volume increase of 5.7%, partially offset by a 2.2% reduction in net sales primarily from the divestiture of SGM, an unfavorable impact from foreign currency exchange rates of 1.5%, and unfavorable price realization of 0.3%. Excluding the divestiture of SGM and unfavorable foreign currency exchange rates, our International and Other segment net sales increased 5.4%. The volume increase was primarily attributed to solid marketplace growth in Mexico, India and Regional Markets where net sales increased by 6.7%, 4.9% and 4.5%, respectively. The unfavorable net price realization was driven by increased levels of trade promotional spending compared to the prior year.
Our International and Other segment generated income of $95.7 million in 2019 compared to $73.8 million in 2018, with the improvement primarily resulting from our efforts to drive sustainable gross margin improvements as we executed our Margin for Growth program and optimize the product portfolio across various international markets. Additionally, segment income benefited from continued growth across Mexico, India, China and Regional Markets, as well as our licensing and world travel retail business.
2018 compared with 2017
Net sales of our International and Other segment decreased $12.9$4.8 million or 1.4%0.5% in 20172018 compared to 2016,2017, reflecting volume declinesa 4.4% reduction in net sales from the divestiture of 4.7%, partially offset by favorable price realization of 2.7%SGM and a favorablean unfavorable impact from foreign currency exchange rates of 0.6%1.8%, partially offset by volume increases of 4.7% and favorable price realization of 1.0%. Excluding the sale of SGM and unfavorable impact of foreign currency exchange rates, the net sales of our International and Other segment decreased by approximately 2.0%net sales increased 5.7%.
The volume decrease isincrease was primarily attributed to our China business, drivensolid marketplace growth in Mexico and India where net sales increased by softness in the modern trade channel coupled with a focus on optimizing our product offerings.4.3% and 21.5%, respectively. The favorable net price realization was driven by higher prices in select markets, as well as reduceddecreased levels of trade promotional spending which declined significantly compared to the prior year. Constant currency net sales in Mexico and Brazil increased by 10.8% and 10.5%, respectively, driven by solid chocolate marketplace performance. India also experienced constant currency net sales growth of 13.8%.
Our International and Other segment generated income of $73.8 million in 2018 compared to $11.5 million in 2017, comparedwith the improvement primarily resulting from our efforts to a loss of $29.1 million in 2016 due to benefits from reduced trade promotional spending and lower operating expenses in Chinadrive sustainable gross margin improvements as a result ofwe executed our Margin for Growth Program.program and optimize the product portfolio across various international markets. Additionally, segment income benefited from the improved combined income in Latin Americacontinued growth across Mexico, Brazil, India and export markets versus the prior year.regional markets.
The favorable net price realization was driven by lower direct trade expense as well as lower returns, discounts and allowances in China, which declined significantly compared to the prior year. The volume decrease primarily related to lower sales in India due to the discontinuance of the edible oil business as well as lower sales in our global retail and licensing business, partially offset by net sales increases in Latin America and select export markets. Constant currency net sales in Mexico and Brazil increased on a combined basis by approximately 13%, driven by solid chocolate marketplace performance.Hershey Company | 2019 Form 10-K | Page 26
Unallocated Corporate Expense
Unallocated corporate expense includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense and (d) other gains or losses that are not integral to segment performance.
Unallocated corporate expense totaled $504.3$533.6 million in 2019 as compared to $486.8 million in 2018 primarily driven by compensation related expenses. In 2018, unallocated corporate expense decreased $12.4 million from $499.2 million in 2017 as compared to $497.4 million in 2016. While we realizedprimarily driven by savings in 2017 from our productivity and cost savings initiatives, these savings were more thanpartially offset by higher costs related tospending on the multi-year implementation of our enterprise resource planning system, as well as higher due diligence costs related to merger and acquisition activity. Unallocated corporate expense in 2016 was consistent with 2015 levels, as savings realized from our productivity and cost savings initiatives were offset by higher employee-related costs and an increase in corporate depreciation and amortization.system.
FINANCIAL CONDITION
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. Significant factors affecting liquidity include cash flows generated from operating activities, capital expenditures, acquisitions, dividends, repurchases of outstanding shares, the adequacy of available commercial paper and bank lines of credit, and the ability to attract long-term capital with satisfactory terms. We generate substantial cash from operations and remain in a strong financial position, with sufficient liquidity available for capital reinvestment, strategic acquisitions and the payment of dividends and strategic acquisitions.dividends.
Cash Flow Summary
The following table is derived from our Consolidated StatementStatements of Cash Flows:
| In millions of dollars | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Net cash provided by (used in): | ||||||||||||||||||||||||
| Operating activities | $ | 1,249.5 | $ | 1,013.4 | $ | 1,256.3 | $ | 1,763.9 | $ | 1,599.9 | $ | 1,249.5 | ||||||||||||
| Investing activities | (328.6 | ) | (595.4 | ) | (477.2 | ) | (780.5 | ) | (1,502.9 | ) | (328.6 | ) | ||||||||||||
| Financing activities | (843.8 | ) | (464.4 | ) | (797.0 | ) | (1,081.4 | ) | 116.1 | (843.8 | ) | |||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 6.1 | (3.1 | ) | (10.4 | ) | 3.3 | (5.3 | ) | 6.1 | |||||||||||||||
| Increase (decrease) in cash and cash equivalents | 83.2 | (49.5 | ) | (28.3 | ) | |||||||||||||||||||
| (Decrease) increase in cash and cash equivalents | $ | (94.7 | ) | $ | 207.8 | $ | 83.2 | |||||||||||||||||
Operating activities
Our principal source of liquidity is cash flow from operations. Our net income and, consequently, our cash provided by operations are impacted by sales volume, seasonal sales patterns, timing of new product introductions, profit margins and price changes. Sales are typically higher during the third and fourth quarters of the year due to seasonal and holiday-related sales patterns. Generally, working capital needs peak during the summer months. We meet these needs primarily with cash on hand, bank borrowings or the issuance of commercial paper.
Cash provided by operating activities in 20172019 increased $236.1$164.0 million relative to 2016.2018. This increase was driven by the following factors:
Net working capital (comprised of trade accounts receivable, inventory, accounts payable and accrued liabilities), generated cash of $60 million in 2019 and consumed cash of $104 million in 2018. This $164 million fluctuation was mainly driven by higher cash receipts prior to year-end 2019, the timing of vendor and supplier payments, as well as higher accrued incentive compensation related to annual performance that will be paid in the first quarter of 2020.
Prepaid expenses and other current assets generated cash of $14 million in 2019, compared to a use of cash of $40 million in 2018. This $54 million fluctuation was mainly driven by the timing of payments on commodity futures. In addition, in 2019, the volume of commodity futures held, which require margin deposits, was lower compared to 2018. We utilize commodity futures contracts to economically manage the risk of future price fluctuations associated with our purchase of raw materials.
The Hershey Company | 2019 Form 10-K | Page 27
The increase in cash provided by operating activities was partially offset by the following net cash outflows:
| ◦ | Incomes taxes used cash of $9 million in 2019, compared to cash generated of $76 million in 2018. This $85 million fluctuation was mainly due to the variance in actual tax expense for 2019 relative to the timing of quarterly estimated tax payments, which resulted in a lower taxes payable position at the end of 2019 compared to 2018. |
| ◦ | Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, long-lived and intangible asset charges, write-down of equity investments and other charges) resulted in $2 million of lower cash flow in 2019 relative to 2018. |
Cash provided by operating activities in 2018 increased $350.4 million relative to 2017. This increase was driven by the following factors:
Net income adjusted for non-cash charges to operations (including depreciation, amortization, stock-based compensation, deferred income taxes, goodwill, indefinitelong-lived and long-livedintangible asset charges, write-down of equity investments the gain on settlement of the SGM liability and other charges) contributed $329$257 million of additional cash flow in 20172018 relative to 2016.2017.
2017.
The increase in cash provided by operating activities was partially offset by the following net cash outflows:
| ◦ |
Pension and Post-Retirement Activity. We recorded net periodic benefit costs of $41.4 million, $42.1 million and $59.7 million $72.8 millionin 2019, 2018 and $66.8 million in 2017, 2016 and 2015, respectively, relating to our benefit plans (including our defined benefit and other post retirement plans). The main drivers of fluctuations in expense from year to year are assumptions in formulating our long-term estimates, including discount rates used to value plan obligations, expected returns on plan assets, the service and interest costs and the amortization of actuarial gains and losses.
The funded status of our qualified defined benefit pension plans is dependent upon many factors, including returns on invested assets, the level of market interest rates and the level of funding. We contribute cash to our plans at our discretion, subject to applicable regulations and minimum contribution requirements. Cash contributions to our pension and post retirement plans totaled $20.1 million, $25.9 million and $56.4 million $41.7 millionin 2019, 2018 and $53.3 million in 2017, 2016 and 2015,
respectively.
Investing activities
Our principal uses of cash for investment purposes relate to purchases of property, plant and equipment and capitalized software, purchases of short-term investments andas well as acquisitions of businesses, partially offset by proceeds from sales of property, plant and equipmentequipment. We used cash of $780.5 million for investing activities in 2019 compared to $1,502.9 million in 2018, with the decrease in cash spend driven by less acquisition and short-term investments.divestiture activity. We used cash of $328.6 million for investing activities in 2017, compared to $595.4 million in 2016, with the decreasedecreases versus 2018 primarily driven by lessno business acquisition activity in 2017 compared to 2016. We used cash of $477.2 million for investing activities in 2015, which was primarily driven by lower business acquisition investment and sales of short-term investments relative to 2017 and 2016.
2017.
Primary investing activities include the following:
| • | Capital spending. Capital expenditures, including capitalized software, primarily to support our enterprise resource planning ("ERP") system implementation, capacity expansion, innovation and cost savings, were $318.2 million in 2019, $328.6 million in 2018 and $257.7 million in 2017. Our 2019 expenditures were relatively in line with 2018 expenditures. The increase in 2018 compared to 2017 was a result of increased U.S. core chocolate brand capacity expansion and investments in our multi-year ERP system implementation. We expect 2020 capital |
The Hershey Company | 2019 Form 10-K | Page 28
expenditures, including capitalized software, to approximate $330$475 million to $350$525 million. The increase in our 20182020 capital expenditures compared to 2017is large driven by a multi-year supply chain project with a focus on additional capacity for our largest and 2016 relates to increasesfastest growing brands, building agile fulfillment and customization capabilities and investing in new data and technology within our U.S. core chocolate brand capacity, investing capabilities as part of our enterprise resource planning system implementationsupply chain enhancing visibility and incremental capital expenditures associated with our acquisition of Amplify.automation.
| • | Proceeds from sales of property, plant and equipment and other long-lived assets. During 2019, we generated $28.1 million of proceeds from the sale of property, plant and equipment and other long-lived assets. This included the sale of select Pennsylvania facilities and land for sales proceeds of approximately $27.6 million, resulting in a gain on the sale of $11.3 million. During 2018, we generated $49.8 million of proceeds from the sale of property, plant and equipment and other long-lived assets. This included sales of select China facilities that were taken out of operation in connection with the Operational Optimization Program. Proceeds from the sale of these facilities totaled $27.5 million, resulting in a gain of $6.6 million. Additionally, we sold licensing rights for a non-core trademark relating to a brand marketed outside of the U.S. for $13.0 million, resulting in a gain of $2.7 million. |
| • | Proceeds from the sales of businesses. In July 2018, we sold the Tyrrells and SGM businesses. Collectively, the proceeds from the sales of these businesses, net of cash divested, totaled approximately $167.0 million. We had no divestiture activity in the comparable 2019 or 2017 periods. |
| • | Business acquisitions. In 2019, we spent $402.2 million to acquire ONE Brands. In 2018, we spent $915 million to acquire Amplify and $423 million to acquire Pirate Brands. We had no acquisition activity in 2017. |
| • | Investments in partnerships qualifying for tax credits. We make investments in partnership entities that in turn make equity investments in projects eligible to receive federal historic and energy tax credits. We invested approximately $80.2 million in 2019, $52.6 million in 2018 and $78.6 million in 2017 in projects qualifying for tax credits. |
| • | Other investing activities. In 2019, we made minority investments in emerging snacking businesses that qualify as cost method investments. |
Financing activities
Our cash flow from financing activities generally relates to the use of cash for purchases of our Common Stock and payment of dividends, offset by net borrowing activity and proceeds from the exercise of stock options. Financing activities in 2019 decreased cash by $1,081.4 million, compared to cash generated of $116.1 million in 2018. We used cash of $843.8 million for financing activities in 2017, compared to $464.4 million in 2016. We used cash of $797.0 million for financing activities in 2015, primarily to fund dividend payments and share repurchases.repurchases, partially offset by incremental borrowings.
The majority of our financing activity was attributed to the following:
| • | Short-term borrowings, net. In addition to utilizing cash on hand, we use short-term borrowings (commercial paper and bank borrowings) to fund seasonal working capital requirements and ongoing business needs. In 2019, we used $1.2 billion to reduce short-term commercial paper borrowings and short-term foreign borrowings. We utilized the proceeds from the issuance of long-term debt in October 2019 to repay outstanding commercial paper used to fund the ONE Brands acquisition. In 2018, we generated cash flow of $645.8 million through the issuance of short-term commercial paper, partially offset by a reduction in short-term foreign bank borrowings. We utilized the proceeds from the issuance of commercial paper to fund the Amplify acquisition and repay Amplify's outstanding debt owed under its existing credit agreement. A portion of the commercial paper borrowings used to fund the Amplify acquisition were subsequently refinanced with the proceeds of new notes issued during the second quarter of 2018, as discussed below. In 2017, we used $81.4 million to reduce commercial paper borrowings and short-term foreign borrowings. |
| • | Long-term debt borrowings and repayments. In October 2019, we issued $300 million of 2.05% Notes due in 2024, $300 million of 2.45% Notes due in 2029 and $400 million of 3.125% Notes due in 2049. Proceeds from the issuance of the Notes, net of discounts and issuance costs, totaled $990.3 million. In May 2018, we issued $350 million of 2.90% Notes due in 2020, $350 million of 3.10% Notes due in 2021 and $500 million of 3.375% Notes due in 2023. Proceeds from the issuance of the Notes, net of discounts and issuance costs, totaled $1,193.8 million. In 2018, we repaid $300 million of 1.60% Notes due in 2018 upon their maturity. Additionally, in August |
The Hershey Company | 2019 Form 10-K | Page 29
2018, we repaid a portion of the commercial paper borrowings and short-term foreign borrowings. In 2016, we generated cash flow of $275.6 million through short-term commercial paper borrowings, partially offset by payments in short-term foreign borrowings. In 2015, we generated cash flow of $10.7 million as a result of higher borrowings at certain of our international businesses.
| • | Tax receivable obligation. In connection with the Amplify acquisition, the Company agreed to make payments to the counterparty of a tax receivable agreement. In 2018, we paid $72.0 million to settle the tax receivable obligation. |
| • | Share repurchases. We repurchase shares of Common Stock to offset the dilutive impact of treasury shares issued under our equity compensation plans. The value of these share repurchases in a given period varies based on the volume of stock options exercised and our market price. In addition, we periodically repurchase shares of Common Stock pursuant to Board-authorized programs intended to drive additional stockholder value. In 2019, we used cash for total share repurchases of $527.2 million that included purchases pursuant to authorized programs; this included $150.0 million to purchase 1.4 million shares. In 2018, we used cash for total share repurchases of $247.5 million, which included a privately negotiated repurchase transaction with Hershey Trust Company, as trustee for the Trust, to purchase 450 thousand shares for $47.8 million. In 2017, we used cash for total share repurchases of $300.3 million, which included a privately negotiated repurchase transaction with Hershey Trust Company, as trustee for the Trust, to purchase 1.5 million shares for $159.0 million. In October 2017, our Board of Directors approved a $100 million share repurchase authorization. This program was completed in the first quarter of 2019. In July 2018, our Board of Directors approved an additional $500 million share repurchase authorization. As of December 31, 2019, approximately $410 million remained available for repurchases of our Common Stock under this program. The share repurchase program does not have an expiration date. |
| • | Dividend payments. Total dividend payments to holders of our Common Stock and Class B Common Stock were $610.3 million in 2019, $562.5 million in 2018 and $526.3 million in 2017. Dividends per share of Common Stock increased 8.5% to $2.990 per share in 2019 compared to $2.756 per share in 2018, while dividends per share of Class B Common Stock increased 8.5% in 2019. |
| • | Proceeds from the exercise of stock options, including tax benefits. We received $240.8 million from employee exercises of stock options, net of employee taxes withheld from share-based awards in 2019. We received $63.3 million in 2018 and 2017, respectively. Variances are driven primarily by the number of shares exercised and the share price at the date of grant. |
Liquidity and Capital Resources
At December 31, 2017,2019, our cash and cash equivalents totaled $380.2$493.3 million. At December 31, 2016,2018, our cash and cash equivalents totaled $297.0$588.0 million. Our cash and cash equivalents at the end of 2017 increased $83.22019 decreased $94.7 million compared to the 20162018 year-end balance as a result of the sourcesuses of net cash outlined in the previous discussion.
Approximately 75%60% of the balance of our cash and cash equivalents at December 31, 20172019 was held by subsidiaries domiciled outside of the United States. The Company recognized the one-time U.S. repatriation tax due under U.S. tax reform and, as a result, repatriation of these amounts would not be subject to additional U.S. federal income tax but would be subject to applicable withholding taxes in the relevant jurisdiction. Our intent is to permanently reinvest these funds earned outside of the United States. The cash that our foreign subsidiaries hold for indefinite reinvestment is expected to be usedStates to finance foreign operations and investments.investments, and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. We believe we have sufficient liquidity to satisfy our cash needs, including our cash needs in the United States.
We maintain debt levels we consider prudent based on our cash flow, interest coverage ratio and percentage of debt to capital. We use debt financing to lower our overall cost of capital which increases our return on stockholders’ equity. Our total debt was $2.9$4.3 billion at December 31, 20172019 and $3.0$4.5 billion at December 31, 2016.2018. Our total debt decreased slightly in 2017 as we reduced our2019 mainly due to the repayment of commercial paper and short-term foreign borrowings.borrowings used to fund the ONE Brands acquisition, partially offset by additional Notes issued in October 2019.
As a source of short-term financing, we maintain a $1.0$1.5 billion unsecured revolving credit facility with anthe option to increase borrowings by an additional $400$500 million with the consent of the lenders. As of December 31, 2017,2019, the termination date of this agreement is November 2020.July 2, 2024, however, we may extend the termination date for up to two additional one-year periods upon notice to the administrative agent under the facility. We may use these funds for
The Hershey Company | 2019 Form 10-K | Page 30
general corporate purposes, including commercial paper backstop and business acquisitions. As of December 31, 2017,2019, we had $551 million$1.5 billion of available capacity under the agreement. The unsecured revolving credit agreement contains certain financial and other covenants, customary representations, warranties and events of default. We were in compliance with all covenants as of December 31, 2017.2019.
In addition to the revolving credit facility, we maintain lines of credit in various currencies with domestic and international commercial banks. As of December 31, 2017,2019, we had available capacity of $329$358 million under these lines of credit.
Furthermore, we have a current shelf registration statement filed with the SEC that allows for the issuance of an indeterminate amount of debt securities. Proceeds from the debt issuances and any other offerings under the current registration statement may be used for general corporate requirements, including reducing existing borrowings, financing capital additions and funding contributions to our pension plans, future business acquisitions and working capital requirements.
Our ability to obtain debt financing at comparable risk-based interest rates is partly a function of our existing cash-flow-to-debt and debt-to-capitalization levels as well as our current credit standing.
We believe that our existing sources of liquidity are adequate to meet anticipated funding needs at comparable risk-based interest rates for the foreseeable future. Acquisition spending and/or share repurchases could potentially increase our debt. Operating cash flow and access to capital markets are expected to satisfy our various cash flow requirements, including acquisitions and capital expenditures.
Equity Structure
We have two classes of stock outstanding – Common Stock and Class B Stock. Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. Holders of the Common Stock have 1 vote per share. Holders of the Class B Stock have 10 votes per share. Holders of the Common Stock, voting separately as a class, are entitled to elect one-sixth of our Board. With respect to dividend rights, holders of the Common Stock are entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.
Hershey Trust Company, as trustee for the trust established by Milton S. and Catherine S. Hershey that has as its sole beneficiary Milton Hershey School, (such trust, the "Milton Hershey School Trust"), maintains voting control over The Hershey Company. In addition, a representativethree representatives of Hershey Trust Company currently servesserve as a membermembers of the Company's Board. In performing histheir responsibilities on the Company’s Board, this representativethese representatives may from time to time exercise influence with regard to the ongoing business decisions of our Board or management. Hershey Trust Company, as trustee for the Milton Hershey School Trust, in its role as controlling stockholder of the Company, has indicated it intends to retain its controlling interest in The Hershey Company. The Company's Board, and not the Hershey Trust Company board, is solely responsible and accountable for the Company’s management and performance.
Pennsylvania law requires that the Office of Attorney General be provided advance notice of any transaction that would result in Hershey Trust Company, as trustee for the Milton Hershey School Trust, no longer having voting control of the Company. The law provides specific statutory authority for the Attorney General to intercede and petition the court having jurisdiction over Hershey Trust Company, as trustee for the Milton Hershey School Trust, to stop such a transaction if the Attorney General can prove that the transaction is unnecessary for the future economic viability of the Company and is inconsistent with investment and management considerations under fiduciary obligations. This legislation makes it more difficult for a third party to acquire a majority of our outstanding voting stock and thereby may delay or prevent a change in control of the Company.
Guarantees and Other Off-Balance Sheet Arrangements
We do not have guarantees or other off-balance sheet financing arrangements, including variable interest entities, that we believe could have a material impact on our financial condition or liquidity.
The Hershey Company | 2019 Form 10-K | Page 31
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2017:2019:
| Payments due by Period | Payments due by Period | |||||||||||||||||||||||||||||||||||||||
| In millions of dollars | In millions of dollars | |||||||||||||||||||||||||||||||||||||||
| Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||||||||
| Long-term notes (excluding capital leases obligations) | $ | 2,278.4 | $ | 300.1 | $ | 350.0 | $ | 84.7 | $ | 1,543.6 | ||||||||||||||||||||||||||||||
| Long-term notes (excluding finance leases obligations) | $ | 4,178.3 | $ | 700.0 | $ | 434.7 | $ | 1,050.0 | $ | 1,993.6 | ||||||||||||||||||||||||||||||
| Interest expense (1) | 725.3 | 78.4 | 148.9 | 107.2 | 390.8 | 1,131.6 | 132.2 | 197.9 | 165.3 | 636.2 | ||||||||||||||||||||||||||||||
| Operating lease obligations (2) | 254.3 | 16.2 | 31.5 | 24.2 | 182.4 | 283.2 | 36.8 | 46.7 | 26.9 | 172.8 | ||||||||||||||||||||||||||||||
| Capital lease obligations (3) | 193.5 | 3.4 | 7.0 | 7.8 | 175.3 | |||||||||||||||||||||||||||||||||||
| Finance lease obligations (3) | 194.4 | 7.8 | 11.7 | 9.2 | 165.7 | |||||||||||||||||||||||||||||||||||
| Minimum pension plan funding obligations (4) | 17.8 | 1.6 | 6.4 | 6.5 | 3.3 | 9.4 | 1.5 | 3.1 | 3.2 | 1.6 | ||||||||||||||||||||||||||||||
| Unconditional purchase obligations (5) | 1,646.6 | 1,359.7 | 283.7 | 3.2 | — | 2,324.8 | 1,511.1 | 813.7 | — | — | ||||||||||||||||||||||||||||||
| Total obligations | $ | 5,115.9 | $ | 1,759.4 | $ | 827.5 | $ | 233.6 | $ | 2,295.4 | $ | 8,121.7 | $ | 2,389.4 | $ | 1,507.8 | $ | 1,254.6 | $ | 2,969.9 | ||||||||||||||||||||
(1) Includes the net interest payments on fixed rate debt associated with long-term notes.
(2) Includes the minimum rental commitments (including inputed interest) under non-cancelable operating leases primarily for offices, retail stores, warehouses and distribution facilities.
(3) Includes the minimum rental commitments (including interest expense)inputed interest) under non-cancelable capitalfinance leases primarily for offices and warehouse facilities.facilities, as well as vehicles.
(4) Represents future pension payments to comply with local funding requirements. Our policy is to fund domestic pension liabilities in accordance with the minimum and maximum limits imposed by the Employee Retirement Income Security Act of 1974 (“ERISA”), federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans. For more information, see Note 911 to the Consolidated Financial Statements.
(5) Purchase obligations consist primarily of fixed commitments for the purchase of raw materials to be utilized in the normal course of business. Amounts presented included fixed price forward contracts and unpriced contracts that were valued using market prices as of December 31, 2017.2019. The amounts presented in the table do not include items already recorded in accounts payable or accrued liabilities at year-end 2017,2019, nor does the table reflect cash flows we are likely to incur based on our plans, but are not obligated to incur. Such amounts are part of normal operations and are reflected in historical operating cash flow trends. We do not believe such purchase obligations will adversely affect our liquidity position.
In entering into contractual obligations, 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 performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. Our risk is limited to replacing the contracts at prevailing market rates. We do not expect any significant losses resulting from counterparty defaults.
Asset Retirement Obligations
We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations, which require that we handle or dispose of asbestos in a specified manner if such facilities undergo major renovations or are demolished. We do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos.
Income Tax Obligations
Liabilities for unrecognized income tax benefits are excluded from the table above as we are unable to reasonably predict the ultimate amount or timing of a settlement of these potential liabilities. See Note 810 to the Consolidated Financial Statements for more information.
The Hershey Company | 2019 Form 10-K | Page 32
Recent Accounting Pronouncements
Information on recently adopted and issued accounting standards is included in Note 1 to the Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires management to use judgment and make estimates and assumptions. We believe that our most critical accounting policies and estimates relate to the following:
Pension and Other Post-Retirement Benefits Plans
Business Acquisitions, Valuation and Impairment of Goodwill and Other Intangible Assets
Income Taxes
Management has discussed the development, selection and disclosure of critical accounting policies and estimates with the Audit Committee of our Board. While we base estimates and assumptions on our knowledge of current events and
actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Other significant accounting policies are outlined in Note 1 to the Consolidated Financial Statements.
Accrued Liabilities for Trade Promotion Activities
We promote our products with advertising, trade promotions and consumer incentives. These programs include, but are not limited to, discounts, coupons, rebates, in-store display incentives and volume-based incentives. We expense advertising costs and other direct marketing expenses as incurred. We recognize the costs of trade promotion and consumer incentive activities as a reduction to net sales along with a corresponding accrued liability based on estimates at the time of revenue recognition. These estimates are based on our analysis of the programs offered, historical trends, expectations regarding customer and consumer participation, sales and payment trends and our experience with payment patterns associated with similar programs offered in the past.
Pension and Other Post-Retirement Benefits Plans
We sponsor various defined benefit pension plans. The primary plans are The Hershey Company Retirement Plan and The Hershey Company Retirement Plan for Hourly Employees, which are cash balance plans that provide pension benefits for most U.S. employees hired prior to January 1, 2007. We also sponsor two primary other post-employment benefit (“OPEB”) plans, consisting of a health care plan and life insurance plan for retirees. The health care plan is contributory, with participants’ contributions adjusted annually, and the life insurance plan is non-contributory.
For accounting purposes, the defined benefit pension and OPEB plans require assumptions to estimate the projected and accumulated benefit obligations, including the following variables: discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality; expected return on assets; and health care cost trend rates. These and other assumptions affect the annual expense and obligations recognized for the underlying plans. Our assumptions reflect our historical experiences and management's best judgment regarding future expectations. Our related accounting policies, accounting balances and plan assumptions are discussed in Note 911 to the Consolidated Financial Statements.
The Hershey Company | 2019 Form 10-K | Page 33
Pension Plans
Changes in certain assumptions could significantly affect pension expense and benefit obligations, particularly the estimated long-term rate of return on plan assets and the discount rates used to calculate such obligations:
| • | Long-term rate of return on plan assets. The expected long-term rate of return is evaluated on an annual basis. We consider a number of factors when setting assumptions with respect to the long-term rate of return, including current and expected asset allocation and historical and expected returns on the plan asset categories. Actual asset allocations are regularly reviewed and periodically rebalanced to the targeted allocations when considered appropriate. Investment gains or losses represent the difference between the expected return estimated using the long-term rate of return and the actual return realized. For 2019, we decreased the expected return on plan assets assumption to 5.3% from the 6.0% assumption used during 2018. The historical average return (compounded annually) over the 20 years prior to December 31, 2019 was approximately 6.8%. |
As of December 31, 2017,2019, our primary plans had cumulative unrecognized investment and actuarial losses of approximately $345$296 million. We amortize the unrecognized net actuarial gains and losses in excess of the corridor amount, which is the greater of 10% of a respective plan’s projected benefit obligation or the fair market value of plan assets. These unrecognized net losses may increase future pension expense if not offset by (i) actual investment returns that exceed the expected long-term rate of investment returns, (ii) other factors, including reduced pension liabilities arising from higher discount rates used to calculate pension obligations or (iii) other
actuarial gains when actual plan experience is favorable as compared to the assumed experience. A 100 basis point decrease or increase in the long-term rate of return on pension assets would correspondingly increase or decrease annual net periodic pension benefit expense by approximately $10$9 million.
| • | Discount rate. Prior to December 31, 2017, the service and interest cost components of net periodic benefit cost were determined utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Beginning in 2018, we elected to utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We made this change to provide a more precise measurement of service and interest costs by improving the correlation between the projected cash flows to the corresponding spot rates along the yield curve. This change does not affect the measurement of our pension and other post-retirement benefit liabilities but generally results in lower benefit expense in periods when the yield curve is upward sloping, which was the case in 2018. We accounted for this change as a change in accounting estimate and, accordingly, accounted for it on a prospective basis starting in 2018. |
A 100 basis point decrease (increase) in the weighted-average pension discount rate would increase (decrease) annual net periodic pension benefit expense by approximately $4$5 million and the December 31, 20172019 pension liability would increase by approximately $100$103 million or decrease by approximately $85$87 million, respectively.
Pension expense for defined benefit pension plans is expected to be approximately $13$16 million in 2018.2020. Pension expense beyond 20182020 will depend on future investment performance, our contributions to the pension trusts, changes in discount rates and various other factors related to the covered employees in the plans.
Other Post-Employment Benefit Plans
Changes in significant assumptions could affect consolidated expense and benefit obligations, particularly the discount rates used to calculate such obligations:
| • | Discount rate. The determination of the discount rate used to calculate the benefit obligations of the OPEB plans is discussed in the pension plans section above. A 100 basis point decrease (increase) in the discount rate assumption for these plans would not be material to the OPEB plans' consolidated expense and the December 31, 2019 benefit liability would increase by approximately $25 million or decrease by approximately $21 million, respectively. |
The Hershey Company | 2019 Form 10-K | Page 34
Business Acquisitions, Valuation and the healthcare cost trend rate:
Goodwill and Other Intangible Assets
We use the acquisition method of accounting for business acquisitions. Under the acquisition method, the results of operations of the acquired business have been included in the consolidated financial statements since the respective dates of the acquisitions. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly intangible assets. As a result, we normally obtain the assistance of a third-party valuation specialist in estimating fair values of tangible and intangible assets. The fair value estimates are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. While management believes those expectations and assumptions are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions.
Goodwill and indefinite-lived intangible assets are not amortized, but instead, are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter.
We test goodwill for impairment by performing either a qualitative or quantitative assessment. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors in assessing the fair value of the related reporting unit. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required. For those reporting units tested using a quantitative approach, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge for the differential (up to the carrying value of goodwill). We test individual indefinite-lived intangible assets by comparing the estimated fair values with the book values of each asset.
We determine the fair value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to
evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to measure fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and profitability, and cash flows associated with taxes and capital spending. Additional assumptions include forecasted growth rates, estimated discount rates, which may be risk-adjusted for the operating market of the reporting unit, and estimated royalty rates that would be charged for comparable branded licenses. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions.
We also have intangible assets, consisting primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions, that are expected to have determinable useful lives. The costs of finite-lived intangible assets are amortized to expense over their estimated lives. Our estimates of the useful lives of finite-lived intangible assets consider judgments regarding the future effects of obsolescence, demand, competition and other economic factors. We conduct impairment tests when events or changes in circumstances indicate that the carrying value of these finite-lived assets may not be recoverable. Undiscounted cash flow analyses are used to determine if an impairment exists. If an impairment is determined to exist, the loss is calculated based on the estimated fair value of the assets.
Results of Impairment Tests
At December 31, 2017,2019, the net book value of our goodwill totaled $821.1 million and related to five reporting units. Based on our most recent quantitative testing, all of our reporting units had a percentage of excess fair value over carrying value of at least 100%. Therefore, as$1,986.0 million. As it relates to our 20172019 annual testing performed at the beginning of the fourth quarter, we tested all five reporting units using a qualitative assessment and determined that no quantitative assessment. Based on our testing, was deemed necessary.all of our reporting units had an excess fair value well over the their respective carrying values. There were no other events or circumstances that would indicate that impairment may exist. We had no goodwill impairment charges in 2019, 2018 or 2017.
The Hershey Company | 2019 Form 10-K | Page 35
In 2019, sales and operating performance associated with our KRAVE Pure Foods, Inc. (“Krave”) business were below expectations. In the fourth quarter of 2019, as part of a strategic review initiated by our leadership team, we updated our strategic forecast which projected under performance related to the Krave business primarily due to mainstream brands driving category volume and an increase in the overall competitive landscape. We deemed this to be a triggering event requiring us to test our Krave long-lived asset group for impairment. Based on our assessment, we determined that the carrying value was not recoverable and calculated an impairment loss as the excess of the asset group's carrying value over its fair value. Therefore, as a result of this testing, during the fourth quarter of 2019, we recorded an impairment charge totaling $100.1 million to write down the long-lived asset group, which predominantly consisted of customer relationship and trademark intangible assets.
In February 2017, we commenced the Margin for Growth Program which includes an initiative to optimize the manufacturing operations supporting our China business. We deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded an impairment charge totaling $105.9 million representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition.
Income Taxes
We base our deferred income taxes, accrued income taxes and provision for income taxes upon income, statutory tax rates, the legal structure of our Company, interpretation of tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate. We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. We are regularly audited by federal, state and foreign tax authorities, butauthorities; a number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. From time to time, these audits result in assessments of additional tax. We maintain reserves for such assessments.
We apply a more-likely-than-not threshold to the recognition and derecognition of uncertain tax positions. Accordingly, we recognize the amount of tax benefit that has a greater than 50% likelihood of being ultimately realized upon settlement. Future changes in judgments and estimates related to the expected ultimate resolution of uncertain tax positions will affect income in the quarter of such change. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome. Accrued interest and penalties related to unrecognized tax benefits are included in income tax expense. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances, such as receiving audit assessments or clearing of an item for which a reserve has been established. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution.
We believe it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets, net of valuation allowances. Our valuation allowances are primarily related to U.S. capital loss carryforwards and various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets for which we do not expect to realize a benefit.
The Hershey Company | 2019 Form 10-K | Page 36
| Item 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We use certain derivative instruments to manage our interest rate, foreign currency exchange rate and commodity price risks. We monitor and manage these exposures as part of our overall risk management program.
We enter into interest rate swap agreements and foreign currency forward exchange contracts for periods consistent with related underlying exposures. We enter into commodities futures and options contracts and other derivative instruments for varying periods. These commodity derivative instruments are intended to be, and are effective as, economic hedges of market price risks associated with anticipated raw material purchases, energy requirements and transportation costs. We do not hold or issue derivative instruments for trading purposes and are not a party to any instruments with leverage or prepayment features.
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.
Refer to Note 1 and Note 5 to the Consolidated Financial Statements for further discussion of these derivative instruments and our hedging policies.
Interest Rate Risk
The total notional amount of interest rate swaps outstanding at December 31, 20172019 and 20162018 was $350 million. The notional amount relates to fixed-to-floating interest rate swaps which convert a comparable amount of fixed-rate debt to variable rate debt at December 31, 20172019 and 2016.2018. A hypothetical 100 basis point increase in interest rates applied to this now variable-rate debt as of December 31, 20172019 would have increased interest expense by approximately $3.5 million for the full year 2019 and $3.62018, respectively.
In addition, the total amount of short-term debt, net of cash, amounted to net cash of $461 million and net short-term debt of $610 million, respectively, at December 31, 2019 and 2018. A hypothetical 100 basis point increase in interest rates applied to this variable-rate short-term debt as of December 31, 2019 would have increased interest expense by approximately $4.3 million for the full year 20172019 and 2016, respectively.$9.0 million for the full year 2018.
We consider our current risk related to market fluctuations in interest rates on our remaining debt portfolio, excluding fixed-rate debt converted to variable rates with fixed-to-floating instruments, to be minimal since this debt is largely long-term and fixed-rate in nature. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. A 100 basis point increase in market interest rates would decrease the fair value of our fixed-rate long-term debt at December 31, 20172019 and December 31, 20162018 by approximately $134$246 million and $142$121 million, respectively. However, since we currently have no plans to repurchase our outstanding fixed-rate instruments before their maturities, the impact of market interest rate fluctuations on our long-term debt does not affect our results of operations or financial position.
The Hershey Company | 2019 Form 10-K | Page 37
Foreign Currency Exchange Rate Risk
We are exposed to currency fluctuations related to manufacturing or selling products in currencies other than the U.S. dollar. We may enter into foreign currency forward exchange contracts to reduce fluctuations in our long or short currency positions relating primarily to purchase commitments or forecasted purchases for equipment, raw materials and finished goods denominated in foreign currencies. We also may hedge payment of forecasted intercompany transactions with our subsidiaries outside of the United States. We generally hedge foreign currency price risks for periods from 3 to 12 months.
A summary of foreign currency forward exchange contracts and the corresponding amounts at contracted forward rates is as follows:
| December 31, | 2017 | 2016 | 2019 | 2018 | ||||||||||||||||||||
Contract Amount | Primary Currencies | Contract Amount | Primary Currencies | Contract Amount | Primary Currencies | Contract Amount | Primary Currencies | |||||||||||||||||
| In millions of dollars | ||||||||||||||||||||||||
| Foreign currency forward exchange contracts to purchase foreign currencies | $ | 19.5 | Euros | $ | 9.4 | Euros | $ | 110.8 | Euros British pound Malaysian ringgit | $ | 33.4 | Euros British pound | ||||||||||||
| Foreign currency forward exchange contracts to sell foreign currencies | $ | 158.2 | Canadian dollars Brazilian reals Japanese yen | $ | 80.4 | Canadian dollars Brazilian reals Japanese yen | $ | 125.8 | Canadian dollars Brazilian reals Japanese yen | $ | 51.8 | Canadian dollars Brazilian reals Japanese yen | ||||||||||||
The fair value of foreign currency forward exchange contracts represents the difference between the contracted 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. At December 31, 20172019 and 2016,2018, the net fair value of these instruments was a liabilityan asset of $1.0 million and an asset of $1.4$2.5 million, respectively. AssumingIn addition, assuming an
unfavorable 10% change in year-end foreign currency exchange rates, the fair value of these instruments would have declined by $19.7$55.4 million and $9.6$4.5 million, respectively.respectively, generally offset by a reduction in foreign exchange associated with our transactional activities.
The Hershey Company | 2019 Form 10-K | Page 38
Commodities—Price Risk Management and Futures Contracts
Our most significant raw material requirements include cocoa products, sugar, corn products, dairy products, peanuts and almonds. The cost of cocoa products and prices for related futures contracts and costs for certain other raw materials historically have been subject to wide fluctuations attributable to a variety of factors. These factors include:
Foreign currency exchange rates;
Imbalances between supply and demand;
The effect of weather on crop yield and quality;
Speculative influences;
Trade agreements among producing and consuming nations;
Supplier compliance with commitments;
Import/export requirements for raw materials and finished goods;
Political unrest in producing countries; and
Changes in governmental agricultural programs and energy policies.
We use futures and options contracts and other commodity derivative instruments in combination with forward purchasing of cocoa products, sugar, corn sweeteners,products, certain dairy products, natural gas and certain dairy productsdiesel fuel primarily to reduce the risk of futuremitigate price increasesvolatility and provide visibility to future costs.costs within our supply chain. Currently, active futures contracts are not available for use in pricing our other major raw material requirements, primarily peanuts and almonds. We attempt to minimize the effect of future raw material and energy price fluctuations related to the purchase of raw materials by using derivatives and forward purchasing to cover future manufacturing requirements generally for 3 to 24 months. However, dairy futures liquidity is not as developed as many of the other commoditiescommodity futures markets and, therefore, it can be difficult to hedge ourdairy costs for dairy products by entering into futures contracts or other derivative instruments to extend coverage for longextended periods of time. We use diesel swapfuel futures contracts to minimize price fluctuations associated with our transportation costs. Our commodity procurement practices are intended to reduce the risk of futuremitigate price increasesvolatility and provide visibility to future costs, but also may potentially limit our ability to benefit from possible price decreases. Our costs for major raw materials will not necessarily reflect market price fluctuations primarily because of our forward purchasing and hedging practices.
Cocoa Products
During 2017,2019, average cocoa futures contract prices decreased compared with 20162018 and traded in a range between $0.87$0.90 and $0.99$1.14 per pound, based on the Intercontinental Exchange futures contract. Cocoa production was higher during the 20162018 to 20172019 crop year andbut was slightly outpaced by the increasesincrease in global demand, which led to a rebuildsmall reduction in global cocoa stocks over the past year. As a result,At the beginning of the year, cocoa prices declined in 2017 versus 2016 due to excess supply relativehigher production in West Africa before rallying in the second half due to demand.sustained consumption. The table below shows annual average cocoa futures prices and the highest and lowest monthly averages for each of the calendar years indicated. The prices reflect the monthly averages of the quotations at noon of the three active futures trading contracts closest to maturity on the Intercontinental Exchange.
Cocoa Futures Contract Prices (dollars per pound) | Cocoa Futures Contract Prices (dollars per pound) | |||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||
| Annual Average | $ | 0.91 | $ | 1.29 | $ | 1.40 | $ | 1.36 | $ | 1.09 | $ | 1.03 | $ | 1.06 | $ | 0.91 | $ | 1.29 | $ | 1.40 | ||||||||||||||||||||
| High | 0.99 | 1.38 | 1.53 | 1.45 | 1.26 | 1.14 | 1.23 | 0.99 | 1.38 | 1.53 | ||||||||||||||||||||||||||||||
| Low | 0.87 | 1.03 | 1.28 | 1.25 | 0.97 | 0.90 | 0.88 | 0.87 | 1.03 | 1.28 | ||||||||||||||||||||||||||||||
Source: International Cocoa Organization Quarterly Bulletin of Cocoa Statistics
Our costs for cocoa products will not necessarily reflect market price fluctuations because of our forward purchasing and hedging practices, premiums and discounts reflective of varying delivery times, and supply and demand for our specific varieties and grades of cocoa liquor, cocoa butter and cocoa powder. As a result, the average futures contract prices are not necessarily indicative of our average costs.
Sugar
The price of sugar is subject to price supports under U.S. farm legislation. Such legislation establishes import quotas and duties to support the price of sugar. As a result, sugar prices paid by users in the United States are currently higher than prices on the world sugar market. United States delivered east coast refined sugar prices traded in a range from $0.38$0.40 to $0.40$0.47 per pound during 2017.2019. Prices rallied in late 2019 due to a poor sugar beet harvest in the upper Midwest and West.
Corn Products
We uses corn futures to price our corn sweetener product requirements. Excessive spring rains caused late plantings, which resulted in lower yields compared to a record crop in 2018. Corn prices traded in a range from $3.52 to $4.73 per bushel during 2019.
Dairy Products
During 2019, prices for fluid dairy milk ranged from a low of $0.15 per pound to a high of $0.17 per pound, on a Class IV milk basis. Fluid dairy milk prices were higher than 2018, driven by declines in U.S. milk production.
Peanuts and Almonds
Peanut prices in the United States ranged from a low of $0.45 per pound to a high of $0.55 per pound. Adverse weather conditions in the Southeast U.S. during the end of the growing season have resulted in lower quality and higher prices. Almond prices began the year around $0.65at $2.99 per pound and closed the year at $0.47$3.39 per pound. Higher planted acreagepound, driven by strong shipments and optimal growing conditions throughout 2017lower than expected yields for the 2019 crop.
Changes in the key U.S. peanut growing regions resulted in an estimated 21% larger crop versus the 2016 crop and drove price decreases. Almond prices began the year at $2.84 per pound and closed the year at $2.84 per pound. Almond supply is ample to support U.S. demand heading into 2018 as the 2017 crop is expected to be approximately 5.1% larger than the 2016 crop. (Source: Almond BoardValue of California)Futures Contracts
We make or receive cash transfers to or from commodity futures brokers on a daily basis reflecting changes in the value of futures contracts on the Intercontinental Exchange or various other exchanges. These changes in value represent unrealized gains and losses. The cash transfers offset higher or lower cash requirements for the payment of future invoice prices of raw materials, energy requirements and transportation costs.
Commodity Sensitivity Analysis
Our open commodity derivative contracts had a notional value of $405.3$589.7 million as of December 31, 20172019 and $739.4$693.5 million as of December 31, 2016.2018. At the end of 2017,2019, the potential change in fair value of commodity derivative instruments, assuming a 10% decrease in the underlying commodity price, would have increased our net unrealized losses in 20172019 by $38.6$58.6 million, generally offset by a reduction in the cost of the underlying commodity purchases.
The Hershey Company | 2019 Form 10-K | Page 40
| Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The Hershey Company | 2019 Form 10-K | Page 41
RESPONSIBILITY FOR FINANCIAL STATEMENTS
The Hershey Company is responsible for the financial statements and other financial information contained in this report. We believe that the financial statements have been prepared in conformity with U.S. generally accepted accounting principles appropriate under the circumstances to reflect in all material respects the substance of applicable events and transactions. In preparing the financial statements, it is necessary that management make informed estimates and judgments. The other financial information in this annual report is consistent with the financial statements.
We maintain a system of internal accounting controls designed to provide reasonable assurance that financial records are reliable for purposes of preparing financial statements and that assets are properly accounted for and safeguarded. The concept of reasonable assurance is based on the recognition that the cost of the system must be related to the benefits to be derived. We believe our system provides an appropriate balance in this regard. We maintain an Internal Audit Department which reviews the adequacy and tests the application of internal accounting controls.
The 2019, 2018 and 2017 financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm. The 2016 and 2015 financial statements have been audited by KPMG LLP, an independent registered public accounting firm. Ernst & Young LLP's reports on our financial statements and internal controls over financial reporting as of December 31, 20172019 are included herein.
The Audit Committee of the Board of Directors of the Company, consisting solely of independent, non-management directors, meets regularly with the independent auditors, internal auditors and management to discuss, among other things, the audit scope and results. Ernst & Young LLP and the internal auditors both have full and free access to the Audit Committee, with and without the presence of management.
| /s/ MICHELE G. BUCK | /s/ | |
Michele G. Buck Chief Executive Officer (Principal Executive Officer) | Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer) | |
The Hershey Company | 2019 Form 10-K | Page 42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Hershey Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of The Hershey Company (the Company) as of December 31, 2017,2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the yearthree years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017,2019 and 2018, and the results of its operations and its cash flows for each of the yearthree years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 27, 201820, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit.audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our auditaudits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our auditaudits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our auditaudits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
The Hershey Company | 2019 Form 10-K | Page 43
| Valuation of Accrued Liabilities for Trade Promotion Activities | ||
| Description of the Matter | The unsettled portion of the Company’s obligation for trade promotion activities at December 31, 2019 was $181.0 million. As discussed in Note 1 of the consolidated financial statements, the Company promotes its products through programs such as, but not limited to, discounts, coupons, rebates, in-store display incentives, and volume-based incentives. The Company recognizes the estimated costs of these trade promotion activities as a component of variable consideration when determining the transaction price. The unsettled portion of the Company’s obligation for trade promotion activities is included in accrued liabilities in the consolidated balance sheet. Auditing management’s calculation of the unsettled portion of the Company’s obligation for trade promotion activities was highly subjective and required significant judgment as a result of the nature of the required estimates and assumptions. In particular, the estimates required an analysis of the programs offered, expectations regarding customer and consumer participation, historical sales and payment trends, and experience with payment patterns associated with similar programs offered in the past. The estimated cost of these programs is sensitive to changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of the controls related to the Company’s calculation of the accrued liabilities for trade promotion activities. For example, we tested controls over management’s review of the completeness of the promotional activities as well as the significant assumptions and the data inputs utilized in the calculations. To test the unsettled portion of the Company’s obligation for trade promotion activities, we performed audit procedures that included, among others, assessing (1) the expected value estimation methodology used by management, (2) whether all material trade promotion activities were properly included in management’s estimate, and (3) the significant assumptions discussed above and the underlying data used in its analyses. Specifically, when evaluating the significant assumptions, we compared them to historical trends, third party data, and assumptions used in prior periods, and inspected management’s retrospective review of actual trade promotion activities compared to previous estimates. We also performed sensitivity analyses of significant assumptions to evaluate the changes in the estimate that would result from changes in the assumptions. | |
| Valuation of Identifiable Intangible Assets in Business Acquisition | ||
| Description of the Matter | As discussed in Note 2 of the consolidated financial statements, the Company completed the acquisition of ONE Brands, LLC on September 23, 2019 for net consideration of $402.2 million in a transaction that was accounted for as a business combination. Auditing the Company’s accounting for its acquisition of ONE Brands, LLC was complex due to the significant estimation uncertainty in the Company’s determination of the fair value of acquired identifiable intangible assets, which principally consisted of trademarks with an estimated fair value of $144.9 million and customer-related intangible assets with an estimated fair value of $58.8 million. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business and due to the limited historical data on which those assumptions were based. The Company used a discounted cash flow model to measure these acquired identifiable intangible assets. The significant assumptions used to estimate the fair value of the trademarks and customer-related intangible assets included discount rates, royalty rates, customer attrition rates, and certain significant assumptions that formed the basis of projected cash flows, including forecasted revenue growth rates and operating margins. These significant assumptions are forward-looking and could be affected by future economic and market conditions. | |
The Hershey Company | 2019 Form 10-K | Page 44
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s valuation of the acquired identifiable intangible assets. For example, we tested controls over the recognition and measurement of these intangible assets, including management’s review of the significant assumptions and methods discussed above. To test the estimated fair value of the acquired trademarks and customer-related intangible assets, we performed audit procedures that included, among others, evaluating the Company’s selection of valuation methods and testing the models and significant assumptions discussed above, including the completeness and accuracy of the underlying data. For example, we compared the significant assumptions to current industry, market, and economic trends and to the historical results of the acquired business. We also performed sensitivity analyses of these significant assumptions to evaluate the changes in the fair value of the acquired identifiable intangible assets that would result from changes in the assumptions. We involved our internal valuation specialists to assist in evaluating the significant assumptions and methodologies used by the Company. | |
| /s/ ERNST & YOUNG LLP |
| We have served as the Company‘s auditor since 2016. |
| Philadelphia, Pennsylvania |
| February |
The Hershey Company | 2019 Form 10-K | Page 45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of The Hershey Company
Opinion on Internal Control over Financial Reporting
We have audited The Hershey Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Hershey Company (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of ONE Brands, LLC (“the Acquired Company”) which is included in the 2019 consolidated financial statements of the Company and constituted 5.1% of total assets as of December 31, 2019 and 0.3% of net sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the Acquired Company.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheetsheets of The Hersheythe Company (the Company) as of December 31, 2017,2019 and 2018, the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for the yearyears ended December 31, 2017,2019 and 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a)(2) and our report dated February 27, 201820, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
The Hershey Company | 2019 Form 10-K | Page 46
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| /s/ ERNST & YOUNG LLP |
| Philadelphia, Pennsylvania |
| February |
The Hershey Company:
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| For the years ended December 31, | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Net sales | $ | 7,515,426 | $ | 7,440,181 | $ | 7,386,626 | $ | 7,986,252 | $ | 7,791,069 | $ | 7,515,426 | ||||||||||||
| Cost of sales | 4,070,907 | 4,282,290 | 4,003,951 | 4,363,774 | 4,215,744 | 4,060,050 | ||||||||||||||||||
| Gross profit | 3,444,519 | 3,157,891 | 3,382,675 | 3,622,478 | 3,575,325 | 3,455,376 | ||||||||||||||||||
| Selling, marketing and administrative expense | 1,913,403 | 1,915,378 | 1,969,308 | 1,905,929 | 1,874,829 | 1,885,492 | ||||||||||||||||||
| Long-lived asset impairment charges | 208,712 | — | — | |||||||||||||||||||||
| Goodwill and indefinite-lived intangible asset impairment charges | — | 4,204 | 280,802 | |||||||||||||||||||||
| Long-lived and intangible asset impairment charges | 112,485 | 57,729 | 208,712 | |||||||||||||||||||||
| Business realignment costs | 47,763 | 32,526 | 94,806 | 8,112 | 19,103 | 47,763 | ||||||||||||||||||
| Operating profit | 1,274,641 | 1,205,783 | 1,037,759 | 1,595,952 | 1,623,664 | 1,313,409 | ||||||||||||||||||
| Interest expense, net | 98,282 | 90,143 | 105,773 | 144,125 | 138,837 | 98,282 | ||||||||||||||||||
| Other (income) expense, net | 65,691 | 16,159 | 30,139 | 71,043 | 74,766 | 104,459 | ||||||||||||||||||
| Income before income taxes | 1,110,668 | 1,099,481 | 901,847 | 1,380,784 | 1,410,061 | 1,110,668 | ||||||||||||||||||
| Provision for income taxes | 354,131 | 379,437 | 388,896 | 234,032 | 239,010 | 354,131 | ||||||||||||||||||
| Net income including noncontrolling interest | 756,537 | 720,044 | 512,951 | 1,146,752 | 1,171,051 | 756,537 | ||||||||||||||||||
| Less: Net loss attributable to noncontrolling interest | (26,444 | ) | — | — | (2,940 | ) | (6,511 | ) | (26,444 | ) | ||||||||||||||
| Net income attributable to The Hershey Company | $ | 782,981 | $ | 720,044 | $ | 512,951 | $ | 1,149,692 | $ | 1,177,562 | $ | 782,981 | ||||||||||||
| Net income per share—basic: | ||||||||||||||||||||||||
| Common stock | $ | 3.79 | $ | 3.45 | $ | 2.40 | $ | 5.64 | $ | 5.76 | $ | 3.79 | ||||||||||||
| Class B common stock | $ | 3.44 | $ | 3.15 | $ | 2.19 | $ | 5.12 | $ | 5.24 | $ | 3.44 | ||||||||||||
| Net income per share—diluted: | ||||||||||||||||||||||||
| Common stock | $ | 3.66 | $ | 3.34 | $ | 2.32 | $ | 5.46 | $ | 5.58 | $ | 3.66 | ||||||||||||
| Class B common stock | $ | 3.44 | $ | 3.14 | $ | 2.19 | $ | 5.10 | $ | 5.22 | $ | 3.44 | ||||||||||||
| Dividends paid per share: | ||||||||||||||||||||||||
| Common stock | $ | 2.548 | $ | 2.402 | $ | 2.236 | $ | 2.990 | $ | 2.756 | $ | 2.548 | ||||||||||||
| Class B common stock | $ | 2.316 | $ | 2.184 | $ | 2.032 | $ | 2.716 | $ | 2.504 | $ | 2.316 | ||||||||||||
See Notes to Consolidated Financial Statements.
The Hershey Company | 2019 Form 10-K | Page 48
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| For the years ended December 31, | For the years ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | Pre-Tax Amount | Tax (Expense) Benefit | After-Tax Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income including noncontrolling interest | $ | 756,537 | $ | 720,044 | $ | 512,951 | $ | 1,146,752 | $ | 1,171,051 | $ | 756,537 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | $ | 19,616 | $ | — | 19,616 | $ | (13,041 | ) | $ | — | (13,041 | ) | $ | (59,707 | ) | $ | — | (59,707 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gains (losses) during period | $ | 13,141 | $ | — | 13,141 | $ | (31,143 | ) | $ | — | (31,143 | ) | $ | 19,616 | $ | — | 19,616 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification to earnings due to the sale of businesses | — | — | — | 25,131 | — | 25,131 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pension and post-retirement benefit plans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial gain (loss) and prior service cost | 28,718 | (10,883 | ) | 17,835 | 20,304 | (7,776 | ) | 12,528 | (5,559 | ) | 2,002 | (3,557 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net actuarial (loss) gain and prior service cost | (9,315 | ) | 2,273 | (7,042 | ) | (39,724 | ) | 10,120 | (29,604 | ) | 28,718 | (10,883 | ) | 17,835 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of tax effects relating to U.S. tax reform | — | — | — | — | (36,535 | ) | (36,535 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification to earnings | 46,305 | (26,497 | ) | 19,808 | 56,604 | (21,653 | ) | 34,951 | 52,469 | (18,910 | ) | 33,559 | 31,341 | (8,256 | ) | 23,085 | 40,421 | (9,986 | ) | 30,435 | 46,305 | (26,497 | ) | 19,808 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow hedges: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gains (losses) on cash flow hedging derivatives | (4,931 | ) | 73 | (4,858 | ) | (52,708 | ) | 18,701 | (34,007 | ) | 61,839 | (23,520 | ) | 38,319 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Losses) gains on cash flow hedging derivatives | (2,515 | ) | 857 | (1,658 | ) | 5,822 | (86 | ) | 5,736 | (4,931 | ) | 73 | (4,858 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of tax effects relating to U.S. tax reform | — | — | — | — | (11,121 | ) | (11,121 | ) | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification to earnings | 14,434 | (3,853 | ) | 10,581 | (16,482 | ) | 7,524 | (8,958 | ) | (36,634 | ) | 13,416 | (23,218 | ) | 8,404 | (2,949 | ) | 5,455 | 5,573 | (2,677 | ) | 2,896 | 14,434 | (3,853 | ) | 10,581 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | $ | 104,142 | $ | (41,160 | ) | 62,982 | $ | (5,323 | ) | $ | (3,204 | ) | (8,527 | ) | $ | 12,408 | $ | (27,012 | ) | (14,604 | ) | $ | 41,056 | $ | (8,075 | ) | 32,981 | $ | 6,080 | $ | (50,285 | ) | (44,205 | ) | $ | 104,142 | $ | (41,160 | ) | 62,982 | ||||||||||||||||||||||||||||||||
| Total comprehensive income including noncontrolling interest | $ | 819,519 | $ | 711,517 | $ | 498,347 | $ | 1,179,733 | $ | 1,126,846 | $ | 819,519 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive loss attributable to noncontrolling interest | (25,604 | ) | (3,664 | ) | (2,152 | ) | (2,773 | ) | (7,682 | ) | (25,604 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income attributable to The Hershey Company | $ | 845,123 | $ | 715,181 | $ | 500,499 | $ | 1,182,506 | $ | 1,134,528 | $ | 845,123 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
The Hershey Company | 2019 Form 10-K | Page 49
THE HERSHEY COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| December 31, | 2017 | 2016 | 2019 | 2018 | ||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 380,179 | $ | 296,967 | $ | 493,262 | $ | 587,998 | ||||||||
| Accounts receivable—trade, net | 588,262 | 581,381 | 568,509 | 594,145 | ||||||||||||
| Inventories | 752,836 | 745,678 | 815,251 | 784,879 | ||||||||||||
| Prepaid expenses and other | 280,633 | 192,752 | 240,080 | 272,159 | ||||||||||||
| Total current assets | 2,001,910 | 1,816,778 | 2,117,102 | 2,239,181 | ||||||||||||
| Property, plant and equipment, net | 2,106,697 | 2,177,248 | 2,153,139 | 2,130,294 | ||||||||||||
| Goodwill | 821,061 | 812,344 | 1,985,955 | 1,801,103 | ||||||||||||
| Other intangibles | 369,156 | 492,737 | 1,341,166 | 1,278,292 | ||||||||||||
| Other assets | 251,879 | 168,365 | 512,000 | 252,984 | ||||||||||||
| Deferred income taxes | 3,023 | 56,861 | 31,033 | 1,166 | ||||||||||||
| Total assets | $ | 5,553,726 | $ | 5,524,333 | $ | 8,140,395 | $ | 7,703,020 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 523,229 | $ | 522,536 | $ | 550,828 | $ | 502,314 | ||||||||
| Accrued liabilities | 676,134 | 750,986 | 702,372 | 679,163 | ||||||||||||
| Accrued income taxes | 17,723 | 3,207 | 19,921 | 33,773 | ||||||||||||
| Short-term debt | 559,359 | 632,471 | 32,282 | 1,197,929 | ||||||||||||
| Current portion of long-term debt | 300,098 | 243 | 703,390 | 5,387 | ||||||||||||
| Total current liabilities | 2,076,543 | 1,909,443 | 2,008,793 | 2,418,566 | ||||||||||||
| Long-term debt | 2,061,023 | 2,347,455 | 3,530,813 | 3,254,280 | ||||||||||||
| Other long-term liabilities | 438,939 | 400,161 | 655,777 | 446,048 | ||||||||||||
| Deferred income taxes | 45,656 | 39,587 | 200,018 | 176,860 | ||||||||||||
| Total liabilities | 4,622,161 | 4,696,646 | 6,395,401 | 6,295,754 | ||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| The Hershey Company stockholders’ equity | ||||||||||||||||
| Preferred stock, shares issued: none in 2017 and 2016 | — | — | ||||||||||||||
| Common stock, shares issued: 299,281,967 in 2017 and 2016 | 299,281 | 299,281 | ||||||||||||||
| Class B common stock, shares issued: 60,619,777 in 2017 and 2016 | 60,620 | 60,620 | ||||||||||||||
| Preferred stock, shares issued: none in 2019 and 2018 | — | — | ||||||||||||||
| Common stock, shares issued: 160,939,248 in 2019 and 299,287,967 in 2018 | 160,939 | 299,287 | ||||||||||||||
| Class B common stock, shares issued: 60,613,777 in 2019 and 2018 | 60,614 | 60,614 | ||||||||||||||
| Additional paid-in capital | 924,978 | 869,857 | 1,142,210 | 982,205 | ||||||||||||
| Retained earnings | 6,371,082 | 6,115,961 | 1,290,461 | 7,032,020 | ||||||||||||
| Treasury—common stock shares, at cost: 149,040,927 in 2017 and 147,642,009 in 2016 | (6,426,877 | ) | (6,183,975 | ) | ||||||||||||
| Treasury—common stock shares, at cost: 12,723,592 in 2019 and 150,172,840 in 2018 | (591,036 | ) | (6,618,625 | ) | ||||||||||||
| Accumulated other comprehensive loss | (313,746 | ) | (375,888 | ) | (323,966 | ) | (356,780 | ) | ||||||||
| Total—The Hershey Company stockholders’ equity | 915,338 | 785,856 | 1,739,222 | 1,398,721 | ||||||||||||
| Noncontrolling interest in subsidiary | 16,227 | 41,831 | 5,772 | 8,545 | ||||||||||||
| Total stockholders’ equity | 931,565 | 827,687 | 1,744,994 | 1,407,266 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 5,553,726 | $ | 5,524,333 | $ | 8,140,395 | $ | 7,703,020 | ||||||||
See Notes to Consolidated Financial Statements.
The Hershey Company | 2019 Form 10-K | Page 50
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| For the years ended December 31, | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||
| Operating Activities | ||||||||||||||||||||||
| Net income including noncontrolling interest | $ | 756,537 | $ | 720,044 | $ | 512,951 | $ | 1,146,752 | $ | 1,171,051 | $ | 756,537 | ||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||
| Depreciation and amortization | 261,853 | 301,837 | 244,928 | 291,544 | 295,144 | 261,853 | ||||||||||||||||
| Stock-based compensation expense | 51,061 | 54,785 | 51,533 | 51,899 | 49,286 | 51,061 | ||||||||||||||||
| Deferred income taxes | 18,582 | (38,097 | ) | (38,537 | ) | (15,072 | ) | 36,255 | 18,582 | |||||||||||||
| Impairment of goodwill, indefinite and long-lived assets (see Notes 3 and 7) | 208,712 | 4,204 | 280,802 | |||||||||||||||||||
| Loss on early extinguishment of debt (see Note 4) | — | — | 28,326 | |||||||||||||||||||
| Impairment of long-lived and intangible assets (see Note 6) | 112,485 | 57,729 | 208,712 | |||||||||||||||||||
| Write-down of equity investments | 66,209 | 43,482 | 39,489 | 50,457 | 50,329 | 66,209 | ||||||||||||||||
| Gain on settlement of SGM liability (see Note 2) | — | (26,650 | ) | — | ||||||||||||||||||
| Other | 77,291 | 51,375 | 28,467 | 57,426 | 37,278 | 77,291 | ||||||||||||||||
| Changes in assets and liabilities, net of business acquisitions and divestitures: | ||||||||||||||||||||||
| Accounts receivable—trade, net | (6,881 | ) | 21,096 | (24,440 | ) | 40,252 | 8,585 | (6,881 | ) | |||||||||||||
| Inventories | (71,404 | ) | 13,965 | 52,049 | (21,194 | ) | (12,746 | ) | (71,404 | ) | ||||||||||||
| Prepaid expenses and other current assets | 18,214 | (42,955 | ) | 118,007 | 13,593 | (39,899 | ) | 18,214 | ||||||||||||||
| Accounts payable and accrued liabilities | (52,960 | ) | (63,467 | ) | 9,574 | 41,101 | (100,252 | ) | (52,960 | ) | ||||||||||||
| Accrued income taxes | (71,027 | ) | (937 | ) | 36,848 | (9,544 | ) | 75,568 | (71,027 | ) | ||||||||||||
| Contributions to pension and other benefit plans | (56,433 | ) | (41,697 | ) | (53,273 | ) | (20,134 | ) | (25,864 | ) | (56,433 | ) | ||||||||||
| Other assets and liabilities | 49,761 | 16,443 | (30,413 | ) | 24,308 | (2,471 | ) | 49,761 | ||||||||||||||
| Net cash provided by operating activities | 1,249,515 | 1,013,428 | 1,256,311 | 1,763,873 | 1,599,993 | 1,249,515 | ||||||||||||||||
| Investing Activities | ||||||||||||||||||||||
| Capital additions (including software) | (257,675 | ) | (269,476 | ) | (356,810 | ) | (318,192 | ) | (328,601 | ) | (257,675 | ) | ||||||||||
| Proceeds from sales of property, plant and equipment | 7,609 | 3,651 | 1,205 | |||||||||||||||||||
| Proceeds from sale of business | — | — | 32,408 | |||||||||||||||||||
| Proceeds from sales of property, plant and equipment and other long-lived assets | 28,131 | 49,759 | 7,609 | |||||||||||||||||||
| Proceeds from sales of businesses, net of cash and cash equivalents divested | — | 167,048 | — | |||||||||||||||||||
| Equity investments in tax credit qualifying partnerships | (78,598 | ) | (44,255 | ) | (30,720 | ) | (80,230 | ) | (52,641 | ) | (78,598 | ) | ||||||||||
| Business acquisitions, net of cash and cash equivalents acquired | — | (285,374 | ) | (218,654 | ) | (402,160 | ) | (1,338,459 | ) | — | ||||||||||||
| Sale of short-term investments | — | — | 95,316 | |||||||||||||||||||
| Other investing activities | (8,029 | ) | — | — | ||||||||||||||||||
| Net cash used in investing activities | (328,664 | ) | (595,454 | ) | (477,255 | ) | (780,480 | ) | (1,502,894 | ) | (328,664 | ) | ||||||||||
| Financing Activities | ||||||||||||||||||||||
| Net (decrease) increase in short-term debt | (81,426 | ) | 275,607 | 10,720 | (1,168,205 | ) | 645,805 | (81,426 | ) | |||||||||||||
| Long-term borrowings | 954 | 792,953 | 599,031 | 989,618 | 1,199,845 | 954 | ||||||||||||||||
| Repayment of long-term debt | — | (500,000 | ) | (355,446 | ) | |||||||||||||||||
| Payment of SGM liability (see Note 2) | — | (35,762 | ) | — | ||||||||||||||||||
| Repayment of long-term debt and finance leases | (6,151 | ) | (910,844 | ) | — | |||||||||||||||||
| Repayment of tax receivable obligation | — | (72,000 | ) | — | ||||||||||||||||||
| Cash dividends paid | (526,272 | ) | (499,475 | ) | (476,132 | ) | (610,312 | ) | (562,521 | ) | (526,272 | ) | ||||||||||
| Repurchase of common stock | (300,312 | ) | (592,550 | ) | (582,623 | ) | (527,211 | ) | (247,500 | ) | (300,312 | ) | ||||||||||
| Exercise of stock options | 63,288 | 94,831 | 55,703 | 240,806 | 63,323 | 63,288 | ||||||||||||||||
| Other | — | — | (48,270 | ) | ||||||||||||||||||
| Net cash used in financing activities | (843,768 | ) | (464,396 | ) | (797,017 | ) | ||||||||||||||||
| Net cash (used in) provided by financing activities | (1,081,455 | ) | 116,108 | (843,768 | ) | |||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 6,129 | (3,140 | ) | (10,364 | ) | 3,326 | (5,388 | ) | 6,129 | |||||||||||||
| Increase (decrease) in cash and cash equivalents | 83,212 | (49,562 | ) | (28,325 | ) | |||||||||||||||||
| (Decrease) increase in cash and cash equivalents | (94,736 | ) | 207,819 | 83,212 | ||||||||||||||||||
| Cash and cash equivalents, beginning of period | 296,967 | 346,529 | 374,854 | 587,998 | 380,179 | 296,967 | ||||||||||||||||
| Cash and cash equivalents, end of period | $ | 380,179 | $ | 296,967 | $ | 346,529 | $ | 493,262 | $ | 587,998 | $ | 380,179 | ||||||||||
| Supplemental Disclosure | ||||||||||||||||||||||
| Interest paid (excluding loss on early extinguishment of debt in 2015) | $ | 101,874 | $ | 90,951 | $ | 88,448 | ||||||||||||||||
| Interest paid | $ | 139,504 | $ | 132,486 | $ | 101,874 | ||||||||||||||||
| Income taxes paid | 351,832 | 425,539 | 368,926 | 238,067 | 118,842 | 351,832 | ||||||||||||||||
See Notes to Consolidated Financial Statements.
The Hershey Company | 2019 Form 10-K | Page 51
THE HERSHEY COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
| Preferred Stock | Common Stock | Class B Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Common Stock | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests in Subsidiaries | Total Stockholders’ Equity | Preferred Stock | Common Stock | Class B Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Common Stock | Accumulated Other Comprehensive Income (Loss) | Noncontrolling Interests in Subsidiaries | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2015 | $ | — | $ | 299,281 | $ | 60,620 | $ | 754,186 | $ | 5,860,784 | $ | (5,161,236 | ) | $ | (358,573 | ) | $ | 64,468 | $ | 1,519,530 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 512,951 | 512,951 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (12,452 | ) | (2,152 | ) | (14,604 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock, $2.236 per share | (352,953 | ) | (352,953 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B Common Stock, $2.032 per share | (123,179 | ) | (123,179 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 50,722 | 50,722 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | 8,204 | 71,500 | 79,704 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (582,623 | ) | (582,623 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of reclassifications to and purchase of redeemable noncontrolling interest | (29,235 | ) | (13,428 | ) | (42,663 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings of noncontrolling interests | 577 | 577 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2015 | — | 299,281 | 60,620 | 783,877 | 5,897,603 | (5,672,359 | ) | (371,025 | ) | 49,465 | 1,047,462 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | 720,044 | 720,044 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | (4,863 | ) | (3,664 | ) | (8,527 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (including dividend equivalents): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock, $2.402 per share | (369,292 | ) | (369,292 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B Common Stock, $2.184 per share | (132,394 | ) | (132,394 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 54,429 | 54,429 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | 31,551 | 80,934 | 112,485 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (592,550 | ) | (592,550 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss of noncontrolling interest | (3,970 | ) | (3,970 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | — | 299,281 | 60,620 | 869,857 | 6,115,961 | (6,183,975 | ) | (375,888 | ) | 41,831 | 827,687 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, January 1, 2017 | $ | — | $ | 299,281 | $ | 60,620 | $ | 869,857 | $ | 6,115,961 | $ | (6,183,975 | ) | $ | (375,888 | ) | $ | 41,831 | $ | 827,687 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 782,981 | (26,444 | ) | 756,537 | 782,981 | (26,444 | ) | 756,537 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 62,142 | 840 | 62,982 | 62,142 | 840 | 62,982 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (including dividend equivalents): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock, $2.548 per share | (387,466 | ) | (387,466 | ) | (387,466 | ) | (387,466 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B Common Stock, $2.316 per share | (140,394 | ) | (140,394 | ) | (140,394 | ) | (140,394 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 49,243 | 49,243 | 49,243 | 49,243 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | 5,878 | 57,410 | 63,288 | 5,878 | 57,410 | 63,288 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (300,312 | ) | (300,312 | ) | (300,312 | ) | (300,312 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | $ | — | $ | 299,281 | $ | 60,620 | $ | 924,978 | $ | 6,371,082 | $ | (6,426,877 | ) | $ | (313,746 | ) | $ | 16,227 | $ | 931,565 | — | 299,281 | 60,620 | 924,978 | 6,371,082 | (6,426,877 | ) | (313,746 | ) | 16,227 | 931,565 | |||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 1,177,562 | (6,511 | ) | 1,171,051 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | 4,622 | (1,171 | ) | 3,451 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (including dividend equivalents): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock, $2.756 per share | (412,491 | ) | (412,491 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B Common Stock, $2.504 per share | (151,789 | ) | (151,789 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Class B Common Stock into Common Stock | 6 | (6 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 49,656 | 49,656 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | 7,571 | 55,752 | 63,323 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (247,500 | ) | (247,500 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of tax effects relating to U.S. tax reform | 47,656 | (47,656 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | — | 299,287 | 60,614 | 982,205 | 7,032,020 | (6,618,625 | ) | (356,780 | ) | 8,545 | 1,407,266 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | 1,149,692 | (2,940 | ) | 1,146,752 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | 32,814 | 167 | 32,981 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends (including dividend equivalents): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock, $2.990 per share | (445,618 | ) | (445,618 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class B Common Stock, $2.716 per share | (164,627 | ) | (164,627 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | 50,732 | 50,732 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options and incentive-based transactions | 109,273 | 131,533 | 240,806 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (527,211 | ) | (527,211 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of treasury common stock | (138,348 | ) | (6,284,919 | ) | 6,423,267 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impact of ASU 2016-02 related to leases | 3,913 | 3,913 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | — | $ | 160,939 | $ | 60,614 | $ | 1,142,210 | $ | 1,290,461 | $ | (591,036 | ) | $ | (323,966 | ) | $ | 5,772 | $ | 1,744,994 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements.
The Hershey Company | 2019 Form 10-K | Page 52
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share data or if otherwise indicated)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
The Hershey Company together with its wholly-owned subsidiaries and entities in which it has a controlling interest,(the (the “Company,” “Hershey,” “we” or “us”) is a global confectionery leader known for its branded portfolio of chocolate, sweets, mints and other great-tasting snacks. The Company has more than 80 brands worldwide including such iconic brand names as Hershey’s, Reese’s, Kisses, Jolly Rancher and Ice Breakers, which are marketed, sold and distributed in approximately 8085 countries worldwide. HersheyHershey's structure is focuseddesigned to ensure continued focus on growing its presenceNorth America, coupled with an emphasis on profitable growth in keyour focus international markets while continuing to build its competitive advantage in North America.markets. The Company currently operates through two2 reportable segments that are aligned with its management structure and the key markets it serves: North America and International and Other. For additional information on our segment presentation, see Note 11.13.
Basis of Presentation
Our consolidated financial statements include the accounts of The Hershey Company and its majority-owned or controlled subsidiaries. Intercompany transactions and balances have been eliminated. We have a controlling financial interest if we own a majority of the outstanding voting common stock and minority shareholders do not have substantive participating rights, we have significant control through contractual or economic interests in which we are the primary beneficiary or we have the power to direct the activities that most significantly impact the entity's economic performance. Net income (loss) attributable to noncontrolling interests in 2016 and 2015 was not considered significant and was recorded within selling, marketing and administrative expense in the Consolidated Statements of Income. See Note 12 for additional information on our noncontrolling interest. We use the equity method of accounting when we have a 20% to 50% interest in other companies and exercise significant influence. See Note 14 for information on our noncontrolling interest. In addition, we use the equity method of accounting for our investments in partnership entities which make equity investments in projects eligible to receive federal historic and energy tax credits. See Note 810 for additional information on our equity investments in partnership entities qualifying for tax credits. Other investments that are not controlled, and over which we do not have the ability to exercise significant influence, are accounted for under the cost method. Both equity and cost method investments are included as Other non-current assets in the Consolidated Balance Sheets.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. Our significant estimates and assumptions include, among others, pension and other post-retirement benefit plan assumptions, valuation assumptions of goodwill and other intangible assets, useful lives of long-lived assets, marketing and trade promotion accruals and income taxes. These estimates and assumptions are based on management’s best judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and the effects of any revisions are reflected in the consolidated financial statements in the period that they are determined. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates.
Revenue Recognition
fulfillment of customer orders for the purchase of our products, including chocolate, sweets, mints and other grocery and snack offerings. Net sales include revenue fromreflect the sale of finished goods and royalty income, net of allowancestransaction prices for these contracts based on our selling list price which is then reduced by estimated costs for trade promotions,promotional programs, consumer coupon programs and other sales incentives, and allowances and discounts associated with aged or potentially unsaleable products. Trade promotionsWe recognize revenue at the point in time that control of the ordered product(s) is transferred to the customer, which is typically upon delivery to the customer or other customer-designated delivery point. Amounts billed and sales incentives primarily include reduced price features,due from our customers are classified as accounts receivables on the balance sheet and require payment on a short-term basis.
The Hershey Company | 2019 Form 10-K | Page 53
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
We also recognize a minor amount of royalty income (less than 1% of our consolidated net sales) from sales-based licensing arrangements, pursuant to which revenue is recognized as the third-party licensee sales occur. Shipping and handling costs incurred to deliver product to the customer are recorded within cost of sales. Sales, use, value-addedvalue add, and other excise taxes we collect concurrent with revenue producing activities are not recognized inexcluded from revenue.
The majority of our products are confectionery or confectionery-based and, therefore, exhibit similar economic characteristics, as they are based on similar ingredients and are marketed and sold through the same channels to the same customers. In connection with our recent acquisitions, we have expanded our portfolio of snacking products, which also exhibit similar economic characteristics to our confectionery products and are sold through the same channels to the same customers. See Note 13 for revenues reported by geographic segment, which is consistent with how we organize and manage our operations, as well as product line net sales information.
In 2019, 2018 and 2017, 2016approximately 30%, 28% and 2015, approximately 29%, 25% and 26%, respectively, of our consolidated net sales were made to McLane Company, Inc., one of the largest wholesale distributors in the United States to convenience stores, drug stores, wholesale clubs and mass merchandisers and the primary distributor of our products to Wal-Mart Stores, Inc.
Cost of Sales
Cost of sales represents costs directly related to the manufacture and distribution of our products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling, warehousing and the depreciation of manufacturing, warehousing and distribution facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes.
Selling, Marketing and Administrative Expense
Selling, marketing and administrative expense (“SM&A”) represents costs incurred in generating revenues and in managing our business. Such costs include advertising and other marketing expenses, selling expenses, research and development costs, administrative and other indirect overhead costs, amortization of capitalized software and intangible assets and depreciation of administrative facilities. Research and development costs, charged to expense as incurred, totaled $37,146 in 2019, $38,521 in 2018 and $45,850 in 2017, $47,268 in 2016 and $49,281 in 2015.2017. Advertising expense is also charged to expense as incurred and totaled $513,302 in 2019, $479,908 in 2018 and $541,293 in 2017, $521,479 in 2016 and $561,644 in 2015.2017. Prepaid advertising expense was $56$242 and $651$594 as of December 31, 20172019 and 2016,2018, respectively.
Cash Equivalents
Cash equivalents consist of highly liquid debt instruments, time deposits and money market funds with original maturities of three months or less. The fair value of cash and cash equivalents approximates the carrying amount.
The Hershey Company | 2019 Form 10-K | Page 54
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Accounts Receivable—Trade
In the normal course of business, we extend credit to customers that satisfy pre-defined credit criteria, based upon the results of our recurring financial account reviews and our evaluation of current and projected economic conditions. Our primary concentrationsconcentration of credit risk areis associated with McLane Company, Inc. and Target Corporation, two customers, one customer served principally by our North America segment. As of December 31, 2017,2019, McLane Company, Inc. accounted for approximately 24% of our total accounts receivable. Target Corporation accounted for approximately 11% of our total accounts receivable as of December 31, 2017. No other customer accounted for more than 10% of our year-end accounts receivable. We believe that we have little concentration of credit risk associated with the remainder of our customer base. Accounts receivable-trade in the Consolidated Balance Sheets is presented net of allowances for bad debts and anticipated discounts of $41,792$24,966 and $40,153$24,610 at December 31, 20172019 and 2016,2018, respectively.
Inventories
Inventories are valued at the lower of cost or market value, adjusted for the value of inventory that is estimated to be excess, obsolete or otherwise unsaleable. As of December 31, 2017,2019, approximately 59%61% of our inventories, representing the majority of our U.S. inventories, were valued under the last-in, first-out (“LIFO”) method. The remainder of our inventories in the U.S. and inventories for our international businesses arewere valued at the lower of first-in, first-out (“FIFO”) cost or market.net realizable value. LIFO cost of inventories valued using the LIFO method was $443,492$501,459 as of December 31, 20172019 and $402,919$466,911 as of December 31, 2016.2018. The adjustment to LIFO, as shown in Note 16,18, approximates the excess of replacement cost over the stated LIFO inventory value. The net impact of LIFO acquisitions and liquidations was not material to 2017, 20162019, 2018 or 2015.
2017.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets, as follows: 3 to 15 years for machinery and equipment; and 25 to 40 years for buildings and related improvements. At December 31, 20172019 and December 31, 2016,2018, property, plant and equipment includesincluded assets under finance lease (formerly capital leaselease) arrangements with net book values totaling $116,843$93,917 and $104,503,$110,249, respectively. Total depreciation expense for the years ended December 31, 2019, 2018 and 2017 2016was $218,096, $231,012 and 2015 was $211,592, $231,735 and $197,054, respectively, and includesincluded depreciation on assets recorded under capitalfinance lease arrangements. Maintenance and repairs are expensed as incurred. We capitalize applicable interest charges incurred during the construction of new facilities and production lines and amortize these costs over the assets’ estimated useful lives.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We measure the recoverability of assets to be held and used by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated. If these assets are considered to be impaired, we measure impairment as the amount by which the carrying amount of the assets exceeds the fair value of the assets. We report assets held for sale or disposal at the lower of the carrying amount or fair value less cost to sell.
We assess asset retirement obligations on a periodic basis and recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We capitalize associated asset retirement costs as part of the carrying amount of the long-lived asset.
Computer Software
We capitalize costs associated with software developed or obtained for internal use when both the preliminary project stage is completed and it is probable the software being developed will be completed and placed in service. Capitalized costs include only (i) external direct costs of materials and services consumed in developing or obtaining internal-use software, (ii) payroll and other related costs for employees who are directly associated with and who devote time to the internal-use software project and (iii) interest costs incurred, when material, while developing internal-use software. We cease capitalization of such costs no later than the point at which the project is substantially complete and ready for its intended purpose.
The unamortized amount of capitalized software totaled $104,881$153,842 and $95,301$126,379 at December 31, 20172019 and 2016,2018, respectively. We amortize software costs using the straight-line method over the expected life of the software, generally 3 to 7 years. Accumulated amortization of capitalized software was $296,042$338,449 and $322,807$316,710 as of December 31, 20172019 and 2016,2018, respectively. Such amounts are recorded within other assets in the Consolidated Balance Sheets.
The Hershey Company | 2019 Form 10-K | Page 55
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
We review the carrying value of software and development costs for impairment in accordance with our policy pertaining to the impairment of long-lived assets.
Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually or more often if indicators of a potential impairment are present. Our annual impairment tests are conducted at the beginning of the fourth quarter. We test goodwill for impairment by performing either a qualitative or quantitative assessment. If we choose to perform a qualitative assessment, we evaluate economic, industry and company-specific factors in assessing the fair value of the related reporting unit. If we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying value, a quantitative test is then performed. Otherwise, no further testing is required. For those reporting units tested using a quantitative approach, we compare the fair value of each reporting unit with the carrying amount of the reporting unit, including goodwill. If the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, impairment is indicated, requiring recognition of a goodwill impairment charge for the differential (up to the carrying value of goodwill). We test individual indefinite-lived intangible assets by comparing the estimated fair values with the book values of each asset.
We determine the fair value of our reporting units and indefinite-lived intangible assets using an income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets based on the present value of estimated future cash flows. Considerable management judgment is necessary to
evaluate the impact of operating and macroeconomic changes and to estimate the future cash flows used to measure fair value. Our estimates of future cash flows consider past performance, current and anticipated market conditions and internal projections and operating plans which incorporate estimates for sales growth and profitability, and cash flows associated with taxes and capital spending. Additional assumptions include forecasted growth rates, estimated discount rates, which may be risk-adjusted for the operating market of the reporting unit, and estimated royalty rates that would be charged for comparable branded licenses. We believe such assumptions also reflect current and anticipated market conditions and are consistent with those that would be used by other marketplace participants for similar valuation purposes. Such assumptions are subject to change due to changing economic and competitive conditions. See Note 3 for additional information regarding the results of impairment tests.
The cost of intangible assets with finite useful lives is amortized on a straight-line basis. Our finite-lived intangible assets consist primarily of certain trademarks, customer-related intangible assets and patents obtained through business acquisitions,acquisitions. The weighted-average amortization period for our finite-lived intangible assets is approximately 33 years, which are amortized over estimated useful lives of approximately 25 years, 15 years, and 5 years, respectively.is primarily driven by recently acquired trademarks. If certain events or changes in operating conditions indicate that the carrying value of these assets, or related asset groups, may not be recoverable, we perform an impairment assessment and may adjust the remaining useful lives. See Note 3 for additional information regarding the results of impairment tests.
Currency Translation
The financial statements of our foreign entities with functional currencies other than the U.S. dollar are translated into U.S. dollars, with the resulting translation adjustments recorded as a component of other comprehensive income (loss). Assets and liabilities are translated into U.S. dollars using the exchange rates in effect at the balance sheet date, while income and expense items are translated using the average exchange rates during the period.
Derivative Instruments
We use derivative instruments principally to offset exposure to market risks arising from changes in commodity prices, foreign currency exchange rates and interest rates. See Note 5 for additional information on our risk management strategy and the types of instruments we use.
Derivative instruments are recognized on the balance sheetConsolidated Balance Sheets at their fair values. When we become party to a derivative instrument and intend to apply hedge accounting, we designate the instrument for financial reporting purposes as a cash flow or fair value hedge. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether we have designated it and it qualified as part of a hedging relationship, as noted below:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in accumulated other comprehensive income (“AOCI”) to the extent effective and reclassified into earnings in the same period or periods during which the transaction hedged by that derivative also affects earnings.
Changes in the fair value of a derivative that is designated as a fair value hedge, along with the offsetting loss or gain on the hedged asset or liability that is attributable to the risk being hedged, are recorded in earnings, thereby reflecting in earnings the net extent to which the hedge is not effective in achieving offsetting changes in fair value.
Changes in the fair value of a derivative not designated as a hedging instrument are recognized in earnings in cost of sales or SM&A, consistent with the related exposure.
For derivatives designated as hedges, we assess, both at the hedge's inception and on an ongoing basis, whether they are highly effective in offsetting changes in fair values or cash flows of hedged items. The ineffective portion, if any, is recorded directly in earnings. In addition, if we determine that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively.
We do not hold or issue derivative instruments for trading or speculative purposes and are not a party to any instruments with leverage or prepayment features.
Cash flows related to the derivative instruments we use to manage interest, commodity or other currency exposures are classified as operating activities.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In MarchFebruary 2016, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU") No. 2016-09, Compensation—Stock Compensation2016-02, Leases (Topic 718): Improvements842). This ASU requires lessees to Employee Share-Based Payment Accounting. Werecognize most leases on their balance sheets as lease liabilities with corresponding right-of-use ("ROU") assets. The Company adopted the standard as of January 1, 2019, using a modified retrospective approach and applying the standard’s transition provisions at January 1, 2019, the effective date.
We elected the package of this ASUpractical expedients permitted under the transition guidance, which among other things, allows us to carryforward the historical lease classification. In addition, we made accounting policy elections to combine the lease and non-lease components for asset categories that support selling, marketing and general administrative activities. These asset categories comprise the majority of our leases. Finally, we made elections to exclude from balance sheet reporting those leases with initial terms of 12 months or less.
Adoption of the new standard resulted in the first quarterrecording of 2017. This update principally affectsoperating lease ROU assets and lease liabilities of $227,258 and $216,966, respectively, with the recognition of excess tax benefitsdifference largely due to prepaid and deficiencies anddeferred rent that were reclassified to the cash flow classification of share-based compensation-related transactions. The requirement to recognize excess tax benefits and deficiencies as income tax expense or benefitROU asset value. In addition, we derecognized a build-to-suit arrangement in accordance with the income statement was applied prospectively, with a benefit of $11,745 recognized during the year ended December 31, 2017. Additionally, within the Consolidated Statement of Cash Flows, the impact of the adoptiontransition requirements, which resulted in a $24,901 increase inan adjustment to retained earnings of $3,913. The standard did not materially affect our consolidated net income or cash flow from operating activities and a corresponding decrease in net cash flow from financing activitiesflows. See Note 7 for the year ended December 31, 2017. These classification requirements were adopted retrospectively to the Consolidated Statement of Cash Flows. As a result, for the year ended December 31, 2016, the impact resulted in a $29,953 increase in net cash flow from operating activities and a corresponding $29,953 decrease in net cash flow from financing activities. For the year ended December 31, 2015, the impact resulted in a $41,855 increase in net cash flow from operating activities and a corresponding $41,855 decrease in net cash flow from financing activities.further details.
In January 2017,August 2018, the FASB issued ASU No. 2017-04, Intangibles-Goodwill2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans, which modifies the disclosure requirements for defined benefit pension plans and Other (Topic 350): Simplifying the Test for Goodwill Impairment. Thisother post-retirement plans. ASU eliminated Step 2 from the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. ASU 2017-042018-14 is effective for annual or any interim goodwill impairment tests in fiscal yearsperiods beginning after December 15, 2019. Entities are permitted2020, with early adoption permitted. The amendments in this ASU should be applied on a retrospective basis to adopt the standardall periods presented. We elected to early for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We early-adoptedadopt the provisions of this ASU in the fourth quarter of 2017 in conjunction with our annual impairment testing. The adoption had no impact on our Consolidated Financial Statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends ASC 815.815 – Derivatives and Hedging. The purpose of this ASU is to better align accounting rules with a company’s risk management activities and financial reporting for hedging relationships, better reflect economic results of hedging in financial statements, simplify hedge accounting requirements and improve the disclosures of hedging arrangements. We adopted the provisions of this ASU in the first
The amendment should be appliedHershey Company | 2019 Form 10-K | Page 57
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
quarter of 2019 using thea modified retrospective transition method.approach. Adoption of the new standard did not have a material impact on our consolidated financial statements.
In June 2018, the FASB issued ASU 2017-12No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance consistent with accounting for employee share-based compensation. We adopted the provisions of this ASU in the first quarter of 2019. Adoption of the new standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 20182019 and interim periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods with early adoption permitted.presented. We intend to adopt the provisions of this ASU in the first quarter of 2018. We believe the2020. Based on our assessment, adoption of the new standard willis not expected to have a material impact on our Consolidated Financial Statements.consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We intend to adopt the provisions of this ASU in the first quarter of 2020. Based on our assessment, adoption of the new standard is not expected to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We intend to adopt the provisions of this ASU in the first quarter of 2020 on a prospective basis. Based on our assessment, adoption of the new standard is not expected to have a material impact on our consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. We are currently evaluating the impact of the new standard on our consolidated financial statements and related disclosures.
No other new accounting pronouncement issued or effective during the fiscal year had or is expected to have a material impact on our consolidated financial statements or disclosures.
The Hershey Company | 2019 Form 10-K | Page 58
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
2. BUSINESS ACQUISITIONS AND DIVESTITURES
Acquisitions of businesses are accounted for as purchases and, accordingly, the results of operations of the businesses acquired have been included in the consolidated financial statements since the respective dates of the acquisitions. The purchase price for each acquisition is allocated to the assets acquired and liabilities assumed.
2019 Activity
On April 26, 2016,September 23, 2019, we completed the acquisition of all of the outstanding shares of Ripple Brand Collective,ONE Brands, LLC ("ONE Brands"), previously a privately held company that owned the barkTHINS mass premium chocolate snacking brand. The barkTHINS brand is largely soldsells a line of low-sugar, high-protein nutrition bars to retailers and distributors in the United States, with the ONE Bar as its primary product. The purchase consideration for ONE Brands totaled $402,160 and consisted of cash on hand and short-term borrowings. Acquisition-related costs for the ONE Brands acquisition were immaterial.
The acquisition has been accounted for as a purchase and, accordingly, ONE Brands' results of operations have been included within the North America segment results in take-home resealable packages and is available inour consolidated financial statements since the club channel, as well as select natural and conventional grocers.
date of acquisition. The purchase consideration was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:
| Initial Allocation (1) | Adjustments | Updated Allocation | ||||||||||||
| Goodwill | $ | 128,110 | $ | 178,179 | $ | 1,061 | $ | 179,240 | ||||||
| Trademarks | 91,200 | |||||||||||||
| Other intangible assets | 60,900 | 206,800 | — | 206,800 | ||||||||||
| Other assets, primarily current assets, net of cash acquired totaling $674 | 12,375 | |||||||||||||
| Current liabilities | (7,211 | ) | ||||||||||||
| Other assets acquired, primarily current assets | 25,760 | 166 | 25,926 | |||||||||||
| Other liabilities assumed, primarily current liabilities | (9,278 | ) | (528 | ) | (9,806 | ) | ||||||||
| Net assets acquired | $ | 285,374 | $ | 401,461 | $ | 699 | $ | 402,160 | ||||||
| (1) | As reported in the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 29, 2019. |
The purchase price allocation presented above is preliminary. The measurement period adjustments to the initial allocation are based on more detailed information obtained about the specific assets acquired and liabilities assumed. We continue to refine our purchase price allocation, including goodwill, and expect to finalize during the first half of 2020.
Goodwill is calculatedwas determined as the excess of the purchase price over the fair value of the net assets acquired.acquired (including the identifiable intangible assets). The goodwill resultingderived from thethis acquisition is attributable primarilyexpected to be deductible for tax purposes and reflects the value of leveraging our brand building expertise, consumer insights, supply chain capabilities and retail relationships to accelerate growth and access to barkTHINSthe portfolio of ONE Brands products. Acquired
Other intangible assets include trademarks valued at $144,900, customer relationships valued at $58,800 and covenants not to compete valued at $3,100. Trademarks were assigned an estimated useful life of 33 years, customer relationships were assigned estimated useful lives of 27ranging from 17 to 19 years while other intangibles, including customer relationships and covenants not to compete were assigned an estimated useful lives ranginglife of 4 years.
The Hershey Company | 2019 Form 10-K | Page 59
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
2018 Activity
Pirate Brands
On October 17, 2018, we completed the acquisition of Pirate Brands, which includes the Pirate's Booty, Smart Puffs and Original Tings brands, from 2B&G Foods, Inc. Pirate Brands offers baked, trans fat free and gluten free snacks and is available in a wide range of food distribution channels in the United States. The purchase consideration for Pirate Brands totaled $423,002 and consisted of short-term borrowings and cash on hand. Acquisition-related costs for the Pirate Brands acquisition were immaterial.
The acquisition has been accounted for as a purchase and, accordingly, Pirate Brands' results of operations have been included within the North America segment results in our consolidated financial statements since the date of acquisition. The purchase price allocation presented below has been finalized as of the end of the fourth quarter of
2018. The purchase consideration was allocated to 14 years.assets acquired and liabilities assumed based on their respective fair values as follows:
| Inventories | $ | 4,663 | |
| Property, plant and equipment, net | 48 | ||
| Goodwill | 129,991 | ||
| Other intangible assets | 289,300 | ||
| Accrued liabilities | (1,000 | ) | |
| Net assets acquired | $ | 423,002 | |
Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets). The recorded goodwill trademarks and other intangibles arederived from this acquisition is expected to be deductible for tax purposes and reflects the value of leveraging the Company's resources to expand the distribution locations and customer base for the Pirate Brands' products.
Other intangible assets includes trademarks valued at $272,000 and customer relationships valued at $17,300. Trademarks were assigned estimated useful lives of 45 years and customer relationships were assigned estimated useful lives ranging from 16 to 18 years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Amplify Snack Brands, Inc.
On January 31, 2018, we completed the acquisition of all of the outstanding shares of Amplify Snack Brands, Inc. (“Amplify”), previously a publicly traded company based in Austin, Texas that owns several popular better-for-you snack brands such as SkinnyPop, Oatmega and Paqui. Amplify's anchor brand, SkinnyPop, is a market-leading ready-to-eat popcorn brand and is available in a wide range of food distribution channels in the United States. Total consideration of $968,781 included payment of $12.00 per share for Amplify's outstanding common stock (for a total of $907,766), as well as payment of Amplify's transaction related expenses, including accelerated equity compensation, consultant fees and other deal costs. The business enables us to capture more consumer snacking occasions by contributing a new portfolio of brands.
The acquisition has been accounted for as a purchase and, accordingly, Amplify's results of operations have been included within the North America segment results in our consolidated financial statements since the date of acquisition. The purchase price allocation presented below has been finalized as of the end of the fourth quarter of
2018. The purchase consideration, net of cash acquired totaling $53,324, was allocated to assets acquired and liabilities assumed based on their respective fair values as follows:
| Accounts receivable | $ | 40,763 | |
| Other current assets | 34,593 | ||
| Property, plant and equipment, net | 67,989 | ||
| Goodwill | 966,389 | ||
| Other intangible assets | 682,000 | ||
| Other non-current assets | 1,049 | ||
| Accounts payable | (32,394 | ) | |
| Accrued liabilities | (132,519 | ) | |
| Current debt | (610,844 | ) | |
| Other current liabilities | (2,931 | ) | |
| Non-current deferred income taxes | (93,489 | ) | |
| Other long-term liabilities | (5,149 | ) | |
| Net assets acquired | $ | 915,457 | |
In connection with the acquisition, the Company agreed to pay in full all outstanding debt owed by Amplify under its existing credit agreement as of January 31, 2018, as well as the amount due under Amplify's existing tax receivable obligation. The Company funded the acquisition and repayment of the acquired debt utilizing proceeds from the issuance of commercial paper.
Goodwill was determined as the excess of the purchase price over the fair value of the net assets acquired (including the identifiable intangible assets) and is not expected to be deductible for tax purposes. The goodwill that resulted from the acquisition is attributable primarily to cost-reduction synergies as Amplify leverages Hershey's resources, expertise and capability-building.
Other intangible assets includes trademarks valued at $648,000 and customer relationships valued at $34,000. Trademarks were assigned estimated useful lives ranging from 28 to 38 years and customer relationships were assigned estimated useful lives ranging from 14 to 18 years.
The Company incurred acquisition-related costs of $20,577 related to the acquisition of Amplify, the majority of which were incurred during the first quarter of 2018. Acquisition-related costs consisted primarily of legal fees, consultant fees, valuation fees and other deal costs and are recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Income.
The Hershey Company | 2019 Form 10-K | Page 61
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| 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 | |
3. GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying value of goodwill by reportable segment for the years ended December 31, 20172019 and 20162018 are as follows:
| North America | International and Other | Total | ||||||||||
| Goodwill | $ | 804,902 | $ | 378,507 | $ | 1,183,409 | ||||||
| Accumulated impairment loss | (4,973 | ) | (357,375 | ) | (362,348 | ) | ||||||
| Balance at January 1, 2018 | 799,929 | 21,132 | 821,061 | |||||||||
| Acquired during the period (see Note 2) | 1,069,379 | — | 1,069,379 | |||||||||
| Measurement period adjustments (see Note 2) | 27,001 | — | 27,001 | |||||||||
| Divested during the period (see Note 8) | (98,379 | ) | — | (98,379 | ) | |||||||
| Foreign currency translation | (15,085 | ) | (2,874 | ) | (17,959 | ) | ||||||
| Balance at December 31, 2018 | 1,782,845 | 18,258 | 1,801,103 | |||||||||
| Acquired during the period (see Note 2) | 178,179 | — | 178,179 | |||||||||
| Measurement period adjustments (see Note 2) | 1,061 | — | 1,061 | |||||||||
| Foreign currency translation | 5,381 | 231 | 5,612 | |||||||||
| Balance at December 31, 2019 | $ | 1,967,466 | $ | 18,489 | $ | 1,985,955 | ||||||
| North America | International and Other | Total | ||||||||||
| Goodwill | $ | 667,056 | $ | 379,544 | $ | 1,046,600 | ||||||
| Accumulated impairment loss | (4,973 | ) | (357,375 | ) | (362,348 | ) | ||||||
| Balance at January 1, 2016 | 662,083 | 22,169 | 684,252 | |||||||||
| Acquired during the period (see Note 2) | 128,110 | — | 128,110 | |||||||||
| Foreign currency translation | 1,997 | (2,015 | ) | (18 | ) | |||||||
| Balance at December 31, 2016 | 792,190 | 20,154 | 812,344 | |||||||||
| Foreign currency translation | 7,739 | 978 | 8,717 | |||||||||
| Balance at December 31, 2017 | $ | 799,929 | $ | 21,132 | $ | 821,061 | ||||||
We had no0 goodwill impairment charges in 20172019, 2018 or 2016. 2017.
The following table provides the gross carrying amount and accumulated amortization for each major class of intangible asset:
| December 31, | 2019 | 2018 | ||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||
| Trademarks | $ | 1,212,172 | $ | (73,262 | ) | $ | 1,173,770 | $ | (60,995 | ) | ||||||
| Customer-related | 207,749 | (40,544 | ) | 163,860 | (33,516 | ) | ||||||||||
| Patents | 16,711 | (16,525 | ) | 16,306 | (15,772 | ) | ||||||||||
| Total | 1,436,632 | (130,331 | ) | 1,353,936 | (110,283 | ) | ||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||
| Trademarks | 34,865 | 34,639 | ||||||||||||||
| Total other intangible assets | $ | 1,341,166 | $ | 1,278,292 | ||||||||||||
In 2015,2019, sales and operating performance associated with our KRAVE Pure Foods, Inc. (“Krave”) business were below expectations. In the fourth quarter of 2019, as part of a strategic review initiated by our leadership team, we recorded goodwillupdated our strategic forecast which projected under performance related to the Krave business primarily due to mainstream brands driving category volume and an increase in the overall competitive landscape. We deemed this to be a triggering event requiring us to test our Krave long-lived asset group for impairment. Based on our assessment, we determined that the carrying value was not recoverable and calculated an impairment charges totaling $280,802, which resulted from our interim reassessmentloss as the excess of the valuation of the SGM business, coupled with a write-down of goodwill attributed to the China chocolate business in connection with the SGM acquisition, as discussed below.
The results of this test suggested that a goodwill impairment was probable, and the conclusions of the second step analysis resulted in a write-down of $14,393, representing the full value of goodwill attributed to this reporting unit as of October 4, 2015.Hershey Company | 2019 Form 10-K | Page 62
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| December 31, | 2017 | 2016 | ||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
| Intangible assets subject to amortization: | ||||||||||||||||
| Trademarks | $ | 277,473 | $ | (37,510 | ) | $ | 317,023 | $ | (30,458 | ) | ||||||
| Customer-related | 128,182 | (34,659 | ) | 200,409 | (36,482 | ) | ||||||||||
| Patents | 17,009 | (15,975 | ) | 16,426 | (13,700 | ) | ||||||||||
| Total | 422,664 | (88,144 | ) | 533,858 | (80,640 | ) | ||||||||||
| Intangible assets not subject to amortization: | ||||||||||||||||
| Trademarks | 34,636 | 39,519 | ||||||||||||||
| Total other intangible assets | $ | 369,156 | $ | 492,737 | ||||||||||||
As discussed in Note 7,9, in February 2017, we commenced the Margin for Growth Program which includesincluded an initiative to optimize the manufacturing operations supporting our China business. We deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded an impairment charge totaling $105,992 representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGMShanghai Golden Monkey ("SGM") acquisition.
Total amortization expense for the years ended December 31, 2019, 2018 and 2017 2016was $46,690, $38,555 and 2015 was $23,376, $26,687 and $22,306, respectively.
Amortization expense for the next five years, based on current intangible asset balances, is estimated to be as follows:
| Year ending December 31, | 2020 | 2021 | 2022 | 2023 | 2024 | |||||||||||||||
| Amortization expense | $ | 46,515 | $ | 46,315 | $ | 46,315 | $ | 46,121 | $ | 45,540 | ||||||||||
| Year ending December 31, | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||
| Amortization expense | $ | 20,529 | $ | 19,599 | $ | 19,360 | $ | 19,345 | $ | 19,345 | ||||||||||
4. SHORT AND LONG-TERM DEBT
Short-term Debt
As a source of short-term financing, we utilize cash on hand and commercial paper or bank loans with an original maturity of three months or less. We maintain a $1.0$1.5 billion unsecured revolving credit facility which currently expires in November 2020. This agreement also includes anwith the option to increase borrowings by an additional $400$500 million with the consent of the lenders. This facility is scheduled to expire on July 2, 2024, however, we may extend the termination date for up to two additional one-year periods upon notice to the administrative agent under the facility.
The unsecured committed revolving credit agreement contains a financial covenant whereby the ratio of (a) pre-tax income from operations from the most recent four fiscal quarters to (b) consolidated interest expense for the most recent four fiscal quarters may not be less than 2.0 to 1.0 at the end of each fiscal quarter. The credit agreement also contains customary representations, warranties and events of default. Payment of outstanding advances may be accelerated, at the option of the lenders, should we default in our obligation under the credit agreement. As of December 31, 2017,2019, we compliedare in compliance with all customary affirmative and negative covenants and the financial covenant pertaining to our credit agreement. There were no significant compensating balance agreements that legally restricted these funds.
In addition to the revolving credit facility, we maintain lines of credit with domestic and international commercial banks. Our credit limit in various currencies was $440,148$390,299 at December 31, 20172019 and $504,237$386,590 at December 31, 2016.2018. These lines permit us to borrow at the respective banks’ prime commercial interest rates, or lower. We had short-term foreign bank loans against these lines of credit for $110,684$32,282 at December 31, 20172019 and $158,805$113,189 at December 31, 2016.2018. Commitment fees relating to our revolving credit facility and lines of credit are not material.
At December 31, 2017,2019, we had 0 outstanding commercial paper. At December 31, 2018, we had outstanding commercial paper totaling $448,675,$1,084,740, at a weighted average interest rate of 1.4%. At December 31, 2016, we had outstanding commercial paper totaling $473,666, at a weighted average interest rate of 0.6%2.4%.
The maximum amount of short-term borrowings outstanding during 20172019 and 2018 was $815,588.$1,275,430 and $2,246,485, respectively. The weighted-average interest rate on short-term borrowings outstanding was 1.7%2.4% as of December 31, 20172019 and 1.0%2.5% as of December 31, 2016.2018.
The Hershey Company | 2019 Form 10-K | Page 63
| December 31, | 2017 | 2016 | ||||||
| 1.60% Notes due 2018 | $ | 300,000 | $ | 300,000 | ||||
| 4.125% Notes due 2020 | 350,000 | 350,000 | ||||||
| 8.8% Debentures due 2021 | 84,715 | 84,715 | ||||||
| 2.625% Notes due 2023 | 250,000 | 250,000 | ||||||
| 3.20% Notes due 2025 | 300,000 | 300,000 | ||||||
| 2.30% Notes due 2026 | 500,000 | 500,000 | ||||||
| 7.2% Debentures due 2027 | 193,639 | 193,639 | ||||||
| 3.375% Notes due 2046 | 300,000 | 300,000 | ||||||
| Capital lease obligations | 99,194 | 83,619 | ||||||
| Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts | (16,427 | ) | (14,275 | ) | ||||
| Total long-term debt | 2,361,121 | 2,347,698 | ||||||
| Less—current portion | 300,098 | 243 | ||||||
| Long-term portion | $ | 2,061,023 | $ | 2,347,455 | ||||
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Long-term Debt
Long-term debt consisted of the following:
| December 31, | 2019 | 2018 | ||||||
| 2.90% Notes due 2020 (2) | $ | 350,000 | $ | 350,000 | ||||
| 4.125% Notes due 2020 | 350,000 | 350,000 | ||||||
| 3.10% Notes due 2021 (2) | 350,000 | 350,000 | ||||||
| 8.8% Debentures due 2021 | 84,715 | 84,715 | ||||||
| 3.375% Notes due 2023 (2) | 500,000 | 500,000 | ||||||
| 2.625% Notes due 2023 | 250,000 | 250,000 | ||||||
| 2.050% Notes due 2024 (1) | 300,000 | — | ||||||
| 3.20% Notes due 2025 | 300,000 | 300,000 | ||||||
| 2.30% Notes due 2026 | 500,000 | 500,000 | ||||||
| 7.2% Debentures due 2027 | 193,639 | �� | 193,639 | |||||
| 2.450% Notes due 2029 (1) | 300,000 | — | ||||||
| 3.375% Notes due 2046 | 300,000 | 300,000 | ||||||
| 3.125% Notes due 2049 (1) | 400,000 | — | ||||||
| Finance lease obligations | 79,643 | 101,980 | ||||||
| Net impact of interest rate swaps, debt issuance costs and unamortized debt discounts | (23,794 | ) | (20,667 | ) | ||||
| Total long-term debt | 4,234,203 | 3,259,667 | ||||||
| Less—current portion | 703,390 | 5,387 | ||||||
| Long-term portion | $ | 3,530,813 | $ | 3,254,280 | ||||
| (1) | In October 2019, we issued $300,000 of 2.05% Notes due in 2024, $300,000 of 2.45% Notes due in 2029 and $400,000 of 3.125% Notes due in 2049 (the "2019 Notes"). Proceeds from the issuance of the 2019 Notes, net of discounts and issuance costs, totaled $990,337. The 2019 Notes were issued under a shelf registration statement on Form S-3 filed in May 2018 that registered an indeterminate amount of debt securities. |
| (2) | In May 2018, we issued $350,000 of 2.90% Notes due in 2020, $350,000 of 3.10% Notes due in 2021 and $500,000 of 3.375% Notes due in 2023 (the "2018 Notes"). Proceeds from the issuance of the 2018 Notes, net of discounts and issuance costs, totaled $1,193,830. The 2018 Notes were issued under a shelf registration statement on Form S-3 filed in June 2015 that registered an indeterminate amount of debt securities. |
Additionally, in August 2018, we repaid $300,000 of 1.60% Notes due in 2018 upon their maturity.
Aggregate annual maturities of our long-term Notes (excluding capitalfinance lease obligations and net impact of interest rate swaps, debt issuance costs and unamortized debt discounts) are as follows for the years ending December 31:
| 2020 | $ | 700,000 | |
| 2021 | 434,715 | ||
| 2022 | — | ||
| 2023 | 750,000 | ||
| 2024 | 300,000 | ||
| Thereafter | 1,993,639 | ||
| 2018 | $ | 300,098 | |
| 2019 | — | ||
| 2020 | 350,000 | ||
| 2021 | 84,715 | ||
| 2022 | — | ||
| Thereafter | 1,543,639 | ||
Our debt is principally unsecured and of equal priority. None of our debt is convertible into our Common Stock.
The Hershey Company | 2019 Form 10-K | Page 64
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Interest Expense
Net interest expense consists of the following:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Interest expense | $ | 157,707 | $ | 151,950 | $ | 104,232 | ||||||
| Capitalized interest | (5,585 | ) | (5,092 | ) | (4,166 | ) | ||||||
| Interest expense | 152,122 | 146,858 | 100,066 | |||||||||
| Interest income | (7,997 | ) | (8,021 | ) | (1,784 | ) | ||||||
| Interest expense, net | $ | 144,125 | $ | 138,837 | $ | 98,282 | ||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Interest expense | $ | 104,232 | $ | 97,851 | $ | 93,520 | ||||||
| Capitalized interest | (4,166 | ) | (5,903 | ) | (12,537 | ) | ||||||
| Loss on extinguishment of debt | — | — | 28,326 | |||||||||
| Interest expense | 100,066 | 91,948 | 109,309 | |||||||||
| Interest income | (1,784 | ) | (1,805 | ) | (3,536 | ) | ||||||
| Interest expense, net | $ | 98,282 | $ | 90,143 | $ | 105,773 | ||||||
5. DERIVATIVE INSTRUMENTS
We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures.
In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchanged-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.
Commodity Price Risk
We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3- to 24-month periods. Our open commodity derivative contracts had a notional value of $405,288$589,662 as of December 31, 20172019 and $739,374$693,463 as of December 31, 2016.
2018.
Derivatives used to manage commodity price risk are not designated for hedge accounting treatment. Therefore, the changes in fair value of these derivatives are recorded as incurred within cost of sales. As discussed in Note 11,13, we define our segment income to exclude gains and losses on commodity derivatives until the related inventory is sold, at which time the related gains and losses are reflected within segment income. This enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income.
Foreign Exchange Price Risk
We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, Brazilian real and Brazilian real.Malaysian ringgit. We typically utilize foreign currency forward exchange contracts to hedge these exposures for periods ranging from 3 to 12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $135,962$65,826 at December 31, 20172019 and $68,263$29,458 at December 31, 2016.2018. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $2,791$50,831 at December 31, 20172019 and $11,072 at December 31, 2016, respectively.2018. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.
The Hershey Company | 2019 Form 10-K | Page 65
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Interest Rate Risk
We manage our targeted mix of fixed and floating rate debt with debt issuances and by entering into fixed-to-floating interest rate swaps in order to mitigate fluctuations in earnings and cash flows that may result from interest rate volatility. These swaps are designated as fair value hedges, for which the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in current earnings as interest expense (income), net. We had one interest rate derivative instrument in a fair value hedging relationship with a notional amount of $350,000 at December 31, 20172019 and 2016.2018.
In order to manage interest rate exposure, in previous years we utilized interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which were settled upon issuance of the related debt, were designated as cash flow hedges and the gains and losses that were deferred in other comprehensive income are being recognized as an adjustment to interest expense over the same period that the hedged interest payments affect earnings. During 2016, we had one interest rate swap agreement in a cash flow hedging relationship with a notional amount of $500,000, which was settled in connection with the issuance of debt in August 2016, resulting in a payment of approximately $87,000 which is reflected as an operating cash flow within the Consolidated Statement of Cash Flows.
Equity Price Risk
We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at December 31, 20172019 and 20162018 was $25,246$28,187 and $22,099,$33,168, respectively.
The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of December 31, 20172019 and 2016:2018:
| December 31, | 2019 | 2018 | ||||||||||||||
| Assets (1) | Liabilities (1) | Assets (1) | Liabilities (1) | |||||||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||||||||||
| Foreign exchange contracts | $ | 1,235 | $ | 1,779 | $ | 3,394 | $ | 485 | ||||||||
| Derivatives designated as fair value hedging instruments: | ||||||||||||||||
| Interest rate swap agreements | 555 | — | — | 4,832 | ||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||
| Commodities futures and options (2) | 9,080 | 626 | 7,230 | 262 | ||||||||||||
| Deferred compensation derivatives | 2,557 | — | — | 4,736 | ||||||||||||
| Foreign exchange contracts | 1,496 | — | 70 | 484 | ||||||||||||
| 13,133 | 626 | 7,300 | 5,482 | |||||||||||||
| Total | $ | 14,923 | $ | 2,405 | $ | 10,694 | $ | 10,799 | ||||||||
| December 31, | 2017 | 2016 | ||||||||||||||
| Assets (1) | Liabilities (1) | Assets (1) | Liabilities (1) | |||||||||||||
| Derivatives designated as cash flow hedging instruments: | ||||||||||||||||
| Foreign exchange contracts | $ | 423 | $ | 1,427 | $ | 2,229 | $ | 809 | ||||||||
| Derivatives designated as fair value hedging instruments: | ||||||||||||||||
| Interest rate swap agreements | — | 1,897 | 1,768 | — | ||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||
| Commodities futures and options (2) | 390 | 3,054 | 2,348 | 10,000 | ||||||||||||
| Deferred compensation derivatives | 1,581 | — | 717 | — | ||||||||||||
| Foreign exchange contracts | 31 | — | — | 16 | ||||||||||||
| 2,002 | 3,054 | 3,065 | 10,016 | |||||||||||||
| Total | $ | 2,425 | $ | 6,378 | $ | 7,062 | $ | 10,825 | ||||||||
| (1) | Derivatives assets are classified on our |
| (2) | As of December 31, |
The Hershey Company | 2019 Form 10-K | Page 66
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
December 31, 2019 and 2018, the remaining amount reflected in assets and liabilities related to the fair value of other non-exchange traded derivative instruments, respectively.
Income Statement Impact of Derivative Instruments
The effect of derivative instruments on the Consolidated Statements of Income for the years ended December 31, 20172019 and December 31, 20162018 was as follows:
| Non-designated Hedges | Cash Flow Hedges | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-designated Hedges | Cash Flow Hedges | |||||||||||||||||||||||||||||||||||||||||||||||
| Gains (losses) recognized in income (a) | Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion) | Gains (losses) reclassified from accumulated OCI into income (effective portion) (b) | Gains (losses) recognized in income (a) | Gains (losses) recognized in other comprehensive income (“OCI”) | Gains (losses) reclassified from accumulated OCI into income (b) | |||||||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
| Commodities futures and options | $ | (55,734 | ) | $ | (171,753 | ) | $ | — | $ | — | $ | (1,774 | ) | $ | 30,783 | $ | 35,488 | $ | 69,379 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||
| Foreign exchange contracts | (23 | ) | (46 | ) | (4,931 | ) | (5,485 | ) | (3,180 | ) | (5,625 | ) | 410 | 972 | (2,515 | ) | 5,822 | 939 | 3,906 | |||||||||||||||||||||||||||||
| Interest rate swap agreements | — | — | — | (47,223 | ) | (9,480 | ) | (8,676 | ) | — | — | — | — | (9,343 | ) | (9,479 | ) | |||||||||||||||||||||||||||||||
| Deferred compensation derivatives | 4,497 | 2,203 | — | — | — | — | 6,738 | (2,173 | ) | — | — | — | — | |||||||||||||||||||||||||||||||||||
| Total | $ | (51,260 | ) | $ | (169,596 | ) | $ | (4,931 | ) | $ | (52,708 | ) | $ | (14,434 | ) | $ | 16,482 | $ | 42,636 | $ | 68,178 | $ | (2,515 | ) | $ | 5,822 | $ | (8,404 | ) | $ | (5,573 | ) | ||||||||||||||||
| (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 (losses) reclassified from AOCI into income |
The amount of pretax net losses on derivative instruments, including interest rate swap agreements and foreign currency forward exchange contracts expected to be reclassified into earnings in the next 12 months was approximately $10,484$9,887 as of December 31, 2017.2019. This amount wasis primarily associated with interest rate swap agreements.
Fair Value HedgesHedging Relationships
The following table presents amounts that were recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for interest rate swap derivatives designated as fair value accounting hedges as of December 31, 2019 and 2018.
| Line Item in the Consolidated Balance Sheets in Which the Hedged Item is Included | Carrying Amount of the Hedged Asset/(Liability) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount Assets/(Liabilities) | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Long-term debt | $ | (349,445 | ) | $ | (354,832 | ) | $ | 555 | $ | (4,832 | ) | |||||
For the years ended December 31, 20172019 and 2016,2018, we recognized a net pretax benefit toincremental interest expense of $2,660$1,829 and $4,365$748, respectively, relating to our fixed-to-floating interest swap arrangements.
6. FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements requires that financial assets and liabilities be classified and disclosed in one of the following categories of the fair value hierarchy:
Level 1 – Based on unadjusted quoted prices for identical assets or liabilities in an active market. |
Level 2 – Based on observable market-based inputs or unobservable inputs that are corroborated by market data. |
Level 3 – Based on unobservable inputs that reflect the entity's own assumptions about the assumptions that a market participant would use in pricing the asset or liability. |
The Hershey Company | 2019 Form 10-K | Page 67
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
We did not have any level 3 financial assets or liabilities, nor were there any transfers between levels during the periods presented.
The following table presents assets and liabilities that were measured at fair value in the Consolidated Balance SheetSheets on a recurring basis as of December 31, 20172019 and 2016:2018:
| Assets (Liabilities) | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| December 31, 2019: | ||||||||||||||||
| Derivative Instruments: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Foreign exchange contracts (1) | $ | — | $ | 2,731 | $ | — | $ | 2,731 | ||||||||
| Interest rate swap agreements (2) | — | 555 | — | 555 | ||||||||||||
| Deferred compensation derivatives (3) | — | 2,557 | — | 2,557 | ||||||||||||
| Commodities futures and options (4) | 9,080 | — | — | 9,080 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts (1) | — | 1,779 | — | 1,779 | ||||||||||||
| Commodities futures and options (4) | 626 | — | — | 626 | ||||||||||||
| December 31, 2018: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Foreign exchange contracts (1) | $ | — | $ | 3,464 | $ | — | $ | 3,464 | ||||||||
| Commodities futures and options (4) | 7,230 | — | — | 7,230 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts (1) | — | 969 | — | 969 | ||||||||||||
| Interest rate swap agreements (2) | — | 4,832 | — | 4,832 | ||||||||||||
| Deferred compensation derivatives (3) | — | 4,736 | — | 4,736 | ||||||||||||
| Commodities futures and options (4) | 262 | — | — | 262 | ||||||||||||
| Assets (Liabilities) | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| December 31, 2017: | ||||||||||||||||
| Derivative Instruments: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Foreign exchange contracts (1) | $ | — | $ | 454 | $ | — | $ | 454 | ||||||||
| Deferred compensation derivatives (3) | — | 1,581 | — | 1,581 | ||||||||||||
| Commodities futures and options (4) | 390 | — | — | 390 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts (1) | — | 1,427 | — | 1,427 | ||||||||||||
| Interest rate swap agreements (2) | — | 1,897 | — | 1,897 | ||||||||||||
| Commodities futures and options (4) | 3,054 | — | — | 3,054 | ||||||||||||
| December 31, 2016: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Foreign exchange contracts (1) | $ | — | $ | 2,229 | $ | — | $ | 2,229 | ||||||||
| Interest rate swap agreements (2) | — | 1,768 | — | 1,768 | ||||||||||||
| Deferred compensation derivatives (3) | — | 717 | — | 717 | ||||||||||||
| Commodities futures and options (4) | 2,348 | — | — | 2,348 | ||||||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts (1) | — | 825 | — | 825 | ||||||||||||
| Commodities futures and options (4) | 10,000 | — | — | 10,000 | ||||||||||||
| (1) | The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences. |
| (2) | The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. |
| (3) | The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index. |
| (4) | The fair value of commodities futures and options contracts is based on quoted market prices. |
Other Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and short-term debt approximated fair values as of December 31, 20172019 and December 31, 20162018 because of the relatively short maturity of these instruments.
The estimated fair value of our long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy. The fair values and carrying values of long-term debt, including the current portion, were as follows:
The Hershey Company | 2019 Form 10-K | Page 68
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| Fair Value | Carrying Value | |||||||||||||||
| At December 31, | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Current portion of long-term debt | $ | 712,863 | $ | 5,387 | $ | 703,390 | $ | 5,387 | ||||||||
| Long-term debt | 3,656,540 | 3,228,877 | 3,530,813 | 3,254,280 | ||||||||||||
| Total | $ | 4,369,403 | $ | 3,234,264 | $ | 4,234,203 | $ | 3,259,667 | ||||||||
| Fair Value | Carrying Value | |||||||||||||||
| At December 31, | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Current portion of long-term debt | $ | 299,430 | $ | 243 | $ | 300,098 | $ | 243 | ||||||||
| Long-term debt | 2,113,296 | 2,379,054 | 2,061,023 | 2,347,455 | ||||||||||||
| Total | $ | 2,412,726 | $ | 2,379,297 | $ | 2,361,121 | $ | 2,347,698 | ||||||||
Other Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, GAAP requires that, under certain circumstances, we also record assets and liabilities at fair value on a nonrecurring basis. Generally, assets are
2019 Activity
During 2019, we recorded atthe following impairment charges, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy:
| 2019 | ||||
| Customer relationship and trademark intangible assets (1) | $ | 100,131 | ||
| Other long-lived assets not held for sale (2) | 9,629 | |||
| Adjustment to disposal group (3) | 2,725 | |||
| Long-lived and intangible asset impairment charges | $ | 112,485 | ||
| (1) | During the fourth quarter of 2019, as discussed in Note 3, we recorded impairment charges to write down customer relationship and trademark intangible assets associated with Krave. These charges were determined by comparing the fair value of the asset group to its carrying value. We used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis and relief-from-royalty valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. |
| (2) | During 2019, we recorded impairment charges predominantly comprised of select long-lived assets that had not yet met the held for sale criteria. The fair value of these assets was supported by potential sales prices with third-party buyers and market analysis. |
| (3) | In connection with our disposal group classified as held for sale, as discussed in Note 8, during 2019, we recorded impairment charges to adjust long-lived asset values. The fair value of the disposal group was supported by potential sales prices with third-party buyers. We expect the sale of the disposal group to be completed in the first half of 2020. |
In connection with the acquisition of ONE Brands in the third quarter of 2019, as discussed in Note 2, we used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis, relief-from-royalty, a form of the multi-period excess earnings and the with-and-without valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.
2018 Activity
In connection with the acquisitions of Amplify in the first quarter of 2018 and Pirate Brands in the fourth quarter of 2018, as discussed in Note 2, we used various valuation techniques to determine fair value, with the primary techniques being discounted cash flow analysis, relief-from-royalty, and a form of the multi-period excess earnings valuation approaches, which use significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy.
In connection with disposal groups classified as held for sale, as discussed in Note 8, during 2018, we recorded impairment charges totaling $57,729 to adjust the long-lived asset values within certain disposal groups, including the SGM and Tyrrells businesses, the Lotte Shanghai Foods Co., Ltd. ("LSFC") joint venture and other assets. These charges represent the excess of the disposal groups' carrying values, including the related currency translation adjustment amounts realized or to be realized upon completion of the sales, over the sales values less costs to sell for the respective businesses. The fair values of the disposal groups were supported by the sales prices paid by third-party
The Hershey Company | 2019 Form 10-K | Page 69
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
buyers or estimated sales prices based on a nonrecurring basis as a resultmarketing of impairment charges. the disposal group, when the sale has not yet been completed. The sales of SGM and Tyrrells were both completed in July 2018.
2017 Activity
During the first quarter of 2017, as discussed in Note 7,9, we recorded impairment charges totaling $105,992 to write-downwrite down distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and wrote-downwrote down property, plant and equipment by $102,720. These charges were determined by comparing the fair value of the assets to their carrying value. The fair value of the assets werewas derived using a combination of an estimated market liquidation approach and discounted cash flow analyses based on Level 3 inputs.
7. BUSINESS REALIGNMENT ACTIVITIESLEASES
We lease office and retail space, warehouse and distribution facilities, land, vehicles, and equipment. We determine if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are currently pursuing several business realignment activities designednot recorded on the balance sheet.
Right-of-use ("ROU") assets represent our right to increaseuse an underlying asset for the lease term and lease liabilities represent our efficiencyobligation to make lease payments arising from the lease. ROU assets and focus our business in supportliabilities are based on the estimated present value of lease payments over the lease term and are recognized at the lease commencement date.
As most of our key growth strategies. Costs recordedleases do not provide an implicit rate, we use our estimated incremental borrowing rate in 2017, 2016determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date.
Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of our lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants.
For real estate, equipment and 2015 relatedvehicles that support selling, marketing and general administrative activities the Company accounts for the lease and non-lease components as a single lease component. These asset categories comprise the majority of our leases. The lease and non-lease components of real estate and equipment leases supporting production activities are not accounted for as a single lease component. Consideration for such contracts are allocated to these activitiesthe lease component and non-lease components based upon relative standalone prices either observable or estimated if observable prices are not readily available.
The components of lease expense were as follows:
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Margin for Growth Program: | ||||||||||||
| Severance | $ | 32,554 | $ | — | $ | — | ||||||
| Accelerated depreciation | 6,873 | — | — | |||||||||
| Other program costs | 16,407 | — | — | |||||||||
| Operational Optimization Program: | ||||||||||||
| Severance | 13,828 | 17,872 | — | |||||||||
| Accelerated depreciation | — | 48,590 | — | |||||||||
| Other program costs | (303 | ) | 21,831 | — | ||||||||
| 2015 Productivity Initiative: | ||||||||||||
| Severance | — | — | 81,290 | |||||||||
| Pension settlement charges | — | 13,669 | 10,178 | |||||||||
| Other program costs | — | 5,609 | 14,285 | |||||||||
| Other international restructuring programs: | ||||||||||||
| Severance | — | — | 6,651 | |||||||||
| Accelerated depreciation and amortization | — | — | 5,904 | |||||||||
| Mauna Loa Divestiture (see Note 2) | — | — | 2,667 | |||||||||
| Total | $ | 69,359 | $ | 107,571 | $ | 120,975 | ||||||
| Lease expense | Classification | 2019 | ||||
| Operating lease cost | Cost of sales or SM&A (1) | $ | 42,580 | |||
| Finance lease cost: | ||||||
| Amortization of ROU assets | Depreciation and amortization (1) | 7,821 | ||||
| Interest on lease liabilities | Interest expense, net | 4,467 | ||||
| Net lease cost (2) | $ | 54,868 | ||||
| (1) | Supply chain-related amounts were included in cost of sales. |
| (2) | Net lease cost does not include short-term leases, variable lease costs or sublease income, all of which are immaterial. |
The costs and related benefits of the Margin for Growth Program relate approximately 45% to the North America segment and 55% to the International and Other segment. The costs and related benefits of the Operational Optimization Program relate approximately 35% to the North America segment and 65% to the International and Other segment on a cumulative program to date basis. The costs and related benefits to be derived from the 2015 Productivity Initiative relate primarily to the North American segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs.Hershey Company | 2019 Form 10-K | Page 70
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Information regarding our lease terms and discount rates were as follows:
| 2019 | |||
| Weighted-average remaining lease term (years) | |||
| Operating leases | 14.3 | ||
| Finance leases | 31.4 | ||
| Weighted-average discount rate | |||
| Operating leases | 3.8 | % | |
| Finance leases | 6.0 | % | |
Supplemental balance sheet information related to leases were as follows:
| Leases | Classification | 2019 | |||
| Assets | |||||
| Operating lease ROU assets | Other assets (non-current) | 220,678 | |||
| Finance lease ROU assets, at cost | Property, plant and equipment, gross | 101,142 | |||
| Accumulated amortization | Accumulated depreciation | (7,225 | ) | ||
| Finance lease ROU assets, net | Property, plant and equipment, net | 93,917 | |||
| Total leased assets | 314,595 | ||||
| Liabilities | |||||
| Current | |||||
| Operating | Accrued liabilities | 29,209 | |||
| Finance | Current portion of long-term debt | 4,079 | |||
| Non-current | |||||
| Operating | Other long-term liabilities | 184,163 | |||
| Finance | Long-term debt | 75,564 | |||
| Total lease liabilities | 293,015 | ||||
The maturity of our lease liabilities as of December 31, 2019 were as follows:
| Operating leases | Finance leases | Total | ||||||
| 2020 | 36,803 | 7,798 | 44,601 | |||||
| 2021 | 30,205 | 6,641 | 36,846 | |||||
| 2022 | 16,480 | 5,027 | 21,507 | |||||
| 2023 | 13,846 | 4,629 | 18,475 | |||||
| 2024 | 13,062 | 4,618 | 17,680 | |||||
| Thereafter | 172,752 | 165,693 | 338,445 | |||||
| Total lease payments | 283,148 | 194,406 | 477,554 | |||||
| Less: Imputed interest | 69,776 | 114,763 | 184,539 | |||||
| Total lease liabilities | 213,372 | 79,643 | 293,015 | |||||
The Hershey Company | 2019 Form 10-K | Page 71
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
As of December 31, 2019, the Company has entered into additional leases as a lessee, primarily for real estate. These leases have not yet commenced and will result in ROU assets and corresponding lease liabilities of approximately $19,000. These leases are expected to commence in 2020, with lease terms between two and five years.
Supplemental cash flow and other information related to leases were as follows:
| 2019 | |||
| Cash paid for amounts included in the measurement of lease liabilities: | |||
| Operating cash flows from operating leases | 39,910 | ||
| Operating cash flows from finance leases | 4,467 | ||
| Financing cash flows from finance leases | 4,018 | ||
| ROU assets obtained in exchange for lease liabilities: | |||
| Operating leases | 27,890 | ||
| Finance leases | 7,943 | ||
Disclosures related to periods prior to adoption of ASU 2016-02, Leases (Topic 842)
Future minimum payments under lease arrangements with a remaining term in excess of one year were as follows as of December 31, 2018:
| Operating leases (1) | Capital leases (2) | |||||||
| 2019 | $ | 38,041 | $ | 6,980 | ||||
| 2020 | 24,047 | 5,272 | ||||||
| 2021 | 16,883 | 3,901 | ||||||
| 2022 | 15,424 | 4,399 | ||||||
| 2023 | 13,494 | 4,577 | ||||||
| Thereafter | 185,608 | 169,686 | ||||||
| (1) | Future minimum rental payments reflect commitments under non-cancelable operating leases primarily for offices, retail stores, warehouse and distribution facilities. Total rent expense for the years ended December 31, 2018 and 2017 was $34,157 and $25,525, respectively, including short-term rentals. |
| (2) | Future minimum rental payments reflect commitments under non-cancelable capital leases primarily for offices and warehouse facilities, as well as vehicles. |
8. ASSETS AND LIABILITIES HELD FOR SALE
As of December 31, 2019, the following disposal group has been classified as held for sale and stated at the lower of net book value or estimated sales value less costs to sell:
The LSFC joint venture and other select assets, which were taken out of operation and classified as held for sale during the second quarter of 2018. We sold a portion of the joint venture's equipment in the third and fourth quarters of 2018, and expect the sale of the remaining business to be completed in the first half of 2020.
The Hershey Company | 2019 Form 10-K | Page 72
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
The amounts classified as assets and liabilities held for sale at December 31, 2019 include the following:
| Assets held for sale, included in prepaid expenses and other assets | ||||
| Property, plant and equipment, net | $ | 1,677 | ||
| $ | 1,677 | |||
| Liabilities held for sale, included in accrued liabilities | ||||
| Accounts payable and accrued liabilities | $ | 105 | ||
| $ | 105 | |||
During 2019, we completed the sale of one disposal group that had been previously classified as assets held for sale, as follows:
In December 2019, we sold select Pennsylvania facilities and land for sales proceeds of approximately $27,613, resulting in a gain on the sale of $11,289, which is recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Income.
During 2018, we completed the sale of other disposal groups that had been previously classified as assets and liabilities held for sale, as follows:
In April 2018, we sold the licensing rights for a non-core trademark relating to a brand marketed outside of the United States for sale proceeds of approximately $13,000, realizing in a gain on the sale of $2,658, which is recorded in the selling, marketing and administrative expense caption within the Consolidated Statements of Income.
During the second and third quarters of 2018, we sold select China facilities that were taken out of operation and classified as assets held for sale during the first quarter of 2017 in connection with the Operational Optimization Program (as defined in Note 8). Proceeds from the sale of these facilities totaled $27,468, resulting in a gain on the sale of $6,562, which is recorded in the business realignment costs caption within the Consolidated Statements of Income.
In July 2018, we sold the Tyrrells and SGM businesses, both of which were previously classified as held for sale. Total proceeds from the sale of Tyrrells and SGM, net of cash divested, were approximately $171,950. We recorded impairment charges of $28,817 to adjust the book values of the disposal groups to the sales value less costs to sell.
9. BUSINESS REALIGNMENT ACTIVITIES
We periodically undertake business realignment activities designed to increase our efficiency and focus our business in support of our key growth strategies. Costs associated with business realignment activities are classified in our Consolidated Statements of Income as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Cost of sales | $ | — | $ | 11,323 | $ | 5,147 | ||||||
| Selling, marketing and administrative expense | 1,126 | 21,401 | 16,449 | |||||||||
| Business realignment costs | 8,112 | 19,103 | 47,763 | |||||||||
| Costs associated with business realignment activities | $ | 9,238 | $ | 51,827 | $ | 69,359 | ||||||
The Hershey Company | 2019 Form 10-K | Page 73
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Costs recorded by program in 2019, 2018 and 2017 related to these activities were as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Margin for Growth Program: | ||||||||||||
| Severance | $ | 5,178 | $ | 15,378 | $ | 32,554 | ||||||
| Accelerated depreciation | — | 9,131 | 6,873 | |||||||||
| Other program costs | 4,060 | 30,940 | 16,407 | |||||||||
| Operational Optimization Program: | ||||||||||||
| Severance | — | — | 13,828 | |||||||||
| Gain on sale of facilities | — | (6,562 | ) | — | ||||||||
| Other program costs | — | 2,940 | (303 | ) | ||||||||
| Total | $ | 9,238 | $ | 51,827 | $ | 69,359 | ||||||
The following table presents the liability activity for costs qualifying as exit and disposal costs for the year ended December 31, 2019:
| Total | |||
| Liability balance at December 31, 2018 | $ | 14,605 | |
| 2019 business realignment charges (1) | 9,239 | ||
| Cash payments | (14,726 | ) | |
| Liability balance at December 31, 2019 (reported within accrued liabilities) | $ | 9,118 | |
| (1) | The costs reflected in the liability roll-forward represent employee-related and certain third-party service provider charges. |
The costs and related benefits of the Margin for Growth Program relate approximately 63% to the North America segment and 37% to the International and Other segment. However, segment operating results do not include these business realignment expenses because we evaluate segment performance excluding such costs.
Margin for Growth Program
In Februarythe first quarter 2017, the Company's Board of Directors ("Board") unanimously approved several initiatives under a single program designed to drive continued net sales, operating income and earnings per-share diluted growth over the next several years. This program will focusis focused on improving global efficiency and effectiveness, optimizing the Company’s supply chain, streamlining the Company’s operating model and reducing administrative expenses to generate long-term savings.
For the years end ended December 31, 2019, 2018 and 2017, we recognized total costs associated with the Margin for Growth Program of $9,238, $55,449, and $55,834 respectively. These charges include employee severance, largely relating to initiatives to improve the cost structure of our China business and to further streamline our corporate operating model, as well as non-cash, asset-related incremental depreciation expense as part of optimizing the global
The Hershey Company | 2019 Form 10-K | Page 74
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
supply chain. In addition, we incurred other program costs, which relate primarily to third-party charges in support of our initiative to improve global efficiency and effectiveness.
The program includesincluded an initiative to optimize the manufacturing operations supporting our China business. WeWhen the program was approved in 2017, we deemed this to be a triggering event requiring us to test our China long-lived asset group for impairment by first determining whether the carrying value of the asset group was recovered by our current estimates of future cash flows associated with the asset group. Because this assessment indicated that the carrying value was not recoverable, we calculated an impairment loss as the excess of the asset group's carrying value over its fair value. The resulting impairment loss was allocated to the asset group's long-lived assets. Therefore, as a result of this testing, during the first quarter of 2017, we recorded impairment charges totaling $208,712, with $105,992 representing the portion of the impairment loss that was allocated to the distributor relationship and trademark intangible assets that had been recognized in connection with the 2014 SGM acquisition and $102,720 representing the portion of the impairment loss that was allocated to property, plant and equipment. These impairment charges are recorded in the long-lived asset impairment charges caption within the Consolidated Statements of Operations.
2016 Operational Optimization Program
In the second quarter of 2016, we commenced a program (the “Operational Optimization Program”) to optimize our production and supply chain network, which includesincluded select facility consolidations. The program encompassesencompassed the continued transition of our China chocolate and SGM operations into a united Golden Hershey platform, including the integration of the China sales force, as well as workforce planning efforts and the consolidation of production within certain facilities in China and North America.
10. INCOME TAXES
The components of approximately $8,000 over the next twelve months to complete the remaining facility consolidation efforts relating to this program.income (loss) before income taxes were as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Domestic | $ | 1,211,051 | $ | 1,195,645 | $ | 1,187,825 | ||||||
| Foreign | 169,733 | 214,416 | (77,157 | ) | ||||||||
| Income before income taxes | $ | 1,380,784 | $ | 1,410,061 | $ | 1,110,668 | ||||||
The Hershey Company | 2019 Form 10-K | Page 75
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Cost of sales | $ | 5,147 | $ | 58,106 | $ | 8,801 | ||||||
| Selling, marketing and administrative expense | 16,449 | 16,939 | 17,368 | |||||||||
| Business realignment costs | 47,763 | 32,526 | 94,806 | |||||||||
| Costs associated with business realignment activities | $ | 69,359 | $ | 107,571 | $ | 120,975 | ||||||
| Total | |||
| Liability balance at December 31, 2016 | $ | 3,725 | |
| 2017 business realignment charges (1) | 61,872 | ||
| Cash payments | (26,536 | ) | |
| Other, net | (69 | ) | |
| Liability balance at December 31, 2017 (reported within accrued and other long-term liabilities) | $ | 38,992 | |
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Domestic | $ | 1,187,825 | $ | 1,395,440 | $ | 1,357,618 | ||||||
| Foreign | (77,157 | ) | (295,959 | ) | (455,771 | ) | ||||||
| Income before income taxes | $ | 1,110,668 | $ | 1,099,481 | $ | 901,847 | ||||||
The components of our provision for income taxes arewere as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 179,358 | $ | 151,107 | $ | 314,277 | ||||||
| State | 38,232 | 38,243 | 37,628 | |||||||||
| Foreign | 31,514 | 13,405 | (16,356 | ) | ||||||||
| 249,104 | 202,755 | 335,549 | ||||||||||
| Deferred: | ||||||||||||
| Federal | 14,958 | 35,035 | 19,204 | |||||||||
| State | 1,865 | 7,572 | 7,573 | |||||||||
| Foreign | (31,895 | ) | (6,352 | ) | (8,195 | ) | ||||||
| (15,072 | ) | 36,255 | 18,582 | |||||||||
| Total provision for income taxes | $ | 234,032 | $ | 239,010 | $ | 354,131 | ||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Current: | ||||||||||||
| Federal | $ | 314,277 | $ | 391,705 | $ | 409,060 | ||||||
| State | 37,628 | 51,706 | 47,978 | |||||||||
| Foreign | (16,356 | ) | (25,877 | ) | (29,605 | ) | ||||||
| 335,549 | 417,534 | 427,433 | ||||||||||
| Deferred: | ||||||||||||
| Federal | 19,204 | (7,706 | ) | (31,153 | ) | |||||||
| State | 7,573 | (452 | ) | (2,346 | ) | |||||||
| Foreign | (8,195 | ) | (29,939 | ) | (5,038 | ) | ||||||
| 18,582 | (38,097 | ) | (38,537 | ) | ||||||||
| Total provision for income taxes | $ | 354,131 | $ | 379,437 | $ | 388,896 | ||||||
U.S. Tax Cuts and Jobs Act of 2017
The U.S. Tax Cuts and Jobs Act, enacted in December 2017 (“U.S. tax reform”), significantly changeschanged U.S. corporate income tax laws by, among other things, reducing the U.S. corporate income tax rate to 21% starting in 2018 and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. Under GAAP (specifically, ASC Topic 740), the effects of changes in tax rates and laws on deferred tax balances are recognized in the period in which the new legislation is enacted.
Additionally, U.S. tax reform.reform subjects a U.S. shareholder to current tax on global intangible low-taxed income ("GILTI") earned by certain foreign subsidiaries. We have elected to not recognize deferred taxes for temporary differences until such differences reverse as GILTI in future years.
The Hershey Company | 2019 Form 10-K | Page 76
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Deferred taxes reflect temporary differences between the tax basis and financial statement carrying value of assets and liabilities. The significant temporary differences that comprised the deferred tax assets and liabilities are as follows:
| December 31, | 2019 | 2018 | ||||||
| Deferred tax assets: | ||||||||
| Post-retirement benefit obligations | $ | 56,384 | $ | 52,915 | ||||
| Accrued expenses and other reserves | 88,590 | 85,180 | ||||||
| Stock-based compensation | 19,304 | 30,448 | ||||||
| Derivative instruments | 16,864 | 17,423 | ||||||
| Pension | 3,952 | 8,921 | ||||||
| Lease liabilities | 64,988 | 12,284 | ||||||
| Accrued trade promotion reserves | 21,709 | 13,670 | ||||||
| Net operating loss carryforwards | 160,584 | 161,242 | ||||||
| Capital loss carryforwards | 26,022 | 26,670 | ||||||
| Other | 9,685 | 9,969 | ||||||
| Gross deferred tax assets | 468,082 | 418,722 | ||||||
| Valuation allowance | (206,743 | ) | (239,959 | ) | ||||
| Total deferred tax assets | 261,339 | 178,763 | ||||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment, net | 161,449 | 144,044 | ||||||
| Acquired intangibles | 144,314 | 161,003 | ||||||
| Lease ROU assets | 48,419 | — | ||||||
| Inventories | 29,158 | 21,366 | ||||||
| Other | 46,984 | 28,044 | ||||||
| Total deferred tax liabilities | 430,324 | 354,457 | ||||||
| Net deferred tax (liabilities) assets | $ | (168,985 | ) | $ | (175,694 | ) | ||
| Included in: | ||||||||
| Non-current deferred tax assets, net | 31,033 | 1,166 | ||||||
| Non-current deferred tax liabilities, net | (200,018 | ) | (176,860 | ) | ||||
| Net deferred tax (liabilities) assets | $ | (168,985 | ) | $ | (175,694 | ) | ||
| December 31, | 2017 | 2016 | ||||||
| Deferred tax assets: | ||||||||
| Post-retirement benefit obligations | $ | 58,306 | $ | 90,584 | ||||
| Accrued expenses and other reserves | 103,769 | 141,228 | ||||||
| Stock-based compensation | 31,364 | 48,500 | ||||||
| Derivative instruments | 27,109 | 44,010 | ||||||
| Pension | — | 14,662 | ||||||
| Lease financing obligation | 12,310 | 18,950 | ||||||
| Accrued trade promotion reserves | 26,028 | 50,463 | ||||||
| Net operating loss carryforwards | 226,142 | 143,085 | ||||||
| Capital loss carryforwards | 23,215 | 38,691 | ||||||
| Other | 7,748 | 14,452 | ||||||
| Gross deferred tax assets | 515,991 | 604,625 | ||||||
| Valuation allowance | (312,148 | ) | (235,485 | ) | ||||
| Total deferred tax assets | 203,843 | 369,140 | ||||||
| Deferred tax liabilities: | ||||||||
| Property, plant and equipment, net | 132,443 | 202,300 | ||||||
| Acquired intangibles | 68,476 | 113,074 | ||||||
| Inventories | 20,769 | 27,608 | ||||||
| Pension | 969 | — | ||||||
| Other | 23,819 | 8,884 | ||||||
| Total deferred tax liabilities | 246,476 | 351,866 | ||||||
| Net deferred tax (liabilities) assets | $ | (42,633 | ) | $ | 17,274 | |||
| Included in: | ||||||||
| Non-current deferred tax assets, net | 3,023 | 56,861 | ||||||
| Non-current deferred tax liabilities, net | (45,656 | ) | (39,587 | ) | ||||
| Net deferred tax (liabilities) assets | $ | (42,633 | ) | $ | 17,274 | |||
Changes in deferred taxes includeswas primarily due to the impactadoption of remeasurement on U.S. deferred taxes atASU 2016-02, Leases (Topic 842) and the lower enacted corporate tax rates resulting from the U.S. tax reform.recognition of lease liabilities and lease ROU assets. Changes in deferred tax assets for net operating loss carryforwardsthe valuation allowance resulted primarily from current year lossesthe release of valuation allowances in foreign jurisdictions.Mexico and Brazil.
The valuation allowances as of December 31, 20172019 and 2016 are2018 were primarily related to U.S. capital loss carryforwards and various foreign jurisdictions' net operating loss carryforwards and other deferred tax assets that we do not expect to realize.
The Hershey Company | 2019 Form 10-K | Page 77
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
The following table reconciles the federal statutory income tax rate with our effective income tax rate:
| For the years ended December 31, | 2019 | 2018 | 2017 | ||||||
| Federal statutory income tax rate | 21.0 | % | 21.0 | % | 35.0 | % | |||
| Increase (reduction) resulting from: | |||||||||
| State income taxes, net of Federal income tax benefits | 1.8 | 2.7 | 2.6 | ||||||
| Qualified production income deduction | — | — | (2.9 | ) | |||||
| Business realignment and impairment charges | — | 0.6 | 4.3 | ||||||
| Foreign rate differences | (1.5 | ) | (2.0 | ) | (4.3 | ) | |||
| Historic and solar tax credits | (3.4 | ) | (3.5 | ) | (4.8 | ) | |||
| U.S. tax reform | — | (1.4 | ) | 2.9 | |||||
| Tax contingencies | 0.9 | 0.5 | 0.5 | ||||||
| Stock compensation | (1.3 | ) | (0.3 | ) | (1.1 | ) | |||
| Valuation allowance release | (1.5 | ) | — | — | |||||
| Other, net | 0.9 | (0.6 | ) | (0.3 | ) | ||||
| Effective income tax rate | 16.9 | % | 17.0 | % | 31.9 | % | |||
| For the years ended December 31, | 2017 | 2016 | 2015 | ||||||
| Federal statutory income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| Increase (reduction) resulting from: | |||||||||
| State income taxes, net of Federal income tax benefits | 2.6 | 3.4 | 4.2 | ||||||
| Qualified production income deduction | (2.9 | ) | (3.8 | ) | (4.4 | ) | |||
| Business realignment and impairment charges and gain on sale of trademark licensing rights | 4.3 | 0.4 | 10.8 | ||||||
| Foreign rate differences | (4.3 | ) | 3.6 | 2.2 | |||||
| Historic and solar tax credits | (4.8 | ) | (3.3 | ) | (3.3 | ) | |||
| U.S. tax reform | 2.9 | — | — | ||||||
| Other, net | (0.9 | ) | (0.8 | ) | (1.4 | ) | |||
| Effective income tax rate | 31.9 | % | 34.5 | % | 43.1 | % | |||
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| December 31, | 2019 | 2018 | ||||||
| Balance at beginning of year | $ | 97,530 | $ | 42,082 | ||||
| Additions for tax positions taken during prior years | 9,327 | 1,174 | ||||||
| Reductions for tax positions taken during prior years | (2,080 | ) | (2,581 | ) | ||||
| Additions for tax positions taken during the current year | 10,472 | 61,627 | ||||||
| Settlements | (1,151 | ) | — | |||||
| Expiration of statutes of limitations | (5,715 | ) | (4,772 | ) | ||||
| Balance at end of year | $ | 108,383 | $ | 97,530 | ||||
| December 31, | 2017 | 2016 | ||||||
| Balance at beginning of year | $ | 36,002 | $ | 33,411 | ||||
| Additions for tax positions taken during prior years | 2,492 | 2,804 | ||||||
| Reductions for tax positions taken during prior years | (1,689 | ) | (4,080 | ) | ||||
| Additions for tax positions taken during the current year | 10,018 | 9,100 | ||||||
| Settlements | (1,481 | ) | — | |||||
| Expiration of statutes of limitations | (3,260 | ) | (5,233 | ) | ||||
| Balance at end of year | $ | 42,082 | $ | 36,002 | ||||
The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $37,587$102,671 as of December 31, 20172019 and $27,691$93,507 as of December 31, 2016.2018.
We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. We recognized a net tax expense of $795$3,824 in 2017,2019, a net tax benefitexpense of $75$1,785 in 20162018 and a net tax expense of $1,153$795 in 20152017 for interest and penalties. Accrued net interest and penalties were $4,966$9,978 as of December 31, 20172019 and $3,716$6,154 as of December 31, 2016.2018.
We file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which we have unrecognized tax benefits, is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our unrecognized tax benefits reflect the most likely outcome. We adjust these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash. Favorable resolution would be recognized as a reduction to our effective income tax rate in the period of resolution.
The Company’s major taxing jurisdictions currently include the United States (federal and state), as well as various foreign jurisdictions such as Canada, China, Mexico, Brazil, India, Malaysia and Switzerland. The number of years with open tax audits varies depending on the tax jurisdiction, with 20132010 representing the earliest tax year that remains open for examination by certain taxing authorities. In 2017, theThe U.S. Internal Revenue Service began an examination ofis examining our U.S. federal income tax returns for 2013, 2014 and 2014.2016.
We reasonably expect reductions in the liability for unrecognized tax benefits of approximately $8,089$13,534 within the next 12 months because of the expiration of statutes of limitations and settlements of tax audits.
The Hershey Company | 2019 Form 10-K | Page 78
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
As of December 31, 2017,2019, we had approximately $370,027$726,024 of undistributed earnings of our international subsidiaries. We intend to continue to reinvest earnings outside of the United States for the foreseeable future and, therefore, have not recognized additional tax expense (e.g., foreign withholding taxes)taxes due upon repatriation) on these earnings beyond the one-time U.S. repatriation tax due under the 2017 Tax Cuts and Jobs Act.
Investments in Partnerships Qualifying for Tax Credits
We invest in partnerships which make equity investments in projects eligible to receive federal historic and energy tax credits. The investments are accounted for under the equity method and reported within other assets in our Consolidated Balance Sheets. The tax credits, when realized, are recognized as a reduction of tax expense under the flow-through method, at which time the corresponding equity investment is written-down to reflect the remaining value of the future benefits to be realized. For the years ended December 31, 20172019, 2018 and 2016,2017 we recognized investment tax credits and related outside basis difference benefitbenefits totaling $74,600$58,798, $60,111 and $52,342,$74,600, respectively, and we wrote-down the equity investment by $66,209$50,457, $50,329 and $43,482,$66,209, respectively, to reflect the realization of these benefits. The equity investment write-down is reflected within other (income) expense, net in the Consolidated Statements of Income.
We sponsor a number of defined benefit pension plans. The primary plans are The Hershey Company Retirement Plan and The Hershey Company Retirement Plan for Hourly Employees. These are cash balance plans that provide pension benefits for most domestic employees hired prior to January 1, 2007. We also sponsor two2 post-retirement benefit plans: health care and life insurance. The health care plan is contributory, with participants’ contributions adjusted annually. The life insurance plan is non-contributory.
The Hershey Company | 2019 Form 10-K | Page 79
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Obligations and Funded Status
A summary of the changes in benefit obligations, plan assets and funded status of these plans is as follows:
| Pension Benefits | Other Benefits | |||||||||||||||
| December 31, | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Change in benefit obligation | ||||||||||||||||
| Projected benefit obligation at beginning of year | $ | 1,031,206 | $ | 1,117,564 | $ | 214,719 | $ | 236,112 | ||||||||
| Service cost | 20,878 | 21,223 | 151 | 230 | ||||||||||||
| Interest cost | 35,756 | 31,943 | 7,837 | 6,923 | ||||||||||||
| Actuarial loss (gain) | 89,092 | (50,432 | ) | 23,635 | (10,842 | ) | ||||||||||
| Curtailment | — | (16 | ) | — | — | |||||||||||
| Settlement | (21,445 | ) | (61,268 | ) | — | — | ||||||||||
| Currency translation and other | 2,956 | (4,674 | ) | 589 | (1,073 | ) | ||||||||||
| Benefits paid | (53,237 | ) | (23,134 | ) | (16,474 | ) | (16,631 | ) | ||||||||
| Projected benefit obligation at end of year | 1,105,206 | 1,031,206 | 230,457 | 214,719 | ||||||||||||
| Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | 963,861 | 1,086,226 | — | — | ||||||||||||
| Actual return on plan assets | 157,931 | (43,118 | ) | — | — | |||||||||||
| Employer contributions | 3,660 | 9,233 | 16,474 | 16,631 | ||||||||||||
| Settlement | (21,445 | ) | (61,268 | ) | — | — | ||||||||||
| Currency translation and other | 2,668 | (4,078 | ) | — | — | |||||||||||
| Benefits paid | (53,237 | ) | (23,134 | ) | (16,474 | ) | (16,631 | ) | ||||||||
| Fair value of plan assets at end of year | 1,053,438 | 963,861 | — | — | ||||||||||||
| Funded status at end of year | $ | (51,768 | ) | $ | (67,345 | ) | $ | (230,457 | ) | $ | (214,719 | ) | ||||
| Amounts recognized in the Consolidated Balance Sheets: | ||||||||||||||||
| Other assets | $ | 10,481 | $ | 332 | $ | — | $ | — | ||||||||
| Accrued liabilities | (3,476 | ) | (1,298 | ) | (19,251 | ) | (19,553 | ) | ||||||||
| Other long-term liabilities | (58,773 | ) | (66,379 | ) | (211,206 | ) | (195,166 | ) | ||||||||
| Total | $ | (51,768 | ) | $ | (67,345 | ) | $ | (230,457 | ) | $ | (214,719 | ) | ||||
| Amounts recognized in Accumulated Other Comprehensive Income (Loss), net of tax: | ||||||||||||||||
| Actuarial net (loss) gain | $ | (216,443 | ) | $ | (254,735 | ) | $ | 444 | $ | 17,967 | ||||||
| Net prior service credit (cost) | 27,031 | 32,350 | (219 | ) | (812 | ) | ||||||||||
| Net amounts recognized in AOCI | $ | (189,412 | ) | $ | (222,385 | ) | $ | 225 | $ | 17,155 | ||||||
| Pension Benefits | Other Benefits | |||||||||||||||
| December 31, | 2017 | 2016 | 2017 | 2016 | ||||||||||||
| Change in benefit obligation | ||||||||||||||||
| Projected benefit obligation at beginning of year | $ | 1,118,318 | $ | 1,169,424 | $ | 242,846 | $ | 255,617 | ||||||||
| Service cost | 20,657 | 23,075 | 263 | 299 | ||||||||||||
| Interest cost | 40,996 | 41,875 | 8,837 | 9,731 | ||||||||||||
| Plan amendments | (8,473 | ) | (43,065 | ) | — | — | ||||||||||
| Actuarial (gain) loss | 40,768 | 15,804 | 2,207 | (2,998 | ) | |||||||||||
| Settlement | (44,978 | ) | (59,784 | ) | — | — | ||||||||||
| Currency translation and other | 6,749 | 1,416 | 889 | 314 | ||||||||||||
| Benefits paid | (56,473 | ) | (30,427 | ) | (18,930 | ) | (20,117 | ) | ||||||||
| Projected benefit obligation at end of year | 1,117,564 | 1,118,318 | 236,112 | 242,846 | ||||||||||||
| Change in plan assets | ||||||||||||||||
| Fair value of plan assets at beginning of year | 1,023,676 | 1,041,902 | — | — | ||||||||||||
| Actual return on plan assets | 121,241 | 49,012 | — | — | ||||||||||||
| Employer contributions | 37,503 | 21,580 | 18,930 | 20,117 | ||||||||||||
| Settlement | (44,978 | ) | (59,784 | ) | — | — | ||||||||||
| Currency translation and other | 5,257 | 1,393 | — | — | ||||||||||||
| Benefits paid | (56,473 | ) | (30,427 | ) | (18,930 | ) | (20,117 | ) | ||||||||
| Fair value of plan assets at end of year | 1,086,226 | 1,023,676 | — | — | ||||||||||||
| Funded status at end of year | $ | (31,338 | ) | $ | (94,642 | ) | $ | (236,112 | ) | $ | (242,846 | ) | ||||
| Amounts recognized in the Consolidated Balance Sheets: | ||||||||||||||||
| Other assets | $ | 14,988 | $ | 39 | $ | — | $ | — | ||||||||
| Accrued liabilities | (6,916 | ) | (28,994 | ) | (20,792 | ) | (22,576 | ) | ||||||||
| Other long-term liabilities | (39,410 | ) | (65,687 | ) | (215,320 | ) | (220,270 | ) | ||||||||
| Total | $ | (31,338 | ) | $ | (94,642 | ) | $ | (236,112 | ) | $ | (242,846 | ) | ||||
| Amounts recognized in Accumulated Other Comprehensive Income (Loss), net of tax: | ||||||||||||||||
| Actuarial net (loss) gain | $ | (207,659 | ) | $ | (243,228 | ) | $ | 8,313 | $ | 9,264 | ||||||
| Net prior service credit (cost) | 30,994 | 28,360 | (1,174 | ) | (1,565 | ) | ||||||||||
| Net amounts recognized in AOCI | $ | (176,665 | ) | $ | (214,868 | ) | $ | 7,139 | $ | 7,699 | ||||||
The project benefit obligation during 2019 was impacted by actuarial loss of $89,092 which was the result of the discount rate assumption decreasing from 4.1% at December 31, 2018 to 3.1% at December 31, 2019. The accumulated benefit obligation for all defined benefit pension plans was $1,077,112$1,063,955 as of December 31, 20172019 and $1,081,261$994,278 as of December 31, 2016.2018.
The Hershey Company | 2019 Form 10-K | Page 80
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Plans with accumulated benefit obligations in excess of plan assets were as follows:
| December 31, | 2019 | 2018 | ||||||
| Projected benefit obligation | $ | 709,651 | $ | 1,030,382 | ||||
| Accumulated benefit obligation | 674,017 | 993,892 | ||||||
| Fair value of plan assets | 647,402 | 962,705 | ||||||
| December 31, | 2017 | 2016 | ||||||
| Projected benefit obligation | $ | 711,767 | $ | 1,118,294 | ||||
| Accumulated benefit obligation | 675,660 | 1,081,254 | ||||||
| Fair value of plan assets | 665,441 | 1,023,613 | ||||||
Net Periodic Benefit Cost
The components of net periodic benefit cost were as follows:
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| For the years ended December 31, | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Amounts recognized in net periodic benefit cost | ||||||||||||||||||||||||
| Service cost | $ | 20,878 | $ | 21,223 | $ | 20,657 | $ | 151 | $ | 230 | $ | 263 | ||||||||||||
| Interest cost | 35,756 | 31,943 | 40,996 | 7,837 | 6,923 | 8,837 | ||||||||||||||||||
| Expected return on plan assets | (54,520 | ) | (58,612 | ) | (57,370 | ) | — | — | — | |||||||||||||||
| Amortization of prior service (credit) cost | (7,230 | ) | (7,202 | ) | (5,822 | ) | 811 | 836 | 748 | |||||||||||||||
| Amortization of net loss (gain) | 32,647 | 26,875 | 33,648 | (385 | ) | — | (1 | ) | ||||||||||||||||
| Curtailment credit | — | (299 | ) | — | — | — | — | |||||||||||||||||
| Settlement loss | 5,498 | 20,211 | 17,732 | — | — | — | ||||||||||||||||||
| Total net periodic benefit cost | $ | 33,029 | $ | 34,139 | $ | 49,841 | $ | 8,414 | $ | 7,989 | $ | 9,847 | ||||||||||||
| Change in plan assets and benefit obligations recognized in AOCI, pre-tax | ||||||||||||||||||||||||
| Actuarial net (gain) loss | $ | (52,028 | ) | $ | 3,715 | $ | (73,768 | ) | $ | 23,956 | $ | (10,771 | ) | $ | 2,139 | |||||||||
| Prior service cost (credit) | 7,232 | 7,198 | (2,650 | ) | (810 | ) | (838 | ) | (744 | ) | ||||||||||||||
| Total recognized in other comprehensive (income) loss, pre-tax | $ | (44,796 | ) | $ | 10,913 | $ | (76,418 | ) | $ | 23,146 | $ | (11,609 | ) | $ | 1,395 | |||||||||
| Net amounts recognized in periodic benefit cost and AOCI | $ | (11,767 | ) | $ | 45,052 | $ | (26,577 | ) | $ | 31,560 | $ | (3,620 | ) | $ | 11,242 | |||||||||
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||||||||
| Amounts recognized in net periodic benefit cost | ||||||||||||||||||||||||
| Service cost | $ | 20,657 | $ | 23,075 | $ | 28,300 | $ | 263 | $ | 299 | $ | 542 | ||||||||||||
| Interest cost | 40,996 | 41,875 | 44,179 | 8,837 | 9,731 | 10,187 | ||||||||||||||||||
| Expected return on plan assets | (57,370 | ) | (58,820 | ) | (68,830 | ) | — | — | — | |||||||||||||||
| Amortization of prior service (credit) cost | (5,822 | ) | (1,555 | ) | (1,178 | ) | 748 | 575 | 611 | |||||||||||||||
| Amortization of net loss (gain) | 33,648 | 34,940 | 30,510 | (1 | ) | (13 | ) | (57 | ) | |||||||||||||||
| Curtailment credit | — | — | (688 | ) | — | — | 204 | |||||||||||||||||
| Settlement loss | 17,732 | 22,657 | 23,067 | — | — | — | ||||||||||||||||||
| Total net periodic benefit cost | $ | 49,841 | $ | 62,172 | $ | 55,360 | $ | 9,847 | $ | 10,592 | $ | 11,487 | ||||||||||||
| Change in plan assets and benefit obligations recognized in AOCI, pre-tax | ||||||||||||||||||||||||
| Actuarial net (gain) loss | $ | (73,768 | ) | $ | (31,772 | ) | $ | (21,554 | ) | $ | 2,139 | $ | (3,047 | ) | $ | (26,270 | ) | |||||||
| Prior service (credit) cost | (2,650 | ) | (41,517 | ) | 1,748 | (744 | ) | (572 | ) | (834 | ) | |||||||||||||
| Total recognized in other comprehensive (income) loss, pre-tax | $ | (76,418 | ) | $ | (73,289 | ) | $ | (19,806 | ) | $ | 1,395 | $ | (3,619 | ) | $ | (27,104 | ) | |||||||
| Net amounts recognized in periodic benefit cost and AOCI | $ | (26,577 | ) | $ | (11,117 | ) | $ | 35,554 | $ | 11,242 | $ | 6,973 | $ | (15,617 | ) | |||||||||
| Pension Plans | Post-Retirement Benefit Plans | ||||||
| Amortization of net actuarial loss | $ | 26,735 | $ | — | |||
| Amortization of prior service (credit) cost | $ | (7,197 | ) | $ | 836 | ||
Assumptions
The weighted-average assumptions used in computing the year end benefit obligations were as follows:
| Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||||||||||
| December 31, | 2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | ||||||||||||||||
| Discount rate | 3.4 | % | 3.8 | % | 3.5 | % | 3.8 | % | 3.1 | % | 4.1 | % | 3.2 | % | 4.2 | % | ||||||||
| Rate of increase in compensation levels | 3.8 | % | 3.8 | % | N/A | N/A | 3.6 | % | 3.6 | % | N/A | N/A | ||||||||||||
| Interest crediting rate | 4.7 | % | 4.7 | % | N/A | N/A | ||||||||||||||||||
The Hershey Company | 2019 Form 10-K | Page 81
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
The weighted-average assumptions used in computing net periodic benefit cost were as follows:
| Pension Benefits | Other Benefits | |||||||||||||||||
| For the years ended December 31, | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
| Discount rate | 4.1 | % | 3.4 | % | 3.8 | % | 4.2 | % | 3.5 | % | 3.8 | % | ||||||
| Expected long-term return on plan assets | 5.9 | % | 5.8 | % | 5.8 | % | N/A | N/A | N/A | |||||||||
| Rate of compensation increase | 3.6 | % | 3.8 | % | 3.8 | % | N/A | N/A | N/A | |||||||||
| Pension Benefits | Other Benefits | |||||||||||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | ||||||||||||
| Discount rate | 3.8 | % | 4.0 | % | 3.7 | % | 3.8 | % | 4.0 | % | 3.7 | % | ||||||
| Expected long-term return on plan assets | 5.8 | % | 6.1 | % | 6.3 | % | N/A | N/A | N/A | |||||||||
| Rate of compensation increase | 3.8 | % | 3.8 | % | 4.1 | % | N/A | N/A | N/A | |||||||||
The Company’s discount rate assumption is determined by developing a yield curve based on high quality corporate bonds with maturities matching the plans’ expected benefit payment streams. The plans’ expected cash flows are then discounted by the resulting year-by-year spot rates. We base the asset return assumption on current and expected asset allocations, as well as historical and expected returns on the plan asset categories.
Prior to December 31, 2017, the service and interest cost components of net periodic benefit cost were determined utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Beginning in 2018, we have elected to utilize a full yield curve approach in the estimation of service and interest costs by applying the specific spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. We made this change to provide a more precise measurement of service and interest costs by improving the correlation between the projected cash flows to the corresponding spot rates along the yield curve. This change does not affect the measurement of our pension and other post-retirement benefit liabilities but generally results in lower benefit expense in periods when the yield curve is upward sloping. Compared tosloping, which was the method used in 2017, we expect this change to result in lower pension and other post-retirement benefit expense of approximately $5,800case in 2018. We are accountingaccounted for this change prospectively as a change in accounting estimate that is inseparable fromand, accordingly, accounted for it on a changeprospective basis starting in accounting principle.2018.
For purposes of measuring our post-retirement benefit obligation at December 31, 2017,2019, we assumed a 6.4% annual rate of increase in the per capita cost of covered health care benefits for 2020, grading down to 5.0% by 2025. For purposes of measuring our post-retirement benefit obligation at December 31, 2018, we assumed a 7.0% annual rate of increase in the per capita cost of covered health care benefits for 2018,2019, grading down to 5.0% by 2023. For measurement purposes as of December 31, 2016, we assumed a 7.0% annual rate of increase in the per capita cost of covered health care benefits for 2017, grading down to 5.0% by 2021. Assumed health care cost trend rates could have a significant effect on the amounts reported for the post-retirement health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
| Impact of assumed health care cost trend rates | One-Percentage Point Increase | One-Percentage Point Decrease | ||||||
| Effect on total service and interest cost components | $ | 148 | $ | (129 | ) | |||
| Effect on accumulated post-retirement benefit obligation | 3,133 | (2,758 | ) | |||||
The valuations and assumptions reflect adoption of the Society of Actuaries updated RP-2014Pri-2012 mortality tables with MP-2017MP-2019 generational projection scales, which we adopted as of December 31, 2017.2019. Adoption of the updated scale did not have a significant impact on our current pension obligations or net period benefit cost since our primary plans are cash balance plans and most participants take lump-sum settlements upon retirement.
Plan Assets
We broadly diversify our pension plan assets across public equity, fixed income, diversified credit strategies and diversified alternative strategies asset classes. Our target asset allocation for our major domestic pension plans as of December 31, 20172019 was as follows:
| Asset Class | Target Asset Allocation | |
| Cash | 1% | |
| Equity securities | 25% | |
| Fixed income securities | 49% | |
| Alternative investments, including real estate, listed infrastructure and other | 25% | |
As of December 31, 2017,2019, actual allocations were consistent with the targets and within our allowable ranges. We expect the level of volatility in pension plan asset returns to be in line with the overall volatility of the markets within each asset class.
The Hershey Company | 2019 Form 10-K | Page 82
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
The following table sets forth by level, within the fair value hierarchy (as defined in Note 6), pension plan assets at their fair values as of December 31, 2017:2019:
| Quoted prices in active markets of identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant other unobservable inputs (Level 3) | Investments Using NAV as a Practical Expedient (1) | Total | |||||||||||||||
| Cash and cash equivalents | $ | 365 | $ | 13,194 | $ | — | $ | 629 | $ | 14,188 | |||||||||
| Equity securities: | |||||||||||||||||||
| Global all-cap (a) | — | — | — | 248,222 | 248,222 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||||
| U.S. government/agency | — | — | — | 264,066 | 264,066 | ||||||||||||||
| Corporate bonds (b) | — | — | — | 136,896 | 136,896 | ||||||||||||||
| International government/corporate bonds (c) | — | — | — | 32,407 | 32,407 | ||||||||||||||
| Diversified credit (d) | — | — | — | 103,793 | 103,793 | ||||||||||||||
| Alternative investments: | |||||||||||||||||||
| Global diversified assets (e) | — | — | — | 146,681 | 146,681 | ||||||||||||||
| Global real estate investment trusts (f) | — | — | — | 53,159 | 53,159 | ||||||||||||||
| Global infrastructure (g) | — | — | — | 54,026 | 54,026 | ||||||||||||||
| Total pension plan assets | $ | 365 | $ | 13,194 | $ | — | $ | 1,039,879 | $ | 1,053,438 | |||||||||
| Quoted prices in active markets of identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant other unobservable inputs (Level 3) | Investments Using NAV as a Practical Expedient (1) | Total | |||||||||||||||
| Cash and cash equivalents | $ | 1,179 | $ | 18,161 | $ | — | $ | 730 | $ | 20,070 | |||||||||
| Equity securities: | |||||||||||||||||||
| Global all-cap (a) | — | — | — | 276,825 | 276,825 | ||||||||||||||
| Fixed income securities: | |||||||||||||||||||
| U.S. government/agency | — | — | — | 239,686 | 239,686 | ||||||||||||||
| Corporate bonds (b) | — | 33,019 | — | 162,633 | 195,652 | ||||||||||||||
| Collateralized obligations (c) | — | 40,350 | — | 34,538 | 74,888 | ||||||||||||||
| International government/corporate bonds (d) | — | — | — | 32,447 | 32,447 | ||||||||||||||
| Alternative investments: | |||||||||||||||||||
| Global diversified assets (e) | — | — | — | 149,030 | 149,030 | ||||||||||||||
| Global real estate investment trusts (f) | — | — | — | 50,213 | 50,213 | ||||||||||||||
| Global infrastructure (g) | — | — | — | 47,415 | 47,415 | ||||||||||||||
| Total pension plan assets | $ | 1,179 | $ | 91,530 | $ | — | $ | 993,517 | $ | 1,086,226 | |||||||||
The following table sets forth by level, within the fair value hierarchy, pension plan assets at their fair values as of December 31, 2016:2018:
Quoted prices in active markets of identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant other unobservable inputs (Level 3) | Total | Quoted prices in active markets of identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant other unobservable inputs (Level 3) | Investments Using NAV as a Practical Expedient (1) | Total | ||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 576 | $ | 9,540 | $ | — | $ | 10,116 | $ | 1,040 | $ | 17,857 | $ | — | $ | 664 | $ | 19,561 | ||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||||||||||||
| Global all-cap (a) | 20,216 | 242,214 | — | 262,430 | — | — | — | 210,850 | 210,850 | |||||||||||||||||||||||||
| Fixed income securities: | ||||||||||||||||||||||||||||||||||
| U.S. government/agency | — | 228,648 | — | 228,648 | — | — | — | 242,618 | 242,618 | |||||||||||||||||||||||||
| Corporate bonds (b) | — | 199,634 | — | 199,634 | — | — | — | 117,656 | 117,656 | |||||||||||||||||||||||||
| Collateralized obligations (c) | — | 50,532 | — | 50,532 | ||||||||||||||||||||||||||||||
| International government/corporate bonds (d) | — | 30,928 | — | 30,928 | ||||||||||||||||||||||||||||||
| International government/corporate bonds (c) | — | — | — | 29,115 | 29,115 | |||||||||||||||||||||||||||||
| Diversified credit (d) | — | — | — | 94,008 | 94,008 | |||||||||||||||||||||||||||||
| Alternative investments: | ||||||||||||||||||||||||||||||||||
| Global diversified assets (e) | — | 146,975 | — | 146,975 | — | — | — | 147,661 | 147,661 | |||||||||||||||||||||||||
| Global real estate investment trusts (f) | — | 48,000 | — | 48,000 | — | — | — | 57,854 | 57,854 | |||||||||||||||||||||||||
| Global infrastructure (g) | — | 46,413 | — | 46,413 | — | — | — | 44,538 | 44,538 | |||||||||||||||||||||||||
| Total pension plan assets | $ | 20,792 | $ | 1,002,884 | $ | — | $ | 1,023,676 | $ | 1,040 | $ | 17,857 | $ | — | $ | 944,964 | $ | 963,861 | ||||||||||||||||
| (1) | Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy but are included to reconcile to the amounts presented in our Obligations and Funded Status table. |
The Hershey Company | 2019 Form 10-K | Page 83
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| (a) | This category comprises equity funds that primarily track the MSCI World Index or MSCI All Country World Index. |
| (b) | This category comprises fixed income funds primarily invested in investment grade and high yield bonds. |
| (c) | This category comprises fixed income funds primarily invested in |
| (d) | This category comprises fixed income funds primarily invested in |
| (e) | This category comprises diversified funds invested across alternative asset classes. |
| (f) | This category comprises equity funds primarily invested in publicly traded real estate securities. |
| (g) | This category comprises equity funds primarily invested in publicly traded listed infrastructure securities. |
The fair value of the Level 1 assets was based on quoted prices in active markets for the identical assets. The fair value of the Level 2 assets was determined by management based on an assessment of valuations provided by asset management entities and was calculated by aggregating market prices for all underlying securities.
Investment objectives for our domestic plan assets are:
To maintain careful control of the risk level within each asset class; and
To focus on a long-term return objective.
We believe that there are no significant concentrations of risk within our plan assets as of December 31, 2017.2019. We comply with the rules and regulations promulgated under the Employee Retirement Income Security Act of 1974 (“ERISA”) and we prohibit investments and investment strategies not allowed by ERISA. We do not permit direct purchases of our Company’s securities or the use of derivatives for the purpose of speculation. We invest the assets of non-domestic plans in compliance with laws and regulations applicable to those plans.
Cash Flows and Plan Termination
Our policy is to fund domestic pension liabilities in accordance with the limits imposed by the ERISA, federal income tax laws and the funding requirements of the Pension Protection Act of 2006. We fund non-domestic pension liabilities in accordance with laws and regulations applicable to those plans.
We made total contributions to the pension plans of $37,503$3,660 during 2017. This included contributions totaling $29,201 to fund payouts from the unfunded supplemental retirement plans and $6,461 to complete the termination of the Hershey Company Puerto Rico Hourly Pension Plan, which was approved in 2016 by the Company's Board Compensation and Executive Organization Committee.2019. In 2016,2018, we made total contributions of $21,580$9,233 to the pension plans. For 2018,2020, minimum funding requirements for our pension plans are approximately $1,591.$1,503.
Total benefit payments expected to be paid to plan participants, including pension benefits funded from the plans and other benefits funded from Company assets, are as follows:
Expected Benefit Payments | |||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | 2025-2029 | ||||||||||||||||||
| Pension Benefits | $ | 105,287 | $ | 93,240 | $ | 115,785 | $ | 89,634 | $ | 90,039 | $ | 372,692 | |||||||||||
| Other Benefits | 19,247 | 18,239 | 17,021 | 16,239 | 15,583 | 66,581 | |||||||||||||||||
Expected Benefit Payments | |||||||||||||||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023-2027 | ||||||||||||||||||
| Pension Benefits | $ | 126,392 | $ | 78,614 | $ | 85,804 | $ | 87,159 | $ | 107,005 | $ | 407,769 | |||||||||||
| Other Benefits | 20,773 | 19,026 | 17,768 | 16,863 | 15,767 | 69,003 | |||||||||||||||||
Savings Plans
The Company sponsors several defined contribution plans to provide retirement benefits to employees. Contributions to The Hershey Company 401(k) Plan and similar plans for non-domestic employees are based on a portion of eligible pay up to a defined maximum. All matching contributions were made in cash. Expense associated with the defined contribution plans was $47,651 in 2019, $47,959 in 2018 and $46,154 in 2017, $43,545 in 2016 and $44,285 in 2015.2017.
The Hershey Company | 2019 Form 10-K | Page 84
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
12. STOCK COMPENSATION PLANS
Share-based grants for compensation and incentive purposes are made pursuant to the Equity and Incentive Compensation Plan (“EICP”). The EICP provides for grants of one or more of the following stock-based compensation awards to employees, non-employee directors and certain service providers upon whom the successful conduct of our business is dependent:
Performance stock units ("PSUs") and performance stock;
Stock appreciation rights;
Restricted stock units ("RSUs") and restricted stock; and
Other stock-based awards.
As of December 31, 2017,2019, 65.8 million shares were authorized and approved by our stockholders for grants under the EICP. The EICP also provides for the deferral of stock-based compensation awards by participants if approved by the Compensation and Executive Organization Committee of our Board and if in accordance with an applicable deferred compensation plan of the Company. Currently, the Compensation and Executive Organization Committee has authorized the deferral of PSU and RSU awards by certain eligible employees under the Company’s Deferred Compensation Plan. Our Board has authorized our non-employee directors to defer any portion of their cash retainer, committee chair fees and RSUs awarded that they elect to convert into deferred stock units under our Directors’ Compensation Plan.
At the time stock options are exercised or RSUs and PSUs become payable, common stock is issued from our accumulated treasury shares. Dividend equivalents are credited on RSUs on the same date and at the same rate as dividends are paid on Hershey’s common stock. These dividend equivalents are charged to retained earnings.
For the periods presented, compensation expense for all types of stock-based compensation programs and the related income tax benefit recognized were as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Pre-tax compensation expense | $ | 51,899 | $ | 49,286 | $ | 51,061 | ||||||
| Related income tax benefit | 9,030 | 9,463 | 13,684 | |||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Pre-tax compensation expense | $ | 51,061 | $ | 54,785 | $ | 51,533 | ||||||
| Related income tax benefit | 13,684 | 17,148 | 17,109 | |||||||||
Compensation costs for stock compensation plans are primarily included in selling, marketing and administrative expense. As of December 31, 2017,2019, total stock-based compensation cost related to non-vested awards not yet recognized was $62,274$41,422 and the weighted-average period over which this amount is expected to be recognized was approximately 2.12.0 years.
Stock Options
The exercise price of each stock option awarded under the EICP equals the closing price of our Common Stock on the New York Stock Exchange on the date of grant. Each stock option has a maximum term of 10 years. Grants of stock options provide for pro-rated vesting, typically over a four-year period. Expense for stock options is based on grant date fair value and recognized on a straight-line method over the vesting period, net of estimated forfeitures.
The Hershey Company | 2019 Form 10-K | Page 85
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
A summary of activity relating to grants of stock options for the year ended December 31, 20172019 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 | 5,394,382 | $94.28 | 5.6 years | ||||
| Granted | 1,640 | $109.74 | |||||
| Exercised | (2,881,923 | ) | $91.09 | ||||
| Forfeited | (93,638 | ) | $101.45 | ||||
| Outstanding as of December 31, 2019 | 2,420,461 | $97.80 | 5.7 years | $ | 119,043 | ||
| Options exercisable as of December 31, 2019 | 1,410,004 | $95.50 | 4.5 years | $ | 72,589 | ||
| Stock Options | Shares | Weighted-Average Exercise Price (per share) | Weighted-Average Remaining Contractual Term | Aggregate Intrinsic Value | |||
| Outstanding at beginning of the period | 6,192,008 | $82.67 | 6.2 years | ||||
| Granted | 1,094,155 | $108.06 | |||||
| Exercised | (1,133,511 | ) | $69.64 | ||||
| Forfeited | (231,590 | ) | $103.03 | ||||
| Outstanding as of December 31, 2017 | 5,921,062 | $89.06 | 5.8 years | $ | 141,893 | ||
| Options exercisable as of December 31, 2017 | 3,699,469 | $81.65 | 4.3 years | $ | 116,067 | ||
The weighted-average fair value of options granted was $15.76, $11.46$15.25, $15.58 and $18.99$15.76 per share in 2017, 20162019, 2018 and 2015,2017, respectively. The fair value was estimated on the date of grant using a Black-Scholes option-pricing model and the following weighted-average assumptions:
| For the years ended December 31, | 2019 | 2018 | 2017 | ||||||
| Dividend yields | 2.7 | % | 2.4 | % | 2.4 | % | |||
| Expected volatility | 17.0 | % | 16.6 | % | 17.2 | % | |||
| Risk-free interest rates | 2.5 | % | 2.8 | % | 2.2 | % | |||
| Expected term in years | 6.5 | 6.6 | 6.8 | ||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | ||||||
| Dividend yields | 2.4 | % | 2.4 | % | 2.1 | % | |||
| Expected volatility | 17.2 | % | 16.8 | % | 20.7 | % | |||
| Risk-free interest rates | 2.2 | % | 1.5 | % | 1.9 | % | |||
| Expected term in years | 6.8 | 6.8 | 6.7 | ||||||
"Expected volatility" means the historical volatility of our Common Stock over the expected term of each grant;
"Expected term" means the period of time that stock options granted are expected to be outstanding based | |
The total intrinsic value of options exercised was $115,786, $38,382 and $45,998 $73,944in 2019, 2018 and $66,161 in 2017, 2016 and 2015, respectively.
As of December 31, 2017,2019, there was $15,849$6,288 of total unrecognized compensation cost related to non-vested stock option awards granted under the EICP, which we expect to recognize over a weighted-average period of 2.41.8 years.
The following table summarizes information about stock options outstanding as of December 31, 2019:
| Options Outstanding | Options Exercisable | |||||||||||
| Range of Exercise Prices | Number Outstanding as of 12/31/19 | Weighted- Average Remaining Contractual Life in Years | Weighted- Average Exercise Price | Number Exercisable as of 12/31/19 | Weighted- Average Exercise Price | |||||||
| $33.40 - $98.10 | 676,329 | 4.2 | $80.73 | 513,366 | $77.59 | |||||||
| $98.11 - $105.91 | 932,220 | 7.0 | $101.87 | 396,854 | $104.39 | |||||||
| $105.92 - $111.76 | 811,912 | 5.6 | $107.35 | 499,784 | $106.84 | |||||||
| $33.40 - $111.76 | 2,420,461 | 5.7 | $97.80 | 1,410,004 | $95.50 | |||||||
The Hershey Company | 2019 Form 10-K | Page 86
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| Options Outstanding | Options Exercisable | |||||||||||
| Range of Exercise Prices | Number Outstanding as of 12/31/17 | Weighted- Average Remaining Contractual Life in Years | Weighted- Average Exercise Price | Number Exercisable as of 12/31/17 | Weighted- Average Exercise Price | |||||||
| $33.40 - $81.73 | 1,985,084 | 3.4 | $63.53 | 1,985,084 | $63.53 | |||||||
| $81.74 - $105.91 | 2,060,833 | 6.9 | $97.25 | 929,199 | $99.72 | |||||||
| $105.92 - $111.76 | 1,875,145 | 7.1 | $107.06 | 785,186 | $106.04 | |||||||
| $33.40 - $111.76 | 5,921,062 | 5.8 | $89.06 | 3,699,469 | $81.65 | |||||||
Performance Stock Units and Restricted Stock Units
Under the EICP, we grant PSUs to selected executives and other key employees. Vesting is contingent upon the achievement of certain performance objectives. We grant PSUs over 3-year performance cycles. If we meet targets for financial measures at the end of the applicable 3-year performance cycle, we award a resulting number of shares of our Common Stock to the participants. For PSUs granted, the target award is a combination of a market-based total shareholder return and performance-based components. The performance scores for 20152017 through 20172019 grants of PSUs can range from 0% to 250% of the targeted amounts.
We recognize the compensation cost associated with PSUs ratably over the 3-year term. Compensation cost is based on the grant date fair value because the grants can only be settled in shares of our Common Stock. The grant date fair value of PSUs is determined based on the Monte Carlo simulation model for the market-based total shareholder return component and the closing market price of the Company’s Common Stock on the date of grant for performance-based components.
In 2017, 20162019, 2018 and 2015,2017, we awarded RSUs to certain executive officers and other key employees under the EICP. We also awarded RSUs quarterly to non-employee directors.
We recognize the compensation cost associated with employee RSUs over a specified award vesting period based on the grant date fair value of our Common Stock. We recognize expense for employee RSUs based on the straight-line method. We recognize the compensation cost associated with non-employee director RSUs ratably over the vesting period, net of estimated forfeitures.
A summary of activity relating to grants of PSUs and RSUs for the period ended December 31, 20172019 is as follows:
| Performance Stock Units and Restricted Stock Units | Number of units | Weighted-average grant date fair value for equity awards (per unit) | |||
| Outstanding at beginning of year | 999,018 | $101.57 | |||
| Granted | 493,828 | $115.94 | |||
| Performance assumption change | 165,858 | $124.94 | |||
| Vested | (450,922 | ) | $99.19 | ||
| Forfeited | (117,866 | ) | $109.04 | ||
| Outstanding at end of year | 1,089,916 | $112.52 | |||
| Performance Stock Units and Restricted Stock Units | Number of units | Weighted-average grant date fair value for equity awards (per unit) | |||
| Outstanding at beginning of year | 828,228 | $102.66 | |||
| Granted | 478,044 | $110.97 | |||
| Performance assumption change | 21,305 | $96.71 | |||
| Vested | (277,261 | ) | $109.35 | ||
| Forfeited | (126,952 | ) | $107.91 | ||
| Outstanding at end of year | 923,364 | $103.11 | |||
The following table sets forth information about the fair value of the PSUs and RSUs granted for potential future distribution to employees and non-employee directors. In addition, the table provides assumptions used to determine the fair value of the market-based total shareholder return component using the Monte Carlo simulation model on the date of grant.
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Units granted | 493,828 | 457,315 | 478,044 | |||||||||
| Weighted-average fair value at date of grant | $ | 115.94 | $ | 97.86 | $ | 110.97 | ||||||
| Monte Carlo simulation assumptions: | ||||||||||||
| Estimated values | $ | 48.40 | $ | 29.17 | $ | 46.85 | ||||||
| Dividend yields | 2.6 | % | 2.6 | % | 2.3 | % | ||||||
| Expected volatility | 20.3 | % | 20.4 | % | 20.4 | % | ||||||
"Estimated values" means the fair value for the market-based total shareholder return component of each PSU at the date of grant using a Monte Carlo simulation model;
"Dividend yields" means the sum of dividends declared for the four most recently quarterly periods, divided by the average price of our Common Stock for the comparable periods;
"Expected volatility" means the historical volatility of our Common Stock over the expected term of each grant.
The Hershey Company | 2019 Form 10-K | Page 87
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Units granted | 478,044 | 545,750 | 381,407 | |||||||||
| Weighted-average fair value at date of grant | $ | 110.97 | $ | 93.55 | $ | 104.68 | ||||||
| Monte Carlo simulation assumptions: | ||||||||||||
| Estimated values | $ | 46.85 | $ | 38.02 | $ | 61.22 | ||||||
| Dividend yields | 2.3 | % | 2.5 | % | 2.0 | % | ||||||
| Expected volatility | 20.4 | % | 17.0 | % | 14.9 | % | ||||||
The fair value of shares vested totaled $51,739, $28,752 and $29,981 $22,062in 2019, 2018 and $46,113 in 2017, 2016 and 2015, respectively.
Deferred PSUs, deferred RSUs and deferred stock units representing directors’ fees totaled 369,278296,802 units as of December 31, 2017.2019. Each unit is equivalent to one1 share of the Company’s Common Stock.
Our organizational structure is designed to ensure continued focus on North America, coupled with an emphasis on profitable growth in our focus international markets. Our business is primarily organized around geographic regions, which enables us to build processes for repeatable success in our global markets. As a result, we have defined our operating segments on a geographic basis, as this aligns with how our Chief Operating Decision Maker (“CODM”) manages our business, including resource allocation and performance assessment. Our North America business, which generates approximately 88%89% of our consolidated revenue, is our only reportable segment. None of our other operating segments meet the quantitative thresholds to qualify as reportable segments; therefore, these operating segments are combined and disclosed below as International and Other.
| • | North America - This segment is responsible for our traditional chocolate and non-chocolate confectionery market position, as well as our grocery and growing snacks market positions, in the United States and Canada. This includes developing and growing our business in chocolate and non-chocolate confectionery, pantry, food service and other snacking product lines. |
| • | International and Other - International and Other is a combination of all other operating segments that are not individually material, including those geographic regions where we operate outside of North America. We currently have operations and manufacture product in China, Mexico, Brazil, India and Malaysia, primarily for consumers in these regions, and also distribute and sell confectionery products in export markets of Asia, Latin America, Middle East, Europe, Africa and other regions. This segment also includes our global retail operations, including Hershey's Chocolate World stores in Hershey, Pennsylvania, New York City, Las Vegas, Niagara Falls (Ontario) and Singapore, as well as operations associated with licensing the use of certain of the Company's trademarks and products to third parties around the world. |
For segment reporting purposes, we use “segment income” to evaluate segment performance and allocate resources. Segment income excludes unallocated general corporate administrative expenses, unallocated mark-to-market gains and losses on commodity derivatives, business realignment and impairment charges, acquisition integrationacquisition-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 as well the measure of segment performance used for incentive compensation purposes.
Accounting policies associated with our operating segments are generally the same as those described in Note 1.
Certain manufacturing, warehousing, distribution and other activities supporting our global operations are integrated to maximize efficiency and productivity. As a result, assets and capital expenditures are not managed on a segment basis and are not included in the information reported to the CODM for the purpose of evaluating performance or allocating resources. We disclose depreciation and amortization that is generated by segment-specific assets, since these amounts are included within the measure of segment income reported to the CODM.
The Hershey Company | 2019 Form 10-K | Page 88
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Our segment net sales and earnings were as follows:
| For the years ended December 31, | For the years ended December 31, | 2017 | 2016 | 2015 | For the years ended December 31, | 2019 | 2018 | 2017 | ||||||||||||||||||
| Net sales: | Net sales: | Net sales: | ||||||||||||||||||||||||
| North America | North America | $ | 6,621,173 | $ | 6,532,988 | $ | 6,468,158 | North America | $ | 7,081,764 | $ | 6,901,607 | $ | 6,621,173 | ||||||||||||
| International and Other | International and Other | 894,253 | 907,193 | 918,468 | International and Other | 904,488 | 889,462 | 894,253 | ||||||||||||||||||
| Total | Total | $ | 7,515,426 | $ | 7,440,181 | $ | 7,386,626 | Total | $ | 7,986,252 | $ | 7,791,069 | $ | 7,515,426 | ||||||||||||
| Segment income (loss): | ||||||||||||||||||||||||||
| Segment income: | Segment income: | |||||||||||||||||||||||||
| North America | North America | $ | 2,045,550 | $ | 2,040,995 | $ | 2,073,967 | North America | $ | 2,125,861 | $ | 2,020,082 | $ | 2,044,218 | ||||||||||||
| International and Other | International and Other | 11,532 | (29,139 | ) | (98,067 | ) | International and Other | 95,702 | 73,762 | 11,532 | ||||||||||||||||
| Total segment income | Total segment income | 2,057,082 | 2,011,856 | 1,975,900 | Total segment income | 2,221,563 | 2,093,844 | 2,055,750 | ||||||||||||||||||
| Unallocated corporate expense (1) | Unallocated corporate expense (1) | 504,323 | 497,423 | 497,386 | Unallocated corporate expense (1) | 533,632 | 486,716 | 499,251 | ||||||||||||||||||
| Unallocated mark-to-market (gains) losses on commodity derivatives | (35,292 | ) | 163,238 | — | ||||||||||||||||||||||
| Goodwill, indefinite and long-lived asset impairment charges | 208,712 | 4,204 | 280,802 | |||||||||||||||||||||||
| Costs associated with business realignment activities | 69,359 | 107,571 | 120,975 | |||||||||||||||||||||||
| Non-service related pension expense | 35,028 | 27,157 | 18,079 | |||||||||||||||||||||||
| Acquisition and integration costs | 311 | 6,480 | 20,899 | |||||||||||||||||||||||
| Unallocated mark-to-market gains on commodity derivatives | Unallocated mark-to-market gains on commodity derivatives | (28,651 | ) | (168,263 | ) | (35,292 | ) | |||||||||||||||||||
| Long-lived and intangible asset impairment charges (see Note 6) | Long-lived and intangible asset impairment charges (see Note 6) | 112,485 | 57,729 | 208,712 | ||||||||||||||||||||||
| Costs associated with business realignment activities (see Note 9) | Costs associated with business realignment activities (see Note 9) | 9,238 | 51,827 | 69,359 | ||||||||||||||||||||||
| Acquisition-related costs (see Note 2) | Acquisition-related costs (see Note 2) | 10,196 | 44,829 | 311 | ||||||||||||||||||||||
| Gain on sale of other assets (see Note 8) | Gain on sale of other assets (see Note 8) | (11,289 | ) | (2,658 | ) | — | ||||||||||||||||||||
| Operating profit | Operating profit | 1,274,641 | 1,205,783 | 1,037,759 | Operating profit | 1,595,952 | 1,623,664 | 1,313,409 | ||||||||||||||||||
| Interest expense, net | Interest expense, net | 98,282 | 90,143 | 105,773 | Interest expense, net | 144,125 | 138,837 | 98,282 | ||||||||||||||||||
| Other (income) expense, net | Other (income) expense, net | 65,691 | 16,159 | 30,139 | Other (income) expense, net | 71,043 | 74,766 | 104,459 | ||||||||||||||||||
| Income before income taxes | Income before income taxes | $ | 1,110,668 | $ | 1,099,481 | $ | 901,847 | Income before income taxes | $ | 1,380,784 | $ | 1,410,061 | $ | 1,110,668 | ||||||||||||
| (1) | Includes centrally-managed (a) corporate functional costs relating to legal, treasury, finance, and human resources, (b) expenses associated with the oversight and administration of our global operations, including warehousing, distribution and manufacturing, information systems and global shared services, (c) non-cash stock-based compensation expense, and (d) other gains or losses that are not integral to segment performance. |
Activity within the unallocated mark-to-market (gains) losses on commodity derivatives is as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in income | $ | (35,488 | ) | $ | (69,379 | ) | $ | 55,734 | ||||
| Net gains (losses) on commodity derivative positions reclassified from unallocated to segment income | 6,837 | (98,884 | ) | (91,026 | ) | |||||||
| Net gains on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses | $ | (28,651 | ) | $ | (168,263 | ) | $ | (35,292 | ) | |||
| For the years ended December 31, | 2017 | 2016 | ||||||
| Net losses on mark-to-market valuation of commodity derivative positions recognized in income | $ | 55,734 | $ | 171,753 | ||||
| Net losses on commodity derivative positions reclassified from unallocated to segment income | (91,026 | ) | (8,515 | ) | ||||
| Net (gains) losses on mark-to-market valuation of commodity derivative positions recognized in unallocated derivative (gains) losses | $ | (35,292 | ) | $ | 163,238 | |||
As of December 31, 2017,2019, the cumulative amount of mark-to-market lossesgains on commodity derivatives that have been recognized in our consolidated cost of sales and not yet allocated to reportable segments was $127,946.$68,969. Based on our forecasts of the timing of the recognition of the underlying hedged items, we expect to reclassify net pretax lossesgains on commodity derivatives of $94,449$39,839 to segment operating results in the next twelve months.
The Hershey Company | 2019 Form 10-K | Page 89
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Depreciation and amortization expense included within segment income presented above is as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| North America | $ | 220,513 | $ | 205,340 | $ | 171,265 | ||||||
| International and Other | 29,289 | 35,656 | 42,542 | |||||||||
| Corporate (1) | 41,742 | 54,148 | 48,046 | |||||||||
| Total | $ | 291,544 | $ | 295,144 | $ | 261,853 | ||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| North America | $ | 171,265 | $ | 162,211 | $ | 153,185 | ||||||
| International and Other | 42,542 | 50,753 | 46,342 | |||||||||
| Corporate (1) | 48,046 | 88,873 | 45,401 | |||||||||
| Total | $ | 261,853 | $ | 301,837 | $ | 244,928 | ||||||
| (1) | Corporate includes non-cash asset-related accelerated depreciation and amortization related to business realignment activities, as discussed in Note |
Additional geographic information is as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Net sales: | ||||||||||||
| United States | $ | 6,722,617 | $ | 6,535,675 | $ | 6,263,703 | ||||||
| Other | 1,263,635 | 1,255,394 | 1,251,723 | |||||||||
| Total | $ | 7,986,252 | $ | 7,791,069 | $ | 7,515,426 | ||||||
| Long-lived assets: | ||||||||||||
| United States | $ | 1,717,606 | $ | 1,668,186 | $ | 1,575,496 | ||||||
| Other | 435,533 | 462,108 | 531,201 | |||||||||
| Total | $ | 2,153,139 | $ | 2,130,294 | $ | 2,106,697 | ||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net sales: | ||||||||||||
| United States | $ | 6,263,703 | $ | 6,196,723 | $ | 6,116,490 | ||||||
| Other | 1,251,723 | 1,243,458 | 1,270,136 | |||||||||
| Total | $ | 7,515,426 | $ | 7,440,181 | $ | 7,386,626 | ||||||
| Long-lived assets: | ||||||||||||
| United States | $ | 1,575,496 | $ | 1,528,255 | $ | 1,528,723 | ||||||
| Other | 531,201 | 648,993 | 711,737 | |||||||||
| Total | $ | 2,106,697 | $ | 2,177,248 | $ | 2,240,460 | ||||||
| For the year ended December 31, | 2019 | 2018 | |||||
| Net sales: | |||||||
| Confectionery and confectionery-based portfolio | $ | 7,553,954 | $ | 7,453,364 | |||
| Snacks portfolio | 432,298 | 337,705 | |||||
| Total | $ | 7,986,252 | $ | 7,791,069 | |||
We had 1,055,000,000 authorized shares of capital stock as of December 31, 2017.2019. Of this total, 900,000,000 shares were designated as Common Stock, 150,000,000 shares were designated as Class B Stock and 5,000,000 shares were designated as Preferred Stock. Each class has a par value of one1 dollar per share.
Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders, including the election of directors. The holders of Common Stock have 1 vote per share and the holders of Class B Stock have 10 votes per share. However, the Common Stock holders, voting separately as a class, are entitled to elect one-sixth of the Board. With respect to dividend rights, the Common Stock holders are entitled to cash dividends 10% higher than those declared and paid on the Class B Stock.
Class B Stock can be converted into Common Stock on a share-for-share basis at any time. During 2019 and 2017 2016, and 2015 no0 shares of Class B Stock were converted into Common Stock. During 2018, 6,000 shares of Class B Stock were converted into Common Stock.
The Hershey Company | 2019 Form 10-K | Page 90
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Changes in the outstanding shares of Common Stock for the past three years were as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | ||||||
| Shares issued | 359,901,744 | 359,901,744 | 359,901,744 | ||||||
| Treasury shares at beginning of year | (150,172,840 | ) | (149,040,927 | ) | (147,642,009 | ) | |||
| Stock repurchases: | |||||||||
| Shares repurchased in the open market under pre-approved share repurchase programs | (1,386,193 | ) | (1,406,093 | ) | — | ||||
| Shares repurchased directly from the Milton Hershey School Trust | — | (450,000 | ) | (1,500,000 | ) | ||||
| Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation | (2,674,349 | ) | (615,719 | ) | (1,278,675 | ) | |||
| Stock issuances: | |||||||||
| Shares issued for stock options and incentive compensation | 3,161,071 | 1,339,899 | 1,379,757 | ||||||
| Retirement of treasury shares | 138,348,719 | — | — | ||||||
| Treasury shares at end of year | (12,723,592 | ) | (150,172,840 | ) | (149,040,927 | ) | |||
| Change in Common Stock due to retirement of treasury shares | (138,348,719 | ) | — | — | |||||
| Net shares outstanding at end of year | 208,829,433 | 209,728,904 | 210,860,817 | ||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | ||||||
| Shares issued | 359,901,744 | 359,901,744 | 359,901,744 | ||||||
| Treasury shares at beginning of year | (147,642,009 | ) | (143,124,384 | ) | (138,856,786 | ) | |||
| Stock repurchases: | |||||||||
| Shares repurchased in the open market under pre-approved share repurchase programs | — | (4,640,964 | ) | (4,209,112 | ) | ||||
| Milton Hershey School Trust repurchase | (1,500,000 | ) | — | — | |||||
| Shares repurchased to replace Treasury Stock issued for stock options and incentive compensation | (1,278,675 | ) | (1,820,766 | ) | (1,776,838 | ) | |||
| Stock issuances: | |||||||||
| Shares issued for stock options and incentive compensation | 1,379,757 | 1,944,105 | 1,718,352 | ||||||
| Treasury shares at end of year | (149,040,927 | ) | (147,642,009 | ) | (143,124,384 | ) | |||
| Net shares outstanding at end of year | 210,860,817 | 212,259,735 | 216,777,360 | ||||||
We are authorized to purchase our outstanding shares in open market and privately negotiated transactions. The programs have no expiration date and acquired shares of Common Stock will be held as treasury shares. Purchases under approved share repurchase authorizations are in addition to our practice of buying back shares sufficient to offset those issued under incentive compensation plans.
Retirement of Treasury Shares
During 2019, we retired 138,348,719 shares or $6,423,267 of the Company’s treasury shares previously repurchased. Under the applicable state law, these shares resume the status of authorized and unissued shares upon retirement. In accordance with our accounting policy, we record any excess of repurchase price over par value to retained earnings. As a result, our retained earnings were reduced by $6,284,919 during 2019. This transaction was approved by the Board on October 11, 2019.
Hershey Trust Company
Hershey Trust Company, as trustee for the Milton Hershey School Trust (the "Trust") and as direct owner of investment shares, held 8,403,121123,600 shares of our Common Stock as of December 31, 2017.2019. As trustee for the Trust, Hershey Trust Company held 60,612,012 shares of the Class B Stock as of December 31, 2017,2019, and was entitled to cast approximately 80% of all of the votes entitled to be cast on matters requiring the vote of both classes of our common stock voting together. Hershey Trust Company, as trustee for the Trust, or any successor trustee, or Milton Hershey School, as appropriate, must approve any issuance of shares of Common Stock or other action that would result in it not continuing to have voting control of our Company.
In November 2018, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Trust, pursuant to which the Company agreed to purchase 450,000 shares of the Company’s common stock from the Trust at a price equal to $106.30 per share, for a total purchase price of $47,835.
In August 2017, the Company entered into a Stock Purchase Agreement with Hershey Trust Company, as trustee for the Trust, pursuant to which the Company agreed to purchase 1,500,000 shares of the Company’s common stock from the Trust at a price equal to $106.01 per share, for a total purchase price of $159,015.
| Noncontrolling Interest | |||
| Balance, December 31, 2016 | $ | 41,831 | |
| Net loss attributable to noncontrolling interest | (26,444 | ) | |
| Other comprehensive income - foreign currency translation adjustments | 840 | ||
| Balance, December 31, 2017 | $ | 16,227 | |
The 2017 net loss attributable to the noncontrolling interest reflects the 50% allocation of LSFC-related business realignment and impairment costs (see Note 7). The 2016 net loss attributable to noncontrolling interests totaled $3,970, which was presented within selling, marketing and administrative expense in the Consolidated Statements of Income since the amount was not considered significant.Hershey Company | 2019 Form 10-K | Page 91
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
We currently own a 50% controlling interest in LSFC, a joint venture established in 2007 in China for the purpose of manufacturing and selling product to the joint venture partners.
A roll-forward showing the 2019 activity relating to the noncontrolling interest follows:
| Noncontrolling Interest | |||
| Balance, December 31, 2018 | $ | 8,545 | |
| Net loss attributable to noncontrolling interest | (2,940 | ) | |
| Other comprehensive income - foreign currency translation adjustments | 167 | ||
| Balance, December 31, 2019 | $ | 5,772 | |
The 2019 net loss attributable to the noncontrolling interest reflects the 50% allocation of LSFC-related business realignment and impairment costs (see Note 9).
15. COMMITMENTS AND CONTINGENCIES
Purchase obligations
We enter into certain obligations for the purchase of raw materials. These obligations are primarily in the form of forward contracts for the purchase of raw materials from third-party brokers and dealers. These contracts minimize the effect of future price fluctuations by fixing the price of part or all of these purchase obligations. Total obligations consisted of fixed price contracts for the purchase of commodities and unpriced contracts that were valued using market prices as of December 31, 2017.2019.
The cost of commodities associated with the unpriced contracts is variable as market prices change over future periods. We mitigate the variability of these costs to the extent that we have entered into commodities futures contracts or other commodity derivative instruments to hedge our costs for those periods. Increases or decreases in market prices are offset by gains or losses on commodities futures contracts or other commodity derivative instruments. Taking delivery of and making payments for the specific commodities for use in the manufacture of finished goods satisfies our obligations under the forward purchase contracts. For each of the three years in the period ended December 31, 2017,2019, we satisfied these obligations by taking delivery of and making payment for the specific commodities.
As of December 31, 2017,2019, we had entered into agreements for the purchase of raw materials with various suppliers. Subject to meeting our quality standards, the purchase obligations covered by these agreements were as follows as of December 31, 2017:2019:
| in millions | 2020 | 2021 | 2022 | 2023 | 2024 | |||||||||||||||
| Purchase obligations | $ | 1,511.1 | $ | 813.0 | $ | 0.7 | $ | — | $ | — | ||||||||||
| in millions | 2018 | 2019 | 2020 | 2021 | 2022 | |||||||||||||||
| Purchase obligations | $ | 1,359.7 | $ | 272.3 | $ | 11.4 | $ | 2.5 | $ | 0.7 | ||||||||||
| Operating leases (1) | Capital leases (2) | |||||||
| 2018 | $ | 16,241 | $ | 3,401 | ||||
| 2019 | 16,784 | 3,469 | ||||||
| 2020 | 14,763 | 3,538 | ||||||
| 2021 | 12,914 | 3,609 | ||||||
| 2022 | 11,267 | 4,216 | ||||||
| Thereafter | 182,368 | 175,313 | ||||||
Environmental contingencies
We have a number of facilities that contain varying amounts of asbestos in certain locations within the facilities. Our asbestos management program is compliant with current applicable regulations, which require that we handle or dispose of asbestos in a special manner if such facilities undergo major renovations or are demolished. We do not have sufficient information to estimate the fair value of any asset retirement obligations related to these facilities. We cannot specify the settlement date or range of potential settlement dates and, therefore, sufficient information is not available to apply an expected present value technique. We expect to maintain the facilities with repairs and maintenance activities that would not involve or require the removal of significant quantities of asbestos.
Legal contingencies
We are subject to various pending or threatened legal proceedings and claims that arise in the ordinary course of our business. While it is not feasible to predict or determine the outcome of such proceedings and claims with certainty, in our opinion these matters, both individually and in the aggregate, are not expected to have a material effect on our financial condition, results of operations or cash flows.
The Hershey Company | 2019 Form 10-K | Page 92
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Collective Bargaining
As of December 31, 2017,2019, the Company employed approximately 15,36014,520 full-time and 1,5501,620 part-time employees worldwide. Collective bargaining agreements covered approximately 5,4505,500 employees, or approximately 32%34% of the Company’s employees worldwide. During 2018,2020, agreements will be negotiated for certain employees at fourthree facilities outside of the United States and one United States facility, comprising approximately 72%74% of total employees under collective bargaining agreements. We currently expect that we will be able to renegotiate such agreements on satisfactory terms when they expire.
We compute basic earnings per share for Common Stock and Class B common stock using the two-class method. The Class B common stock is convertible into Common Stock on a share-for-share basis at any time. The computation of diluted earnings per share for Common Stock assumes the conversion of Class B common stock using the if-converted method, while the diluted earnings per share of Class B common stock does not assume the conversion of those shares.
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:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||||||||||||||
| Common Stock | Class B Common Stock | Common Stock | Class B Common Stock | Common Stock | Class B Common Stock | |||||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||
| Allocation of distributed earnings (cash dividends paid) | $ | 445,685 | $ | 164,627 | $ | 410,732 | $ | 151,789 | $ | 385,878 | $ | 140,394 | ||||||||||||
| Allocation of undistributed earnings | 393,731 | 145,649 | 449,372 | 165,669 | 188,286 | 68,423 | ||||||||||||||||||
| Total earnings—basic | $ | 839,416 | $ | 310,276 | $ | 860,104 | $ | 317,458 | $ | 574,164 | $ | 208,817 | ||||||||||||
| Denominator (shares in thousands): | ||||||||||||||||||||||||
| Total weighted-average shares—basic | 148,841 | 60,614 | 149,379 | 60,614 | 151,625 | 60,620 | ||||||||||||||||||
| Earnings Per Share—basic | $ | 5.64 | $ | 5.12 | $ | 5.76 | $ | 5.24 | $ | 3.79 | $ | 3.44 | ||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||
| Allocation of total earnings used in basic computation | $ | 839,416 | $ | 310,276 | $ | 860,104 | $ | 317,458 | $ | 574,164 | $ | 208,817 | ||||||||||||
| Reallocation of total earnings as a result of conversion of Class B common stock to Common stock | 310,276 | — | 317,458 | — | 208,817 | — | ||||||||||||||||||
| Reallocation of undistributed earnings | — | (886 | ) | — | (803 | ) | — | (492 | ) | |||||||||||||||
| Total earnings—diluted | $ | 1,149,692 | $ | 309,390 | $ | 1,177,562 | $ | 316,655 | $ | 782,981 | $ | 208,325 | ||||||||||||
| Denominator (shares in thousands): | ||||||||||||||||||||||||
| Number of shares used in basic computation | 148,841 | 60,614 | 149,379 | 60,614 | 151,625 | 60,620 | ||||||||||||||||||
| Weighted-average effect of dilutive securities: | ||||||||||||||||||||||||
| Conversion of Class B common stock to Common shares outstanding | 60,614 | — | 60,614 | — | 60,620 | — | ||||||||||||||||||
| Employee stock options | 785 | — | 651 | — | 1,144 | — | ||||||||||||||||||
| Performance and restricted stock units | 462 | — | 345 | — | 353 | — | ||||||||||||||||||
| Total weighted-average shares—diluted | 210,702 | 60,614 | 210,989 | 60,614 | 213,742 | 60,620 | ||||||||||||||||||
| Earnings Per Share—diluted | $ | 5.46 | $ | 5.10 | $ | 5.58 | $ | 5.22 | $ | 3.66 | $ | 3.44 | ||||||||||||
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||||||||||||||
| Common Stock | Class B Common Stock | Common Stock | Class B Common Stock | Common Stock | Class B Common Stock | |||||||||||||||||||
| Basic earnings per share: | ||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||
| Allocation of distributed earnings (cash dividends paid) | $ | 385,878 | $ | 140,394 | $ | 367,081 | $ | 132,394 | $ | 352,953 | $ | 123,179 | ||||||||||||
| Allocation of undistributed earnings | 188,286 | 68,423 | 162,299 | 58,270 | 27,324 | 9,495 | ||||||||||||||||||
| Total earnings—basic | $ | 574,164 | $ | 208,817 | $ | 529,380 | $ | 190,664 | $ | 380,277 | $ | 132,674 | ||||||||||||
| Denominator (shares in thousands): | ||||||||||||||||||||||||
| Total weighted-average shares—basic | 151,625 | 60,620 | 153,519 | 60,620 | 158,471 | 60,620 | ||||||||||||||||||
| Earnings Per Share—basic | $ | 3.79 | $ | 3.44 | $ | 3.45 | $ | 3.15 | $ | 2.40 | $ | 2.19 | ||||||||||||
| Diluted earnings per share: | ||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||
| Allocation of total earnings used in basic computation | $ | 574,164 | $ | 208,817 | $ | 529,380 | $ | 190,664 | $ | 380,277 | $ | 132,674 | ||||||||||||
| Reallocation of total earnings as a result of conversion of Class B common stock to Common stock | 208,817 | — | 190,664 | — | 132,674 | — | ||||||||||||||||||
| Reallocation of undistributed earnings | — | (492 | ) | — | (324 | ) | — | (69 | ) | |||||||||||||||
| Total earnings—diluted | $ | 782,981 | $ | 208,325 | $ | 720,044 | $ | 190,340 | $ | 512,951 | $ | 132,605 | ||||||||||||
| Denominator (shares in thousands): | ||||||||||||||||||||||||
| Number of shares used in basic computation | 151,625 | 60,620 | 153,519 | 60,620 | 158,471 | 60,620 | ||||||||||||||||||
| Weighted-average effect of dilutive securities: | ||||||||||||||||||||||||
| Conversion of Class B common stock to Common shares outstanding | 60,620 | — | 60,620 | — | 60,620 | — | ||||||||||||||||||
| Employee stock options | 1,144 | — | 964 | — | 1,335 | — | ||||||||||||||||||
| Performance and restricted stock units | 353 | — | 201 | — | 225 | — | ||||||||||||||||||
| Total weighted-average shares—diluted | 213,742 | 60,620 | 215,304 | 60,620 | 220,651 | 60,620 | ||||||||||||||||||
| Earnings Per Share—diluted | $ | 3.66 | $ | 3.44 | $ | 3.34 | $ | 3.14 | $ | 2.32 | $ | 2.19 | ||||||||||||
The earnings per share calculations for the years ended December 31, 2017, 2016 and 2015 excluded 2,374, 3,680 and 2,660 stock options (in thousands), respectively, that would have been antidilutive.Hershey Company | 2019 Form 10-K | Page 93
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
17. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net reports certain gains and losses associated with activities not directly related to our core operations. A summary of the components of other (income) expense, net is as follows:
| For the years ended December 31, | 2019 | 2018 | 2017 | |||||||||
| Write-down of equity investments in partnerships qualifying for tax credits | $ | 50,457 | $ | 50,329 | $ | 66,209 | ||||||
| Non-service cost components of net periodic benefit cost relating to pension and other post-retirement benefit plans | 20,415 | 20,672 | 38,768 | |||||||||
| Other (income) expense, net | 171 | 3,765 | (518 | ) | ||||||||
| Total | $ | 71,043 | $ | 74,766 | $ | 104,459 | ||||||
The Hershey Company | 2019 Form 10-K | Page 94
| For the years ended December 31, | 2017 | 2016 | 2015 | |||||||||
| Write-down of equity investments in partnerships qualifying for tax credits | $ | 66,209 | $ | 43,482 | $ | 39,489 | ||||||
| Settlement of SGM liability (see Note 2) | — | (26,650 | ) | — | ||||||||
| Gain on sale of non-core trademark | — | — | (9,950 | ) | ||||||||
| Other (income) expense, net | (518 | ) | (673 | ) | 600 | |||||||
| Total | $ | 65,691 | $ | 16,159 | $ | 30,139 | ||||||
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
The components of certain Consolidated Balance Sheet accounts are as follows:
| December 31, | 2019 | 2018 | ||||||
| Inventories: | ||||||||
| Raw materials | $ | 271,125 | $ | 237,086 | ||||
| Goods in process | 98,842 | 107,139 | ||||||
| Finished goods | 614,698 | 618,798 | ||||||
| Inventories at FIFO | 984,665 | 963,023 | ||||||
| Adjustment to LIFO | (169,414 | ) | (178,144 | ) | ||||
| Total inventories | $ | 815,251 | $ | 784,879 | ||||
| Prepaid expenses and other: | ||||||||
| Prepaid expenses | $ | 84,058 | $ | 68,490 | ||||
| Assets held for sale | 1,677 | 23,421 | ||||||
| Other current assets | 154,345 | 180,248 | ||||||
| Total prepaid expenses and other | $ | 240,080 | $ | 272,159 | ||||
| Property, plant and equipment: | ||||||||
| Land | $ | 105,627 | $ | 102,074 | ||||
| Buildings | 1,298,985 | 1,211,011 | ||||||
| Machinery and equipment | 3,120,003 | 2,988,027 | ||||||
| Construction in progress | 209,788 | 280,559 | ||||||
| Property, plant and equipment, gross | 4,734,403 | 4,581,671 | ||||||
| Accumulated depreciation | (2,581,264 | ) | (2,451,377 | ) | ||||
| Property, plant and equipment, net | $ | 2,153,139 | $ | 2,130,294 | ||||
| Other assets: | ||||||||
| Capitalized software, net | $ | 153,842 | $ | 126,379 | ||||
| Operating lease ROU assets | 220,678 | — | ||||||
| Other non-current assets | 137,480 | 126,605 | ||||||
| Total other assets | $ | 512,000 | $ | 252,984 | ||||
| Accrued liabilities: | ||||||||
| Payroll, compensation and benefits | $ | 230,518 | $ | 180,546 | ||||
| Advertising, promotion and product allowances | 279,440 | 293,642 | ||||||
| Operating lease liabilities | 29,209 | — | ||||||
| Liabilities held for sale | 105 | 596 | ||||||
| Other | 163,100 | 204,379 | ||||||
| Total accrued liabilities | $ | 702,372 | $ | 679,163 | ||||
| Other long-term liabilities: | ||||||||
| Post-retirement benefits liabilities | $ | 211,206 | $ | 195,166 | ||||
| Pension benefits liabilities | 58,773 | 66,379 | ||||||
| Operating lease liabilities | 184,163 | — | ||||||
| Other | 201,635 | 184,503 | ||||||
| Total other long-term liabilities | $ | 655,777 | $ | 446,048 | ||||
| Accumulated other comprehensive loss: | ||||||||
| Foreign currency translation adjustments | $ | (83,704 | ) | $ | (96,678 | ) | ||
| Pension and post-retirement benefit plans, net of tax | (189,187 | ) | (205,230 | ) | ||||
| Cash flow hedges, net of tax | (51,075 | ) | (54,872 | ) | ||||
| Total accumulated other comprehensive loss | $ | (323,966 | ) | $ | (356,780 | ) | ||
The Hershey Company | 2019 Form 10-K | Page 95
| December 31, | 2017 | 2016 | ||||||
| Inventories: | ||||||||
| Raw materials | $ | 224,940 | $ | 315,239 | ||||
| Goods in process | 93,627 | 88,490 | ||||||
| Finished goods | 614,945 | 528,587 | ||||||
| Inventories at FIFO | 933,512 | 932,316 | ||||||
| Adjustment to LIFO | (180,676 | ) | (186,638 | ) | ||||
| Total inventories | $ | 752,836 | $ | 745,678 | ||||
| Property, plant and equipment: | ||||||||
| Land | $ | 108,300 | $ | 103,865 | ||||
| Buildings | 1,214,158 | 1,238,634 | ||||||
| Machinery and equipment | 2,925,353 | 3,001,552 | ||||||
| Construction in progress | 212,912 | 230,987 | ||||||
| Property, plant and equipment, gross | 4,460,723 | 4,575,038 | ||||||
| Accumulated depreciation | (2,354,026 | ) | (2,397,790 | ) | ||||
| Property, plant and equipment, net | $ | 2,106,697 | $ | 2,177,248 | ||||
| Other assets: | ||||||||
| Capitalized software, net | $ | 104,881 | $ | 95,301 | ||||
| Income tax receivable | — | 1,449 | ||||||
| Other non-current assets | 146,998 | 71,615 | ||||||
| Total other assets | $ | 251,879 | $ | 168,365 | ||||
| Accrued liabilities: | ||||||||
| Payroll, compensation and benefits | $ | 190,863 | $ | 240,080 | ||||
| Advertising and promotion | 305,107 | 358,573 | ||||||
| Other | 180,164 | 152,333 | ||||||
| Total accrued liabilities | $ | 676,134 | $ | 750,986 | ||||
| Other long-term liabilities: | ||||||||
| Post-retirement benefits liabilities | $ | 215,320 | $ | 220,270 | ||||
| Pension benefits liabilities | 39,410 | 65,687 | ||||||
| Other | 184,209 | 114,204 | ||||||
| Total other long-term liabilities | $ | 438,939 | $ | 400,161 | ||||
| Accumulated other comprehensive loss: | ||||||||
| Foreign currency translation adjustments | $ | (91,837 | ) | $ | (110,613 | ) | ||
| Pension and post-retirement benefit plans, net of tax | (169,526 | ) | (207,169 | ) | ||||
| Cash flow hedges, net of tax | (52,383 | ) | (58,106 | ) | ||||
| Total accumulated other comprehensive loss | $ | (313,746 | ) | $ | (375,888 | ) | ||
THE HERSHEY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(amounts in thousands, except share data or if otherwise indicated)
Summary quarterly results were as follows:
| Year 2019 | First | Second | Third | Fourth | ||||||||||||
| Net sales | $ | 2,016,488 | $ | 1,767,217 | $ | 2,134,422 | $ | 2,068,125 | ||||||||
| Gross profit | 892,504 | 874,744 | 943,318 | 911,912 | ||||||||||||
| Net income attributable to The Hershey Company | 304,358 | 312,840 | 325,307 | 207,187 | ||||||||||||
| Common stock: | ||||||||||||||||
Net income per share—Basic(a) | 1.49 | 1.54 | 1.59 | 1.02 | ||||||||||||
Net income per share—Diluted(a) | 1.45 | 1.48 | 1.54 | 0.98 | ||||||||||||
| Dividends paid per share | 0.722 | 0.722 | 0.773 | 0.773 | ||||||||||||
| Class B common stock: | ||||||||||||||||
Net income per share—Basic(a) | 1.36 | 1.39 | 1.45 | 0.93 | ||||||||||||
Net income per share—Diluted(a) | 1.36 | 1.38 | 1.44 | 0.92 | ||||||||||||
| Dividends paid per share | 0.656 | 0.656 | 0.702 | 0.702 | ||||||||||||
| Market price—common stock: | ||||||||||||||||
| High | 114.83 | 138.32 | 161.40 | 157.70 | ||||||||||||
| Low | 104.30 | 113.84 | 134.25 | 140.29 | ||||||||||||
| Year 2017 | First | Second | Third | Fourth | ||||||||||||
| Net sales | $ | 1,879,678 | $ | 1,662,991 | $ | 2,033,121 | $ | 1,939,636 | ||||||||
| Gross profit | 906,560 | 763,210 | 940,222 | 834,527 | ||||||||||||
| Net income attributable to The Hershey Company | 125,044 | 203,501 | 273,303 | 181,133 | ||||||||||||
| Common stock: | ||||||||||||||||
Net income per share—Basic(a) | 0.60 | 0.98 | 1.32 | 0.88 | ||||||||||||
Net income per share—Diluted(a) | 0.58 | 0.95 | 1.28 | 0.85 | ||||||||||||
| Dividends paid per share | 0.618 | 0.618 | 0.656 | 0.656 | ||||||||||||
| Class B common stock: | ||||||||||||||||
Net income per share—Basic(a) | 0.55 | 0.89 | 1.20 | 0.80 | ||||||||||||
Net income per share—Diluted(a) | 0.55 | 0.89 | 1.20 | 0.80 | ||||||||||||
| Dividends paid per share | 0.562 | 0.562 | 0.596 | 0.596 | ||||||||||||
| Market price—common stock: | ||||||||||||||||
| High | 109.61 | 115.96 | 110.50 | 115.45 | ||||||||||||
| Low | 103.45 | 106.41 | 104.06 | 102.87 | ||||||||||||
| Year 2016 | First | Second | Third | Fourth | ||||||||||||||||||||||||||||
| Year 2018 | First | Second | Third | Fourth | ||||||||||||||||||||||||||||
| Net sales | $ | 1,828,812 | $ | 1,637,671 | $ | 2,003,454 | $ | 1,970,244 | $ | 1,971,959 | $ | 1,751,615 | $ | 2,079,593 | $ | 1,987,902 | ||||||||||||||||
| Gross profit | 817,376 | 747,398 | 850,848 | 742,269 | 974,060 | 793,420 | 863,493 | 944,352 | ||||||||||||||||||||||||
| Net income attributable to The Hershey Company | 229,832 | 145,956 | 227,403 | 116,853 | 350,203 | 226,855 | 263,713 | 336,791 | ||||||||||||||||||||||||
| Common stock: | ||||||||||||||||||||||||||||||||
Net income per share—Basic(a) | 1.09 | 0.70 | 1.09 | 0.56 | 1.71 | 1.11 | 1.29 | 1.65 | ||||||||||||||||||||||||
Net income per share—Diluted(a) | 1.06 | 0.68 | 1.06 | 0.55 | 1.65 | 1.08 | 1.25 | 1.60 | ||||||||||||||||||||||||
| Dividends paid per share | 0.583 | 0.583 | 0.618 | 0.618 | 0.656 | 0.656 | 0.722 | 0.722 | ||||||||||||||||||||||||
| Class B common stock: | ||||||||||||||||||||||||||||||||
Net income per share—Basic(a) | 0.99 | 0.64 | 0.99 | 0.51 | 1.55 | 1.01 | 1.17 | 1.50 | ||||||||||||||||||||||||
Net income per share—Diluted(a) | 0.99 | 0.64 | 0.99 | 0.51 | 1.55 | 1.01 | 1.17 | 1.49 | ||||||||||||||||||||||||
| Dividends paid per share | 0.530 | 0.530 | 0.562 | 0.562 | 0.596 | 0.596 | 0.656 | 0.656 | ||||||||||||||||||||||||
| Market price—common stock: | ||||||||||||||||||||||||||||||||
| High | 93.71 | 113.49 | 113.89 | 104.44 | 114.06 | 100.60 | 106.60 | 110.01 | ||||||||||||||||||||||||
| Low | 83.32 | 89.60 | 94.64 | 94.63 | 96.06 | 89.54 | 91.04 | 101.64 | ||||||||||||||||||||||||